Innovation Policy and the Economy, Volume 11



reduces the ability of a current monopolist to deter a potential entrant may also reduce the
innovation incentives of the entrant (and so perhaps reduce the overall rate of industry
innovation). Gans narrows the analysis by analyzing whether the criteria used to identify
anticompetitive conduct based on
static analysis - for example, below-cost pricing, exclusionary
long-term contracts, and certain types of tying arrangements - is undermined or enhanced when
one incorporates dynamic considerations.

His analysis covers two important cases. First, building on a formal framework developed in
Segal and Whinston (2008), Gans shows that allowing certain types of behavior that reduce the
ability of a potential entrant to compete with an established incumbent ultimately have the effect
of
reducing the level of industry innovation. Since the benefits of earning profits (as an entrant)
are in the near-term, while the costs of a more restrictive antitrust policy are borne at the end of
the firm’s life as a monopolist, the present value of the near-term costs outweigh the present
value of the long-term benefits, thus depressing innovation incentives. In other words, when
considering the impact of policies designed to enhance the ability of entrants to compete in the
market, dynamic considerations reinforces the logic underlying static analysis.

Gans then examines an environment where potential entrants also have the option of licensing to
(or being acquired by) the established firm. The option of licensing or acquisition makes
antitrust analysis more subtle. Notably, antitrust policy that impacts the ability of a potential
entrant to compete shapes the outside options of both entrant and incumbent in the context of
negotiations. The ultimate impact of antitrust policy thus depends on how these shifts in
bargaining position affect the licensing or acquisition price (and thus the potential returns to
entrant innovation). Gans shows that the dynamic impact of some policies (e.g., those that
disallow exclusive long-term contracts) complement the static analysis, while the dynamic
impact of other policies is more ambiguous. More generally, the essay illustrates the potential
for sophisticated antitrust analysis that directly accounts for the dynamic impact of antitrust
policy on innovation incentives.

Raymond Fisman and Eric Werker shift the analysis to consider broader macroeconomic issues
in their evaluation of innovations in governance. Motivated by striking differences in institutions
across countries (e.g., in the extent of the rule of law) and the linkage between institutional
quality and economic prosperity, Fisman and Werker examine the types of innovations and
conditions that promote the adoption of rules and institutions that encourage investment and
economic growth. They are particularly interested in cases of reform, where policymakers have
proactively attempted to enhance the efficacy of rules and institutions. They examine a range of
diverse cases, including innovations in governance emerging from within the system, arising
from events external to the system, and those involving attempts at wholesale governance
change.

Their analysis then synthesizes these cases to identify the key factors associated with growth-
enhancing innovations of governance In particular, they highlight the importance of competition
(among jurisdictions), information (providing knowledge that enhances the ability to advocate
for governance innovations), trade in institutions (allowing institutions effective in one location
to be used in others), and shifting culture (which shifts informal norms in order to build on novel
innovations in governance). Fisman and Werker then use their framework to consider a recent



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