smart grid investments regulation and organization worldwide but in particular in north america and europe the grid infrastructure managers are facing demands for reinvestments in new assets with higher on grid and off grid functionality in order to promote energy efficiency and low carbon conversion of the energy sector to meet societal policy objectives in terms of carbon dioxide emissions both the composition of the generators in favor of distributed energy resources der and the load promoting integration with downstream energy useage will change in this paper we chararcterize some of the effects of new asset investments policy on the network tasks assets and costs and contrast this with the assumptions implicit or explicit in current economic network regulation the resulting challenge is identified as the change in the direction of higher asymmetry of information and higher capital intensity combined with ambiguities in terms of task separation to provide guidance we present a model of investment provision under regulation between a distribution system operator dso and a potential investor generation the results from the model confirm the hypothesis that network regulation should find a focal point should integrate externalities in the performance assessment and should avoid wide delegation of contracting billing for smart grid investments

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

super efficiency evaluations based on potential slack abstract super efficiency evaluations are introduced along the lines of the potential improvements approach in journal of productivity analysis 12 1999 233 both a reference selection and a related super efficiency index are defined the new potential slack super efficiency index is compared to a farrell based super efficiency index as in management science 39 1993 1261 with respect to convex envelopment technologies

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

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

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

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

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

dea based auctions we discuss the design of a multi dimensional procurement mechanism that combines data envelopment analysis dea and auction theory the mechanism selects an agent to provide a project characterized by multiple attributes the optimal configuration of the multiple attributes is settled endogenously by trading off the costs to the provider with the benefits to the acquirer this is done within a context of asymmetric information and strategic behavior as well as possibly correlated costs the mechanism makes it individually rational and incentive compatible to participate and reveal costs and the outcome is socially optimal allocatively efficient

relative efficiency measurement and prospects for yardstick competition in brazilian electricity distribution abstract the paper considers the non parametric methodology of data envelopment analysis dea in the context of efficiency measurement for brazilian electricity distribution in 1997 98 indicating the existence of firms operating substantially below the efficiency frontier the potential and difficulties associated with the implementation of yardstick competition schemes are then discussed stressing in particular the role of relative efficiency scores obtained from the dea approach

equity responsibility and the cultural dimension we present questionnaire studies concerning equity judgments based on an axiom that underlies rawls s difference principle our investigation spanning over a period of fifteen years was run at german austrian and slovenian universities we also modified two of our basic scenarios to check for responsibility aspects additionally we included information on socio demographic characteristics of respondents in a probit model answers depend on cultural environments but results indicate some convergence over time responsibility considerations are important if they can be attributed to particular persons although overall explanatory power of demographic attributes is low we observe significant gender differences

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

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

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

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

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

some models for estimating technical and scale inefficiencies in data envelopment analysis in management contexts mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best in this capacity mathematical programming serves as a planning aid to management data envelopment analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments however they may have been planned or executed mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities the ccr ratio form introduced by charnes cooper and rhodes as part of their data envelopment analysis approach comprehends both technical and scale inefficiencies via the optimal value of the ratio form as obtained directly from the data without requiring a priori specification of weights and or explicit delineation of assumed functional forms of relations between inputs and outputs a separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of dea directly on observational data technical inefficiencies are identified with failures to achieve best possible output levels and or usage of excessive amounts of inputs methods for identifying and correcting the magnitudes of these inefficiencies as supplied in prior work are illustrated in the present paper a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing constant or decreasing returns to scale in multiple input and multiple output situations the results are discussed and related not only to classical single output economics but also to more modern versions of economics which are identified with contestable market theories

egypt s development in the seventies this paper seeks to examine aspects of the changes in the economic performance and management of the economy that occurred in egypt during the 1970s this era of change began with the death of nassar in 1970 and was given its impetus in 1973 with the presentation of the new policy of opening egyptian economy and society to the rest of the world this liberalization was a movement away from a ussr type of physical planning toward a greater use of market mechanisms to guide the economy section i is a brief discussion of the general social and political environment within which the economy had to be managed and development effected in section ii the conventional national accounts are examined and tables showing gdp gross domestic product growth balance of payments exports and employment by sector are presented in section iii monetary developments and exchange rate issues are reviewed and tables provide data on government revenues and expenditures foreign exchange in deposits and growth in liquidity the final section offers some conclusions about the development process that the egyptian story reveals the delicate political and social environment within which economic policy is made is a factor in every decision egypts social and political stability is 1 of its great assets and to jeopardize it by policies that may penalize key groups is to be avoided the government hopes to provide all egyptians with a high level of consumption by the year 2000 at no cost to the people themselves by means of a series of large sector projects this approach will not succeed unless a way is found to use foreign exchange to create an indigenous dynamic to enable egypts own resources to achieve continually increasing productivity what foreign exchange rich countries are now learning is that the heart of development must be indigenous resources and their commitment to the nations development

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

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

competition and innovation evidence from financial services abstract this paper presents new evidence on the relationship between competition and innovation by extending previous literature from manufacturing to financial services we introduce a new measure of overall innovation by estimating and enveloping annual minimum cost frontiers to create a global frontier the distance to the global frontier constitutes each bank s technology gap which decreases if the bank manages to innovate our innovation measure enables us to derive and estimate the model of aghion et al 2005b at the firm level for the us banking industry based on individual bank call report data for the period 1984 2004 consistent with theoretical and empirical work by aghion et al we find evidence of an inverted u relationship between competition and innovation that is robust over several different specifications further evidence on major structural changes in the us banking industry indicates that banks moved beyond their optimal innovation level and that interstate banking deregulation resulted in lower bank innovation policy implications to financial reform and prudential regulation are discussed also

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

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

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

optimal investment choice for developing countries rational theory and rational decision making abstract this paper analyzes a key feature of the conceptual process that governments use for making major investment choices in the developing countries both through their direct investment activities and through the special incentives e g credit foreign exchanage and tax subsidies they provide governments typically play a large role in the allocation of investment resources in ldc s consequently the public investment choice process has significant effects on the efficiency of capital formation and on economic growth in developing countries although the feature of the investment choice process on which we focus has important theoretical and practical implications it has so far received little analytical attention

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

long term trends in fair and unfair inequality in the united states abstractthis article analyses the microeconomic sources of wage inequality in the united states from 1967 2012 decomposing inequality into factors categorized by degree of personal responsibility education explains over twice as much of inequality today as 45 years ago however neither hours worked nor education industry marital status or geographical location can explain the rise in income inequality in fact unfair inequality income disparity derived from non responsibility factors has risen faster than fair inequality income disparity derived from responsibility factors regardless of the set of variables chosen as fair sources of inequality we further examine income inequalities within gender and racial groups finding substantial heterogeneity overall using micro data to understand the sources of inequality and how these changes over time can provide better information for policymakers motivated to combat rising inequality

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 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

non parametric production analysis in non competitive environments we extend the non parametric methodology for empirical production analysis to deal with endogenous prices as price endogeneity is often complemented by price uncertainty we consider both the case of certain prices and the case of uncertain prices the extensions are fully compatible with existing tools for eliciting and representing technology and price information and preserves the tractable mathematical programming structure of the original methodology an empirical application to the dutch electricity distribution sector illustrates our extension

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

the tale of two research communities the diffusion of research on productive efficiency abstract the field of theoretical and applied efficiency analysis is pursued both by economists and people from operational research and management science each group tends to cite a different paper as the seminal one recent availability of extensive electronically accessible databases of journal articles makes studies of the diffusion of papers through citations possible research strands inspired by the seminal paper within economics are identified and followed by citation analysis during the 20 year period before the operations research paper was published the first decade of the operations research paper is studied in a similar way and emerging differences in diffusion patterns are pointed out main factors influencing citations apart from the quality of the research contribution are reputation of journal reputation of author number of close followers colleagues cadres of proteges ph d students and extent of network invisible college such factors are revealed by the citing papers in spite of increasing cross contacts between economics and operations research the last decades co citation analysis reveals a relative constant tendency to stick to own camp references

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

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

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

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

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

distributive justice theoretical foundations and empirical findings abstract the first part of this paper discusses various theories of distributive justice such as utilitarianism rawlsianism approaches within cooperative bargaining theory and the notion of fair allocations the focus is on the different informational bases used in these solution concepts the second part reports some results from empirical investigations where a particular distributive problem had to be solved by undergraduate students of economics and business administration the question we are posing is whether the respondents behaviour can to some extent at least be rationalized in terms of utilitarian ethics

when is inequality fair an experiment on the effect of procedural justice and agency abstract we investigate how the perceived fairness of an income distribution depends on the beliefs about the process that generates the inequality specifically we examine how two crucial features of this process affect fairness views 1 procedural justice equal treatment of all 2 agency one s ability to determine his her income we do this in a lab experiment by differentially varying subjects ability to influence their earnings comparison of ex post redistribution decisions of total earnings under different conditions indicate both agency and procedural justice to matter for fairness highlighting the importance of agency we observe lower redistribution of unequal earnings resulting from risk when risk is chosen freely highlighting the importance of procedural justice we find introduction of inequality of opportunity to significantly increase redistribution despite this increase under inequality of opportunity the share of subjects redistributing none remain close to the share of subjects redistributing fully revealing an underlying heterogeneity in the population about how fairness views should account for inequality of opportunity

estimating most productive scale size using data envelopment analysis abstract the relation between the most productive scale size mpss for paparticular input and output mixes and returns to scale for multiple inputs multiple outputs situations is explicitly developed this relation is then employed to extend the applications of data envelopment analysis dea introduced by charnes cooper and rhodes ccr to the estimation of most productive scale sizes for convex production possibility sets it is then shown that in addition to productive inefficiencies at the actual scale size the ccr efficiency measure also reflects any inefficiencies due to divergence from the most productive scale size two illustrations of the practical applications of these results to the estimation of most productive scale sizes and returns to scale for hospitals and stem electric generation plants are also provided emphasize the advantage of this method in examining specific segments of the efficient production surface

data envelopment analysis on a relaxed set of assumptions data envelopment analysis is a procedure for evaluation of the relative efficiency of units in a production system dea involves construction of composite units as convex combinations of other units inputs and outputs under various conditions related to returns to scale the assumption of convexity is inconsistent with increasing returns to scale and not implied by constant or non increasing returns to scale an alternative dea approach which does not invoke the assumption of a convex production possibility set is developed in this paper it is implemented in two stages stage one is concerned with the spanning of isoquants and stage two with an evaluation of the position of an observed input output combination compared to the isoquants both stages involve linear programming techniques solely

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

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

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

incentive efficient production frontiers an agency perspective on dea in this paper we examine how empirical production frontiers may contribute to the incentives of production units we consider a series of data envelopment analysis dea frontiers and we show when these may be incentive efficient in the sense that they contain all the information that are relevant for optimal incentive provision the frontiers considered include the so called constant decreasing and varying return to scale models the free disposability and the free replicability models as well as the increasing and decreasing return to scale models based on a relaxed set of assumptions also we illustrate how to design optimal incentive schemes based on such frontiers contents 1 introduction 2 the incentive problem 3 production frontiers and productivity measures 4 incentive efficient production frontiers 5 extensions 6 an example 7 final remarks mathematical appendix references

a dea based incentives system for centrally managed multi unit organisations in multi unit organisations such as a bank and its branches or a national body delivering publicly funded health or education services through local operating units the need arises to incentivize the units to operate efficiently in such instances it is generally accepted that units found to be inefficient can be encouraged to make efficiency savings however units which are found to be efficient need to be incentivized in a different manner it has been suggested that efficient units could be incentivized by some reward compatible with the level to which their attainment exceeds that of the best of the rest normally referred to as super efficiency a recent approach to this issue varmaz et al 2013 has used data envelopment analysis dea models to measure the super efficiency of the whole system of operating units with and without the involvement of each unit in turn in order to provide incentives we identify shortcomings in this approach and use it as a starting point to develop a new dea based system for incentivizing operating units to operate efficiently for the benefit of the aggregate system of units data from a small german retail bank is used to illustrate our method

measuring unfair in equality abstract this paper shows one way of generalizing the standard framework of inequality measurement to allow for a distinction between fair and unfair inequalities we introduce the unfairness lorenz curve and the unfairness gini which are generalizations of the standard versions of the lorenz curve and the gini with this more general framework in place we study the implications of responsibility sensitive theories of justice for the evaluation of the income distribution in norway from 1986 to 2005 we find that both the pre tax and the post tax income distributions have become less fair in norway even though the standard gini for the pre tax income distribution has decreased in the same period two trends explain this development the increase in income share of the top percentile and the change in the situation of females in the labor market the concentration of income at the top of the distribution contributes both to increased unfairness and increased inequality whereas the increase in females working hours and level of education primarily contributes to a reduction in inequality thus the latter effect dominates for the standard gini and the former effect for the unfairness gini furthermore we find that the increase in post tax unfairness is even larger than the increase in pre tax unfairness which shows that the tax system in norway contributes less to eliminating unfairness in 2005 than in 1986

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

from efficiency measurement to efficiency improvement the choice of a relevant benchmark abstract this article deals with efficiency improvement and how to identify appropriate benchmarks for inefficient firms to imitate we argue that the most relevant benchmark is the most similar efficient firm having interpreted similarity in terms of input endowments the problem reduces to find the closest reference firm on the efficient subset of the isoquant to such an end we introduce the concept of input specific contractions this concept allows to find the shortest path to the efficient subset this information can be used to advise inefficient firms about which efficient firm to visit in order to detect its mistakes and to learn better managerial practices

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

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

allocative efficiency of technically inefficient production units we discuss how to measure allocative efficiency without presuming technical efficiency this is relevant when it is easier to introduce reallocations than improvements of technical efficiency we compare the approach to the traditional one of assuming technical efficiency before measuring allocative efficiency in particular we develop necessary and sufficient conditions in the technology to ensure consistent measures we suggest alternative interpretations of the approaches and we relate them to motivational and organizational change perspectives

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

a caveat on the measurement of productive efficiency abstract the correspondence between used performance measures and enterprise objectives such as profit maximization and cost minimization is fundamental for manufacturing companies this paper identifies and critically examines a minimal set of relevant properties that a productivity index needs to satisfy to rightly assess performance development of a decision making unit commonly applied and suggested productivity measurement techniques such as partial efficiencies total factor productivity tfp index number approaches integrated partial efficiencies and operational competitiveness ratings are analyzed in order to assess the alignment with superior objectives there is a considerable spread in the results of this class of models and the interpretation may prove difficult or misleading as these apparently less complicated productivity measures increasingly are employed as a component in evaluation of manufacturing efficiency the question is of high managerial relevance in particular the paper points out inconsistencies with properties related to commensurability monotonicity and implications of maximizing behavior based on this viewpoint issues such as the consistency with profit maximization will be shown extra interest the paper also provides a critique of previous work in non parametric efficiency analysis where properties have been postulated or based on other arguments the findings suggest that there is no globally superior measurement technique to be found in this class and that care should be taken when evaluating managerial performance not to penalize rational behavior

currency diversification and export competitiveness a model of the dutch disease in egypt abstract the paper presents a dynamic portfolio model under currency inconvertibility which rationalizes the recent egyptian experience of real exchange rate appreciation and currency diversification following the increase in oil exports and the partial financial liberalization that took place after 1976 the two shocks are linked because the relative price of manufacturing exports in terms of oil is also the premium of the gray market rate over the official exchange rate the effects of various official exchange rate policies on the temporary equilibrium values of the premium and the real wage and on the steady state values of asset stocks are examined a review of the egyptian experience in light of the model results suggests that the unification of 1979 was ineffective against this variant of the dutch disease but that the restoration in 1981 of a parallel rate closer to the gray market rate applicable to competitive exports may be more effective

cross cultural equity evaluations a questionnaire experimental approach abstract the theoretical background of the empirical investigations to be reported in this paper are positionalist aggregation functions which are numerically representable the broad borda rule is proposed as an aggregation mechanism for the case of a complete profile of the so called individual extended orderings we modify this rule to reflect considerations of equity students from germany israel the baltic states austria and slovenia were confronted with questionnaires that describe situations most of which reflect different aspects of needs all situations start from the preference structure which underlies an equity axiom we are focussing on the following three points a what is the percentage of respondents satisfying the equity axiom b how often do the students revise their initial decision when more and more people join the side of the more advantaged c are there major differences across countries and cultures

approaches to inequality of opportunity principles measures and evidence we put together the dierent conceptual issues involved in measuring inequality of opportunity discuss how these concepts have been translated into computable measures and point out the problems and choices researchers face when implementing these measures our analysis identies and suggests several new possibilities to measure inequality of opportunity the relevance of the conceptual issues and modelling choices are illustrated with ndings from the empirical literature on income inequality of opportunity

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

price responsiveness efficiency and the impact of structural adjustment on egyptian crop producers abstract this paper examines the role of prices and the impact of the structural adjustment reforms undertaken by the government of egypt in 1986 on the producers of five major crops the results indicate that the program had a positive net impact on the welfare of individual crop producers evaluated as a gain in production efficiency crop profitability was also found to be highly responsive to input and output prices the results highlight the importance of market based prices in agricultural development

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

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

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

practice what you preach microfinance business models and operational efficiency the microfinance sector has room for pure for profit microfinance institutions mfis non profit organizations and social for profit firms that aim to pursue a double bottom line depending on their business model these institutions target different types of borrowers change the size of their loans and adjust their loan pricing we introduce a simple approach that accommodates a wide range of business models and allows us to estimate the operational efficiency of mfis our empirical results show that mfis with a high depth of outreach are most efficient resulting in higher levels of outreach and profits for the same input mix

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

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

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

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

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

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

decision support for target based resource allocation of public services in multiunit and multilevel systems this paper is concerned with the problem of resource allocationand target setting in the provision of public services the paper develops a network based representation of multilevel resource management with equity efficiency and effectiveness being recognised as the fundamental objectives of the system on the modelling side the proposed method combines data envelopment analysis and goal programming formulations integrated within an interactive planning framework an illustrative application on fire departments is used to show the applicability of the method developed to assist the resource allocation process