equilibrium in a stock market economy with shareholder voting this paper demonstrates the existence of a shareholders equilibrium for a two period stock market economy in which there may be fewer securities than states of the world there are two allocation mechanisms in the economy firms owners may vote direction restricted majority rule to change firms production plans across states while keeping shareholdings fixed and individuals may trade their shares and stocks of a current production consumption good while keeping firms plans fixed a shareholders equilibrium is a set of firms plans and an allocation of shares and the current good which are stable with respect to both mechanisms copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

wider share ownership and economic performance in the uk today almost one in every five adults directly own shares on the stock market compared with a figure of 5 as recently as 1983 this has been a remarkable change engineered by the conservative administration the government have argued that the policy is aimed at creating an enterprise culture nothing less than a fundamental change in attitudes to wealth creation in the economy while we would not disagree with this laudible objective it is clearly difficult to assess both in terms of attainment and consequences one would be happier if the justification for the policy could be grounded in more direct economic terms and the purpose of this paper is to attempt to provide an analysis of some economic aspects of wider share ownership as a policy objective we will attempt to provide a general theoretical analysis although this will inevitably be biased towards aspects of relevance to the uk experience

retrospectives friedrich hayek and the market algorithm friedrich a hayek 1899 1992 is known for his vision of the market economy as an information processing system characterized by spontaneous order the emergence of coherence through the independent actions of large numbers of individuals each with limited and local knowledge coordinated by prices that arise from decentralized processes of competition hayek is also known for his advocacy of a broad range of free market policies and indeed considered the substantially unregulated market system to be superior to competing alternatives precisely because it made the best use of dispersed knowledge our purpose in writing this paper is twofold first we believe that hayek s economic vision and critique of equilibrium theory not only remain relevant but apply with greater force as information has become ever more central to economic activity and the complexity of the information aggregation process has become increasingly apparent second we wish to call into question hayek s belief that his advocacy of free market policies follows as a matter of logic from his economic vision the very usefulness of prices and other economic variables as informative messages which is the centerpiece of hayek s economics creates incentives to extract information from signals in ways that can be destabilizing markets can promote prosperity but can also generate crises we will argue accordingly that a hayekian understanding of the economy as an information processing system does not support the type of policy positions that he favored thus we find considerable lasting value in hayek s economic analysis while nonetheless questioning the connection of this analysis to his political philosophy

the lens of contract private ordering james buchanan 2001 p 29 avers that mutuality of advantage from voluntary exchange is the most fundamental of all understandings in economics he further contends that this fundamental understanding is better realized by examining economics through the lens of contract rather than the lens of choice buchanan 1975 because the latter has been the reigning paradigm in economics during the 20th century lionel robbins 1932 melvin w reder 1999 the lens of contract is understandably less fully developed interest in contractual approaches has nevertheless been building up whence the gap between these two has been closing this paper sketches some of these developments with emphasis on private ordering

arbitrage and the flattening effect of large numbers abstract in a model of an exchange economy with a continuum of individuals we show that competitive equilibrium can be regarded as resulting from the elimination of arbitrage opportunities generically the elimination of such opportunities results in a phenomenon we call the flattening effect of large numbers the flattening effect provides a precise meaning to the statement that under perfect competition individuals cannot influence prices they face perfectly elastic demands and supplies the attractive geometry associated with arbitrage and the flattening effect is highlighted in several figures we also link the demonstration of equilibrium through arbitrage with the logic of marginalism journal of economic literature classification number d51

taxes inflation and corporate financial policy this paper examines inflation induced distortions in personal and corporate income taxes and discusses the implications for corporate dividend and financial structure policies and for shareholder unanimity the tax effects relating to capital gains and debt interest cause changes in aggregate corporate borrowing and lead to equilibrium tax relationships which differ from the zero inflation tax relationships some of the important consequences of inflation arise from inflation induced changes in the real tax rates on business and personal income the real tax rate on business income can increase because the historical cost rather than the replacement cost of inventories and of plant and equipment are used in computing taxable income e g see nelson 15 and hong 8 inflation can increase real personal taxes through the taxation of shareholder capital gains that are nominal but not real see feldstein 6 hamada 7 points out that corporate capital structures may be affected by inflation because part of nominal debt interest payments are tax deductible even though they are actually repayments of principal this paper analyzes certain inflation induced tax distortions and discusses the consequences for corporate policy the major findings include 1 real taxes associated with capital gains and losses are greater the higher the inflation rate unless inflation causes offsetting changes in statutory tax rates pretax rates of return on assets or asset holding periods 2 real capital gains tax rates can exceed real dividend tax rates but even in this case shareholders generally lose if the firm reduces capital gains by paying larger dividends financed by new share sales 3 a shareholder s ranking of alternative firm policies can change as a result of a purely neutral inflation in which case a policy which does not maximize share price will be preferred under some inflation rates 4 the lender s real tax rate on debt interest income and the borrower s real tax shelter per dollar of real interest expense depend on the inflation rate and on the nominal interest rate even if statutory tax rates are fixed 5 if the dividend tax rate differs from the capital gains tax rate for some or all investors the miller 13 equilibrium tax relationship does not generally hold with inflation and the effect of inflation on aggregate debt and equity in the economy depends on personal and corporate tax rates section i examines the impact of inflation on the taxation of capital gains and losses and of dividends and discusses the implications for dividend policy and for shareholder preferences concerning firm policies section ii examines the

nonatomic economies and the boundaries of perfect competition this paper explores the distinction between nonatomicity and thick markets as the source of perfect competition the focus of the paper is the construction of a model of an imperfectly competitive economy with a nonatomic continuum of traders and a continuum of differentiated commodities for which walrasian equilibria exist the failure of perfect competition in this instance can be identified in two ways individuals can affect prices and the core is strictly larger than the set of walrasian allocations by contrast it is shown that when markets are physically or economically thick or both then individuals cannot typically affect prices and the core always coincides with the set of walrasian allocations

the determinants of organizational form changes evidence and implications from real estate abstract we study changes in the real estate industry among organizational forms with varying degrees of restrictiveness and document the associated changes in profitability free cash flow debt dividends and investment policies all troubled firms in our sample move to a more flexible organizational structure with subsequent reductions in dividends improvements in performance and increases in asset sales and investments healthy firms that move to a tighter structure have larger free cash flows before the change they increase dividends reduce free cash flows and improve profitability after the change we document evidence of tax considerations in organizational changes

a reformulation of the marginal productivity theory of distribution reformulating marginal productivity theory by replacing productivity with respect to commodities with productivity with respect to persons and then defining perfectly competitive equilibrium as an allocation at which each person receives the marginal product of his her contribution called a no surplus allocation there emerges a competitive theory of price determination characterizations of no surplus allocations are given in models with a nonatomic continuum of agents and an infinite dimensional commodity space comparisons between the no surplus and walrasian equilibrium definitions of competitive equilibrium are made and some sufficient conditions are obtained for the existence of a no surplus allocation

property rights and the efficiency of bargaining we show that efficient bargaining is impossible for a wide class of economic settings and property rights these settings are characterized by i the existence of adverse efficient opt out types whose participation does not change the efficient allocation and who when they opt out are the worst type other agents can face and ii non existence of the marginal core and its multivaluedness with a positive probability we also examine the optimal allocation of property rights within a given class that satisfies i such as simple property rights liability rules and dual chooser rules we characterize property rights that minimize the expected subsidy required to implement efficiency with two agents simple property rights that are optimal in this way maximize the expected surplus at the status quo allocation but this no longer holds with more agents we also study second best budget balanced bargaining under a liability rule the optimal second best liability rule may differ from but is often close to the expectation of the victim s harm which would be optimal if there were no bargaining however liability rules that are close to a simple property right result in a lower expected surplus than the simple property right they are near

the loser s curse and information aggregation in common value auctions we consider an auction in which k identical objects of unknown value are auctioned off to n bidders the k highest bidders get an object and pay the k 1st bid bidders receive a signal that provides information about the value of the object we characterize the unique symmetric equilibrium of this auction we then consider a sequence of auctions a r with n r bidders and k r objects we show that price converges in probability to the true value of the object if and only if both k r and n r k r i e both the number of objects and the number of bidders who do not receive an object go to infinity

when borch s theorem does not apply some key implications of market incompleteness with policy relevance today markets are incomplete when the assets available to the agents do not span the space of future contingencies efficiency is then assessed by the weak criterion of constrained efficiency efficiency relative to the set of allocations compatible with the asset structure that criterion requires firms to optimise relative to shadow prices reflecting shareholders preferences yet even when firms do so competitive equilibria on the markets for assets and commodities fail generically to be constrained efficient section 3 pareto superior allocations can be implemented through price wage rigidities and quantity constraints section 4 but nominal rigidities are conducive to multiple equilibria implying endogenous macroeconomic uncertainties that compound the primitive exogenous uncertainties section 5 various policy implications can be drawn which are of some relevance to the current crisis

walrasian allocations without price taking behavior abstract consider an exchange economy where agents are arbitragers in that they try to upset allocations imagining plausible beneficial trades with an introspective algorithm each agent constructs an interactive choice set ics i e a set of bundles that he considers achievable through a sequence of plausible trades with other agents we show that walrasian allocations can be characterized as those where each agent chooses optimally from his ics which is always contained in a budget set with differentiability both sets coincide our analysis provides a different behavioral assumption underlying walrasian allocations offers an explanation for the source of competitive prices and connects with the core convergence theorem journal of economic literature classification numbers d00 d51

a general equilibrium theory of banks capital structure abstract we develop a general equilibrium theory of the capital structures of banks and firms the liquidity services of bank deposits make deposits a cheaper source of funding than equity in equilibrium banks pass on part of this funding advantage in the form of lower interest rates to firms that borrow from them firms and banks choose their capital structures to balance the benefits of debt financing against the risk of costly default an increase in the equity of a firm makes its debt less risky and that in turn reduces the risk of the banks who lend to the firm hence there is some substitutability between firm and bank equity we find that firms have a comparative advantage in providing a buffer against systemic shocks whereas banks have a comparative advantage in providing a buffer against idiosyncratic shocks

appropriation and efficiency a revision of the first theorem of welfare economics the first theorem of welfare economics rests on the assumption that individuals have neither price making nor market making capacities we offer a revision in which individuals have such capacities the revision emphasizes two keys for market efficiency i the need to align private rewards with social contributions called full appropriation and ii the need for an assumption to counter the possibility of coordination failures in the choice of produced commodities called noncomplementarity we also emphasize that information about prices of unmarketed commodities involves decentralized knowledge available only to product innovators and that pecuniary extemalities are important potential sources of market failure jel d51 d60 d62

competitive stock markets suppose that a perfectly competitive firm wishes to determine its intertemporal production and investment plan in accordance with its shareholders interests will it be able to satisfy this desideratum and if so what course should it pursue in a general equilibrium model with many periods uncertainty incomplete markets and trading through time we show that

bargaining under incomplete information this paper presents and analyzes a bargaining model of bilateral monopoly under uncertainty under the bargaining rule proposed the buyer and the seller each submit sealed offers that determine whether the good in question is sold and the transfer price the nash equilibrium solution of this bargaining game implies an offer strategy of each party that is monotonic in its own reservation price and depends on its assessment of the opponent s reservation price issues of relative bargaining advantage and efficiency are examined for a number of special cases finally we discuss the appropriateness of the nash solution concept

regulation capital and the evolution of organizational form in us life insurance this paper studies the association between regulation and the organizational form of new life insurers between 1900 and 1949 the mutual form was popular in states with low initial capital requirements for mutual companies and differentially higher requirements for stock companies but was rarely used elsewhere this suggests that entrepreneurs took a path of least resistance when choosing organizational form and that the mutual s disadvantage in raising capital contributed to its decline a decline that accelerated as states raised requirements and eliminated the aforementioned differentials contrary to previous analysis the paper finds little evidence connecting other regulations to mutual decline jel g21 l51 n21 n22

post walrasian and post marxian economics it is widely believed that the failure of the socialist experiment should have had a devastating effect on radical economics yet radical economics is not only alive and well but flourishing years before the official demise of marxist socialism they had broadened their critique of standard economics well beyond the received marxist literature indeed their arguments offered striking parallels with the mainstream critiques of walrasian economics provided by the newly developing strand of thought i shall refer to as information economics in walrasian economics information is free moreover there are no costs associated either with making or enforcing contracts but with imperfect and costly information and incomplete risk markets the field of information economics has established that 1 in general markets are not constrained pareto efficient 2 markets may not clear 3 markets may not exist or when they exist may be thin 4 rents are pervasive and indeed reputation rents are necessary to ensure that high quality products get produced that workers do not shirk and so on 5 even when there are many participants in a market competition may be highly imperfect and 6 the distribution of income matters for economic efficiency

hayek and socialism friedrich a hayek was a life long opponent of socialism three of his contributions are surveyed and placed within historical context his debates in the 1930s with the market socialists his political critique of socialism in the road to serfdom and his evolutionary arguments against rationalist constructivists recent discussions that use the economics of information to analyze the prospects for socialism are also reviewed it is argued that theorists working in the economics of information have not recognized just how far hayek s conceptualization of the appropriate theoretical constructs for economics deviates from those of mainstream economists as such they have misunderstood what may constitute an independent set of arguments against socialism

perfect competition and the creativity of the market from the perspective of the walrasian general equilibrium model entrepreneurial and opportunistic behavior seems foreign can the model be refashioned so that it can accommodate such behavior many would say no but we argue the contrary indeed we present a reformulation of the model that serves as a gateway to rather than a detour from such contemporary issues as innovation and incentives the trick is to reexamine what perfect competition means starting with an historical summary of general equilibrium we sketch an image of the perfect competitor as an active market opportunist seeking out profit potentials wherever he can

complexity and economic policy a paradigm shift or a change in perspective a review essay on david colander and roland kupers s complexity and the art of public policy in their recent book colander and kupers 2014 argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy this would necessitate a paradigm shift economics has over time tried to produce a coherent model to underpin the dominant laissez faire liberal approach but we have never proved in that model that left to their own devices the participants in an economy will self organize into a satisfactory state this is an assumption complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self equilibrate and will undergo endogenous crises economists should concentrate on the emergence of certain patterns colander and kupers suggest that we may be able to nudge the system into good basins of attraction a more radical view is that there are no fixed basins of attraction these change with the evolution of the system and it is illusory to believe that we can choose good basins we may be able to recognize and influence the emergence of certain states of the economy but we are far from leon walras s dream of economics as a science like astrophysics

the informational role of spanning in competitive product selection this paper analyzes 1 the information required by competitive firms to solve price conjectures for differentiated goods that are not currently produced and 2 the feasibility of competitive firms acquiring this information products are differentiated according to the gorman lancasterian characteristic approach the assumption of a linear additive characteristics goods technology simplifies the calculation of price conjectures and facilitates the acquisition of information about consumer demand for new goods in particular it enables the firm to use product spanning to work out price conjectures the paper demonstrates that the true role of spanning in these models is informational

competition and unanimity revisited some recent developments in the theory of competitive stock markets are discussed and illustrated in this paper using simple examples these developments challenge the central role played by spanning in the literature dealing with unanimity among shareholders harry deangelo s 1981 article gives a clear account of some popular views about the central importance of spanning and is used to focus my presentation in deangelo s article there are three basic claims a if all initial shareholders in a firm have perfectly competitive conjectures and there is spanning net market value maximization will be unanimously favored by initial shareholders as the objective of the firm whether or not there are short sales of the firm s shares perfect competition plus spanning imply unanimity b perfectly competitive conjectures only make sense when there is spanning perfect competition implies spanning c for perfectly competitive conjectures to be correct there must not only be spanning but also constant returns to scale and hence zero profits profits are inconsistent with perfect competition in this paper i show that claim a can be true even without spanning in particular i if all initial shareholders in a firm have correct and perfectly competitive conjectures then net market value maximization will be unanimously favored by them as the objective of the firm at least if there are no short sales of the firm s shares by initial shareholders perfect competition with or without spanning implies unanimity ii claim b above is false that is perfect competition can exist without spanning iii claim c is false whether or not there is spanning that is positive profits and perfect competition are perfectly consistent since the assumption of spanning is tantamount to the assumption of complete markets for example if there is free disposal plus spanning then markets are complete d m kreps 1979 assertion i significantly extends the scope of the unanimity result in particular it extends the result to environments with incomplete markets in which firms market unique securities assertion ii shows such environments exist and iii shows they can be nontrivial that is ones in which shareholders care about the firm s objective beyond whether or not the objective implies nonnegative profits assertions i iii are easily demonstrated once it is realized that the old textbook maxim for perfect competition there must be many buyers and sellers of a commodity for example a particular type of security is simply false while many buyers and sellers may be sufficient for perfect competition it is not necessary indeed iv there may be only one seller of a commoditywithout any good substitutes yet that seller will face a perfectly elastic demand if he is small relative to his market the import of iv is that spanning is basically irrelevant for perfect competition

perfect competition in the continuous assignment model abstract this paper provides a rigorous formalization in the context of the transferable utility assignment model of perfect competition as the inability of individuals to favorably influence prices the central tool for the analysis is the social gains function the central issue is differentiability of the gains function with respect to the population seven conditions are shown to be equivalent to perfect competition perfect competition and imperfect competition are possible for both finite and continuum assignment economies but most finite economies are imperfectly competitive while most continuum economies are perfectly competitive however most large finite assignment economies are approximately perfectly competitive journal of economic literature classification numbers c61 c62 c78

bringing institutions into performance persistence research exploring the impact of product financial and labor market institutions this study challenges the implicit assumption of homogeneity in national institutional environments made in past studies of firm performance persistence we propose that home country institutions matter we focus on the impact of formal institutions in the product financial and labor markets arguing that they affect the size of pools of exchange partners and the types of exchanges allowed and condoned ultimately these restrictions affect competitive intensity among firms and firm performance persistence using data for over 10 000 firms from 33 countries over a 10 year time frame we show that antitrust law strength a product market institution designed to prevent collusion among firms is associated with decreases in performance persistence unskilled labor market flexibility a labor market institution that reduces legal constraints imposed on residual claimants managers and owners to take necessary actions to maintain or enhance profitability is associated with increases in performance persistence product liability law effectiveness another product market institution and corporate control market development a financial market institution are positively associated with performance persistence only in the case of mnes the two remaining financial and labor market institutions public equity market development respectively skilled labor market availability have a positive respectively negative impact for domestic firms only

competition and unanimity revisited again conditions necessary and sufficient for shareholders to express unanimity with respect to firm decisions have been recently developed by harry deangelo 1981 in a model economy where firms are properly small relative to the market louis makowski 1983 has subsequently found deangelo s requirement that existing securities span the opportunity set to be unnecessary for unanimity at issue in this difference is what is meant by reasonable necessity in propositions relating to model economies is makowski s small relative to the market condition of interest or is it like the giffen good only a curiousity while makowski s case initially appears implausible i shall here argue that the specification of an economy with equivalently complete markets is a reasonable instance of his analysis and qualifies as an interesting complement to the general propositions of deangelo in section i some basic notation and the structure of the model economy are set out following that the distinction between the unanimity proofs of deangelo and makowski is drawn and the issue of reasonableness in necessary conditions is addressed conditions under which equivalently complete markets arise are then described and the reasonableness of these are considered along with their implications for unanimity

efficient incentive compatible economies are perfectly competitive abstract efficient anonymous and continuous mechanisms for exchange environments with a finite number of individuals are dominant strategy incentive compatible if and only if they are perfectly competitive i e each individual is unable to influence prices or anyone s wealth equivalently in such a mechanism each individual creates no externalities for others by her announcement of a type the characterization applies whether preferences are ordinal or quasilinear and it also applies to continuum economies perfectly competitive mechanisms are non generic although non vacuous in finite economies and are generic but non universal in continuum economies we use these results to provide bridges to related work journal of economic literatureclassification numbers c72 d51 d62

incentive efficient price systems in large insurance economies with adverse selection we decentralize incentive efficient allocations in large adverse selection economies by introducing a competitive market for mechanisms that is for menus of contracts facing a budget constraint informed individuals purchase lottery tickets to enter mechanisms whereas firms sell tickets and supply slots at mechanisms at given prices beyond optimization market clearing and rational expectations an equilibrium requires that firms cannot favorably change or cut prices an equilibrium exists and is incentive efficient an equilibrium can be computed as the solution to a programming problem that selects the incentive efficient outcome preferred by the highest type within an appropriately defined set for two types economies this is the only equilibrium outcome

an equilibrium analysis of debt financing under costly tax arbitrage and agency problems in his recent paper merton miller 12 extends the notion of tax induced differential returns on securities into a general equilibrium framework in which firms make adjustments in the supply of corporate debt in an environment of progressive personal taxation the interest rates on taxable corporate bonds are greater than rates on tax exempt securities so as to compensate investors for the associated tax burden on the supply side value maximizing firms have an incentive to issue additional debt so long as the personal tax induced compensation is less than the tax savings from interest payment deductions at the corporate level miller argues that in the final equilibrium the interest rate differential between taxable and tax exempt bonds exactly reflects the tax advantage of debt financing at the corporate level thus the tax subsidy disappears in its entirety and we are back to an environment in which corporate leverage is inconsequential to the value of any particular firm what emerges in equilibrium is merely an optimal debt equity ratio for the corporate sector as a whole 1 miller derives this invariance proposition under the following assumptions 1 progressive personal tax rates reach a maximum at a level beyond the corporate tax rate 2 no tax arbitrage by individuals and firms is allowed 3 there is a personal tax rate differential in favor of income from stocks and 4 the opportunity for riskless borrowing and lending exists 2 indeed miller s equilibrium analysis is based on a zero effective personal tax rate on income from stocks but

standard setting organisations and standard essential patents voting and markets the analysis provides conditions under which standard setting organisations ssos choose efficient technology standards i introduce a two stage game with both voting and market competition in equilibrium standards and market outcomes are efficient even with market power from scarce capacity and standard essential patents seps i show that a drastic innovation with seps generates greater social welfare than a less efficient standard without seps a key finding is that voting power and market power have counterbalancing effects the discussion helps explain empirical observation of differences in sso voting rules intellectual property ip rules membership and alliances

the demise of the mutual organizational form an investigation of the life insurance industry we investigate the role of organizational structure in financial services markets by examining the u s life insurance industry traditionally stock and mutual life insurers were equally represented but now the industry is mainly composed of stock firms we find operational efficiency access to capital and tax savings are important determinants for this shift the incentive to demutualize differs by the type of conversion full demutualization is chosen for efficiency and access to capital reasons and partial conversion using a mutual holding company is chosen for tax savings firm operational efficiency improves after conversion we also find the efficiency of the stock organizational form dominates that of the mutual structure during our sample period 1995 to 2004

competitive intensity and its two sided effect on the boundaries of firm performance the new perspective emerging from strategy s value capture stream is that the effects of competition are twofold competition for an agent bounds its performance from below while that for its transaction partners bounds from above thus assessing the intensity of competition on either side is essential to understanding firm performance yet the literature provides no formal notion of competitive intensity with which to make such assessments rather some authors use added value as their central analytic concept others the core added value is simple but misses the crucial for an agent side of competition the core is theoretically complete but difficult to interpret and empirically intractable this paper formalizes three increasingly general notions of competitive intensity all of which improve on added value while avoiding the complexity of the core we analyze markets characterized by disjoint networks of agents e g supply chains providing several insights into competition and new tools f

preventives versus treatments preventives are sold ex ante before disease status is realized while treatments are sold ex post even if the mean of the ex ante distribution of consumer values is the same as that ex post the shape of the distributions may differ generating a difference between the surplus each product can extract if for example consumers differ only in ex ante disease risk then a monopolist would have more difficulty extracting surplus with a preventive than with a treatment because treatment consumers having contracted the disease no longer differ in disease risk we show that the ratio of preventive to treatment producer surplus can be arbitrarily small in particular when the distribution of consumer values has a zipf shape and the disease is rare the firm s bias toward treatments can be reversed for example if the source of private information is disease severity learned ex post the difference between the producer surplus earned from the products can result in distorted rd the deadweight loss from this distortion can be as large as the entire producer surplus difference calibrations for hiv and heart attacks based on risk factors in the u s population suggest that the distribution of disease risk is sufficiently zipf similar to generate substantial differences between producer surplus from preventives and treatments empirically we find that proxies for the zipf similarity of the disease risk distribution are associated a significantly lower likelihood of vaccine development but not drug development jel codes o31 l11 i18 d42

the theory of the firm as governance structure from choice to contract the propositions that organization matters and that it is susceptible to analysis were long greeted by skepticism by economists one reason why this message took a long time to register is that it is much easier to say that organization matters than it is to show how and why the prevalence of the science of choice approach to economics has also been an obstacle as developed herein the lessons of organization theory for economics are both different and more consequential when examined through the lens of contract this paper examines economic organization from a science of contract perspective with special emphasis on the theory of the firm

on the consequences of legal constraints and taxation for corporate choice in this article the author analyzes the effect taxation and legal constraints have on the definition of the firm s cost of capital and optimal financial policy under uncertainty the assumes firms are competitive and considers only input choices spanned by the return vectors of existing securities under very specific tax conditions these assumptions still guarantee a unique definition of the tax adjusted cost of capital but it is shown that under more general tax structures there is a split among potential shareholders accounted for by the ownership of the corporation

easy proofs of unanimity and optimality without spanning a pedagogical note i there is no assumption of spanning required for unanimity or optimality ii agents are assumed to have consistent competitive conjectures but not necessarily correct competitive conjectures iii competitive conjectures are characterized in terms of the invariance of individuals shadow prices for income as is standard in the finance literature and iv there are no short sales of shares permitted

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

the revenge of homo economicus contested exchange and the revival of political economy recent developments in microeconomic theory have shown that the self interested behavior underlying neoclassical theory is artificially truncated it depicts a charmingly victorian but utopian world in which conflicts abound but a handshake is a handshake but a handshake is not always a handshake studies of principal agent analysis the economics of information radical political economy mechanism design and transactions cost economics have all focused on the difficulties involved in policing and enforcing the actual process of market exchange abandoning the victorian world of neoclassical theory will redirect economists to an older conception of their profession what once was called political economy by taking optimizing more seriously post walrasian economics has inspired a revolution in economic thought fostering both new theoretical departures and alternative conceptions of the capitalist economy we will offer our own interpretation of this literature focusing on the widely recognized fact that the terms arising from exchange are not generally enforceable at zero cost to the exchanging parties where some aspect of the good or service supplied is both valuable to the buyer and costly to provide the absence of third party enforcement of claims gives rise to endogenous enforcement strategies we refer to this relationship as a contested exchange because unlike the transactions of walrasian economics the benefit the parties derive from the transaction depends on their own capacities to enforce competing claims

capabilities transaction costs and firm boundaries although the literature on firm boundaries has been greatly influenced by transaction cost economics strategy scholars often emphasize the importance of capabilities considerations in these decisions this has led to a debate that we suggest has generated more heat than light we argue that the two sets of considerations are in fact so intertwined dynamically that treating them as independent competitive explanations is fundamentally misleading we offer a theoretical synthesis of transaction cost and capabilities approaches to firm boundaries that seeks to overcome each approach s limitations and provides a unified and logically consistent understanding of boundary decisions

vickrey clarke groves mechanisms and perfect competition abstract we present a game theoretic mechanism characterization of perfect competition we prove the perfectly competitive mechanism is the only pareto optimal individually rational dominant strategy allocation mechanism thus perfect competition is uniquely capable of efficiently and non coercively solving the incentive bargaining problem when there is incomplete information i e when each individual knows his own tastes and production possibilities better than anyone else we also show one can interpret any dominant strategy demand revealing mechanism as working because it mimics the reward scheme that characterizes the perfectly competitive market namely the marginal product reward scheme

municipal corporations economic calculation and political pricing exploring a theoretical antinomy most thinking about political economy treats states as unitary actors in contrast this paper treats states as ecologies of politically based enterprises where a market is a congeries of business enterprises a state is a congeries of political enterprises both sets of enterprises compete with one another in a setting where those who manage corporate capital are largely separate from those who supply it competition among political enterprises however cannot generate market prices because of the inalienability of property rights in consequence what arises is a system of pricing and calculation that exists parasitically upon the system of market prices

the economics of governance the economics of governance is an effort to implement the study of good order and workable arrangements where good order includes both spontaneous order in the market which is a venerated tradition in economics adam smith 1776 friedrich hayek 1945 kenneth a arrow and gerard debreu 1954 and intentional order of a conscious deliberate purposeful kind chester irving barnard 1938 p 9 also i interpret workable arrangements to mean feasible modes of organization all of which are flawed in comparison with a hypothetical ideal avinash dixit 1996 pp 4 9 the object is to work out the efficiency logic for managing transactions by alternative modes of governance principally spot markets various long term contracts hybrids and hierarchies interest among social scientists economists included in the study and practice of good order and workable arrangements has been steadily growing in contrast with the orthodox lens of choice prices and output supply and demand the economics of governance is a lens of contract construction broadly in the spirit of james buchanan s 2001 p 29 observation that mutuality of advantage from voluntary exchange is the most fundamental of all understandings in economics the economics of governance as herein described is principally an exercise in bilateral private ordering by which i mean that the immediate parties to an exchange are actively involved in the provision of good order and workable arrangements to be sure the need for private ordering varies with the rules of the game as provided by the state distinctions between lawlessness where the state provides limited or unreliable protection for property and contract dixit 2004 and lawfulness where the state undertakes to protect property and enforce contracts in a principled way are pertinent the first of these applies mainly to primitive and transition economies the second is commonly associated with western democracies recourse to private ordering under conditions of lawlessness is altogether understandable given the absence of state support the walter a haas school of business university of california berkeley ca 94720 1900 the paper has benefited from workshop presentations at the university of california berkeley the university of valencia insead fountainebleau and the 2004 annual conference of the international society for new institutional economics an abbreviated version was also given as the horst claus recktenwald lecture at nuremburg on 4 november 2004 comments and suggestions from fred balderston ernesto dalbo avinash dixit robert gibbons witold henisz ian larkin steven tadelis and dean williamson are especially acknowledged 1 lon fuller s 1954 p 477 definition of eunomics as the science theory or study of good order and workable arrangements is very much in the spirit of what i refer to as governance 2 one of the immediate ramifications of insistently comparing feasible alternatives all of which are flawed is that the purported inefficiencies that are ascribed to failures to achieve first best optimality are not dispositive but invite the query as compared with what i return to this issue in section iv 3 excluding corporate governance the numbers of articles that used the word governance during the period 1998 2000 as compared with the period 1977 1979 in selected economics business management sociology organization and political science journals were 60 vs 1 76 vs 4 79 vs 18 and 60 vs 25 where the journals surveyed were the american economic review journal of political economy quarterly journal of economics rand journal of economics and journal of economic perspectives in economics strategic management journal management science academy of management journal and academy of management review in business management administrative science quarterly organization science american journal of sociology american sociological review and annual review of sociology in sociology organization and american political science review political science quarterly journal of politics and political research quarterly in political science combining these four categories articles using the word governance increased from 48 to 275 over this 20 year interval dixit 2004 pp 149 50 reports that the number of web pages that turn up under the search for governance is huge