learning and wage dynamics we develop a dynamic model of learning about worker ability in a competitive labor market the model produces three testable implications regarding wage dynamics 1 although the role of schooling in the labor market s inference process declines as performance observations accumulate the estimated effect of schooling on the level of wages is independent of labor market experience 2 timeinvariant variables correlated with ability but unobserved by employers such as certain test scores are increasingly correlated with wages as experience increases and 3 wage residuals are a martingale we present evidence from the nlsy that is broadly consistent with the model s predictions

a million off incapacity benefit how achievable is labour s target since 1997 welfare reform has been a defining feature of the uk s labour government this article assesses the extent to which the new aspiration to reduce the number of incapacity benefit claimants by one million within 10 years is deliverable the assessment is based on a model of flows on and off incapacity benefits and their impact on the stock of claimants in particular the analysis takes account of the major geographical variations in the distribution of incapacity claimants and the ability of britain s divergent regional economies to absorb substantial numbers of extra workers the article concludes that without an accelerated revival in the economies of the north scotland and wales labour looks set to fall short of the one million target

characterization of a class of moral hazard adverse selection games abstract studying a principal agent game in which the agent alone observes the state of the world and reports it but the moral hazard is not reducible shows that if the principal uses all signals then no solution exists i e there is no contract that elicits truth telling and motivates the agent to exert effort when the principal does not use signals on the state of the world that seem irrelevant a solution exists in which some of the ex post signals on outcome are not used even though they obey the informativeness condition of holmstrom bell journal of economics 1979 10 74 91

local level incapacity benefits rolls in britain correlates and convergence mcvicar d local level incapacity benefits rolls in britain correlates and convergence regional studies there is considerable variation across british local authority districts in the proportion of the working age population claiming incapacity benefits ranging from 2 in hart to 16 in merthyr tydfil and easington in 2008 these claimant rates are strongly correlated with local unemployment rates and self reported disability rates but spatial differences in claimant rates for incapacity benefits were even greater a decade ago this paper describes the extent of this claimant rate convergence and discusses possible explanations for it mcvicar d 2008 hart 2 merthyr tydfil easington 16 10 mcvicar d la liste des demandeurs des prestations d incapacite en grande bretagne a l echelle loc

indirect effects of an aid program how do cash transfers affect ineligibles consumption cash transfers to eligible households indirectly increase the consumption of ineligible households living in the same villages this effect operates through insurance and credit markets ineligible households benefit from the transfers by receiving more gifts and loans and by reducing their savings thus the transfers benefit the local economy at large looking only at the effect on the treated underestimates the impact one should analyze the effects of this class of programs on the entire local economy rather than on the treated only and use a village level randomization rather than selecting treatment and control subjects from the same community

the welfare implications of moral hazard and adverse selection in competitive insurance markets i model a competitive insurance market with both moral hazard and adverse selection and analyze the effect on welfare when both problems are present simultaneously an examination of the interaction between these two problems leads to two hypotheses first the nature of the equilibrium contracts is such that each problem partially offsets the welfare loss associated with the other and second the degree to which this occurs increases as agents become more heterogeneous simulation results overwhelmingly support both hypotheses

grim down south the determinants of unemployment increases in british cities in the 2008 2009 recession lee n grim down south the determinants of unemployment increases in british cities in the 2008 2009 recession regional studies this paper investigates the impact of the 2008 2009 recession on unemployment in the sixty largest cities in great britain the key determinant of changes in unemployment was the skills of the population with highly skilled cities experiencing smaller increases cities with employment in financial services or manufacturing sectors experienced larger increases in unemployment whether a city has a specialized or a diverse economy appears less important than the industries in which the city is specialized the results highlight a problem as the largest unemployment increases were in cities seen as having least potential for future growth

optimal redistribution and monitoring of labor supply this paper extends the mirrlees 1971 model of optimal non linear income taxation with a monitoring technology that allows the government to verify labor supply at a positive but non infinite cost we analyze the joint determination of the non linear monitoring and tax schedules and the conditions under which these can be implemented monitoring of labor supply reduces the distortions created by income taxation and raises optimal marginal tax rates possibly above 100 the optimal intensity of monitoring increases with the marginal tax rate and the labor supply elasticity our simulations demonstrate that monitoring strongly alleviates the trade off between equity and efficiency welfare gains of monitoring are around 2 8 of total output the optimal intensity of monitoring follows a u shaped pattern similar to that of optimal marginal tax rates our paper can explain why large welfare states optimally rely on work dependent tax credits active labor market policies benefit sanctions and work bonuses in welfare programs

does asymmetric information matter in the early insurance market evidence from the auto insurance market in the late 1960s the performance of automobile insurance declined dramatically in japan in spite of rapid growth in the diffusion rate and the premiums were sharply raised several times in order to improve the situation this observation indicates the possible presence of adverse selection death spiral and provides an ideal situation for assessing informational asymmetry using bodily injury liability bil insurance data from 46 japanese prefectures over the period 1966 to 1975 this article tests two hypotheses of adverse selection i high risk drivers were more likely to join the bil insurance market and ii sharp premium increases drove low risk policyholders away various empirical analyses show that there is little evidence for either type of adverse selection we also test whether a risk misperception hypothesis can explain our results and find some evidence that the population density have a significantly positive impact on the demand for bil insurance an earlier version of this artic

the diversion from unemployment to sickness across british regions and districts beatty c and fothergill s 2005 the diversion from unemployment to sickness across british regions and districts regional studies 39 837 854 around 2 7 million non employed adults of working age in the uk claim sickness related benefits and the numbers have risen steeply over time the very large variation in the numbers across districts and regions points strongly to extensive hidden unemployment especially in older industrial areas affected by job losses this paper builds on two previous papers by the same authors one dealing with the theoretical framework and the other with a local case study to present wholly new estimates of the scale of the diversion across all parts of the country it also questions contemporary perceptions of the uk labour market and the validity of current approaches to re engaging sickness claimants with employment

adverse selection repeated insurance contracts and announcement strategy in this note we present a strategy which relies on multi period contracts and on a self selection mechanism which induces the insured to announce his true risk in the first period thus eliminating inefficiency due to adverse selection

the role of options in the resolution of agency problems a comment the aim of the contracting literature in economics is to explain observed contractual arrangements or organizations as minimizing the costs of incentive conflicts in the agency cost literature of financial economics the contractual arrangement at issue is the mix of securities held by inside management of a firm and outside suppliers of capital the ownership structure of the firm in jensen and meckling s 8 terminology in explaining the ownership structure of a corporation jensen and meckling focus on two sources of agency or incentiveconflict costs a the manager s tendency to consume excessive perquisites and b the manager s tendency to invest in prospects of high risk so as to effect an ex post transfer from bondholders to stockholders a recent article in this journal by haugen and senbet 61 examines the role of stock options in resolving these agency problems and claims to show in particular that a call option in the insider portfolio can eliminate the first type of agency costs this article re examines the role of options in the resolution of agency problems we argue in section i that options cannot eliminate the agency problem of excessive perquisite consumption contrary to haugen and senbet the essential point is that unless outside financing can be provided entirely by riskless debt then outsiders must have a residual claim on the net income of the firm in some states of the world outsiders therefore share in the costs of increased perquisite consumption whatever the ownership structure of the firm this negative externality means that excessive perquisite consumption is inevitable the question remains do call options nonetheless have a role in the mitigation of agency costs an insider portfolio consisting only of equity leaves the manager with the same proportion of residual claim in each state of the world we show using a formal principal agent model that the efficient insider s share of profits is relatively high in favorable high profit states of the world insider call options arise as means of transferring residual claim to the manager in favorable states of the world relative to low profit states the basic agency model has been solved in substantial generality by holmstrom 7 and others we employ here a more specific model that draws on the techniques developed by green and kahn 4 and that is an extension to continuous states of the finite state model of sappington 12 the extension allows a simple characterization of the optimal contract a characterization that

multi period insurance contracts this paper examines the form of insurance contracts in the presence of asymmetric information about consumers accident probabilities our goal is to understand the adjustment in contract terms as a function of accident histories in a finite horizon model we also compare these adjustments between alternative market structures our principal findings indicate that history dependent insurance contracts serve a useful sorting role individuals who declare themselves low risks to insurance companies face adverse contracturai terms if they subsequently have many accidents these adjustments are strongest in the case of a single insurance seller but are present in the competitive model as well

a revelation scheme for allocating organizational resources abstract efficient resource allocation in a hierarchical organization frequently requires top management to obtain information from division managers but division managers may place personal interests above those of the organization and communicate distorted information designing simple and robust optimal game theoretic revelation schemes is difficult instead of making another attempt at this we analyze a project valuation scheme actually used by several us government agencies under certain environments the scheme encourages managers to truthfully reveal the relative benefits of alternative projects while some aspects of these environments do not have nice mathematical properties we argue that they may well represent better characterizations of the way managers actually view their situation

money as the mechanism of exchange abstract the existence and use of money remained an embarrassing puzzle for monetary analysis we observe over man s history that social groups without generally accepted media of exchange exhibit poor survival characteristics most social groups do not use assets or commodities at random in the execution of exchanges one observes that a small subset of assets is dominantly used in transactions these transaction dominating assets are usually referred to as money the literature contains many suggestive attempts to explain the emergence and role of money the classic writers made passing references in somewhat pictorial language to the extension markets and increasing labor productivity induced by the use of a general medium of exchange this idea has never been systematically developed however karl brunner 1971

balanced bayesian mechanisms in the transferable utility case a number of authors have identified conditions on beliefs that guarantee the existence of bayesian incentive compatible mechanisms with balanced transfers we present a new easy to interpret condition and we show that it is strictly more general than all the other conditions found in the literature we also study conditions guaranteeing the bayesian implementability of all social decision rules with balanced budget mechanisms

search theoretic models of the labor market a survey we survey the literature on search theoretic models of the labor market we show how this approach addresses many issues including the following why do workers sometimes choose to remain unemployed what determines the lengths of employment and unemployment spells how can there simultaneously exist unemployed workers and unfilled vacancies what determines aggregate unemployment and vacancies how can homogeneous workers earn different wages what are the tradeoffs firms face from different wages how do wages and turnover interact what determines efficient turnover we discuss various modeling choices concerning wage determination and the meeting process including recent models of directed search

generating skilled self employment in developing countries experimental evidence from uganda we study a government program in uganda designed to help the poor and unemployed become self employed artisans increase incomes and thus promote social stability young adults in uganda s conflict affected north were invited to form groups and submit grant proposals for vocational training and business start up funding was randomly assigned among screened and eligible groups treatment groups received unsupervised grants of 382 per member grant recipients invest some in skills training but most in tools and materials after four years half practice a skilled trade relative to the control group the program increases business assets by 57 work hours by 17 and earnings by 38 many also formalize their enterprises and hire labor we see no effect however on social cohesion antisocial behavior or protest effects are similar by gender but are qualitatively different for women because they begin poorer meaning the impact is larger relative to their starting point and because women s work and earnings stagnate without the program but take off with it the patterns we observe are consistent with credit constraints

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

on governing multilateral transactions with bilateral contracts bilateral contracts while neither negotiated nor enforced in an integrated way are nevertheless often interrelated both economically and strategically owing to production or consumption complementarities and to asymmetric information a set of bilateral contracts forms a mechanism with special properties this mechanism forms a contract equilibrium if there is no joint incentive for a supplier and any individual customer unilaterally to alter the terms of their contract if agents preferences are risk neutral in money income and if their private information is independent then there exists a contract equilibrium that implements efficient transactions if in addition preferences are strictly concave and differentiable in goods and services and technologically feasible sets are suitably convex then this equilibrium is essentially unique

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

price stabilization as a bonding mechanism in new equity issues abstract underwriters have an incentive to overstate investor interest in order to persuade some investors to purchase shares at a price in excess of their initial estimate of the fair value we show that this incentive is eliminated when the underwriter commits to secondary market price stabilization destroying the underwriter s incentive to overstate interest reduces the total surplus captured by initial investors in initial public offerings further efficiency gains are associated with penalty bid systems that permit the underwriter to make the stabilization commitment selectively price stabilization can thus be viewed as a bonding mechanism that improves the efficiency of the primary equity market

anonymity or distance job search and labour market exclusion in a growing african city we show that helping young job seekers signal their skills to employers generates large and persistent improvements in their labour market outcomes we do this by comparing an intervention that improves the ability to signal skills the job application workshop to a transport subsidy treatment designed to reduce the cost of job search in the short run both interventions have large positive effects on the probability of finding a formal job the workshop also increases the probability of having a stable job with an open ended contract four years later the workshop significantly increases earnings job satisfaction and employment duration but the effects of the transport subsidy have dissipated gains are concentrated on individuals who generally have worse labour market outcomes overall our findings highlight that young people possess valuable skills that are unobservable to employers making these skills observable generates earnings gains that are far greater than the cost of the intervention

panel estimates of the determinants of british regional male incapacity benefits rolls 1998 2006 this article explores the determinants of the proportion of the working age male population claiming incapacity benefits ib across the 11 british government office regions for the period 1998 to 2006 three different approaches are adopted to modelling register dynamics first treating ib stocks as if they were trend stationary albeit with persistence and estimating reduced form models for their logs second treating ib stocks as if they were nonstationary and examining their long run determinants plus short run equilibrium reversion properties third focusing on the determinants of gross inflows and outflows that together drive ib stocks given the nature of the data no approach is ideal yet the models provide reasonably robust evidence that labour market changes specifically falling unemployment rates and rising real earnings have contributed to falling male ib stocks over the period

why have uk disability benefit rolls grown so much abstract over the last 30 years many countries including the uk have seen a dramatic rise in the share of the working age population receiving sickness and disability benefits hereafter disability benefits this is despite health levels that are generally thought to be slowly improving this paper describes the time path of uk disability benefit rolls and explores the existing uk literature together with literature from the usa in search of potential explanations for it since the early 1990s despite a number of detailed descriptive studies surprisingly little attention has been paid to quantifying the importance of the different factors believed to be driving the uk benefit roll growth this is all the more surprising given the continued growth and the level of policy attention recently and currently devoted to disability benefits in the uk

optimal multiperiod contracts and the gain from enduring relationships under private information informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts in an illustrative risk sharing model even relatively short two period contracts can be mutually beneficial if there is private information though one period contracts suffice otherwise further contracts which are pareto optimal relative to the environment and the information structure are defined and partially characterized an example illustrates how otherwise inefficient intertemporal tie ins can be used optimally to mitigate incentive problems the obvious borrowing lending schemes are not private information pareto optimal in these period by period actions are not sufficiently constrained discounting affects the form of the optimal contract but none of these qualitative conclusions

the economic lives of the poor in what turned out to be a rhetorical master move the 1990 world development report from the world bank defined the extremely poor people of the world as those who are currently living on no more than 1 per day per person measured at the 1985 purchasing power parity ppp exchange rate in 1993 the poverty line was updated to 1 08 per person per day at the 1993 ppp exchange rate which is the line we use in this paper poverty lines have always existed indeed 1 per day was chosen in part because of its proximity to the poverty lines used by many poor countries 1 however the 1 a day poverty line has come to dominate the conversations about poverty to a remarkable extent

labour market adjustment in areas of chronic industrial decline the case of the uk coalfields beatty c and fothergill s 1996 labour market adjustment in areas of chronic industrial decline the case of the uk coalfields reg studies 30 627 640 the paper explores the labour market consequences of the near terminal decline of employment in the uk coal industry despite the job loss registered unemployment has not risen using labour market accounts derived mainly from census of population data the paper examines the roles of migration commuting job creation and changes in labour force participation as mediating influences substantial hidden male unemployment is exposed and rates of real unemployment are also calculated beatty c et fothergill s 1996 l ajustement du marche du travail dans les zones serieusement touchees par le declin industriel cas d etude des bassins houillers au royaume uni reg studies 30 627 640 cet article cherche a examiner l impact sur le marche du travail du declin quasi terminal de l emploi dans l industrie houillere au royaume uni en depit des supp

social protection response to the covid 19 crisis options for developing countries the public health response to covid 19 in many countries has involved strict restrictions on movement and economic activity which threaten the livelihoods of economically vulnerable households in response governments are adopting emergency economic measures to provide households with some safety net we provide an overview of the policies that could form a comprehensive social protection strategy in low income and middle income countries with examples of specific policies that have been adopted our core argument is that these countries can cast an emergency safety net with extensive coverage if they use a broader patchwork of solutions than higher income countries these strategies could include expanding their social insurance system building on existing social assistance programmes and involving local governments and non state institutions to identify and assist vulnerable groups who are otherwise harder to reach

the rise in the disability rolls and the decline in unemployment between 1984 and 2001 the share of nonelderly adults receiving social security disability insurance income di rose by 60 percent to 5 3 million beneficiaries rapid program growth despite improving aggregate health appears to be explained by reduced screening stringency declining demand for less skilled workers and an unforeseen increase in the earnings replacement rate we estimate that the sum of these forces doubled the labor force exit propensity of displaced high school dropouts after 1984 lowering measured u s unemployment by one half a percentage point steady state calculations augur a further 40 percent increase in the rate of di receipt

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

inefficient hiring in entry level labor markets hiring inexperienced workers generates information about their abilities if this information is public workers obtain its benefits if workers cannot compensate firms for hiring them firms will hire too few inexperienced workers i determine the effects of hiring workers and revealing more information about their abilities through a field experiment in an online marketplace i hired 952 randomly selected workers giving them either detailed or coarse public evaluations both hiring workers and providing more detailed evaluations substantially improved workers subsequent employment outcomes under plausible assumptions the experiment s market level benefits exceeded its cost suggesting that some experimental workers had been inefficiently unemployed

underinvestment in a profitable technology the case of seasonal migration in bangladesh hunger during pre harvest lean seasons is widespread in the agrarian areas of asia and sub saharan africa we randomly assign an 8 50 incentive to households in rural bangladesh to temporarily out migrate during the lean season the incentive induces 22 of households to send a seasonal migrant their consumption at the origin increases significantly and treated households are 8 10 percentage points more likely to re migrate 1 and 3 years after the incentive is removed these facts can be explained qualitatively by a model in which migration is risky mitigating risk requires individual specific learning and some migrants are sufficiently close to subsistence that failed migration is very costly we document evidence consistent with this model using heterogeneity analysis and additional experimental variation but calibrations with forward looking households that can save up to migrate suggest that it is difficult for the model to quantitatively match the data we conclude with extensions to the model that could provide a better quantitative accounting of the behavior

contracts and asymmetric information in the theory of the firm abstract this paper extends the coase notation of firms as intermediaries between consumers and input owners to incorporate asymmetric information we show that in some cases it is optimal for consumers to pay a fixed price for a product and to ignore how the firm operates and the profit that it makes if firms have private information that consumers cannot cheaply obtain however we demonstrate that the optimal contract may require constraints on firms internal operations and profits our work provides conditions under which cost plus contracts are optimal and demonstrates when nonprofit firms are the preferred organization structure

a theory of employment unemployment and sickness beatty c fothergill s and macmillan r 2000 a theory of employment unemployment and sickness reg studies 34 617 630 this paper explains how the measurement of unemployment is distorted by the way that sickness is defined and counted by social security systems drawing on the concepts of hidden sickness the queue for jobs and hidden unemployment and on empirical observations from the uk it shows how job loss can result in increased recorded sickness rather than recorded unemployment it also shows how this process may vary between localities and countries the argument has profound implications for perceptions of the true extent of unemployment and of labour market disparities between regions beatty c fothergill s et macmillan r 2000 l emploi le chomage et la maladie une theorie reg studies 34 617 630 cet article chercheaexpliquer comment la mesure du chomage s avere fausseeacause de la fac on dont la secu definit maladie et la comptabilise puisant dans des notions de

planning stochastic shocks and labour contracts of female workers and their welfare implications in this paper we analyse labour contracts for female workers when there are planned shifts or stochastic shocks to their leisure preference which arise as a result of planned or unplanned pregnancy it will be shown that when female workers plan their pregnancy contract firms can induce self selection among workers through a contract that stipulates a wage profile steeper than the spot wage profile so that self selected workers who accept the contract will not quit even though information on shifts in leisure preference is asymmetric first best efficiency can be achieved through self selection when female workers do not plan childbirths however self selection contracts are not possible when the stochastic shocks are realized there will be quits planning is pareto superior to no planning at equilibrium workers will be allocated optimally workers who have low marginal value of home time will join contract firms and make specific investments while those who have high marginal value will seek employment in the walrasian market and make no specific investments some implications of these results are also discussed in the paper

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

information spillovers margins scale and scope with an application to canadian life insurance a model of the production of life insurance services is developed the focus is on price setting ability and the cost advantages from size and diversity the model characterizes insurers decisions on the face value and number of policies and the number of insurance lines the model is applied to canadian life insurance firms unit revenue cost margins average from 13 per cent to 40 per cent across lines of insurance these margins emanate from information spillovers generated by marketing activities cost advantages due to size are small but are substantial from diversity returns to scale average from 1 13 to 1 40 while returns to scope from offering multiple insurance lines average from 70 per cent to 100 per cent

adverse selection private information and lowballing in insurance markets recent contributions to the adverse selection literature have focused on a multiperiod competitive environment in this setting a clean distinction arises between the predictions of competing models cooper and hayes extend the model of rothschild and stiglitz to multiple periods the result is a self selecting equilibrium characterized by price highballing or systematically overcharging new business kunreuther and pauly suggest that information asymmetries between competing insurance firms render such price quantity policies infeasible their model results in a pooling equilibrium that is characterized by price lowballing or systematically undercharging new business our evidence is consistent with the kunreuther and pauly model and reveals the persistence of adverse selection in the automobile insurance market copyright 1990 by the university of chicago

estimating equilibrium effects of job search assistance identifying policy relevant treatment effects from randomized experiments requires the absence of spillovers between participants and nonparticipants sutva or variation in observed treatment levels we find that sutva is violated for a danish activation program for unemployed workers using a difference in differences model we show that nonparticipants in the experiment regions find jobs more slowly after the introduction of the program than workers

implicit contracts with asymmetric information and bankruptcy the effect of interest rates on layoffs this paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors firms have more information than do the owners of the factors of production and they are also subject to limited liability we show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information the firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined we show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates recent literature in the area of implicit contracts has shown considerable interest in the assumption of asymmetric information henceforth a i papers by azariadis 1982 green and kahn 1982 and grossman and hart 1981 have all shown that a i will interfere with optimal risk sharing but although these models produce non walrasian outcomes it is not clear that they are capable of explaining the observed variations in employment over the business cycle in the absence of a link between the level of employment and other macroeconomic variables these new versions of contract theory are open to the charge that they are presenting a complicated explanation of frictional unemployment one potential link between variations in output and variations in intertemporal prices is suggested by models which explicitly allow for the possibility of bankruptcy sappington 1983 has shown that bankruptcy will generate inefficient outcomes even between risk neutral agents and farmer 1984 has shown that if sappington type contracts are incorporated into a macroeconomic structure then the resulting model predicts that bankruptcies will vary countercyclically over the business cycle although bankruptcy is important however it is unlikely that bankruptcies alone will account for all of the output loss during a recession the purpose of this paper is to show that the assumptions of a i and limited liability will generate a model in which the employment level is inefficient and in which the magnitude of this inefficiency varies systematically with the expected real rate of interest this model predicts that the observed increase in the incidence of layoffs during recessions is directly attributable to the effects of high interest rates on aggregate supply some evidence of the phenomenon to be explained is presented below

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

why do disability benefit rolls vary between regions a review of the evidence from the usa and the uk mcvicar d 2006 why do disability benefit rolls vary between regions a review of the evidence from the usa and the uk regional studies 40 519 533 over the last 30 years many organization for economic co operation and development oecd countries have seen a dramatic rise in the share of the working age population receiving earnings replacement sickness and disability benefits the reasons behind this growth particularly for the usa but also to a lesser extent elsewhere have been extensively researched in the economics literature what have been less well researched are the large spatial differences in the size of disability benefit rolls that have emerged in some countries over this period the uk displays a distinct regional pattern where working age men and women in the north are considerably more likely to be claiming disability benefits than those in the south the usa has its own version of the north south divide with many southern states displaying disproportionately large disabilit

structuring international cooperative ventures we examine the effect of bargaining power and informational asymmetry on the design of international cooperative ventures in the presence of restrictions on equity participation and investment when the bargaining advantage rests with the multinational equity participation restrictions can increase the profits to domestic firms and encourage sub optimal investment policies overinvestment occurs when the multinational s bargaining advantage is reinforced by an informational advantage while underinvestment occurs when the domestic firm possesses the informational advantage in contrast when the bargaining advantage rests with the domestic firm equity participation restrictions do not affect investment levels

pricing in microinsurance markets summary microinsurance markets have exhibited strong growth rates in recent years great parts of the industry are however challenged by fundamental issues of providing insurance products one of the most significant of which is pricing risk in this paper we provide a nontechnical analysis of insurance pricing problems and a review of the set of opportunities that can address some of the specific pricing constraints in microinsurance markets a key contribution of this paper is the investigation of conventional techniques as potential solutions for improving the pricing of insurance risk in microinsurance markets

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

do job networks disadvantage women evidence from a recruitment experiment in malawi using a eld experiment in malawi where men and women apply for future surveyor positions with a local rm we nd that highly skilled women are systematically disadvantaged through the use of referrals this happens both because most men recommend other men and because women refer fewer candidates who qualify for the position we document that segregated networks do not cause this behavior we develop a theoretical model of referral choice and exploit random variation in referral contract terms to nd that that both men s and women s biases result from social incentives rather than expectations of performance we also document that the screening potential of networks is maximized when men refer men this paper suggests that the use of social networks in hiring is an additional channel through which women are disadvantaged in the labor market

strengthening state capabilities the role of financial incentives in the call to public service we study a recent recruitment drive for public sector positions in mexico different salaries were announced randomly across recruitment sites and job offers were subsequently randomized screening relied on exams designed to measure applicants intellectual ability personality and motivation this allows the first experimental estimates of i the role of financial incentives in attracting a larger and more qualified pool of applicants ii the elasticity of the labor supply facing the employer and iii the role of job attributes distance attractiveness of the municipal environment in helping fill vacancies as well as the role of wages in helping fill positions in less attractive municipalities a theoretical model guides each stage of the empirical inquiry we find that higher wages attract more able applicants as measured by their iq personality and proclivity towards public sector work i e we find no evidence of adverse selection effects on motivation higher wage offers also increased acceptance rates implying a labor supply elasticity of around 2 and some degree of monopsony power distance and worse municipal characteristics strongly decrease acceptance rates but higher wages help bridge the recruitment gap in worse municipalities

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

location search costs and youth unemployment experimental evidence from transport subsidies do high search costs affect the labour market outcomes of jobseekers living far away from jobs i randomly assign transport subsidies to unemployed youth in urban ethiopia treated respondents increase job search intensity and are more likely to find good permanent jobs subsidies also induce a short term reduction in temporary work i use a high frequency phone call survey to track the trajectory of search behaviour over time to show that the subsidies significantly increased job search intensity and the use of formal search methods the evidence suggests that cash constraints cause young people to give up looking for good jobs too early

employer learning productivity and the earnings distribution evidence from performance measures two ubiquitous empirical regularities in pay distributions are that the variance of wages increases with experience and innovations in wage residuals have a large unpredictable component the leading explanations for these patterns are that over time either firms learn about worker productivity but productivity remains fixed or workers productivities themselves evolve heterogeneously in this paper we seek to disentangle these two models and place magnitudes on their relative importance we derive a dynamic model of learning and productivity that nests both models and allows them to coexist we estimate our model on a 20 year panel of pay and performance measures from a single large firm the baker gibbsholmstrom data incorporating performance measures yields two key innovations first the panel structure implies that we have repeat measures of correlates of productivity as opposed to the empirical evidence on employer learning which uses one fixed measure second we can separate productivity from pay whereas the previous literature on productivity evolution could not we find that both models are important in explaining the data however the predominant effect is that worker productivity evolves idiosyncratically over time implying firms must continuously learn about a moving target therefore while the majority of pay dispersion is driven by variation in individual productivity wages differ significantly from individual productivity at all experience levels due to imperfect information we believe this represents a significant reinterpretation of the empirical literature on employer learning

insurance consumption and saving a dynamic analysis in continuous time this paper shows how the demand for non life insurance interacts with consumption and saving the analysis is set in continuous time using the maximum principle when insurance is actuarially fair the insurance and consumption decisions are separable with loaded premiums and alternatively without insurance optimal consumption is dynamically related to the growth rate of the loss probability and a growing loss probability generates precautionary saving with loaded premiums less than full insurance is demanded at each instant and optimal cover varies over time whether or not the loss probability is constant

on delegating price authority to a regulated firm this article models a regulatory environment in which the regulated firm possesses better information about demand conditions than does the regulator the regulator would like to tie prices to the firm s private information in a socially optimal way to do so the regulator must induce the firm either truthfully to reveal private information or equivalently unilaterally to set socially optimal prices this is accomplished by assessing lump sum subsidies or taxes that depend in an appropriate way on the prices announced by the firm this mechanism can be reinterpreted as a two part tariff scheme whereby both the service fee and price per unit respond to shifting demand conditions

cash or condition evidence from a cash transfer experiment this brief summarizes the results of a gender impact evaluation study entitled cash or condition evidence from a cash transfer experiment conducted from 2008 to the end of 2009 in malawi the study observed the impact of conditionality in cash transfer programs with two distinct interventions unconditional transfers uct arm and transfers conditional on school attendance cct arm targeted at adolescent girls in malawi on individual level dropout rates declined in both treatment arms however the uct arm is 43 percent as large as the cct arm the fraction of days attended in the cct arm is significantly higher than the uct cognitive ability math and english scores significantly improve for the cct but not for the uct probability of pregnancy and marriage were much lower in the uct arm the delays in marriage and fertility in the uct arm are found entirely among adolescent girls who dropped out of school after the start of the intervention improvements in human capital for the recipients of the cct are achieved at the cost of worse outcomes for people who drop out of school funding for the study derived from the global development network bill and melinda gates foundation national bureau of economic research nber africa project world bank research support budget grant world bank knowledge for change trust fund world development report 2007 small grants fund spanish impact evaluation fund and gender action plan trust fund

dynamic labor contracts under asymmetric information abstract this paper discusses the distortion of employment within a two period asymmetric information contracting model in which an exogenous demand shock is serially correlated and is known only to firms the obtained results show that serial correlations of the state of nature can cause not only underemployment but also overemployment even when overemployment never occurs in the context of a static asymmetric information contracting model

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

the impact of economic conditions on participation in disability programs evidence from the coal boom and bust abstract we examine the impact of the coal boom of the 1970 s and the coal bust of the 1980 s on disability program participation these shocks provide clear evidence that as the value of labor market participation increases disability program participation falls for the disability insurance program the elasticity of payments with respect to local earnings is between 0 3 and 0 4 and for supplemental security income the elasticity is between 0 4 and 0 7 consistent with a model where qualifying for disability programs is costly the relationship between economic conditions and program participation is much stronger for permanent than for transitory economic shocks

a rationalization of bonuses penalties and kinked payment functions within an agency model abstract the optimal payment schedule of the simplest principal agent problem can be continuous smooth or kinked or semicontinuous depending on the specifications of objective functions of the principal and or of the agent using the nonsmooth mathematical analysis this article determines a mapping from classes of objective functions into classes of optimal payment functions examples provide illustrations

repeated insurance contracts and moral hazard abstract an attempt is made to account for the frequently observed phenomenon of insurance companies offering discounts to clients who possess a favorable record of past claims we argue that such discounts provide a mechanism which enables both insurer and insured to counteract the inefficiency which arises from moral hazard

nonparametric bounds on treatment effects assume that each member of a population is characterized by values for the variables ya yb z x here x is a vector describing a person and z is a binary variable indicating which of two treatments this person receives the treatments are labelled a and b the variables ya and yb are scalar measures of the outcomes of the two treatments for example a cancer patient might be treated by a drug therapy or b surgery the relevant outcome y might be life span following treatment an unemployed worker might be given a vocational training or b job search assistance here the relevant outcome might be labor force status following treatment assume that a random sample is drawn and that one observes the realizations of z x and of the outcome under the treatment received thus ya is observed if treatment a is received but is a latent variable if treatment b is received similarly yb is either observed or latent suppose that one wants to learn the difference in expected outcome if all persons with attributes x were assigned to treatment a or b this treatment effect is

rules or discretion in public sector decision making rules and discretion in public sector decision making are compared in a macroeconomic setting where there is a potential role for an active stabilization policy when the policymaker has private information about nominal shocks the credibility of announcements about the state of nature is shown to depend critically on both the policymaker s preferences over output and inflation and on the institutional setting rules or discretion the issue of rules versus discretion is found to depend on the flexibility lost under a rule relative to the timeinconsistency problem arising under discretion

tying life insurance and savings decisions a multiperiod expected utility approach abstract many whole life insurance contracts provide in addition to protection in case of death of the insured also a savings element the main purpose of this article is to provide an economic rationale for this practice two alternative models are offered in both models it is assumed that there is an asymmetry of information between the insurers and insureds where the know better their probability of death and hence adverse selection may cause a market failure it is shown that by offering several deliberately designed contracts tying savings and insurance the insurers can induce the insureds to self select that is insureds with higher probability of death will voluntarily choose different contracts than those with a lower probability of death and hence will reveal their probability of death to the insurers the problem of adverse selection is thus overcome in the first model contracts differ in the amount of insurance they specify and the amount of savings tied with insurance in the second model a multiperiod actually two period contract and a single period contract are offered the multiperiod contract specifies a savings element which will be received by the insured if he or she lives at the end of the second period it is shown that by the right choice of the return on the savings part insureds with lower probabilities of death will choose the multiperiod contract whereas insureds with higher probability of death will prefer two successive single period contracts again self selection is achieved these two models show that tie in arrangements of savings and insurance may help overcome the adverse selection problem and hence an economic rationale is provided for their existence the paper also examines the demand for life insurance and savings the sensitivity of the demand for these products to variations in key parameters is analyzed the differences between the sensitivity analyses results obtained when insurance and savings decisions are made separately and those obtained when these decisions are simultaneosly made are highlighted and explained

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

asymmetric information and learning evidence from the automobile insurance market this paper tests the predictions of adverse selection models using data from the automobile insurance market i find that in contrast to what recent research suggests the evidence is consistent w

consumer lock in with asymmetric information abstract a two period version of the rothschild and stiglitz 1976 model of competitive screening in an insurance market is presented its features include repeat purchase of insurance among consumers no commitment among insurers or consumers asymmetric information among insurers about a consumer s accident history and state contingent contracts an equilibrium may exist in this model with full pooling in period one and consumer lock in in period two in such an equilibrium high risk consumers are experience rated and firms earn negative profits in period one and positive profits in period two

training wages and sample selection estimating sharp bounds on treatment effects this paper empirically assesses the wage effects of the job corps program one of the largest federally funded job training programs in the u s even with the aid of a randomized experiment the impact of a training program on wages is difficult to study because of sample selection a pervasive problem in applied microeconometric research wage rates are only observed for those who are employed and employment status itself may be affected by the training program this paper develops an intuitive trimming procedure for bounding average treatment effects in the presence of sample selection in contrast to existing methods the procedure requires neither exclusion restrictions nor a bounded support for the outcome of interest identification results estimators and their asymptotic distribution are presented the bounds suggest that the program raised wages consistent with the notion that the job corps raises earnings by increasing human capital rather than solely through encouraging work the estimator is generally applicable to typical treatment evaluation problems in which there is nonrandom sample selection attrition copyright wiley blackwell