the cost of contract renegotiation evidence from the local public sector the renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts however assessing the cost of such renegotiation remains an open issue from an empirical viewpoint to address this question we fit a structural principal agent model with renegotiation on a set of urban transport service contracts the model captures two important features of the industry first only two types of contracts are used in practice fixed price and cost plus second subsidies increase over time we compare a scenario with renegotiation and a hypothetical situation with full commitment we conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators

name your own price at priceline com strategic bidding and lockout periods a buyer suggests prices to n sellers in a time period and buys from the seller who accepts the bid first the number of bidding rounds is determined by how frequently the buyer can make an offer we show that with no limit on the frequency and without discounting the price path is either kept flat initially with large jumps at the end or increasing steadily over time which class of path occurs in equilibrium depends on the buyer s trade off between committing to a price ceiling versus finely screening the sellers costs with discounting limiting the number of rounds mitigates the delay caused by the reluctance to raise bids in the first class of equilibrium and therefore can benefit the buyer this result suggests why in reality bargaining parties often take measures to make their offers rigid and consequently force themselves to make fewer offers copyright oxford university press

consumer scores and price discrimination we study the implications of aggregating consumers purchase histories into scores that proxy for unobserved willingness to pay a long lived consumer interacts with a sequence of firms each firm relies on the consumer s current score a linear aggregate of noisy purchase signals to learn about her preferences and to set prices if the consumer is strategic she reduces her demand to manipulate her score which reduces the average equilibrium price firms in turn prefer scores that overweigh past signals relative to applying bayes rule with disaggregated data as this mitigates the ratchet effect and maximizes the firms ability to price discriminate consumers with high average willingness to pay benefit from data collection because the gains from low average prices dominate the losses from price discrimination finally hidden scores those only observed by the firms reduce demand sensitivity increase average prices and reduce consumer surplus sometimes below the naive consumer level

career concerns incentives and endogenous learning in labour markets models of career concerns provide a framework for analyzing the actions that may be taken by a manager in an attempt to influence performance signals that the market uses to update its beliefs on her productivity and the incentive problem that arises if such actions do not coincide with those that maximize the financial return to a firm s owner this survey provides a formal introduction to the main types of models of career concerns hidden action and hidden information and discusses some extensions of these models applications of the career concerns framework to explain aspects of managerial behavior and the form of labor market institutions are emphasized copyright 1992 by blackwell publishers ltd

strategic responses to automobile emissions control a game theoretic analysis abstract this paper examines the dynamics of standard setting regulation under technological uncertainty and asymmetric information about technological capability a two period model which allows fully strategic action is developed and applied to the regulation of automobile emissions a situation in which standards have been used to force innovation it is found that the initial level of r d activity caused by regulation increases with the intrinsic technical capability of industry this result done not depend on marginal productivities of research that favor high capability types and implies that a poor capability industry will not attempt to compensate for its inability to innovate with increased research activity it is also found that the regulator s ability to induce investment is greater when r d is likely to be unsuccessful

planning under incomplete information and the ratchet effect abstract central planning of production is usually performed under asymmetric information the firm in general has more information about its productive possibilities than the central planner from now on for short cp this justifies the use of incentives schemes in which the cp does not directly fix activity levels casual observation of such existing schemes suggests that the time dimensions is crucial for their working typically the cp revises the incentive scheme over time to take into account the information provided by the firm s performance managers of centrally planned economies as well as economists have long recognized that this revision induces firms to underproduce in order to avoid demanding schemes in the future this is the ratchet effect it is purpose of the present paper to study the ratchet effect under the non commitment assumption which we believe to be more realistic the inadequacy of conceptual tools made if difficult in the past to consider such an assumption now basic research on dynamic games with incomplete information recently resulted in new ideas which look particularly relevant for a theoretical analysis of the problem

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

research note optimal selling in dynamic auctions adaptation versus commitment this paper analyzes optimal selling strategies of a monopolist facing forward looking patient unit demand bidders in a sequential auction market such a seller faces a fundamental choice between two selling regimes adaptive selling that involves learning about remaining demand from early prices and commitment selling that forgoes such learning and makes all selling decisions in the beginning of the game a model of the game between the seller and the bidders is proposed to characterize the optimal regime choice the model implies that the relative profitability of the two regimes depends on the expected gains from trade when the expected gains from trade are low commitment dominates adaptation and vice versa

bargaining around cost benefit standards abstract injurers often purchase the property of potential victims to avoid liability or to comply with regulations this paper shows that injurers subject to cost benefit standards could profit from buying out victims even if they attach no value to the victims property because buyouts allow injurers to take fewer precautions a buyout of one victim produces a negative externality for the remaining victims injurers can consequently exploit victims and thereby reduce social welfare by adopting a divide and conquer strategy or by negotiating with victims sequentially perhaps surprisingly buyouts may reduce social welfare and victims joint profits even if victims make simultaneous or sequential take it or leave it buyout demands to the injurer

the ratchet tautness and managerial behavior in soviet type economies suppose a manager receives a fixed bonus for reaching a target plus an overfulfillment reward each period the target is fixed by the manager s superiors in a manner that takes into account past performance this is the ratchet managers facing this incentive scheme will choose an activity level which takes into account the dynamic effects of current behavior on future earnings the conventional wisdom contends that managers will understate capacity by producing below maximum potential we show that this behavior occurs only under certain conditions more importantly we also show that the ratchet can be used to induce managers to reveal the growth rate of average capacity

commitment and fairness in a dynamic regulatory relationship this paper considers a multiperiod model of a regulated firm that has stationary private information which may be revealed through performance if it cannot make commitments to future policies the regulator has an incentive to exploit any information the firm reveals and laffont and tirole show that there is no regulatory policy that is separating over any closed interval a fairness arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods the properties of such arrangements are studied and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment

ex post redistribution in a federation implications for corrective policy abstract this paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy according to the existing literature assuming an ex ante choice of transfers the corrective grant is equal to the marginal damage benefit inflicted by externality generation when the federal government accommodates state finances ex post the grant differs in formula from existing prescription allocative federal policy corrects state policy incentives twofold it entails a correction for the distortion in the marginal benefit of state spending as in earlier literature and for the distortion in the marginal cost of public funds induced by the ex post provision of transfers the required grant rule is generically disproportionate to the equilibrium externality even with lump sum taxation furthermore the ex post provision of transfers is critical for the nature of the equilibrium inefficiency equalizing transfers at least partly internalize consumption spill overs but simultaneously establishes a new source of inefficiency as a final result the existing prescription for allocative federal policy continues to apply if the public good is pure

explaining escalating prices and fines a unified approach abstract this paper provides an explanation for escalating prices and fines based on a unified analytical framework that nests monopoly pricing and optimal law enforcement we show that escalation emerges as an optimal outcome if the principal i lacks commitment ability and ii gives less than full weight to agent benefits escalation is driven by decreasing transfers for non active agents rather than increasing transfers for active agents some forward looking agents then strategically delay their activity which drives a wedge between the optimal static transfer and the benefit of an indifferent agent this wedge is the source of escalation

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

sequentially optimal auctions abstract in auctions where a seller can post a reserve price but if the object fails to sell cannot commit never to attempt to resell it revenue equivalence between repeated first price and second price auctions without commitment results when the time between auctions goes to zero seller expected revenues converge to those of a static auction with no reserve price with many bidders the seller equilibrium reserve price approaches the reserve price in an optimal static auction an auction in which the simple equilibrium reserve price policy of the seller mirrors a policy commonly used by many auctioneers is computed journal of economic literature classification numbers c78 d44 d82

the optimal initial allocation of pollution permits a relative performance approach the initial allocation of pollution permits is an important aspect of emissions trading schemes we generalize the analysis of bohringer and lange 2005 eur econ rev 49 8 2041 2055 to initial allocation mechanisms that are based on inter firm relative performance comparisons including grandfathering and auctions as well as novel mechanisms we show that using firms historical output for allocating permits is never optimal in a dynamic permit market setting while using firms historical emissions is optimal only in closed trading systems and only for a narrow class of allocation mechanisms instead it is possible to achieve social optimality by allocating permits based only on an external factor which is independent of output and emissions we then outline sufficient conditions for a socially optimal relative performance mechanism

food consumption in mexico demographic and economic effects abstract disaggregated demand analysis is beginning to receive increased importance in food policies for developing countries using household data from the mexican expenditure survey we estimate the income and demographic effects on expenditures for nine aggregate food categories in addition we use a probit model to explore the effect of these variables on the purchase decision for five high protein supplying goods the results indicate that demographic variables as well as income have important effects in determining food expenditures we analyse these effects and indicate the role they might play in food policy programmes such as pronal

two sided learning and the ratchet principle i study a class of continuous time games of learning and imperfect monitoring a long run player and a market share a common prior about the initial value of a gaussian hidden state and learn about its subsequent values by observing a noisy public signal the long run player can nevertheless control the evolution of this signal and thus affect the market s belief the public signal has an additive structure and noise is brownian i derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long run player s actions depend on the history of the game only through the market s correct belief using these conditions i demonstrate the existence of pure strategy equilibria in markov strategies for settings in which the long run player s flow utility is nonlinear the central finding is a learning driven ratchet principle affecting incentives i illustrate the economic implications of this principle in applications to monetary policy earnings management and career concerns

incentive plans for productive efficiency innovation and learning in many industries where production or sales is delegated to a number of subunits the central management faces the classical problem how to induce continuous efficiency improvements organizational learning and transfer of knowledge with a minimum of control exercised this paper draws on recent results regarding regulatory frameworks to construct simple yet powerful incentive schemes for decentralized production under asymmetric information the theoretical foundation is based on principal agent theory cf laffont and tirole econometrica 56 1986 614 641 and extensions to production theory by bogetoft management science 40 1994 959 968 the proposed incentive system is operational and makes use of available information to provide positive incentives for participation in the dynamic development of the entire organization

costs of control the source of economic rents for mcdonald s franchisees the main purpose of this article is to establish empirically using financial data that there are both ex ante and ex post rents left downstream at mcdonald s we find that the present value of the ex ante rents is around 300k 455k 1982 dollars ex post rents are of course even larger we argue that the ex post rents represent an incentive mechanism that complements the use of profit sharing rights at mcdonald s we also argue that ex ante rents arise here because franchisees wealth constraints prevent the up front extraction of the full present value of the ex post rents finally we note that mcdonald s desire for a particular type of individual to operate its franchises namely owner operators whose livelihoods are tied to the success of their outlets increases the likelihood that downstream operators face liquidity constraints this in turn contributes to the need for mcdonald s to leave ex ante rents downstream

essential facility financing and market structure abstract the paper analyzes the funding of an infrastructure project when an incumbent operator has private information about market profitability and the regulator does not have access to taxpayers money an open access policy raises welfare but may make the project non viable since funding must be provided by operators capital contributions we characterize the optimal market structure the regulator can ask the incumbent to bear a higher share of investment cost if the latter insists on an exclusive use yet the incumbent is willing to pay more for exclusivity the higher the demand that is precisely when competition yields the highest benefits at the optimum the incumbent s information is not used to determine market structure we further investigate the implications of this basic result in a dynamic context we show that the monopoly franchise policy is time consistent while an open access policy is not we also demonstrate that a threat of regulatory capture creates an open access presumption last we show that when the decision involves multiple projects monopoly segments should cross subsidize open access ones

self selection and monitoring in dynamic incentive problems with incomplete contracts a dynamic trading problem is examined in which a monopsonistic employer tries to hire workers whose productivities and reservation wages are private information the employer can only observe an employee s quality indirectly by monitoring a non verifiable measure of on the job performance the employer makes contract offers which employees can accept or reject once a contract has been accepted it is impossible for the employer to exchange messages with individual employees on the unique stationary equilibrium path for the contracting game the employer chooses between two mutually exclusive outcomes in the market outcome the employer offers long term contracts and information is conveyed entirely through self selection and delayed production in the monitoring outcome the employer offers short term contracts and contract renegotiation is conditioned by an employee s past performance a simple characterization theorem is provided which illustrates the often surprising effects of improvements in information in this setting for example an employer who is initially offering short term contracts to exploit performance information may stop monitoring and shift to market screening when the monitoring technology becomes more informative

the game form approach to redistribution this paper reviews the game form approach to redistributive policies this approach provides a justiucation for studying tax systems as good institutional arrangements for reallocating resources in a heterogeneous society after situating the problem of asymmetric information for public policy the paper provides a short overview of the main concepts and results in implementation theory next these tools are used to inquire about the possibility to decentralise the reallocation of resources in a production economy with the help of tax transfer systems finally the paper deals with some recent extensions of the theory a simple example is used throughout to illustrate the different results

the ratchet effect and the market for secondhand workers workers in a long term relationship often have an incentive to hide their ability early in the relationship to avoid having the firm increase the level of output expected from them in the future we show that competition for older workers will permit the implementation of efficient piece rate contracts when the difficulty of the job is unobserved by the firm gibbons 1987 has shown that all piece rate contracts will be inefficient together these results may explain why piece rates are common in some jobs such as agricultural work and sales and not as popular for many manufacturing jobs

job transfers and incentives in complex organizations thwarting the ratchet effect many complex organizations such as planned soviet enterprises and the u s military routinely transfer employees between jobs since this sacrifices job specific human capital the practice is puzzling this article shows that regular job transfers may be part of an optimal incentive scheme in organizations plagued by the ratchet effect the ratchet effect arises when an employer is uncertain as to the productivity of the various positions or jobs within an organization workers in highly productive jobs then have an incentive to disguise the productivity of their jobs by expending low effort and producing low output this avoids having the employer construct more demanding remuneration schemes once the high productivity of a job becomes known job transfers break the link between current performance and future incentive schemes and hence remove the incentive stifling implications of the ratchet effect this article examines the tradeoff between providing more effective incentives via job transfers and the accompanying sacrifice of job specific human capital establishes conditions under which job transfers are optimal and develops comparative static results

pricing and entry in regulated industries the role of regulatory design abstract this paper studies the optimal regulatory policy in a market where entry may occur in the event of entry the regulator regulates the incumbent but not the entrant we show that the effect of entry on prices depends on the length of the interval between regulatory reviews if the gap is long then the market outcome following entry has a higher price than it would have with a shorter gap 1997 elsevier science s a

arm s length relationships without moral hazard i show that cutting the flow of information between a principal and an agent can increase the power of the incentives of the agent to reveal private information jel d23 d82 d86 l20

efficiency improving investment and the ratchet effect abstract in a long term relationship between a regulator and a firm the production technology may change due to investment this paper investigates how the introduction of such an investment possibility influences the dynamic regulation problem when long term commitments are infeasible contractible investment is shown to reduce the ratchet effect by increasing separation in the first period due to the separation effect of investment the first period optimal scheme converges toward the optimal scheme with commitment as investment increases finally assuming noncontractible investment the paper analyzes the relationship between separation and the degree of under investment

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

resale markets and the assignment of property rights the consumption of an indivisible good causes identity dependent externalities to non consumers we analyse resale markets where the current owner designs the trading procedure but cannot commit to future actions we ask the following questions 1 doer the identity of the initial owner matter for the determination of the final consumer 2 is the outcome always efficient the major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency this result complements the coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency

the strategic impact of references in business markets we investigate a business to business context and ask when and why a firm should announce a reference program that commits the firm to facilitating the flow of information about the efficacy of its products from early adopters to potential late adopters we model a monopolist manufacturer with a new innovation that can be sold to two potential customers we demonstrate here two benefits of a reference program that relate not to an increase in later adopters willingness to pay but to an increase in the willingness to pay of the early adopters themselves the impact on the early adopters willingness to pay arises in two ways as a result of their observation of the firm s commitment to information transmission first in a model of symmetric uncertainty we show that the announcement of a reference program facilitates dynamic pricing by the manufacturer in the sense that it allows the firm to provide temporary exclusive use of the technology to one of the customers this creates more value which the manufacturer can extract via a higher price in this way a reference program can serve as a partial substitute for an exclusive use contract in a model with asymmetric information we demonstrate that under certain conditions the firm is able to use the reference program as a signal again to the early adopting customer that its technology is of high quality however such a signal requires significant discounts to early adopters to ensure separation as a result a pooling equilibrium dominates in which the manufacturer fosters references regardless of its quality finally by allowing the firms private information to be stochastic we show that separation may be a dominant outcome

contracting with imperfect commitment and the revelation principle the single agent case this paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism we show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent in contrast with the conventional revelation principle however the agent may not use this strategy with probability one our results apply to contracting problems between a principal and a single agent by reducing such problems to well defined programming problems they provide a basic tool for studying imperfect commitment

auctions with limited commitment we study the role of limited commitment in a standard auction environment in each period the seller can commit to an auction with a reserve price but not to future reserve prices we characterize the set of equilibrium profits attainable for the seller as the period length vanishes an immediate sale by efficient auction is optimal when there are at least three buyers for many natural distributions two buyers is enough otherwise we give conditions under which the maximal profit is attained through continuously declining reserve prices

disease forecasts and livestock health disclosure a shepherd s dilemma we analyze how to induce sellers to disclose food safety with repeated interactions and safety correlated over time cash transfers alone do not ensure disclosure perfect but costly testing ensures disclosure with a complex lottery that may be difficult to implement in practice in contrast even a noisy quality forecast allows the buyer to induce perfect disclosure with a simple pricing scheme forecast introduction may benefit or harm sellers after introduction sellers may suffer from increases in forecast precision as an illustration we cast our model in the context of rift valley fever in an east african livestock market copyright 2010 oxford university press

dynamic regulation design without payments the importance of timing abstract we consider a two period model of optimal regulation of a firm subject to marginal compliance cost shocks the regulator faces an asymmetric information problem the firm knows current compliance costs but the regulator does not both the regulator and the firm are uncertain about future costs in our basic framework the regulator may not offer payments to the firm we show that the regulator can vary the strength of regulation over time to induce the firm to reveal its costs and increase welfare in the optimal mechanism the regulator offers stronger weaker regulation in the first period and weaker stronger regulation in the second period if the firm reports low high compliance costs in the first period low cost firms expect compliance costs to rise in the future and thus prefer weaker regulation in the second period high cost firms expect costs to fall in the future and thus prefer regulation which becomes stricter over time thus the regulator offers the low high cost firms slightly weaker stronger regulation in the second period in exchange for much stronger weaker regulation in the first period thereby timing the regulation if the regulator can make payments then the optimal mechanism to some degree times the regulation as long as a positive marginal cost of funds exists if the marginal cost of funds is high enough then under the optimal mechanism the regulator will not use payments and use our timing mechanism exclusively

learning about the future and dynamic efficiency we analyze the conditions under which an efficient allocation of resources is achievable in a dynamic private values setting where the designer gradually learns about the distribution of agents values as an application consider the sequential allocation of scarce spectrum to emerg ing technologies whenever a new technology appears a benevolent designer is faced with a problem should he allocate a valuable chunk of spectrum right now while forfeiting for a long period of time the option of allocating it to a possibly superior future technology it makes sense to assume here that current firms have a better knowledge of their technological prow ess than the designer and that the designer s assessment of future technological possibilities is improved by observing the current technology if technology owners are strategic we show below that the learning process about the future disturbs the ability to extract the information necessary for efficient decision making another good example is hiring by an organization that fills positions at different hierarchy levels over time while all candidates prefer higher level positions some aspect of their ability to perform the needed tasks at each level is privately known to the candidates if contracts with current employees are difficult to adjust the designer must carefully compare the quality of present candidates which can serve as a signal about the market to the expected quality of candidates that may become available in the future finally consider a firm allocating franchises in a country where it did not operate before and where contractual clauses or other impediments prevent reallocation during a significant period of time local potential franchisees may have some superior information regarding future prof itability in the respective market and hence the elicitation of private information is crucial for a franchisor that is supposed to get a share of the future profits

optimal forestry contracts under asymmetry of information in this paper i analyze optimal royalty contracts in forestry when the harvesting firm has private information on the cost of harvesting this infinite horizon forest rotation model with asymmetry of information on the cost parameter results in a dynamic incentive problem depending on whether the costs are correlated over time or not the firm either receives rent or receives no rent associated with the continuation part of the rotation choice i characterize the optimal contract explicitly in both cases i also examine the loss in expected welfare surplus resulting from the use of a linear contract instead of the more general non linear contract

torture and the commitment problem we study torture as a mechanism for extracting information from a suspect who may or may not be informed we show that a standard rationale for torture generates two commitment problems first the principal would benefit from a commitment to torture a suspect he knows to be innocent secondly the principal would benefit from a commitment to limit the amount of torture faced by the guilty we analyse a dynamic model of torture in which the credibility of these threats and promises is endogenous we show that these commitment problems dramatically reduce the value of torture and can even render it completely ineffective we use our model to address questions such as the effect of enhanced interrogation techniques rights against indefinite detention and delegation of torture to specialists

the target incentive system vs the price incentive system under adverse selection and the ratchet effect abstract in a dynamic adverse selection type of principal agent relationship where the principal is committed over time to a particular incentive system with fixed structure but variable parameters but not to any intertemporal incentive scheme with both fixed structure and parameters the ratchet effect arises but varies with different incentive systems we show that compared with using prices as the sole planning mode the principal can attenuate the ratchet effect by stipulating targets as well as a result the target incentive system entails higher expected welfare than the price incentive system in a perfect bayesian equilibrium

the economics of repeated extortion we provide a simple model of repeated extortion in particular we ask whether corrupt government officials opportunism to demand more once entrepreneurs have made sunk investments entails further distortion in resource allocations if the choice of technology is left to the entrepreneurs the dynamic path of demand schedules will induce entrepreneurs to pursue a fly by night strategy by adopting a technology with an inefficiently low sunk cost component the unique equilibrium is characterized by a mixed strategy of the government official in future demand our model thus explains why arbitrariness is such a central feature of extortion we also investigate implications of the stability of corrupt regimes for dynamic extortion and discuss alternative applications for our framework

dynamic regulation of quality we develop a dynamic regulation model of quality provision where maintenance efforts and quality shocks have a durable impact when the regulator contracts with a sequence of agents asymmetric information can lead to overprovision of quality reflecting a dynamic rent extraction effect when the regulator contracts with a single agent the efficiency of their relationship depends on the regulator s ability to transfer rents across periods hiring a single agent with unlimited liability is socially preferable to hiring a sequence of agents even when no commitment is feasible by contrast shorter franchises are socially preferable if the agent has limited liability

sequential common value auctions with asymmetrically informed bidders we study an in nitely repeated rst price auction with common values we focus on one sidedincomplete information in which one bidder learns the objects value which itself does not change overtime learning by the uninformed bidder occurs only through observation of the bids the proprietaryinformation is eventually revealed and the seller extracts essentially the entire rent for large discountfactors both players pay offs tend to 0 as the discount factor tends to 1 however the uninformed bidderdoes relatively better than the informed bidder we discuss the case of two sided incomplete informationand argue that under a markovian re nement the outcome is pooling as information is revealed onlyinsofar as it does not affect prices

market failures and public policy industrial organization studies the exercise and control of market power to this purpose it builds models that capture the essence of the situation the predictions of the model can then be tested econometrically and possibly in the lab or the field in the end the reasonableness of and robustness to modeling assumptions and the quality of empirical fit determine how confident economists are in making recommendations to public decision makers for intervention and to companies for the design of their business model industrial organization has a long tradition first theoretical with the work of french engineer economists antoine augustin cournot 1838 and jules dupuit 1844 then policy oriented with the enactment of the sherman act 1890 and subsequent legislation then descriptive with the studies of the harvard school structure conduct performance comforting and refining the antitrust drive and finally skeptical with the chicago school the chicago school correctly pointed out the lack of underlying theoretical doctrine and went on to cast doubt on the whole edifice it however did not develop an alternative antitrust doctrine perhaps because

intertemporal common agency and organizational design how much decentralization abstract in common agency where one agent contracts with several principals to what extent should the principals cooperate and centralize provision of incentives if the agency is over contract complements where an increase in activity for one principal increases the marginal value of contracting with other principals complete centralization seems optimal since this internalizes all externalities we show that this intuition is not generally valid for dynamic agency situations for although centralization provides more accurate incentives to the agent it also aggravates the ratchet effect and this negative effect may dominate the optimal degree of decentralization is discussed and partly characterized

favoring the winner or loser in repeated contests should a firm favor a weaker or stronger employee in a contest despite a widespread emphasis on rewarding the best employees managers continue to tolerate and even favor poor performers contest theory reveals that evenly matched contests are the most intense which implies that a contest designer can maximize each player s effort by artificially boosting the underdog s chances we apply this type of handicapping to a two period repeated contest between employees in which the only information available about their abilities is their performance in the first period in this setting employees are strategic and forward looking such that they fully anticipate the potential impact of the first period contest result on the second period contest and thus adjust their behaviors accordingly the manager also incorporates these strategic behaviors of employees when determining an optimal handicapping policy if employees abilities are sufficiently different favoring the first period loser in the second period increases the total effort over both periods however if abilities are sufficiently similar we find the opposite result occurs total effort increases the most in response to a handicapping strategy of favoring the first period winner

competitive markets without commitment in the presence of a time inconsistency problem with agency contracts we show that competitive markets can implement allocations that pareto dominate those achieved by a benevolent government and they induce more effort we analyze a model with moral hazard and a two sided lack of commitment after agents have chosen their work firms can modify contracts and agents can switch firms if the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals it is pareto superior to a government s allocation with a complete breakdown of incentives moreover competitive markets without commitment implement more effort in equilibrium under general conditions

worker cooperation and the ratchet effect workers paid by the piece should be happy to introduce new techniques that increase output but firms always seem to reduce the piece rate when workers start earning too much money workers respond by restricting output and keeping good new ideas to themselves we show that this outcome is inevitable in a competitive environment however there are noncompetitive situations where firms can use piece rates to get cooperation from their workers these predictions are consistent with case history evidence from the cotton spinning industry in england in the nineteenth century and the lincoln electric company in the united states even today

sequentially optimal mechanisms this paper establishes that posting a price in each period is a revenue maximizing allocation mechanism in a finite period model without commitment a risk neutral seller has one object to sell and faces a risk neutral buyer whose valuation is private information and drawn from an arbitrary bounded subset of the real line the seller has all the bargaining power she designs a mechanism to sell the object at t but if trade does not occur at t she can propose another mechanism at t 1 we show that posting a price in each period is an optimal mechanism a methodological contribution of the paper is to develop a procedure to characterize optimal dynamic incentive schemes under non commitment that is valid irrespective of the structure of the agent s type 2006 the review of economic studies limited

do expiring budgets lead to wasteful year end spending evidence from federal procurement many organizations fund their spending out of a fixed budget that expires at year s end faced with uncertainty over future spending demands these organizations have an incentive to build a buffer stock of funds over the front end of the budget cycle when demand does not materialize they then rush to spend these funds on lower quality projects at the end of the year we test these predictions using data on procurement spending by the u s federal government using data on all federal contracts from 2004 through 2009 we document that spending spikes in all major federal agencies during the 52nd week of the year as the agencies rush to exhaust expiring budget authority spending in the last week of the year is 4 9 times higher than the rest of the year weekly average we examine the relative quality of year end spending using a newly available dataset that tracks the quality of 130 billion in information technology i t projects made by federal agencies consistent with the model average project quality falls at the end of the year quality scores in the last week of the year are 2 2 to 5 6 times more likely to be below the central value to explore the impact of allowing agencies to roll unused spending over into subsequent fiscal years we study the i t contracts of an agency with special authority to roll over unused funding we show that there is only a small end of year i t spending spike in this agency and that the one major i t contract this agency issued in the 52nd week of the year has a quality rating that is well above average

small pollution markets tradable permits versus revelation mechanisms abstract a simple two period model with two polluters is analyzed they emit a homogeneous hazardous substance and they are given tradable permits to pollute the social planner issues permits and tries to learn the cost of reducing pollution by observing the quantity of permits traded in the first period it is shown that although efficient trade is prevented by strategic considerations by the polluters the planner learns something from observing only quantities comparisons are made between this approach and that of mechanism design and it is concluded that the latter is superior in theory but sensitive to collusion by the firms

the multiperiod principal agent problem in repeated principal agent models long term contracts can improve on short term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short term contract negotiated if that circumstance occurs we show that efficient contracting under moral hazard alone does not require long term commitment from the principal provided a short term contract can punish the agent sufficiently in a sense made precise it requires no commitment from the agent either then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing

standard incentive regulation hinders the integration of renewable energy generation the connection and distribution of growing decentralized electricity generation from renewable energy sources res e is leading tomassive investment needs besides investing in additional conventional assets e g cables grid operators can also invest in innovative smart solutions like local storage capacities or voltage regulation appliances which may be a more suitable way of integrating res e this paper investigates the influence of incentive regulation on the investment decision of grid operators to integrate res e we describe the technical and regulatory background explain the advantages of smart solutions and present an approach for comparing investment scenarios as an example we calculate the profitability of investments in a case study of the german electricity market we apply data envelopment analysis dea and stochastic frontier analysis sfa to show the influence of the investment alternatives on grid operator efficiency objectives we demonstrate that under current standard incentive regulation the grid operators gain profitability by avoiding investments and if they are forced to invest by not implementing smart solutions the results highlight the need to consider innovation in the regulation design further research should investigate specific instruments that can be used to account for innovation our brief discussion of such instruments provides a starting point

the strategic use of innovation to influence regulatory standards this paper investigates the welfare consequences of strategic behavior by firms to affect the amount of environmental regulation they face environmental regulation often attempts to force an industry to develop cleaner technology but the regulator may have no means to commit to a specific standard this lack of regulatory commitment induces firms to choose innovation strategically it is well known that firms have incentives to suppress innovation to induce the regulator to ratchet down the standard and this strategic behavior lowers welfare this paper explores a countervailing incentive in oligopoly settings firms have heightened incentives to innovate so as to increase regulation and raise rivals costs in equilibrium the incentive to raise rivals cost can mitigate the welfare loss arising from no regulatory commitment also a regulator who is unable to commit ex ante to the stringency of a regulatory standard can induce more clean technology than a regulator with a commitment mechanism

the life cycle of regulatory agencies dynamic capture and transaction costs the dynamics of regulation is analysed in a model where regulatory capture comes from the repeated interaction between an interest group and a regulatory agency regulatory institutions offer a framework for this dynamic process they put constraints on the interest group s influence the dynamics of regulation and its long run outcome depend on the political principal s the regulator s and the regulated firm s time preferences and their information some foundations for the transaction costs of side contracting used in the standard literature on collusion are provided those transaction costs are linked to the precise nature of regulatory institutions

dynamic income taxation redistribution and the ratchet effect abstract in this paper we extend the classic optimum linear income tax model to a twice repeated game a utilitarian policy maker decides on the second period tax system on the basis of observed first period behaviour we summarise our findings as follows first the static optimal linear tax results cannot be expected to hold in a dynamic setting second more productive households are likely to mimic the behaviour of less productive households third the optimal dynamic first period tax rate might be negative then income is redistributed from low to high income households fourth if the utility function is well behaved then the optimal dynamic first period tax rate is lower than the optimal static tax rate fifth if the optimal static tax rate separates then the dynamic and the static optimal tax rates coincide sixth if a zero tax rate separates then the optimal dynamic tax rate is positive

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

consumer lock in with asymmetric information abstract a two period version of the rothschild and stiglitz 1976 model of competitive screening in an insurance market is presented its features include repeat purchase of insurance among consumers no commitment among insurers or consumers asymmetric information among insurers about a consumer s accident history and state contingent contracts an equilibrium may exist in this model with full pooling in period one and consumer lock in in period two in such an equilibrium high risk consumers are experience rated and firms earn negative profits in period one and positive profits in period two

the dynamics of corruption with the ratchet effect this paper provides a simple model of corruption dynamics with the ratchet effect as in shleifer and vishny 1993 we consider the sale of government property entry permit by government officials as the prototype of corruption activities in a dynamic version of the shleifer vishny model corrupt officials have ex post the incentive to price discriminate entrepreneurs based on the entry decisions made in an earlier period we show that the inability of government officials to commit to future money demands induces the ratchet effect in that entrepreneurs have incentives to delay entry in order to receive a discount in the permit price later the ex post opportunism erodes the official s extortion power and reduces his revenues from selling permits even though the dynamic setting leaves the corrupt official with less extortion power we cannot rule out the possibility that the official s ability to apply dynamic discrimination decreases the intertemporal aggregate social welfare we also explore the effect of the official s tenure stability on the extent of corruption this allows us to identify circumstances under which the often observed practice of job rotation can help mitigate corruption