AEAweb: JEP: Contents: Spring 2001

Journal of Economic Perspectives
Vol. 15, No. 2, Spring 2001

Contents

Distinguished Lecture on Economics in Government — Exchange Rate Regimes: Is the Bipolar View Correct?
Stanley Fischer     3-24

An Economist’s Guide to U.S. v. Microsoft
Richard J. Gilbert and Michael L. Katz       25-44

The Microsoft Case: What Can a Dominant Firm Do to Defend Its Market Position?
Benjamin Klein      45-62

Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don’t Know
Michael D. Whinston       63-80

Capital Structure
Stewart C. Myers       81-102

New Evidence and Perspectives on Mergers
Gregor Andrade, Mark Mitchell, and Erik Stafford      103-120

Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s
Bengt Holmstrom and Steven N. Kaplan       121-144

The Venture Capital Revolution
Paul Gompers and Josh Lerner       145-168

The Record and Prospects of the All-Volunteer Military in the United States
John T. Warner and Beth J. Asch       169-192

Tobacco At the Crossroads: The Past and Future of Smoking Regulation in the United States
Jonathan Gruber       193-212

Early Childhood Education Programs
Janet Currie       213-238

Data Watch: The National Longitudinal Surveys
Michael R. Pergamit, Charles R. Pierret, Donna S. Rothstein and Jonathan R. Veum       239-254

Features:
Recommendations for Further Reading      255-262
Notes      263-264

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.

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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.

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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.

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No abstract available.

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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.

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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.

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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.

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The Venture Capital Revolution
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.

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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.

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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.

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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.

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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.

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Features (view in pdf format):
Recommendations for Further Reading (AEA members only)
Notes      

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