return policies market outcomes and consumer welfare the effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time product reliability is identified with defect rates producers first choose reliability levels and then compete in prices for given defect rates allowing returns makes products closer substitutes enhancing competition and reducing prices being closer substitutes makes higher reliability less worthwhile which reduces reliability while the decrease in reliability reduces consumer welfare the decrease in prices raises it the latter dominates so that aggregate consumer welfare increases with return policy l effet des politiques de remboursement sur les resultats du marche est examine dans le cadre d un modele ou les consommateurs ont des evaluations differentes de la valeur de leur temps la fiabilite des produits est mesuree par leur taux de defectuosite les producteurs choisissent d abord des niveaux de fiabilite et ensuite se concurrencent par les prix pour des niveaux de defectuosite donnes permettre de retourner le produit rend les produits davantage des substituts accroit la concurrence et reduit les prix une plus grande substituabilite rend la fiabilite moins importante et donc reduit la fiabilite alors que la chute de la fiabilite reduit le bien etre du consommateur la chute des prix l accroit ce second effet domine ce qui fait que le bien etre agrege du consommateur s accroit quand il y a politique de remboursement

buyer initiated vs seller initiated information revelation sales presentations are the core of the selling process where salespeople provide information to prospects one challenge is that the amount of information available to be potentially communicated may exceed salespeople s ability to communicate or customers ability to process there is limited bandwidth between the firm and customers one important decision then is which information should customers see what the firm chooses to tell customers may be informative in itself when constrained to a seller initiated information revelation format where the firm chooses which feature to show the firm never finds it optimal to offer more features than it is able to inform customers about consequently customers never find credible a claim that the product has all features the important implication is that price alone cannot serve as a signal of quality in this setting in contrast a buyer initiated information revelation format where customers decide which information to receive increases the probability of a sale and also results in the production of higher quality products in a competitive setting by adopting buyer initiated information revelation firms are able to attain positive profits this is due to the fact that customers infer the product s quality from the price along with the information revelation format customers know that at some prices firms find it profitable to produce high quality products and at other lower prices this is not the case thus customer empowerment leads to higher profits

optimal shared savings contracts in supply chains linear contracts and double moral hazard in many supply chains consumption of indirect materials sold by a supplier to a customer for use in her production process can be reduced by efforts exerted by either party since traditional supply contracts provide no incentive for the supplier to exert such effort shared savings contracts have been proposed as a way to improve incentives in the channel leading to more efficient effort choices by the two parties such shared savings contracts typically combine a fixed service fee with a variable component based on consumption volume we formalize this situation using the double moral hazard framework in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption we also extend the double moral hazard framework to analyze a broader class of cost of effort functions than considered so far including the linear cost of effort functions commonly found in practice we show that the supplier can still always induce the optimal second best equilibrium with a linear shared savings contract under this broader class of functions however the behavior of the optimal contract as a function of the problem parameters becomes more complex we illustrate how small changes in the problem parameters can turn profits from being a well behaved to a poorly behaved function of the contract and provide some theoretical characterization of this phenomenon the practical significance of this is that simple linear contracts are sufficient in many double moral hazard contexts even for the broader class of functions we consider but care must be taken in selecting the optimal contract parameters

pricing under quality of service uncertainty market segmentation via statistical qos guarantees abstract this article examines how performance contingent pricing schemes with long term statistical performance guarantees can be applied to many it services we study two forms of performance contingent pricing with rebate proportional to failure rate and fixed rebate for below threshold performance we show that threshold performance contingency pricing can increase both profits and fairness customers who receive higher benefits pay higher effective price relative to standard pricing but an even better solution is to offer a menu of performance guarantees this can increase the firm s profit and segment the market only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism

money back warranties vs replacement warranties a simple comparaison product warranties are one of the most common time honored and visible contractual relationships entered into by consumers moreover under the uniform commercial code consumers are covered by an implied warranty of merchantability even without a written warranty in this paper we compare the outcomes of two contrasting types of consumer product warranties money back warranties and replacement warranties both these types of warranties are ubiquitous in fact a best and a r andreasen 1977 find that returning an item is the most common action taken by dissatisfied consumers c l kendall and f a russ 1975 in a study of the consumer packaged goods industry find that money back and new merchandise are the two most common responses made by firms to consumer complaints yet as our analysis shows there are significant differences in the incentives they provide firms and in their welfare properties in particular we find that the comparison depends crucially on the observability of quality and on the cost of servicing warranties although there are certainly more complicated explanations for warranties we rely on a simple model of imperfect consumer information in which to embed our comparison of the relative performance of these two forms of warranty consumers are confronted by seller moral hazard that is either they are unable to discern the quality of a product before purchase or alternatively this information is extremely costly for consumers to obtain or for firms to publicly demonstrate we abstract from issues such as differing degrees of risk aversion consumer moral hazard and screening each of which is frequently the rationale behind warranty provision our model is perhaps closest to the model presented in michael spence s 1977 article in which he analyzes the provision of warranties in an environment with biased consumer information

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

time varying response of monetary policy to macroeconomic conditions we reject the hypothesis that the federal reserve s response to the macroeconomy over the period of 1953 1994 can be accurately represented with a fixed parameter discrete choice model thus we model the fed s time varying response with a nonlinear kalman filter the estimated time paths of the reaction function coefficients suggest that the fed has responded countercyclically to movements in the price level except for the middle 1970s when it accommodated inflation the fed has generally responded countercyclically to unemployment and output during recessions however it has not maintained a countercyclical policy during nonrecessionary times until the 1980s a reaction function empirically relates a monetary policy indicator often the federal funds rate or a monetary aggregate to the macroeconomic objectives of monetary policy usually national output inflation and unemployment assuming that the underlying macroeconomy is stable estimated coefficients from a reaction function reveal information about the monetary authority s response to macroeconomic conditions chappell havrilesky and mcgregor 1993 beyond the assumption described above most reaction function studies further assume that the federal reserve s response function is linear in the sense that it contains fixed coefficients see the survey by barth sickles and weist 1982 and more recently chappell havrilesky and mcgregor 1993 that is most studies implicitly assume that the fed responds to a change in inflation for example with the same vigor regardless of whether the level of inflation is unusually high or low and regardless of the timing of the response with respect to the business cycle elections and so on although it is generally recognized that a fixed coefficient estimate of the fed s reaction function overly homogenizes the fed s actual response to macroeconomic conditions solutions to the problem have been ad hoc studies that seek to expose a political business cycle impose structural break points on the fed s reaction function based on pre and postelections periods and then estimate a fixed coefficient reaction function within each subperiod hakes 1988a chappell havrilesky and mcgregor 1993 gamber and hakes 1997 other studies impose structural break points based on political or policy regimes and then estimate a fixed coefficient

satisfaction guaranteed or money partially refunded efficient refunds under asymmetric information refunds are modelled as a competitive market response to asymmetric information firms have private information on their choice of product quality and compete by offering price and refund contracts consumers who care about quality draw inferences about the quality offered by the various firms from observed contracts conditions under which a revealing market equilibrium emerges are specified and the equilibrium quality and contract s characterized the model predicts that when product risk is not insurable consumers with higher incomes will pay higher prices for higher quality goods with higher refunds if the product fails

delegation and incentives this article analyzes the relation between authority and incentives it extends the standard principal agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority the agent s subsequent choice of effort depends both on monetary incentives and the selected project we find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent in fact if the agent is protected by limited liability delegation is never optimal

reducing moral hazard associated with implied warranties of animal health comment in a recent journal article centner and wetzstein examine efficiency losses associated with moral hazard and the assignment of cost liability arising from diseased animals traditionally a buyer of livestock had an implied warranty that the seller would compensate all ex post costs arising from diseased animals the fear that implied warranties would provide disincentive for buyer self protection against possible damages moral hazard has led sellers to lobby for abrogation of implied warranties centner and wetzstein argue that abrogation of implied warranties does not remove moral hazard but simply transfers disincentive from buyer to seller by noting that welfare under buyer liability may be lower than under seller liability centner and wetzstein suggest efficiency losses can be reduced by maintaining seller liability and introducing partial insurance contracts where both parties share a burden of the ex post damages to induce a buyer to self protect the partial insurance contract is assumed to be a decreasing function of self protection this is a restrictive assumption however because it is often impossible or prohibitively costly for insurers sellers to monitor and enforce the insured s buyer behavior spence and zeckhauser holmstrom indeed it is this lack of monitoring that motivates moral hazard in the first place arrow 2 the purpose of this comment is to illustrate that a decentralized solution where monitoring is unnecessary can be obtained by considering three points a that the state of the world is dependent on the buyer s self protecting actions b the blurred distinction between self protection that influences severity of loss and self protection that influences probability of loss and c a sufficiently large difference in the dollar benefits of diseased and disease free animals given these three points contrary to centner and wetzstein s claim the buyer will have sufficient incentive to purchase optimal self protection despite the existence of implied warranties of animal health 3 first centner and wetzstein assume that the two mutually exclusive and jointly exhaustive states of nature are independent of buyer action let 13 and 1 p3 represent the buyer s degree of belief of selecting a diseased or a disease free animal using centner and wetzstein s notation as pointed out by marshall however independent states of nature exist only if a complete set of contingent contracts exist while theoretically feasible complete contingent claims contracts rarely if ever exist in reality for example given imperfect contingency markets the buyer can influence the probability of r ceiving a disease free animal by adopting assorted self protection strategies i e pretesting for disease use of experienced sellers and markets l t x represent buyer self protection such that the degrees of belief of selecting diseased and diseasefree animals are p p3 x and 1 p p3 x respectively where 3p is an endowed probability assume that an increase in self protection decreases the probability of selecting a diseased animal 3 0 4 subscripts denote relevant partial derivatives

signal facilitation a policy response to asymmetric information in cases of asymmetric information policymakers sometimes want to make informed agents share their private information one policy response to this situation is signal facilitation altering the environment to encourage signaling this article illustrates signal facilitation in the context of a competitive used car market sellers may determine quality and reveal it through warranties signal facilitation compares favorably to a policy of mandatory disclosure because car dealers can refuse to test and signal if the cost is excessive also this policy permits dealers to select less costly less revealing alternatives that may enhance social welfare copyright 1992 by university of chicago press

habitability laws for rental housing the impact of tenant inputs court decisions in the 1970s dramatically changed the distribution of legal rights in the landlord tenant relationship in seeking to improve the welfare of tenants thought to be at a disadvantage in their search for housing both landlords and tenants contribute to the quality of services but the fact that the rights of ownership and use are separated prevents both parties from fully internalising the benefits of their efforts the paper develops a simple model of the housing rental relationship capturing the impact which both landlord and tenant have on housing quality it shows that because of the moral hazard problem the non co operative equilibrium of the model is inefficient in that in the absence of any regulation both parties invest too little in maintaining the quality of the unit the model assessing the relationship between the two parties indicates that i increased landlord maintenance raises tenant utility and lowers landlord profits ii the joint benefits of landlords and tenants f

monopoly provision of product quality and warranties an exploration in the theory of multi dimensional screening we address the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels consumers vary in their evaluations of these attributes so that the problem is one of screening it is sufficiently complex that the local approach commonly used does not work instead we use new techniques for dealing with incentive constraints between nonadjacent consumer types these techniques allow us to characterize optimal allocations that may not be monotonic in particular although the more eager types of buyer do pay higher prices and yield the monopoly higher profit they may receive lower quality or lower warranty coverage we find preference restrictions that restore monotonicity concave risk tolerance implies that warranty coverage increases in type and constant absolute risk aversion implies that quality increases in type

an intertemporal model of warranties using a simple two period model this paper attempts to explain certaini interesting intertemporal properties of product warranties specifically why does coverage generally fall over time and why is the typical warranty s life so much shorter than the expected life of the product it covers we view warranties as a partial solution to the double moral hazard problem that arises when buyers cannot readily observe the quality built into a product and sellers cannot observe the care with which buyers use it the optimal warranty strikes the right balance between providing incentives for seller quality and for buyer care under certain conditions a two period warranty will render even the first best i e full information solution achievable un modlde intertemporel dce garanties ce memoire tente d expliquer certaines proprietes intertemporelles interessantes des garanties sur les produits a l aide d un modele simple sur deux periodes specifiquement on se pose les questions suivantes pourquoi est ce que generalement la couverture diminue avec le passage du temps et pourquoi la vie de la garantie est elle tellement plus courte que celle du produit auquel elle est attachee les garanties sont perques comme une solution partielle a un double probleme de risque

product quality and return policy in a supply chain under risk aversion of a supplier abstract this study aims to identify the relationship between return policy and product quality decisions in a decentralized system we consider a supply chain situation as in a retail or oem supply chain system where a buyer decides a return policy for consumers and delegates the product quality decision to a supplier we consider the supplier s different risk attitudes whether risk averse or risk neutral a penalty contract is introduced to control the supplier s hidden action conveying external failures due to returns to the supplier we show the conditions for supply chain coordination and demonstrate that product quality enhancement needs to precede a generous return policy setting in view of the prevalent business environment and current supply chain management practices moreover we indicate the optimal conditions for a generous return policy setting without quality enhancement

exit option in hierarchical agency abstract we explain why organizations that limit the voice of their agents can benefit from granting them an exit option we study a hierarchy with a principal a productive supervisor and an agent communication is imperfect in that only the supervisor can communicate with the principal while the agent has no direct voice to the principal we show that the principal is better off if she grants the agent the option to walk away from the contract by doing so the principal is implicitly giving a veto power to the agent this in turn restricts the manipulation of report by the supervisor thus the exit option can be interpreted as a remedy for limits on communication our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal s welfare while protecting the agent our result is robust to the case of collusion between the supervisor and the agent we also examine the optimal exit option i e whether exit should entail a payment to or from the agent

money back contracts with double moral hazard we analyze money back contracts in which a seller promises to refund some fraction of the buyer s purchase price if an item is returned as a three stage game in a cooperative first stage the players determine a price and refund share in the second stage they noncooperatively choose inputs the buyer decides whether to return the item in the final stage this process economizes on the information necessary to enforce a contract and serves an incentive function when transactions involve double moral hazard efficient contracts exist when uncertainty is moderate inefficiencies result when there is either insufficient or excessive uncertainty

comparing the profitability of organic and conventional production in family farming empirical evidence from brazil abstract several studies have compared the profitability of organic and conventional producers but present very conflicting results although in the majority of these papers selection bias due to observables is accounted for the possibility of selection based on unobservables has been largely overlooked in this paper we compare these two types of producers using a large and unique data of about 4 2 million family farmers in brazil standard propensity score matching techniques are used together with the procedure recently developed by oster forthcoming to address concerns about omitted variables our results confirm the working hypothesis that organic producer s profits are lower than conventional ones

east west joint ventures and buyback contracts abstract contractual joint ventures cjvs and the buyback form of countertrade are popular methods that socialist countries use to attract foreign investment in this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts the existence of sharing rules and minimum standard requirements on inputs the model stresses the incentive problems involved when a socialist host country which does not allow foreign direct investment uses a cjv to obtain the fruits of some knowledge based production process from a multinational enterprise

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

incentive schemes as a signaling device abstract this paper considers a model of moral hazard where the principal has private information for instance in an organizational setting the firm may be better informed about the profitability of a sales area for which it seeks to employ a new sales representative we show how this information asymmetry may lead to a game of signaling which can mute incentives

moral hazard and optimal contract form for r d cooperation abstract this paper aims to explain the use of different governance modes for r d cooperation we argue that ex ante cross licensing agreements are preferred to r d joint ventures if potential synergy effects are negligible and the double moral hazard problem caused by unobservable r d effort can be solved by an appropriate royalty scheme it is shown that the first best effort decisions are implementable by a cross licensing agreement if royalty payments are based on r d success however if the payments have to be based on actual know how transfer because r d success is not verifiable there are cases where joint ventures are necessary to induce optimal r d effort

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

an integrated product returns model with logistics and marketing coordination we develop an integrated approach for analyzing logistics and marketing decisions within the context of designing an optimal returns system for a retailer servicing two distinct market segments at the operational level we show that the optimal refund price is not unique moreover it is such that if both market segments return a purchased product then neither segment will receive a full money back refund and it is such that if one or both segments do not return a purchased product then a refund premium over the purchase price is possible but the refund premium will not be enough to offset a customer s total net cost of purchase and return we also show that any improvement to the returns system that results in increased logistical efficiency or marketing effectiveness will be accompanied by an increase in the selling price of the product at the strategic level we show that if the retailer does not coordinate its logistics and marketing efforts to improve the overall returns system then it will tend to over invest in one of the functions and under invest in the other finally we illustrate how our model can be generalized to the case in which a customer s ex post valuation of the product falls along a continuum

the value of technology improvements in games with externalities a fresh look at offsetting behavior abstract we model the effect of safety technology improvements in a symmetric game in which each player s payoff depends on his own precaution and the other players average precaution we derive conditions under which an improved technology increases or decreases players equilibrium utilities for mandatory safety technologies the direction of the welfare effect depends on whether the externality between players is positive or negative and on whether the technology improvement is a complement or substitute for individual precaution for safety technologies that individuals can choose whether or not to purchase individuals expend too much on reducing the loss size but may spend either too much or too little on features that reduce an individual s loss probability

findings biased but efficient an investigation of coordination facilitated by asymmetric dominance in several marketing contexts strategic complementarity between the actions of individual players demands that players coordinate their decisions to reach efficient outcomes yet coordination failure is a common occurrence we show that the well established psychological phenomenon of asymmetric dominance can facilitate coordination in two experiments thus we demonstrate a counterintuitive result a common bias in individual decision making can help players to coordinate their decisions to obtain efficient outcomes further limited steps of thinking alone cannot account for the observed asymmetric dominance effect the effect appears to be due to increased psychological attractiveness of the dominating strategy with our estimates of the incremental attractiveness ranging from 3 6 a learning analysis further clarifies that asymmetric dominance and adaptive learning can guide players to an efficient outcome

quality indicators in theory and in fact abstract in recent literature it has been suggested that consumers need have no knowledge of product quality as a number of quality indicators or signals may be used as substitutes very little attention has been paid to the empirical verification of these studies the present paper is devoted to the issue of how well these indicators perform using market data provided by consumer magazines from 3 countries the results strongly indicate that price is a poor quality indicator the paper also presents some evidence which suggests that seller reputation and easily observable characteristics are also poor indicators

adoption of organic farming are there differences between early and late adoption based on the fact that not all farmers adopt a technology at the same time it is argued in this paper that the distinction between groups is important because early medium and late adopters respond differently to economic and non economic factors when they consider whether to take up organic farming or not the individual effects on adoption between the groups are identified by the use of multinomial logit analysis the results provide evidence that there are significant differences in the characteristics between the adopter groups the findings also reveal that the factors that affect adoption play a different role for early medium and late adopters particularly with regard to farming intensity age information gathering as well as attitudes of the farmer more specifically early adopters were the youngest to adopt organic farming and their decisions were found to be less profit related compared to other groups late adoption is constrained by risk considerations while environmental attitudes and social learning were identified to be important determinants for all adopter groups overall the findings strongly suggest that for policy measures to be effective the current state of diffusion has to be taken into account

the right to return this article studies the allocation of responsibility for unsold inventory provision for which is made in practically every distribution contract the two extreme cases are the consignment contract which allocates all the burden to the manufacturer and the no return contract in which retailers purchase the merchandise outright and assume responsibility for unsold inventory contract choices are shown to vary across countries industries products and types of transactions the article identifies six main factors affecting this choice optimal inventory policy in a stochastic retail demand environment relative advantage in disposing of the unsold inventory optimal risk allocation incentives to invest in promotions and provide services to increase consumer demand information asymmetry and costs associated with the consignment contract per se several testable implications are presented and the choice of contracts in the publishing industry is shown to be consistent with the predictions of the model

moral hazard asset specificity implicit bonding and compensation the case of franchising i introduction there is a large and growing interest in the structuring of compensation to deal with the moral hazard problem much of this literature treats various forms of income sharing such as piece rates and sharecropping as a means for a principal to provide incentives to an agent this literature has been extended to the case of two sided moral hazard where both parties to an exchange may shirk another mechanism to induce effort discussed in the literature is bonding where workers post a bond that is forgone if effort is inadequate klein 1980 and klein and leffler 1981 treat the possibility of specific assets as constituting an implicit bond where poor performance by a firm is penalized by bankruptcy and sale of assets at a loss this paper studies a situation where these issues coalesce the case of compensation arrangements in franchising the typical franchise contract calls for the sharing of franchise income between franchisee and franchisor additionally franchisees may be terminated for poor performance if franchise assets have a degree of specificity the ensuing sale of assets at a loss provides a penalty for poor performance we examine the determinants of franchise royalty rates and fees in this setting while there is a literature on two sided moral hazard and some empirical work on franchising based on this idea none incorporates the potential influence of asset specificity we explicitly consider the role of implicit bonding and asset specificity in conjunction with moral hazard on the part of both trading parties we go beyond previous work in franchising by estimating the effects of asset specificity and other influences on the royalty rate further part of our empirical work utilizes improved micro data on actual franchise contracts our approach and its implications are discussed in section ii consistent with previous work we expect the royalty rate to decrease increase as the importance of the franchisee s franchisor s input increases however more specific capital with the threat of termination acts as an implicit bond and substitutes for a reduced royalty rate in inducing franchisee effort thus we expect royalty rates to increase with asset specificity also unlike other approaches we do not necessarily expect an inverse relationship between the royalty rate and the franchise fee for example the greater the importance of franchisor effort the higher the royalty rate but the franchise fee may also increase if franchise revenue rises by enough our hypotheses are tested using two different data sets an original firm level data set is taken from federal trade commission ftc required uniform franchise offering circulars ufoc 1 in addition data are obtained from bond s 1989 the source book of franchise opportunities the data are discussed and the results presented in section iii we find substantial support for our approach for example factors that increase the importance of the franchisee s effort such as the number of employees supervised lower the royalty rate and increase the franchise fee also a reduction in the specificity of the franchisee s investment due to leasing lowers the royalty rate and raises the franchise fee 2 section iv summarizes our findings and concludes the paper ii the approach and the hypotheses the typical franchising contract consists of a two part payment by the franchisee to the franchisor the franchisee pays an up front nonrefundable franchisee fee and a continuing royalty payment usually a percentage of sales in return the franchisee receives the right to use the franchisor s brand name capital and a method of operation in addition the franchisor provides on going support to the franchisee however the franchisor maintains the right to unilaterally terminate the contract if the franchisor determines that the franchisee is not delivering a product consistent with the quality guaranteed by the brand name

organic farmers or conventional farmers where s the money abstract there is growing evidence that organic farming is a rapidly expanding economic sector in the u s however an unanswered question is whether organic farmers are better off than conventional farmers when it comes to farm household income using large farm level data and a matching estimator this study explores the relationship between organic certification and farm household income with its various components contrary to expectations certified organic farmers do not earn significantly higher household income than conventional farmers though certified organic crop producers earn higher revenue they incur higher production expenses as well in particular certified organic producers spend significantly more on labor insurance and marketing charges than conventional farmers the results suggest that the lack of economic incentives can be an important barrier to conversion to organic farming

timing of effort and reward three sided moral hazard in a continuous time model this paper studies a three sided moral hazard problem with one agent exerting up front effort and two agents exerting ongoing effort in a continuous time model the agents efforts jointly affect the probability of survival and thus the expected cash flow of the project in the optimal contract the timing of payments reflects the timing of effort payments for up front effort precede payments for ongoing effort several patterns are possible for the cash allocation between the two agents with ongoing effort in one case where the two agents face equally severe moral hazard they share the cash flow equally at each point of time in another case where the two agents have different severities of moral hazard their payments are sequential in a more general case the two agents with ongoing effort first receive the cash flow alternately with an increasing frequency of switches and then divide the cash flow at each point of time this study provides a framework for understanding a broad set of business contracting issues the characteristics suggested in the optimal contract help us analyze the causes of business failure such as the recent debacle of mortgage backed securities

the theory of warranty contracts abstract this paper surveys theories of the existence and design of warranty contracts insurance signalling and incentive motives are used to explain the existence of warranties the incorporation of imperfections that prevent warranties from serving their basic purposes in a first best way describes actual warranty practices

forward induction in coordination games abstract this paper provides experimental evidence on the power of forward induction arguments in a 2 2 coordination game allowing one player the option of obtaining a certain payoff instead of playing the game coordinates play in the direction predicted by the forward induction argument however two way pre play communication is a more effective coordination device

presidential politics budget deficits and monetary policy in the united states 1960 1976 this paper has focused on the extent to which the traditional tools of macroeconomic management in the united states monetary and fiscal policy have contributed to a political business cycle regardless of whether politicians can successfully influence real economic variables to their own ends the evidence presented here suggests that they tried and that they enjoyed some at least indirect aid from their independent monetary authorities in doing so several major conclusions emerge

contractual structure in agriculture abstract this paper develops a generalized double sided moral hazard model of contract choice in agricultural production with mutual monitoring of each other by the landlord and the tiller who generally have different levels of farming efficiency and are risk averse using this model we formally prove that the optimal contract maximizes the output net of the risk bearing and agency costs of both the parties and carry out a simulation exercise which helps explain many of the tenancy related issues the difference in the farming efficiency of the two sides often ignored in previous analysis turns out to be the principal determinant of the contract offered to a tiller

product warranty management iii a review of mathematical models a variety of mathematical models have been developed to study different aspects of warranty in this paper we carry out a comprehensive review of these models by classifying them into three categories based on consumer manufacturer and public policy decision maker perspectives

a dynamic model of the choice of mode for exploiting complementary capabilities this paper examines the choice of mode for a multinational enterprise and a local firm to exploit their complementary capabilities we develop a combined real options and game theoretic model of modal choice by incorporating a range of factors drawn from the dynamic capabilities theory and transaction cost or organizational economics the factors scrutinized in the model include the parties absorptive capacities frictions in knowledge and asset markets and associated incentive problems cost of switching from one mode to another and cost associated with power jockeying the model uses simulation to examine how these factors interact to influence the choice of mode the results identify a number of conditions for one factor to dominate another and help to reconcile different theories that have made contradicting predictions with regard to the effects of such factors as uncertainty and capability divergence on the optimal choice of mode

incentive contracts in two sided moral hazards with multiple agents abstract the paper studies a contracting problem in which a principal enters in two sided moral hazards withnindependent agents there are no technological or informational linkages among thenagency problems despite this independence optimal incentive schemes essentially eliminate the principal s incentive problem when team size is large enough reputation like effects appear in a static setting through an improved aggregation of information about the actions of the principal one implication of this result is that it is generally suboptimal to require an agent s compensation to depend only on his own outcome another implication is the existence of purely informational economies of scale to increasing team size thus the concentration of otherwise unrelated transactions in a single firm creates wealth through a more efficient use of information about the principal s actions the paper also shows that extremely simple statistical contracts are approximately optimal in large teams the outcome of such contracts is observationally indistinguishable from standard principal agent contracts this provides a theoretical justification for using standard principal agent contracts in environments that involve two sided hazard in a fundamental way journal of economic literatureclassification numbers d21 d23

advertising and quality in the u s market for automobiles using data consisting of domestic and foreign automobiles over the period 1985 1990 the hypothesis that advertising serves as a signal of higher quality is empirically tested this is accomplished by examining how advertising levels vary with a quality measure that is not observable at the time of purchase but becomes available subsequent to a model s release above average quality results in expenditures that are 15 higher than average quality outlays lending further support to the signalling hypothesis the positive advertising quality relationship holds strongest when a model significantly improves in quality relative to the previous year s model

unanticipated money and the political business cycle six different series of one period forecasts for money growth are generated for each year 1960 through 1984 the prediction errors are analyzed to see whet herthe authorities attempted to expand the economy in election years by unexpectedly raising money growth while there is no evidence of attempts to fool the public throughout the entire 1960 84 period such fooling may have been tried through 1974 it is speculated that the public discussion of expectations formation and of politicians motivations since then may have signaled officials that further attempts to mislead the public would be prohibitively costly copyright 1986 by ohio state university press

impact of contracts in high yielding varieties seed production on profits and yield the case of nepal abstract nepal s population continues to grow but the agricultural sector s performance remains almost stagnant this has led to a decline in the per capita availability of food increasing agricultural productivity is the key to agricultural growth and one strategy for increasing agricultural productivity is to use improved seeds this study investigates the impact of contract farming cf in high yielding varieties hyv of paddy seed production on costs yield and profits of smallholder farms in nepal using farm level data and a non parametric propensity score matching estimator the study finds a significant positive impact of contract hyv seed farming on revenues profits and yield and a significant negative impact on total costs of production additionally very small farms 0 43 ha with cf in hyv paddy seeds tend to gain the most when it comes to yield per hectare our estimates reveal that the average smallholder household in nepal engaged in cf with input conditions receives higher profits however farmers engaged in cf with output conditions tend to have higher yields but smaller profits finally farmers engaged in cf in hyv paddy seeds with both input and output conditions have the highest yield gains and significantly higher profits

performance verifiability and output sharing in collaborative ventures this paper studies the problem of contracting between two firms when they try to exploit their complementary resources in a collaborative venture cv but their performance in the cv cannot be precisely verified by the other party or by a third party arbiter using a mathematical model that treats performance verifiability as a continuous variable the paper first establishes that a party whose performance cannot be perfectly verified has an incentive to shirk if it is paid only a flat fee and that this shirking problem is more severe as its performance is less verifiable then the paper shows in a general setting that a contract under which each party shares a fraction of the output is superior to a contract under which one of them is paid only a flat fee when performance verifiability is sufficiently low in addition with some specific assumptions about the forms of the revenue and cost functions the paper also shows that a party s share of the venture s residual output in the equilibrium is an increasing function of its productivity and a decreasing function of its opportunity cost finally the numerical examples constructed in the paper suggest that a contract which combines the self enforcing mechanism of output sharing with the third party enforcement mechanism of arbitration generally performs better than a contract that utilizes only one of these mechanisms

promotions and product pricing parsimony versus veblenesque demand the veracity of the parsimonious law of demand has long been challenged by analyses of the veblen effect and prestige pricing backward bending demand curves often attend discussions of conspicuous consumption probing the sociological and psychological intricacies of potential consumer interdependencies scholars in economics and marketing have overlooked mundane product promotions for a monopolistic firm we formalize the relationship between the optimal price quantity combination and the thoroughness of product promotions iterating toward the profit maximizing thoroughness of product promotion gives rise to a backward bending price quantity locus challenges to the law of demand that ignore product promotions are thereby undercut

contract choice in modern agriculture cash rent versus cropshare e conomists have expended enormous effort examining the rationale for various contractual arrangements in agriculture particularly sharecropping while economists have made considerable theoretical efforts to understand agricultural contracts few empirical studies have been undertaken the dearth of empirical analyses of agricultural contracts is particularly striking for modern western agriculture this is an important omission not only because the existing empirical work tends to focus on the question of efficiency but also because the theoretical models tend to examine contracts that bear little resemblance to those found in the united states today

double moral hazard and resale price maintenance incentives for resale price maintenance rpm are studied in a wholesaler retailer relationship in which both firms make a nonprice choice subject to moral hazard the best attainable contract has vertical externalities in both nonprice choices and the choice of consumers price if delegated to the retailer rpm controls the latter externality but interacts with the other externalities as well as a consequence either minimum or maximum vertical price fixing can be optimal in spite of a successive monopoly specification similar incentives exist for writing other variables into contract such as the capital input of the retailer

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

do tournaments solve the two sided moral hazard problem abstract the paper analyzes the optimality of relative performance evaluation via two part piece rate tournaments in incentive contracting with multiple agents and two sided moral hazard if the agents are risk averse it is shown that a tournament is optimal only when the following conditions hold i there is common uncertainty inflicted on the activities of the agents that is not contingent on their actions but can be contingent on the principal s action ii the principal sufficiently saves in transaction costs by employing a tournament iii the number of agents is sufficiently large then the feedback effect of using a tournament to monitor the agents is that the principal s moral hazard problem is relaxed when the principal takes a single action it can also be relaxed when the principal can vary her actions with the agents but there are economies of scale in her activity absent common uncertainty the optimum scheme is shown to be a fixed performance standard rather than a tournament but if the agents are risk neutral a tournament can still be optimal provided that ii and iii hold

product risk sharing by warranties in a monopoly market with risk averse consumers abstract this paper analyzes the implications of three different warranty rules in a monopoly setting with risk averse consumers the necessary condition for the existence of the market is independent of the risk sharing arrangement although the quantity consumed is the highest if the consumer receives no warranty even if the monopolist is constrained to marginal cost pricing the replacement warranty is most efficient from a risk allocation point of view however the situation with no warranty is pareto superior to a money back warranty additionally the producer and the consumers agree on the ranking of the warranty rules

on the limitation of warranty duration this paper analyzes the frequently observed phenomenon that firms offer product warranties that are of much shorter duration than the life expectancy of these products it is shown that competitive equilibria may entail limitation of warranty duration if firms face adverse selection problems with respect to different consumers copyright 1989 by blackwell publishing ltd

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

conversion subsidies for organic production results from sweden and lessons for the united states organic conversion subsidies used in europe are less likely to be politically acceptable in the united states where organic agriculture development is market driven persistent barriers to conversion in the united states include limited availability of and access to production and market information training in management systems and cost of conversion related investments by determining whether these factors affect the requirement of a subsidy to convert we can suggest whether u s policy makers need to provide subsidies to encourage conversion and identify policy variables consistent with market based approaches that could stimulate conversion a utility difference model is used with swedish data to analyze factors that determine whether a subsidy is required to motivate organic conversion the results show that farmers requiring subsidies manage larger less diversified farms and are more concerned with organic inspection quality and adequacy of technical advice access to more market outlets and information sources substitutes for payment level in the farmer s utility function indicating that services rather than subsidies may be used to encourage organic agriculture to the extent that conditions are similar in the u s organic sector market based programs such as cost sharing for conversion and market access improvement should stimulate growth of this industry 2000 elsevier science b v all rights reserved

a multinominal logit analysis of the influence of policy variables and board experience on fomc voting behavior previous studies have used probit or logit models to analyze two states of monetary policy tighter or looser in this paper we employ multinominal logit to permit federal reserve monetary policy to assume one of three alternative states tighter looser or no change as a function of three independent economic variables unemployment real growth and inflation and the amount of experience of the board of governors the results indicate that the federal reserve reacted differently under burns miller and volcker and between volcker s two operating procedures in the formulation of monetary policy

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

signaling new product reliability with after sales service contracts prior studies on performance based contracting pbc for after sales services have highlighted its advantages over traditional resource based contracting rbc when products are established and their reliability is known to all parties we develop a game theoretic model to investigate how these insights are affected when the vendor is privately informed about the reliability of a newly developed product a novel feature of our model is the interaction between reliability signaling private information and the vendor s discretionary investment in spares inventory private action which arises naturally in the setting we consider we find that this interaction leads to contrasting equilibrium outcomes under the two contracts rbc induces the vendor to focus on inventory savings leading to underinvestment in spares whereas pbc induces the vendor to focus on reliability signaling achieved through overinvestment in inventory as a result neither contract is efficient we investigate two means to mitigate this inefficiency but either approach has caveats a making inventory verifiable removes the trade off between reliability signaling and inventory investment but results in diverging contract preferences between the vendor and the buyer b pooling inventories across multiple buyers saves inventory costs but it also hinders reliability signaling potentially exacerbating inefficiency this paper was accepted by yossi aviv operations management

warranties durability and maintenance two sided moral hazard in a continuous time model double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time the more complete the warranty the better the producer s durability incentives and the worse the consumer s maintenance incentives using continuous time highlights the need for some warranty bound to avoid reaching the first best as an unreasonable limit early in the paper an exogenous bound is used while later the bound arises endogenously from the possibility of abuse and repair a quadratic example shows that the warranty s duration depends on the relative severity of the two moral hazard problems

refusals to deal and orders to supply in competitive markets abstract a number of recent antitrust cases in north america and europe have involved allegations that manufacturers of durable products have refused to supply parts to independent service organizations apparently to monopolize the market for repairs of their products this paper analyzes such refusals in a competitive market and connected aftermarket in this model the refusals help to support higher prices for high intensity high value users however these higher charges permit the recovery of higher costs incurred during an initial warranty period since full prices equal full marginal costs in equilibrium the refusals permit the attainment of a first best outcome and an attempt by antitrust authorities to force supply will be welfare reducing

ex ante investment ex post remedy and product liability low quality products may cause consumer harm a firm can reduce the probability of low quality through ex ante investment before sales and can take remedy actions such as product recalls if it learns after sales that product quality is low an increase in the firm s product liability increases its incentive for ex post remedy more ex post remedy however may reduce the firm s ex ante quality investment on the other hand higher product liability increases consumer demand for the product resulting in high output and hence greater return to ex ante investment the trade off between these two effects the substitution effect and the output effect can lead to an inverted u shaped relationship between ex ante investment and product liability we find that the firm always prefers full liability whereas consumers might be better off with less than full liability full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high otherwise partial liability can be socially optimal

warranty quality and price in the us automobile market the observed negative relationship between quality and warranty in the us auto market is analysed using a cost based approach developed by cooper and ross the theory of warranty and quality choice by producers and consumers is extended by endogenizing the joint price quality and warranty decision differences in producer costs and consumer preferences are found to explain the inverse relationship which suggests that american manufacturers should adjust their pricing warranty and quality strategy when entering foreign markets

brand extension as informational leverage the marketing literature refers to the concept of brand capital and provides empirical evidence that firms with a large stock of well established brands have an advantage in introducing new products this paper develops a theory of brand extension as a mechanism for informational leverage in which a firm leverages off a good s reputation in one market to alleviate the problem of informational asymmetry encountered in other markets it is shown that brand extension helps a multi product monopolist introduce a new experience good with less price distortion thus the paper provides a theoretical foundation for the concept of brand capital

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

adverse selection and convertible bonds informational asymmetries between a firm and investors may lead to adverse selection in capital markets this paper demonstrates that when the market obtains noisy information about a firm over time this adverse selection problem can be costlessly solved by issuing callable convertible bonds with restrictive call provisions such securities can be designed to make the payoff to new claimholders independent of the private information of the manager this eliminates the possibility of any dilution of equity or underinvestment and implements the symmetric information outcome in either a pooling or a separating equilibrium the same first best efficient outcome can also be implemented by issuing floating price and mandatory convertibles

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

an analysis of sample attrition in panel data the michigan panel study of income dynamics by 1989 the michigan panel study on income dynamics psid had experienced approximately 50 percent sample loss from cumulative attrition from its initial 1968 membership we study the effect of this attrition on the unconditional distributions of several socioeconomic variables and on the estimates of several sets of regression coefficients we provide a statistical framework for conducting tests for attrition bias that draws a sharp distinction between selection on unobservables and on observables and that shows that weighted least squares can generate consistent parameter estimates when selection is based on observables even when they are endogenous our empirical analysis shows that attrition is highly selective and is concentrated among lower socioeconomic status individuals we also show that attrition is concentrated among those with more unstable earnings marriage and migration histories nevertheless we find that these variables explain very little of the attrition in the sample and that the selection that occurs is moderated by regression to the mean effects from selection on transitory components that fade over time consequently despite the large amount of attrition we find no strong evidence that attrition has seriously distorted the representativeness of the psid through 1989 and considerable evidence that its cross sectional representativeness has remained roughly intact

competition and confidentiality signaling quality in a duopoly when there is universal private information abstract we model non cooperative signaling by two firms that compete over a continuum of consumers assuming each consumer has private information about the intensity of her preferences for the firms respective products and each firm has private information about its own product s quality we characterize a symmetric separating equilibrium in which each firm s price reveals its respective product quality we show that the equilibrium prices the difference between those prices the associated outputs and profits are all increasing functions of the ex ante probability of high safety if horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known thus while signaling imposes a distortionary loss on a monopolist using price to signal quality duopolists may benefit from the distortion as it can reduce competition finally average quality is lower since signaling quality redistributes demand towards low quality firms

all units discounts and double moral hazard abstract an all units discount is a price reduction applied to all units purchased if the customer s total purchases equal or exceed a given quantity threshold since the discount is paid on all units rather than marginal units the tariff is discontinuous and exhibits a negative marginal price cliff at the threshold that triggers the discount this paper shows that all units discounts arise in optimal agency contracts between upstream and downstream firms that face double moral hazard i present conditions under which all units discounts dominate two part tariffs and other continuous tariffs i also examine these tariffs when the upstream market faces a threat of entry in the case considered all units discounts deter entry by less efficient rivals without distorting price and investment whereas continuous tariffs either accommodate such entry or deter it by distorting price and investment

calculating the reserve for a time and usage indexed warranty many products carry a warranty that offers protection for the consumer against low quality these warranties are often two dimensional such as an automobile warranty that guarantees repair up to a certain time and mileage after sale this paper considers the problem of assessing the size of a reserve needed by the manufacturer to meet future claims for such a two dimensional warranty to do this a class of failure models that describe failure by two scales time and mileage for example must be developed the first half of the paper is devoted to this development then the warranty reserve problem is considered in more detail the problem is described and a decision theoretic solution making use of the newly developed reliability model is proposed

monetary policy and presidential elections a nonpartisan political cycle this paper develops a federal reserve reaction function which relates policy intentions to forecasts of policy objectives pre and postpresidential election estimates of this reaction function for the post accord period of 1953 1984 suggest two conclusions

voluntary product safety certification this paper describes the incentives for firms to seek voluntary product safety certifications we consider a firm that makes the decision of whether or not to seek certification prior to selling the product we show that even when the firm and the consumers have the same beliefs about the product s safety there are incentives for the firm to seek safety certification the main analysis investigates the role of consumer moral hazard and shows that it can lead to greater incentives for voluntary certification when inherent product safety and effort are substitutes but smaller incentives when they are complements the analysis of consumer moral hazard provides a nuanced perspective on the so called risk compensation or the peltzman effect phenomenon which postulates higher levels of accidents for safer products in our paper products that are successfully certified can end up with a higher incidence of accidents we also uncover an interesting nonmonotonic relationship between effectiveness of consumer

farmers adoption of integrated crop protection and organic farming do moral and social concerns matter we investigate empirically the role of moral and social concerns in farmers decision to adopt integrated crop protection ip and organic farming of a survey questionnaire has been sent to 1286 fruit growers and vegetable producers located in the french areas of alpes de haute provence hautes alpes and vaucluse analysis of individual responses n 243 shows that although economic concerns play a strong role a significant number of respondents give high importance to moral and social ones we also examine how these considerations matter according to different crop protection strategies that is conventional farming ip and of using a multinomial logistic regression we find that 1 social concerns e g showing to others one s environmental commitment drive both ip and of adoption 2 moral concerns e g do not feel guilty about one s choices increase the probability of organic farming adoption only and 3 farmers who give high importance to economic concerns e g cutting production costs are less likely to adopt of

a simple model of buybacks abstract buybacks are a type of contractual joint venture used in countertrade where the good produced is allocated in fixed proportions to the parties involved we show that buybacks can act as commitment devices when the quality of inputs cannot be contracted over

optimal second stage outsourcing manufacturers have recently begun outsourcing product assembly and completion tasks to their suppliers such outsourcing solves several contracting problems but generates new incentive frictions between manufacturers and their suppliers in this paper we analyze a manufacturer s decision to outsource an assembly second stage task to a preestablished supplier we find that outsourcing second stage tasks becomes more attractive as the cost of either the first or second stage activity rises outsourcing becomes less attractive when the supplier is unable to accept large levels of liability the manufacturer is shown to prefer more testing when she outsources assembly to her supplier as opposed to when she assembles products in house last we find that the contracting frictions identified persist when the supplier s work can be tested individually albeit imperfectly

aid conditionality and military expenditure reduction in developing countries models of asymmetric information this paper analyzes problems of implementing noneconomic conditionality such as military expenditure reduction in the granting of foreign aid given the presence of asymmetric information the authors present two conceptually separate principal agent models to capture the stylized facts of multilateral and bilateral aid negotiations respectively the first model is an application of the problem of adverse selection when there is more than one type of principal donor with varying objectives the second model extends moral hazard to double moral hazard where neither principal nor agent recipient can fully observe or verify each other s strategies copyright 1995 by royal economic society

monotone equilibria in signaling games abstract we examine the monotonicity of the sender s equilibrium strategy with respect to her type in signaling games we show that when the sender s return from the receiver s action depends on her type the spence mirrlees condition cannot rule out equilibria in which a higher type sender chooses a strictly lower action than a lower type we provide sufficient conditions under which all equilibria are monotone which require that the sender s payoff is decreasing in her action is increasing in the receiver s action and has strictly increasing differences between her type and the action profile we apply our sufficient conditions to education signaling advertising and warranty provision

the federal reserve s response to aggregate demand and aggregate supply shocks evidence of a partisan political cycle the orthodox approach to modeling the fed s response to economic conditions is to employ a monetary policy reaction function most reaction functions are estimated by regressing a policy indicator possibly the federal funds rate or a monetary aggregate on variables that describe the state of the economy such as unemployment inflation and growth in output under certain conditions which we discuss below estimated coefficients from a reaction function provide information about the fed s monetary policy priorities moreover extending the model to include election and partisan dummy variables may provide information about the fed s response to political pressures there are two problems with interpreting the coefficients in a standard reaction function as the weights that the fed attaches to its policy objectives first the monetary policy decision may not be represented accurately by an aggregate reaction function one that models the fed as a whole because there are twelve voting members on the fomc chappell havrilesky and mcgregor 10 have recently addressed this issue by employing a disaggregated set of reaction functions the second problem with interpreting reaction function coefficients as the weights the fed places on its policy objectives is that this interpretation implicitly assumes structural stability of the underlying macroeconomy abrams froyen and waud 1 31 acknowledge this shortcoming when they state coefficients from estimated reaction functions do not provide direct information on policymaker utility functions rather than being the solution to an unconstrained optimization dependent only on policymaker preferences reaction functions are the output of a constrained maximization where the constraints are the reduced form equations that characterize

a theory of credit bureaus when both the buyer and seller have the potential to exercise opportunistic behavior some balancing of these mal incentives must be found seller financing has the potential to work as a quality assurance device because the lien holder is clearly at risk when mortgaged property fails the buyer is at risk in the amount of the down payment and installments if the property is abused credit bureaus act as arbitrators our model accurately predicts the shifting in contract terms to account for relative opportunism and the incidence of this contract based on changes in the relative costs and benefits