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Volume 15, Number 2, Spring 2001
Articles
Distinguished Lecture on Economics in Government — Exchange Rate Regimes: Is the Bipolar View Correct? by Stanley Fischer
The bipolar or two-corner solution view of exchange rates is that intermediate policy regimes between hard pegs and floating are not sustainable. This paper argues that the proponents of the bipolar view have probably exaggerated their point. The right statement is that for countries open to international capital flows, softly pegged exchange rates are crisis-prone and not sustainable over long periods. However a wide variety of flexible rate arrangements remains possible; and monetary and exchange rate policy in most countries should not and will not be indifferent to exchange rate movements.
An Economist's Guide to U.S. v. Microsoft by Richard J. Gilbert and Michael L. Katz
We analyze the central economic issues raised by U.S. v Microsoft. Network effects and economies of scale in applications programs created a barrier to entry for new operating system competitors, which the combination of Netscape Navigator and the Java programming language potentially could have lowered. Microsoft took actions to eliminate this threat to its operating system monopoly, and some of Microsoft's conduct very likely harmed consumers. While we recognize the risks of the government's proposed structural remedy of splitting Microsoft in two, we are pessimistic that a limited conduct remedy would be effective in this case.
The Microsoft Case: What Can a Dominant Firm Do to Defend Its Market Position? by Benjamin Klein
This paper examines the competitive actions taken by Microsoft in its "browser war" with Netscape, most importantly Microsoft's decisions to give away Explorer free of charge, integrate Explorer into its dominant Windows operating system and pay online service providers for exclusive distribution. Consumers benefited significantly from these actions, but the fundamental economic question is whether Microsoft abused its existing market power when competing in this way. A detailed analysis of Microsoft's conduct and the economics of competition for distribution suggests that severe limits placed on Microsoft's behavior would not be welfare.
Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know by Michael D. Whinston
Capital Structure by Stewart C. Myers
Research on capital structure attempts to explain how corporations finance real investment, with particular emphasis on the proportions of debt vs. equity financing. There is no universal theory of the debt-equity choice, and no reason to expect one. But three useful conditional theories are reviewed in this paper. The tradeoff theory says that firms seek debt levels that balance the tax advantages of additional debt against the costs of possible financial distress. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. Thus the amount of debt will reflect the firm's cumulative need for external funds. The free cash flow theory says that dangerously high debt levels will increase value, despite the threat of financial distress. Each of these theories "works" for some firms in some circumstances. More general theories will require a deeper understanding of the financial objectives of corporate managers.
New Evidence and Perspectives on Mergers by Gregor Andrade, Mark Mitchell, and Erik Stafford
As in previous decades, merger activity clusters by industry during the 1990s. One particular kind of industry shock, deregulation, becomes a dominant factor, accountings for nearly half of the merger activity since the late 1980s. In contrast to the 1980s, mergers in the 1990s are mostly stock swaps, and hostile takeovers virtually disappear. Over our 1973 to 1998 sample period, the announcement-period stock market response to mergers is positive for the combined merging parties, suggesting that mergers create value on behalf of shareholders. Consistent with that, we find evidence of improved operating performance following mergers, relative to industry peers.
Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s by Bengt Holmstrom and Steven N. Kaplan
This paper describes and considers explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. We conclude by considering whether these changes and the movement toward shareholder value are likely to be permanent.
The Venture Capital Revolution by Paul Gompers and Josh Lerner
Venture capital has emerged as an important intermediary in financial markets, providing capital to young high-technology firms that might have otherwise gone unfunded. Venture capitalists have developed a variety of mechanisms to overcome the problems that emerge at each stage of the investment process. At the same time, the venture capital process is also subject to various pathologies from time to time, which can create problems for investors or entrepreneurs. This article reviews the recent empirical literature on these organizations and points out area where further research is needed.
The Record and Prospects of the All-Volunteer Military in the United States by John T. Warner and Beth J. Asch
From the onset of World War II until July 1973, the draft was a fact of life for male youth in the United States. Since then, America's armed forces have been staffed by volunteers. Recent recruiting difficulties have precipitated calls from some quarters for a return to conscription. This paper reviews the economic issues involved in the choice over conscription versus volunteerism and it reviews the volunteer force record in the U. S. Despite recent recruiting difficulties, the case for the volunteer force is more compelling today than it was in 1973.
Tobacco At the Crossroads: The Past and Future of Smoking Regulation in the United States by Jonathan Gruber
The past five years has seen a dramatic turn of events against the tobacco industry, raising the question of the appropriate future path for smoking policy in the U.S. This paper discusses the theory and evidence on regulation of smoking . I begin by reviewing the background on this industry. I then turn to a discussion of the motivations for regulating smoking, both external and internal to the smoker. I review the evidence on the effects of existing regulations. And I conclude with a discussion of future policy directions.
Early Childhood Education Programs by Janet Currie
This paper discusses early childhood education programs: their goals; effectiveness; optimal timing, targeting, and content; and costs and benefits. Early intervention has significant short- and medium-term benefits: most notably it reduces grade repetition and special education costs, and provides quality child care. The effects are greatest for more disadvantaged children. Some model programs have produced exciting improvements in educational attainment and earnings and have reduced welfare dependency and crime. The jury is still out on the long-term effects of Head Start, but Head Start would pay for itself if it produced a quarter of the long-term gains of model programs.
Data Watch: The National Longitudinal Surveys by Michael R. Pergamit, Charles R. Pierret, Donna S. Rothstein and Jonathan R. Veum
This article describes the design features and topical coverage of the National Longitudinal Surveys (NLS). The NLS are perhaps the oldest and most widely used panel surveys of individuals in the United States. These surveys were started in the mid-1960s to examine employment issues faced by different cohorts of the U.S. population. Since then, the NLS surveys have expanded to include two new cohorts of youth. Survey topic areas include employment, education, training, family relationships, financial well-being, and health. Information on data access is also provided.
Features
Recommendations for Further Reading
Notes