Information, Innovation, Market Structure, and Public Policy

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This project explores the implications of imperfect information for the functioning of the capital market, the implications of these derived properties of the capital markets for the behavior of firms, the implications of these derived characteristics of firm behavior for the macroeconomic performance of the economy, and the potential ensuing consequences for tax policy, for macroeconomic stabilization and growth policies, and for government interventions in the capital markets. A basic objective of the project is the construction of a general macroeconomic model incorporating in a consistent way central aspects of financial markets, together with results derived from earlier work on how imperfect information affects product and labor markets. This project also enhances our understanding of the consequences of different organizational forms for organizational performance, in the presence of imperfect information, e.g., with respect to decision making (the selection of projects, the selection and assignment of managers), and the design of incentive structures. This grant is an accomplishment-based renewal. Funding is provided because of the high quality, pathbreaking research in the 103 papers and 3 books completed by the investigator under his last NSF grant and because of future contributions from this extremely productive project. Research takes place in six interrelated areas: (1) the economics of information; (2) the implications of imperfect information for the economy's macroeconomic performance; (3) welfare economics; (4) the theory of innovation and market structure; (5) the economics of organizations; and (6) public finance and development.