durable goods monopolists durable goods monopolists face special problems because the sale of their products creates a secondhand market not controlled by the monopolist to the extent the monopolist is able to rent his product rather than sell it or to make binding promises about his future production such problems are ameliorated given the inability to do the above the monopolist is led to producing goods less durable than those produced by either competitive firms or monopolist returns a reverse averch johnson result that monopolist sellers may invest less in fixed costs including plant modernization and research and development than would the renters is shown it is also shown that even though sellers have less monopoly power than renters and nondurable goods monopolists it is possible that the seller will cause a greater deadweight loss than the other types of monopolies

coexistence of strategic vertical separation and integration abstract this paper gives conditions under which vertical separation is chosen by some upstream firms while vertical integration is chosen by others in the equilibrium of a symmetric model a vertically separating firm trades off fixed contracting costs against the strategic benefit of writing a two part tariff exclusive dealing contract with its retailer coexistence emerges when more than two vertical cournot oligopolists supply close substitutes when vertical integration and separation coexist welfare could be improved by reducing the number of vertically separating firms the scope for coexistence diminishes when assumptions on contract observability and commitment are relaxed

simulation study of the price differentiation effect in a stochastic deteriorating inventory with heterogeneous consumers freshness sensitivity a fixed price policy regardless of expiration date may result in unsold inventory and sales loss price reduction over time as the expiration date approaches motivates customers to purchase all items including the ones that are left with only a short interval until their expiration we conduct a discrete event simulation that captures the main characteristics of this phenomenon results show that a moderate differentiation of price increases profits by 6 a larger differentiation reduces profits profits are the highest for freshness oriented customers a fixed price policy is preferred in an environment of large variance and expected near term expirations

foundations of dynamic monopoly and the coase conjecture subgame perfect equilibria are characterized for a market in which the seller quotes a price each period assume zero costs positive interest rate continuum of buyers and some technical conditions if buyers valuations are positive then equilibrium is unique buyers strategies are stationary and the price sequence is determinant along the equilibrium path but possibly randomized elsewhere otherwise a continuum of stationary equilibria can exist but at most one with analytic strategies coase s conjecture is verified for stationary strategies reducing the period length drives all prices to zero or the least valuation connections to bargaining models are described journal qf economic literature classification

concurrent renting and selling in a durable goods monopoly under threat of entry this article analyzes the choice of contract sales or rental of a durable goods monopolist facing a threat of future entry although in the absence of such a threat a monopolist would prefer to rent his entire output we show that the threat of entry alters that preference there is an optimal preentry contract mix involving both rental and sales if both firms behave as cournot duopolists after entry the optimal choice of preentry contracts enables the erstwhile monopolist to gain the same profits as he would if he behaved as a von stackelberg leader

long term care in latin america and the caribbean theory and policy considerations this paper discusses theoretical and practical issues related to long term care ltc services in latin america demand for these services will rise as the region undergoes a swift demographic transition from its currently young population to a rapidly aging one especially since the region s aging cohorts are more prone to experience a decline in their functional and physical abilities than elderly people elsewhere in the world we argue that private insurance markets are ill equipped to provide coverage to meet the need for ltc while the amount of personal savings required to afford self insurance would be prohibitively high in latin america ltc may not be an immediate priority but governments are likely to encourage the development of ltc programs as demand for them steadily grows in particular policymakers are probably going to focus initially on ltc programs for the poor and vulnerable for whom affordability of ltc is a greater problem we therefore study how basic elements of policy design affect cost effectiveness of ltc programs by means of a formal model in a simple context where families can provide care themselves or hire care in a market we find that pro poor programs are more cost effective when families have the option to receive cash subsidies as the opportunity cost of providing care is lower for poor families moreover the availability of in kind and in cash choices reduces program costs overall by screening families based on their opportunity cost of providing care

decentralized procurement in light of strategic inventories the centralization versus decentralization choice is perhaps the quintessential organizational structure decision in the operations realm this choice is particularly critical when it comes to the procurement function why firms may opt to decentralize procurement has been often studied and confirmed to be a multifaceted choice this paper complements existing studies by detailing the trade offs in the centralization versus decentralization decision in light of firms strategic use of inventories to influence supplier pricing in particular we demonstrate that a firm s decision to cede procurement choices to its individual divisions can help moderate inventory levels and provide a natural salve on supply chain frictions this paper was accepted by serguei netessine operations management

the optimal allocation of prizes in contests we study a contest with multiple not necessarily equal prizes contestants have private information about an ability parameter that affects their costs of bidding the contestant with the highest bid wins the first prize the contestant with the second highest bid wins the second prize and so on until all the prizes are allocated all contestants incur their respective costs of bidding the contest s designer maximizes the expected sum of bids our main results are 1 we display bidding equlibria for any number of contestants having linear convex or concave cost functions and for any distribution of abilities 2 if the cost functions are linear or concave then no matter what the distribution of abilities is it is optimal for the designer to allocate the entire prize sum to a single first prize 3 we give a necessary and sufficient conditions ensuring that several prizes are optimal if contestants have a convex cost function

auctionin entry into tournaments a research tournament model with heterogeneous contestants is presented for a large class of contests the optimal number of competitors is two this insight makes designing the tournament easier and highlights the importance of selecting highly qualified contestants while customary uniform price and discriminatory price auctions are intuitively appealing mechanisms for solving this adverse selection problem in practice they generally will not be efficient mechanism for selecting contestants instead we propose an alternative auction format that is equally simple to implement and efficiently selects the most qualified contestants to compete regardless of the form of contestant heterogeneity

risk taking in contests and the role of carrots and sticks i introduction when individuals compete for promotions bonuses or other rewards tied to their relative performance ranking vis a vis other contestants competition is likely to drive not just work effort but where imperfect monitoring permits other choices at the contestants discretion in this article we ask how rank dependent compensation influences attitudes toward risk or the choice of variance of output when contestants have opportunities to influence this aspect of their output distribution unlike previous literature we assume that it is costly for contestants to alter the variance of output and that identical contestants simultaneously choose both the mean of their output distribution i e work effort and its variance our analysis emphasizes the importance of the number of players and symmetry or lack thereof of payoffs on contestants incentives we find that contestants will engage in risk seeking increasing the variance of their output distribution in contests among three or more players when the payoff structure offers a greater prize for ranking first than the penalty for ranking last as happens in winner take all contests if the tournament organizer or sponsor values the aggregate output of the contestants as is typically assumed in labor market tournaments this risk seeking behavior is inefficient because it is costly but does not increase the expected output however we argue that many contests such as the research and development tournaments first modeled by taylor 1995 may be characterized by an organizer who cares only or primarily about the highest output achieved by a single contestant e g the best submission received in such cases the organizer may benefit from costly risk taking among contestants we show that three payoff levels a prize to the contestant ranked first a penalty to the contestant ranked last and a common intermediate payoff to all others are sufficient to achieve any combination of effort and variance of output that the organizer wishes to induce among contestants so long as the desired output variance does not exceed that which results from a winner take all prize structure therefore the sponsor s problem can be characterized as choosing the optimal mean and variance of the output distribution given the contestants costs of influencing the mean and variance of output in this way our model provides an explanation for the importance of both carrots prizes and sticks penalties in competitive settings only through the combined use of both can a contest organizer determine the effort and the variance of output chosen by contestants and doing so is necessary to achieve optimal performance from contests since the pioneering work of lazear and rosen 1981 nalebuff and stiglitz 1983 o keeffe viscusi and zeckhauser 1984 and others rank order tournaments or contests have been used to model incentives in a variety of economic settings in particular executive compensation has frequently been modeled as a tournament in which low level executives are motivated by the prospect of climbing the corporate ladder and obtaining the large salaries attendant to top ranking executives as in rosen 1986 and bognanno 2001 similarly the behavior of investment fund managers who compete for top fund rankings has been modeled as a tournament by brown harlow and starks 1996 taylor 1995 developed a model of research tournaments in which contestants search for an innovation and the best innovation submitted to the sponsor wins a prize the distinguishing feature of a tournament or contest is that contestants are paid based on the rank of their output relative to others rather than the level of output prize levels are set in advance and competition to win generates the incentive to exert effort to increase output lazear and rosen 1981 showed that rank order tournaments can provide an efficient incentive framework in a labor market setting when workers are risk neutral

technology choice relative performance pay and worker heterogeneity abstract we identify a new problem that may arise when heterogeneous workers are motivated by relative performance pay if workers abilities and the production technology are complements the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker s productivity due to the complementarity between ability and technology under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague as a consequence both workers motivation to exert effort is reduced we show that this adverse incentive effect is dominant and consequently keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and or monitoring of workers is sufficiently precise

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

technology growth and expenditure growth in health care in the united states health care technology has contributed to rising survival rates yet health care spending relative to gdp has also grown more rapidly than in any other country we develop a model of patient demand and supplier behavior to explain these parallel trends in technology growth and cost growth we show that health care productivity depends on the heterogeneity of treatment effects across patients the shape of the health production function and the cost structure of procedures such as mris with high fixed costs and low marginal costs the model implies a typology of medical technology productivity i highly cost effective home run innovations with little chance of overuse such as anti retroviral therapy for hiv ii treatments highly effective for some but not for all e g stents and iii gray area treatments with uncertain clinical value such as icu days among chronically ill patients not surprisingly countries adopting category i and effective category ii treatments gain the greatest health improvements while countries adopting ineffective category ii and category iii treatments experience the most rapid cost growth ultimately economic and political resistance in the u s to ever rising tax rates will slow cost growth with uncertain effects on technology growth

executive compensation and tournament theory empirical tests on danish data this article adds to the empirical literature on tournament theory as a theory of executive compensation i test several propositions of tournament models on a rich data set containing information about 2 600 executives in 210 danish firms during a 4 year period i ask are pay differentials between job levels consistent with relative compensation is pay dispersion between levels higher in noisy environments is the dispersion affected by the number of tournament participants is average pay lower in firms with more compressed pay structures does wider pay dispersion enhance firm performance most of the predictions gain support in the data

the timing of sales this paper presents a model of intertemporal price discrimination a fixed number of sellers produce a homogeneous good consumers with different preferences enter the market in each period and leave when they make a purchase the sellers typically vary their prices over time charging a high price in most periods but occasionally cutting the price to sell to a large group of customers with a low reservation price in some equilibria all stores lower their price at the same time and to the same level

benefits of channel discord in the sale of durable goods minimizing strife through vertical integration is commonly seen as the holy grail for long term success in product distribution in this paper we take a different slant showing that sometimes a separated channel that embodies a degree of discord can be helpful particularly when a long term view is taken this result is shown in the context of durable goods manufacturing the quandary of durable goods production is that once demand for a certain time frame is met there is a subsequent temptation to flood the market with additional goods as such consumers are reluctant to buy immediately instead opting to wait for discounted prices this problem can be alleviated by a degree of channel discord high wholesale prices ensure future sales will slow to a trickle

how tournament incentives affect asset markets a comparison between winner take all tournaments and elimination contests abstract we investigate the impact of investment managers tournament incentives on investment strategies and market efficiency distinguishing between winner take all tournaments wta where a minority wins and elimination contests ec where a majority wins theoretically we show that investment managers play heterogeneous strategies in wta and homogeneous strategies in ec and markets are more prone to mispricing in wta than in ec experimentally we find that investment managers play more heterogeneous strategies in wta than in ec but this does not trigger significant differences in prices moreover prices in wta and ec do not differ significantly from markets composed of linearly incentivized subjects

the economic effects of energy price shocks large fluctuations in energy prices have been a distinguishing characteristic of the u s economy since the 1970s turmoil in the middle east rising energy prices in the u s and evidence of global warming recently have reignited interest in the link between energy prices and economic performance this paper addresses a number of the key issues in this debate what are energy price shocks and where do they come from how responsive is energy demand to changes in energy prices how do consumers expenditure patterns evolve in response to energy price shocks how do energy price shocks affect u s real output inflation and stock prices why do energy price increases seem to cause recessions but energy price decreases do not seem to cause expansions why has there been a surge in the price of oil in recent years why has this new energy price shock not caused a recession so far have the effects of energy price shocks waned since the 1980s and if so why as the paper demonstrates it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets when answering these questions

tournament rewards and risk taking this article considers a lazear rosen tournament model where agents can influence both the spread of their output distribution risk taking and its mean the unique equilibrium induces excessive risk taking and a low level of effort by modifying the tournament to give the highest prize to the agent with the most moderate output a low level of risk taking and high level of effort can be sustained as an equilibrium the first result can be useful to understand the relative performance evaluation puzzle of executive compensation and the second result can be useful to understand puzzling workplace norms promoting mediocrity

contests with stochastic abilities we consider the properties of perfectly discriminating contests in which players abilities are stochastic but become common knowledge before efforts are expended players whose expected ability is lower than that of their rivals may still earn a positive expected payoff from participating in the contest which may explain why they participate we also show that an increase in the dispersion of a player s own ability generally benefits this player it may benefit or harm his rival but cannot benefit the rival more than it benefits himself we also explore the role of stochastic ability for sequential contests with the same opponent multibattle contests and with varying opponents elimination tournaments and show that it reduces the strong discouragement effects and holdup problems that may otherwise emerge in such games high own ability dispersion selects such players into the contest and favors them in elimination contests jel d72 d74 i introduction manytournamentsarecharacterizedbymultiple rounds with or without the elimination of some candidates in earlier stages of the process of determining a final winner in the political context electionprocessesthatdetermineparty leadersorpoliticalleadersmoregenerallyconsist ofmultipleconteststages intheracefortheu s presidency severalcompetitionstagesgradually narrowdownthenumberofcompetitors 1 inter

psychological pressure in competitive environments evidence from a randomized natural experiment much like cognitive abilities emotional skills can have major eects on performance and economic outcomes this paper studies the behavior of professional subjects involved in a dynamic competition in their own natural environment the setting is a penalty shoot out in soccer where two teams compete in a tournament framework taking turns in a sequence of ve penalty kicks each as the kicking order is determined by the random outcome of a coin ip the treatment and control

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality

are college graduates more responsive to distant labor market opportunities abstract are highly educated workers better at locating in areas with high labor demand to answer this question i use three decades of u s census data to estimate a mcfadden style model of residential location choice i test for education differentials in the likelihood that young workers reside in states experiencing positive labor demand shocks at the time these workers entered the labor market i find effects of changes in state labor demand on college graduate location choice that are several times greater than for high school graduates nevertheless medium run wage effects of entry labor market conditions for college graduates equal or exceed those of less educated workers

does pooling purchases lead to higher profits consider two buyers facing uncertain demands who need to purchase a common critical component from a powerful sole source supplier if the two buyers pool their demands and purchase from the supplier as a single entity will they necessarily earn higher profits than purchasing separately we show that when a powerful supplier extracts profits from the buyers through optimal contract design the demand variability reduction achieved by pooling can harm the buyers because it makes extracting profits easier for the supplier we characterize cases when pooling is disadvantageous and also provide insights into when it is still advantageous our result is in contrast to the case where the price of the component is exogenous typically assumed in most of the pooling literature in which case pooling demands is always beneficial for the buyers

sales and consumer inventory temporary price reductions sales are common for many goods and naturally result in a large increase in the quantity sold we explore whether the data support the hypothesis that these increases are at least partly due to demand anticipation at low prices consumers store for future consumption this effect if present has broad economic implications we test the predictions of an inventory model using scanner data with two years of household purchases the results are consistent with an inventory model and suggest that static demand estimates may overestimate price sensitivity

grind or gamble an experiment on effort and spread seeking in contests we conduct a contest experiment to study if spread seeking and effort can be managed when participants can invest in increasing both the mean and the spread of an uncertain performance variable subjects are treated with different prize schemes and in accordance with theory we observe higher investments in spread for the winner take all scheme both types of investments can be controlled with a three level prize scheme however the control management is imperfect and behavior is characterized by inertia we also explore the correlation between effort and spread across subjects and find that is robustly positive

equilibrium price dispersion with consumer inventories abstract a model with two types of consumers shoppers and captives is constructed that leads to an equilibrium price dispersion shoppers may hold inventories of the good the level of consumer inventories leads to state dependent price dispersions it is shown that prices and quantities display negative serial correlation the model is tested using grocery store data which display the predicted correlations journal of economic literature classification numbers d43 l13 d83 l81

managing strategic inventories via manufacturer to consumer rebates manufacturer to consumer rebates are a staple of modern supply chains such rebates are typically viewed as a means of price discrimination because of partial redemption by consumers however the proliferation of universally redeemed instant rebates suggests the practice may be motivated by additional considerations an issue we tackle in this paper our results demonstrate that consumer rebates can be particularly useful when a supply chain encounters inefficiencies stemming from strategic inventory buildup by retailers wary of high wholesale prices a retailer may hold excess inventory to convey a lower willingness to pay in future interactions and thereby strategically undercut future wholesale prices as a retaliatory consequence the manufacturer sets high near term wholesale prices the pull promotion from consumer rebates encourages more timely retail sales and in doing so undercuts but does not eliminate the retailer s strategic inventories in other words the introduction of consumer rebates can serve as an enticement for retailers to sell not just for consumers to buy perhaps surprisingly we find that the manufacturer retailer and consumers alike all benefit from the use of rebates this despite the fact that the manufacturer uses the rebates in self interest and as a strategic weapon this paper was accepted by yossi aviv operations management

changing the way the elderly live evidence from the home health care market in the united states abstract i examine how decreases in government coverage of home health care visits to the elderly in the united states have affected their living arrangements specifically i exploit geographic variation in the medicare home health care reimbursement rate that arose as a result of legislation passed in 1997 and i identify its impact on the living arrangements of older medicare beneficiaries i find that less generous reimbursement policies lead to a greater fraction of elderly giving up independent living baseline model estimates suggest that a decline in reimbursement of one visit per user leads to a 0 98 increase in the fraction of elderly medicare beneficiaries living in shared living arrangements that is living with somebody else rather than alone or with only the spouse this estimate implies that a decline in reimbursement of 5 1 visits per medicare beneficiary increases the fraction of elderly that live in shared living arrangements by 1 12 percentage points such an increase is consistent with the time series increase in the fraction of elderly that live in shared living arrangements between 1997 and 2000

the relational advantages of intermediation this paper provides a novel explanation for the use of supply chain intermediaries we find that even in the absence of the well known transactional and informational advantages of mediation inter

retail pricing and clearance sales sellers of new products are faced with having to guess demand conditions to set price appropriately but sellers are able to adjustprice over time and to learn from past mistakes additionally it is not necessary that all goods be sold with certainty it is sometimes better to set a high price and to risk no sale this process is modeledto explain retail pricing behavior and the time distribution of transactions prices start high and fall as a function of time on theshelf the initial price and rate of decline can be predicted and depends on thinness of the market the proportion of customers who are window shoppers and other observable characteristics copyright 1986 by american economic association

durable goods monopoly with varying demand this paper solves for the proflt maximising strategy of a durable goods monopolist when incoming demand varies over time each period additional consumers enter the market these consumers can then choose whether and when to purchase we flrst characterise the consumer s utility maximisation problem and under a monotonicity condition show the proflt maximising allocation can be solved through a myopic algorithm which has an intuitive marginal revenue interpretation consumers ability to delay creates an asymmetry in the optimal price path which exhibits fast increases and slow declines this asymmetry pushes the price level above that charged by a flrm facing the average level of demand applications of this framework include deterministic demand cycles one ofi shocks and iid demand draws the optimal policy outperforms renting and can be implemented by a time consistent best price provision

belief precision and effort incentives in promotion contests the career concerns literature predicts that incentives for effort decline as beliefs about ability become more precise holmstr om 1982 1999 in contrast we show that effort can increase with belief precision when agents compete for promotions to better paid jobs that are assigned on the basis of perceived abilities in this case an intermediate level of precision provides the strongest incentive for effort with effort increasing decreasing when beliefs are less more precise

modifying variability and correlations in winner take all contests we consider contests with a fixed proportion of winners based on relative performance special attention is paid to winner take all contests which we define as contests with relatively few winners receiving relatively large awards but we consider the full range of values of the proportion of winners if a contestant has the opportunity to modify the distribution of her performance what strategy is advantageous when the proportion of winners is less than one half a riskier performance distribution is preferred when this proportion is greater than one half it is better to choose a less risky distribution using a multinormal model we consider modifications in the variability of the distribution and in correlations with the performance of other contestants increasing variability and decreasing correlations lead to improved chances of winning when the proportion of winners is less than one half and the opposite directions should be taken for proportions greater than one half thus it is better to take chances and to attempt to distance oneself from the other contestants i e to break away from the herd when there are few winners a more conservative herding strategy makes sense when there are many winners our analytical and numerical results indicate that the probability of winning can change substantially as variability and or correlations are modified furthermore in a game theoretic setting in which all contestants can make modifications choosing a riskier less risky performance distribution when the proportion of winners is low high is the dominant best response strategy we briefly consider some practical issues related to the recommended strategies and some possible extensions

speculative storage in imperfectly competitive markets markets for many commodities are characterized by imperfectly competitive production as well as substantial storage by speculators who are attracted by significant price volatility we examine how speculative storage affects the behavior of an oligopoly producing a commodity for which demand is subject to random shocks speculators compete with consumers when purchasing the commodity and then subsequently compete with producers when selling their stocks resulting in two opposing incentives on the one hand producers would like to increase production to capture future sales in advance by selling to speculators while on the other hand they would like to withhold production to deter speculation thereby eliminating the additional supply from speculators in future periods we find that the incentive to sell to speculators can be quite strong potentially resulting in prices sufficiently high to drive consumers from the market furthermore these incentives are non monotonic in the number of producers speculative storage occurs more frequently in a relatively concentrated oligopoly than in the extremes of monopoly or perfect competition

centralized vs decentralized procurement does dispersed information call for decentralized decision making abstract should the government procure equipment for its agencies or let them run their own procurement auctions suppose the agency has private information about product quality but is inclined to favour local suppliers decentralization saves bureaucracy and agency costs costs tied to truthful revelation of quality information but leads to biased decisions a discriminatory auction i show that the costs associated with discrimination may increase when the quality differences or the probability that the agency knows the quality increase moreover this effect may be dominant implying that increased importance of local information may be an argument for centralization

an economic theory of planned obsolescence planned obsolescence is the production of goods with uneconomically short useful lives so that customers will have to make repeat purchases however rational customers will pay for only the present value of the future services of a product therefore profit maximization seemingly implies producing any given flow of services as cheaply as possible with production involving efficient useful lives this paper shows why this analysis is incomplete and therefore incorrect monopolists are shown to desire uneconomically short useful lives for their goods oligopolists have the monopolist s incentive for short lives as well as a second incentive that may either increase or decrease their chosen durability however oligopolists can generally gain by colluding to reduce durability and increase rentals relative to sales some evidence is presented that appears to be generally consistent with the predictions of the theory

price discrimination and social welfare studies the effect of price discrimination on social welfare using methods from duality theory features of the reservation model presented quasi linear utility and consumers surplus upper and lower bounds on welfare change bounds on welfare change with optimal price discrimination from ebsco

licensing information goods abstract a significant amount of research on patent licensing and the diffusion of knowledge is organized around static frameworks of analysis patent holders however may face a dynamic problem namely the intertemporal consistency problem of the durable goods monopolist that is induced by durability on the demand side licensing practices such as exclusive licensing contracts and most favored customer clauses allow patentees to solve or mitigate this dynamic consistency problem there are situations however where these practices are not possible either due to the nature of the patent the case of information goods or due to compulsory patenting laws we study the effects of the intertemporal consistency problem on patent licensing in these situations relative to the existing literature we obtain the following main results i all of the firms that remain in the industry will be using the innovation ii royalty licensing may be superior to fixed fee or auction licensing from the licensor s point of view iii social welfare and consumer surplus may be lower than when the patent holder can commit not to make additional sales iv even for non drastic innovations the price of the good that is produced may be lower than the competitive price corresponding to the initial situation before the innovation was discovered

the dynamics of portfolio management contracts we consider the multiperiod relationship between a client and a portfolio manager and the resulting problem of motivating a manager of unknown ability to acquire valuable information we explore the contractual forms and the optimal retention policy of the client and find that the optimal initial set of contracts features a smaller performance based fee component paid to the manager than in a first best contract and the contract choice elicits only partial information about the manager as a result ex post performance measurement is critical to future recontracting in general managers are retained only if the returns on their portfolio exceed the benchmark by an appropriate amount article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

tournaments as a response to ambiguity aversion in incentive contracts we study a principal agent problem with multiple identical agents where the action dependent stochastic relationship between actions and output is perceived to be ambiguous and agents are ambiguity averse we argue that ambiguity and particularly ambiguity aversion make it more attractive for the principal to choose a tournament if agents are risk neutral but ambiguity averse we show that the set of optimal incentive schemes contains a tournament moreover if ambiguity is rich enough all optimal incentive schemes must be such that realized output levels affect only the distribution of wages across agents and not the total wages paid out as it is true for tournaments when agents are both risk averse and ambiguity averse tournaments need not be optimal but ambiguity and ambiguity aversion still favor in many cases the use of tournaments or tournament like schemes over e g incentive schemes that only depend on each agent s own output level

myopic risk taking in tournaments abstract there is a common notion that incentive schemes in the financial industry trigger myopia and risk taking in some sense this contrasts with the concept of myopic loss aversion mla which implies that myopia mitigates risk taking a number of experimental studies support the mla hypothesis by showing that people take less risk the more frequently their investments are evaluated in this paper we show experimentally that if subjects are exposed to tournament incentives the standard mla effect disappears rather there is a tendency towards more risk taking the more frequently investments are evaluated

home care reimbursement long term care utilization and health outcomes abstract using a substantial change in medicare reimbursement policy to study the market for home health care i find that the introduction of tightly binding average per patient reimbursement caps led to a large drop in the provision of home care particularly to the least healthy beneficiaries this decline in home health utilization was not offset by increases in institutional long term care or other medical care and there were no associated adverse health consequences however approximately one quarter of the decline in medicare spending was offset by increases in out of pocket expenditures for home health care with the offset concentrated in higher income populations

strategic inventories in vertical contracts classical reasons for carrying inventory include fixed nonlinear production or procurement costs lead times nonstationary or uncertain supply demand and capacity constraints the last decade has seen active research in supply chain coordination focusing on the role of incentive contracts to achieve first best levels of inventory an extensive literature in industrial organization that studies incentives for vertical controls largely ignores the effect of inventories does the ability to carry inventory influence the problem of vertical control conversely can inventories arise purely due to incentive effects this paper explicitly considers both incentives and inventories and their interplay in a dynamic model of an upstream firm supplier and a downstream firm buyer who can carry inventories in our model none of the classical reasons for carrying inventory exists however as we prove the buyer s optimal strategy in equilibrium is to carry inventories and the supplier is unable to prevent

pricing and promotions in asymmetric duopolies this paper develops a modeling framework for making promotions decisions in contrast to some of the prior research the framework explicitly models promotions its central feature is the view of promotions competition as a multistage game in which regular prices are chosen first followed by the choice of promotion depths and frequencies it is used to illustrate the nature of competition between a national brand and private label in equilibrium the national brand promotes to ensure that the private label does not try to attract consumers away from the national brand moreover the private label does not promote this equilibrium is also contrasted with varian s framework used by other researchers in which mixed strategy equilibrium prices are interpreted as promotions

dealing temporary price cuts by seller as a buyer discrimination mechanism this paper is concerned with temporary price cuts deals sales and specials as a mechanism for the seller to price discriminate between buyers with different intensities of demand we analyze why a seller offers such price cuts which buyers take advantage of them and what the parameters are that determine the amount and frequency of the discount offered in the remainder of this section we briefly review the literature on price deals 1 in section ii simple models of buyer and seller behavior are developed and we show why and how a seller adopts a dealing strategy section iii summarizes the key implications of the model and indicates how the price discrimination hypothesis could be tested in practice section iv suggests possible extensions of the model finally section v gives our conclusions in the marketing literature the issue of who is deal prone has been extensively researched an explanation for temporary price cuts usually called deals sales or specials is provided we hypothesize that they are a mechanism that discriminates between more intense and less intense demanders we further hypothesize a positive relationship between demand elasticity and holding costs buyers with more intense demand with high holding costs are those who will be buying the product at its regular price the low holdingcost buyers take advantage of deals by forward buying the model is applicable to three relationships 1 manufacturer reseller where the reseller may be a wholesaler or a retailer 2 resellerreseller for example wholesaler retailer and 3 retailer consumer we are grateful to michael mussa and albert madansky for their comments we also benefited from comments made by the marketing faculty of the wharton school at a seminar where an earlier version of this paper was presented neil beckwith in particular is acknowledged 1 for a more detailed review of deals and similar pricecutting mechanisms e g mail in rebates cents off labels coupons etc see narsimhan 1982 chan 2 journal of business 1985 vol 58 no 3 1985 by the university of chicago all rights reserved 0021 9398185 5803 0004 01 50

gambling in contests this paper presents a strategic model of risk taking behavior in contests formally we analyze an n player winner take all contest in which each player decides when to stop a privately observed brownian motion with drift a player whose process reaches zero has to stop the player with the highest stopping point wins unlike the explicit cost for a higher stopping time in a war of attrition here higher stopping times are riskier because players can go bankrupt we derive a closed form solution of a nash equilibrium outcome in equilibrium highest expected losses occur at an intermediate negative value of the drift

storable good monopoly the role of commitment we study dynamic monopoly pricing of storable goods in an environment where demand changes over time the literature on durables has focused on incentives to delay purchases our analysis focuses on a different intertemporal demand incentive for consumers the key force on the consumer side is advance purchases or stockpiling this stockpiling motive can be present in the case of standard durables as well in environments unmodeled in the prior literature we show that if the monopolist cannot commit then prices are higher in all periods and social welfare is lower than in the case in which the monopolist can commit this is in contrast with the durable goods analysis in the literature on the coase conjecture

incorporating quantity discounts and their inventory impacts into the centralized purchasing decision multi site organizations must balance conflicting forces to determine the appropriate degree of purchasing centralization for their respective supplies the ability to garner quantity discounts represents one of the primary reasons that organizations centralize procurement this paper provides methodologies to calculate optimal order quantities and compute total purchasing and inventory costs when products have quantity discount pricing procedures for both all units and incremental quantity discount schedules are provided for four different strategic purchasing configurations scenarios complete decentralization centralized pricing with decentralized purchasing centralized purchasing with local distribution and centralized purchasing and warehousing for ordering decisions under local distribution procedures to determine optimal order quantities and costs are presented in a precise form that could be easily implemented into spreadsheets by practicing managers for the more complicated multi echelon scenarios we introduce a single cycle policy with a tailored aggregation refinement step that performs very well under experimentation when compared to a conservative bound

bank stability and managerial compensation abstract we investigate the relationship between insolvency risk and executive compensation for bhcs over the 1992 2008 period we employ ceo compensation sensitivity to risk vega and pay share inequality between the ceo and other executives as measures of compensation and employ a system model to account for the endogeneity problem between vega and risk five main results are obtained first ceo compensation sensitivity to risk of bhcs has risen in response to deregulation to resemble those of the industrial firms second higher vegas lead to greater bank instability third the association between bank stability and managerial compensation is bi directional higher vegas induce greater risk and vice versa fourth bhcs in the next to the largest size group increase ceo vegas the most and have the strongest potential to create instability fifth increased pay share inequality has effects opposite to those of the increase in vega greater pay share inequality is associated with greater stability

dynamic interaction between markets for leasing and selling automobiles we develop a model of dynamic interactions between price variations in leasing and selling markets for automobiles our framework assumes a differential game between multiple bertrand type competing firms which offer differentiated products to forward looking agents empirical analysis of our model using monthly us data from 2002 to 2011 shows that variations in selling cash market prices lead rapidly dissipating changes of leasing market prices in the opposite direction we discuss the practical implications of these results by augmenting a standard leasing valuation formula the additional terms represent the leased asset value changes that can be expected on the basis of past variations in automobile selling market prices

asymmetric price adjustments a supply side approach using a model of dynamic price competition we provide an explanation from the supply side for the well established observation that output prices react faster in response to input cost increases than to decreases when costs decline the opportunity of profitable storing in anticipation of higher future costs allows competitive firms to coordinate on prices above current marginal costs the initial price response is only partial and profitable storing relaxes competition conversely when costs rise storing is not beneficial in anticipation of lower future costs and firms immediately adjust their prices to current marginal costs which entails the standard bertrand outcome our results shed new light on the empirical evidence about asymmetric pricing and can stimulate further empirical investigation on this puzzle

long term care insurance informal care and medical expenditures abstract this paper provides empirical evidence on the short run impact of government subsidies of long term care we apply a regression discontinuity design using administrative data from south korea to estimate the first year impact of subsidies for formal home and institutional care on informal care use and medical expenditures these subsidies lead to increases in formal long term care utilization even when accounting for crowd out of private spending our main finding is that the benefits of subsidized home and facility care are heterogeneous across physical function level and therefore that setting policy accordingly has the potential to dramatically reduce medical expenses we also find that formal long term care is a substitute for informal care at the intensive margin but do not find such evidence at the extensive margin the results suggest that publicly financed home care may have limited impact among the more able but that it may be both more cost effective and beneficial than institutional care for the least able

contests as selection mechanisms the impact of risk aversion abstract we investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two player tullock contest our theoretical model yields two main predictions first an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage second if the prize money is sufficiently large a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent in a laboratory experiment we confirm both the non monotonic impact and the compensating effect of risk aversion on winning probabilities our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests

endogenous timing in contests with delegation i introduction contests with delegation where each player hires a delegate to expend effort or resources on the player s behalf to win a prize are common 1 an example is litigation between a plaintiff and a defendant in which each litigant hires an attorney who expends his effort to win the lawsuit on behalf of his client another example is a rent seeking contest in which each firm hires a lobbyist who expends his effort to acquire a monopoly or a procurement contract from the government on behalf of his client yet another example is a patent contest in which each firm hires a group of independent researchers or university professors who conduct research to obtain a patent on behalf of their employer delegation is attractive to players because they each can use superior ability by hiring a delegate with more ability than herself and achieve strategic commitments through delegation in such contests with delegation we believe delegates decide endogenously when to expend their effort after signing delegation contracts indeed pursuing their self interest the delegates may well endogenize the order of their moves and communicate it with each other before they expend their effort we believe also that players take it into account when designing their contracts for the delegates that the delegates will endogenize the order of their moves it is these ideas that motivate this paper accordingly the purpose of this paper is to systematically study contests with delegation in which delegates decide endogenously when to expend their effort after signing delegation contracts and before they expend their effort we study two player contests with delegation focusing on not only the equilibrium delegation contracts between players and their delegates but also the equilibrium orders of the delegates moves specifically we set up and analyze the following three stage game in the first stage two players each hire a delegate and they simultaneously announce their contracts written with their delegates each player s contract specifies how much her delegate will be paid if he wins the contest and how much if he loses it in the second stage each delegate decides when to expend his effort and the delegates announce their decisions simultaneously in the third stage the delegates expend their effort according to their decisions in the second stage to win the prize on behalf of their employers we show that in equilibrium the delegate hired by the higher valuation player chooses his effort level after observing his counterpart s and his expected payoff is greater than that of his counterpart this advantage of the delegate of the higher valuation player can be explained by the fact that his employer the higher valuation player offers better contingent compensation as it will be defined in section ii to him than the lower valuation player does to her delegate we compare the outcomes of the endogenous timing framework the three stage game presented above with those of the simultaneous move framework the game which is the same as the three stage game with the exception that the delegates choose their effort levels simultaneously and this order of their moves is given exogenously an interesting result is that each player offers her delegate a better contract in the endogenous timing framework than in the simultaneous move framework another interesting result is that unless the valuation for the prize of the higher valuation player is significantly greater than that of the lower valuation player then each delegate s expected payoff is greater in the endogenous timing framework than in the simultaneous move framework whereas each player s expected payoff is less in the endogenous timing framework than in the simultaneous move framework in summary pursuing their self interest the delegates decide endogenously when to expend their effort given contracts between the players and the delegates

ranking games and gambling when to quit when you re ahead it is common for rewards to be given on the basis of a rank ordering so that relative performance amongst a cohort is the criterion in this paper we formulate an equilibrium model in which an agent makes successive decisions on whether or not to gamble and is rewarded on the basis of a rank ordering of the final position amongst competing players one application of this model is to the behavior of mutual fund managers who are paid depending on funds under management which in turn are greatly influenced by annual or quarterly rank orderings our model deals with a situation in which fund managers can elect either to pick stocks or to use a market tracking strategy in equilibrium the distribution of the final position will have a negative skew we explore how this distribution depends on the number of players the probability of success when gambling the structure of the rewards and on information regarding the performance of other players

storability market structure and demand shift incentives we consider a two period model in which buyers can store a good by purchasing in advance of consumption so as to realize potential gains from intertemporal arbitrage we find that storability introduces a kink in the aggregate period 1 demand when supply is oligopolistic quantity setting and consumers are sufficiently patient storage cost is relatively low each firm has a strong current incentive to capture future market share from a rival as a result in equilibrium the price path is increasing and there is rational in advance purchase by buyers in contrast the monopoly and perfectly competitive markets exhibit no such price dynamics intermediate storage costs result in multiple equilibria with at least one that involves advance purchase and one that does not

behavioral and welfare effects of tournaments and fixed performance contracts some experimental evidence using experimental economics we compare the efficiency and welfare effects of tournaments and fixed performance contracts our subjects agents were generally better off under fixed performance contracts but the advantage of the fixed performance contract disappears if the relative magnitude of the standard deviation of the common shock exceeds a critical value efficiency wise agents tend to exert higher effort under fixed performance contracts on average additionally an increase in the common shock standard deviation appeared to be associated with lower effort under tournaments our results shed light on the potential impact of legislative proposals to ban tournament contracts

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

the dynamics of markups and inventories in retailing firms this paper is concerned with the interaction between price and inventory decisions in retailing firms and its implications for the dynamics of markups and the existence of sales pro motions we consider a model where a monopolistically competitive retailer decides price and inventories and assumes lump sum costs when placing orders or changing nominal prices tn this model the existence of stockout probabilities and fixed ordering costs generate a cyclical price behaviour characterized by long periods without nominal price changes and short periods with very low prices i e sales promotions we estimate this model using a unique longitudinal dataset with information about retail and wholesale prices inventories orders and sales for several brands in a supermarket chain based on the estimated model we perform several counterfactual experi ments that show the important role that inventories and fixed ordering costs play in the dynamics of retail prices and the frequency of sales promotions in this dataset

vertical contracts in a supply chain and the bullwhip effect this paper shows that decentralized supply chains in which upstream firms use linear wholesale prices may experience lower upstream production and downstream sales volatility than vertically inte

revenue management without commitment dynamic pricing and periodic flash sales a seller has a fixed number of goods to sell by a deadline at each time he posts a regular price and decides whether to hold a flash sale over time buyers privately enter the market and strategically time their purchases if a buyer does not purchase when she arrives she can pay an attention cost to recheck the regular price afterwards or she can wait for future flash sales where she may obtain a good at a discounted price in the unique markov perfect equilibrium the seller sporadically holds flash sales to lower the stock of goods a flash sale increases the willingness to pay of future buyers but decreases the willingness to pay of buyers who arrive early in the game when it is very likely that a buyer will obtain a good in a flash sale the seller holds a big initial flash sale for all but one unit of the good

incidence and consequences of risk taking behavior in tournaments evidence from the nba we empirically explore the relevance and efficiency of risk taking behavior in tournaments we use data from the national basketball association nba and measure risk taking by the fraction of three point shots in basketball games we examine how point differences between teams during games affect their subsequent risk taking behavior it is found that teams that are trailing are more likely to increase their use of three point shots we additionally analyze the consequences of this change in behavior enhanced risk taking is inefficient in the vast majority of cases and is only beneficial if a team is trailing by a rather large margin we discuss possible explanations for these decision errors jel m5 d81 j30

sales and collusion in a market with storage sales are a widespread and well known phenomenon documented in several product markets this paper presents a novel rationale for sales that does not rely on consumer heterogeneity or on any form of randomness to explain such periodic price fluctuations the analysis is carried out in the context of a simple repeated price competition model and establishes that firms must periodically reduce prices in order to sustain collusion when goods are storable and the market is large the largest equilibrium profits are characterized at any market size a trade off between the size of the industry and its profits arises sales foster collusion by magnifying the inter temporal links in consumers decisions

durable goods theory for real world markets the early 1970s witnessed three major advances in durable goods theory swan 1970 1971 and sieper and swan 1973 on optimal durability coase 1972 on time inconsistency and akerlof 1970 on adverse selection this paper surveys durable goods theory starting with these three contributions where much of the focus is on recent literature and on models that explain real world phenomena in addition to the ideas found in the contributions of swan coase and akerlof topics covered include why producers sometimes practice planned obsolescence the role of adverse selection in new car leasing and reasons for aftermarket monopolization

strategic transfer pricing most research into cost systems has focused on their motivational implications this paper takes a different approach by developing a model where two oligopolistic firms strategically select their cost based transfer prices duopoly models frequently assume that firms game on their choice of prices product prices however are ultimately based on the firms transfer prices that communicate manufacturing costs to marketing departments it is for this reason that transfer prices will have a strategic component to them we derive implications for cost system choice and transfer pricing including showing that firms may cross subsidize their products a result consistent with the empirical evidence

search duplication in research and design spaces exploring the role of local competition a lack of sufficient diversification in research strategies has been identified as an important problem for delegated research we show that this problem can be solved by local competition such as bribery lobbying rent seeking competition at the patent office among players who apply the same search strategies or develop the same design such competition can restore full efficiency in the non cooperative equilibrium local competition interacts with the choice of whether to cluster or diversify and rather than adding a further inefficiency to the existing ones it eliminates inefficiency the results are robust and hold under simultaneous search strategy choices as well as for sequential choices

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

cyclic pricing by a durable goods monopolist in the model of this paper a monopoly seller of a durable good holds periodic sales as a means of price discrimination a new cohort of consumers enters the market in each period interested in purchasing the good either immediately or after a delay within each cohort consumers vary in their tastes for the good under broad conditions the seller will vary the price over time in most periods he will charge a price just low enough to sell immediately to consumers with a high willingness to pay periodically however he will drop the price far enough to sell to an accumulated group of consumers with a low willingness to pay

optimal tournament contracts for heterogeneous workers abstract we consider a rank order tournament between workers with different abilities under malcomson s self commitment property the employer optimally uses individual tournament prizes to extract rents from the workers without the self commitment property individual prizes are used to make the asymmetric competition less uneven by discriminating against the more able worker i e he is offered a lower winner prize than the less able worker in this spirit individual prizes serve as a substitute for handicaps

reimbursing health plans and health providers efficiency in production versus selection the tradeoff between an insurer s or medical provider s incentives to select good risks and to produce efficiently is governed by the supply price analog to the demand price tradeoff between moral hazard and risk aversion under a variety of models the optimum supply price is a mixture of capitation and fee for service payments empirical literature shows that pure capitation payment leaves strong incentives for selection that are acted upon the presence of contracting costs in a rothschild stiglitz model means a limited pooling equilibrium can exist and that poor risks will not be at their preferred outcome

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

piece rate incentive schemes this paper uses recent results from incentive theory to study heretofore informal critiques of piece rate compensation schemes the informal critiques are based on the history of failed attempts to install piece rate compensation schemes at the turn of the century the formal analysis emphasizes the importance of information and commitment in contracting the main result is as follows in a work environment characterized by hidden information and a hidden action if neither the firm nor the worker can commit to future behavior then no compensation scheme piece rate or otherwise can induce the worker not to restrict output

inequality and risk taking behaviour this paper investigates social in uences on attitudes to risk and ofiers an evolutionary explanation of risk taking by young low ranked males becker murphy and werning 2005 found that individuals about to participate in a status tournament may take fair gambles even though they are risk averse in both wealth and status here their model is generalised by use of the insight of hopkins and kornienko 2010 that in a tournament or status competition one can consider equality in terms of the status or rewards available as well as in initial endowments while becker et al found that risk taking is increasing in the equality of initial endowments it is found here that it is increasing in the inequality of rewards in the tournament further it is shown that the poorest will be risk loving if the lowest level of status awarded is su ciently low thus the disadvantaged in society rationally engage in risky behavior when social rewards are su ciently unequal finally as greater inequality in terms of social status induces gambling it can cause greater inequality of wealth

an industry equilibrium analysis of downstream vertical integration this paper investigates the effect of product substitutability on nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer which may be either a franchised outlet or a factory store static linear demand and cost functions are assumed and a number of rules about players expectations of competitors behavior are examined it is found that for most specifications product substitutability does influence the equilibrium distribution structure for low degrees of substitutability each manufacturer will distribute its product through a company store for more highly competitive goods manufacturers will be more likely to use a decentralized distribution system this article was originally published in marketing science volume 2 issue 2 pages 161 191 in 1983

durable goods monopoly with entry of new consumers this paper analyzes a model of a dynamic monopolist who produces at constant unit cost each period a new cohort of consumers enters the market each entering cohort is identical consumers within a cohort have different tastes for the good my main results are if players are sufficiently patient any positive average profit less than the maximum feasible level can be attained in a subgame perfect equilibrium in the subset of subgame perfect equilibria in which players use stationary strategies the seller cannot make sales at prices significantly greater than the lowest willingness to pay when period length goes to zero and the seller attains the maximum profit when commitment is feasible by charging the same static monopoly price in every period this paper analyzes a model of a dynamic monopolist who operates in a market in which there is a regular flow of new consumers the seller produces a durable good at constant unit cost each period a new cohort of consumers enters the market consumers wish to buy exactly one unit of the item but are willing to wait resales are not allowed each entering cohort is identical

cognitive performance in competitive environments evidence from a natural experiment competitive situations that involve cognitive performance are widespread in labor markets schools and organizations including test taking competition for promotion in firms and others this paper studies cognitive performance in a high stakes competitive environment the analysis takes advantage of a natural experiment that randomly allocates different emotional states across professional subjects competing in a cognitive task the setting is a chess match where two players play an even number of chess games against each other alternating the color of the pieces white pieces confer an advantage for winning a chess game and who starts the match with these pieces is randomly decided the theoretical analysis shows that in this setting there is no rational reason why winning frequencies should be better than 50 50 in favor of the player drawing the white pieces in the first game yet we find that observed frequencies are about 60 40 differences in performance are also stronger when the competing subjects are more similar in cognitive skills we conclude that the evidence is consistent with the hypothesis that psychological elements affect cognitive performance in the face of experience competition and high stakes