Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, May 27, 2021

AI Summary. A study of Boston's pre-kindergarten program found participants were 6 percentage points more likely to graduate high school and 5.4 percentage points more likely to enroll in college, with gains concentrated among affluent white boys. Critics argue its $13,000 per-child cost estimate is understated and that programs in Quebec and Tennessee showed negative effects.

Max Eden American Enterprise Institute
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Boston’s universal pre-K study reveals mixed outcomes, raising questions about its efficacy. Benefits were largely concentrated among affluent white boys, while actual costs align with Boston’s $20,000 per-pupil spending. @MaxEden

Does universal pre-K deliver benefits that justify its cost?

Core argument: Boston pre-K participants were 6 percentage points more likely to graduate high school and 5.4 percentage points more likely to enroll in college, though those benefits were largely concentrated among affluent white boys.

The Boston pre-K study reveals mixed outcomes, raising questions about the efficacy of universal pre-K as a public investment. While participants were 6 percentage points more likely to graduate high school and 5.4 percentage points more likely to enroll in college, benefits were largely concentrated among affluent white boys. The study's cost analysis is flawed, estimating $13,000 per child based on outdated projections, while actual costs align with Boston's $20,000 per-pupil spending. Despite positive findings, the study's limited scope and external validity issues suggest caution. Comparisons with Quebec and Tennessee's programs, which showed negative impacts on children, highlight potential risks of large-scale implementation. Policymakers must weigh these findings against alternative investments, such as direct financial support to families, to determine the most effective use of resources.

Takeaways by Macro Roundup® AI

  1. Boston pre-K participants were 6 percentage points more likely to graduate high school and 5.4 percentage points more likely to enroll in college, though those benefits were largely concentrated among affluent white boys.
  2. The Boston study's estimate of $13,000 per child rests on outdated projections, while actual costs align with Boston's $20,000 per-pupil spending.
  3. Pre-K programs in Quebec and Tennessee showed negative impacts on children, suggesting risks in large-scale implementation and supporting consideration of alternatives such as direct financial support to families.

Max Eden critique of study of Boston’s public pre-K program, “….It would still be far from clear that this study proves that universal pre-k would be a wise public investment. That’s because policymakers must necessarily deal in tradeoffs and counterfactuals, and this study leaves unanswered the question about what would have happened to student outcomes if instead of launching a pre-K program, Boston had instead simply given families $20,000 per child.”…”

Max Eden, "Boston pre-K miracle or mirage: What can the latest pre-K study tell policymakers?," American Enterprise Institute, May 25, 2021, https://www.aei.org/op-eds/boston-pre-k-miracle-or-mirage-what-can-the-latest-pre-k-study-tell-policymakers/

Boston pre-K miracle or mirage: What can the latest pre-K study tell policymakers?

Universal pre-K advocates have historically used studies the way a drunk man uses lampposts - for support rather than illumination, as the Brookings Institution’s Russ Whitehurst has pointed out. Their argument could be justly paraphrased: We have strong evidence that small, intensively resourced programs serving deeply disadvantaged students yielded strong benefits; therefore, we know that large-scale, less resourced, differently designed universal programs will also yield strong benefits.

But just as Congress is debating President Biden’s $1.8 trillion American Families Plan, with $425 billion going towards universal public pre-K as well as universally affordable child care, researchers have released a discussion draft of a paper demonstrating, as an author told the New York Times, “that modern large-scale public preschool programs can improve educational attainment.”

The study examines long-term outcomes for students chosen randomly by lottery to attend Boston’s public pre-K program (for four-year-olds) from 1997 to 2003. The top-line results are strikingly positive: participants were 6 percentage points more likely to graduate high school, and 5.4 percentage points more likely to enroll in college. They also received fewer suspensions in high school and were less likely to be incarcerated as a juvenile.

But underneath that topline, the findings get somewhat peculiar. In theory, public pre-k should provide a benefit either by allowing kids to enroll in a higher quality program than their families could afford, or by providing them with a more developmentally congenial environment than they would experience at home. Pre-K should, then, provide greater benefits for disadvantaged students from single-parent households. Much of the literature on childcare and pre-K conforms to this expectation.

But not this study. To put it somewhat crudely, but also probably more accurately than the authors put it themselves, this study finds that the benefits of pre-K are largely the preserve of affluent white boys.

In their subgroup analysis by gender (see Table 8 in the study), the authors found no benefits for girls significant at a 5% or higher level. They found benefits for boys significant at a 5% or higher level for: taking the SAT test, high-school graduation, discipline, four-year-college enrollment, and college graduation. By race, white students saw significant improved outcomes on college enrollment, graduation, and standardized math test scores; black students saw improved outcomes only on discipline and SAT-taking; Hispanic students saw an increase in on-time college enrollment, but (oddly) a substantial deterioration in standardized math test scores. By poverty, higher-income students saw gains in college enrollment, college graduation, and standardized math test scores. Low-income students saw benefits only for discipline and SAT-taking.

Boston pre-K miracle or mirage: What can the latest pre-K study tell policymakers?: Extended Excerpt Image 1


Yet the authors claim in their public-facing brief that “there are no differences in preschool impact by race and income.” They make this claim because their joint P test shows that the differences by race and income can’t be stated with statistical significance. But the authors could have created an index (as they did with the discipline variable) or conducted a joint F test across all outcomes, which would likely have shown that the benefits were concentrated in advantaged and white students. The fact that they did not—and then presented a categorical public statement at apparent odds with their pattern of findings—is disconcerting. Though they claim otherwise, their findings appear theoretically incoherent, and theoretically incoherent findings are often a symptom of some other serious empirical problem.

But for the moment, let’s stipulate that this discussion draft is perfectly internally valid. In terms of external validity, it is surely an order of magnitude superior to the “go-to” studies typically touted by early education advocates (the High/Scope Perry Preschool Project and the Carolina Abecedarian Project). But it is still an extremely thin and tenuous reed on which to make the case for rapidly scaling universal pre-K for 3- and 4-year-olds with a massive infusion of federal cash.

The researchers claim that Boston’s pre-K program costs about $13,000 per child for a full-day, full-year program in today’s dollars. But that is a sloppy and incorrect cost calculation, based not on actual administrative expenses but rather on a third-party projection made two years prior to the launch, which assumed that middle-class parents would pay substantial fees to access public pre-K. Given that Boston pre-K teachers “are paid on the same scale as K-12 teachers that pre-k teachers are required to get a masters’ degree within five years,” and that pre-K class size is similar to class size in the public school system, a more reasonable back-envelope calculation puts the cost of the program in line with overall per-pupil spending of about $20,000.

Furthermore, although Boston’s pre-K program was technically “universal” insofar as it was open to students regardless of income, it was still relatively small during the time period studied. At launch in 1997, Boston’s program served more than 2,500 students. In 1998, the school district cut the program back to under 1,000, where it remained for the duration of the period that was studied. Cutting back dramatically on the program may have enabled the school to select only the best teachers to remain in it, further undercutting the external validity of the study’s findings. While the program has grown since, the authors note that today—almost 25 years after—the pre-K program only has capacity to serve roughly half of Boston’s pre-K students.

When it comes to assessing the likely effect of a rapid and massive expansion of pre-K intended to yield a universal entitlement, the studies with the greatest external validity remain those conducted on the Quebec Family Plan and the Tennessee Voluntary Pre-K (VPK) Program. Both provide grounds for substantial alarm.

Quebec’s rapid and massive expansion of affordable child care/pre-K, which yielded a 14-percentage point increase in the share of 0-4 year-olds in center-based care, did substantial and lasting harm to children. Researchers found that time in child care was linked to increased hyperactivity, anxiety, and aggression, as well as deterioration in motor and social development. Research also found strong evidence of “worse parenting” after the new policy was put into place, as well as a significant deterioration in the reported quality of the relationship between the child’s parents. Based on all this, the researchers concluded that “the consistency of the results suggest that more access to child care is bad for these children (and, at least along some dimensions, for these parents).” Further studies provided the small silver lining that this damage was confined to students from two-parent households, and that child care still did some good for children from single-parent households. But the damage done was lasting. Researchers concluded that “the negative impact of the Quebec program on the noncognitive outcomes of young children appears to persist and grow as they reach school ages,” including a rise in anxiety and aggression as well as worse health and lower life satisfaction.

Tennessee’s statewide voluntary pre-K program serves about 18,000 low-income children at a high level of quality, according to the National Institute of Early Education Research’s metrics, but at a cost of less than $5,000 per student. The results were bad: by third grade, VPK students performed substantially worse on science and math tests, were more likely to be disciplined for behavioral infractions, and more likely to be diagnosed with disabilities.

The Boston Pre-K study provides evidence adequate to reasonably advise city mayors or school boards of well-resourced districts to experiment with the provision of small-scale pre-K programs. But as Congress considers dramatically expanding investment in early education, the Quebec Family Study and the Tennessee VPK study hold vastly more relevance to the American Families Plan, which would (as in Quebec) dramatically scale up early education provision and likely sustain it at a cost point closer to Tennessee’s $5k per pupil than Boston’s $20k. Hence we still, on balance, have more reason for alarm than optimism about what Biden’s American Families Plan will mean for children.

But for the sake of argument, let’s wave away the very real concerns about implementation. And let’s assume that the American Families Plan would yield two more grades in public schools funded at around $20k per year. And let’s assume that from this investment we could expect benefits similar to what researchers found in Boston. And let’s assume that these benefits would be universal, not reserved for affluent white boys.

It would still be far from clear that this study proves that universal pre-k would be a wise public investment. That’s because policymakers must necessarily deal in tradeoffs and counterfactuals, and this study leaves unanswered the question about what would have happened to student outcomes if instead of launching a pre-K program, Boston had instead simply given families $20,000 per child.

Tuesday, June 1, 2021

AI Summary. Across Western democracies, the most educated voters have shifted toward left-wing parties since the 1960s while less-educated voters have leaned right, a divergence between education and income as predictors of ideology that appears in both two-party and proportional systems.

Economist Staff The Economist
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The divergence btw income and education as predictors of political ideology began in the 1960s, with the top 10% of voters by education increasingly supporting left-wing parties, while the bottom 90% leaned right.

Has the educated voters' leftward shift been long-running and international?

Core argument: The top 10% of voters by education have increasingly backed left-wing parties since the 1960s while the bottom 90% leaned right, reflecting a divergence between income and education as predictors of political ideology.

The divergence between income and education as predictors of political ideology began in the 1960s, with the top 10% of voters by education increasingly supporting left-wing parties, while the bottom 90% leaned right. By 2000, the most educated voters were more left-wing than their less-educated peers, a trend that has only widened since. This shift is consistent across Western democracies, affecting both two-party and proportional systems. The rise of educated voters has enabled parties to form winning coalitions by appealing to this demographic, while rival politicians have gained support by opposing their liberal preferences.

Takeaways by Macro Roundup® AI

  1. The top 10% of voters by education have increasingly backed left-wing parties since the 1960s while the bottom 90% leaned right, reflecting a divergence between income and education as predictors of political ideology.
  2. By 2000 the most educated voters were more left-wing than their less-educated peers, a gap that has widened since across Western democracies with both two-party and proportional systems.
  3. The growing share of educated voters has allowed parties to build winning coalitions by appealing to that demographic, while rival politicians have gained support by opposing educated voters' liberal preferences.

"Educated voters’ leftward shift is surprisingly old and international,"The Economist, May 29, 2021, https://www.economist.com/graphic-detail/2021/05/29/educated-voters-leftward-shift-is-surprisingly-old-and-international

Educated voters’ leftward shift is surprisingly old and international

Educated voters’ leftward shift is surprisingly old and international: Extended Excerpt Image 1


You could fill a small library with books on right-wing populism. Some authors argue that these movements emerged in reaction to relatively recent events, such as the financial crisis of 2007-09 or the advent of social media. Others look to longer-lasting regional trends, like European integration or racial politics in America.

Thomas Piketty, an economist, became famous for a book that analysed 200 years of data on wealth inequality in a wide range of countries. This month he published a paper, co-written by Amory Gethin and Clara Martínez-Toledano, which applies a similar approach to the relationship between demography and ideology. Its findings imply that the electoral victories of Donald Trump and the Brexit campaign in 2016 were not an abrupt departure from precedent, but rather the consequence of a 60-year-old international trend.

In a paper in 2018 Mr Piketty noted that elites in Britain, France and America were split between intellectuals who backed left-of-centre parties—he dubbed them the “Brahmin left”—and businesspeople who preferred right-wing ones (the “merchant right”). His new work expands this study from three Western democracies to 21. It combines data on parties’ policy positions with surveys that show how vote choices varied between demographic groups.

The paper finds that income and education began diverging as predictors of ideology long ago. In 1955 both the richest and the most educated voters tended to support conservative parties. Conversely, both poorer and less-educated people mostly chose labour or social-democratic ones.

Today, wealthy people still lean to the right. In contrast, the relationship between education and ideology began to reverse as early as the 1960s. Every year, the 10% of voters with the most years of schooling gravitated towards left-wing parties, while the remaining 90% slid the other way. By 2000, this had gone on for so long that, as a group, the most educated voters became more left-wing than their less-educated peers. The gap has only grown since then.

This trend is strikingly consistent. It developed just as fast in the 20th century as in the 21st, and appears in almost every Western democracy studied. This includes both two-party systems and proportional ones, in which green parties now lure educated voters, and nativist parties attract the less educated. Such breadth and regularity make the rise of right-wing populists like Mr Trump—and of left-of-centre technocrats like Emmanuel Macron or Justin Trudeau—look like a historical inevitability.

Educated voters’ leftward shift is surprisingly old and international: Extended Excerpt Image 2


Although the authors do not identify a cause for this trend, the simplest explanation is that it stems from growing educational attainment. In 1950 less than 10% of eligible voters in America and Europe had graduated from college. Any party relying on this group for support would have had scant hope of winning elections. In contrast, more than a third of Western adults today have degrees, which is enough to anchor a victorious coalition. And once candidates and parties began catering to educated voters—who often put living in a liberal society above lowering their tax bills—rival politicians could start winning elections by taking the opposite position.

Economist on changing patterns in voting behavior across advanced economies"...Today, wealthy people still lean to the right. In contrast, the relationship between education and ideology began to reverse as early as the 1960s. Every year, the 10% of voters with the most years of schooling gravitated towards left-wing parties, while the remaining 90% slid the other way. By 2000, this had gone on for so long that, as a group, the most educated voters became more left-wing than their less-educated peers. The gap has only grown since then. This trend is strikingly consistent. It developed just as fast in the 20th century as in the 21st, and appears in almost every Western democracy studied. This includes both two-party systems and proportional ones, in which green parties now lure educated voters, and nativist parties attract the less educated. Such breadth and regularity make the rise of right-wing populists like Mr Trump—and of left-of-centre technocrats like Emmanuel Macron or Justin Trudeau—look like a historical inevitability...."

Ed Comment, "I suspect highly educated people are swinging left because they read/watch the mainstream news, which is increasingly turning left and growing less objective/more opinionated. So is academics which intentionally influences the media. So they read articles, like the WSJ's summary of the Boston preschool study, and are easily mislead because they don't have the time to read the summary and important critiques of it (which Ben tried to dismiss), and therefore don't know how thick the coating of propaganda really is. In addition, the right is compromising with blue-collar workers to gain votes, and everyone is very creative in finding ways to justify their self-interest. The highly educated don't want free markets to produce higher low-skilled wages. That costs them money and doesn't sooth their guilt. They want rich taxpayer to give workers subsidies. That costs them less and gives them more control. It may seem far fetched, but it's entirely aligned with their self-interest"

AI Summary. The diffusion of product innovations follows a five-stage cycle in which a burst of new producer entries is followed by a slowdown and then a shakeout that reduces producer numbers before a new equilibrium. Data on 46 products show the initial stage's average length fell from 23.1 years for products introduced before 1930 to 4.9 years for those after 1940.

Michael Gort The Economic Journal
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New product entries follow a cyclical pattern, with initial bursts of new entries followed by market shakeouts. Data shows the average duration of initial entry stages has decreased over time, from 23.1 years to 4.9 years.

Do new product markets follow a predictable entry and shakeout cycle?

Core argument: Across 46 products, the average duration of Stage I — the early phase with few producers — fell from 23.1 years for products introduced before 1930 to 4.9 years for those introduced after 1940.

The diffusion of product innovations follows a cyclical pattern characterized by initial bursts of new product entries followed by market shakeouts. This cycle is divided into five stages, with Stage I having few producers and Stage II marking a rapid increase in entries. However, Stage III sees a slowdown, and Stage IV experiences a decline in producer numbers, leading to a new equilibrium in Stage V. Data from 46 products show that the average duration of Stage I has decreased over time, from 23.1 years for products introduced before 1930 to 4.9 years for those after 1940. The contraction phase (Stage IV) had an average net entry rate of -4.84 firms annually over 5.4 years. This pattern suggests that technical changes and information flow significantly influence market structure, with innovations driving entry rates during periods of positive net entry.

Takeaways by Macro Roundup® AI

  1. Across 46 products, the average duration of Stage I — the early phase with few producers — fell from 23.1 years for products introduced before 1930 to 4.9 years for those introduced after 1940.
  2. The Stage IV contraction phase in product diffusion lasted 5.4 years on average with a net entry rate of -4.84 firms annually, following the rapid entry burst of Stage II and the slowdown of Stage III.
  3. The five-stage diffusion pattern suggests that technical change and information flow influence market structure, with innovations driving entry rates during periods of positive net entry before a new equilibrium is reached in Stage V.

Gort and Klepper present evidence that the product show a cycle of large new entries followed by shakeouts, the basic dynamic, “….Stage I encompasses the interval in which the number of producers in the market remains relatively small (usually between one and three). Stage II is the interval from the 'take-off' point of net entry to the time that net entry decelerates drastically. Stage III is the ensuing period of low or zero net entry, and Stage IV is the subsequent period of negative net entry. Stage V represents the new equilibrium in the number of producers that coincides with the maturity of the product market and continues until some new fundamental disturbance generates a change in market structure…”

Michael Gort and Steven Klepper, "Time Paths in the Diffusion of Product Innovations,"The Economic Journal, September 1982, http://www.unife.it/economia/lm.economia/insegnamenti/economia-applicata-avanzata/mat-did/frattini/ff1-gort1982.pdf

Their takeaway, “…(1) The markets for most new products appear to pass through at least five distinguishable stages in the course of their evolution. (2) New industries generally pass through a stage in which the number of producers declines significantly.(3) The evidence does not support the hypothesis that variations in entry of producers into new markets can be explained largely by economies of scale. (4) The dynamic adjustment costs hypothesis as an explanation of entry rates is consistent with some of the evidence but is not a sufficient explanation for many of the observed phenomena. (5) There appears to be an association between rises and declines in the rate of innovation and the rate of entry into new markets. We interpret the causal relation as being positive, and flowing primarily from innovations to entry rates during the period of positive net' entry. (6) The character, importance, and sources of innovations appear to change over the product cycle. (7) The results support the conclusion that the structure of markets (in terms of number and composition of producers) is shaped, to an important degree, by discrete events such as technical change and the flow of information among existing and potential producers…”

“…Results of the decomposition are presented in Tables 2 and 3. For each product, Table 2 lists the number of years classified in each stage and Table 3 lists the mean rate of net entry of the years classified in each stage….Notwithstanding considerable variation in the duration of stages among products, certain dominant attributes of the process of entry stand out in Tables 2 and 3 with remarkable consistency. First, as Table 2 demonstrates, there are few instances of initial commercial introduction of a product that are immediately followed by rapid entry. For all but three of the forty-six innovations, there was at least one year in Stage I (preceding take-off in entry). Closer examination of Table 2 indicates that the average length of Stage I has declined over time. While the overall average length of Stage I is I4j4 years, the average length of Stage I for products introduced before I930 was 23-I years; it was 9-6 years for those introduced in I930-9 and only 4-9 years for products introduced in I940 or later. While the result could arise partly from sample selection bias, it strongly suggests that the interval required for successful imitation has systematically declined over time. Table 2 further indicates that, of the 36 products which had attained Stages IV or V by I973, all proceeded through a distinct contraction phase in the number of producers. As indicated in Table 3, the average annual rate of net entry in this period for the 36 products was - 4-84 firms. The average duration of the stage was 5-4 years - roughly half the average duration of 9.7 years for Stage II…”

“…we assembled data on the historical development of 46 new products.' The 46 were chosen on the basis of three criteria: (I) to allow sufficient diversity by including consumer, industrial, and military products; (2) to include only products that were 'basic' innovations; (3) to include products with adequate data on net entry. The 46 products are listed inTable 2 along with the year they were first commercially introduced.2 The initial dates of commercial introduction span a 73-year period, beginning with phonograph records in 1887 and ending with lasers in 1960…”

The evidence,

AI Summary. An analysis of 46 products finds new industries follow a common pattern: a rise in the number of firms, a shakeout averaging a 52% net decline in producers with some industries losing over 80%, and then stabilization. The authors argue the shakeout phase sets market structure, tending to leave the lowest-cost firms.

Steven Klepper and Elizabeth Graddy The RAND Journal of Economics
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New industries grow rapidly, then experience a significant shakeout, with 38 of 46 products showing a net decrease of 52% in producers by 1981.

Do new industries follow a common pattern of growth, shakeout, and stabilization?

Core argument: Klepper and Graddy find that across 46 products, 38 had entered a shakeout phase by 1981, with an average net decrease of 52% in the number of producers and some industries shedding over 80%.

Klepper and Graddy's analysis reveals a distinct pattern in the evolution of new industries, characterized by initial growth in the number of firms, followed by a significant shakeout, and eventual stabilization. Data from 46 products show that by 1981, 38 had entered the shakeout phase, with an average net decrease of 52% in producers during this stage, and some industries experiencing reductions of over 80%. This shakeout phase is critical as it determines the market structure, often leaving only firms with the lowest costs. The stabilization phase shows varied outcomes, with 11 products experiencing a net increase in producers, 8 a decrease, and 3 remaining unchanged. This cycle underscores the importance of cost efficiency and timing in achieving market dominance.

Takeaways by Macro Roundup® AI

  1. Klepper and Graddy find that across 46 products, 38 had entered a shakeout phase by 1981, with an average net decrease of 52% in the number of producers and some industries shedding over 80%.
  2. Klepper and Graddy describe new industries as following a pattern of initial growth in firm numbers, a shakeout, and eventual stabilization, with the shakeout phase determining market structure and often leaving only the lowest-cost firms.
  3. In the stabilization phase identified by Klepper and Graddy, 11 products saw a net increase in producers, 8 a decrease, and 3 no change.

Klepper/Graddy argue that they“..establish that the number of firms in new industries follows a distinctive path: first it grows, then declines sharply, and finally levels off…”echoing a cycle of new entries followed by shakeouts

Their takeaway, “…Analyzing first the data on the number of firms, each product history was divided into a maximum of three stages. Stage 1 is composed of the years in which the number of firms grows. Stage 2 is characterized by a decline or shakeout in the number of firms. Stage 3 is composed of the period after the shakeout when the number of firms stabilizes…One factor bearing on the evolutionary process is chance. In each period, potential entrants randomly receive information that qualifies them for a particular cost. The realization of this random process will have an important effect on an industry’s ultimate market structure. To see this, note that the model predicts thatthe industry will even be composed of only those firms that attain the lowest possible cost after imitation, with the largest firms being those that were among the first to attain this cost. If, after the first N firms attain this cost, there is an unexpectedly long period before other firms receive the information required to attain this cost, then the N-firm concentration ratio of the industry will be high, ceteris paribus. Indeed, if there is an unexpectedly long delay after the first firm attains the lowest possible cost, then the industry could end up as a virtual monopoly…”

Steven Klepper and Elizabeth Graddy: Extended Excerpt Image 1

 

Steven Klepper and Elizabeth Graddy: Extended Excerpt Image 2

Steven Klepper and Elizabeth Graddy, “The Evolution of New Industries and the Determinants of Market Structure,” The RAND Journal Of Economics, Spring 1990, https://www.jstor.org/stable/2555491

Their evidence, “…Table 1 lists the 46 products and the number of years in each stage for each product. The table indicates that by 1981, all but 8 of the products had attained stage 2, and 22 of the 46 products had attained stage 3. The 8 products that had not attained stage 2 by 1981 are relatively young, with a mean birth year of 1945 versus 1926 for the other 38 products. Thus, it might be expected that eventually these products will also pass through a shakeout period before reaching maturity. While the 46 products appear to follow a similar pattern in terms of the three stages in the number of producers, Table 1 indicates that the length of each stage varies considerably across products. This is particularly true for stage 1, where some products have a much longer gestation period before developing a sizable market.9 The average number of years in stages 1 and 2 across all products attaining the next stage is reported at the bottom of Table 1. Table 2 lists the mean annual change in the number of producers in each stage for each product. Not surprisingly, in each stage there is considerable variation across products in the mean annual change in the number of producers, particularly in stages 1 and 2. What is more surprising is the severity of stage 2 (the shakeout) and the relative stability in the number of producers in stage 3. The severity of stage 2 is conveyed by Table 3, which reports the net decrease in the number of producers in stage 2 as a fraction of the peak number of producers for the 22 products attaining stage 3 by 1981. On average, Table 3 indicates there was a net decrease of 52% of the producers in stage 2, with some industries experiencing a shakeout of over 80% of their producers. In contrast, there is no clear trend in the number of producers in stage 3 for the same 22 products: 11 experience a net increase, 8 a net decrease, and 3 no change at all in the number of producers...”