repeated moral hazard and contracts with memory the case of risk neutrality we consider a repeated moral hazard problem where both the principal and the wealth constrained agent are risk neutral in each of two periods the agent can exert unobservable effort leading to success or failure incentives provided in the second period act as carrot and stick for the first period so that the effort level induced in the second period is higher after a first period success than after a failure if renegotiation cannot be prevented the principal may prefer a project with lower returns i e a project may be too good to be financed or similarly an agent can be overqualified this article offers a new perspective on dynamic moral hazard problems consider a riskneutral principal who can hire a risk neutral but wealth constrained agent the agent can exert unobservable effort which increases the likelihood of success in the one shot problem there is a well known trade off between effort incentives and rent extraction which leads to a downward distorted effort level compared to the first best solution we extend the standard model by assuming that there is a second period in which the principal can make an investment to continue the project and the agent can again exert unobservable effort it turns out that there are several interesting insights that so far have escaped the literature on repeated moral hazard which was focused on the case of risk averse agents in particular if the principal can commit not to renegotiate the second period incentives can be used to partially circumvent the limited liability constraint in the second period the principal induces the agent to choose a particularly high effort level following a first period success and a particularly low effort level following a first period failure the prospect of a higher second period rent following a first period success motivates the agent to exert more effort in the first period i e rents in the second period act as reward and punishment for the first period it should be emphasized that we assume no technological impact of a first period success or failure on the second period technology nevertheless an optimal dynamic contract exhibits memory hence if an outsider observed today a principal agent pair that was successful and another identical pair that was not successful he would be right to predict that the first pair also is more likely to succeed tomorrow in other words a serial correlation across periods which we sometimes refer to as a hot hand effect is generated endogenously merely based on incentive considerations 2

clustering and competition in asset markets economists financial commentators regulatory agencies and the legal community have recently criticized the nasdaq stock market inc because there is greater clustering of stock quotations on even eighths on nasdaq than on the new york stock exchange or the american stock exchange a phenomenon which critics attribute to collusion or some other defect in nasdaq market structure however as this article demonstrates clustering occurs in varying degrees in many other incontestably competitive financial markets including the nyse the amex the london stock exchange the london gold market and the international foreign exchange market this article provides a competitive theory of clustering that emphasizes the effect of uncertainty the size of transactions volatility and the informational and transactional roles of quotations on the degree of clustering in addition the article examines how market structure can affect the degree of clustering and considers the relation between clustering spread

cognitive limitation and investment performance evidence from limit order clustering we hypothesize that cognitive limitation may be manifested in a disproportionately large volume of limit orders submitted at round number prices if investors use these numbers as cognitive shortcuts using detailed limit order data in the taiwan futures exchange we find that investors with lower cognitive abilities defined as higher limit order submission ratios at round numbers suffer greater losses in their round numbered and non round numbered limit orders market orders and round trip trades the positive correlation between cognitive ability and investment performance is monotonic and robust across futures and options markets in addition past trading experience helps mitigate cognitive limitation

prizes and lemons procurement of innovation under imperfect commitment the literature on r d contests implicitly assumes that contestants submit their innovation regardless of its value this ignores a potential adverse selection problem the present paper analyzes the procurement of innovations when the procurer cannot commit to never bargain with innovators who bypass the contest we compare xed prize tournaments with and without entry fees and optimal scoring auctions with and without minimum score requirement our main result is that the optimal xed prize tournament is more pro table than the optimal auction since preventing bypass is more costly in the optimal auction

can agents be better off with pay caps a popular way to discipline the managers of companies or banks that got into trouble during the recent financial crisis has been to impose caps on managers pay using a small extension of the standard principal agent model we argue that pay caps might serve the opposite purpose because the agent might be better off with a pay cap specifically we show that given a fixed effort level to be implemented the agent s expected utility can be decreasing in an upper bound for the agent s reward the effect of pay caps on the general structure of optimal incentive contracts is also characterized while an improvement of contracting information always helps the principal it might increase or decrease the marginal cost of imposing pay caps

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

demand for gasoline in kuwait an empirical analysis using cointegration techniques abstract this paper estimates the demand for gasoline in kuwait for the period 1970 1989 using a cointegration and error correction model ecm it is found that gasoline demand is inelastic with respect to price in the short and long run and while it is elastic in the long run gasoline demand is inelastic with respect to income in the short run this suggests that gasoline demand response to income changes is higher in the long run than in the short run furthermore gasoline consumption adjusts towards its long run level with about 52 of the adjustment occurring in the first year

price clustering in australian water markets the finding of clustering in financial prices on particular digits is common across a broad range of financial markets this article explores whether price clustering is also present in the case of the weekly market for seasonal water in rural victoria australia we find a similar degree of clustering in the seasonal water market this suggests that the trading activities of the market produce characteristics that are similar to more sophisticated and deeper financial markets

describability and agency problems this paper suggests a reason other than asymmetric information why agency contracts are not explicitly contingent on the agent s performance or actions two ingredients are essential to this reason the first is the written form that contracts are required to take to be enforceable the second is a form of discontinuity in the parties preferences and in the technology that transforms actions into a probabilistic outcome we show that under these conditions the chosen contract may not be explicitly contingent on the agent s actions although in principle such actions are contractible and observable to all parties to the contract court included

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

state gasoline consumption in the usa an econometric analysis abstract this paper examines the determinants of state gasoline consumption per household in the usa using pooled time series cross section data for the period 1966 1980 it was found that gasoline price fuel efficiency of vehicle stock percentage of population in metropolitan areas and non automobile transport modes have negative effects on consumption while per capita income number of vehicles non agricultural employment per household age 18 44 warm weather visits by out of state automobiles and share of buses and trucks have positive effects on consumption holding constant the size of vehicle stock and its fuel efficiency characteristics the short run price elasticity of gasoline was found to be 0 321 for the period 1966 1973 and 0 106 for the period 1974 1980 it was also found that gasoline demand experienced a temporary shift both in the intercept and in the price coefficient during the shortages of 1974 and 1979 and had undergone a permanent shift in the same parameters during the post embargo period

fuel tourism in border regions the case of switzerland this paper explores the issue of fuel tourism in switzerland for the period 1985 1997 a panel data model for the border regions of switzerland italy france and germany is estimated the results show a significant impact of the gasoline price differential on demand suggesting that a decrease of 10 in the swiss gasoline price leads to an increase in demand in the border areas of nearly 17 5 it is shown that fuel tourism accounted for about 9 of overall gasoline sales in the three regions during the period 1985 1997 and that the recently proposed swiss co2 tax might given current conditions eliminate net fuel tourism

a decomposition of the price and income elasticity of the consumer demand for gasoline the authors specify and estimate a model of the short run demand for gasoline which allows them to decompose a consumer s gasoline demand elasticities into miles driven and driving efficiency components their model is estimated using detailed household survey data which allows direct focus on the short run holding both the household s automobile stock and demographic profile fixed among the most interesting results are 1 the data allow interesting insights to be drawn into the interrelationship between these important variables and household behavior with respect to gasoline consumption miles driven and driving efficiency 2 the gasoline demand behavior of one car and multi car households differ significantly from each other evaluated at overall sample means one car households have higher in absolute value price elasticites for gasoline miles driven and fuel efficiency demand conversely multi car households have higher in absolute value total expenditure elasticities for each category 3 for both one car and multi car households roughly 75 of the estimated price elasticity and roughly 80 of the estimated total expenditure elasticity of gasoline demand stem from the miles driven component the estimated fuel efficiency elasticities though smaller than their standard errors indicate that households respond to changes in prices and total expenditure levels not only by changing the number of miles theymore drive but also by changing the efficiency with which they drive them 23 references 3 tables less

the sensitivity of consumption of oil products to price changes an econometric investigation abstract this paper presents a small econometric model of the supply and demand of motor spirit diesel fuel oil and other gas diesel oil by modelling at this level of disaggregation it is possible to identify the dynamic structure of each market and estimate own price and cross price elasticities

bounds on the welfare loss from moral hazard with limited liability we study a principal agent problem with discrete outcome and effort level spaces the principal and the agent are risk neutral and the latter is subject to limited liability quantifying welfare loss as the ratio between the first best social welfare and that arising from the principal s optimal pay for performance contract we provide simple parametric bounds for problem instances with moral hazard relying on that we compute the worst case welfare loss ratio among all problem instances with a fixed number of effort and outcome levels as a function of the number of possible effort levels and the likelihood ratio evaluated at the highest outcome as extensions we look at linear contracts and at cases with multiple identical tasks our work constitutes an initial attempt to quantify the losses arising from moral hazard when the agent is subject to limited liability and shows that these losses are non negligible in the worst case

demand for gasoline in the gcc an application of pooling and testing procedures the structure of gasoline demand in the gcc countries was analysed the aim was to estimate price and income elasticities both for the short and long run it was found that gasoline demand is inelastic with respect to both price and income for both the short and long run when gcc countries were divided into two groups based on their pricing policies it was found that the group with the free market approach and higher reliance on market forces gave larger price elasticities and smaller income elasticities in both the short run and long run

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

contract negotiation and the coase conjecture a strategic foundation for renegotiation proof contracts what does contract negotiation look like when some parties hold private information and negotiation frictions are negligible this paper analyzes this question and provides a foundation for renegotiation proof contracts in this environment the model extends the framework of the coase conjecture to situations in which the quantity or quality of the good is endogenously determined and to more general environments in which preferences are nonseparable in the traded goods as frictions become negligible all equilibria converge to a unique outcome which is separating efficient and straightforward to characterize

adverse selection in dynamic moral hazard this paper studies a multiperiod moral hazard problem under two assumptions i contracts are subject to renegotiations ii the agent s action has long term effects the action is also interpreted as a choice of characteristic or type renegotiation proof contracts that implement various actions including random ones are characterized under appropriate conditions the equilibrium involves the principal implementing a random action therefore the equilibrium has standard properties of adverse selection models

on the moral hazard problem without the first order approach abstract we study the moral hazard problem without the first order approach or other common structure we present sufficient conditions under which the shadow value of simultaneously tightening the minimum payment and individual rationality constraints has a simple and intuitive expression we then show how this expression can be used to perform comparative statics exercises in which we study i the effect of a change in the agent s wealth on the well being of the principal and ii the effects of the outside option and minimum payment on the effort level optimally implemented

minimum payments and induced effort in moral hazard problems abstract consider a moral hazard problem in which there is a constraint to pay the agent no less than some amount m this paper studies the effect of changes in m on the effort that the principal chooses to induce from the agent we present sufficient conditions on the informativeness of the signal observed by the principal and on the agent s utility under which when m increases induced effort and hence productivity falls we also study how the cost minimizing contract for any given effort level varies in m we present an efficient algorithm for numerically calculating optimal contracts for given parameters and show that induced effort falls when m is increased in many cases even when our sufficient conditions fail

after you sir hold up direct externalities and sequential investment we propose a solution to the hold up problem the parties in a contract can avoid the inefficiencies caused by the possibility of opportunistic behaviour and implement the first best level of investment if they make their investment decision sequentially one party observing the choice made by the other party before making his own choice unlike the existing literature the proposed solution leads to the efficient choice of investment even when there are two sided direct externalities journal of economic literatureclassification numbers d23 d82

unobservable investment and the hold up problem we study a two person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining we show that if all offers are made by the seller and the time between offers is small then the buyer invests efficiently and the seller extracts all of the surplus hence bargaining with frequently repeated offers remedies the hold up problem even when the agent who makes the relation specific investment has no bargaining power and contracting is not possible we consider alternative formulations with uncertain gains from trade or two sided investment

moral hazard renegotiation and debt abstract renegotiation of financial contracts is frequently observed in practice we show how contract renegotiation based on unverifiable information improves efficiency when both ex ante private action and ex post costly state verification moral hazard are present simultaneously we find that the final contract is always debt since renegotiation allows the parties to handle sequentially the two information problems

a meta analysis of the price elasticity of gasoline demand a sur approach abstract automobile gasoline demand can be expressed as a multiplicative function of fuel efficiency mileage per car and car ownership this implies a linear relationship between the price elasticity of total fuel demand and the price elasticities of fuel efficiency mileage per car and car ownership in this meta analytical study we aim to investigate and explain the variation in empirical estimates of the price elasticity of gasoline demand a methodological novelty is that we use the linear relationship between the elasticities to develop a meta analytical estimation approach based on a seemingly unrelated regression sur model with cross equation restrictions this approach enables us to combine observations of different elasticities and thus increase our sample size furthermore it allows for a more detailed interpretation of our meta regression results the empirical results of the study demonstrate that the sur approach leads to more precise results i e lower standard errors than a standard meta analytical approach we find that with mean short run and long run price elasticities of 0 34 and 0 84 respectively the demand for gasoline is not very price sensitive both in the short and the long run the impact of a change in the gasoline price on demand is mainly driven by responses in fuel efficiency and mileage per car and to a slightly lesser degree by changes in car ownership furthermore we find that study characteristics relating to the geographic area studied the year of the study the type of data used the time horizon and the functional specification of the demand equation have a significant impact on the estimated value of the price elasticity of gasoline demand

implications of the discreteness of observed stock prices stock prices on the organized exchanges are restricted to be divisible by 1 8 therefore the true price usually differs from the observed price this paper examines the biases resulting from the discreteness of observed stock prices it is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased an approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made the natural estimators of the beta and of the variance of the market portfolio on the other hand are nearly unbiased the behavior of stock prices has been an issue of interest to the financial economist for many years this interest resulted in a growing number of empirical studies which attempt to estimate this behavior e g blattberg and gonedes 2 fama 6 fama and roll 7 8 barnea and downes 1 to date stock price behavior is estimated under the assumption that the observed trading price is the true equilibrium price however observed stock prices and stock price changes on the organized exchanges are restricted to multiples of 1 8 of a dollar 1 therefore if the true distribution of stock prices is continuous an observed trading price can be different from the true price this paper examines the biases in estimating the moments of stock price changes caused by the discreteness of observed stock prices the major focus of the paper is in noting this problem providing a model which explains the source of these biases and quantifying their size section i demonstrates that due to the discrete nature of observed stock prices the natural estimators for the variance and for the higher order moments of the rate of returns are biased upward this bias is larger for stocks with lower prices and smaller standard deviation for instance assuming that the standard deviation a is 0 001 the stock price is one dollar the true probability distribution of stock prices is lognormal and the observed prices are as close as possible to the true prices then the natural estimator of r has expectation 0 01400 hence it is biased upward by 1300 significant biases have important implications in option pricing we derive an approximate set of correction factors which can be applied to the

extreme price clustering in the london equity index futures and options markets price clustering and optimal tick sizes have recently been topics of substantial public policy interest and this paper presents evidence which is relevant to both debates around 98 of quoted and traded prices for liffe stock index derivatives are found to occur at even ticks we report that clustering increases with volatility and transaction frequency and decreases with trade size and find that the proportion of odd ticks is significantly lower near the market open and higher near the close further an inverse relationship is reported between bid ask spreads and the number of odd ticks and spreads cluster at even tick values this evidence of extreme price clustering is the first to be presented for financial derivatives the results support both the price resolution and the negotiation hypotheses of price clustering

collusion and renegotiation in hierarchies a case of beneficial corruption corruption opportunities arise when a principal delegates enforcement or audit authority to a supervisor the supervisor may then strike a deal with the agent she is supposed to monitor and conceal important information from the principal corruption imposes a constraint on governance and appears therefore to be harmful for the principal we show that this need not be the case in our model the prospect of corruption can make the principal better off the reason is that the collusion possibility generates dynamic effects which in cases where only limited intertemporal commitments can be made may be beneficial for the principal

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

gasoline demand the case of saudi arabia this paper specifies a partial adjustment model to estimate the demand for gasoline in saudi arabia for the period 1970 1985 it is found that the demand for gasoline is inelastic with respect to price in the short and long run as compared to other countries the kingdom s gasoline demand elasticities more closely resemble those of industrial countries

optimal contracts when enforcement is a decision variable this paper analyzes choice theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur an intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions the goal of the analysis is to characterize the effect of choice theoretic costly enforcement on the structure of optimal contracts the paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable theorem 1 in contrast stochastic contracts are optimal when agents can commit to the ex ante optimal decisions theorem 2 the paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect bayesian nash equilibrium

an analysis of intraday patterns in price clustering on the tokyo stock exchange abstract stock prices tend to cluster at round numbers a phenomenon observed in many markets using tick by tick transaction data this article studies price clustering on the tokyo stock exchange which is a computerized limit order market as for the intraday pattern the degree of price clustering is greatest at the market opening then it decreases during the first half hour and reaches a stable level it does not increase again near the market closing there is no clear difference in clustering between call auctions and continuous auctions

renegotiation of sales contracts this paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort unlike in previous models a contract here contains only one compensation scheme and the agent has all the bargaining power in the renegotiation stage using a relatively weak forward induction refinement all equilibria are shown tb be second best efficient renegotiation occurs in every equilibrium if the effort set is rich the only equilibrium initial contract is a sales contract i e a scheme which sells the project to the agent this captures the idea that a party the principal who has an inherently weak renegotiation position will sometimes insist on a simple initial contract

contracts and money why are contracts not fully indexed in a setting in which fully indexed contracts are feasible we find that when price level data are gathered with delay these contracts are not renegotiation proof the contracts that replace them entail a lower level of welfare for the parties to that contract they also imply that real variables respond to nominal shocks

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

moral hazard and capital structure dynamics we base a contracting theory for a start up firm on an agency model with observable but nonverifiable effort and renegotiable contracts two essential restrictions on simple contracts are imposed the entrepreneur must be given limited liability and the investor s earnings must not decrease in the realized profi to f thefirm all message game contracts with pure strategy equilibria and no third parties are considered within this class of contracts equilibria and regardless of who has the renegotiating bargaining power debt and convertible debt maximize the entrepreneur s incentives to exert effort these contracts are optimal if the entrepreneur has the bargaining power in renegotiation if the investor has the bargaining power the same is true unless debt induces excessive effort in the latter case a non debt simple contract achieves efficiency the non contractibility of effort does not lower welfare thus when the non contractibility of effort matters our results mirror typical capital structure dynamics an early use of debt claims followed by a switch to equity like claims

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

renegotiating moral hazard contracts under limited liability and monotonicity in a principal agent model with unobservable effort and possible renegotiation contracts are assumed to satisfy two natural restrictions limited liability for the agent and monotonicity of payments for the principal the main result is that if the agent has the renegotiation bargaining power any contract is weakly pareto dominated by a debt contract journal of economic literature classification numbers d820 l140 o261

an analysis of trade size clustering and its relation to stealth trading abstract nyse and nasdaq trades increasingly cluster on multiples of 500 1 000 and 5 000 shares such clustering varies over time and across stocks and tends to increase with the level of trading activity furthermore rounded trades tend to have more persistence both in occurrence and in trade initiation finally medium sized rounded trades tend to have greater relative price impact than large rounded trades from these observations we surmise that trade size clustering is consistent at least in part with the actions of stealth traders who tend to use medium sized rounded transactions in an attempt to disguise their trades