analysis of new product diffusion using a four segment trial repeat model a four segment trial repeat model is developed to model sales of a frequently purchased product in the early stage of the product s life cycle the model can be calibrated using aggregate data alone two versions of the model one emphasizing the competitive aspect of marketing communications and another emphasizing the informative aspect are estimated from data on 21 newly launched pharmaceutical products the model provides valuable diagnostics such as an early estimate of the long run market share of the new product a decomposition of total sales into trial sales due to marketing activities trial sales due to word of mouth and repeat sales the changing composition of the trial market and repeat market over time and the time when the trial market is expected to be saturated in addition the effectiveness of the entrant s marketing efforts word of mouth communication and buyers trial experience are analyzed with the model a cross sectional analysis based on the empirical estimation results of our model reveals interesting insights into product introduction strategies we find that 1 the effectiveness of the firms communication activities on trial is related mainly to product quality attributes and market growth whereas that of word of mouth is associated with product class characteristics and market competitiveness and 2 the effect of product trial on repeat purchases is related mainly to product quality attributes and various market characteristics such as size growth competitiveness and familiarity

on the use of econometric models for policy simulation in marketing abstract in this article the author discusses the properties of useful econometric models for marketing phenomena with particular attention on models for policy simulations the author addresses model diagnostics parameter stability exogeneity and the lucas critique he also presents the results of a search through the 1998 2003 issues of the journal of marketing research finally the author offers practical guidelines

optimal labour contracts when workers have a variety of privately observed reservation wages if a firm does not know the individual ex post outside opportunities of its contracted workforce then it can use hours wages and redundancy payments to screen them will a second best contract have underemployment inefficiency or overemployment and with a stochastic contract are those workers randomly selected for layoff worse off than their retained colleagues involuntary layoff or vice versa involuntary retention the answers depend on the nature of the workers preferences two polar cases are looked at corresponding to permanent and temporary layoff the former is characterized by overemployment and involuntary retention the latter by underemployment and involuntary layoff also examined are simple contracts where all retained workers are paid a common wage and all laid off workers receive a common redundancy payment handling asymmetric information in stochastic contracts has led to two technical innovations first a number of results are proved even though all the truth telling constraints are explicitly included second a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

environmental federalism and environmental liability abstract environmental federalism considers what level of government should optimally regulate pollution this paper addresses this question for accidental pollution which government regulates through the ex post liability regimes of either negligence or strict liability we find that decentralizing the choice between these regimes does not in general induce the socially optimal outcome when firms can pay all damages all regions may choose negligence and impose an overly strict standard of due care when firms may be bankrupted by damages all regions may choose strict liability which induces too little care in addition asymmetric equilibria are possible in which some regions choose negligence others strict liability combining negligence with a pigovian tax or strict liability with a bonding requirement can align regional authorities incentives with those of a central government

nash equilibria in models of fiscal competition abstract this paper analyzes nash equilibria in a simple model of an economy with jurisdictions engaging in fiscal competition small number nash equilibria in which tax rates are the strategic variables are shown not to coincide with nash equilibria in which public expenditure levels are the strategic variables

real investment decisions under adjustment costs and asymmetric information abstract we study the cost of adjustment model of investment when there is asymmetry of information between owners the principal and managers the agent information asymmetry distorts the relationship between investment and the cost of capital for all agent types and a regime of inaction appears over a certain cost range in an observationally different way than when fixed adjustment costs or irreversibilities cause a similar phenomenon uncertainty in the form of an increase in the spread of agents types tends to reduce investment despite symmetric adjustment cost and perfect competition the model gives a new interpretation of tobin s q under asymmetric information explaining some results of the mergers and acquisition literature

the price elasticity of demand for pharmaceuticals amongst high income older australians a natural experiment most high income older australians became eligible for a pharmaceutical concession through a 1999 policy change i exploit this natural experiment to estimate their price elasticity of demand for pharmaceuticals the preferred model is a nonlinear instrumental variable iv regression estimated on nationally representative repeated cross sectional survey data using the generalized method of moments gmm no significant evidence is found for endogenous take up and so cross sectional estimates are also considered taking all of the results into account the headline estimate is 0 1 implying that quantity demanded is not highly responsive to price

inflexible rules in incentive problems in practice contracts involve standard terms or rules allowing for variations only under exceptional circumstances we develop a simple model in which optimal contracts display this feature even in the absence of transactions costs rules arise when an agent has countervailing incentives to misrepresent private information these incentives are created by endowing the agent with a critical factor of production ex ante applications in regulatory labor and legal settings

agent discretion and the choice of insurance marketing system this article argues that different insurance marketing organizations arise as a means to minimize the costs of correctly matching policyholder risks with insurance coverage when policyholders are easily sorted without sales agent participation in screening exclusive dealing will be the preferred marketing organization when agent information is important for risk placement independent agency may be preferred empirical support for our theory is obtained from analysis of compensation contracts and market shares of the different marketing forms exclusive dealers are found to be prevalent in relatively standardized homogeneous product lines and markets and their agents receive less profit based compensation than those of independent agency insurers these findings are consistent with our theory

early marketing matters a time varying parameter approach to persistence modeling are persistent marketing effects most likely to appear right after the introduction of a product the authors give an affirmative answer to this question by developing a model that explicitly reports how persistent and transient marketing effects evolve over time the proposed model provides managers with a valuable tool to evaluate their allocation of marketing expenditures over time an application of the model to many pharmaceutical products estimated through exact initial kalman filtering indicates that both persistent and transient effects occur predominantly immediately after a brand s introduction subsequently the size of the effects declines the authors theoretically and empirically compare their methodology with methodology based on unit root testing and demonstrate that the need for unit root tests creates difficulties in applying conventional persistence modeling the authors recommend that marketing models should either accommodate persistent effects that change over time or be applied to mature brands or limited time windows only

identification and estimation of complex multivariate lag structures a nesting approach a process for investigating complex and multivariate lag structures is proposed the sources of the dynamic promotional effects on sales are explained and related to conventional means of mathematical expression multivariate and hybrid versions of the expressions are proposed and nests of equations are derived the nests are not universal so depend upon the subject selection of final models the process is finally followed using an example from the pharmaceutical industry where both promotions and detailing are in use

a simple model of pharmaceutical price dynamics abstract branded pharmaceutical firms use price and promotional strategy to manage public knowledge about their drugs we propose a dynamic theory of pharmaceutical pricing and conduct an exploratory empirical analysis inspired by the theory our theory predicts a pattern of increasing prices and decreasing promotional activities over a drug s life cycle prices are kept low and advertising levels high early in the life cycle in order to build public knowledge about the drug as knowledge grows prices rise and advertising falls if the management of this stock is important enough this tendency of prices to rise can overwhelm the price decreasing effect of entry by generic competitors late in the drug life cycle we argue that our theory of price dynamics explains empirical regularities in this industry

patient or physician oriented marketing what drives primary demand for prescription drugs abstract the authors analyze primary demand effects of marketing efforts directed at the physician detailing and professional journal advertising versus marketing efforts directed at the patient direct to consumer advertising the analysis covers 86 categories or approximately 85 of the u s pharmaceutical market during the 2001 2005 period primary demand effects are rather small in contrast with the estimated sales effects for individual brands by using a new brand level method to estimate primary demand effects with aggregate data the authors show that the small effects are due to intense competitive interactions during the observation period but not necessarily to low primary demand responsiveness in contrast with previous studies the authors also find that detailing is more effective in driving primary demand than direct to consumer advertising a category sales model cannot provide such insights in addition a category sales model likely produces biased predictions about period by perio

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

screening in a matching market contract design under incomplete information is often analysed in a bilaterally monopolistic setting if the informed party s reservation value does not depend on its private information its type it is a standard result that the uninformed side offers low types distorted contracts to reduce the information rent left to high types we challenge this result by embedding contract design in a matching market environment we consider a market where players meet pairwise and where in each match either side may be chosen to make a take it or leave it offer as frictions become sufficiently low we find that the set of equilibria is independent of whether there is complete or incomplete information in particular all contracts are free of distortions

implications of power when the ceo can pressure the cfo to bias reports abstract building on archival anecdotal and survey evidence on managers roles in accounting manipulations i develop an agency model to examine the effects of a ceo s power to pressure a cfo to bias a performance measure like earnings this power has implications for incentive compensation reporting quality firm value and information rents predictions from the model provide potential explanations for the differing results from recent empirical studies on the impact of regulatory interventions like sox and the extent to which the ceo s or cfo s incentives significantly impact on earnings management the model also identifies conditions under which either a powerful or a non powerful ceo can extract rents which can help explain mixed empirical results on the association between ceo power and excessive compensation

optimality free mobility and the regional authority in a federation abstract this paper examines the efficiency properties of a federation characterized by strategically competing regions and freely mobile homogeneous individuals analyses of this economy have concluded that achieving a pareto optimal will require intervention by a national authority this paper makes one basic point the nash equilibrium of regional authority behavior is pareto optimal the implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods the nash equilibrium involves samuelson public goods provision and regions purchasing preferred population distributions with optimal interregional transfers

motivating with simple contracts abstract in practice incentive schemes are rarely tailored to the specific characteristics of contracting parties however according to economic theory optimal contracts should be highly dependent on individual conditions we reconcile these observations in the context of a principal agent model with both moral hazard and adverse selection motivating an agent could be increasingly costly to the principal because a more productive agent could also be more able to manipulate the terms of the contract as a result the principal may optimally pool some types by offering a contract with constant transfer and bonus we also explore parameterizations where the optimal contract is fully separating but simple contracts attain a significant portion of the optimal welfare

market participation in delegated and intrinsic common agency games we study how competition in nonlinear pricing between two principals sellers affects market participation by a privately informed agent consumer when participation is restricted to all or nothing intrinsic agency the agent must choose between both principals contracts and selecting her outside option when the agent is afforded the additional possibilities of choosing only one contract delegated agency competition is more intense the two games have distinct predictions for participation intrinsic agency always induces more distortion in participation relative to the monopoly outcome and equilibrium allocations are discontinuous for the marginal consumer under delegated agency relative to monopoly market participation increases respectively decreases when contracting variables are substitutes respectively complements on the intensive margin equilibrium allocations are continuous for the marginal consumer and the range of product offerings is identical to both the first best and the monopoly outcome

noisy observation in adverse selection models we consider a principal agent contracting problem under incomplete information where some of the agent s actions are imperfectly observable contracts take the form of reward schedules based on the noisy observation of the agent s action we first review situations where the principal can reach the same utility as in the absence of noise then we focus on the use of linear reward schedules which allow universal implementation i e implementation of a given mechanism for any unbiased noise of observation and on quadratic reward schedules which only require the knowledge of the variance of the noise we exhibit sufficient conditions under which linear reward schedules implement a given mechanism finally we characterize necessary conditions for a mechanism to be implementable under noisy observation by a linear schedule and by quadratic schedules we give the geometric intuition behind all results

advertising and competition in the ethical pharmaceutical industry the case of antihypertensive drugs abstract this paper uses data on the majority of name brand antihypertensive drugs marketed in the united states during 1988 93 to test the hypothesis that advertising decreases the price elasticity of demand in the pharmaceutical industry this is the first study to directly estimate the effects of drug product promotion on the price elasticity of demand in this industry we find strong evidence of an advertising effect in particular detailing efforts the salient means for product promotion in this industry systematically lower price sensitivity given the inverse relationship between elasticity of demand and price it is likely that consumers pay higher prices as a result of the advertising that occurs in this industry our findings are thus consistent with hurwitz and caves who find evidence that advertising inhibits entry into this market but in contrast to earlier research that found no anticompetitive effect

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

designing a private industry government auctions with endogenous market structure abstract this paper considers government mechanisms for auctioning production rights in which both the winners and the market structure doupoly dual sourcing monopoly sole sourcing or government owned production are a function of the bids in designing the optimal mechanism the government considers the tradeoffs among consumer surplus producer surplus and revenue under incomplete information doupoly is implemented less frequently and government production more frequently than under complete information when bidders are symmetric the optimal mechanism can be implemented as a modified second price auction applications to privatization deregulation and defense procurement are discussed

optimal delegation with multi dimensional decisions this paper investigates optimal communication mechanisms in a framework with a twodimensional policy space and no monetary transfers contrary to the one dimensional setting if the conflicts of interests between the principal and the agent are different on each dimension the optimal mechanism never exhibits any pooling and the agent s ideal policies are never chosen simple delegation sets that trade off inflexible rules and full discretion are no longer optimal but take more complex shapes

nonrevelation in employment contracts the author considers an employment contracting model in which firms have private information that is directly payoff relevant to workers and workers are always free to quit in contrast to existing models firms will sometimes fail to reveal adverse information to workers in equilibrium because of the effect this will have on quits risk averse workers can prefer such pooling contracts to separating ones because inducing truth telling requires firms to cut wages in states that are already bad for the worker applications to firms incentives to reveal unsafe working conditions and impending layoffs or plant closures are discussed copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

cheap talk with two audiences these problems have in common a simple structure an informed sender says something to two interested but uninformed receivers who then take actions based on their beliefs these actions affect the sender as well as the receivers in this paper we study how costless nonverifiable claims cheap talk can affect these beliefs and hence the actions and how the incentives for truthful revelation to one receiver are affected by the presence of the other we then ask how welfare is affected by whether claims are made in public or in private as some of the above examples suggest public messages may be more credible than private messages addressed to either audience one possibility is that the presence of one audience can discipline the sender s relationship with the other we call this one sided

vertical restraints under asymmetric information on the role of participation constraints the impact on vertical contracting of a type dependent reservation utility is investigated within a sequential monopolies environment with asymmetric information the welfare and private properties of contracts controlling both the retail price and the sales level are compared with those restricting only sales when firms choose contracts non cooperatively retail price restrictions are desirable for the upstream supplier although detrimental to consumers whenever the retailer reservation utility has a relevant impact on optimal contracts if this impact is relatively weak and contracts are chosen cooperatively vertical price control fails to maximize firms joint profit although it would be beneficial to consumers

how much discretion for risk regulators we analyze the regulation of firms that undertake socially risky activities but can reduce the probability of an accident inflicted on third parties by carrying out non verifiable effort congress delegates regulation to an agency although these two bodies may have different preferences toward the industry the optimal level of discretion left to the agency results from the following trade off the agency can tailor discretionary policies to its expert knowledge about potential harm but it implements policies that are too pro industry the agency should be given full discretion when the firm is solvent partial discretion is preferred otherwise we then investigate how this trade off changes as the political and economic landscapes are modified

costly distortion of information in agency problems anecdotal evidence suggests that agents often spend resources distorting information transmitted to principals we present a model where costly information distortion emerges as equilibrium behavior the information structure we focus on is intermediate between and encompasses the cases of private information and public information the agent can falsify the privately observed state at some cost although the principal can design contracts that induce no falsification these may involve excessive iinformation rents falsification can be beneficial in spite of the waste of resources involved because it helps reduce information rents we examine how optimal contract and equilibrium payoffs change as the information structure ranges from private to public information

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

a model of competing jurisdictions with locally polluting environments and mobile populations in this model we consider a federation consisting oftwo geographically separated regional states withlocal taxing authority the residents of thefederation are identical in preferences and haveexplicit tolerance to pollution pollution is local innature and is a by product of production implying amore highly populated region would generate morepollution local authorities in the regions can andwill in the interest of local residents engage ingame theoretical taxation strategies the model isused to illustrate that nash equilibrium can resultwherein the two regions have different levels ofenvironmental quality the resulting nash conditionsimply for instance that residents of the cleanregion will subsidize those in the other region tostay in the more polluted environment in order foreach to accomplish their preferred consumption andenvironmental quality pair

a reduced form optimal nonlinear income tax problem abstract for a finite population with quasilinear preferences it is shown how mirrlees optimal nonlinear income tax problem can be simplified to a reduced form problem involving only the allocation of the consumption good this result is a finite version of a proposition established in the continuum by s lollivier and j c rochet

optimal border policies for invasive species under asymmetric information this paper analyzes the problem faced by a border protection agency if endogenous exporter abatement activities affect invasive species risk allowing for unobservable differences in abatement cost we show how the optimal inspection penalty regime differs from the symmetric information case departing from previous literature we allow for technical assistance a policy instrument specifically permitted and commonly employed under article 9 of the world trade organization sanitary and phytosanitary agreement we find the information asymmetry can make it optimal for the importing country to provide technical assistance grants for exporter risk abatement even if it would otherwise be inefficient further we show that fungibility of technical assistance with inputs in other sectors of the exporting economy affects the qualitative nature of optimal policy if technical assistance has no outside value in the exporter s country optimal policy is characterized by a menu of contracts balancing higher tariffs with lower penalties for being caught with an invasive if technical assistance can be used in other sectors of the exporter s economy it can introduce countervailing incentives making a uniform tariff penalty combination optimal

evaluation of credit risk based on firm performance abstract this paper investigates whether productive inefficiency measured as the distance from the industry s best practice frontier is an important ex ante predictor of business failure we use samples of french textiles wood and paper products computers and r d companies to obtain efficiency estimates for individual firms in each industry these efficiency measures are derived from a directional technology distance function constructed empirically using non parametric data envelopment analysis dea methods estimating binary and ordered logit regression models we find that productive efficiency has significant explanatory power in predicting the likelihood of default over and above the effect of standard financial indicators

contractual distortions in a market with frictions abstract this paper analyses contract design in a decentralized market environment with frictions while principals e g firms have all contractual power their market power is constrained as agents e g workers can choose to wait and search for better offers we find that results depend crucially on how market frictions affect agents utilities with type independent costs of search and waiting equilibrium contracts are always first best if agents are impatient and discount future payoffs however distortions vanish only gradually in the latter case we also characterize equilibrium offers and show that the market exhibits two types of externalities both of which are absent in the case of type independent costs of search

are two a good representative for many abstract this paper studies a discrete formulation of the screening model with type dependent reservation utilities it closes the gap between various pooling results derived in continuous type models and the separating results obtained for the binary case we show that binary models do not capture the most interesting features of general models with countervailing incentives however as soon as at least three types are introduced all interesting results of the continuum case can be replicated in a discrete framework two kinds of pooling can appear in the three type model overtake pooling which can be ruled out by standard monotonicity conditions and crash pooling which is really a consequence of countervailing incentives journal of economic literature classification numbers c72 d82

interregional spillovers in the presence of perfect and imperfect household mobility abstract when households are immobile across regions the decentralized provision of public goods that generate interregional benefit spillovers is inefficiently low we analyze this problem in an environment of interregional household migration and obtain the following results if households are perfectly mobile across regions then the decentralized provision of public goods generating spillovers is socially efficient there is no need for central government intervention if households are attached to particular regions for cultural or nationalistic reasons however at least one of two regions undersupplies the public good central government intervention can enhance efficiency

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

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

partnership dissolution with interdependent values we study partnership dissolution when valuations are interdependent and only one party is informed in contrast with the case of private values cramton gibbons and klemperer 1987 in which efficient trade is feasible whenever initial shares are about equal there exists a wide class of situations in which full efficiency cannot be reached in these cases i the subsidy required to restore the first best is minimal when the entire ownership is allocated initially to one of the parties and ii ruling out external subsidies the second best welfare is maximized when one of the parties initially has full ownership

the structure of firms abstract this paper studies different organizational forms within a single framework the u form is modelled as a two round communication game between a principal and agents with unobservable efforts and adverse selection problems the m form is modelled by considering a one round communication game with pure adverse selection feasible and optimal mechanisms are characterized the profit functions are derived and an extension of hotelling s lemma proved in the absence of the control loss problems flowing form the unobservability of agent effort levels the u form will be superior to the m form both forms will be superior to the corrupted m form

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

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

international pollution problems unilateral initiatives by environmental groups in one country abstract international pollution involving two groups of countries is modelled as a two player game each country is characterized by specific preferences for consumption goods and the environment both countries produce a single consumption good with a given technology that determines pollution per unit output each country is economically isolated except for the presence of a global pollutant within a static framework m hoel j environ econom management 20 55 70 1991 shows that unilateral actions to reduce harmful emissions advocated by environmental groups in one country may result in higher total emissions i characterize cooperative and noncooperative emission strategies for the two countries using welfare functions that within a static framework yield total emissions without cooperation always higher than those with cooperation when both governments choose linear closed loop strategies and one country is not sensitive to the environmental condition the unique equilibrium exhibits less pollution than the cooperative equilibrium only if the other country cares a great deal about the well being of future generations and has relatively low bargaining power in the negotiations equilibria that result from nonlinear closed loop strategies are also characterized

countervailing incentives in agency problems abstract we analyze countervailing incentives in agency problem countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations and to overstate it for others when countervailing incentives arise pooling generally characterizes the equilibrium contract furthermore performance is distorted both above and below efficient levels in addition the agent s rents generally increase with the realization of his private information over some ranges and decrease over other ranges we demonstate that the creation of countervailing incentives can enhance aggregate welfare

the welfare effects of innovative pharmaceuticals an international perspective from the dutch experience policy discussions on new medicines are often focused on cost containment rather than on the benefits they produce such as health gains and cost savings in other sectors in this study we identify systematic differences in policies towards pharmaceuticals between countries and calculate the welfare gains of 39 innovative pharmaceuticals introduced in the dutch market after 1997 welfare gains are defined as the difference between the value of a qaly gained by innovative pharmaceuticals and their costs the review shows that there are systematic differences among pharmaceutical policies and regulations between countries it is further found that the welfare gains of pharmaceuticals are substantial and amount to 77 per capita per year in the netherlands the welfare gains could be higher if institutional barriers for an efficient utilization of innovative pharmaceuticals are removed

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

information and diffusion of new prescription drugs this article examines the role of different product information flows on the diffusion of new pharmaceuticals given the innovative nature of pharmaceutical drugs and their impact on health care expenditure there is a surprisingly small literature devoted to this topic some information flow mechanisms have been examined individually in the literature but very few have captured the simultaneous impact of these mechanisms on up take and diffusion this article uses the up take of statins as an example diffusion of this therapeutical group is expressed as a function of four specific informational channels self experience consumption externalities scientific evidence and marketing in addition to this the influence of economic factors is tested to examine whether they have any role in drug diffusion prescription data from over 130 general practitioners gp practices in the uk during 1991 2004 are used to test the econometric specification applying dynamic panel data methods results suggest individual self experience and clinical evidence are major factors promoting diffusion while there is an inverse relationship with gp practice size and diffusion having controlled for these factors financial incentives and marketing appear to play little role

budget constrained sequential auctions with incomplete information i study a budget constrained private valuation sealed bid sequential auction with two incompletely informed risk neutral bidders in which the valuations and income may be non monotonic functions of a bidder s type multiple equilibrium symmetric bidding functions may exist that differ in allocation efficiency and revenue the sequence of sale affects the competition for a good and therefore also affects revenue and the prices of each good in a systematic way that depends on the relationship among the valuations and incomes of bidders the sequence of sale may affect prices and revenue even when the number of bidders is large relative to the number of goods if a particular good say is allocated to a strong bidder independent of the sequence of sale then auction revenue and the price of good are higher when good is sold first

incomplete contracts and signaling this article presents a principal agent model in which asymmetric information leads to contractual incompleteness i show that in the presence of transactions costs incompleteness may act as a signal of the principal s type two types of transactions costs are considered those incurred ex ante drafting costs and those incurred ex post enforcement or verification costs i prove that in the presence of either of these costs asymmetric information leads to more contractual incompleteness than full information does

using markets to allocate pollution permits and other scarce resource rights under limited information abstract we consider the design of government policy to ration such scarce resources as water or pollution permits in the presence of limited information when government policy is formulated some informed agents e g established public utilities know how highly they value the resource other uninformed agents e g potential independent power producers only learn their valuations at some later date the government allows uninformed agents to trade the resource rights they receive on a competitive market informed agents may or may not have the same privilege the optimal initial distribution of resource rights differs significantly according to whether informed agents can trade the rights they receive

contract design and bargaining power abstract it is a common assumption in contract theory that the uninformed side makes a take it or leave it proposal in contrast this paper explores a model which allows a shift in bargaining power continuously between the two parties endowing the informed side with more bargaining power gradually reduces distortions

modelling the effects of promotion expenditures on sales of pharmaceuticals the successful innovation of pharmaceuticals requires a substantial amount of marketing support despite concerns about the effects of these marketing efforts this study considers prior findings that indicate that higher marketing expenditures for a brand reduce its price elasticity of demand which may lead to higher prices in the context of the dutch pharmaceutical market the authors find that parameters are heterogeneous across brands and that marketing effects differ across product life cycle stages they propose a separate analysis of established and new brands for established brands marketing efforts neither have a positive effect on sales nor do they affect the price elasticity for new brands several proposed models might capture their diffusion pattern the diffusion of innovation models provide the best results marketing accelerates the rate of diffusion and leads to a higher baseline level of sales

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

a comparison of sales response predictions from demand models applied to store level versus panel data in order to generate sales promotion response predictions marketing analysts estimate demand models using either disaggregated consumer level or aggregated store level scanner data comparison of predictions from these demand models is complicated by the fact that models may accommodate different forms of consumer heterogeneity depending on the level of data aggregation this study shows via simulation that demand models with various heterogeneity specifications do not produce more accurate sales response predictions than a homogeneous demand model applied to store level data with one major exception a random coefficients model designed to capture within store heterogeneity using store level data produced significantly more accurate sales response predictions as well as better fit compared to other model specifications an empirical application to the paper towel product category adds additional insights this article has supplementary material online

transfers to families with children as a principal agent problem abstract the relationship between government and parents is modelled as a principal agent problem with the former in the role of principal and the latter in that of agents we make four major points the first is that if the well being of the child depends not only on luck but also on parental actions that the government cannot readily observe the latter can influence parental behaviour by conditioning income transfers to families on child performance the second point is that if there are market inputs into the making of a happy or successful child which the government can observe but not ascribe to any particular parent or child because they are bought anonymously an income transfer policy can be usefully complemented by an indirect subsidy on the price of these inputs the third is that if parents care about their children incentive considerations may have to be tempered by the need to compensate those who have the misfortune of getting a child with low ability the fourth is that parents can be induced to have the socially desirable number of children by making the transfer conditional not only on child performance but also on number of children ways of making these findings operational and the effects of administrative costs are discussed in some detail