Economic History: Antibiotics

Some time ago I wrote about a paper of mine (Hünermund et al., 2015) in which my coauthors and me develop a model to explain the occurrence of industry shakeouts. Shakeouts are a phenomenon which we encounter frequently in new industries. At one point in time, a large number of relatively small firms, previously operating in a market, becomes unsustainable. Within a short period of time a lot of firms exit and, eventually, the industry becomes dominated by a few large players. Our model explains this frequently observed pattern by technological factors that change over the lifespan of an industry. Cost advantages — because of more efficient production technologies — allow a few firm to take over and squeeze all others out of the market. Continue reading Economic History: Antibiotics

Welcome to the Eurozone, Lithuania!

With the beginning of 2015 Lithuania, as the last of the three Baltic states, will adopt the euro. A first attempt to join the single currency in 2007 failed because the inflation rate was above Maastricht requirements. Seven years later, Lithuania is considered to be ready to be a part of the eurozone. But what are the prospects of the small country of only 3 million inhabitants in a currency area which, according to theory, is far from being optimal? Continue reading Welcome to the Eurozone, Lithuania!

Step by step to innovation success?

This year I had the opportunity to attend the Lindau Nobel Laureate Meeting in Economic Sciences. Afterwards, I contributed a short excerpt about my ongoing research on innovation management and resource allocation to the Lindau blog, which I like to reblog here. The corresponding paper appeared as a ZEW discussion paper.

Being an innovative company is easier said (or included in a mission statement) than done. Managers of innovative companies have to spend large R&D budgets on projects with highly uncertain outcomes. In high-tech industries such as automobiles, biotech and pharma, R&D intensities of more than 15% of annual sales are not uncommon (EU R&D Scoreboard, 2013). How to invest these funds in the most efficient manner, that is, maximising the success rate of the conducted innovation projects, is of great interest to practitioners and academics alike. Continue reading Step by step to innovation success?

Hurry up and wait

In a previous post I argued that a lot more work needs to be done by economists to understand the implications of dynamic strategic incentives. Actually, this was an act of shameless self-promotion. Because I have written a paper* together with Philipp Schmidt-Dengler and Yuya Takahashi on strategic interaction and how it can shape the evolution of industries over time. Continue reading Hurry up and wait

What’s wrong with policy advice?

John Cochrane recently released a blog post about the discrepancy between academic work and policy advice in macroeconomics. He criticizes that consulting for the policy world is most often based on economic methodology such as static IS-LM/AS-AD models. These date back 40 years and have largely disappeared from the academic landscape.

This current state is puzzling. At least one of the reasons why we do economic research is to better guide policy makers to more sensible interventions to the economy. So either “academic research ran off the rails for 40 years producing nothing of value” or we hold back the diamonds for our little elite circle in the ivory tower. I have seen quite some policy related work myself. Thus,  I want report from my own field – innovation economics. Continue reading What’s wrong with policy advice?

Last Man Standing

Game theory has all sorts of interesting applications. In their classic textbook from 1991, Drew Fudenberg and Jean Tirole (this year’s Nobel prize winner in economics, by the way) present an example for a War of Attrition from biology. Two animals are fighting for a prize, let’s say food or a mating partner. Fighting, as you might expect, is costly in terms of energy and because of the possible injuries you might suffer. Both animals do not know the strength of the other. Which means, they do not know how long exactly the opponent is able to withstand* (they might have had some sparring sessions though). As the fight goes on, both animals become more and more pessimistic about the strength of the other. And because the costs of fighting are accumulating, eventually one of them will drop out, leaving the prize up to the other.

Male impalas fighting
Male impalas fighting during the breeding season. Source:

Although we occasionally observe fights to the death, these are very rare and most of the times they end with exhaustion and only minor injuries. The goal is winning a fight with the least possible amount of effort. Anything beyond that, risking serious injuries, would be a huge waste of resources, even for the winner. When your enemy appears to be too strong, you rather opt out and try it next year than going all-in.

But how do hoofed animals in the African savanna turn out to be so wise? Continue reading Last Man Standing