optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

competition increases x efficiency a limited liability mechanism the main result of this study is that a financial constraint may serve as a disciplining device on the internal efficiency of a firm and the tougher the product market competition the higher the disciplining power this limited liability mechanism may in part account for the alleged disciplining power of product market competition on firm efficiency however even if policies that promote competition enhance x efficiency the gain may be outweighed by a less efficient allocation of risk moreover this adverse risk effect has repercussions implying that the effect of reduced entry barriers on competition and consumer s welfare is small

multidimensional mechanism design for auctions with externalities abstract in an auction with externalities a buyer s type is multidimensional and specifies the payoff he would get for each of the n 1 possible outcomes the seller keeps the object or buyer i i 1 n gets the object we provide a characterization of multidimensional incentive compatible mechanisms similar to that for one dimensional mechanisms although reservation utilities are endogenous and type dependent the participation constraint is binding for only one critical type a main difficulty in a multidimensional setting is the integrability condition we present a geometric characterization for discontinuous conservative vector fields in auctions where the buyers submit scalar bids and the seller transfers the object to one of the buyers for sure a second price auction maximizes revenue with two buyers this auction remains optimal even if the seller can set a reservation price journal of economic literature classification numbers c7 c72

financial liberalization and house price dynamics in europe this article investigates the determinants of house prices in a sample of european countries over the period 1970 to 2004 focusing on the role of financial liberalization we find that it has mainly affected the short term dynamics of residential prices in particular the impulse effects on house prices of income and mortgage debt have become smaller on the other hand the effects of interest rates past house prices and to a lesser degree stock market have strengthened in other words there seems to have been a certain de linking of short term house price dynamics from income whereas the housing market may have become more similar to a financial asset market with interest rates and expectations of capital gains playing a more prominent role

the role of optimal threats in auction design abstract this paper studies revenue maximizing auctions when buyers outside options depend on their private information and are endogenously chosen by the seller we show that the revenue maximizing assignment of the object can depend crucially on the outside options that the seller can choose as threats depending on the shape of outside options sometimes an optimal mechanism allocates the object in an ex post efficient way and other times buyers obtain the object more often than is efficient

selling an asset to a competitor a seller decides whether to allocate an item among two potential buyers the seller and buyer 1 interact ex post in such a way that each of them suffers a negative externality if the other possesses the item we show that the optimal allocation rule favors buyer 2 who does not interact ex post with the seller and in particular bidder 1 may not obtain the good even if his valuation is highest the auction is therefore subject to resale when resale is possible the seller must distort the original auction we show that the mechanism depends crucially on the way resale is organized ex post the seller may decide to always allocate the good to the agent with the highest valuation when rents are fully extracted by an intermediary on the resale market however she may resort to a stochastic mechanism when the winner of the primary auction has full bargaining power in the resale stage

product market competition and managerial slack this article analyzes the effect of product market competition on managerial incentives in contrast to hart 1983a i show that competition may actually exacerbate the incentive problem the difference in results derives from our different assumptions about managerial preferences the importance of assumptions about preferences suggests that we do not yet understand the precise mechanism through which competition affects incentives

a note on endogenous firm efficiency in cournot models of incomplete information abstract martin models cournot firms with informational asymmetries on costs to investigate the relation betweenx inefficiency and the number of firms he argues that an increase in the number of competitors decreases firm efficiency we show that his results hold in a complete information model they are due to the implicit assumption of increasing returns to scale we further argue that a setting of adverse selection on cost and of ex post cost observability tends to isolate the intrafirm agency problem from what happens inside the product market leaving firm efficiency unaffected by the degree of competition journal of economic literatureclassification numbers l13 l22 d82

reward structures in a planned economy some difficulties there is an extensive literature on the socially optimal pricing policy for public firms but much less attention has been paid to the vital question of how managers of public firms can be induced to follow such policies the politicians or planners who seek to control a public enterprise will be less well informed about cost and demand functions than the manager and there is no reason to suppose that managers are altruists thus with asymmetrical information and selfish managers there is a significant control problem recently tam 1981 has suggested an ingenious iterative incentive mechanism designed to surmount this problem this note a argues that her negative price incentive scheme npis will not achieve its objective of guiding managers to price at marginal cost2 and b compares npis with variants of the performance index pi proposed by scott 1952 1978 and finsinger and vogelsang 1980a 1981 tam s proposal is that the manager of a public firm be paid a bonus b each period

how not to sell nuclear weapons we consider situations where a sale affects the ensuing interaction between potential buyers these situations are modeled by assuming that an agent who does not acquire the object for sale incurs an identity dependent externality we construct a revenue maximizing auction for the seller we observe that 1 outside options and participation constraints are endogenous 2 the seller extracts surplus also from agents who do not obtain the auctioned object 3 the seller is better off by not selling at all while obtaining some payments if externalities are much larger than valuations

optimal taxation and firm formation abstract this paper analyzes non linear optimal taxation under asymmetric information in a general equilibrium model with endogenous firm formation it first shows under a weak separability assumption on technologies that output and input taxes are not necessary if profits are optimally taxed it then examines the progressivity or lack of it of the optimal profit tax and describes the corresponding effects on the structure of the production sector relative to the first best solution finally the paper investigates conditions under which the provision of public goods can be decentralized

policy watch medicare public policies are often made without much recourse to economic reasoning economists are sometimes unaware of what is happening in the world of public affairs as a result both the quality of public decision making and the role that economists play in it are less than optimal this feature contains short articles on topics that are currently on the agendas of policymakers thus illustrating the role of economic analysis in illuminating current debates suggestions for future columns and comments on past ones should be sent to daniel weinberg c o journal of economic perspectives hhes division bureau of the census department of commerce washington d c 20233

efficiency wages and x inefficiencies within most organizations agents may spend time on a variety of tasks productive and redistributive in this paper i derive an optimal multi task incentive scheme under the assumption that agents have limited liability the wage level is shown to increase with an agent s discretion and the organization s profits with multiple agents it is generally not optimal for the principal to fully eliminate distributional conflict within the organization the resulting influence costs constitute a measure of x inefficiency the analysis illuminates the relationship between competition and influence costs emphasizing the role of the organization s production technology

socially optimal pricing with rivalry and economies of scale this article examines the nature of economically efficient tariffs when there exists rivalry among firms that produce imperfectly substitutable outputs with economies of scale and that operate under a viability constraint pricing principles are derived and related to the rules developed in the literature for the regulated monopolist for some firms excess profits may prevail at efficient prices and the form of the inverse elasticity rule is altered in markets with rivalry however the standard efficient pricing rules and increased welfare results if regulators are empowered to implement lump sum interfirm payments a numerical example is provided

multitask agency problems focus and task clustering abstract this short paper discusses recent insights of multitask agency theory it considers in turn the issues of effort substitution conflicts between tasks and implicit incentives and mission it concludes by addressing the problem of optimal task clustering

booms and busts in the uk housing market the often volatile behaviour of uk house prices between 1957 and 1994 is analysed in an annual econometric model theory suggests that financial liberalisation of mortgage markets in the 1980s should have led to notable shifts in house price behaviour the evidence supports the predictions of theory suggesting shifts took place in wealth effects as in the consumption function and that real interest rates and income expectations became more important the presence of transactions costs suggests important nonlinearities in house price dynamics the paper also contains an explicit econometric treatment of expectations demography supply spillovers from the rented sector and of composition biases in the official house price index

incentives for monitoring quality we analyze a procurement problem in which the quality of the delivered product can be observed perfectly by the buyer and supplier but may not be verifiable i e may not be observable to any third party we present a set of plausible conditions under which the equilibrium welfare of both the buyer and supplier is higher when quality is verifiable than when it is unverifiable the welfare gain for the privately informed supplier arises even when the buyer has all the bargaining power thus the interests of the buyer and supplier coincide with regard to whether delivered quality should be made verifiable

price caps and output floors a comparison of simple regulatory rules we study in this paper a simple alternative to price cap regulation the mechanism which we label output floor regulation requires the regulated firm to supply a given level of output this rule is as simple as price cap regulation and performs identically when the regulated firm is a natural monopoly however we show that in the presence of a competitive fringe output floor regulation yields lower prices and stronger incentives for cost reduction its introduction however is likely to be resisted by the industry since it lowers managerial utility and shareholders profits

when do auctions ensure the welfare maximizing allocation of scarce inputs we determine when an unfettered auction will ensure the welfare maximizing allocation of a scarce input that enhances product quality and may reduce production costs a supplier values the input for this use value and for its foreclosure value because once the input is acquired it is unavailable to rivals an unfettered auction often ensures the welfare maximizing allocation of an input increment however it can fail to do so when the input would increase relatively rapidly the competitive position of a rival with a moderate competitive disadvantage bidder handicapping that ensures auctions generate welfare maximizing input allocations differ from standard handicapping policies

two part tariffs as regulatory constraints abstract this paper introduces a regulatory two part monopoly pricing mechanism with desirable properties assuming that firm managers are informed about cost and demand functions no detailed prior information of the regulator about the regulated firm and its environment is required also subsequent observations of the regulator are restricted to verifiable bookkeeping data nevertheless the pricing formula is simple and easily interpreted the firm may freely choose the variable price of the two part tariff as long as the fixed part obeys a constraint the firm will then in every period receive an approximation to the welfare change caused by its price changes over the last period contrary to most other suggestions for incentive pricing the current approach requires no government subsidies

entry by takeover auctions vs bilateral negotiations firms often enter new markets by taking over an incumbent we analyze a potential entrant s choice of target under two exogenously given takeover mechanisms i auctions where other incumbents can bid for the target against the entrant and ii bilateral negotiations between the entrant and the target the entrant s choice of target depends on the mechanism and it may not maximize its ex post profit nor consumer welfare in an auction the entrant pays a higher price to take over a target with higher synergies because these impose stronger negative externalities on incumbents and increase their willingness to pay for preventing entry auctions increase the price obtained by the target but reduce welfare compared to negotiations because they may discourage the entrant from acquiring a target with higher synergies

incentive mechanisms for environmental protection under asymmetric information a case study the purpose of this paper is to compare the performance of some instruments of environmental policy using data for a coal fired power plant each decentralized scheme coverages towards the social optimum chosen by a regulator we look at the performance of a changing tax rate on emission of an announcement of the tax formula of an announcement of the tax formula with a tax refund possibility and of a tax cum subsidy scheme our emphasis is on full information concerning the tax and subsidy formulas and on the opportunity for the firm to optimize intertemporally we also test two performance schemes which combine social optimal pricing with optimal abatement decisions our interest is to compare the speed of convergence of the schemes the monetary side payments subsidy bonus required and to look for self financing schemes

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

regulating bidder participation in auctions regulating bidder participation in auctions can potentially increase efficiency compared to standard auction formats with free entry we show that the relative performance of two such mechanisms a standard first price auction with free entry and an entry rights auction depends nonmonotonically on the precision of information that bidders have about their costs prior to deciding whether to participate in a mechanism as an empirical application we estimate parameters from first price auctions with free entry for bridge building contracts in oklahoma and texas and predict that an entry rights auction increases efficiency and reduces procurement costs significantly

intertemporal price cap regulation under uncertainty this paper examines the intertemporal price cap regulation of a firm that has market power under uncertainty the unconstrained firm waits longer before investing or adding to capacity and as a corollary enjoys higher prices over time than would be observed in an equivalent competitive industry in the certainty case the imposition of an inter temporal price cap can be used to realise the competitive market solution by contrast under uncertainty it cannot even if the price cap is optimally chosen under uncertainty the monopoly firm will generally a under invest and b impose quantity rationing on its customers

modelling uk house prices using cointegration an application of the johansen technique this paper provides an econometric analysis of the long term equilibrium determination of uk house prices using the relatively recent johansen cointegration procedure this long term equilibrium specification is then utilized in order to estimate a parsimonious dynamic model for uk house prices

endogenous firm efficiency in a cournot principal agent model abstract in a market of cournot firms managed by agents the degree of firm efficiency is inversely related o the number of firms in the market journal of economic literature classification numbers l22 d23 d43

do managers work harder in competitive industries abstract we analyze the relationship between product market competition and managerial effort in a linear principal agent model firms compete in a differentiated cournot oligopoly we use two competition indexes the degree of product differentiation and the number of firms an increase in competition stemming from a lower degree of product differentiation reduces the optimal level of effort while an increase in competition from more firms has an ambiguous effect an increase in the number of firms reduces increases effort when the degree of product differentiation is low high

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

competition for scarce resources we model a downstream industry where firms compete to buy capacity in an upstream market which allocates capacity efficiently although downstream firms have symmetric production technologies we show that industry structure is symmetric only if capacity is sufficiently scarce otherwise it is asymmetric with one large fat capacity hoarding firm and a fringe of smaller lean capacity constrained firms as demand varies the industry switches between symmetric and asymmetric phases generating predictions for firm size and costs across the business cycle surprisingly increasing available capacity can cause a reduction in output and consumer surplus by resulting in such a switch

the effects of competition on executive behavior economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems this article investigates this presumption it finds that the effects of competition on executive behavior can be decomposed into four effects each of which is of potentially ambiguous sign theory thus offers no definitive defense of this presumption this article also derives sets of conditions under which increased competition has the presumed effect of reducing agency problems in some sets important conditions are that increased competition reduce the executive s expected income and that agency goods e g shirking be normal goods for the executive the article shows that an increase in the shareholder bargaining strength can both reduce the agency problem and make it more sensitive to competition

reward structures in a planned economy the problem of incentives and efficient allocation of resources this paper considers a reward mechanism for inducing the choice of a socially optimal level of output by a socialist price setting manager under this mechanism the planner is assumed to have no information other than the observed output and price level it thus has informational advantages over other schemes thus far discussed in the literature the other schemes require the additional knowledge of demand elasticities of all the products produced in the economy besides this informational advantage the reward structure suggested here also eliminates other basic weaknesses of those schemes suggested previously

regulation with non price discrimination abstract this paper considers the optimal regulation of access charges and the effect such regulation has on incentives for non price discrimination i show that when a vertically integrated firm is able to discriminate against rivals by means of non price measures optimal access charges must be set higher than in the case when no discrimination is possible since the level of the access charge affects incentives to practice foreclosure furthermore i show that whether the access charge should be used to level or tilt the playing field in favour of the more efficient firm depends on the cost associated with non price discrimination

an economic perspective on auctions the recent spectrum auctions in europe have shown that serious problems can wise in auctions where multiple complementary objects are being sold such as blocks of radio spectrum that will subsequently be used by the wining bidders to compete against each other in downstream markets other important instances of such situations include take off and landing slots at airports and rights for electricity and gas transmission t i first review some of the theory describing multi object auctions i i next outline the importance of strategic effects arising in auctions that are followed by competition between the bidders and the tension arising between various goals such as efficiency and revenue maximization although more flexible auction formats can have virtues particularly in taking into account complementarities they can also be manipulated by bidders to build market power to the detriment of consumers we next apply these insights to the recent european umts licence auctions finally we draw the main conclusions and policy implications

the regulation of multiproduct firms part ii applications to competitive environments and policy analysis abstract this paper extends our companion paper part i laffont and tirole 1990 on the regulation of the rate of return and prices of a multiproduct firm in two directions first it studies optimal pricing by a regulated firm competing with regulated or unregulated rivals with or without market power or other distorted pricing it then focuses on the access pricing problem and its potential foreclosure effects second it shows how optimal pricing can be decentralized to the regulated firm in the absence of cost and demand information

competition long run contracts and internal inefficiencies in firms abstract internal reward structures in firms are often integral parts of their culture and are changed infrequently in comparison to decisions about e g prices this paper investigates how this feature of firm organization provides a mechanism through which product market competition affects firms internal efficiency the design of firms internal organization is modeled as a choice of an incentive structure between a principal and an agent with strategic implications for firm s competitive positions on the product market it is shown that contrary to popular beliefs there may be a negative relation between the competitiveness of the product market and effort incentives

tirole s industrial regulation and organization legacy in economics jean tirole was awarded the 2014 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of market power and regulation this paper provides an overview of some of that work and of his related contributions to game theory

an alternative method for identifying booms and busts in the euro area housing market this article develops a model based method to detect booms and busts in the euro area housing market a model is constructed and tested whereby the user cost rate a demographic variable unemployment rate disposable income debt to income ratio and housing stock are fundamental variables significantly explaining house price hp developments booms busts are identified as episodes when the hp index exceeds the levels implied by those economic fundamentals furthermore a cross check with boom bust episodes based on other methods is carried out to substantiate the results while the ability of the model in predicting booms busts in real time is also tested

the politics of government decision making a theory of regulatory capture the paper develops an agency theoretic approach to interest group politics and shows the following 1 the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation 2 the threat of producer protection leads to low powered incentive schemes for regulated firms 3 consumer politics may induce uniform pricing by a multiproduct firm 4 an interest group has more power when its interest lies in inefficient rather than efficient regulation where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal congress

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

deregulation and quality abstract this paper analyses within a static model the effect of quality concern on optimal market structure it focuses on cases where industry quality has public good like features and is not contractible it is shown that the introduction of competition raises a free rider problem which depresses quality the smaller producer free rides on its competitor investment which as a result underinvests to encourage the efficient producer to provide quality the regulator diminishes the market share of the opportunistic producer and chooses more often a monopoly however when quality is verifiable the introduction of competition entails no welfare loss whether the regulator observes total quality outcome or individual contributions

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

cartel enforcement with uncertainty about costs what cartel agreements are possible when firms have private information about production costs in order for a cartel agreement to work it must take into account the incentives for firms to misrepresent their cost information and it must provide sufficient reward so that no firm wishes to defect for private cost uncertainty we characterize the set of cartel agreements with side payments that can be supported as bayesian nash equilibria we show that if defection results in either cournot or bertrand competition the incentive problems in large cartels are severe enough to prevent the cartel from achieving the monopoly outcome in contrast with common cost uncertainty the incentive problems become less severe in large cartels allowing perfect collusion

determinants of management compensation with risk averse agents and dispersed ownership of the firm abstract the salaries of top managers consist of two parts one part depending on profits the other being constant in a model of management compensation schemes with risk averse agents holmstrom and milgrom 1987 predict that an increasing variance in profits should reduce the profit relatedness of salaries using data from germany we show that indeed a larger variance of profits reduces the pay performance sensitivity moreover we analyze the relative influence of profits as compared to firm size on managerial compensation in general as well as the relationship between pay performance sensitivity and ownership structure

an incentive scheme of a non linear price schedule for regulating a monopolist with unknown cost abstract we construct a non linear price schedule that serves as an incentive tool under doubly asymmetric information where the regulator has incomplete information about a monopolist s cost parameter while the monopolist cannot identify consumer types

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

on the efficiency of competitive markets for operating licenses some economists and policy makers have suggested that market allocation of scarce operating licenses broadcasting licenses and airport slots for instance would lead to their efficient use this paper demonstrates that a competitive market allocation of operating licenses whether attained through auctioning selling or allowing resale of the rights does not in general assure efficiency the profit criterion that would guide the allocation of licenses in a competitive market would not necessarily lead to the uses that maximize social benefits the paper shows that the difference between private and social incentives in the allocation process can be quite large the theory is then applied to discussions of allocating airport takeoff and landing slots and broadcasting licenses

left for dead anti competitive behavior in orbital space in a dynamic investment framework with depreciation we show incumbent satellite operators have incentives to warehouse a fraction of their assigned spectrum and orbital slots keeping nonoperational assets in place which reduces output increases prices and diminishes social welfare exploring three distinct market structures we model firms incentives to warehouse and show conditions under which firms choose to warehouse rather than replace nonfunctioning satellites we find a dominant firm with a competitive fringe produces more and longer duration warehousing relative to perfect competition or monopoly regulators could remediate warehousing by increasing a firm s marginal costs or by increasing the probability of reallocating orbital slots that do not have a fully functioning satellite

auctions with resale markets an application to u s forest service timber sales when bidders anticipate an opportunity for resale trade the value of winning an auction is determined in part by the option values of buying and selling in the secondary market one implication is that a bidder s willingness to pay at an auction increases with the expected level of competition between resale buyers empirical evidence from auctions of timber contracts supports this prediction and rejects standard models that ignore resale the estimated effect is smaller after policy changes expected to diminish the prevalence of resale additional evidence supports the predicted presence of a common value element introduced by the resale opportunity

contributions of neoclassical economics to public utili iy analysis neoclassical economics the dominant economics paradigm has influenced and been influenced by developments in regulated industries we identify major theoretical and empirical accomplishments discuss the impactofthese accomplishmentsonpolicydevelopment andlist the channelsthrough which the impacts are madepossible we then discuss regulatorypolitics lack ofresearchperspective an overly narrow focus on economic efficiency and the academic profession as factors limiting the impact of neoclassical economics on public policy

price and access charge discrimination in electricity distribution an application to the chilean case this paper presents and analyzes a model of electricity distribution in chile with three alternative regulatory pricing contract schemes for assigning a common capacity cost to final customers and competitive energy sellers the first scheme involves ramsey pricing while under the second and third schemes the monopoly chooses final prices and access charges subject either to a peak load physical cap or a total revenue price cap constraint in addition we consider circumstances in which the regulator does not know consumer demand the monopoly cannot price discriminate beyond a range defined by the marginal cost as a floor and the stand alone cost as a ceiling and access charges are set at the fully distributed cost allocation level currently in force the model is calibrated with chilean data and demonstrates that in terms of social welfare the fully distributed cost contract scheme currently in effect can be improved by discriminatory pricing complemented by certain of the analyzed constraints

a bargaining model of farrell inefficiency abstract an enormous number of empirical papers have estimated technical efficiency the distance of firms inside a frontier following the model of farrell farrell 1957 the measurement of productive efficiency journal of the royal statistical society series a 120 3 253 290 we propose a theory that explains the distance these empirical papers seek to measure the theory is based on the idea that workers can bargain low effort high crew sizes etc if they and the firm have some monopoly power we provide simple theoretical expressions for the empirical measures of technical and allocative efficiency and compare them to those in the statistical literature we also consider the relation between competition and efficiency

how to license intangible property we examine the optimal licensing strategy of a research lab selling to firms who are product market competitors we consider an independent lab as well as a research joint venture we show that 1 demands are interdependent and hence the standard price mechanism is not the profit maximizing licensing strategy 2 the seller s incentives to develop the innovation may be excessive 3 the seller s incentives to disseminate the innovation typically are too low 4 larger ventures are less likely to develop the innovation and more likely to restrict its dissemination in those cases where development occurs and 5 a downstream firm that is not a member of the research venture is worse off as a result of the innovation

an optimal auction with identity dependent externalities we analyze the problem of a seller of multiple identical units of a good who faces a set of buyers with unit demands private information and identity dependent externalities we derive the seller s optimal mechanism and characterize its main properties we show that the probability that a buyer obtains a unit is an increasing function of the externalities he generates and enjoys also the seller s allocation of the units of the good need not be ex post efficient as an illustration we apply the model to the problem faced by a developer of a shopping mall who wants to allocate and price its retail space among anchor and non anchor stores we show that a commonly used sequential mechanism is not optimal unless externalities are large enough

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

coordination and externalities abstract we analyze the gains of coordinating decisions in a regulatory framework in which agents are sovereign and tax inducements are socially costly we consider a general multi agent situation with externalities among agents incomplete information and type dependent reservation utilities when the regulator optimally leaves informational rents to the most efficient agents centralized coordination reduces global activity coordination induces more activity when the principal optimally leaves rents to the most inefficient agents last if we impose budget balance our mechanism can also be interpreted as the optimal auction of a public good with congestion externalities journal of economic literatureclassification numbers d62 d82 l51

standard auctions with identity dependent externalities i analyze equilibrium bidding behavior in the open ascending bid auction with identity dependent externalities with reciprocal externalities the allocation is determined by bidders consumption values alone with large nonreciprocal externalities the open auction generates higher expected revenue compared to standard sealed bid auctions the progress of the open auction reveals more information about the identity of the potential winner allowing active bidders greater opportunity to avoid incurring payoff reducing externalities the associated option value to staying active up until a relatively high price translates into higher expected revenue multiple bidders may sequentially quit at the same price and relative to sealed bid auctions bidders experience less ex post regret

auctions with endogenous valuations the persistence of monopoly revisited it is shown that the standard arguments for a monopoly to persist break down when many units of capacity become available sequentially the reason is that deterring entry at one st age affects the cost of doing so in later stages this force can be so powerful that entry is deterred only at the final stage the persistence of monopoly or its erosion over time depends on the timi ng of arrival of capacity the size of early versus subsequent capacity availability the length of the capacity acquisition stage relative to the life of the industry and the discount factor copyright 1993 by american economic association

do lower mortgage rates mean higher housing prices much research has shown that mortgage rates exert a negative influence on housing prices this study analyses the long and short run relationships between housing prices and mortgage rates using advanced nonstructural estimation methods as expected a bivariate specification and a four variable housing demand specification both show that these variables have a long run relationship and that there is a rather inelastic response of housing prices to changes in mortgage rates however contrary to previous research the results from granger non causality tests impulse response functions and variance decompositions reveal that there is virtually no short run influence from mortgage rates to housing prices

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

testing for persistence in housing price to income and price to rent ratios in 16 oecd countries housing price to income and price to rent ratios are among the most widely monitored indicators of housing market conditions while these ratios tend to fluctuate around a constant level or a mild trend over the long term they also tend to deviate from these benchmarks for protracted periods traditional unit root tests often indicate the presence of a unit root this article uses the framework of fractional integration to test the persistence of price to income and price to rent ratios in a sample of 16 oecd countries spanning four decades the results indicate that the ratios are highly persistent the possibility that persistence estimates may be affected by structural breaks in the series is also considered but evidence of such breaks is found only in a very limited number of cases policy action may be required if high price to income and price to rent ratios have adverse social and economic consequences policies should be guided by a careful analysis of the factors behind high ratios