but who will monitor the monitor suppose that providing incentives for a group of individuals in a strategic context requires a monitor to detect their deviations what about the monitor s deviations to address this question i propose a contract that makes the monitor responsible for monitoring and thereby provides incentives even when the monitor s observations are not only private but costly too i also characterize exactly when such a contract can provide monitors with the right incentives to perform in doing so i emphasize virtual enforcement and suggest its implications for the theory of repeated games jel c78 d23 d82 d86

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

interfirm relationships and informal credit in vietnam trading relations in vietnam s emerging private sector are shaped by two market frictions the difficulty of locating trading partners and the absence of legal enforcement of contracts examining relational contracting we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier a longer duration of trading relationship is associated with larger credit as is prior information gathering customers identified through business networks receive more credit these network effects are enduring suggesting that networks are used to sanction defaulting customers

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

a theory of participation in elections we analyze a model of participation in elections in which voting is costly and no vote is pivotal ethical agents are motivated to participate when they determine that agents of their type are obligated to do so unlike previous duty based models of participation in our model an ethical agent s obligation to vote is determined endogenously as a function of the behavior of other agents our model predicts high turnout and comparative statics that are consistent with strategic behavior jel d72

relational contracts and the theory of the firm relational contracts informal agreements sustained by the value of future relationships are prevalent within and between firms we develop repeated game models showing why and how relational contracts within firms vertical integration differ from those between nonintegration we show that integration affects the parties temptations to renege on a given relational contract and hence affects the best relational contract the parties can sustain in this sense the integration decision can be an instrument in the service of the parties relationship our approach also has implications for joint ventures alliances and networks and for the role of management within and between firms

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

diffusion of a new product under network effects the us dvd market we formulate a model that captures the inter dependence between hardware demand and software supply indirect network effect in the dvd industry the identification of the network effect comes from the difference in software availability across two different formats vhs and dvd we find that a 1 increase in the number of dvd titles raises the demand for dvd players by 0 87 simultaneously a 1 increase in video player ownership leads to a 0 14 increase in the variety of video titles our simulations show that hardware manufacturers might be able to internalize the network externality to increase total industry revenues

voting technology political responsiveness and infant health evidence from brazil this paper studies the introduction of electronic voting technology in brazilian elections estimates exploiting a regression discontinuity design indicate that electronic voting reduced residual error ridden and uncounted votes and promoted a large de facto enfranchisement of mainly less educated citizens estimates exploiting the unique pattern of the technology s phase in across states over time suggest that as predicted by political economy models it shifted government spending toward health care which is particularly beneficial to the poor positive effects on both the utilization of health services prenatal visits and newborn health low weight births are also found for less educated mothers but not for the more educated

the rise of europe atlantic trade institutional change and economic growth the rise of western europe after 1500 is due largely to growth in countries with access to the atlantic ocean and with substantial trade with the new world africa and asia via the atlantic this trade and the associatedcolonialism affected europe not only directly but also indirectly by inducing institutional change where initial political institutions those established before 1500 placed significant checks on the monarchy the growth of atlantic trade strengthened merchant groups by constraining the power of the monarchy and helped merchants obtain changes in institutions to protect property rights these changes were central to subsequent economic growth

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

fragile states and development policy it is widely recognized that fragile states are key symptoms of under development in many parts of the world such states are incapable of delivering basic services to their citizens and political violence is commonplace as of yet mainstream development economics has not dealt in any systematic way with such concerns and the implications for development assistance this paper puts forward a framework for analyzing fragile states and applies it to a variety development policies in different types of states

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

the economics of labor coercion the majority of labor transactions throughout much of history and a significant fraction of such transactions in many developing countries today are coercive in the sense that force or the threat of force plays a central role in convincing workers to accept employment or its terms we propose a tractable principal agent model of coercion based on the idea that coercive activities by employers or guns affect the participation constraint of workers we show that coercion and effort are complements so that coercion increases effort but coercion always reduces utilitarian social welfare better outside options for workers reduce coercion because of the complementarity between coercion and effort workers with a better outside option exert lower effort in equilibrium and thus are coerced less greater demand for labor increases coercion because it increases equilibrium effort we investigate the interaction between outside options market prices and other economic variables by embedding the coercive principal agent relationship in a general equilibrium setup and studying when and how labor scarcity encourages coercion general market equilibrium interactions working through the price of output lead to a positive relationship between labor scarcity and coercion along the lines of ideas suggested by domar while interactions those working through the outside option lead to a negative relationship similar to ideas advanced in neo malthusian historical analyses of the decline of feudalism in net a decline in available labor increases coercion in general equilibrium if and only if its direct partial equilibrium effect is to increase the price of output by more than it increases outside options our model also suggests that markets in slaves make slaves worse off conditional on enslavement and that coercion is more viable in industries that do not require relationship specific investment by workers

endogenous enforcement institutions we model the state as a self enforcing agreement over the use of force powerful individuals punish violations of contracts and property rights and if they shirk or abuse their power society reverts to a low production anarchy stage our model has two implications first improvements in coercion move the optimal enforcement system from private ordering where coercive punishments are not used to centralized state where punihments sanction violations by citizens but not by the ruler to decentralized state where punishments sanction all violations second institutions that reinforce the allegiance of state militias to the law simultaneously insure that contract violations are punished and that the ruler does not expropriate citizens thus they are more productive than judicial institutions which solely facilitate contract enforcement the model is consistent with the historical correlation between technological advances in coercion and the transition from private to state enforcement and with the fact that institutional constraints on the executive affected the long run economic development of nations more than improvements in judicial institutions acemoglu and johnson 2005 we also provide a framework for the optimal sequencing of institutional reforms they should focus first on the binding self enforcement constraint punishment or expropriation and switch to other constraints when the initially binding constraint becomes slack

the folk theorem with imperfect public information the authors study repeated games in which players observe a public outcome that imperfectly signals the actions played they provide conditions guaranteeing that any feasible individually rational payoff vector of the stage game can arise as a perfect equilibrium of the repeated game with sufficiently little discounting the central condition requires that there exist action profiles with the property that for any two players no two deviations one by either player give rise to the same probability distribution over public outcomes the results apply to principal agent partnership oligopoly and mechanism design models and to one shot games with transferable utilities copyright 1994 by the econometric society

land and power theory and evidence from chile many employment relationships concede rents to workers depending on the political institutions the presence of such rents allows employers to use the threat of withdrawing them to control their workers political behavior such as their votes in the absence of secret ballot we examine the effects of the introduction of the secret ballot in chile in 1958 on voting behavior before the reforms localities with more pervasive patron client relationships tended to exhibit a much stronger support for the right wing parties traditionally associ ated with the landed oligarchy after the reform however this difference across localities completely disappeared jel d72 n46 o13 o15 o17

barbed wire property rights and agricultural development this paper examines the impact on agricultural development of the introduction of barbed wire fencing to the american plains in the late nineteenth century without a fence farmers risked uncompensated damage by others livestock from 1880 to 1900 the introduction and near universal adoption of barbed wire greatly reduced the cost of fences relative to the predominant wooden fences especially in counties with the least woodland over that period counties with the least woodland experienced substantial relative increases in settlement land improvement land values and the productivity and production share of crops most in need of protection this increase in agricultural development appears partly to reflect farmers increased ability to protect their land from encroachment states inability to protect this full bundle of property rights on the frontier beyond providing formal land titles might have otherwise restricted agricultural development

the demarcation of land and the role of coordinating property institutions we use a natural experiment in nineteenth century ohio to analyze the economic effects of two dominant land demarcation regimes metes and bounds mb and the rectangular system rs mb is decentralized with plot shapes alignment and sizes defined individually rs is a centralized grid of uniform square plots that does not vary with topography we find large initial net benefits in land values from the rs and also that these effects persist into the twenty first century these findings reveal the importance of transaction costs and networks in affecting property rights land values markets and economic growth

but who will guard the guardians a pre recorded version of leonid hurwicz prize lecture was presented on 8 december 2007 at aula magna stockholm university the lecture was introduced by professor jorgen weibull chairman of the economics prize committee this abstract was borrowed from another version of this item

managing conflicts in relational contracts a manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker we show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously to manage a conflict the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict finally we show that liquidity constraints limit the manager s ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less jel c73 d74 d86 j33 j41 m12 relational contracts often suffer from conflicts during which workers punish managers for broken promises a common cause for such conflicts is disagreement over the availability and efficient use of funds in a typical conflict of this sort workers demand that a bonus be paid while managers insist that the necessary funds are either nonexistent or would be better spent on something else such as an exceptional investment opportunity one source of disagreement over the availability and efficient use of funds is asymmetric information managers are typically better informed about the challenges and opportunities that their firms face and therefore often have private information about the opportunity costs of paying their workers the aim of this article is to explore optimal relational contracts in such a setting for this purpose we examine the repeated relationship between a manager and a worker in which the manager s opportunity costs of paying the worker are stochastic and privately observed by her in the optimal relational contract the manager promises a bonus if opportunity costs are low but none if they are high conflicts therefore arise whenever the manager does not pay the bonus to manage these conflicts the manager relies on a combination of informal promises and formal commitments that evolves with the duration of the conflict as a result effort and expected profits decline during a conflict only gradually and then recover instantaneously the same pattern is repeated over time

persistence of power elites and institutions we construct a model to study the implications of changes in political insti tutions for economic institutions a change in political institutions alters the distribution of de jure political power but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power the model can imply a pattern of captured democracy whereby a democratic regime may survive but choose economic institutions favoring an elite the model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions and economic institutions them selves will persist over time jel d02 d72 the domination of an organized minority over the unor ganized majority is inevitable the power of any minority is irresistible as against each single individual in the majority who stands alone before the totality of the organized minor ity at the same time the minority is organized for the very reason that it is a minority

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

the colonial origins of comparative development an empirical investigation comment abstract acemoglu johnson and robinson s 2001 seminal article argues property rights institutions powerfully affect national income using estimated mortality rates of early european settlers t

multilateral contracting and the employment relationship this paper studies the structure of the employment relationship in organizations it investigates the trade off firms face between making commitments to their workforce as a whole multilateral relational contracts and making more limited commitments to individuals or smaller groups of employees bilateral relational contracts multilateral contracts bind the firm more strongly to implicit commitments improving motivation but are difficult to adjust in response to changes in the environment bilateral contracts make workforce changes easier to implement the framework helps to explain the use of relative performance evaluation why firms rely on temporary employees and the adoption of two tier workforces

coordinating adoption decisions under externalities and incomplete information abstract a monopolist sells a good whose value depends on the number of buyers who adopt it as well as on their private types the seller coordinates the buyers adoption decisions based on their reported types and charges them the price based on the number of adoptions we study ex post implementable sales schemes that are collusion proof and show that under the revenue maximizing scheme more buyer types are willing to adopt when there are more adoptions and the number of adoptions is maximized subject to the participation constraints

technology success and failure in winner take all markets the impact of learning orientation timing and network externalities in industries characterized by network externalities a single technology standard often rises to dominance locking out competing technologies this research demonstrates that despite path depend

trade expansion and contract enforcement consider a world of traders separated in geographic economic or social space honest trade offers larger gains for more distant traders but frequencies of meetings and information flows about cheating have local bias honesty is self enforcing only between pairs of sufficiently close neighbors global honesty prevails only in a sufficiently small world the extent of self enforcing honesty is likely to decrease when the world expands beyond this size costly external enforcement is useful only if the world is sufficiently large and its net payoff need not be larger than that of a self governing small community intermediate size worlds fare worst

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

peer discipline and incentives within groups abstract we investigate how a collusive group can sustain non nash actions by enforcing internal discipline through costly peer punishment we give a simple and tractable characterization of schemes that minimize discipline costs while preserving incentive compatibility we apply the model to a public goods contribution problem we find that if the per capita benefit from the public good is low then regardless of whether peer discipline is feasible or not only small groups will contribute to the good if the public good benefit is significant but peer discipline is infeasible it remains the case that only small groups contribute on the other hand if the public good benefit is significant but peer discipline is feasible then full contribution takes place regardless of group size we reconcile this result with olson s idea that small groups are more effective by considering the case where the per capita benefit of the public good varies with group size

p e p b and the present value of future dividends 1994 p e p b and the present value of future dividends financial analysts journal vol 50 no 4 pp 23 31

selection of biomass thermochemical conversion technology in the netherlands a best worst method approach this paper studies the technology battle for biomass conversion in the netherlands three types of technologies are currently fighting the battle for standard dominance combustion pyrolysis and gasification twelve relevant factors for standard dominance were found financial strength operational supremacy learning orientation technological superiority compatibility flexibility pricing strategy distribution strategy previous installed base regulator effectiveness of the format development process and network of stakeholders applying expert opinions and the best worst method bwm the relative importance weights of these factors were calculated the weights were then used to evaluate and rank the technologies the results show that biomass gasification has the highest chance of achieving standard dominance and that technological superiority is the most important factor affecting standard success the weights per factor were explained and theoretical contributions and areas for future research were discussed

state capacity and military conflict powerful centralized states controlling a large share of national income only begin to appear in europe after 1500 we build a model that explains their emergence in response to the increasing importance of money for military success when fiscal resources are not crucial for winning wars the threat of external conflict stifles state building as finance becomes critical internally cohesive states invest in state capacity while divided states rationally drop out of the competition causing divergence we emphasize the role of the military revolution a sequence of technological innovations that transformed armed conflict using data from 374 battles we investigate empirically both the importance of money for military success and patterns of state building in early modern europe the evidence is consistent with the predictions of our model

using the law to change the custom the custom often acts as a powerful hindrance to equity increasing changes in this paper we present a simple model of legal dualism in which a progressive legal reform can under certain conditions shift the conflicting custom in the direction intended by the legislator formal law then acts as an outside anchor that exerts a magnet effect on the custom we also characterize the conditions under which a moderate reform performs better than a radical one in improving the welfare of the disadvantaged sections of the population we illustrate our insights using examples on inheritance marriage and divorce in sub saharan africa and india

self enforcing democracy author s fearon james abstract if democracy is to have any of the good effects said to justify it it must be self enforcing those who control the government must want to hold regular competitive elections for the highest offices and all parties must be willing to comply with the results i consider a model in which citizens can always protest or rebel against the current ruler but can unseat the ruler only if enough people rebel when individuals privately observe a signal of the government s performance e g their own welfare they face a difficult problem of how to coordinate to pose a credible threat of rebellion necessary to keep the ruler from stealing further if the signals are noisy inefficient rebellions must occur in equilibrium to keep the ruler honest allowing for the possibility of elections makes for equilibria that eliminate both problems the convention of holding elections at particular times provides a public signal for coordinating rebellion in the event that elections are suspended of blatantly rigged the electoral results themselves aggregate private information about the ruler s performance providing the ruler an incentive to stick to the terms int he case of noisy signals of government performance the electoral results act as a cheap talk signal that allows the public to commit to rebel if a losing ruler does not step down avoiding the need for costly rebellions these arguments pose an explanation for self enforcing democracy whereas the several models in the literature do not because they do not explain why anyone would want to use elections to allocate power

search for the best financial performance measure basics are better economic value added eva is a well known and widely used measure of operating performance bacidore boquist milbourn and thakor 1997 claimed in a recent financial analysts journal article that a modified version of eva refined economic value added reva is theoretically superior to eva actually eva is theoretically superior to reva

incentives information and organizational form we model an organization as a hierarchy of managers erected on top of a technology here consisting of a collection of plants in our framework the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him we argue that different organizational forms give rise to different information about managers performance and therefore differ according to how effective incentives can be in encouraging a good performance in particular we show that under certain assumptions the m form multi divisional form is likely to provide better incentives than the u form unitary form because it promotes yardstick competition i e relative performance evaluation more effectively we conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for chinese data

the economics of convention c onventions regulate much of economic and social life yet they have received surprisingly little attention from economists by a convention we mean a pattern of behavior that is customary expected and self enforcing everyone conforms everyone expects others to conform and everyone has good reason to conform because conforming is in each person s best interest when everyone else plans to conform lewis 1969 familiar examples include following rules of the road adhering to conventional codes of dress and using words with their conventional meanings conventions with direct economic implications include species of money and credit industrial and technological standards accounting rules and forms of economic contracts indeed it would scarcely be an exaggeration to say that almost all economic and social institutions are governed to some extent by convention the main feature of a convention is that out of a host of conceivable choices only one is actually used this fact also explains why conventions are needed they resolve problems of indeterminacy in interactions that have multiple equilibria indeed from a formal point of view we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium the economic significance of conventions is that they reduce transaction costs imagine the inconvenience if whenever two vehicles approached one another the important exceptions are sugden 1986 and ullman margalit 1977 the interested reader might also refer to the symposium on social norms that appeared in the fall 1989 issue of this journal with articles by sugden 1989 and elster 1989

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

federalism chinese style the political basis for economic success in china china s remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets this reform reflects a special type of institutionalized decentralization that the authors call federalism chinese style this form of decentralization has three consequences first it fosters competition not only in product markets but also among local governments for labor and foreign capital this competition in turn encourages local government experimentation and learning with new forms of enterprises regulation and economic relationships second it provides incentives for local governments to promote local economic prosperity finally it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government