on the efficiency of law a public choice perspective economists have not yet developed a comprehensive theoretical framework incorporating transaction cost economics within a public choice perspective for predicting when there will be an efficiency problem with the law transaction cost reasoning and the rent seeking insight have not been applied systematically in a dynamic institutional context to evaluate when the law will be used to increase or not minimize problems of bounded rationality and opportunism this paper takes a first step at identifying and remedying this deficiency the paper first provides a critical review of relevant theoretical contributions made by becker 1983 1985 posner 1977 priest 1977 rubin 1977 1982 williamson 1975 1985 and others we then show how analysis of the efficiency of law can be synthesized into a broader whole by incorporating transaction cost economics more fully into existing understanding of rentseeking in the political realm thus within the public choice paradigm this paper develops a deeper transaction cost analysis of the efficiency of law building on prior research by the authors crew and rowley 1988a 1988b twight 1983 1988 the paper identifies variables that position legal rules on a spectrum that ranges from those that are predominantly transaction cost

optimal card payment systems abstract this paper presents a model of a card payment system to address the pricing and rules that govern such systems it evaluates the social optimality of privately set interchange fees and the adoption of a rule by payment systems to prevent merchants surcharging for card transactions using two extremes of merchant pricing monopolistic pricing and perfect competition both types of merchant pricing constrain the ability of card schemes to use interchange fees and the no surcharge rule in anticompetitive ways although for quite different reasons the positive role of the no surcharge rule in preventing excessive merchant surcharging is also highlighted

two sided search marriages and matchmakers this article analyzes the provision of matching services in a model of two sided search agents belong to two heterogeneous populations and are distributed on 0 1 their utility is equal to the index of their mate in a search equilibrium agents form subintervals and are only matched to agents inside their class marriage brokers match agents according to a centralized procedure if the matchmaker charges a uniform participation fee only agents of higher quality participate in the centralized procedure if the matchmaker charges a commission on the matching surplus only agents of lower quality go to the intermediary

negative intra group externalities in two sided markets two types of agents interact on a pre existing free platform agents value positively the presence of agents of the other type but may value negatively the presence of agents of their own type we ask whether a new platform can find fees and subsidies so as to divert agents from the existing platform and make a profit we show that this might be impossible if intra group negative externalities are sufficiently but not too strong with respect to positive inter group externalities

a general equilibrium model of congressional voting in this paper we specify a model in which congressmen constituents and campaign contributors simultaneously decide on behavior constituents and contributors desire to influence the voting behavior of congressmen congressmen on the other hand want to be elected and vote accordingly we empirically test this model using roll call voting on eight bills dealing with economic regulation and find support for the model our results indicate that part of the voting behavior of congressmen may be explained by noneconomic factors we also find that unions and businesses as campaign contributors are sometimes influential unions are more often influential than is business ideological factors are also important in explaining voting

platform competition in two sided markets many if not most markets with network externalities are two sided to succeed platforms in industries such as software portals and media payment systems and the internet must get both sides of the market on board accordingly platforms devote much attention to their business model that is to how they court each side while making money overall this paper builds a model of platform competition with two sided markets it unveils the determinants of price allocation and end user surplus for different governance structures profit maximizing platforms and not for profit joint undertakings and compares the outcomes with those under an integrated monopolist and a ramsey planner jel l5 l82 l86 l96

capture and ideology in the economic theory of politics the economic theory of regulation long ago put public interest theories of politics to rest these theories have correctly been viewed as normative wishings rather than explanations of real world phenomena they have been replaced by models of political behavior that are consistent with the rest of microeconomics anthony downs 1957 james buchanan and gordon tullock 1965 george stigler 1971 sam peltzman 1976 recently however debate has arisen over whether some version of a public interest theory of regulation will have to be readmitted to our thinking about actions and results in the political arena what is at issue is the empirical importance of the altruistic publicly interested goals of rational actors in determining legislative and regulatory outcomes james kau and paul rubin 1979 kalt 1981 peltzman 1982 this study assesses the nature and significance of publicly interested objectives in a particular instance of economic policymaking u s senate voting on coal strip mining regulations the existence of such objectives is of course no contradiction of the economic view of human behavior kenneth arrow 1972 gary becker 1974 and may well be rooted in genetic biological history becker 1976 jack hirshleifer 1978 generally however individuals altruistic publicly interested goals have been given little attention this reflects the judgment that such goals are so empirically unimportant as to allow the use of occam s razor in positive models or well founded apprehensions that these goals are unusually difficult to identify measure and analyze notwithstanding the latter problem we find that approaches which confine themselves to a view of political actors as narrowly egocentric maximizers explain and predict legislative outcomes poorly the tracking and dissecting of the determinants of voting on coal strip mining policy suggest that the economic theory of politics has been prematurely closed to a broader conception of political behavior

chicken and egg competition among intermediation service providers we analyze a model of imperfect price competition between intermediation service providers we insist on features that are relevant for informational intermediation via the internet the presence of indirect network externalities the possibility of using the nonexclusive services of several intermediaries and the widespread practice of price discrimination based on users identity and on usage efficient market structures emerge in equilibrium as well as some specific form of inefficient structures intermediaries have incentives to propose non exclusive services as this moderates competition and allows them to exert market power we analyze in detail the pricing and business strategies followed by intermediation services providers copyright 2003 by the rand corporation

contracts and externalities how things fall apart a single principal interacts with several agents offering them contracts the crucial assumption of this paper is that the outside option payoffs of the agents depend positively on how many uncontracted or free agents there are we study how such a principal unwelcome though he may be approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out two variants are considered when the principal cannot re approach agents there is a unique equilibrium in which contract provision is split up into two phases in phase 1 simultaneousoffers at good though varying terms are made to a number of agents in phase 2 offers must be made sequentially and their values are discontinuously lower they are close to the very lowest of all the outside options when the principal can repeatedly approach the same agent there is a multiplicity of equilibria in some of these the agents have the power to force delay they can hold off the principal s overtures temporarily but they must succumb in finite time in both models despite beingable to coordinate their actions agents cannot resist an invasion by the principal and hold to their best payoff it is in this sense that things eventually fall apart

cooperation among competitors some economics of payment card associations we analyze platforms in two sided markets with network externalities using the specific context of a payment card association we study the cooperative determination of the interchange fee by member banks the interchange fee is the access charge paid by the merchants banks the acquirers to cardholders banks the issuers we develop a framework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a payment card after drawing the welfare implications of a cooperative determination of the interchange fee we describe in detail the factors affecting merchant resistance compare cooperative and for profit business models and make a first cut in the analysis of system competition

the structure of a contract and the theory of a non exclusive resource the process of arriving at a useful concept of analysis is not only slow and painful but also may go astray and attain nothing useful someone begins with one example or observation followed by a theory which is intuitively plausible a theoretical term associated with a vague concept is coined examples of a seemingly different type emerge which call for another theory the process goes on as examples and theories continue to accumulate the different categories under the same heading of analysis serve only to confuse and each associated theory becomes ad hoc such has been the fate of the concept of externality a more useful approach i think is via contractual conditions the example chosen for illustration is marine fisheries where the fishing right is taken

coordination and discrimination in contracting with externalities divide and conquer abstract the paper studies bilateral contracting between n agents and one principal whose trade with each agent generates externalities on other agents it examines the effects of prohibiting the principal from i coordinating agents on her preferred equilibrium and ii making different contracts available to different agents these effects depend on whether an agent is more or less eager to trade when others trade more the prohibitions reduce the aggregate trade in the former case and have little or no effect in the latter case the inefficiencies under different contracting regimes are linked to the sign of the relevant externalities and are shown to be typically reduced by both prohibitions

federal control over education crisis deception and institutional change abstract this paper analyzes the emergence of two key statutes which first established comprehensive federal controls over education in the united states the national defense education act of 1958 and the elementary and secondary education act of 1965 the u s experience in establishing federal control over education is examined against a model of institutional change grounded in the economics of political transaction cost manipulation detailed examination of relevant congressional documents shows the roles of real and feigned crisis and of deliberate deception in effecting acceptance of federal control over education

two sided markets a progress report the paper provides a road map to the burgeoning literature on two sided markets and presents new results it identifies two sided markets with markets in which the structure and not only the level of prices charged by platforms matters the failure of the coase theorem is necessary but not sufficient for two sidedness the paper builds a model integrating usage and membership externalities that unifies two hitherto disparate strands of the literature emphasizing either form of externality and obtains new results on the mix of membership and usage charges when price setting or bargaining determine payments between end users

naked exclusion comment the ability of an incumbent firm to deter entry by writing exclusionary contracts with customers has been a subject of contention in the antitrust literature the courts concern with such exclusionary contracts has been challenged by those who argue that an incumbent faced with buyers whose interest is to promote entry and competition would have to pay buyers more for the inclusion of exclusionary provisions than it could possibly gain from exclusion in a provocative article eric b rasmusen et al 1991 henceforth rrw have argued that an incumbent may in fact be able to exclude rivals profitably using such contractual provisions because it can exploit buyers lack of coordination in essence if buyers expect other buyers to sign such provisions then they may see little reason not to do so themselves the rrw argument is potentially an important one because most alleged instances of entry deterrence through exclusionary contracts with customers occur in situations with multiple buyers unfortunately however rrw s two main results contain errors in this note we reconsider the rrw model providing correct characterizations of the likelihood and cost of exclusion for an incumbent firm our results indicate that while the intuition suggested by rrw is valid the equilibrium likelihood and cost of exclusion differ from what rrw derive moreover our analysis illuminates some further aspects of exclusionary contracting with multiple buyers among these issues we focus on how an incumbent can use discriminatory offers to exploit the externalities that exist among buyers in the provision of competition in section i we review the basic assumptions of the rrw model in sections ii and iii we then consider in turn the cases of simultaneous and sequential offers studied by rrw for the simultaneous model we distinguish between settings in which the incumbent can and cannot discriminate in its offers to different buyers this distinction is the source of the problem in rrw s analysis their simultaneous offer model assumes no discrimination but the proof of their proposition 2 assumes at times that discrimination is feasible we show that absent the ability to discriminate the incumbent can exclude profitably only when buyers fail to coordinate on their most preferred continuation equilibrium in contrast we show that when discrimination is possible the incumbent need not rely on a lack of buyer coordination to segal department of economics landau building stanford university stanford ca 94305 e mail ilya segal stanford edu whinston department of economics northwestern university 2003 sheridan road evanston il 60208 e mail mwhinston nwu edu we thank eric rasmusen john wiley and participants in the berkeley stanford iofest the university of copenhagen vertical restraints conference and a seminar at the antitrust division of the u s department of justice for helpful comments we thank federico echenique for excellent research assistance 1 for example a recent department of justice investigation concerned the use of exclusive contracts by the leading provider of computerized ticketing services ticketmaster most major cities have several large concert sports venues in many cities ticketmaster has exclusive contracts with a very large share of these venues 2 the other leading response to the argument that contracts with buyers cannot be a profitable method of exclusion is given in philippe aghion and patrick bolton 1987 section i one factor limiting the applicability of the aghion and bolton theory however is that it involves partial exclusion the contracts signed are not fully exclusionary they involve finite stipulated damages and the profitability of the strategy arises from extracting rents from an entrant when entry occurs indeed in the aghion and bolton model contracts that fully exclude offer no benefits over writing no contract at all in section iii of their paper aghion and bolton also discuss a two buyer version of their model in which externalities arise across buyers in contrast to the analysis here and in rrw they allow the incumbent to make an offer to a buyer i that is conditional on the acceptance decision of the other buyer 3 r innes and r j sexton 1994 also discuss the use of discriminatory offers in the context of a model in which buyers can form coalitions with the entrant

a theory of price control price or rent control is but one of many forms of legislative action which interfere with private contracting in the market place to delimit the scope of my analysis i shall use the term price control to refer only to any set of regulations which satisfies the following three conditions first the control must fix the price or income terms of private contracts this categorically excludes any laws which regulate the distribution of income among the contracting parties on a share or percentage basis 2 second the control must involve no appropriation of proceeds to or from the government taxation and subsidization are thus excluded finally the fixing of price must not be associated with direct government sales purchases or manipulation of resources so as to maintain the regulated price 3 by this stipulation price support is also excluded even on such terms legal regulations to control price are still many and varied to evaluate our understanding of the class of phenomena which we seek to explain it is essential that we discover implications refutable by facts by this criterion the available body of economic theory pertaining to price control is deficient indeed the massive literature on the subject offers few such implications 4 an alternative approach to analyzing the observable effects of price control is presented here

government manipulation of constitutional level transaction costs a general theory of transaction cost augmentation and the growth of government transaction costs are pivotal to the ongoing political choice of where to draw the line between the private sector and the public sector contrary to the dominant paradigm politically important transaction costs are actively manipulated in the public sector by those who perceive potential personal gain from such action over time transaction cost changes so created by government decision makers may fundamentally redefine the role and scope of government to analyze the role of transaction costs in the growth or decline of government it is essential to distinguish transaction costs that are unavoidable realworld constraints from those that are contrived in the sense that they are created by government officials use or extension of their existing authority once discretionary power is vested in the government its officials have both the capacity and the incentive to restructure the transaction costs constraining the revision ofgovernrnental authority this restructuring of transaction costs may take two forms 1 altering people s perceptions of the costs and benefits of governmental authority in a given sphere an information cost problem 1 2 altering the cost of acting upon one s perceptions of the costs and benefits of collectivization in order to procure revision of the scope of governmental authority 2

budget maximizing governmental agencies an empirical test niskanen s theory of government budgeting involving powerful agencies interested in maximizing their budgets through bargaining with a weak poorly informed governmental sponsor has received wide recognition this paper presents the first direct empirical tests of niskanen s ideas one implication of niskanen s model of budgeting is that the demand for public services will appear to be elastic niskanen s model also implies restrictions on the elasticity of the derived demand for labor in the public sector neither set of predictions is supported by existing empirical research on government activity

a multisectorial matching model of unions abstract we develop an equilibrium matching model where unions have an important institutional presence monopolistic competition characterizes the goods market where only some sectors are unionized thus the model can vary the coverage of collective bargaining it can vary the degree of coordination between unions and alternatively consider national and sectorial unions calibration to the union premium implies a workers rent extraction parameter much lower than assumed in the matching literature we introduce unemployment insurance to study the interactions of policies with unions and find that unions only push for more generous benefits if this does not entail higher payroll taxes

information gatekeepers on the internet and the competitiveness of homogeneous product markets we examine the equilibrium interaction between a market for price information controlled by a gatekeeper and the homogenous product market it serves the gatekeeper charges fees to firms that advertise prices on its internet site and to consumers who access the list of advertised prices gatekeeper profits are maximized in an equilibrium where a the product market exhibits price dispersion b access fees are sufficiently low that all consumers subscribe c advertising fees exceed socially optimal levels thus inducing partial firm participation and d advertised prices are below unadvertised prices introducing the market for information has ambiguous social welfare effects