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

stopping agents from cheating abstract when a principal hires two or more agents to work in a correlated environment each agent s reward will depend on the other s performance unfortunately with just the usual optimal incentive constrained contracts being offered the agents strictly prefer to play equilibrium strategies other than those desired by the principal they cheat however the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost this mechanism uses one agent to police the other and exploits certain properties of the optimal contracts

a common agency with incomplete information in the present article i demonstrate that forming a common agency by oligopolistic firms may not be to their advantage if agents have access to private information about their costs bernheim and whinston 1985 1986 pointed out that a common agency allows the firms to sustain the collusive outcome by giving them a vehicle to internalize the externality generated by their pricing or output decisions if agents have access to private information the advantage pointed out by bernheim and whinston may be more than outweighed by the possible existence of an informational disadvantage specifically if the unit costs of different potential agents are correlated the firm may be more successful in extracting the informational rents of its agent if it contracts with an independent agent and not with the same agent as its rival firm when oligopolistic firms contract with independent agents the revenues of one firm reveal implicit information about the unit costs of agents serving competing firms in the same industry however if the unit costs of different agents are correlated revenues also reflect information about the unit cost of the firm s own agent this additional information transmitted by revenues cannot be controlled by the agent s reporting behavior as a result if the firm conditions its agent s payoff upon revenues it can limit the informational rents that this agent can secure due to the existence of private information this possibility of limiting its agent s informational rents is eliminated if the firm contracts with the same agent as its rivals with a common agency the agent can manipulate the reports delivered to all the firms thus reducing the options available to each of them various patterns of agency relationship exist in markets where oligopolistic producers

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

stochastic production and heterogeneous risk preferences commercial fishers gear choices we present a model of fishers gear choice which allows for heterogeneity both in production technology and risk preferences and apply it on a panel of swedish trawlers stochastic revenue functions are estimated and used to predict the mean and standard deviation of revenue for each trip in a random parameters logit model we test if these predicted values explain gear choice a majority of fishers respond positively to increased mean and negatively to increased variability of expected landing values indicating risk aversion but also show a strong tendency to choose the same gear used on the previous trip

enterprise diversification in us dairy impact of risk preferences on scale and scope economies enterprise diversification has recently become a prominent feature of us dairy farms scope economies and risk aversion are two forces that simultaneously determine diversification we jointly estimate scope economies and determine risk preferences under price uncertainty we reject risk neutrality in favour of increasing absolute risk aversion iara and increasing relative risk aversion irra scope economies are significant but diminish with farm size increasing returns to scale exist in the production of multiple enterprises and diminish with size large farms operate under decreasing returns to scale ignoring risk preferences a common practice in empirical work results in an underestimate of the effect of scope economies for large farms

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

acreage decisions under risk the case of corn and soybeans an acreage supply response model is developed under expected utility maximization the resulting framework is used to specify and estimate a system of risk responsive acreage equations for corn and soybeans in the united states particular attention is given to the truncation effects of government price supports on the distribution of corn and soybean prices also a wealth variable is included in the acreage equations the empirical results indicate that risk and wealth variables play an important role in cornsoybean acreage decisions the analysis also shows that cross commodity risk reduction is important in acreage allocation decisions

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

the economics of career concerns part i comparing information structures many incentives in organizations arise not through explicit formal incentive contracts but rather implicitly through career concerns this paper models career concerns through agents trying to manipulate the market assessment of their future productivity the information flow from current actions to market assessment is therefore crucial in determining the nature of these incentives improved information may either increase or reduce incentives the impact of information provides a major distinction between the explicit and implicit incentives model the paper derives general results on comparisons of information structures which serve as counterparts to the standard results on information structures in the principal agent model sufficient statistic impact of a blackwell garbling comparison of inclusive information structures 1999 the review of economic studies limited

washington biofuel feedstock crop supply under output price and quantity uncertainty abstract subsidized development of an in state biofuels industry has received some political support in the state of washington usa utilizing in state feedstock supplies could be an efficient way to stimulate biofuel industries and the local economy in this paper we estimate supply under output price and quantity uncertainty for major biofuel feedstock crops in washington farmers are expected to be risk averse and maximize the utility of profit and uncertainty we estimate very large washington price elasticities for corn and sugar beets but a small price elasticity for a third potential feedstock canola even with the large price elasticities for two potential feedstocks their current and historical production levels in the state are so low that unrealistically large incentives would likely be needed to obtain sufficient feedstock supply for a washington biofuel industry based on our examination of state and regional data we find low likelihood that a washington biofuels industry will develop in the near future primarily using within state biofuel feedstock crops

cost functions and duality for stochastic technologies cost functions dual to stochastic production technologies are derived and their properties are discussed these cost functions are shown to be consistent with expected utility maximization without placing serious structural restrictions on the underlying technology

contracts with endogenous information abstract i study covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition when posteriors satisfy two dimensional versions of the standard first order stochastic dominance and concavity convexity of the distribution function conditions a first order approach is justified under the same conditions informativeness and riskiness of reports are equivalent high powered contracts that make the agent s informational rents more risky are used to increase incentives for information acquisition insensitive contracts are used to reduce incentives for information gathering the value of information to the agent is always positive the value of information to the principal is ambiguous

the degree of decoupling of area payments for arable crops in the european union in 1992 the common agricultural policy cap of the european union eu significantly changed direction in the arable crop sector with the so called macsharry reform this reform which reduced cereal intervention prices eliminated output payments for oilseeds and introduced per hectare compensatory payments and a compulsory set aside requirement attached to these payments implied a significant change in the policy incentives to produce in 1999 intervention prices were cut further bringing them closer to world market levels as well as aligning payments of cereals and oilseeds the most recent reform in

undominated nash implementation in bounded mechanisms we study implementation in undominated nash equilibrium by bounded mechanisms an undominated nash equilibrium is a nash equilibrium in which no agent uses a weakly dominated strategy a mechanism is bounded if every dominated strategy is dominated by some undominated strategy we identify necessary conditions and sufficient conditions for such implementation these conditions are satisfied in virtually all economic environments and are also satisfied by interesting correspondences from the social choice literature for economic settings we provide a particularly simple implementing mechanism for which the undominated equilibrium outcomes coincide with those obtained from the iterative elimination of weakly dominated strategies

structural agricultural land use modeling for spatial agro environmental policy analysis this paper develops a spatially disaggregated structural econometric model of agricultural land use and production based on the joint multi output technology representation introduced by chambers and just 1989 starting from a flexible specification of the farm profit function we derive land use allocation input application crop yield and livestock intensity equations in a joint and theoretically consistent framework to account for the presence of censored observations in micro level data the model is estimated as a system of two limit tobit equations via quasi maximum likelihood we present an empirical application using fine scale spatial data covering the entirety of england and wales and including the main economic policy and environmental drivers of land use change in the past forty years a simulation of the effects of diffuse pollution reduction measures illustrates how our approach can be applied for agro environmental policy appraisal

how reliable is duality theory in empirical work the neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology this relationship commonly referred to as duality theory has been widely used in empirical work to estimate production parameters such as elasticities and returns to scale we generate a pseudo dataset by monte carlo simulations which starting from known production parameters yield a dataset with the main characteristics of u s agriculture in terms of unobserved firm heterogeneity decisions under uncertainty unexpected production and price shocks endogenous prices output and input aggregation measurement error in variables and omitted variables production parameters are not precisely recovered when performing econometric estimation based on the duality approach and the elasticity estimates are inaccurate deviations of own and cross price elasticities from initial median values given our parameter calibration range between 6 and 690 with an average of 90 also own price elasticities are as imprecisely recovered as cross price elasticities sensitivity analysis shows that results still hold for different sources and levels of noise and sample size used in estimation

symmetry restrictions in the analysis of the competitive firm under price uncertainty this paper shows that if the production function is appropriately restricted some symmetry reciprocity results that hold for a competitive firm under certainty continue to hold under price uncertainty for any strictly concave utility function in contrast earlier analyses have established these symmetry relations by imposing restrictions on the utility function the present analysis uses the envelope theorem the indirect utility function and the duality between production and cost copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

unique implementation of incentive contracts with many agents in this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions we distinguish two cases i when actions are mutually observable among agents ii when actions are not observable at all in i there is a mechanism in which the first best arises as a unique perfect equilibrium in ii we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules however we prove that the principal can use these optimal sharing rules as a starting point and construct a multi stage mechanism that has a unique second best perfect bayesian equilibrium

implementation in undominated nash equilibria without integer games a mechanism which uses neither integer games nor modulo games is shown to implement any social choice function in a production economy with private and excludable public goods more precisely th

risk and the value of bt corn a conceptual model is developed to evaluate the effect of bt corn on risk results highlight the importance of distinguishing between marginal and aggregate risk effects and demonstrate that the effect of bt corn on risk depends crucially on the price paid for the technology empirical results show that depending on the price bt corn can be marginally risk increasing or decreasing and can either increase or decrease corn acreage also depending on the price bt corn can provide a risk benefit to farmers even when bt corn is risk increasing bt corn is genetically engineered to produce a protein found in the soil bacterium bacillus thuringiensis bt the protein is toxic to lepidopterous insects such as the european

nash implementation and uncertain renegotiation we study nash implementation when the outcomes of the mechanism can be renegotiated among the agents but the planner does not know the renegotiation function that they will use we characterize the social objectives that can be implemented in nash equilibrium when the same mechanism must work for every admissible renegotiation function and show the importance of allowing the planner to sometimes take away resources from the agents

industrial restructuring and regional household income growth negrey c zickel m b and fenn j m 1998 industrial restructuring and regional household income growth reg studies 32 103 111 in this study industry and place intersect in a systematic examination of the effects of industrial restructuring on men s and women s personal income and married couple and female headed household income we analyse income trends from 1969 89 in relationship to shifts in employment in manufacturing finance insurance and real estate wholesale and retail trade and services in 140 us metropolitan areas grouped into six types improvements in women s income appear to have offset men s losses in all six area types given increases in average median married couple household income in each area type during the 20 year period our most provocative finding is the average decrease in median female headed household income in the 19 classic deindustrializing centres while female headed household income actually increased on average in the five other area types this finding ha

renegotiation and optimality in agency contracts we analyse renegotiation in a hidden action principal agent model contract renegotiation offers are made by the agent a refinement is imposed on the principal s beliefs if precisely one action is optimal with respect to both the principal s and the agent s contracts the principal believes that that action has been taken with the refinement imposed perfect bayesian equilibrium allocations are identical to the second best in the classical principal agent model without renegotiation when renegotiation is led by the agent and when equilibria satisfy the refinement equilibrium allocations are ex ante efficient incentive contracting is a common mechanism for promoting ex ante investments and for avoiding ex post opportunistic behaviour in a long term or continuing economic relationship the classical principal agent model holmstrom 1979 grossman and hart 1983 is a natural framework for this class of problem in such a model a risk averse agent performs an action on behalf of a risk neutral principal the agent s action is unobservable and affects the principal s revenue in a random fashion the derivation and characterization of efficient compensation schemes have been the major focus in the principal agent literature generally the incentives to motivate a costly action from the agent take the form of profit sharing the agent s reward is made contingent on his random performance outcomes

coordinating development can income based incentive schemes eliminate pareto inferior equilibria individuals inability to coordinate investment may significantly constrain economic development in this paper we study a simple investment game characterized by multiple equilibria and ask whether an income based incentive scheme can uniquely implement the high investment outcome a general property of this game is the presence of a crossover investment point at which an individual s incomes from investment and noninvestment are equal we show that arbitrarily small errors in the government s knowledge of this crossover point can prevent unique implementation of the high investment outcome we conclude that informational requirements are likely to severely limit a government s ability to use income based incentive schemes as a coordination device

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

worldwide acreage and yield response to international price change and volatility a dynamic panel data analysis for wheat rice corn and soybeans this study estimates a worldwide aggregate supply response for key agricultural commodities namely wheat rice corn and soybeans by employing a newly developed multi country crop and calendar specific seasonally disaggregated model with price changes and price volatility applied accordingly the findings reveal that although higher output prices serve as incentives to improve global crop supply as expected output price volatility acts as a disincentive depending on the crop the results show that own price supply elasticities range from about 0 05 to 0 40 output price volatility however has negative correlations with crop supply implying that farmers shift land other inputs and yield improving investments to crops with less volatile prices simulating the impact of price dynamics since 2006 we find that price risk has reduced the production response of wheat in particular and to a lesser extent rice thus dampening price incentive effects the simulation analysis shows that the increase in own crop price volatility during the 2006 2010 period has dampened yield by about 1 2 for the crops considered

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

pay equality and industrial politics personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers but it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme however when workers rewards are based on relative comparisons salary compression reduces uncooperative behavior that is detrimental to the firm relative comparisons imply that some reference group must be selected the major result is that within the relevant groups some wage compression is efficient

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

linear inequality methods to enforce partnerships under uncertainty an overview we review different generic conditions on stochastic outcome functions to enforce either efficient or nearly efficient partnerships their logical relationship is explored two kinds of conditions are considered however the property for an action profile to be compatible plays a crucial role in both kinds also two kinds of enforcement mechanisms are considered enforcement through utility transfers and enforcement through repetition

adjustment to production uncertainty and the theory of the firm this paper considers the behavior of the firm which faces uncertainty in its production process but can adjust its output once the uncertainty is resolved ex post adjustment unlike previous treatments involves a marginal cost penalty if more output is required and a lowering of price if too much is produced with ex post adjustment allowed in this fashion it is found that nonlinear risk preferences do not affect the sign of the firm s marginal risk premium at optimum ex ante output the firm will produce less output than under certainty whether it is risk averse risk neutral or prefers risk

production risk and optimal input decisions the paper examines the impact of production risk on a producer s optimal input decisions whether producers use more or fewer inputs in a yield risky environment depends on the sign of the marginal risk premium which is determined by risk preferences and technology i present the weakest condition on technology that is sufficient to sign the marginal risk premium for all risk averse preferences if this condition fails to hold the marginal risk premium is not of the same sign for all risk averters results are used to explore the properties of an estimated technology

joint risk preference technology estimation with a primal system applied studies of the firm in a risky environment have concentrated either on the firm s technology or on its risk preferences these models result in generally inconsistent and inefficient parameter estimates a primal model is proposed which allows a firm s preferences and technology to be estimated jointly in the presence of risk the model is applied to iowa corn production and estimated technology parameters are compared with those from other approaches modest risk aversion leads to inelastic even backbending per acre supplies and input demands yield heteroskedasticity in inputs leads to supply heteroskedasticity in prices especially for risk neutral firms

industrial restructuring gender segregation and sex differences in earnings men s and women s 1979 earnings are examined within a framework of the structural transformation of employment and the gender composition of jobs during the 1970s tests for interaction between structural change and gender composition reveal that industrial restructuring translates into different job opportunities for men and women which in turn differentiate their economic rewards both men and women benefited from the effects of industrial shifts and intraindustry occupational restructuring but men benefited more from the entry of women into traditionally male dominated occupations than did woman apparently the industrial transformation of employment accompanies a process which redefines gender boundaries so that job sex segregation persists as a feature of the employment structure

production uncertainty and the market equilibrium of the competitive firm abstract assumptions outputs are planned ex ante by risk neutral firms actual outputs are stochastic with variance function of planned output production costs are function of planned outputs while the market linear demand function is stable if individual outputs as positively correlated expected profit is decreased by the negative covariance between output and price the firms and market equilibria are analyzed in the short run and the long run with varying number of firms they are compared with oi s and tisdell s uncertain demand models

the competitive firm with uncertainty in the rate of labor turnover the adoption of more sophisticated production techniques usually requires firms to increase their expenditures on worker training and to pay greater attention to the costs of labor turnover economists are beginning to explicitly incorporate both training expenditures and the rate of labor turnover into the theory of the firm at the same time they are extending the theory of the firm to cases in which the firm faces uncertainty in its environment for example uncertainty in the price of output the prices of inputs or the quantity of output that a given input mix will yield this paper seeks to extend both of these areas of research by first introducing uncertainty in the rate of labor turnover and then examining the consequences of this new form of uncertainty for optimal training expenditures the optimal wage and the optimal level of output at the firm the paper assumes that the firm can increase output by providing workers with more training and can discourage turnover by paying workers a higher wage the quantities of labor and capital that the firm employs are held constant throughout the analysis it is found that the introduction of uncertainty in the rate of labor turnover results in lower optimal expenditures for both training and wages the reduction in training also reduces the level of output per worker at the firm comparative static analysis of ceteris paribus changes in the mean and variance of the labor turnover rate are also performed an increase in the mean of the turnover rate with the variance held constant reduces the wage and the amount of training provided also an increase in the variance of the turnover rate with the mean held constant reduces the wage and the amount of training provided a number of authors have considered models of the competitive firm in which the firm must determine its output level in the presence of uncertainty sandmo 13 batra and ullah 2 hartman 7 ishii 9 ingene and yu 8 flacco 5 and many others consider the behavior of the competitive firm facing uncertainty in its output price blair 3 ratti and ullah 12 stewart 15 perrakis 11 macminn and holtman 10 and many others consider cases in which the firm faces uncertainty in its technology or factor prices in all of these models it is assumed that the firm must make its input and output decisions before the uncertainty is resolved without ex

production decisions under joint price and production uncertainty abstract while production decisions in the presence of price uncertainty have been extensively studied this is not so for the case in which the level of production is itself uncertain in this paper we provide a decision analysis under multiplicative production uncertainty both with and without price uncertainty we depict equilibrium and obtain comparative statics results with the aid of a diagram based on the difference between expected price and marginal cost comparative statics results are obtained for the model with production uncertainty alone and also for simultaneous price and production uncertainty including two special cases we first derive results based on the arrow pratt coefficients of risk aversion and then supplement these with the ross measure of relative risk aversion since this proves useful in the presence of multiple sources of uncertainty we find that increases in risk both price and production or input prices reduce expected output however expected output supply is an increasing function of expected price only for low levels of risk aversion and in general the relationship is ambiguous

does the law of supply hold under uncertainty a widely held conjecture of economists is that the quantity supplied by pricetaking producers increases with an increase in output price law of supply this cornerstone of economics has been proven repeatedly with many techniques under many different sets of assumptions and is found in all textbooks on principles of economics most of these proofs assume full certainty of production relationships single product technology and or risk neutrality in a world of uncertainty one of the most crucial aspects of economic behaviour is risk aversion with risk aversion diversification is a basic response to economic uncertainty thus models of producer behaviour under uncertainty need to consider multioutput technology where diversification is a possibility this paper points out that the widely held law of supply may fail when these generalities risky multioutput production with risk aversion are introduced simultaneously where diversification is also affected by a capacity constraint in production conditions are developed under which the law fails holds the peculiar result occurs because increasing price can increase profit risk more than proportionally while expected profit increases proportionally this relative increase in risk causes a tendency to shift production capacity into an alternative activity the first section introduces a model of production under uncertainty the second section analyses the behaviour of supply in the special case of additive production risk without price risk the third section shows that similar problems can be encountered with other cases as well empirical examples which demonstrate relevance of the results are also given

risk aversion and yield uncertainty in duality models of production a mean variance approach a duality model of production is developed that endogenizes stochastic output decisions under risk aversion the model incorporates both yield and price uncertainty and nonlinear mean variance risk preferences this permits modeling of the firm s expected output supply and input demand decisions under risk and also in principle the firm s output variance decisions the duality model is tractable for empirical research

broken symmetry symmetry and price uncertainty or short and long run comparative statics of the competitive firm abstract the notion of broken or hidden symmetry is applied to a long run characterization of a competitive firm operating under price uncertainty the main result of the paper is the restoration of a slutsky type symmetry of the input demand functions within an expected utility framework which does not involve any assumption about risk aversion a second conclusion is that economic relations expressed in terms of relative quantities are essential in the long run comparative statics under price uncertainty

risk aversion and price risk in duality models of production a linear mean variance approach a duality model of production is developed that permits risk aversion and price uncertainty the linear mean variance framework employed is tractable for empirical research in contrast to duality models of risk based on a generalized expected utility function the framework is more general than in standard price certainty models while retaining the simplicity needed for empirical research

forward market equilibrium economists have long been interested in the functioning of forward futures markets keynes and hicks were the first to write persuasively in support of the theory of normal backwardation this theory says the futures price is biased downward relative to the expected future spot price as a means of compensating speculators for taking long futures positions 12 8 in this theory speculators are viewed as providing insurance to hedgers who desire to take short futures positions to reduce the riskiness of their commodity holdings in addition to normal backwardation there are theories of unbiasedness and normal contango the unbiasedness theory says that the futures price equals the expected spot price while the normal contango theory says that the futures price exceeds the expected spot price 4 19 21 however the controversy over the three theories has not been entirely resolved it has been suggested 4 19 that each of the three theories could be applicable at various points during the planting harvesting processing cycle of a crop as the net hedging demand shifts from a large number of hedgers who desire to be short in the futures market to a large number of individuals who are long hedgers nonetheless the traditional theories of futures markets have been criticized because they are not grounded in a general equilibrium model where participants tastes endowments and beliefs interact so as to generate a market equilibrium incorporating both speculative and non speculative transactions 9 it is the purpose of this paper to provide a framework within which normal contango normal backwardation and unbiasedness can each occur for commodities which have certain well specified characteristics independent of the relative numbers of participants on each side of the futures market in the spirit of 9 we consider the major source of uncertainty to be technological in nature quantity risk and argue that the commonly used definitions of hedger one who sells forward some fraction of his crop yield and speculator are not very useful for economic analysis instead the more generally applicable concept of hedger as one who trades mean income for reductions in risk in the rothschild stiglitz sense 17 is supported because it

interactions between agricultural and resource policy the importance of attitudes toward risk using a method proposed by meyer for deriving comparative statics results in the presence of risk this paper analyzes the effects of various agricultural and environmental policy alternatives on the choices of a risk averse producer with a just and pope production function many commonly held beliefs about policy effects are not supported unambiguously by economic theory for example a tax on pesticides will not necessarily reduce pesticide use or average output and a reduction in price of agricultural output will not necessarily lead to a reduction in use of water or agricultural chemicals

labor market discrimination against hispanic and black men h ispanic american men have lower average wage rates than white non hispanics in 1975 the average white non hispanic male wage earner in the united states earned 5 97 an hour mexican men earned 4 31 72 as much as white non hispanics puerto rican men earned 4 52 76 as much and cuban men earned 5 33 89 as much as white non hispanics by way of comparison black men s average wages in 1975 were 4 65 78 of the white male wage several possible reasons for the hispanics lower wages come to mind among them are age and education geographic location immigration language difficulties and discrimination for example as shown in table 1 mexicans and puerto ricans are younger on average than the white non hispanic population and earnings tend to rise with age hispanics have lower average levels of education than white non hispanics and wages are positively associated with education many mexican americans live in the southwest where prices are relatively low moreover hispanics are more likely to be recent immigrants and to lack fluency in english than white non hispanics and so to be at a disadvantage in the labor market in addition there is a widespread belief that hispanics suffer from employment discrimination and cannot obtain the wages that their human capital would command if they were non hispanic whites how much of the wage differentials described above are due to each of these factors and to other inter group differences in wage related characteristics in particular how much impact does labor market discrimination have on the average hispanic man s wage and how does this compare with discrimination against blacks this paper provides answers to these questions a few other efforts have been made to analyze the relative earnings of hispanic and white nonhispanic men using 1960 and 1970 census data fogel 1966 poston and alvirez 1973 poston alvirez and tienda 1976 long 1977 and gwartney and long 1978 we use more recent data from the 1976 survey of income and education this data set enables us to measure wage rates more accurately and to specify the wage function more completely than does the census unlike previous analysts in estimating the wage function we take account of possible selectivity bias due to the distinction between average wage offers and average observed wages thus we hope to obtain a more accurate and up to date measure of labor market discrimination against hispanic men section ii explains the method used to separate the minority white non hispanic wage differential into the portions due to differences in average characteristics and the portion due to differences in unobserved factors and discrimination taking into account the possibility of selectivity bias in the observed wage sample section iii describes the data used in the study and the specification of the wage equation the breakdown of the observed wage differentials into components due to differences in participation in the wage and salary sector local price levels average characteristics and discrimination are presented in section iv section v summarizes our findings and discusses their implications for efforts to improve the economic situation of hispanics in the united states

optimal incentive contracts with multiple agents abstract a setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered with correlated productivities each agent s private information also provides a signal about the other agent s productivity in contrast to the setting in which there is only one agent it is shown that such private information may be of no value to the agents it is only if the agents are risk averse that their private information may allow them to command rents moreover when the agents are constrained only to reveal their private information truthfully as a nash equilibrium the pareto optimal incentive scheme may induce the agents to adopt strategies other than truth telling this leads to the consideration of truth telling equilibria that are not pareto dominated in the subgame played by the agents among all such equilibria the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a nash response to truth

a response to glazer and rosenthal we are most grateful to glazer and rosenthal for the attention they have paid to our work abreu and matsushima 1992a b c in the process of criticizing our mechanism they have provided an elegant exposition of it which usefully supplements our own efforts the criticisms themselves we feel are misplaced and based on a close reading but narrow interpretation of our results glazer and rosenthal seek to show that in our mechanisms the iterative removal of strictly dominated strategies is or indeed ought to be controversial in terms of conventional decision theory the iterative logic is impeccable when iterative deletion leads to a unique profile that profile is the unique rationalizable profile the unique nash equilibrium and so on of course the logic of iterative dominance entails common knowledge of rationality the theoretical coherence of this assumption has been questioned in the context of backward programming in extensive form games see luce and raiffa 1957 pp 80 81 rosenthal 1981 basu 1988 reny 1992a 1992b bonanno 1991 binmore 1987a 1987b and gul 1989 among others these paradoxes of common knowledge of rationality have been highlighted in stylized examples such as the finitely repeated prisoners dilemma and rosenthal s centipede game which in fact has been a seminal inspiration for this recent literature 2 but our mechanisms are simultaneous there is no opportunity to demonstrate irrationality strategic or otherwise and therefore no scope to rationalize iteratively dominated behavior from a decision theory perspective the glazer and rosenthal critique might therefore be viewed as an elaborate revival of the indefensible claim that players in a one short prisoners dilemma will choose not to confess because they are both better off doing so than by both playing their dominant strategies within the standard game theory paradigm there is really nothing more to be said before turning to issues of bounded rationality we note that the glazer and rosenthal critique is essentially premised on the existence of a countervailing focal point but what is a focal point the notion is notoriously vague and we are aware of no widely accepted definition 3 this is not to deny that in very simple and particular games certain behavior may be focal frequently focalness is identified with a pareto dominating equilibrium and this is the point of view glazer and rosenthal seem to adopt 4 this is implicit in their acknowledgement that when the social choice function does satisfy pareto optimality our objection loses much of its immediate

correlation and relative performance evaluation this paper reexamines the issue of relative versus joint incentive schemes in a multi agent moral hazard framework the model allows a full analysis of the information and dependence structure an important result is that the widespread notion that greater correlation in outcomes calls for more competition is not robust first when the dependence structure is effort sensitive the optimal incentive scheme in general mixes elements of relative evaluation and joint evaluation second under limited liability higher equilibrium correlation tends to make joint performance evaluation more desirable examples are provided regarding incentives in firms finance and innovation

further toward a theory of agricultural insurance the economic theory of contracts is applied to agricultural insurance to show that given full information pareto optimal insurance contracts are actuarially fair provide full coverage and differ for each individual the information problems of moral hazard and adverse selection prevent pareto optimality from being attained several second best solutions to these problems are applied to agricultural insurance it is shown that information collection and the application of contract design principles are second best solutions which may achieve the benefits of insurance at less cost than the current practice of public subsidies in theory agricultural insurance is an efficient risk sharing mechanism in practice however agricultural insurance has been a costly means of transferring risk from farmers to governments and or other insurers to induce farmers to participate in agricultural insurance governments have borne significant subsidy costs hazell pomareda and valdes p 295 in a recent study ahsan ali and kurian aak concluded that public subsidies are necessary to make agricultural insurance viable they also showed that insurance will increase output relative to a case with no insurance thus insurance is beneficial particularly in less developed countries where increasing food supplies is a policy goal for this reason they concluded that public subsidization of insurance also is desirable their conclusions are derived from a simplified model of production with one output and one input in this article we consider a more general production model with multiple inputs and outputs we show that aak s conclusion about the benefits of insurance may not hold depending on the nature of the inputs and outputs as defined by the production function carl h nelson is an assistant professor of agricultural economics

implementing coordinated team play abstract this note studies a moral hazard model of joint production in which there are strong gains to coordination the mechanism we propose for resolving the tacit collusion problem that arises in our setting makes use of at will contracts which provide the agents with the option to quit at any time journal of economic literature classification numbers c72 d82

cost functions under production uncertainty we characterize the cost functions which would be consistent with expected utility maximization when production is uncertain it is not generally possible assuming risk aversion to use only expected output as the constraint in a cost minimization problem in some leading cases cost functions consistent with expected utility maximization are particularly useful because they are devoid of risk preferences

implementation in undominated strategies a look at bounded mechanisms this paper examines the impact of placing natural restrictions on the mechanisms considered for implementation problems it is shown that if all mechanisms are considered and preferences satisfy a basic condition then any social choice correspondence can be implemented in undominated strategies an example points out that the strength of this result derives from the use of mechanisms with questionable features in part of the message space the agent who announces the highest integer is rewarded this sort of tail chasing construction common in the constructive proofs of the literature is used to assure that undesired strategy combinations do not form an equilibrium if such mechanisms are ruled out then the social choice correspondences which can be implemented in undominated strategies satisfy an incentive compatibility type condition called strategy resistence for social choice functions this is equivalent to strategy proofness this contrast suggests that this issue should be examined as it applies to other solution concepts used in implementation theory the last portion of the paper begins to explore the issue as it relates to nash implementation and undominated nash implementation

decentralization and collusion abstract we consider a model where agents work in sequence on a project share information not available to the principal and can collude due to limited liability the coase theorem does not apply the distribution of surplus among the agents is therefore an important control variable for the principal which gives us a theory of how to delegate in an organization subject to moral hazard the optimal distribution of surplus can always be achieved by delegating in the right way decentralization without using message games journal of economic literature classification numbers d23 d82 l14 l22

moral hazard and renegotiation with multiple agents we investigate the effects of contract renegotiation in multi agent situations where risk averse agents negotiate a contract offer to the principal after the agents observe a common unverifiable perfect signal about their actions we show that renegotiation with multiple agents reduces the cost of implementing any implementable action profile down to the first best level even though the principal cannot observe the agents actions moreover it is sufficient for the principal to use a simple initial contract in the sense that it consists of no more than a single sharing scheme for each agent and the total payments to the agents are the same regardless of the realised state an important implication is that decentralization in the sense of delegated negotiation and proposals from the agents can be as effective as centralized schemes that utilize revelation mechanisms in unrestricted ways

sex segregation and sectors an analysis of gender differences in returns from employer changes sweet james 1973 women in the labor force new york seminar press vanek joann 1974 time spent in housework scientific american 231 116 20 1980 household work wage work and sexual equality pp 275 91 in sarah f berk ed women and household labor beverly hills ca sage walker k and m woods 1976 time use a measure of household production of family goods and services washington d c american home economics association

theory of the firm under the threat of input supply interruption economists have been intrigued by the behavior of firms under different types of risk and uncertainty relatively recently there has been a particular interest in the theory of production under input uncertainty perhaps as a reflection of the energy supply disruptions experienced in the 1970s nevertheless this literature concentrates on the firm s production decisions when the uncertainty stems from stochastic input deliveries or from the production process itself this paper extends the stochastic input analysis to the monopolistic firm operating under the threat of input supply interruption turnovsky 8 presents some results pertaining to production decisions under input supply uncertainty he examines the risk neutral competitive firm s response to a randomly delivered input allowing the firm to reject excess order deliveries martin 6 examines the competitive firm s optimal short run response to stochastic deliveries where the entire input deliveries cannot exceed orders in these frameworks random deliveries can stem from internal sources such as machine failures or external sources such as unanticipated input market shocks and transportation breakdowns both studies demonstrate that the uncertainty induces a stochastic input ordering bias by the firm while turnovsky 8 finds that the existence of uncertainty in one input supply will not alter the optimal order of the nonstochastic input this is the so called input independence result martin 6 finds that the effect of the uncertainty on the nonstochastic input orders will depend upon the inputs relationship in production in this paper as in turnovsky s and martin s papers the supply of one perishable input is stochastic unlike the existing models however the ex post input supply under the threat of interruption is dichotomous either interruption occurs in which case none of the input is delivered to the firm or interruption does not occur in which case the entire input order is delivered to the firm also the existing work by turnovsky 8 and martin 6 concentrates on the competitive firm whereas this paper focuses on the monopolistic firm s behavior under factor supply uncertainty 2

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

a simple forecasting mechanism for moral hazard settings abstract this paper studies a multiagent moral hazard setting we resolve the tacit collusion problem that arises in our setting while employing a solution concept that makes less demanding behavioral assumptions than nash a simple mechanism is constructed that approximately implements the second best solution in two rounds of iteratively removing strictly dominated strategies under our mechanism the agents best reply correspondences are well defined a small message space is employed and the messages can be interpreted as divisional forecasts journal of economic literature classification numbers c72 d82

technological uncertainty and the theory of the firm several recent articles 1 6 have generalized the theory of the firm to incorporate price uncertainty and risk aversion it is now well known that the risk averse entrepreneur will select that level of output at which the expected price equals the marginal cost plus the marginal risk premium leland 5 provides a similar generalization given demand uncertainty however in each case the assumption of a well specified technology is maintained this paper complements and generalizes the earlier work on the theory of the firm by investigating the effect which technological uncertainty has on the firm s optimal production decision like the earlier work on the theory of the firm we show that the firm selects the level of input at which the expected marginal productivity equals the factor price plus the marginal risk premium unlike the earlier work we show that the sign of the marginal risk premium is not always positive and that it depends on the structure of the firm s technology we show that the distinction between price and technological uncertainty is important because each can lead to different implications for firm behavior like its predecessors the model of the firm presented here assumes a single ownerentrepreneur who makes the production decision we modify the baron and sandmo models by assuming that the entrepreneur knows the cost of each production decision but not the output as a result the entrepreneur s decision yields a random variable denoting output and a linear transformation of it denoting profit the entrepreneur chooses the random variable denoting profit to maximize his expected utility there are at least three distinct ways in which our notion of technological uncertainty may be interpreted first the entrepreneur may not know the location of the production surface in this case each production decision yields a random output an increase in the

incentives information and organizational form we model an organization as a hierarchy of managers erected on top of a technology here consisting of a collection of plants in our framework the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him we argue that different organizational forms give rise to different information about managers performance and therefore differ according to how effective incentives can be in encouraging a good performance in particular we show that under certain assumptions the m form multi divisional form is likely to provide better incentives than the u form unitary form because it promotes yardstick competition i e relative performance evaluation more effectively we conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for chinese data

a note on adjustment to production uncertainty and the theory of the firm this paper analyzes the impact of production uncertainty on the firm s optimal output decision if uncertainty is introduced by an additive risk variable then short run optimal output is unchanged but the owner manager s expected utility can change causing long run output effects if uncertainty is introduced by a multiplicative random variable then short run output can change as well

pesticide use environmental spillovers and efficiency a dea risk adjusted efficiency approach applied to dutch arable farming pesticides are widely used by crop producers in developed countries to combat risk associated with pests and diseases however their indiscriminate use can lead to various environmental spillovers that may alter the agricultural production environment thus contributing to production risk this study utilises a data envelopment analysis dea approach to measure performance of arable farms incorporating pesticides environmental spillovers and output variance as undesirable outputs in the efficiency analysis and taking explicitly into account the effect of pesticides and other inputs on production risk the application focuses on panel data from dutch arable farms over the period 2003 2007 a moment approach is used to compute output variance providing empirical representations of the risk increasing or decreasing nature of the used inputs finally shadow values of risk adjusted inputs are computed we find that pesticides are overused in dutch arable farming and there is a considerable evidence of the need for decreasing pesticides environmental spillovers

the impact of decoupled payments on farm choices conceptual and methodological challenges abstract in this paper we review the methodological framework for analysing decoupled payments in models of agricultural production market and technological uncertainty farm efficiency credit constraints farm household choices involving extra agricultural decisions policy uncertainty and long run impact of decoupling on investment and land values are the relevant issues that should be pursued by methodological and empirical analysis future research should refine the analysis of decoupled payments mainly trying to provide results that can be useful for policy simulation to bridge the gap between analysis at the individual level and sector policy models

moral hazard and renegotiation in multi agent incentive contracts when each agent makes a renegotiation offer abstract the purpose of this paper is to explore a mechanism for implementing the desired equilibrium actions in the one principal multi agent model with renegotiation when each agent is allowed to make a renegotiation offer with some belief restriction we show that there exists a mechanism in which the second best strategy is always implemented

coalitions incentives and risk sharing abstract this paper analyzes the effects of coalitional behavior in principal multiagent relationships with moral hazard and identifies cases where the principal prefers agents to form a coalition via side contracting it is shown that the principal can implement given efforts via non individualistic incentive contracts at a lower cost when the agents can monitor each other s efforts perfectly and hence coordinate their effort choice than when the agents behave independently permitting the principal to utilize more complex communication mechanisms does not alter the result for there is no coalition proof revelation mechanism improving the principal s welfare journal of economic literature classification number d82

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

tests for the role of risk aversion on input use for risk averting agents risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality in this article conditions are identified on a stochastic technology to test h that risk averters choose smaller input levels than risk neutral agents and h that an increase in risk aversion reduces input use a robust statistical method to test for dominance is adapted to stochastic production relations it is found that h is likely true for nitrogen application on iowa corn weaker evidence is found in favor of h

constrained choices under risk there has recently been a revival of interest in the implications of rationing for economic theory extending the work of samuelson 21 tobin and houthakker 24 and pollak 16 recent papers by bruno 3 howard 8 latham 13 and neary and roberts 15 have explored the theory of producer and consumer behavior under quantity rationing these developments have provided useful hypotheses in the investigation of economic behavior for example they have stimulated a reexamination of macroeconomic disequilibrium however previous work seems to have focused on economic models in the absence of uncertainty yet given that production decisions are often made before output prices are known and in the absence of complete contingent markets sandmo 22 batra and ullah 2 and others have developed the theory of the competitive firm under price uncertainty under the expected utility maximization hypothesis such a theory provides useful information about the influence of changing economic conditions or of risk behavior on production decisions but because of the presence of short run adjustment costs leading to short run input fixity or because of regulatory or institutional constraints quantity rationing often influences production decisions in order to evaluate how rationing influences such decisions there is a need to develop a conceptual model of constrained choices of the firm under risk the objective of this paper is to explore the implications of quantity rationing in the context of production theory under price uncertainty by introducing risk and risk behavior it extends the classical analysis of quantity constrained production decisions 3 21 the implications of quantity constraints for risk responsive choice functions are derived using the concepts of compensated choice functions and virtual prices it is shown that expected price effects can be decomposed into substitution effects and wealth effects the substitution effects measure the effects of a change in expected price on the compensated choice functions the compensation being made through a change in initial wealth holding expected utility constant the wealth effects characterize risk preferences since a non zero wealth effect reflects a departure from an arrow pratt constant absolute risk aversion utility function the influence of rationing on the properties of ordinary as well as compensated choice functions is analyzed in details by deriving the implications of quantity constraints for firm behavior under uncertainty the paper presents a number of useful results concerning the influence of risk or technology on economic behavior under rationing for example a

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives