Volume 16, Issue 5:

Bousquet, Alain, Cremer, Helmuth, Ivaldi, Marc and Wolkowicz, Michel

"Risk sharing in licensing"

JEL codes: D81; L14; D32
Keywords: License; Royalties; Risk sharing; Product innovation; Process innovation

Abstract: This paper studies the design of linear license contracts under demand or cost uncertainty. The optimal contract consists, in general, of a mix of a fixed fee and royalties. The source of uncertainty has a crucial impact on the type of royalties that must be used. In particular, under demand uncertainty at most two of the instruments are used. The contract generally combines a fixed fee with and ad valorem royalty. When cost is uncertain, a wider variety of cases can arise. The contract may involve a combination of either type of royalties, coupled with a fixed fee. Alternatively, it may be optimal to use all three available instruments.

Garvey, Gerald T., Grant, Simon and King, Stephen P.

"Talking down the firm: Short term market manipulation and optimal management compensation"

JEL codes: G30
Keywords: Incentive contracts; Manipulation; Share price

Abstract: This paper analyzes the optimal use of short- and long-term share prices in management incentive contracts. A key innovation of our model is that the short- term share price is determined even before the manager has made her effort choice and therefore cannot be informative in the standard principal-agent sense. We show that when traders on the short-term market have as much information as the manager does, the optimal contract fully insures the manager against short-term share price fluctuations. However, if the manager has private information that is relevant to the short-term share price and is fully insured then she will have an incentive to "talk down the firm" -to manipulate the short-term share price and so raise perceptions of her value added. These results endogenize corporate managers' concern with short-term stock market fluctuations, and show how manipulation can occur even with optimal contracts.

Nakamura, M. and Xie, J.

"Nonverifiability, noncontractibility and ownership determination models in foreign direct investment, with an application to foreign operations in Japan"

JEL codes: F23; C7
Keywords: Joint venture; Foreign direct investment; Bargaining power; Technology spillover; Japan

Abstract: Firms' intangible assets are important inputs for their foreign operations. Inputs of intangible assets and the resulting output are often not contractible in that neither precise use of such inputs nor potential products, which can be produced by taking advantage of such inputs, can be completely delineated in a contract. Where such incomplete contracts prevail, control of residual rights becomes essential for protecting firms' intangible assets. Ownership is often used to control residual rights in international operations.
In this paper we present a few interrelated models of ownership determination for firms' international operations. We show that a firm's ownership share in its foreign operation reflects the importance of the firm's intangible assets used in the operation and the resulting bargaining power relative to its local partners'. We test our theoretical implications using data on foreign firms' manufacturing operations located in Japan. Our empirical results are consistent with theoretical predictions.

Belderbos, René and Sleuwaegen, Leo

"Tariff jumping DFI and export substitution: Japanese electronics firms in Europe"

JEL codes: F23; F13
Keywords: Export; Direct foreign investment; Multinational firms; Trade policy; Antidumping

Abstract: Analysis of micro data on Japanese electronics firms establishes that the rapid increase in Japanese manufacturing investments in the late 1980s has for substantial part been induced by EC antidumping and other trade restricting measures targeting Japanese firms. Evidence is found at the firm level that such "tariff jumping" investment has substituted for exports from Japan. On the other hand, firms which invested in EC distribution activities, acquired EC firms, or produce components within a vertical Keiretsu, export relatively more to Europe. The latter finding suggests that subcontractor firms were able to expand components exports by supplying the European manufacturing plants of their parent firms.

Ariga, Kenn and Ohkusa, Yasushi

"Price flexibility in Japan, 1970-1992: A study of price formation"

JEL codes: E31; L16; D49
Keywords: Downward price rigidity; price adjustments in distribution channel; Inflation in Japan

Abstract: We estimate probability and size of price change conditional upon the deviation of a price from its target level for a large number of individual wholesale and consumer price indices in Japan. We find robust and strong asymmetry in price adjustments, especially among CPIs. Cross section variations in price responsiveness depend upon characteristics of distribution channels, in particular, efficiency and input measures of distributive services. Using a simulation model, we also find that the macroscopic downward rigidity almost disappears if the size of the shock is small compared to the target inflation rate.

Scarpa, Carlo

"Minimum quality standards with more than two firms"

JEL codes: L13; L15; L52
Keywords: Minimum quality standard; profit levels; maximum quality level; average quality consumed; consumer surplus

Abstract: This paper studies the effects of introducing a minimum quality standard (MQS) in a vertically differentiated market. It is shown that previous results indicating beneficial effects of a MQS heavily depend on the duopolistic set-up they had been developed in. An example with three firms is then provided, showing that not all reaction functions in quality levels are increasing. We also show that the introduction of the standard decreases the profit levels of all firms, the maximum quality level and the average quality consumed. As a consequence, despite the increase in consumer surplus, any effective MGS would reduce welfare.