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

early decision and financial aid competition among need blind colleges and universities abstract this paper presents a stylized theoretical model of competition among need blind colleges and universities that implement early decision admissions under need blind admissions an applicant s financial aid status cannot affect their likelihood of admission in the model a need blind school can use early decision admissions as a screening mechanism to indirectly identify a student s ability to pay while superficially maintaining a need blind policy as a result in equilibrium non financial aid students are more likely to be admitted than financial aid students of comparable quality

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

incomplete mechanisms and efficient allocation in labour markets efficiency is analyzed in a walrasian model of labour markets with adverse selection workers are distinguished by productivity and preferences firms are distinguished by productivity and ability to distinguish workers an equilibrium is defined to be constrained efficient if it cannot be dominated by an incomplete mechanism im the set of equilibria turns out to have an interesting structure within the class of strongly monotonic economies there exists at least one efficient equilibrium under slightly stronger conditions an equilibrium is dominated by an im only if it can be dominated by another equilibrium that is equilibria are pareto ranked

an empirical examination of quality certification in a lemons market i introduction researchers have long understood that a variety of mechanisms may be used to overcome problems of adverse selection stigler 1961 224 notes that s ome forms of economic organization may be explicable chiefly as devices for eliminating uncertainties in quality and akerlof 1970 cites independent groups such as the consumers union and united laboratories that test and certify the quality of goods there is however little empirical evidence that illustrates the effectiveness of such mechanisms in this article we examine the effect certification has on a market characterized by adverse selection using data from the market for young thoroughbreds we compare the performance of sales where auction houses provide certification services with sales where certification is absent the thoroughbred racehorse market consists of two distinct types of public auctions certified and noncertified sales in a certified sale auction houses physically inspect the horses nominated to their sales selling only the horses they conclude are from the upper end of the quality distribution in noncertified sales auction houses sell all horses nominated to a sale our empirical strategy is to perform tests that indicate whether adverse selection affects market outcomes in either certified or noncertified sales a finding that adverse selection is present in noncertified sales but absent in certified sales is consistent with the hypothesis that certification alleviates problems of adverse selection we adopt three approaches to test for the presence of adverse selection 1 the first approach is in the spirit of chiappori and salanie 2000 who examine the relationship between unobservable factors from participation and performance equations we model adverse selection as a case of sample selection bias and examine the correlation between errors in participation and price equations 2 to accomplish this we use a unique data set that allows us to estimate how breeder decisions to sell or retain horses affect market prices the data set consists of a 10 random sample of all thoroughbreds born in 1993 and includes both horses retained by their breeders who own a horse at the time of its birth and horses that breeders chose to sell our second test follows genesove 1993 and chezum and wimmer 1997 by examining the relationship between seller characteristics and price theoretically when observable seller characteristics are correlated with seller incentives to select goods adversely prices should reflect these differences chezum and wimmer observe that some breeders sell all of their horses whereas others retain a portion to race they find that market prices are inversely related to the extent of a breeder s involvement in racing concluding that adverse selection affects market outcomes we extend this work in two respects first we isolate the effect seller characteristics have on price through the decision to sell or retain a horse second we compare the effect seller characteristics have on observed prices in certified and noncertified sales our last test follows bond 1982 who attempts to identify adverse selection in the market for used trucks by comparing the repair records of trucks that were sold with the records of trucks retained by their original owners because the horses in our sample had not begun their racing careers at the time they were sold we use data on racetrack earnings as an ex post measure of quality and compare the quality of horses sold in noncertified sales with certified horses and horses retained by their breeders the results from each approach are consistent with certification alleviating problems of adverse selection we find that holding observable attributes constant horses that would receive unusually high market prices in noncertified sales are even more valuable in other options and are less likely to be sold in a noncertified sale

revisiting wage earnings and hours profiles abstract for the youngest cohorts whose entire working life can be observed hours start falling much earlier than wages wages do not fall if they fall at all until one s late 60s the data suggest that many workers start a smooth transition into retirement by working progressively fewer hours while still facing an upward sloping wage profile this pattern is not an artifact of staggered abrupt retirement or selection this evidence imposes restrictions on dynamic models of the aggregate economy and provide updated numerical profiles that can be readily used in quantitative macroeconomic analysis to incorporate this new pattern into aggregate models

information in production this paper presents a simple model of the manner in which person specific information on productive capabilities is put to use in the firm the analysis is then employed to examine the impact of improved information quality on equilibrium output wage rates and degree of specialization much effort has been devoted to studying the process through which personspecific information is accumulated burdett mortensen 1 macdonald 8 prescott visscher 10 hartog 3 and johnson 5 examine the process of learning about person specific parameters through investment of resources in activities that yield information jovanovic 6 analyses the more specific problem of inferring the quality of a particular job worker match little attention has been given to the question of just how the firm utilizes this kind of information for information to play an interesting role in production two things are necessary one is that workers be heterogeneous in a meaningful sense that is in the space of productive characteristics workers must not all be simply scalar multiples of one another second the firm must have some choice about the kind of activities in which workers are engaged if either of these conditions fails the optimal assignment of workers is not a problem 2

measuring asset market linkages nonlinear dependence and tail risk abstracttraditional measures of dependence in time series are based on correlations or periodograms these are adequate in many circumstances but in others especially when trying to assess market

prices and qualities in markets with costly information this paper extends the seminal work of akerlof and salop and stiglitz in two directions i the sellers can select both the selling prices and quality levels of their good and ii the buyers can acquire price quality information about individual sellers at a cost we observe multiple price quality combinations in equilibrium which depend upon the distribution of information costs of consumers and upon whether quality or price or both are costly observable welfare comparisons of equilibrium are considered we show that welfare will be greater when price advertising is permitted

srisk a conditional capital shortfall measure of systemic risk we introduce srisk to measure the systemic risk contribution of a financial firm srisk measures the capital shortfall of a firm conditional on a severe market decline and is a function of its size leverage and risk we use the measure to study top financial institutions in the recent financial crisis srisk delivers useful rankings of systemic institutions at various stages of the crisis and identifies fannie mae freddie mac morgan stanley bear stearns and lehman brothers as top contributors as early as 2005 q1 moreover aggregate srisk provides early warning signals of distress in indicators of real activity received june 7 2011 accepted april 18 2016 by editor geert bekaert

testing for ability in a competitive labor market 1 introduction the seminal works of akerlof 1 and spence 13 141 have stimulated much research on what may be loosely termed the economics of infor mation creation although studies in this area have considered various markets the majority have concentrated on the creation of information about workers abilities see for example arrow 2 riley 61 and stiglitz 171 the purpose of the present study is to specify conditions on the information structure that guarantee efficiency of a competitive market for worker ability information that information structure is termed symmetric as it satisfies the following maxim what is known to one is known to all if the infor mation structure is asymmetric it does not satisfy this maxim a competitive equilibrium will not be efficient in general two asymmetric information models are specified which illustrate this point in both these models a planner can obtain an efficient solution in principle there is an intimate relationship between the market for information about abilities and the labor market which utilizes this information surprisingly there are very few studies in the labor economics literature that deal with a labor market where the abilities of some workers may not be known with certainty as a labor market of this type is required to study a market for information about abilities one is specified in some detail in section 2 being primarily interested in the information structure and because we have

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

distribution of ability and earnings in a hierarchical job assignment model we examine the mapping of the distribution of ability onto earnings in a hierarchical job assignment model workers are assigned to a continuum of jobs in fixed proportions ordered by sensitivity to ability the model implies a novel marginal productivity interpretation of wages we derive comparative statics for changes in technology and in the distribution of ability we find conditions under which a more unequal distribution of ability maps onto a more less unequal distribution of earnings we also analyze an assignment model with variable proportions and find that in the cobb douglas case a rise in the inequality of ability always narrows the range of earnings

informative advertising with differentiated products in this paper we study the role of promotional expenditures by sellers in a model of product differentiation advertising conveys full and accurate information about the characteristics of products heterogeneous consumers who have no source of information other than advertisements seek to purchase the products that best fit their needs despite the roles played by advertising in improving the matching of products and consumers and in increasing the elasticity of demand faced by each firm we find that the market determined levels of advertising are excessive given the extent of diversity in the market we derive a promotional equilibrium based on a specific information transmission technology paying explicit attention to the structure of consumer information and its impact on firms demand curves this allows us to study the effects of changes in the advertising technology including an increased ability to target messages to specific groups of consumers on the equilibrium in the product market we find that decreased advertising costs may reduce profits by increasing the severity of price competition

the united states higher education antitrust exemption and college enrollment this study examines the effect of the higher education antitrust exemption on enrollment of financial aid applicants at highly selective private colleges the antitrust exemption used since 2002

managerial defections promotion criteria and firm growth abstract junior managers learning decisions and career expectations promotion criteria and parent firms growth strategies are interdependent we study this interdependence in a two stage game where a junior manager invests in unobservable industry specific learning in response to the firm s growth strategy in the absence of a credible promotion criterion the firm is unable to insure itself fully against defections growth is low and ex post regrettable managerial promotions may occur higher growth relaxes promotion decisions and erodes managers learning incentives whereas lower growth generates the opposite effect but increases the likelihood of defections

factor pricing in the assignment problem the income distribution theory inherent in the linear programming assignment problem i analyzed in a context in which workers are assigned to machines dual prices correspond to worker wages and machine rents the principle which guides the assignment is contrasted with comparative advantage using factor analysis wage differences are shown to depend on both worker and machine properties the determination of wage differences is illustrated in a numerical example the assignment theory is then compared with neoclassical and human capital theories

dividing online and offline a case study every new method of trade offers an opportunity for economic agents to compare its costs and benefits relative to the status quo such comparison motivates sorting across market segments and reshapes the whole marketplace the internet provides an excellent example it introduces substantial search cost savings over brick and mortar retail stores but imposes new obstacles for sellers to convey quality using sports card trading as a case study we provide empirical evidence on 1 the sorting of product quality between the online and offline segments 2 the changes for retail outlets after the internet came into place and 3 how supporting industries such as professional grading and card manufacturing adapted to take advantage of the new market copyright 2007 wiley blackwell

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

how should food safety certification be financed an analytical framework where consumers are imperfectly informed about the safety of products is used to investigate the welfare effects of a public certification system several certification fees under alternative structures of certification cost are analyzed by maintaining competition among numerous sellers voluntary certification financed by a per unit fee is efficient and sufficient to signal product safety however mandatory certification linked with a fixed user fee may be necessary if a seller wields monopoly power further certification by a single private agency results in a distorted fee copyright 2001 oxford university press

policy watch antitrust goes to college it may have come as a shock to many economists especially those in academia to learn that the antitrust division of the u s department of justice doj has been investigating alleged price fixing and information exchange of financial aid among 23 prestigious east coast colleges and universities these schools include the ivy overlap group mit brown columbia cornell dartmouth harvard university of pennsylvania princeton and yale and the pentagonal sisters group amherst barnard bowdoin bryn mawr colby mount holyoke middlebury smith trinity tufts vassar wesleyan and williams we have no specific knowledge concerning the possible validity of these allegations or expertise about their legality rather in this article we wish to present the potential applicability of current antitrust doctrines to colleges and their conduct and the possible defenses that they might raise to justify their actions

antitrust and higher education was there a conspiracy to restrict financial aid in 1991 the u s justice department s antitrust division accused mit and the ivy league schools of fixing prices the schools claimed that their cooperative behavior enabled them to concentrate financial aid on needy students and did not affect price we analyze the empirical determinants of tuition and find no evidence that the schools agreement raised price we also analyze the appropriate application of the antitrust laws to nonprofit institutions and conclude that in the absence of adverse price or output effects the justification for the collective action should be considered under the rule of reason

reputation quality observability and the choice of quality assurance systems participants in a supply chain of agricultural value added products face significant challenges many of the costly distinctive traits desired by consumers are difficult if not impossible to observe even after consumption a complicating factor addressed here is that in some circumstances delivered quality can only be imperfectly learned and or affected stochastically by producers hence both symmetric and asymmetric informational imperfections may be present in order for markets for these classes of goods to arise firms touting the quality of the product need to be trusted a repeated purchases model is developed to explore the fundamental economic factors that lie behind the choice of different quality assurance systems and their associated degrees of stringency by firms differences in the quality discoverability of a sought after attribute attractiveness of a market and the value placed in the future are among the factors contributing to the implementation of widely diverse systems across participants in different markets close attention is paid to the role of reputations in providing the incentives for firms to deliver high quality goods in an environment of symmetrically imperfect information

imperfect product testing and market size we consider an imperfect test of product quality and ask how it interacts with adverse selection to affect market size although one might expect adverse selection to be mitigated there are scenarios where it is exacerbated also two counter intuitive comparative static results emerge first a small increase in the test cost can increase the equilibrium expected profits earned by sellers of higher quality units and so expand the market second the equilibrium expected profits earned by sellers with lower quality units can be increased by a small improvement in the accuracy of an imperfect test

imperfect certification in a bertrand duopoly abstract a label that imperfectly signals product quality is analyzed in a bertrand duopoly with differentiated products considering strategic firms when certification is imperfect has some important implications a separating equilibrium can be sustained with a free test due to price strategic complementarity when the certifier s objective is welfare and the test cost is sufficiently small the most appropriate test is that which is subject to a low rate of false negatives

affordability family incomes and net prices at highly selective private colleges and universities working from the financial aid records of individual students at 28 highly selective private colleges and universities we were able to calculate both the price the low income students at these schools actually pay for a year s education net of financial aid grants and how the schools differentiate net price in recognition of their students different family incomes their pricing policies

the design of contracts and remedies for breach in the first part of this article hypothetical contracts providing for all possible uncertain contingencies are considered in the next part contracts providing for only some contingencies are examined and are shown to be advantageous due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them in the following major part of the article two of these substitutes for contingent terms are analyzed remedies for breach and the opportunity for renegotiation the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts

risk aversion supply response and the optimality of random prices a diagrammatic analysis this paper analyzes the effect of commodity price stabilization on producers and consumers both in the short run and in the long run when producers have adjusted their production decisions to take account of the change in the price distribution we derive conditions under which a both producers and consumers may be better off and b both producers and consumers may be worse off moreover we show that the long run effects may differ not only quantitatively but also qualitatively from the short run effects the anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers

equilibrium selection in imperfectly competitive economies with multiple equilibria this paper investigates the selection of an equilibrium in an economy with multiple pareto ranked nash equilibria a history dependent selection criterion is proposed which induces correlated behavior in equilibrium even though agents are playing one shot games and disturbances are not correlated over time the model economy may experience prolonged periods in which a low productivity technology is in use and then as a consequence of a large real disturbance may switch to an alternative equilibrium in which a high productivity technology is utilized thus the model qualitatively matches observations of serially correlated movements in output and employment and generates procyclical productivity though there are no exogenous technology shocks copyright 1994 by royal economic society

disease forecasts and livestock health disclosure a shepherd s dilemma we analyze how to induce sellers to disclose food safety with repeated interactions and safety correlated over time cash transfers alone do not ensure disclosure perfect but costly testing ensures disclosure with a complex lottery that may be difficult to implement in practice in contrast even a noisy quality forecast allows the buyer to induce perfect disclosure with a simple pricing scheme forecast introduction may benefit or harm sellers after introduction sellers may suffer from increases in forecast precision as an illustration we cast our model in the context of rift valley fever in an east african livestock market copyright 2010 oxford university press

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

the theory of contracts and agency there has been much work recently on the effects of informational asymmetries on allocation and economic welfare these asymmetries render complete contracting infeasible or at least unenforceable and the resulting inefficiency creates incentives for information gathering various kinds of contracts emerge from the interaction of these incentives with the costs of contracting in this survey we shall attempt a brief critical review of the contracts literature point out some open questions and suggest some directions for future research section two discusses how moral hazard problems are solved in simple principal agent models section three considers adverse selection problems the fourth section discusses the form of contracts that arise in response to the above problems in labor markets finally in the last section we consider some recent developments and open questions

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

work effort and search subsidies with long run equilibrium contracts abstract we consider an economy where infinitely lived firms offer long term contracts to finitely lived heterogeneous workers and labor mobility is imperfect in the short run when on the job search costs are partly verifiable firms as a rule subsidize the search activity of poorly adapted workers when these are risk averse and not when they are risk neutral when firms know worker types and monitor individual productivities perfectly work effort is first best independently of search and the problem is one of pure moral hazard in search when workers are risk averse when types cannot be observed work efforts are generally lower and search subsidies used more frequently than when types are observable

learning by doing adverse selection and firm structure abstract much of the literature devoted to explaining the existence of firms has focused on the firm as either a transactions cost economizing institution or as a means of allocating residual property rights to output contrastingly this paper explores the implications for firm structure of a particular form of learning by doing which arises because of the relationship between jobs it implies that a worker s productivity in some of these jobs depends on whether the worker had previously performed certain other jobs this issue is analyzed using an overlapping generations model the analysis shows that when firms are specialized as to jobs there is a misallocation of workers across productive activities the allocation of workers is efficient when firms are integrated across the jobs further when firm structure is an endogenous choice the equilibrium is characterized by all firms being integrated across jobs

eco labeling and market equilibria with noisy certification tests an intriguing alternative to traditional methods for regulating externalities is the provision of information about firms environmental attributes an increasingly important example of this approach is eco labeling where a third party certifies firms products such schemes are currently used in a variety of countries this paper investigates the equilibria that may occur with eco labeling and the attendant welfare effects i model certification as a noisy test subject to both type i and type ii errors but where green firms more likely to pass than brown firms while it commonly leads to an increase in the fraction of green units in the market the introduction of an eco label can either increase or decrease welfare

the wage distribution in a model of the assignment of skills to jobs this paper discusses a general equilibrium model of the assignment of heterogeneous workers to heterogeneous jobs both jobs and workers are measured along a continuous one dimensional scale the c

aggregation bias in elasticities of substitution and the minimum wage paradox while the employment effects of minimum wages are usually reported to be small suggesting low substitutability between skill types direct estimates suggest a much larger degree of substitutability this article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories an assignment model is applied where skilled workers have a comparative advantage in complex jobs the implied pattern of substitutability reveals the sources of the bias estimation results for the united states show elasticities of complementarity to be underestimated by up to a factor 2 5 the methods laid out likewise can be applied to other markets where different quality types are close substitutes such as the housing market

sequential bargaining with incomplete information this paper describes a simple two person two period bargaining game and solves it using the concept of perfect bayesian equilibrium in which the actions of each player convey information which is used by his opponent the paper examines the effects of changes in bargaining costs the size of the contract zone and the length of the bargaining process on such aspects of the solution as the probability of impasse and the likelihood of concessions the combination of information transfer and the lack of pre commitment embodied in perfectness yields many surprising results common perceptions about the effects of parameter changes on bargaining processes are suspect and should be checked in the particular game being discussed

incentives information systems and competition we show how dierent competitive regimes aect the ability to provide incentives based on noisy information systems reduced com petition facilitates incentive provision this may rationalize both ver tical integration and horizontal integration as seen in many agricul tural markets with uncertain quality grading moreover if trading terms are settled before the information is observed a noisy infor mation system su ces to give proper incentives this may rationalize the use of long term conditional price contracts in the trading of many agricultural products

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration