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this showing, not higher, provided the pressures are kept on high and long. But the more usual tack is to suggest that the difficulty in Britain has lain not so much with the level of demand but with its instability. Investment is a function not of today's demand but of tomorrow's. Before he undertakes cost-reducing investment which expands capacity, the business executive needs assurance that demand will be sustained. A project which would be under- taken with a steady demand over 4 years might be abandoned in favor of cash if there was a high probability of

opportunism. In other words, unlike Table 5.1, Table 5.2 allows production costs to depend on orga- nizational form. A "dynamic" effect occurs because the governance role of the PTA encourages investment that changes the pattern of compara- tive advantage. The first line of Table 5.2 reproduces the free-trade result in which Country Three, the low-cost producer without cost-reducing investment by Two, serves One's automobile market. In the second row of Table 5.2, a one hundred percent nonpreferential tariff causes One to become inef- ficiently self-sufficient in

the expense of its cost- reducing investment. even though its innovation would have been duplicative of that of the first, it would have eroded that firm’s unilateral market power, which is the cause of reduced allocative inefficiency. On the other hand, if the two firms each are able to elevate prices somewhat, whether through coordination or through exercise of their own unilateral market power (which the text suggests may or may not be possible), there may be sufficient reward to induce the second innovator to proceed. Depending on the cost of the

., the strategic cost- reducing investment is socially excessive at the margin if n > N(δ0). An important question still remains. How large is the critical number N(δ0) that appears in Theorem 23.1? In the case of concave inverse demand functions, it is easy to see that N(δ0) = 2. In the case of constantly elastic inverse demand functions,N(δ0)will increase as the elasticity η of the inverse demand function increases, but for all values of η satisfying 0 < η < 1, we have 1<N(δ0) < 2 + √ 2. Thus, N(δ0) remains fairly small for these important classes of situations. 23

) Higher marginal productivity of capital (δΥ,/δΚ) in Japan. This is attributable to the higher Japanese ratio of labor to capital, the high American loading on long-range research and development (of which Japan, too, takes advantage), the American practice of rapid depre­ ciation and obsolescence, and the higher degree of excess capacity in America, (b) Concentration on output-increasing investment in Japan, as against cost-reducing investment in America. This results in higher employment factors (dN/I) in Japan. The (dN/I) term may even turn negative when

industry demand, have perfect foresight expectations about the future actions of all firms, and behave non-cooperatively. . . . Marginal cost can vary bo th among firms and over time. . . . The investment function relating expendi­ tures to reduction i n marginal cost is the same for all firms for all periods. . . . Positive investment is required to maintain cost levels because inpu t costs, such as labor costs, are assumed to be increasing over time. . . . The expense of a given un i t of cost reduction achieved through cost-reducing investment [taken from the

to Probability Theory and Its Applications. 2 d ed. New York: Wiley. Finley M . I . 1973. The Ancient Economy. Berkeley and Los Angeles: University of California Press. Fischhoff, Baruch. 1993. "Value Elicitation: Is There Anyth ing i n There?" Chapter 9 i n Hechter, Nadel, and Michod 1993. Flaherty, M . Louise. 1980. "Industry Structure and Cost-Reducing Investment." Econo- metrica 48 :1187-1209. Fligstein, Nei l . 1985. "The Spread of the Mult id ivisonal Form among Large Firms, 1919-1979." American Sociological Review 5 0 : 3 7 7 - 9 1 . . 1990. The

. The Japanese empire, of course, was organized on a fundamentally different basis, and suggests that the term “reducing transactions costs” can be some- what euphemistic. Though Japan reduced transactions costs for Japanese ex- porters and investors, the government was clearly intent on raising them for everyone else through the imposition of formal and informal preferences. In developing the transactions costs approach, therefore, it is crucial to consider the extent to which the transactions cost-reducing investment is a private, club, or public good. The U

of capital] j e nach Anteil der Fremdkapitalkosten) II cost of debt Fremdkapitalkosten [InvR] Zinsen + Nebenkosten des Fremdkapitals —> Ka- pitalkosten II cost of equity [InvR] Eigenkapitalkosten II cost recovery [Bil] Kostendeckung II regulation concerning costs Kostenregelung II cost-centre burden rate [BWL / RW] [Kostenstelle-] Gemeinkostenzu- schlag II cost-reducing investment [InvR] Rationalisierungsinvestition —> syn.: cost-saving investment II cost- saving investment Rationalisie- rungsinvestition [InvR] Investition mit dem Ziel der

seller receives all the returns from any cost-saving actions. In contrast, under a cost-plus contract, the buyer pays all costs of production, thereby reduc- ing the incentives to the seller of making unobserved cost-reducing investments. If all events are foreseeable, then the fixed-price contract implements the first-best, whereas if events are unforeseeable, then the cost-plus contract is more efficient. Thus, if the costs of planning are sufficiently low that unforeseen events occur with low probability, then a fixed-price contract is optimal; the opposite holds