optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

contracting with wealth constrained agents we examine how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input e g effort when potential operators are privately informed about their limited wealth truthful revelation of wealth is induced by promising a higher probability of operation and if necessary a greater share of realized profit the larger the nonrefundable bond that a potential operator posts the project owner benefits when total wealth is widely dispersed among potential operators under plausible conditions limited knowledge of wealth is not constraining for the project owner

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

monitoring versus incentives abstract this paper analyzes the trade off between monitoring and incentives in a principal agent relationship with moral hazard we derive general results on the optimal monitoring incentives mix for the case where both parties are risk neutral and the agent faces a limited liability constraint we show that the principal uses less monitoring and stronger incentives if the agent s liability limit is relaxed or if monitoring costs increase to induce more effort on the part of the agent the principal resorts to more monitoring or to stronger incentives or both in particular there are cases where the cheapest way to induce more effort is to use lower powered money incentives but with much more precise monitoring

explanations for the instability of equity beta risk free rate changes and leverage effects this paper is an initial attempt to bridge the gap that presently exists between the theoretical and empirical literature on the instability of equity beta we focus on two factors from the joint option pricing model capital asset pricing model framework leverage and unexpected changes in the risk free rate which are hypothesized to influence the instability of equity beta across firms and over time using alternative variable parameter regression models we find that highly leveraged firms exhibit greater equity beta instability than firms with lower leverage over time equity betas exhibit greater instability during periods of large unexpected changes in the risk free rate when compared to periods with small unexpected changes in the risk free rate

the inefficiency of reuters foreign exchange quotes abstract reuters foreign exchange fxfx page is the world wide predominant information source to foreign exchange traders in this study we compare the indicative spot exchange rate quotes from reuters with their matching futures exchange rates from the chicago mercantile exchange we find that the indicative quotes on reuters fxfx page are inefficient and could be improved by incorporating information from the futures market this casts doubt on the way banks determine these quotes as well as on the informational content of these quotes as an indicator of the current exchange rate

the minimum wage and the employment of youth evidence from the nlsy using panel data on individuals from the national longitudinal survey of youth we find that employed individuals who were affected by the increases in the federal minimum wage in 1979 and 1980 were about 3 percent less likely to be employed a year later even after accounting for the fact that workers employed at the minimum wage may differ from their peers in unobserved ways

job design delegation and cooperation a principal agent analysis abstract this paper analyzes how tasks are assigned in organizations tasks can be allocated vertically between a principal and an agent or laterally among agents the resulting organizational job design determines how many tasks are delegated to agents and how the agents tasks are divided among them in the framework of the standard principal agent relationship with moral hazard it is shown that i an incentive consideration causes the principal to group a broad range of tasks into an agent s job rather than hire multiple agents and make each of them specialize in just one task and ii the principal may choose to delegate all the tasks in order to mitigate a conflicting incentive problem with agents

wage floors imperfect performance measures and optimal job design we analyze the effects of wage floors on optimal job design in a moral hazard model with asymmetric tasks and imperfect aggregate performance measurement due to cost advantages of specialization assigning the tasks to different agents is efficient a sufficiently high wage floor however induces the principal to dismiss one agent or to even exclude tasks from the production process imperfect performance measurement always lowers profit under multitasking but may increase profit under specialization we further show that variations in the wage floor and the agents reservation utility have significantly different effects on welfare and optimal job design

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

disentangling the minimum wage puzzle an analysis of worker accessions and separations changes in the legislation in the mid 1980s in portugal provide remarkably good conditions for analysis of the employment effects of mandatory minimum wages as the minimum wage increased sharply for a very specific group of workers relying on a matched employer employee panel data set we model gross worker flows accessions and separations in continuing firms as well as in new firms and those going out of business using a count regression model applied to proportions employment trends for teenagers the affected group are contrasted to those of older workers before and after the raise in the youth minimum wage the major effect on teenagers of a rising minimum wage has been the reduction of separations from the employer which during the period under analysis has compensated for the reduction of accessions to new and continuing firms in this sense our results can reconcile some of the previous evidence in the empirical literature when analyzing the aggregate impact of the minimum wage on youth employment without decomposing it by type of worker flow jel d21 j23 j38

when is it foolish to reward for a while benefiting from b a performance measure may or may not reflect the relative importance of different tasks for the production of benefit it can be aligned or unaligned here i examine when using an aligned measure generates a larger surplus in a principal agent relationship than using an unaligned but otherwise identical measure i find that i the agent s effort costs matter for the optimal way of measuring performance and ii the optimal measure is not aligned but tilted toward tasks that the agent finds easy failing to recognize these insights may lead to false predictions about the use of incentives

measuring the relative productivity of multitasking to sole tasking in household production experimental evidence the standard household production model does not incorporate multitasking although time diary data reveal that individuals regularly multitask we incorporate multitasking into a household production model in which time spent in childcare can be sole tasked or multitasked with another household production activity and we present the results of an experiment designed to measure the productivity parameters of this model because utility and productivity are intertwined and difficult to disentangle in any household production model we vary the utility pay offs our experimental participants receive in order to determine how our estimated productivity parameters are affected by a change in the utility parameters our estimates of the relative multitasking productivities indicate that while a minute of sole tasked time produces more of a single commodity than a minute of multitasked time total household output increases when two outputs are produced simultaneously hence confirming the economic motivation f

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

strategic shirking a theoretical analysis of multitasking and specialization we provide a new theory to explain why firms multitask workers instead of specializing them workers overperform in tasks they like and underperform in tasks they dislike to favorably influence future job assignments anticipating this firms may find it optimal to commit to future multitasking to induce workers to appropriately allocate effort early in the employment relationship we show that when the product market is volatile so that future product prices are uncertain the firm s ability to credibly commit to a multitasking strategy diminishes this generates a negative relationship between multitasking and product market volatility consistent with recent empirical evidence

limited liability and incentive contracting with multiple projects i examine a principal agent model with multiple projects where a risk neutral manager is protected by limited liability the analysis has several interesting implications i incentive problems are shown to be a natural source of economies of scope as combining multiple projects under the management of a single manager relaxes the limited liability constraint ii as a result managers may be overloaded with work and exert inefficiently high effort and iii the analysis has implications for the optimal allocation of projects to different managers copyright 2001 by the rand corporation

an examination of risk return relationship in bull and bear markets using time varying betas security behavior in bull and bear markets has received some attention in recent years fabozzi and francis 5 first documented evidence that security betas are not influenced by the alternating forces of bull and bear markets their subsequent study of mutual fund betas also indicated that mutual funds generally respond indifferently to bull and bear market conditions using the concept of bull and bear market variations kim and zumwa1t 9 developed and tested the risk premiums associated with the upside and the downside portions of returns variation they concluded that investors expect to receive a risk premium for downside risk and pay a premium for upside variation of returns from their results kim and zumwalt 9 suggested that the down market beta measuring downside risk downside variation of returns may be a more appropriate measure of portfolio risk than the single beta in the market model

the effectiveness of position limits evidence from the foreign exchange futures markets abstract this study considers the effects of the relative size of hedger and speculator open interests and the potential impact of implementing position limits on the price discovery process in both jpy usd and eur usd futures markets hedging trading exerts a negative impact regardless of its size on price discovery in futures markets hedgers are less likely to be information motivated so their trading uniformly delays the price discovery process however there is a positive and nonlinear impact of speculators trade size on price discovery the contribution of which depends on the relative size of the speculative open interest contrary to conventional wisdom among regulators speculative trading does not harm the market in terms of market efficiency as long as the percentage of speculators open interest is below an endogenously determined threshold approximately 20 for eur usd and 16 3 for jpy usd speculative trading even improves futures market efficiency

beta nonstationarity portfolio residual risk and diversification over the past years the beta coefficient has been widely used as a measure of systematic risk in investment and portfolio analysis the validity of using the beta coefficient as the proper measure of systematic risk is dependent upon the assumption that the beta coefficient is stationary over time unfortunately this assumption has been challenged by a number of empirical studies which have found the beta coefficient to be unstable over time examples of such empirical investigations are those documented by blume 4 levy 12 levitz 11 baesel 2 altman jacquillat and levasseur 1 and roenfelt griepentrong and pflaum 16 most recently fabozzi and francis 9 reported that some security beta coefficients tend to be random over time their findings also support the regression tendency of the beta coefficients towards the mean over time as found by blume 4 thus because the beta coefficient is changing over time the use of the ordinary least squares ols method in investment and portfolio analysis will yield an inefficient estimate of systematic risk furthermore the ols estimates of security and portfolio residual risks will be influenced by the variability of beta coefficient therefore the purpose of this paper is to investigate the relationship between the variability of the beta coefficient and portfolio residual risk and hence to provide a real picture of the process of portfolio diversification under the condition of beta nonstationarity it is shown that the use of the ols method to estimate security and portfolio residual risks will produce an incorrect conclusion that larger residual risks tend to be associated with higher variability in the beta coefficient

information shares in the us treasury market abstract this paper highlights the previously neglected role of the futures markets in us treasury price discovery the estimates of 5 and 10 year govpx spot market information shares typically fail to reach 50 from 1999 on the govpx information shares for the 2 year contract are higher than those of the 5 and 10 year maturities but also decline after 1998 relative bid ask spreads number of trades and realized volatility are statistically significant and explain up to 21 of daily information shares in roughly 1 4 of cases when public information is released the futures market gains information share but macroeconomic announcements rarely explain information shares independently of liquidity

estimating market model betas a comparison of random coefficient methods and their ability to correctly identify random variation when estimating market model betas using random coefficient methods the rather fine distinction between significance or insignificance as argued in recent studies overlooks two important factors first the maximum likelihood method has not been tested in comparison to the generalized least squares approximation second and more importantly the ability of these methodologies to correctly identify a known random coefficient process has not been examined in the context of the market model using both simulations and subsequent empirical tests this study shows that for reasonable levels of variation in beta neither method can consistently identify a random coefficient process these results suggest that the nominal level of significant random coefficients previously observed could be indicative of a much more predominant phenomenon

moral hazard with bounded payments we study the moral hazard problem with general constraints on how little or much the agent can be paid as a function of output we provide a characterization and existence result using only very simple methods in the dual problem of minimizing costs for a given effort level a constraint that harms the principal will always result in a contract that pays according to the constraint on some range of outcomes for the case of a simple fixed minimum feasible payment the resultant contract will be option like we show how the strike price and intensity of incentives once the strike price is exceeded vary in the minimum payment and the outside option of the agent when the principal can also choose the effort to induce then even if the constraint harms the principal he may optimally choose a contract that never pays the minimum or maximum we show that this can only occur if the problem without the payment constraints fails a form of concavity

hedgers funds and small speculators in the energy futures markets an analysis of the cftc s commitments of traders reports the commodity futures trading commission cftc s commitments of traders cot data are examined for crude oil unleaded gasoline heating oil and natural gas futures contracts the collection procedures for the cot data are first examined followed by granger causality tests to determine if relationships between trader positions and market prices exist a positive correlation between returns and positions held by noncommercial traders and a negative correlation between commercial positions and market returns are found furthermore positive returns result in an increase in noncommercial net positions in the following week whereas the net long positions held by commercial hedgers decline following price increases however traders net positions do not lead market returns in general