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

an experimental investigation of the hahn noll revenue neutral auction for emissions licenses abstract this paper reports on three series of laboratory experiments designed to test the performance of the hahn noll revenue neutral auction rna an alternative institution a no rebate uniform price auction upa is also examined as a benchmark in these experiments the rna markets were little different from upa markets in terms of either prices or market efficiencies the two institutions did differ in terms of the distribution of the gains from exchange and of the propensity of bidders to engage in a certain type of overbidding

equilibrium properties of auctions and alternative procedures for allocating transferable permits abstract this paper examines the equilibrium properties of a range of auctions and related procedures placing emphasis on the types of procedures that are likely to be of special interest in environmental management applications nash equilibrium properties are first derived for a very general class of auctions for multiple homogeneous or heterogeneous objects or permits next it is shown that given appropriate assumptions three broad classes of public allocation procedures that do not generate revenues for the government would yield participants equal expected profits these classes are 1 incentive compatible auctions where bidders receive equal lump sum refunds 2 non incentive compatible procedures where refunds are a function of participants bids and 3 free initial distribution of permits on a lump sum basis followed by trading via a competitive market the applicability of the general results is then demonstrated by examining the particular non incentive compatible fair division procedure originally suggested by knaster finally implications of the theoretical results for applications including the allocation of transferable discharge permits and water rights are discussed

using contests to allocate pollution rights in this paper we advocate a new initial allocation mechanism for a tradable pollution permit market we outline a permit allocation contest pac that distributes permits to firms based on their rank relative to other firms this ranking is achieved by ordering firms based on an observable external action where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradable permit market we argue that this mechanism has a number of benefits over auctioning and grandfathering using this mechanism efficiently distributes permits allows for the attainment of a secondary policy objective and has the potential to be more politically appealing than existing alternatives

who should abate carbon emission we review the optimal pattern of carbon emission abatements across countries in a simple multi country world we model explicitly with the model in chichilnisky 4 the fact that the atmosphere is a public good within this framework we establish conditions for it to be necessary for optimality that the marginal cost of abatement be the same in all countries these condition are quite restrictive and amount to either ignoring distributional issues between countries or operating within a framework within which lump sum transfers can be made between countries these results have implications for the use of tradeable emission permits which as normally advocated will lead to the equalization of marginal abatement costs across countries the observation that the atmosphere is a public good implies that we may need to look at a lindahl equilibrium rather than a walrasian equilibrium in tradeable permits

what can we learn from the grand policy experiment lessons from so2 allowance trading stable url http links jstor org sici sici 0895 3309 28199822 2912 3a3 3c69 3awcwlft 3e2 0 co 3b2 tthe journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgtue jun 26 16 25 17 2007

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

the us so2 auction analysis and generalization abstract the new acid rain program allows electric utilities all over the us to trade so 2 emission permits an annual discriminative and revenue neutral auction is linked to this program this innovative so 2 auction distributes 3 of the permits in circulation and takes place at the chicago board of trade early results showed that the auction generated a clearing price signal lower than the market price now the auction price seems to be determined by the outside market price still in the important starting phase a non discriminative auction design would probably have generated better price signals since potentially severe downward biases in both seller price offers and buyer bids are due to the discriminative feature of the epa auction

carbon dioxide emissions allocation a review carbon dioxide co2 emissions allocation plays a fundamental role in determining reduction responsibility at economy level or emission permits at firm level past decades have seen the development and applications of various methods for co2 emissions allocation this paper provides a literature review of co2 emissions allocation with emphasis on the evolution of allocation methods used it begins with a summary of the most popular allocation principles and criteria that lay a foundation for the development of allocation methods we then classify the existing allocation methods into four groups namely indicator optimization game theoretic and hybrid approaches the main features and findings of past studies are identified and summarized while the fairness principle prevails in earlier studies the efficiency principle has been found to receive increasing attention recently we also present a comparison of the empirical results based on ten popular indicator methods to show how indicator choice affects the allocation results issues related to selecting appropriate methods in co2 emissions allocation are finally discussed further research may be carried out to strike a balance between fairness and efficiency so that the allocation results become more widely acceptable and economically feasible

on the design of optimal grandfathering schemes for emission allowances to meet its commitment under the kyoto protocol the eu plans to implement an emissions trading system whith grandfathering of allowances besides having distributional impacts the choice of the grandfathering scheme may affect efficiency if firms anticipate how future allocations depend on upcoming decisions in this paper we determine central design rules for optimal grandfathering within a simple two period model we find that for small open trading systems where allowance prices are exogenous first best second period grandfathering schemes must not depend on firm specific decisions in the first period second best schemes correspond to a ramsey rule of optimal tax differentiation and are generally based on both previous emissions and output however ofr closed emissions trading systems i e endogeneous allowance prices firstand second best rules coincide and must not depend on previous output levels they consist of an assignment proportional to the emissions in the first period plus a term which does not depend on firm specific decisions in either of the two periods

mechanism design with interdependent valuations efficiency ggagents valuations are interdependent if they depend on the signals or types of all agents under the implicit assumption that agents cannot observe their outcome decision payoffs previous literature has shown that with interdependent valuations and independent signals efficient design is impossible this paper shows that an efficient mechanism exists in an environment where first the final outcome e g allocation of the goods is determined then the agents observe their own outcome decision payoffs and then final transfers are made

bidding with securities comment to feasible securities 1 their main finding concerns the role of the steepness of securities in determining the seller s revenue they show that the steeper the payment to the seller as a func tion of the realized value the higher is the seller s expected revenue a shift from a security say a debt to a steeper one say equity or call option flattens the surplus accruing to a bidder as a function of his future realized value and this levels the competitive gaps between bidders hence the competition becomes intensified 2 in this comment we wish to add to dks analysis a caveat that the adverse selection prob lem should be an important part of security and auction design consideration unlike cash bids security bids are difficult to evaluate when the seller does not know the buyer s exact type for instance a 40 percent share of an asset managed by a buyer may be less valuable than a 30 per cent share of the same asset managed by a different buyer if the latter is much more competent lacking such information a seller may fall victim to adverse selection choosing a wrong bidder this problem has been noted by several authors such as william samuelson 1987 simon board 2007 and charles zheng 2001 in the context of a fixed security design our concern here is its relevance for security design we show that the adverse selection problem may lead to rankings of alternative security designs that are quite different from and in fact opposite to those found in dks in particular under a reasonable circumstance a steeper security is more vulnerable to adverse selection and could result in a poorer revenue performance than a flatter security to illustrate suppose there are two buyers 1 and 2 buyer 1 2 has a project which gener ates a gross return of v and requires initial investment cost of x r suppose that vx v2 0 and xx x2 and also that vx xx v2 x2 that is buyer 1 s project generates a higher net return so is efficient to select but requires a higher investment than buyer 2 s project this assumption is reasonable a financially distressed or bankrupt firm will more likely turn profitable again under management willing to infuse more cash for instance or a firm that can generate a greater value from an underperforming target is more likely to have a higher opportunity cost e g of pursuing other target or standalone values the assumption is equally compelling in other contexts such as the government sale of oil leases

atheoretical macroeconometrics a critique abstract the spurious nature of the restrictions used to identify many macroeconometric models has led some researchers to advocate a style of econometric inquiry that is less dependent on prior theoretical restrictions of the sort that were central to the approach of the cowles commission this development which we call atheoretical macroeconometrics is summarized and evaluated in the current paper it is contrasted with an updated version of the cowles commission approach we conclude that while some of the exercises of atheoretical macroeconometrics are valid those that have attracted the most attention and appear the most innovative exogeneity testing impulse response analysis and policy analysis using estimated vector autoregressions are based on incorrect analysis

does the exchange rate follow a random walk a monte carlo study of four tests for a random walk abstract several authors have urged that real and nominal exchange rates follow a random walk conditions under which the exchange rate follows a random walk are reviewed in this paper many of these do not appear to hold therefore the empirical evidence presents a puzzle some evidence suggets the exchange rate follows a random walk while other evidence suggests the opposite should be true this paper attempts to reconcile the evidence it is argued that the tests for a random walk have low power monte carlo evidence on four tests for a random walk is presented that suppors this claim

optimal equity auctions with heterogeneous bidders abstract i analyze the effects of heterogeneity in terms of bidders valuation distributions and standalone values in equity auctions auctions in which bidders offer equities rather than cash heterogeneity misaligns equity bids face values monetary values and bidder types making the seller s revenues sensitive to the auction design given heterogeneity i identify the mechanism that maximizes the expected revenue among all incentive compatible mechanisms of equity auctions i show how different sources of heterogeneity alter the optimal design revenues and allocational efficiency unlike optimal cash auctions myerson 1981 where bidders standalone values are irrelevant the allocation of optimal equity auctions favors bidders with lower standalone values because the seller can extract a larger proportion of their rents by contrast when bidders differ only in valuation distributions optimal equity auctions feature more efficient allocations than optimal cash auctions

international equity and differentiation in global warming policy ne of the major obstacles to reaching a comprehensive agreement on global warming is the setting of greenhouse gas emission reduction targets for individual countries long standing tensions between industrialized and developing countries have raised the issue of equity in burden sharing moreover individual industrialized nations have pleaded special circumstances and have sought differentiation in their obligations this paper analyzes alternative rules for distributing tradable carbon dioxide emissions permits a non linear programming model which distinguishes between allocation based and outcome based rules is used to analyze the relative welfare outcomes the model is applied to the world body of nations and yields several important policy implications

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

the economic design of sporting contests what is the optimal number of entrants in a race or the optimal number of teams in a baseball league what is the optimal structure of prizes for a golf tournament or degree of revenue sharing for a football championship how evenly balanced should the competing teams be in the nascar or formula one championships what is the maximum number of entrants per nation to the olympic games that should be permitted what quota of qualifying teams to the soccer world cup should be allocated to the developing nations

auctions and alternative procedures for allocating pollution rights this paper considers two different types of auctions which the government could use to sell discharge rights 1 an auction where rights are sold for a single clearing price and 2 a special type of discriminating auction that discourages strategic manipulation of bids by individual dischargers based on both theoretical and practical considerations there appears to be a fundamental trade off between reducing the financial burden of rights purchases and eliminating the incentives for strategic behavior very few discharges in either case study would have lower expenses under government sales of rights than under uniform treatment the simulations also suggest that there may be opportunities for strategic behavior under nonincentive compatible procedures because of small numbers of dischargers despite its problems with respect to incentive compatibility the right allocation approach of free distribution followed by exchange may offer the most desirable package of features this approach can yield dischargers savings over the expenses of present uniform regulations as well as provide incentives for efficient allocation of treatment efforts 25 references 1 figure 5 tables

pollution taxes and revenue recycling abstract discussions of environmental policy and the tax system have emphasized the value of pollution tax revenues which can be used to reduce other tax distortions in the economy however by raising private marginal production costs environmental taxes also tend to reduce gdp and exacerbate the welfare costs of conventional taxes for environmental taxes in consumption goods industries the net welfare change from these two effects is negative unless this good is a relatively weak substitute for leisure an estimate for the optimal pollution tax with full revenue recycling is 63 to 78 of marginal environmental damages

who should abate carbon emissions an international viewpoint abstract we review the optimal pattern of carbon emission abatements across countries in a simple multi country world we model explicitly with the model in chichilnisky 1993b the fact that the atmosphere is a public good within this framework we establish conditions for it to be necessary for optimality that the marginal cost of abatement be the same in all countries these conditions are quite restrictive and amount to either ignoring distributional issues between countries or operating within a framework within which lump sum transfers can be made between countries these results have implications for the use of tradeable emission permits which as normally advocated will lead to the equalization of marginal abatement costs across countries the observation that the atmosphere is a public good implies that we may need to look at a lindahl equilibrium rather than a walrasian equilibrium in tradeable permits

efficient dynamic mechanisms with interdependent valuations this paper considers a dynamic environment with interdependent valuations and evolving private information under the assumption of independent types we construct an efficient incentive compatible mechanism that is also budget balanced in every period of the game our mechanism works in environments where in each period each agent observes her own realized outcome decision payoff from the previous period this extends the insight of mezzetti 2004 to the dynamic setting

horizontal mergers with synergies cash vs profit share auctions we consider takeover bidding in a cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals beliefs through their bids we compare cash and profit share auctions first and second price supplemented by entry fees since non merged firms benefit from a merger if synergies are low bidders are subject to a positive externality with positive probability nevertheless pooling does not occur unlike cash auctions profit share auctions are not revenue equivalent and the second price profit share auction is more profitable than the other auctions

market efficiency and cointegration an application to the sterling and deutschemark exchange markets abstract the assumption that the foreign exchange market is efficient that is that agents are risk neutral and use all available information rationally so that the forward exchange rate is an unbiased predictor of the future spot rate is a property often imposed in theoretical international macroeconomic models although a vast empirical literature has evolved to test market efficiency we use recent developments in the theory of cointegration to provide new methods of testing several aspects of foreign exchange market efficiency we ffind evidence inconsistent with market efficiency for both germany and the united kingdom

transaction costs and tradeable permits abstract tradeable permit systems are at the center of current interest and activity in market based reforms of environmental policy because these systems can offer significant advantages over conventional approaches to pollution control unfortunately claims made for their relative cost effectiveness have often been exaggerated transaction costs which may be significant in these markets reduce trading levels and increase abatement costs in some cases equilibrium permit allocations and hence aggregate control costs are sensitive to initial permit distributions providing an efficiency justification for politicians typical focus on initial allocations

tradeable carbon permit auctions how and why to auction not grandfather abstract an auction of carbon permits is the best way to achieve domestic carbon caps designed to limit global climate change to minimize administrative costs permits would be required at the level of oil refineries natural gas pipe lines natural gas liquid sellers and coal processing plants to maximize liquidity in secondary markets permits would be fully tradable and bankable the government would conduct quarterly auctions a standard ascending clock auction in which price is gradually raised until there is no excess demand would provide reliable price discovery an auction is preferred to grandfathering giving companies permits based on historical output or emissions because it allows reduced tax distortions provides more flexibility in distribution of costs provides greater incentives for innovation and reduces the need for politically contentious arguments over the allocation of rents

exclusionary manipulation of markets for pollution rights abstract strategic price manipulation can affect the distribution of transferable pollution rights across polluters and the efficiency of pollution control efforts prior research has concentrated on market manipulation by firms seeking only to minimize the sum of pollution rights costs and pollution abatement costs in this paper we explore the potential for the exclusionary manipulation of pollution permit markets intended to drive up the costs of one s rivals and we distinguish between the resource allocation effects of exclusionary manipulation and cost minimizing manipulation we find that exclusionary manipulation can sometimes worsen and sometimes ameliorate the abatement inefficiency which occurs under cost minimizing manipulation and that an overbuying rule can obviate or at least limit damages from this form of strategic behavior

impacts of alternative allowance allocation methods under a cap and trade program in power sector emission trading is considered to be a cost effective environmental economic instrument for pollution control however the policy design of an emission trading program has a decisive impact on its performance allowance allocation is one of the most important policy design issues in emission trading not only for equity but also for policy performance in this research an artificial market for sulfur dioxide so2 emission trading was constructed by applying an agent based model the performance of the jiangsu so2 emission trading market was examined under different allowance allocation methods and transaction costs the results showed that the market efficiency of emission trading would be affected by the allocation methods when the transaction costs are positive the auction allowance allocation method was more efficient and had the lowest total emission control costs than the other three allocation methods examined however the use of this method will require that power plants pay for all of their allowance and doing so will increase the production costs of power plants on the other hand output based allowance allocation is the second best method

when can carbon abatement policies increase welfare the fundamental role of distorted factor markets abstract this paper employs analytical and numerical models to assess the welfare effects of a revenue neutral carbon tax and nonauctioned carbon emissions permits taking into account preexisting tax distortions in factor markets the presence of preexisting taxes significantly raises the general equilibrium costs of both policies this cost increase is much greater under emissions permits since this policy does not generate revenues to reduce distortionary taxes under our central estimates emissions permits cannot increase welfare unless environmental damages exceed about 18 per ton of carbon in contrast an appropriately scaled carbon tax is welfare improving so long as environmental damages are positive

reflections on the double dividend debate we survey the history of carbon taxation the range of market based instruments mbis of environmental control and the state of the double dividend debate in order to suggest directions for future research into mbis returning mbi revenues as lower distortionary taxes rather than as lump sums raises aggregate welfare but we favour mbis which raise little or no revenue for reasons of political acceptability to interest groups at the same time the overall case for any environmental improvement is weaker because of general equilibrium interactions with prior distortionary taxes research seems most necessary on quantifying the efficiency benefits of market control of heterogeneous polluters the benefits of environmental improvement the tax interaction effect and the various information costs of an mbi all on a case by case basis for different pollutants and places

market power and transferable property rights the appeal of using markets as a means of allocating scarce resources stems in large part from the assumption that a market will approximate the competitive ideal when competition is not a foregone conclusion the question naturally arises as to how a firm might manipulate the market to its own advantage this paper analyzes the issue of market power in the context of markets for transferable property rights first a model is developed that explains how a single firm with market power might exercise its influence this is followed by an examination of the model in the context of a particular policy problem the control of particulate sulfates in the los angeles region

modelling weekly data on uk interest and exchange rates this paper examines the short term dynamic relationships existing between four variables of major interest to market analysts in the uk long and short interest rates the dollar sterling exchange rate and the sterling effective exchange rate the sample period investigated is from july 1985 to december 1988 both interest and exchange rates are found to be first order integrated processes but they are not cointegrated this is inconsistent with the term structure of interest rates but is consistent with exchange markets being efficient a vector autoregression is developed and analysed through two alternative sets of structural restrictions on the contemporaneous correlations between the series the predominant relationship between the interest rates runs from long to short rates thus confirming the rejection of the term structure hypothesis there are negative contemporaneous relationships between interest and exchange rates while the lagged relationship runs from interest to exchange rates so that

the relation between variance and information rent in auctions abstract this paper examines the conventional wisdom expressed in mcafee and mcmillan s 1987 widely cited survey paper on auctions that links increased variance of bidder values to increased information rent we find that although the conventional wisdom does indeed hold in their 1986 model of a linear contract auction this relationship is an artifact of that particular model and cannot be generalized using samuelson s 1987 model which is similar but allows for unobservable costs we show that increased variance does not always imply increased information rent finally we give the appropriate measure of dispersion different from variance that provides the link between the bidder value distribution and information rent

dynamic incentives by environmental policy instruments a survey abstract in this paper i survey and discuss recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology a main conclusion to be drawn from the literature is that under competitive conditions market based instruments usually perform better than command and control moreover taxes may provide stronger long term incentives than tradable permits if the regulator is myopic if the government can anticipate new technology or is able to react on it optimally regulatory policies by virtue of administered prices taxes and policies by setting quantities issuing tradable permits are almost equivalent the literature also shows that under competitive conditions there is no difference between auctioning permits and grandfathering moreover timing and commitment of environmental policy is not crucial for adoption under competitive conditions commitment has positive incentive effects however if an r d sector has market power in the presence of market imperfections the ranking of the different policy instruments is ambiguous

efficient mechanisms for mergers and acquisitions we characterize incentive ecient merger outcomes when payments can be made both in cash and stock each firm has private information about both its stand alone value and a component of the possibly negative potential synergies we study two cases when transfers can and cannot be made contingent on the value of any new firm when they can we show that redistributing shares of any non merging firm generates information rents and provide necessary and sucient conditions for the implementability of ecient merger rules when they cannot private information undermines eciency more when it concerns stand alone values

international emission permit markets with refunding we propose a blueprint for an international emission permit market such as the eu trading scheme each country decides on the amount of permits it wants to offer a fraction of these permits is grandfathered the remainder is auctioned revenues from the auction are collected in a global fund and reimbursed to member countries in fixed proportions we show that international permit markets with refunding lead to outcomes in which all countries tighten the issuance of permits and are better off compared to standard international permit markets if the share of grandfathered permits is sufficiently small we obtain approximately socially optimal emission reductions

bidding with securities auctions and security design we study security bid auctions in which bidders compete for an asset by bidding with securities that is they offer payments that are contingent on the realized value of the asset being sold the value depends on investment by the winner thus creating the possibility of moral hazard such auctions are commonly used both formally and informally in formal auctions the seller generally restricts bids to an ordered set such as an equity share or royalty rate by restricting the bids standard auction formats such as first and second price auctions can be used in informal settings with competing buyers the seller does not commit to a mechanism upfront rather bidders offer securities and the seller chooses the most attractive bid based on his beliefs ex post we characterize equilibrium payoffs and bidding strategies in this setting and show that an informal mechanism yields the lowest possible revenues across all mechanisms we also determine the optimal formal mechanism and show that the security design is more important than the auction format we show that the revenue equivalence principle that expected revenues are independent of the auction format holds if the set of permissible securities is ordered and convex such as equity otherwise it need not hold for example when bidders offer standard debt securities a second price auction is superior on the other hand if bidders compete on the conversion ratio of convertible debt a first price auction yields higher revenues finally we examine how different forms of moral hazard impact our results

a study of allocative efficiency of pm2 5 emission rights based on a zero sum gains data envelopment model abstract it is an urgent task for china to control haze emission in environmental treatment emission right trading is a feasible way to achieve the reduction of pollutant emission on the premise that the total pollutant emission amount is under control and the allocation of initial emission rights based on the target total amount is the key to emission right trading in this paper via the input oriented zsg dea model the inter provincial allocative efficiency of pm2 5 emission rights is investigated under the condition that the target total amount is fixed the results showed that 1 after initial emission rights were allocated in accordance with the zsg dea model pm2 5 emission amounts of all provinces would be in a new common dea frontier so as to realize the overall pareto optimality with a set total amount 2 two factors namely land areas and atmospheric environmental capacities of all provinces were considered in the actual allocation to avoid the homogenization of all evaluated units found in the previous evaluation literature on allocative efficiency thereby making the evaluation results more in line with the actual situations in all provinces such an investigation approach can provide guidance on the allocation of initial emission rights in emission right trading and the research results can offer empirical support for haze reducing work load conducted by central and local governments of china

optimal equity auctions with two dimensional types abstract we analyze the design and performance of equity auctions when bidder s valuations and opportunity costs are private information distributed according to an arbitrary joint density that can differ across bidders we identify for any incentive compatible mechanism an equivalent single dimensional representation for uncertainty we then characterize the revenue maximizing and surplus maximizing equity mechanisms and compare revenues in optimal equity and cash auctions unlike in cash auctions the adverse selection arising from bidders two dimensional types in equity auctions can lead to a global violation of the regularity condition which represents a maximal mismatch between incentive compatibility and maximization of revenue or surplus such mismatch can lead a seller to exclude bidders and demand a bidder specific stake from a non excluded bidder providing insights into when a firm should employ an auction and when it should just negotiate with a single bidder

an analysis of the war of attrition and the all pay auction we study the war of attrition and the all pay auction when players signals are affiliated and symmetrically distributed we a find sufficient conditions for the existence of symmetric monotonic equilibrium bidding strategies and b examine the performance of these auction forms in terms of the expected revenue accruing to the seller under our conditions the war of attrition raises greater expected revenue than all other known sealed bid auction forms journal of economic literature classification numbers d44 d82 1997 academic press

econometric modelling of the sterling effective exchange rate the exchange rate is recognised as a particularly tricky subject for modelling and prediction the problems of unobservables such as expectations of simultaneity and of policy changes both overt and covert in the sample period to which models must be fitted may account for the disappointing results of recent attempts to test theories of exchange rate determination this paper develops an appropriate empirical model to deal with these problems it allows consideration of the proper interpretation of theoretical assumptions and determination of how far modelling for ex ante prediction can succeed the exchange rate is recognised as a particularly tricky subject for modelling and prediction the problems of unobservables such as expectations of simultaneity and of policy changes both overt and covert in the sample period to which models must be fitted may account for the disappointing results of recent attempts to test theories of exchange rate determination see for example the pessimistic conclusions of hacche and townend 1981 the aim of this paper is to develop an appropriate empirical model for these purposes to consider in particular the proper interpretation of theoretical assumptions and to determine how far in this case modelling for ex ante prediction can succeed the core of the model is the view of the exchange rate as a price determined in an efficient market with low transactions costs and well informed transactors in this view the observed rate represents a market equilibrium apart from random deviations and where equilibrium is contingent upon an expected future state of the world the expectations are assumed rational in the sense of being unbiased relative to a given information set the implications of strong and weak forms of rationality in which the information set is either relatively wide or narrow must however be carefully distinguished under the most extreme rationality hypothesis it will not be possible to improve on a simple modified random walk model for ex ante prediction and so the role of additional lagged variables is an important empirical issue compare for example the life cycle model of consumption as in hall 1978 and see also davidson and hendry 1981 although there has been a good deal of investigation of exchange market rationality e g frenkel 1981 levich 1978 hacche and townend 1981 baillie lippens and macmahon 1983 the evidence remains inconclusive another important issue which the paper seeks to understand separate from although related to the rationality question is the volatility of the exchange rate relative to the variables which might be expected to explain it explanation in terms of a linear short run equilibrium model e g the overshooting hypothesis does not account convincingly for the very large shifts periodically observed in response to apparently minor stimuli a theoretical justification for a nonlinear econometric framework is developed and this model is found to dominate the linear alternative on goodness of fit criteria