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

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

the hold up problem in government contracting a two period procurement model is considered in an incomplete contract framework in contrast to o hart and j moore 1988 the welfare maximizing government as the buyer is able to accomplish ex ante optimal contracts which guarantee first best specific investments of both buyer and seller these contracts are precisely characterized regardless of the underlying supports of cost and benefit distributions renegotiation inevitably occurs in some states of nature this renegotiation always increases the ex ante fixed trade price hence the empirical observation of soft budget constraints in government contracting can be rationalized furthermore in accordance with common beliefs the seller s rents accrue only at the production stage copyright 1996 by the editors of the scandinavian journal of economics

knowledge accumulation within an organization in this article we consider a knowledge accumulation problem within an organization that cannot prevent the worker from quitting and using the knowledge outside the organization we show that knowledge accumulation is delayed the fraction of working time allocated to knowledge creation is highest at the early career stage falls gradually then rises again before falling finally toward zero we determine the effect of a change in the severity of the enforcement problem or the specificity of knowledge we also discuss the form of the optimal life cycle wage profiles the role of the initial knowledge level and the role of discounting

two remarks on the property rights literature we first point out that the recent property rights literature is based on three assumptions 1 that contracts are always subject to renegotiation 2 that the exercise of a property right confers a private benefit and 3 that parties are risk neutral building on hart moore 1999 we provide conditions under which an optimal contract consists of nothing more than an assignment of property rights we also examine the robustness of some of the literature s standard predictions about asset ownership to the introduction of mechanisms for eliciting parties ex post willingness to pay for the assets such as options or financial markets to illustrate the issue we revisit the hart moore 1990 proposition that joint ownership is suboptimal and argue that ownership by a single party is dominated by joint ownership with put options

from inside the firm to the growth process this paper argues that the internal organization of therm andthe growth process interact stronglyto determinesimultaneously the power ofincentives withintherm and the growthrate of the economy we show how agents within therm can invest either by using their ownhumancapital or by relying onsome form of reputational capital to secure implicit relationships withintherm andwe discuss how these investments a ect the growthrate ofthe economy

is unemployment lower if unions bargain over employment would there be more employment if unions bargained over employment and not only over wages most economists seem to answer yes 1

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

relationships commitment and labor productivity growth this paper analyzes the interactions between growth and the contracting environment in production with incompleteness in contracting a firm s capacity to commit to its workers will depend on institutional frictions such as hiring and firing costs this interaction of contracting structure and relationship costs will in part determine firms technology choices we suggest this as a possible explanation of the differential rates of labor productivity growth in europe and the united states jel o31 o33 o38 o40 l16

simple contracts renegotiation under asymmetric information and the hold up problem abstract in this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non trivial it is argued that the default decision may be interpreted as a simple contract that the parties have written ex ante this result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold up problem to be solved even if the parties valuations are private information

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

does the currency board matter us news and argentine financial market reaction using a generalized autoregressive conditional heteroscedasticity garch model we study the effects of the us monetary policy and macroeconomic announcements on argentine money stock and foreign exchange markets over the period january 1998 to july 2007 we show first that both types of news have a significant impact on all markets second there are noticeable differences in reaction for different subsamples argentine money markets were more dependent on us news under the currency board than after it was abandoned as the floating exchange rate partly absorbs spillover effects from the us finally we find that the us dollar denominated assets react less to us news than peso denominated assets which suggests that the currency board was not completely credible during its final years

organizational design and technology choice under intrafirm bargaining comment the authors consider a wide number of applications of an intrafirm bargaining game within organizations where employees and the firm engage in wage negotiations under their presumption that contracts cannot bind employees to the organization the resulting stable wage and profit profiles give rise to an objective function for the firm that places weight on inframarginal profits in an economically significant manner the authors in turn employ this methodology to explore applications of organizational design hiring and capital decisions training and cross training the importance of labor and asset specificity managerial hierarchies preferences for unionization responses to competition and internal capital budgeting copyright 1996 by american economic association

endogenous incomplete contracts a bargaining approach in this paper we argue that by modelling the contracting process as a bargaining game one can endogenize the choice between complete and incomplete contracts this point is demonstrated within a stylized model in which agents can allocate an endowment stream either via a once for all bargain over the entire stream a long term contract or through a series of bargaining rounds a short term contract within this structure short term contracts arise as equilibrium outcomes under very general conditions because a short term contract implies reduced bargaining costs for one of the agents in essence reduced transaction costs produce a short term contract jel classification l14 c78

renegotiation of concession contracts in latin america evidence from the water and transport sectors abstract high rates of contract renegotiation have raised serious questions about the viability of the concession model to attract private participation in infrastructure in developing countries after extending in reduced form a standard regulation model in which renegotiation occurs due to the imperfect enforcement of concession contracts we use a unique data set of 307 concessions awarded in latin america from 1989 to 2000 covering the sectors of transport and water to analyze the determinants of this high incidence of renegotiations of infrastructure contracts we look in details at the impact on the probability of renegotiation of a concession of regulatory institutions institutional features economic shocks and of the characteristics of the concession contracts themselves we then derive some policy implications of our work

transmutability generalised darwinism and the limits to conceptual integration this article explores the limits to conceptual integration between evolutionary biology cognitive neuroscience and economics the new learning in the natural sciences supplies material to update and enrich the microfoundations of institutional economics specifically the instinct habit psychology the framing of social reality with evolutionary concepts is however misguided in important respects metaphorical modelling is the transfer of concepts developed for the understanding of one domain to another ontological distinct domain the argument is made that the generalisation of darwinian principles to the phenomena of institutional persistence and change is theorising by metaphor because there are crucial ontological differences separating the natural and social domains social reality has the property of transmutability meaning the social environment unlike the natural domain is changeable by human agency this article endeavours to explain how the generalisation of the natural selection principle evokes a fallacious conception of institutional reality the idea that fitness in the social economic sphere is a matter of purposive adaptation by agents to exogenous conditions is misleading because real success in business or politics is transformative and is achieved by catalysing and maintaining advantageous shifts of widely prevalent habits of thought and behaviour copyright oup

efficient informal trade theory and experimental evidence from the cape town taxi market informal sectors in developing countries are often thought of as responses to rigid and cumbersome market regulations in this paper i study informal trade as a first best outcome in the model i propose rigid regulations can be necessary to achieve efficiency even though they are always sidestepped the key assumption is that the regulations define the trading parties fall back position in case the informal bargaining process breaks down i set up a field experiment to test the model s mechanisms in the cape town market for metered taxis consistent with the model i find that sidestepping the regulations increase cost efficiency taxis take the shortest route the price is however unaffected suggesting informal bargaining leads to a pareto improvement

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

the aaea ever growing and changing research challenges the changing economic conditions over the past century along with changes in technology and developments in economic theory and quantitative methods helped shape the profession we currently refer to as agricultural and applied economics the broadening of the profession from the original focus on the farm and agricultural industry to encompass international affairs governmental policies resources and environmental and rural affairs is discussed within this context emergence of the subdisciplines and some of the major individual contributions are noted the final section argues that members of the profession are well positioned to continue contributing research that will help society achieve its goals and notes six challenges that provide such opportunities

co specific investments hold up and self enforcing contracts abstract this paper offers a general model of the hold up problem when investments are co specific agents are risk neutral and there are no information asymmetries nash bargaining with outside options determines the division of the surplus arising from exchange the model formally demonstrates that reciprocal exposure to specific assets achieved via the partial redistribution of specific investment costs to the potentially opportunistic party serves as a credible commitment to mutually advantageous exchange

job independence as an incentive device a firm can either subject its workers to strict rules and regulations or grant them independence if independent they can make entrenchment investments which will not only raise their productivity but also make the firm depend on their cooperation however in contrast to a standard holdup problem the firm can afterwards take over control thus stripping such workers of a part of their bargaining assets this leads to structural distortions and may aggravate the holdup problem however the threat of partial expropriation may also alleviate the holdup problem and even induce overinvestment

firm specific human capital a skill weights approach the theory of human capital is agnostic on what constitutes firm specific skills the theory specifies that specific skills contribute to productivity only at the current firm a broader approach lets all skills be general but firms use them with different weights attached for example computer programming economics and accounting are general skills but there may be only one firm that wants workers trained in all three one implication is that wage profiles and the split of human capital costs depend on thickness of the market another is that firms pay for what appears to be general training

union egalitarianism as income insurance it is a common observation that unions often try to compress the wage distribution among their members as compared with the productivity distribution a troublesome aspect of standard theories of redistributive unions is the question why high productivity workers choose to enter the union in the first place this paper develops and explores the implications of an alternative insurance rationale for egalitarian wage objectives apart from providing a simple explanation of why heterogeneous union members may agree on egalitarian wage policies it also suggests a more guarded attitude toward the welfare costs of pay compression copyright 1992 by the london school of economics and political science

the when the how and the why of mathematical expression in the history of economic analysis when one reads about the history of the use of mathematical expression in economics one gets the impression of a few brave but lonely innovators like daniel bernoulli 1738 achille isnard 1781 n f canard 1801 johann von thunen 1826 and antoine augustin cournot 1838 present at the creation of economic thought and later a feisty band of visionaries associated with the marginalist revolution at the turn of the century who had the right tools in their rucksacks and then finally the full flowering of activity in the postwar period through it all there is the unmistakable conviction that this movement was cumulative inevitable and indeed natural

economics and the self organisation approach alfred marshall revisited the economics of alfred marshall is reassessed in the light of new developments in the natural sciences whereby a nonequilibrium thermodynamic approach is adopted to analyze self organization in dissipative structures it is argued that there is a clear correspondence between marshall s treatment of time irreversibility and this modern approach particularly when the latter is set in an informational context thus his principles is viewed as a very useful starting point in adapting the self organization approach for application in economics the main features of such a post marshallian approach to economics are discussed and compared with the mechanical approach of neoclassicism copyright 1993 by royal economic society

economic theory in the mathematical mode iif a symbolic date were to be chosen for the birth of mathematical economics our profession in rare unanimous agreement would select 1838 the year in which augustin cournot published his recherches sur les principes mathematiques de la thetorie des richesses students of the history of economic analysis could point out contributions made to mathematical economics as early as the beginning of the eighteenth century they could also point out johann heinrich von thunen s der isolierte staat 1826 a prototypical example of the use of mathematical reasoning in economic theory with little mathematical formalism but cournot stands out as the first great builder of mathematical models explaining economic phenomena among his successors in the nineteenth century and the early twentieth century the highest prominence will be given in this lecture to leon walras 1834 1910 the founder of the mathematical theory of general economic equilibrium to francis y edgeworth 1845 1926 and to vilfredo pareto 1848 1923 all three lived long enough into the twentieth century to have increased for all nobel laureates the value of the economics prize had it like the other prizes been initiated in 1901 if 1838 is the symbolic birthdate of mathematical economics 1944 is the symbolic beginning of its contemporary period in that year john von neumann and oskar morgenstern published the first edition of the theory of games and economic behavior an event that announced a profound and extensive transformation of economic theory in the following decade powerful intellectual stimuli also came from many other directions in addition to von neumann and morgenstern s book wassily leontiefs input output analysis paul samuelson s foundations of economic analysis tjalling koopmans activity analysis of production and george dant

formalising economics social change values mechanics and mathematics in economic discourse the mathematisation and formalisation of economic science has been one of the most important features of the development of economic science in the latter part of the twentieth century what were the causes behind this ubiquitous mathematisation of economic science recent scholarship places excessive emphasis on the role and prestige of mathematics as a scientific tool in this paper we argue this is inadequate not least because it fails to account for the whole classical era when mathematical economists failed to have any impact explaining this failure is one of the main aims of this paper most accounts focus mostly on the intellectual factors involved failing to do justice to what amounts to a multifaceted and complicated phenomenon involving social economic political intellectual normative and institutional factors partly redressing the balance by bringing to the fore the various factors involved is the other prime aim of this paper

timing of investments holdup and total welfare abstract we explore holdup with simultaneous and sequential investment with simultaneous investment both investors are held up with sequential investment contracting becomes possible after the project has commenced so the second investor avoids being held up if the investments are independent sequential investment increases cost of delay reduces the incentive for the first player to invest and increases the second player s incentive to invest the paper shows the timing of investment can act as an additional form of holdup if they have the option when to invest a party may choose the regime that does not maximize total welfare

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

sudden stops the real exchange rate and fiscal sustainability in argentina he fall of convertibility in argentina has stirred a lively discussion aboutthe causes for its collapse several explanations have been offered themost popular one relates to the unsustainable combination of a fixed exchangerate and large fiscal deficits that led to a rapid growth in public debt severe fiscalproblems and eventually a loss of access to credit markets another popularview stresses the impact of devaluation by argentina s major trading partners asan important cause of real exchange rate rer misalignment which reducedprofitability in the tradable sector this in turn slowed down investment and ledthe economy into a protracted recession with the associated deflation being themechanism for easing the rer disequilibrium here a different interpretation of the collapse of convertibility is provided drawing heavily on recent work by calvo et al 2002 this interpretation shareswith the previous views the acknowledgement of fiscal sustainability problemsand rer misalignment however this view places special emphasis on financialconsiderations in particular it is argued that the impact of rer misalignmentwent beyond considerations of trade and competitiveness it played a major rolein the fiscal and financial problems that eventually argentina had to confront moreover fixed exchange rates helped conceal those problems and as a result necessary fiscal measures were postponed thereby intensifying the crisis

contractual contingencies and renegotiation in a dynamic model of asymmetric information between the owner of a firm and a manager we investigate the optimal set of contingencies on which an incentive contract should depend when renegotiation is possible in particular we characterize the circumstances in which the contracting parties find it desirable to deliberately restrict what the owner can monitor thereby limiting the contractible contingencies our findings thus provide an endogenous explanation for contract simplicity in contrast to those based on transactions costs or bounded rationality

on renegotiation design a central concern of contract theory is to investigate departures from the first best paradigm in which rational agents could in principle achieve unrestrained efficiency through complete long term contingent contracts in order to take into account some of the observed limitations in real life contracts attention has been paid to informational problems one focus has been on asymmetries of information between contractors adverse selection and moral hazard have been used for example to analyze insurance problems labor contracts managerial incentives regulation of monopolies vertical restraints or the financial structure of firms see for example hartholmstrom 1987 for a survey of these issues attention has also been devoted to private information shared by the parties but unavailable to outsiders like courts that is observable but unverifiable information asymmetries of information between contractors introduce constraints which indeed most often prevent to achieve first best efficiency unfortunately this paradigm involves technical difficulties which explains why most contributions focus on unidimensional asymmetries and may leave some undeterminacies as to the form of optimal contracts e g if there are more than one asymmetry or the size of the inetliciencies there may for instance exist several equilibria which are more or less inefficient the last paradigm observable but unverifiable information is technically more convenient what is not clear however is the extent to which the presence of unverifiable information may prevent achieving first best

ambivalent investment and the hold up problem in this paper we add to the foundations of incomplete contracting literature we study the hold up problem with ambivalent investment where investment benefits the investing party if ex post the right decision is undertaken but harms the investing party if the wrong decision is made in this context we show that the power of contracts to provide investment incentives depends on three factors the commitment value of contracts the amount of quasirents that the investing party can expect in the case of out of contract renegotiation and the degree of ambivalence of investment first contracts provide first best investment incentives when parties can commit to a contract regardless of the type of investment second with sufficiently ambivalent investment if parties cannot commit not to renegotiate a contract and if the investing party s bargaining power is intermediate contracts cannot improve investment incentives above those provided by no contract in contrast a simple buyer or seller option contract is optimal when the investing party s bargaining power is extreme jel d23 k12 l22

a signaling based theory of contractual commitment to relationships abstract in this paper i present signaling as an explanation for how and why parties commit to relationships when they initially contract about the terms of those relationships two forms of contractual commitment to a relationship are considered a promise to trade in the future contracted quantity and a promise not to trade with anyone else contracted exclusivity a party is said to commit more to a relationship if it commits initially to trade a higher quantity and or to a higher level of exclusivity i characterize equilibrium contracts and therefore commitment both the ability to signal information through an exclusivity commitment and whether the informed party commits more to the relationship when the relationship is more likely to succeed depend on the source of the asymmetry of information

vertical mergers and product differentiation this paper presents an equilibrium theory of vertical mergers that incorporates strategic behaviors in the hotelling type location model this enables one to consider the relationship between downstream firms strategies for product differentiation and vertical integration i show that vertical integration enhances the degree of product differentiation of the integrated firm under some conditions partial integration arises in equilibrium which may increase the profit of the nonintegrated downstream firm the paper also discusses the welfare implications of vertical integration

the hold up problem in a repeated relationship abstract much of the literature on what determines the scope of operations of a producer has centered on the hold up problem the standard results indicate the hold up problem may lead to suboptimal investments and therefore integration may improve the organization of production in this paper we consider a repeated relationship with durable investments and show the possibility of integration improves the choice of investments and there is no integration in equilibrium the equilibrium contract is non exclusive in order to allow the buyer to choose integration in later periods we derive this result in the presence of very simple and incomplete contracts

worker reciprocity and employer investment in training standard economic theory predicts that firms will not invest in general training and will underinvest in specific training empirical evidence however indicates that firms do invest in general training of their workers evidence from laboratory experiments points to less underinvestment in specific training than theory predicts we propose a simple model in which a firm invests the socially optimal amounts in general and specific training if the worker is sufficiently motivated by reciprocity a reciprocal worker may be willing to give the firm a full return on its investment we present empirical evidence that supports the proposed mechanism workers with a high sensitivity to reciprocity have 15 higher training rates than workers with a low sensitivity to reciprocity

estimating the benefits of contractual completeness i provide a revealed preference based framework that uses covenant prices and choices to quantitatively study how covenants generate firm benefits by completing debt contracts i use a rational expectations based panel estimator of covenant prices which does not require quasi experimental variation to circumvent the problem of endogenous covenant choices i find that firms surpluses exceed the spread paid on a loan leverage and interest rate covenants produce the largest benefits lending quantitative credence to several standard theories of covenants once covenants are chosen the benefits from fine tuning them are small thus rationalizing boilerplate covenants i conclude by discussing the extensions and limitations of my method the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

procurement and renegotiation parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information the issue of the parties investment in the relationship before renegotiation is analyzed in a simple two period procurement model the firm invests in the first period it then learns its production cost and the sponsor learns its value for the project williamson s underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm s investment is not observable by the sponsor the introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued the role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed last it is shown that if investment is observable by the sponsor andthus may become a joint decision variable the two parties may choose to under or overinvest

efficient investments in the implementation problem abstract this paper identifies a condition for an efficient social choice rule to be fully implementable when we take into account investment efficiency to do so we extend the standard implementation problem to include endogenous ex ante and ex post investments in our problem the social planner aims to achieve efficiency in every equilibrium of a dynamic game in which agents strategically make investments before and after playing the mechanism our main theorem shows that a novel condition commitment proofness is sufficient and necessary for an efficient social choice rule to be implementable in subgame perfect equilibria the availability of ex post investments is crucial in our model there is no social choice rule that is efficient and implementable in subgame perfect equilibria without ex post investments we also show that our positive result continues to hold in the incomplete information setting

accounting information in financial contracting the incomplete contract theory perspective this paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research we argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved by discussing its rich theoretical implications we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency

specific investments holdup and the outside option principle according to the outside option principle the holdup problem can be solved when the non investor has a binding outside option the investor then becomes residual claimant creating efficient investment incentives this paper reports about an experiment designed to test this we find that when the outside option is binding investment levels fall short of the efficient level but holdup is less of a problem than predicted when the outside option is non binding

contractual signaling relationship specific investment and exclusive agreements i analyze a model of hold up with asymmetric information at the contracting stage the asymmetry of information concerns the value of trade with external parties i show that contractual signaling and efficiency of investment can conflict if only quantity is contractible this conflict generates inefficient equilibria in terms of investment contracting on exclusivity in addition to quantity resolves the conflict and consequently eliminates the inefficiency of investment

complexity and renegotiation a foundation for incomplete contracts the paper considers a hold up model where only one of n future trading opportunities will prove to be efficient and where ex post renegotiation of the ex ante contract cannot be prevented as the environment becomes more complex n the outcome under any message contingent long term contract converges to that of the incomplete contracting model where trade is contractible ex post but not ex ante when trades are costly to describe both ex ante and ex post the incomplete contracting result is extended to a broader class of environments

time related characteristics of tenancy contracts and investment in soil conservation practices we present a dynamic model that shows how different types of land tenancy contracts and their time related characteristics influence farmers decisions to invest in soil improvement and productive inputs using recent household and plot level data from the brong ahafo region in ghana we analyze the impact of land tenancy arrangements contract duration as well as the number of times the contract has been renewed in the past on the intensity of investment in soil conservation measures such as ditches and farmyard manure and productive inputs like chemical fertilizer the empirical findings generally confirm the predictions of the theoretical model and reveal that the intensity of investments on different plots cultivated by a given farmer varies significantly with the type of tenancy arrangement on the plot as well as the time related characteristics of the contract

real options with ex post division of the surplus abstract this paper examines a real option model where two vertically related firms are involved in a specific investment project that is subject to an uncertain payoff while ex post bargaining between a seller and a buyer leads to underinvestment by the seller in a standard model where timing of the seller s investment is exogenous we show that this need not be the case when the seller s timing of investment is endogenous however bargaining with a buyer leads to excessive waiting more severe holdup and higher uncertainty will lead to vertical integration of activities to avoid timing inefficiencies

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

holdups simple contracts and information acquisition abstract in a typical procurement setup several recent papers have shown that when complete contracting is not possible simple noncontingent contracts may suffice to solve the under investment problem this paper points out that a noncontingent contract offer such as a fixed price contract may induce the seller to acquire information on the future course of costs and only to accept the offer if the cost is low it is shown that sometimes the buyer prefers to wait and buy on the spot market than to offer a long term contract when the seller rejects a contract offer or the buyer chooses not to make one the seller will not make efficient investments because he expects to be held up on the spot market

coordination commitment and enforcement the case of the merchant guild we interpret historical evidence in light of a repeated game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants the merchant guild developed the theoretically required attributes secured merchants property rights and evolved in response to crises to extend the range of its effectiveness contributing to the expansion of trade during the late medieval period we elaborate on the relations between our theory and the monopoly theory of merchant guilds and contrast it with repeated game theories that provide no role for formal organization

household bargaining and microfinance abstract this paper examines a household bargaining problem where one household member can use external finance to invest in an uncertain business project faced with limited income generating opportunities we show that the household member will consistently choose safe investment projects we also explain why other members of the household can be made worse off from investment even when aggregate household consumption is expected to rise in a dynamic version of the bargaining problem we study incentives for the household to contribute towards loan repayments and identify conditions under which the borrower will transfer control over her loan to her partner

investments and bargaining in a model with positive consumption externalities abstract this paper analyzes the investment decisions of the members of a committee when a subsequent bargaining process determines the distribution of a divisible good among them the shares allocated to investing agents generate positive consumption externalities we show that agents investments improve their bargaining position this induces rent seeking behavior that generates a negative external effect on other investing agents in this setting the effects of rent seeking counterbalance the effects of positive consumption externalities so that equilibria may be efficient or display either over or under investment

unobservable investment and the hold up problem we study a two person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining we show that if all offers are made by the seller and the time between offers is small then the buyer invests efficiently and the seller extracts all of the surplus hence bargaining with frequently repeated offers remedies the hold up problem even when the agent who makes the relation specific investment has no bargaining power and contracting is not possible we consider alternative formulations with uncertain gains from trade or two sided investment

renegotiation proof implementation and time preferences this paper explores how the requirement that the implementation of contracts be renegotiation proof affects the set of contracts that can be implemented in a seller buyer scenario in which the information regarding the agents valuations is nonverifiable this paper explicitly adds a time dimension to an implementa tion problem and introduces a natural criterion of renegotiation proofness for the case of time consuming renegotiation the main insight gained is that the addition of the time dimension enlarges significantly the set of contracts that can be implemented in a renegotiation proof manner jel c70 d23 this paper explores how the requirement that the implementation of contracts be renegotiation proof affects the set of con tracts that can be implemented in a seller buyer scenario in which the informa tion regarding the agents valuations is non verifiable the paper s main contributions are that first it explicitly adds a time di mension to an implementation problem and second it introduces a natural criterion of renegotiation proofness for the case of time consuming renegotiation for concreteness the discussion will be conducted in the context of the following example there are two agents a seller and a buyer who sign a contract for the sale of one unit in the future their valuations for the unit denoted by s and b respectively are not known when they sign the contract they become known to both parties after the contract is signed and before it is imple mented thus when it comes to implement ing the contract the parties information is complete but it is assumed to be nonverifi able i e not observable to third parties such as a court 1 when they sign the con tract the parties want to specify for any possible realization of the valuations s b whether or not there will be trade and the price p s b at which it will take place the contract describes the procedure that will be followed after the valuations are real ized the purpose of this procedure is to make sure that the original intentions of the parties are indeed carried out the idea is that the steps laid out in the contract are independent of s b and hence are en forceable by a third party or by a social convention in game theoretic terms a contract specifies a game form that imple ments the function p in the sense that for all s and b p s b is the resulting game s unique subgame perfect equilibrium out come in the context of this scenario we shall investigate the set of price functions p s b that can be so implemented by a contract and examine how this set is affected by the requirement that the contract be renegotia

revenue sharing in movie exhibition and the arrival of sound i introduction at least since adam smith economists have been intrigued by share contracts there has been a proliferation of models most of which tend to explain the share contract as resulting from some mix of optimal risk bearing and optimal effort motivation 1 a large number of researchers have attempted to test these models empirically sharecropping contracts not surprisingly are the most intensively examined the bibliography in knoeber 2000 but similar studies have been conducted in many other areas for example martin 1988 and lafontaine 1992 examine franchise arrangements hallagan 1978 investigates contracts used to lease gold claims leffler and rucker 1991 analyze a sample of private timber sale contracts goldberg and erickson 1987 study long term contracts for the sale of petroleum coke aggarwal and samwick 1999 investigate incentive contracts between firms and their executives and chisholm 1997 goldberg 1997 and weinstein 1998 all examine profit sharing contracts between fi lm companies and the talent this article differs in an important respect from most previous studies which analyze a cross section of contracts in an attempt to determine how or whether they vary according to the attributes of the contracting parties or the products being contracted for instead it investigates an area where a sudden technology shock led to the rapid and widespread replacement of one form of contracting by another the industry is the motion picture business and the shock was the arrival of sound during the silent film era the vast majority of first run feature films were rented to cinemas for flat daily or weekly payments within two years of the release of the first sound picture revenue sharing contracts were the norm and they remain the norm to this day 2 my goal is to investigate the degree to which the standard economic concerns moral hazard risk sharing and measurement problems can explain this change because the contracting parties remained the same the question becomes what was altered in the nature of the product or in its provision so as to have altered correspondingly the incentives faced i conclude the following first the advent of sound fundamentally changed the inputs live music and other acts supplied by the exhibitor and central to the show were replaced by a soundtrack and short sound films supplied by the film company the benefit of deterring exhibitor shirking through the use of flat rental fees which made the exhibitor full residual claimant declined accordingly the party whose effort makes the largest contribution to marginal product generally receives the largest proportion of the residual claims and in the decades following the arrival of sound the proportion of residual claims collected by film companies rose steadily in addition average revenue per film increased with sound whereas the cost of ensuring that exhibitors reported attendance revenue honestly done by locating a film company s representative in the theater remained the same the ex post division of revenue necessary for revenue sharing thus became cheaper on a per film basis finally uncertainty ab out the value in terms of expected attendance revenue of the early sound films appears to have raised the cost of negotiating lump sum rental fees and thus promoted experiments with revenue sharing however although this may have contributed initially it cannot explain the practice s persistence uncertainty about film values declined as talking films became better known ii the nature of the problem a film company contracts with an exhibitor so that they may jointly produce the final good a movie presentation 3 to that end each supplies essential inputs the film company provides the movie itself assembled from a variety of inputs and some sort of national advertising support the exhibitor provides the theater which consists of seating projection equipment a refreshment stand and other support activities and some form of local advertising

contracting productivity growth in this paper we analyze the interactions between growth and the contracting environment in the production sector allowing incompleteness in contracting implies that viable production relationships for firms and workers and therefore the profitability of industries depend on the rates of innovation and growth the speed at which new innovations arrive in turn depends on the profitability of production for the usual reasons examined in the endogenous growth literature we show that these interactions can have important implications which are consistent with observed phenomena in both the micro and macro environment in particular we demonstrate that a technological shock increasing productivity of research can through this interaction lead to a productivity slowdown and a shift in labor market contracts away from firms providing implicit guarantees of lifetime employment and towards shorter term contractor type arrangements we show the consistency of an increase in the proportion of the labor force under short term employment increased relative returns of workers in high productivity sectors and increased income inequality with a productivity slowdown of finite duration

argentina s currency board collapse weak policy or bad luck two basic views can be discerned in post mortems of argentina s currency board 1 that weak fiscal policy was fundamentally to blame and 2 that the peso had become too severely overvalued for the peg to survive this paper evaluates the evidence for these rival interpretations the real effective exchange rate index did not indicate massive overvaluation but this index does not capture the effects on the equilibrium rate of the sudden stop in capital flows to emerging markets after 1998 it also understates the amount of adjustment required for argentina to reach the equilibrium rate because neighbour countries dollar exchange rates were held up by argentina s overvaluation as is indicated by their depreciation in 2002 argentina was particularly vulnerable to the sudden stop because of the extreme volatility of its portfolio inflows fiscal policy simulations suggest that even with a substantially improved primary balance from 1994 onwards loss of investor confidence would still have triggered unsustainable debt dynamics once the recession began to bite after 1998 the stagnation of output and prices in argentina created a yawning gap between the interest rate on debt and the rate of growth of nominal gdp had the currency been floated in say 1995 the real devaluation of the peso would still have pushed up the debt gdp ratio but higher output would have left greater scope for addressing this by running a sizeable primary surplus moreover the more gradual depreciation under floating might have allowed the economy to adjust to higher debt service payments without resort to default the imf has criticised itself for not pressing for tighter fiscal policy in the 1990s a more fundamental criticism would be that it was seduced by the bipolar model into complacency about adjustment to real shocks and forgetting the teachings of optimum currency area theory

the mirrlees approach to mechanism design with renegotiation with applications to hold up and risk sharing the paper studies the implementation problem first analyzed by maskin and moore 1999 in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism we develop a first order approach to characterizing the set of implementable utility mappings in this problem paralleling mirrlees s 1971 first order analysis of standard mechanism design problems we use this characterization to study optimal contracting in hold up and risk sharing models in particular we examine when the contracting parties can optimally restrict attention to simple contracts such as noncontingent contracts and option contracts where only one agent sends a message

does relationship specific investment depend on asset ownership evidence from a natural experiment in the housing market the classic hold up model grossman and hart 1986 predicts that allocations of asset ownership which expose a party to expropriation reduce relationship specific investments by this party in the empirical context of t he housing market i show that the hold up model predicts more relationship specific investments such as bathroom renovations in owner occupied housing than in rental housing i confirm this prediction for the german housing market to ob tain an exogenous variation of asset home ownership i use the natural experiment of the german reunification under the communist regime ownership exist ed but was economically meaningless it was a quasi random by product of dwelling choice yet after reunification ownership unexpectedly reacquired legal fo rce

optimal information transmission in a holdup problem this article examines the optimal contract in a bilateral trade model with unobservable relationship specific investment and renegotiation in such a setting a contract plays an additional role that it does not have in the standard holdup model namely that of transmitting information between the parties the article shows that a partial disclosure contract may be optimal and describes the optimal contract if the investment is cooperative and the information between the trading parties is asymmetric the optimal contract generally cannot result in the first best but dispensing with either of these assumptions makes the first best achievable

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

sunk costs and the inefficiency of relationship specific investment it is well known that relationship specific investment will be inefficient when the parties are unable to write binding long term contracts in this note i exploit some of the recent developments in strategic bargaining theory in order to explore the relationship between the degree of inefficiency in the level of such relationship specific investment and the degree of sunkness in the cost of investment one result obtained is that the underinvestment result is not sensitive to the degree of sunkness in the cost of investment another result is that each player may actually overinvest when the cost of investment is not sunk

debt restructuring and economic recovery analysing the argentine swap when argentine sovereign default in december 2001 led to a collapse of the peso the burden of dollar debt became demonstrably unsustainable but it was not clear what restructuring was feasible nor when eventually in 2005 after a delay of more than three years a super majority of creditors accepted a swap that essentially involved the pesification of dollar liabilities with the imf not playing its customary role in arranging a swap we consider whether a bilateral bargaining approach can help explain the final settlement and the delay in achieving it we find that the swap broadly corresponds to a bargaining outcome where substantial delay occurred for both political and economic reasons even after political legitimacy was assured by general elections negotiators seeking a sustainable outcome at a time of deep recession profound currency under valuation and high sovereign spreads realised it was better to wait before settling other factors discussed include the definition of sustainability criteria the effect of inter creditor conflict and the role of third parties in promoting good faith bargaining we suggest that while these issues need further investigation there are institutional changes that could make them less problematic

expectation damages divisible contracts and bilateral investment this paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship specific investment by the buyer and the seller as demonstrated by edlin and reichelstein 1996 no contract that specifies only a fixed quantity and a fixed per unit price can induce efficient investment if marginal cost is constant and deterministic we show that this result does not extend to more general payoff functions if both parties face the risk of breaching the first best becomes attainable with a simple price quantity contract

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

wage structure as implicit insurance on human capital in developed versus underdeveloped countries abstract this paper explores the role of wage structure as implicit insurance on human capital it illustrates how smaller wage differentials in the developed world can be welfare enhancing by acting as implicit insurance while larger wage differentials in underdeveloped countries make investments in human capital riskier in other words with smaller wage differentials the students in a developed country are insured against poor educational outcomes through the existence of well paid alternative employments which are not present in the economy of a less developed country this result arises as multiple equilibria in a general equilibrium model when there are no insurance markets for human capital

the architecture of federations constitutions bargaining and moral hazard abstract the paper studies a federal system where a a region provides non contractible inputs into the social benefits from a public policy project with spillovers to other regions and b where political bargaining between different levels of government may ensure efficient decision making ex post allowing intergovernmental grants to be designed optimally we ask whether project authority should rest with the region or with the central government centralization is shown to dominate when governments are benevolent with regionally biased governments both centralization and decentralization yield inefficiencies and the second best institution depends on parameter values if political bargaining is prohibited when bargaining is feasible however the first best can often be achieved under decentralization but not under centralization at the root of this dichotomy is the alignment of decision making over essential inputs and project size under decentralized governance and their misalignment under centralization

coping with terms of trade shocks pegs versus floats the choice of the exchange rate regime has always been an area of great controversy and debate the discussion has once again taken center stage in the developing world the sequence of currency crises in the 1990 s the success of cultency board arrangements the dollarization plan of ecuador and the apparent swing toward flexible regimes of many emerging economies has revived interest in this debate milton friedman 1953 argued that one of the most important advantages of flexible regimes over fixed regimes is that they can smooth adjustment to real shocks even in the presence of nominal rigidities ever since this has been one of the least disputed benefits attributed to fully flexible exchange rate regimes subsequent to friedman many theories of the international transmission of real shocks have confirmed the original intuition that the shortrun responses to terms of trade shocks should be different across exchange rate regimes here i look at a post bretton woods sample of 74 developing countries to test whether flexible regimes can buffer terms of trade shocks better than fixed regimes

court efficiency and procurement performance disputes over penalties for breaching a contract are often resolved in court a simple model illustrates how inefficient courts can sway public buyers from enforcing a penalty for late delivery in order to avoid litigation therefore inducing sellers to delay contract delivery by using a large dataset on italian public procurement we empirically study the effects of court inefficiency on public work performance we find that where courts are inefficient i public works are delivered with longer delays ii delays increase for more valuable contracts iii contracts are more often awarded to larger suppliers and iv a higher share of the payment is postponed after delivery other interpretations receive less support from the data