Yoram Barzel

Optimal Timing of Innovations

The article shows that innovations are induced, since they become more profitable with the expansion of output. The amount of resources devoted to innovating activity, however, is in general not the optimal one because of the pressure of two opposing forces. On the one hand, competition between potential innovators tends to make this amount too large, on the other, the inability of innovators to capture all the benefits tends to make the amount too small. When all benefits are captured by the innovator either there is no economic growth due to innovations or else innovators are the sole beneficiaries from that growth. When benefits are diffused the innovation will always lead to economic growth, but only by sheer coincidence will it lead to maximum growth, which may be missed because the innovation is introduced either too early or too late. The rate of growth is always positive if the innovation is introduced too late. It may fall to zero with too-early introduction or even become negative if innovational activity is subsidized.

An Alternative Approach to the Analysis of Taxation

Because commodities as transacted are complex, tax statutes could not cover all margins subject to optimization. A tax will induce, then, substitution within the commodity away from the taxed attributes and into the others. The results of a test on cigarettes are consistent with our prediction that the effects of unit and ad valorem taxes will differ both from each other and from those predicted by the conventional model. It is shown that, although the market will adjust in numerous changeable characteristics, the adjustment is constrained by the condition that the sum of the dollar value of the inefficiencies and of tax paid is minimized.

The Determination of Daily Hours and Wages

I. The general framework, 220. — II. Productivity changes and nonlabor income, 225. — III. Overtime, 227. — IV. The effect of training, 228. — V. Minimum wage and wage ceiling, 230. — VI. Some aspects of market demand and supply, 233. — VII. Concluding remarks, 234. — Appendix, 234.

The Allocation of Resources by Voting

A general theory of voting, which explains under what conditions voting will be chosen as a means for allocating resources and how the constitution that governs the voting will be structured is presented. It is hypothesized that developers of voting organizations will structure their organizations in order to maximize the value of shares sold by minimizing the expected costs of wealth transfer and decision making in the voting organization. Implications regarding the allocation of votes and assessments within the organization, the domain of voting decisions, and the optimal voting rule are tested with data on the constitutional structure of condominium homeowner associations.

The Capture of Wealth by monopolists and the Protection of Property Rights

Traditional literature on monopoly pricing and its newer branch on rent seeking asserts that these practices result in rent dissipation. The propensity to monopolize an industry is said to depend on such factors as industry demand-elasticity, industry structure, and entry costs.? Demsetz (1968) and Easterbrook (1981) excepted, resistance by consumers and other sellers has been a moot issue. The literature implies that in the absence of antitrust restrictions, would-be monopolists are able to deprive consumers and other sellers of economic benefits. These, however, are not necessarily defenseless and are expected to resist the attempt to harm them. I contend that the use of property rights notions can help to explain various monopoly issues. As is elaborated below, the notion ofeconomic property right as used here indicates the ability to receive income. Acquiring a monopoly position implies obtaining the economic right to inflict harm on others. Could it be, however, that consumers and other sellers have the economic right not to be harmed; that consumers have the right to be competitively supplied rather than having to pay monopoly prices and that other sellers have the right to provide such a service rather than be harmed by having to quit or sell out at a loss? In general, individuals spend resources to acquire, enhance, and protect their rights. A would-be monopolist will spend up to the amount expected to be gained from monopolizing an industry. Victims, however, will be similarly willing to spend resources to prevent losses to monopoly. Had the conditions of the Coase theorem applied, rights would have been well defined and monopolists could not capture them then. Even if they were to replace competitive actors, they would not alter resource allocation. In reality the costs of transacting are positive and rights are not well defined. Nevertheless, unless rights lie entirely in the public domain, monopolists are constrained in their ability to alter the allocation of resources. Specifically, I argue that individuals’ ability to form the appropriate long-term contracts allows them to protect themselves against the threat of monopoly. Property rights considerations are conducive to making the study of monopoly problems more operational. Economic rights are subject to optimization. Analyzing

The Production Function and Technical Change in the Steam-Power Industry

M OST production-function studies impose highly simplified production-function forms on their data as the basis for empirical as well as for theoretical work. Such a choice is dictated by paucity of data, and also by the simplicity and elegance of the simpler forms. The repetitious use of the simple forms (and in particular of the Cobb-Douglas production function) has almost created the belief that the world actually behaves according to these stylized models. This study sets out to examine whether such simple forms are appropriate, or whether their use is likely to be misleading. The abundance of highquality data for the electric-power industry (produced by the regulatory agency) provides an opportunity to determine, at least for this industry, whether a more complex and a more sophisticated form of the production function will contribute to the understanding of the production process. An important by-product of this study is that of providing better understanding of the operations of this particular industry. Although a substantial number of studies of this industry are already in existence,2 the data are far from being exhausted, and there is much room for additional work. The problems specifically considered are as follows: How does the scale of the plant affect the quantities used of each of the three major inputs in the steampower industry-labor, fuel, and capital? How do variations in the intensity of the use of the plant affect the quantities of the inputs? How do changes in relative factor prices affect these quantities? What is the effect of the aging process of the plant on the use of fuel and labor? What has been the pattern of technical advance and how have the individual inputs been affected by this advance? And finally, how can an appropriate price index for capital inputs be constructed?

Organizational Forms and Measurement Costs

Under caveat emptor, buyers effect their measurements prior to exchange. Long-term relations and contracts allow buyers to measure commodities at consumption. Buyers use subjective measurements in long-term relations. Contractual guarantees shift enforcement to the state, but require objective, verifiable measurements. Most exchange agreements combine the two forms and benefit from the comparative advantage that each provides. Vertical integration reduces excessive measurement because employees gain little from manipulating commodities and information about them. The capture of quasi rent from specialized assets is just a manifestation of difficult-to-measure entities. The notion of measurement cost is more general and more operational than that of specific assets.

Excess Capacity in Monopolistic Competition

We should first note that if one does not view expenditures on quality, location, or promotion as utility-generating expenditures, misallocation occurs by definition. We will follow Demsetz, however, in proposing that such expenditures, including those on promotion, do in fact generate utility. We want to show that when price and quantity are appropriately measured, contrary to Demsetzs argument, average cost necessarily falls at equilibrium. We will proceed by first showing that for quality-improving costs, if the quantity-price locus has a zero slope at equilibrium the slope is negative at equilibrium for quality-adjusted units. The argument will be extended to cover other types of cost, and it will be shown that regardless of the slope of the quantity-price locus at equilibrium, the slope of the properly measured average cost curve has to be negative.

Two propositions on the optimum level of producing collective goods

a state. The cost of mosquito control on a private basis is P*, which is prohibitive; but if the state provides such service on a statewide basis, the standard solution indicates a control level of Qo per person at cost Po per unit of service.1 If the economies of scale in providing this service are already realized at a lower level of activity, and if the three groups of consumers can be easily segregated, it is obvious that a superior solution can be achieved by providing individuals in each group not the common quantity Qo but the respective quantities demanded by them at price Po. This, of course, is well-known. Tiebout2 further suggested that if the three levels of service are offered in three localities, consumers will gravitate towards the locality that best agrees with their desires.

Taxation and Voting Rights in Medieval England and France

We explore the relationship between voting rights and taxation in medieval England and France. We hypothesize that voting was a wealth-enhancing institution formed by the ruler in order to facilitate profitable joint projects with subjects. We predict when voting rights and tax payments will be linked to each other, as well as to the projects inducing them, and when they will become separated. We classify taxes into three types: customary, consensual and arbitrary. Customary taxes that did not require voting were dominant in both countries in the early medieval period. These payments, fixed for specific purposes, were not well suited for funding new, large-scale projects. Consensual taxation, in which voting rights and tax payments were tightly linked, was used to finance new, large-scale collective projects in both England and France. Strong rule-of-law institutions are necessary to produce such taxes. In England, where security of rule remained high, the relationship between tax payments and voting rights was maintained. In France, an increase in the insecurity of rule, and the accompanying weakening of voting institutions, produced a shift to arbitrary taxation and a disjunction between tax payments and voting rights. These observations, as well as many of the details we consider, are substantially in conformity with the predictions of our model.