contracting with wealth constrained agents we examine how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input e g effort when potential operators are privately informed about their limited wealth truthful revelation of wealth is induced by promising a higher probability of operation and if necessary a greater share of realized profit the larger the nonrefundable bond that a potential operator posts the project owner benefits when total wealth is widely dispersed among potential operators under plausible conditions limited knowledge of wealth is not constraining for the project owner

a model of delegated project choice we present a model in which a principal delegates the choice of project to an agent with different preferences the principal determines the set of projects from which the agent may choose the principal can verify the characteristics of the project chosen by the agent but does not know which other projects are available to the agent two frameworks are considered i a static setting in which the collection of available projects is exogenous to the agent but uncertain and ii a dynamic setting in which the agent searches for projects

merger policy with merger choice we analyze the optimal policy of an antitrust authority towards horizontal mergers when merger proposals are endogenous and firms choose which of several mutually exclusive mergers to propose in our model the optimal policy of an antitrust authority that seeks to maximize expected consumer surplus imposes a tougher standard on larger mergers i e those involving firms with a larger pre merger market share or equivalently leading to a larger naively computed post merger herfindahl index the optimal policy is a response to a bias in firms proposal incentives firms always propose a larger merger when it is better for consumers than a smaller one but sometimes will propose the larger one even when it is worse for consumers

optimal selling strategies when buyers may have hard information abstract consider a revenue maximizing seller who can sell an object to one of n potential buyers each buyer either has hard information about his valuation i e evidence that cannot be forged or is ignorant the optimal mechanism is characterized it turns out that more ignorance can increase the expected total surplus even when the buyers are ex ante symmetric the object may be sold to a buyer who does not have the largest willingness to pay nevertheless an additional buyer increases the expected total surplus in the symmetric case whereas more competition can be harmful if there are ex ante asymmetries

screening ethics when honest agents care about fairness we analyze a principal s ability to discriminate between honest and dishonest agents who have private information about the circumstances of the exchange honest agents reveal circumstances truthfully as long as the mechanism is suciently fair the probability that an equilibrium allocation is chosen by an agent who is lying should not be too large without intolerance for lying the agent is given proper incentives if dishonest and zero rent if honest with even a small intolerance for lying the optimal mechanism is discontinuously altered it may still involve ethics screening whereby some allocation chosen by a dishonest agent is never chosen by an honest agent it happens either when the dishonest is overstating circumstances or when the principal is forced to allow for some suboptimal announcements due to an excessive intolerance for lying with limited intolerance for lying ethics screening allows for doing better than in the standard setup where the agent is dishonest with certainty even if honesty is unlikely however if intolerance for lying is too strong the principal cannot improve upon the standard setup

stochastic mechanisms in settings without monetary transfers the regular case abstract we analyze relative performance of stochastic and deterministic mechanisms in an environment that has been extensively studied in the literature on communication e g vincent p crawford joel sobel strategic information transmission econometrica 50 6 1982 1431 1451 and optimal delegation e g bengt holmstrom on the theory of delegation in m boyer r e kihlstrom eds bayesian models in economic theory north holland 1984 pp 115 141 a principal agent model with hidden information no monetary transfers and single peaked preferences we demonstrate that under the common assumption of quadratic payoffs and a certain regularity condition on the distribution of private information and the agent s bias the optimal mechanism is deterministic we also provide an explicit characterization of this mechanism

emission standards and stochastic waste load empirical work regarding the impact of environmental regulations on firm behavior has been developed under the assumption that emissions of pollutants are deterministic the implication is that the regulation is effective only when the constraint is exactly satisfied in real life however it is seldom the case that emission constraints are exactly satisfied the purpose of this paper is to find out whether regulation schemes are ineffective or whether the structure is an optimal reaction to random fluctuations in emissions the swedish pulp and paper industry is used as an empirical illustration

plant vintage technology and environmental regulation abstract we use data on productivity and pollution abatement costs at individual pulp and paper mills to test whether the impact of environmental regulation on productivity differs by plant vintage and technology plants with higher pollution abatement costs have significantly lower productivity levels this relationship differs greatly based on a plant s technology with productivity at integrated mills being greatly affected by abatement costs while the impact at non integrated mills is negligible plant vintage does not seem to matter with older and newer plants showing similar impacts reported abatement costs appear to substantially understate the true costs of abatement accounting for the impact of technology differences makes some difference in the estimated overall impact of environmental regulation

trade credit the financial crisis and sme access to finance mounting evidence indicates that firms particularly smes suffered from a significant credit crunch during this crisis we analyze for the first time whether trade credit provided an alternative source of external finance to smes during the crisis using firm level spanish data we find that credit constrained smes depend on trade credit but not bank loans and that the intensity of this dependence increased during the financial crisis unconstrained firms in contrast are dependent on bank loans but not on trade credit

communicating subjective evaluations consider managers evaluating their employees performances should managers justify their subjective evaluations suppose a manager s evaluation is private information justifying her evaluation is costly but limits the principal s scope for distorting her evaluation of the employee i show that the manager justifies her evaluation if and only if the employee s performance was poor the justification assures the employee that the manager has not distorted the evaluation downwards for good performance however the manager pays a constant high wage without justification the empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels this pattern was attributed to biased managers i show that these effects occur in optimal contracts without any biased behavior

money burning in the theory of delegation abstract this paper uses a lagrangian approach to provide sufficient conditions under which money burning expenditures are used in an optimal delegation contract for comparison we also establish simple sufficient conditions for the optimality of a cap allocation under a restricted set of preferences for a benchmark setting in which money burning is not allowed we also apply our findings to a model of cooperation and to a model with quadratic preferences and families of distribution functions in addition we provide several comparative statics results

dynamic delegation of experimentation i study a dynamic relationship where a principal delegates experimentation to an agent experimentation is modeled as a one armed bandit that yields successes following a poisson process its unknown intensity is high or low the agent has private information his type being his prior belief that the intensity is high the agent values successes more than the principal does so prefers more experimentation the optimal mechanism is a cutoff rule in the belief space the cutoff gives pessimistic types total freedom but curtails optimistic types behavior pessimistic types over experiment while the most optimistic ones under experiment this delegation rule is time consistent

trade credit and informational asymmetry commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held by offering trade credit a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short term financing the information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments traditional explanations for the widespread use of trade credit fall into two categories the financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions ferris 4 argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances emery 3 contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit however the financing motive is not sufficient to explain why small suppliers offer trade credit the wide cross sectional variation in terms or why large buyers often take the prompt payment discount late a second set of explanations is best described as pricing motivations for trade credit provision nadiri 10 argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions schwartz and whitcomb 14 argue that trade credit is used to circumvent robinson patman and similar prohibitions on price discrimination the correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller although the explanation is possible in principle an empirical question remains as to why variations in actual credit terms appear to be based on product market rather than buyer characteristics the literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows schwartz 13 for example employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets however a microeconomic

bargaining and sharing innovative knowledge we consider the problem of bargaining over the disclosure of interimresearch knowledge between two participants in an r d race for an ultimate patentable invention licence fee schedules that are functions of the amount of knowledge disclosed by the leading to the laggingagent are examined for their abilities to attain efficient outcomes andvarying shares of the surplus arising from disclosure in hersequential offers bargaining games the uninformed buyer is able to elicitfull disclosures without sharing the incremental surplus with any type ofthe licensor and thus do as well as a perfectly informed and discriminatingknowledge licensee

effects of pollution control on industry productivity a factor demand approach four major manufacturing industries are examined the abatement effect on capital and labor productivity are determined from parameters of a system of factor demand equations which allow for disequilibrium in factor markets the system is estimated for each industry with annual time series data from 1960 to 1980 abatement requirements were found to retard both average capital productivity and average labor productivity in three of the four industries paper chemicals and primary metals for several industries in which factor productivity was slower after 1973 environmental controls accounted for a significant proportion of that slow down

screening when some agents are nonstrategic does a monopoly need to exclude we characterize the optimal screening mechanism for a monopolist facing consumers with privately known demands some of whom have limited abilities to misrepresent their preferences we show that consumers with better abilities to misrepresent information benefit from the presence of consumers who lack such abilities whenever the fraction of the latter group is positive there is no exclusion the firm supplies a positive quantity of the good to all consumers whose valuations exceed marginal cost of production our analysis is motivated by the evidence indicating that some individuals have limited ability to misrepresent themselves and imitate others

the dynamic structure of optimal debt contracts abstract in a two period model of costly state verification the optimal contract is characterized and shown to exist the optimal contract is interpreted as a bond contract the model extends the result of one period models that the verification region must be a left tail interval to a multi period setting conditions are identified for the optimal contract to exhibit features such as call prepayment option coupon payment or sinking fund the optimality of certain bond covenants such as refinancing covenants and dividends covenants is also studied

optimal allocation with costly verification consider a principal with a good to allocate among a number of agents each of whom wants the good each agent i knows the value the principal receives if he gives the good to i but the principal does not this value need not coincide with the value to i of getting the good the principal can verify the agents private information at a cost but cannot use transfers there are a number of economic environments of interest that roughly correspond to this scenario we discuss a few below how does the principal maximize the expected gain from allocating the good less the costs of verification we characterize optimal mechanisms for such settings we construct an optimal mechanism with a particularly simple structure which we call a favored agent mechanism there is a threshold value and a favored agent say i if each agent other than i reports a value for the good below the threshold then the good goes to the favored agent and no verification is required if some agent other than i reports a value above the threshold then the agent who reports the highest value is checked this agent receives the good if and only if his claims are verified and the good goes to any other agent otherwise in addition we show that every optimal mechanism is essentially a randomization over optimal favored agent mechanisms in this sense we can characterize the

self selecting agri environmental policieswith an application to the don watershed we consider a model of regulation for nonpoint source water pollution through non linear taxation subsidization of agricultural production farmers are heterogenous along two dimensions their ability to transform inputs into final production and the available area they possess asymmetric information and participation of farmers to the regulation scheme put constraints on the optimal policy that we characterize we show that a positive relationship between size of land and ability may exacerbate adverse selection effects we calibrate the model using data on a french watershed and we simulate the optimal second best policy and characterize the allocation of the abatement effort among the producers

taxes and employment subsidies in optimal redistribution programs this paper explores how to optimally set taxes and transfers when taxation authorities 1 are uninformed about individuals value of time in both market and non market activities and 2 can observe both market income and time allocated to market employment we show that optimal redistribution in this environment involves distorting market employment upwards for low wage individuals through decreasing wage contingent employment subsidies and distorting employment downwards for high wage individuals through positive and increasing marginal income tax rates in particular we show that whether a person is taxed or subsidized depends primarily on his wage with the optimal program involving a cut off wage whereby workers above the cutoff are taxed as they increase their income while workers earning a wage below the cutoff receive an income supplement as they increase their income finally we show that the optimal program transfers zero income to individuals who choose not to work

why the npv criterion does not maximize npv this article presents a theory of capital allocation that shows how the use of net present value npv as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria like the internal rate of return and the profitability index the essence of our theory is rooted in the mainstream paradigm of corporate finance while firms use npv to measure the addition to firm value from prospective projects classical informational and agency considerations prevent it from implementing the optimal capital budgeting outcome our theory also identifies conditions when alternative criteria should be used finally we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem copyright 2004 oxford university press

optimal collusion resistant mechanisms with verification abstract we present the first general positive result on the construction of collusion resistant mechanisms that is mechanisms that guarantee dominant strategies even when agents can form arbitrary coalitions and exchange compensations sometimes referred to as transferable utilities or side payments this is a much stronger solution concept as compared to truthful or even group strategyproof mechanisms and only impossibility results were known for this type of mechanisms in the classical model we describe collusion resistant mechanisms with verification that return optimal solutions for a wide class of mechanism design problems which includes utilitarian ones as a special case note that every collusion resistant mechanism without verification must have an unbounded approximation factor and in general optimal solutions cannot be obtained even if we content ourselves with truthful non collusion resistant mechanisms all these results apply to problems that have been extensively studied in the algorithmic mechanism design literature like for instance task scheduling and inter domain routing

revenue management by sequential screening abstract using a mechanism design approach we consider a firm s optimal pricing policy when consumers are heterogeneous and learn their valuations at different times we show that by offering a menu of advance purchase contracts that differ in when and for how much the product can be returned a firm can more easily price discriminate between privately informed consumers in particular we show that screening on when the return option can be exercised increases firm profits relative to screening on the size of the refund alone only if the expected gains from trade are higher for consumers who learn later we show that in some settings mean preserving spread the firm can achieve the complete information profits and analyze the optimal contract in other settings first order stochastic dominance in which the first best allocation is not always feasible

the contribution of environmental regulations to the slowdown in productivity growth abstract the radical slowdown in productivity growth since 1965 is often attributed to environmental regulations several studies varying widely in method have attempted to assess this contribution here these analyses are reviewed and critiqued and a summary appraisal of the likely contribution of environmental regulations to the observed decrease in productivity growth is offered

extracting information or resource the hotelling rule revisited under asymmetric information we characterize the optimal extraction path when a concessionaire has private information on the initial stock of resource under asymmetric information a virtual hotelling rule describes how the resource price evolves over time and how extraction costs are compounded with information costs along an optimal extraction path in sharp contrast with the case of complete information elds which are heterogeneous in terms of their initial stocks follow di erent extraction paths some resource might be left unexploited in the long run as a way to foster incentives the optimal contract may sometimes be implemented through royalties and license fees with a market of concessionaires asymmetric information leads to a virtual her ndahl principle and to a new form of heterogeneity across active concessionaires under asymmetric information the market price converges faster to its long run limit exhibiting more stability

certification and market transparency we provide elementary insights into the effectiveness of certification to increase market transparency in a market with opaque product quality sellers use certification as a signaling device while buyers use it as an inspection device this difference alone implies that seller certification yields more transparency and higher social welfare under buyer certification profit maximizing certifiers further limit transparency but because seller certification yields larger profits active regulation concerning the mode of certification is not needed these findings are robust and widely applicable to for instance patents automotive parts and financial products

to build or not to build normative and positive theories of public private partnerships abstract this paper analyzes whether the two tasks of building infrastructures which are socially useful in providing public services and managing these assets should be bundled or not when performance contracts can be written both tasks should be performed altogether by the same firm if a better design of the infrastructure helps also to save on operating costs otherwise tasks should be kept apart and undertaken by different units in incomplete contracting environments we isolate conditions under which either the traditional form of public provision of services or the more fashionable public private partnership emerges optimally the latter dominates when there is a positive externality and the private benefits from owning assets are small enough finally we take a political economy perspective and study how incentive schemes are modified under the threat of capture of the decision makers much of the gains from bundling may be lost in this case

the effect of epa enforcement funding on private sector pollution control investment the paper estimates the effects of the us environmental protection agency epa enforcement budget upon the demand for pollution control equipment in the private sector there are two possible effects a direct effect occurs when the enforcement budget is used for inspections that result in enforced compliance requiring additional pollution control equipment a second effect is anticipatory and arises from the private sector s objective of minimizing expected costs due to fines imposed by the epa for infractions of pollution control requirements this component of demand depends in part on the epa enforcement budget we find that increases in the epa budget increase the demand for pollution abatement equipment this in turn implies that increases in the epa enforcement budget have been effective in mitigating pollution

trade credit and the bank lending channel the bank lending channel theory posits that during monetary contractions banks restrict some firms loans thus reducing their desired investment independently of interest rates previous research finds small firms reduce while large firms accelerate loan growth we find that small firms increase trade credit a substitute credit indicating a strong loan demand it supports the bank lending channel they do not voluntarily cut bank loans since they increase a less desirable alternative using trade credit is propitious since unlike commercial paper investigated by previous researchers it is widely used by the small firms suffering the loan decline surprisingly we also find large firms increase trade credit a puzzle since they are typically assumed to have wide access to other credit using individual manufacturing firm data we find the reasons large firms use trade credit are financial in nature those without a bond rating increase trade credit that is without access to open market credit as relatively few firms have this mark of quality it implies that more firms are affected by credit constraints than previously believed

the politics of compromise abstract an organization must select among competing projects that differ in their payoff consequences for its members each agent chooses a project and exerts effort affecting its completion time when one or more projects are complete the agents select which one to adopt the selection rule for multiple projects that maximizes ex post welfare leads to inefficiently high polarization rules that favor later proposals improve upon ex post optimal selections the optimal degree of favoritism increases in the cost of effort and discount rate this trade off informs the design of process rules in standard setting organizations and helps explain their performance jel c78 d23 d71 d72 d83 l15

learning while setting precedents a decision maker dm must address a series of problems over time each period a random case arises and the dm must make a yes or no decision which we call a ruling she is uncertain about the correct ruling until she conducts a costly investigation a ruling establishes a precedent which may be costly to violate in the future we compare the dm s incentive to acquire information the evolution of standards and the social welfare under two institutions nonbinding precedent and binding precedent under nonbinding precedent the dm is not required to follow previous rulings but under binding precedent she must follow previous rulings where applicable we find that compared to nonbinding precedent the incentive for information acquisition is stronger under binding precedent in earlier periods when few precedents exist but as more precedents are established over time the incentive for information acquisition becomes weaker under binding precedent even though erroneous rulings may be perpetuated under binding precedent social welfare can be higher because of the more intensive investigation conducted early on

does corporate lending by banks and finance companies differ evidence on specialization in private debt contracting this paper establishes empirically the existence of specialization in private market corporate lending adding a new dimension to the public versus private debt distinctions now common in the literature comparing corporate loans made by banks and by finance companies we find that the two types of intermediaries are equally likely to finance information problematic firms however finance companies tend to serve observably riskier borrowers particularly more leveraged borrowers evidence supports both regulatory and reputation based explanations for this specialization in passing we shed light on various theories of debt contracting and intermediation and present facts about finance companies

budget selection when agents compete abstract a principal selects a budget k of how many projects to fund within an organization and then consults n agents each of whom has private information about his own project s value after receiving cheap talk reports from the agents the principal decides which projects to implement subject to the budget and agents report on new i i d projects every period until the budget is exhausted when the budget is small relative to the number of agents each of whom are biased towards their own projects competition between agents degrades the quality of information conveyed in equilibrium and lowers the principal s payoff a larger budget induces less competition and therefore may be selected in order to extract more information from the agents even though this leads to some unprofitable projects being adopted in an extension i find that a policy of never allowing a funded agent to seek funding again increases payoffs compared to when the agent can always re seek funding

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

when are local incentive constraints sufficient we study the question of whether local incentive constraints are sufficient to imply full incentive compatibility in a variety of mechanism design settings allowing for probabilistic mechanisms we give a unified approach that covers both continuous and discrete type spaces on many common preference domains including any convex domain of cardinal or ordinal preferences single peaked ordinal preferences and successive single crossing ordinal preferences local incentive compatibility suitably defined implies full incentive compatibility on domains of cardinal preferences that satisfy a strong nonconvexity condition local incentive compatibility is not sufficient our sufficiency results hold for dominant strategy and bayesian nash solution concepts and allow for some interdependence in preferences

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

competition risk neutrality and loan commitments abstract we rationalize fixed rate loan commitments forward credit contracting with options in a competitive credit market with universal risk neutrality future interest rates are random but there are no transactions costs borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs credit contract design by the bank is the outcome of a non cooperative nash game between the bank and the borrower the initial formal analysis is basically in two steps first we show that the only spot credit market nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank s informational handicap second we show that loan commitments because of their ability to weaken the link between the offering bank s expected profit and the loan interest rate enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly pareto dominates any spot market equilibrium perhaps our most surprising result is that if the borrower has some initial liquidity it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing

optimal forecasting incentives an agent of unknown expertise is requested to forecast the mean of an uncertain outcome the agent can refine forecasts at a constant marginal cost per unit precision but neither cost nor precision can be verified by the planner the problem is to induce both truthful revelation and an appropriate degree of learning so as to minimize the expected sum of direct planning losses and agent payments optimal contracts are derived with and without self screening of expertise and with and without competition between agents self screening tends to be much less valuable than competition

public goods with costly access abstract we examine the optimal allocation of excludable public goods with a private access cost that some consumers may not be able to afford the full information benchmark is presented first then individuals access costs and income levels are private information when high income consumers have low access cost asymmetric information increases the cost of subsidizing the poor for accessing the public good and inequality increases when the low access cost consumers have the lower income subsidizing the poor may involve countervailing incentives but inequality decreases finally monopoly provision exacerbates underprovision of the poor particularly of those with low access cost

bank lending standards and access to lines of credit this paper examines how changes in bank lending standards are related to the availability of bank lines of credit for private and comparable public firms overall we find that access to lines of credit is more contingent on bank lending standards for private than for public firms the impact of bank lending standards is however asymmetric while private firms are less likely than public firms to gain access to new lines when credit market conditions are tight we find no difference between public and private firms in terms of their use or retention of pre existing lines we also find that private firms without lines of credit use more trade credit when bank lending standards are tight which is suggestive of a supply effect overall the evidence suggests that credit crunches are likely to have a disproportionate impact on private firms however pre existing banking relationships appear to mitigate the impact of these contractions on private firms

a theory of yes men this paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation this desire to conform arises endogenously from the firm s need to induce the worker to exert effort the author shows that firms may optimally eschew the use of incentive contracts to retain workers incentives for honesty the author illustrates that the incentive to conform implies inefficiencies even when workers are risk neutral and is likely to lead to more centralized decision making than in the absence of the desire to conform copyright 1993 by american economic association

optimal allocation with ex post verification and limited penalties several agents with privately known social values compete for a prize the prize is allocated based on the claims of the agents and the winner is subject to a limited penalty if he makes a false claim if the number of agents is large the optimal mechanism places all agents above a threshold onto a shortlist along with a fraction of agents below the threshold and then allocates the prize to a random agent on the shortlist when the number of agents is small the optimal mechanism allocates the prize to the agent who makes the highest claim but restricts the range of claims above and below

identifying and testing models of managerial compensation this article analyses the identification and empirical content of the pure moral hazard pmh and the hybrid moral hazard hmh principal agent models the pmh model has hidden actions while the hmh model has hidden information in addition to hidden actions in both models agents are risk averse and principals are risk neutral the article derives the equilibrium restrictions from the optimal contract and uses the restrictions to show that the models have empirical content for any given risk aversion parameter the models other parameters are non parametrically point identified the risk aversion parameter and hence the model are however only partially identified management s ability to manipulate accounting reports arises endogenously within hmh models but not in all versions of pmh models we use our framework to investigate whether shareholders contract with management recognizing that accounting reports are susceptible to manipulation and therefore endogenous to the incentives offered to management the data reject all models in which accounting reports are verifiable furthermore the version of the pmh in which accounting reports can be manipulated is rejected if expected compensation is restricted to be positive

business loans and the transmission of monetary policy we study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to the contractual characteristics and the borrower lender types of loans we show that the puzzling increase in business loans in response to monetary tightening documented before the great recession is largely driven by drawdowns from existing commitments at large banks spot loans also rise and take a considerable amount of time to adjust banks nonetheless do curtail credit supply by shortening maturities of new loans following the great recession the mechanism has worked differently with loan responses to monetary tightening displaying a significant downward shift

bargaining failures and merger policy in this paper we study the optimal ex ante merger policy in a model where merger proposals are the result of strategic bargaining among alternative candidates we allow for firm asymmetries and in particular we emphasize the fact that potential synergies generated by a merger may vary substantially depending on the identity of the participating firms the model demonstrates that under some circumstances relatively inefficient mergers may take place that is a particular merger may materialize despite the existence of an alternative merger capable of generating higher social surplus and even higher profits such bargaining failures have important implications for the ex ante optimal merger policy we show that a more stringent policy than the ex post optimal reduces the scope of these bargaining failures and raises expected social surplus we use a bargaining model that is flexible in the sense that its strategic structure does not place any exogenous restriction on the endogenous likelihood of feasible mergers

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

the economics of clear advice and extreme options i study a principal agent model in which the agent collects information and then chooses a verifiable action i show that the principal can find it desirable to constrain the agent s action set even though there is no disagreement about the ranking of actions ex post the elimination or penalization of intermediate actions which are optimal when information is poor improves incentives for information collection i characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral copyright 2005 wiley blackwell

evidence games truth and commitment an evidence game is a strategic disclosure game in which an informed agent who has some pieces of verifiable evidence decides which ones to disclose to an uninformed principal who chooses a reward the agent regardless of his information prefers the reward to be as high as possible we compare the setup where the principal chooses the reward after the evidence is disclosed to the mechanism design setup where he can commit in advance to a reward policy the main result is that under natural conditions on the truth structure of the evidence the two setups yield the same equilibrium outcome

red tape and corruption abstract we study the emergence and interaction of red tape and corruption in a principal bureaucrat agent hierarchy the principal is to provide the agent with a unit of a good that involves externalities so that market mechanisms fail to achieve first best red tape produces information but is costly to the agent and is administered by a corrupt bureaucrat first the bureaucrat may extort bribes from the agent in exchange for reducing the amount of red tape second the bureaucrat may take bribes to conceal the information produced through red tape even though the former kind of corruption tends to reduce red tape we show that the equilibrium level of red tape is above the social optimum

the use of bank lines of credit in corporate liquidity management a review of empirical evidence abstract this paper reviews empirical evidence on the use of bank lines of credit as a source of corporate liquidity traditional explanation for lines of credit is that they provide insurance against liquidity shocks in much the same as way hoarding cash does however recent empirical research suggests that access to lines of credit is contingent on the credit quality of the borrower as well as the financial condition of the lender these findings suggest that lines of credit are an imperfect substitute for cash as a source of corporate liquidity

pandering to persuade a principal chooses one of multiple projects or an outside option an agent is privately informed about the projects benets and shares the principal s preferences except for not internalizing her value from the outside option we show that for moderate outside option values strategic communication is characterized by pandering the agent biases his recommendation toward conditionally better looking projects even when both parties would be better o with some other project a project that has lower expected value can be conditionally better looking we develop some comparative statics of pandering pandering is also induced by an optimal mechanism without transfers

continuity in mechanism design without transfers we adopt a mechanism design approach to model communication between a principal and a privately informed agent in the context where monetary incentives are not available we provide a simple condition on the distribution of the agent s type which ensures that the optimal mechanism is continuous with strict log concavity of the distribution there exists a unique optimal mechanism that is characterized

taking the dogma out of econometrics structural modeling and credible inference without a doubt there has been a credibility revolution in applied econometrics one contributing development has been in the improvement and increased use in data analysis of structural methods that is the use of models based in economic theory structural modeling attempts to use data to identify the parameters of an underlying economic model based on models of individual choice or aggregate relations derived from them structural estimation has a long tradition in economics but better and larger data sets more powerful computers improved modeling methods faster computational techniques and new econometric methods such as those mentioned above have allowed researchers to make significant improvements while angrist and pischke extol the successes of empirical work that estimates treatment effects based on actual or quasi experiments they are much less sanguine about structural analysis and hold industrial organization up as an example where progress is less dramatic indeed reading their article one comes away with the impression that there is only a single way to conduct credible empirical analysis this seems to us a very narrow and dogmatic approach to empirical work credible analysis can come in many guises both structural and nonstructural and for some questions structural analysis offers important advantages in this comment we address the criticism of structural analysis and its use in industrial organization and consider why empirical analysis in industrial organization differs in such striking ways from that in fields such as labor which have recently emphasized the methods favored by angrist and pischke

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

on the role of empirical industrial organization in competition policy abstract in this paper i consider the role of empirical industrial organization io in competition policy in particular i consider the effect of the institutional setting in which competition policy is developed on the diffusion of ideas and techniques emerging from the empirical io literature in doing so my aims are two fold first i aim to understand the areas of competition policy most likely to provide fertile ground for future work and those which are less likely to have an impact and second i hope to make a small step towards ensuring that the important potential synergies between competition policy and empirical io are more fully developed to the benefit of both communities and more importantly the public this paper necessarily draws heavily on my experience in the uk but many remarks may resonate more generally

ignorance in agency problems we extend the standard agency model of adverse selection to incorporate the possibility that the agent may be ignorant i e know no more about a critical parameter than does the principal ignorance introduces a discontinuity pooling and particularly severe output distortions into the optimal incentive contract journal of economic literature classification numbers c79 d82

do remedies affect the efficiency defense an optimal merger control analysis abstract this paper examines the optimal use of remedies and the efficiency defense for merger control we develop a framework in which merger efficiency gains are endogenously determined and are not observed by the competition authority the possibility of an efficiency defense can push firms to design the merger better leading to greater efficiency gains firms can also submit remedies to the competition authority they interact with the efficiency defense by reducing the firm s incentive to enhance efficiency at the same time remedies improve the assessment of the merger in particular by signaling the true level of efficiency gains we ask to what extent it may be optimal to make use of both instruments simultaneously and thus discuss the possibility that the competition agency refrain from using one of the instruments to try to improve overall merger control performance

financial distress and underemployment a reasonable model of the labour market over the business cycle should predict among other things that a in very low states of product demand there may be too little employment from an efficiency perspective but as the state improves employment will increase until ultimately it is efficiently deployed and b in low states of demand a worker s welfare level will be low and as the state of the world improves so will the worker s welfare except possibly at high levels of demand where the worker s utility may start to fall surprisingly there does not exist a labour contract based model that is consistent with predictions a and b in fact the standard results in the literature are if leisure is a normal good then there will be too much employment in essentially all states of the world and the welfare of the worker declines as the state of the world improves in this paper a labour contracting model is constructed that is consistent with the above mentioned predictions two necessary ingredients in the model are the possibility of financial distress in low demand states and partial provability in contracting financial distress can be viewed as frustrating renegotiation and thus inefficient outcomes are possible in equilibrium partial provability the ability of an informed player to make verifiable claims or statements to an uninformed player eliminates certain kinds of inefficient outcomes in particular it eliminates the possibility that in equilibrium there is too much employment this last result is interesting in itself because it is commonly believed that normality of leisure necessarily implies that labour contracting models will generate employment levels that are too high from an efficiency perspective

optimal delegation via a strategic intermediary abstract this paper studies the optimal design of delegation rule in a three tier principal intermediary agent hierarchy in this hierarchy monetary transfer is not feasible delegation is made sequentially and all players are strategic we characterize the optimal delegation mechanism it is shown that the single interval delegation a la holmstrom is optimal only when the intermediary is moderately biased otherwise as responses to the distortion caused by a biased intermediary the optimal delegation set may involve a hole thus multi interval delegation set would arise when subordinates have opposing biases this result sheds some light on policy threshold effects slight changes in the underlying state cause a jump in the policy responses

disclosures and asset returns public information in financial markets often arrives through the disclosures of interested parties who have a material interest in the reactions of the market to the new information when the strategic interaction between the sender and the receiver is formalized as a disclosure game with verifiable reports equilibrium prices can be given a simple characterization in terms of the concatenation of binomial pricing trees there are a number of empirical implications the theory predicts that the return variance following a poor disclosed outcome is higher than it would have been if the disclosed outcome were good also when investors are risk averse this leads to negative serial correlation of asset returns other points of contact with the empirical literature are discussed

implementation with partial provability we extend implementation theory by allowing the social choice function to depend on more than just the preferences of the agents and allowing agents to support their statements with hard evidence we show that a simple condition on evidence is necessary for the implementation of a social choice function f when the preferences of the agents are state independent and sufficient for implementation for any preferences including state dependent with at least three agents if the social planner can perform small monetary transfers beyond those called for by f if transfers can be large f can be implemented in a game with perfect information when there are at least two players under a boundedness assumption for both results transfers only occur out of equilibrium the use of evidence enables implementation which is robust in the sense that the planner needs little information about agents preferences or beliefs and agents need little information about each others preferences our results are robust to evidence forgery at any strictly positive cost

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

optimal dynamic mechanism design with deadlines a seller maximizes revenue from selling an object in a dynamic environment with buyers that differ in their patience each buyer has a privately known deadline for buying and a privately known valuation first we derive the optimal mechanism neglecting the incentive constraint for the deadline the deadline of the winner determines the time of the allocation and therefore also the amount of information available to the seller when he decides whether to allocate to a buyer depending on the shape of the markup that the seller uses this can lead to a violation of the neglected incentive constraint we give sufficient conditions on the type distribution under which the neglected constraint is fulfilled or violated second for the case that the constraint cannot be neglected we consider a model with two periods and two buyers here the optimal mechanism is implemented by a fixed price in period one and an asymmetric auction in period two the asymmetry which is introduced to prevent the patient type of the first buyer from buying in period one leads to pooling of deadlines at the top of the type space

strategic communication with lying costs i study a model of strategic communication between an uninformed receiver and an informed but upwardly biased sender the sender bears a cost of lying or more broadly of misrepresenting his private information the main results show that inflated language naturally arises in this environment where the sender almost always claims to be of a higher type than he would with complete information regardless of the intensity of lying cost there is incomplete separation with some pooling on the highest messages the degree of language inflation and how much information is revealed depend upon the intensity of lying cost the analysis delivers a framework to span a class of cheap talk and verifiable disclosure games unifying the polar predictions they make under large conflicts of interest i use the model to discuss how the degree of manipulability of information can affect the trade off between delegation and communication copyright 2009 wiley blackwell

samurai accountant a theory of auditing and plunder a risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know but may verify through a costly auditing procedure we characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent the main results are that efficient schemes involve preaudit payments which are increasing in the agent s wealth audit probabilities are decreasing in the agent s wealth and also satisfy certain constraints as equalities in general such schemes involve stochastic auditing and rebates after an audit in this paper we analyse the problem of a principal extracting wealth from an agent who is reluctant to part with it and is also better informed than the principal as to the amount he owns we assume that the principal has a costly means of discovering the agent s

mechanism design with weaker incentive compatibility constraints abstract we study an adverse selection problem where an agent is able to understate his productivity but not allowed to overstate it the solution to this problem is generally different than the solution to the standard problem where no restriction is made on the statements of the agent we identify a sufficient condition that does not depend on the distribution of types under which these two solutions coincide

environmental regulations and plant exit a qualitative response model is applied to study the relationship between environmental regulations and plant exit the data set is norwegian panel data for establishments in three manufacturing sectors that have high shares of units which have been under strict environmental regulations in two of the sectors the estimated exit probability of regulated establishments is ceteris paribus only one third of the exit probability of non regulated establishments we also find that the probability to change regulation status from being non regulated to become regulated depends significantly on economic factors in particular establishments with weak profitability had the highest probability to come under environmental regulation

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures

mechanism design with renegotiation and costly messages in one interpretation of the mechanism design problem the agents in volved are designing a mechanism for themselves rather than having it im posed on them by an outside planner the mechanism may for example be a contract or a constitution in that case they will presumably choose a mecha nism that will deliver a pareto efficient outcome in equilibrium suppose how ever that play of the mechanism results in an out of equilibrium outcome and that this outcome is pareto inefficient then unless they have been able some how to commit to this mechanism the agents can be expected to tear up the contract and negotiate a new pareto efficient outcome in the two agent case this possibility of renegotiation limits the set of social choice rules that can

economic policy uncertainty and the supply of business loans abstract using a vector autoregressive framework of analysis we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty this contraction takes two main distinct forms on the one hand banks restrict their supply of spot funds which we document using flows of loans and term loan originations on the other hand banks also curtail their provision of liquidity insurance reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers drawing down on the lines at the peak of the responses we find that a one standard deviation increase in epu causes a contraction in the supply of business loans between 3 and 5 on the extensive margin

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts