patterns and trends in local pay in great britain 1975 76 to 1987 88 whilst local pay differentials lie at the heart of most models of local labour markets not enough is known about the size and trends of such differentials in great britain this study is based on a new data set derived from inland revenue and department of social security statistics for a 1 per cent sample of national insurance records the information was available at the detailed local labour market area level annually from 1975 76 to 1987 88 disaggregated by sex age industry and for women marital status the data showed a marked widening of local pay differentials in the late 1980s much of the cross sectional variation reflected a differential between greater london and the rest of the country partly reflected in house prices the trend towards increasing local pay differentials over time was still in evidence however even when labour markets in the south east were excluded from the sample

the north south divide questions of existence and stability this paper investigates the relationship between regional earnings and unemployment by use of information primarily from the general household surveys of 1975 and 1982 conventional earnings functions are augmented to capture the effects of the level and duration of unemployment and of regional differences in living costs in common with previous studies the authors find personal characteristics and the occupation or industry of employment to be important in earnings determination in this paper however they generally find that although higher unemployment is associated with reduced regional earnings ceteris paribus long term unemployment has little influence in regional earnings determination copyright 1990 by royal economic society

the effects of hospitals governance on optimal contracts bargaining vs contracting we propose a two stage model to study the impact of different hospitals governance frameworks on the optimal contracts designed by third party payers when patients disease severity is the private information of the hospital in the second stage doctors and managers interact within either a bargaining or a contracting scenario in the contracting scenario managers offer a contract that determines the payment to doctors and doctors decide how many patients to treat in the bargaining scenario doctors and managers strategically negotiate on both the payment to doctors and the number of patients to treat we derive the equilibrium doctors payments and number of treated patients under both scenarios we then derive the optimal contract offered by the government to the hospital in the first stage results show that when the cost of capital is sufficiently low the informational rent is lower and the social welfare is higher in the contracting scenario

on decomposing the wage gap a critical comment on blinder s method many studies have found that the impact of schooling on earnings is greater for females than for males despite the fact that females tend to earn less both absolutely and controlling for personal characteristics this study investigates possible

intra firm bargaining under non binding contracts we present a new methodology for studying the problem of intra firm bargaining based on the notion that contracts cannot commit the firm and its agents to wages and employment we develop and analyse a general non cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party equilibrium firm profits are characterizable as both a weighted average of a neo classical non bargaining firm s profits and a generalization of shapley value for a corresponding cooperative game furthermore the resulting payoffs induce economically significant distortions in the firm s input and organizational design decisions

purchasing health care services from providers with unknown altruism cost sharing rules for paying physicians have been advanced as a way of generating incentives for the provision of quality care while recognizing their potential negative effects on production efficiency however the optimal sharing rate typically depends on the degree to which the physician acts in the interest of the patient what we identify as the physician s altruism since the degree of altruism is likely to vary across physicians and to be private information the standard rules for setting the cost sharing rate are unlikely to be optimal this paper derives conditions for the optimal non linear cost sharing mechanism in the presence of asymmetric information about altruism and shows how it can sometimes be implemented through a menu of linear cost sharing schemes the model can be used to rationalize the design of the fund holder system for general practictioners that operated in the 1990s in the united kingdom

crime confiscation and frowth for and against leviathan this paper presents a dynamic general equilibrium model ofrent seeking in which the payoffs and the choices between productiveand non productive activity are endogenous the economy has the potential for endogenous growth but when agents can choose between confiscation and productive investment growth is no longer possible

unemployment in britain male unemployment in britain has risen from around 2 per cent in the 1950s to around 17 per cent in 1985 see figure 1 the figures are for male unemployment because there is no consistent series for women 1 even more remarkably unemployment has fallen in only three years out of the last twenty 1973 1978 and 1979 to account for this we need a model that explains both changes in the natural or non accelerating inflation rate of unemployment nairu and deviations from it we use a three equation supply side model centred on the labour market this has two main features the first concerns the determination of employment in the short run the labour demand function that we use cuts through the fruitless debate now raging especially in europe as to whether current unemployment is classical or keynesian according to the classical view employment is too high because real wages are too high according to the keynesian view real wages are not binding and unemployment is high because the product market does not clear with prices too high relative to nominal demand the whole debate is set in the framework of perfect competition yet in perfect competition prices are set by impersonal forces and it is not clear what could possibly stop prices clearing the market it is much more reasonable to think of prices as being set by imperfectly competitive firms existing prices being the best they can think of given the demand they face in this context firms demand for labour will depend on both the real product wage and the level of real aggregate demand this is the demand function we estimate and it conforms both to common sense and to the data however this does not imply that employment can be made to grow without limit by pumping up real demand for in the medium term when price surprises are eliminated our model determines three variables employment real wages and real demand on the basis of three equations an employment equation a price equation and a wage equation thus in the medium term there is a natural level of employment and corresponding to this a natural level of real aggregate demand the second key feature of our model concerns the medium term determination of unemployment in the medium term the planned mark up of wages over prices in wage settlements must be consistent with the mark up of prices over wage costs in employers pricing behaviour for if wage setters try to set real product wages higher than is consistent with employers pricing behaviour this generates ever increasing inflation thus the key to understanding unemployment in the medium term is the behaviour of wage setters if events occur that push them towards too high real wages then unemployment has to rise to offset these influences we shall call these influences wage pressure variables or push factors and they are clearly crucial in understanding unemployment the variables here include the social security system employment protection

power in a theory of the firm transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this within the contractibility assumptions of this literature we identify a potentially superior mechanism the regulation of access to critical resources access can be better than ownership because i the power agents get from access is more contingent on their making the right investment and ii ownership has adverse effects on the incentive to specialize the theory explains the importance of internal organization and third party ownership

contracting for health services when patient demand does not reflect quality this paper analyses contracts to keep down costs while maintaining quality of health services when patient demand does not reflect quality there is then a natural role for forms of contract that have emerged during the reforms of the nhs in britain that differ from pure fixed price or cost reimbursement contracts the optimal form depends on whether the provider is entirely self interested or benevolent in having genuine concern for patient welfare with fully benevolent providers there are roles for block and cost and volume contracts with partially benevolent providers some degree of cost sharing is typically optimal

medical care costs how much welfare loss hardly a week goes by without a front page newspaper article on rising health care costs and the uninsured in this article i focus mainly on costs arguing that the issue has been somewhat misconceived while the level of medical care spending in the u s is a cause for concern the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem in fact cost containment may not be as urgent as is widely supposed and some proposed cost containment policies may result in welfare losses for the insured and even increase the number of uninsured

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

contracting with externalities and outside options this paper proposes a model of multilateral contracting where players are engaged in two parallel interactions they dynamically form coalitions and play a repeated normal form game with temporary and permanent decisions we show that when outside options are independent of the actions of other players all markov perfect equilibrium without coordination failures are efficient regardless of externalities created by interim actions otherwise in the presence of externalities on outside options all markov perfect equilibrium may be inefficient this formulation encompasses many economic models and we analyze the distribution of coalitional gains and the dynamics of coalition formation in four illustrative applications

cost sharing in health service provision an empirical assessment of cost savings fixed price payments for treatment of patients with a specified diagnosis are widespread in both us medicare and the british nhs even though there are substantial variations in the cost of treatment theory suggests that when there is asymmetric information about those costs total payment can be reduced by cost sharing this paper uses data from medicare to assess the cost savings that might be feasible in practice from cost sharing for diagnosis related groups with low cost variation the calculated cost savings are approximately 7 for those with high cost variation the calculated cost savings are more than 60

accounting for south non south real wage differentials and for changes in those differentials over time a unified accounting framework for analyzing differences in real wages between the south and non south in 1979 and for changes in south non south wage ratios between 1973 and 1979 is outlined cross section analysis of real wage differentials allows two sources of regional wage variation 1 worker and job characteristics and 2 returns to those characteristics our results suggest that differences in the latter may be as important in accounting for regional wage differentials as the former an interactive specification permits decomposition of changes in regional wage ratios into direct effects of changes in characteristics and indirect effects of region year and region year variations in returns more than half the predicted changes in south non south wage ratios can be accounted for by changing relative returns to characteristics between the south and non south

bargaining over a menu of wage contracts we investigate an infinite horizon bargaining problem in which a firm and a worker bargain over two dimensions quality and wage the worker has private information about his type only the uninformed firm makes an offer and it can offer a menu of quality wage contracts instead of single one we show that for all discount factors the unique sequential equilibrium outcome is separating without delay the firm separates the types of worker with a menu of contracts in the first period our result shows that in multi dimensional bargaining the coase conjecture holds in the sense that the game ends in the first period but it fails in the sense that the uninformed party can preserve the entire bargaining power

is health care really a luxury much of the work which has led to a widely held view that the income elasticity of health care spending exceeds one has been based on international cross section data or on pooled cross sections and time series in this paper we re examine this view in the context of long run equilibrium relationships between non stationary time series possibly including autonomous trends our results cast doubt upon the usefulness of pooling and upon the notion of an elasticity above one

endogenous formation of coalitions the formation of coalitions is a fundamental problem in game theory by a coalition is meant a group of players e g economic or political agents which decide to act together as one unit relative to the rest of the players this includes the instances of syndicates unions cartels blocks political parties parliamentary coalitions etc we would like to emphasize that forming a coalition does not eliminate the individual players as decision makers in all interactions with the other players coalition members act as one unit it may be useful to think of a representative agent taking their place 2 however this arrangement will continue only as long as each player finds it desirable to act this way further bargaining occurs among the members of each coalition on how to divide what they obtained together thus the existence of coalitions implies that the interactions among the players will be conducted on two levels first among the coalitions and second within each coalition most of the existing models in economics and game theory assume that the coalition structure is given exogenously instead we try here to obtain it as an endogenous outcome of our model namely we want to be able to predict which coalitions will in fact form in each given situation 3 our theory combines two kinds of game theoretic concepts value and stability the basic idea is first to evaluate the players prospects in the various coalition structures and then based on these values to find which ones are stable we will call this value coalition structure value or cs value for short the reason we are considering coalition structures i e partitions of the set of players into disjoint coalitions rather than just coalitions is that in general players may find it to their advantage to join forces in some situations and to act separately in others all depending on the way the other participants are organized this implies that both the value and the stability concepts should depend on the entire coalition structure the cs value we analyze in this paper was first developed by owen 7

hospital quality choice and market structure in a regulated duopoly this paper analyzes the optimal structure of a regulated health care industry in a model in which the regulator cannot enforce what hospitals do unverifiable quality of health or does not know what hospitals know incomplete information about production costs or both we show that if quality is unverifiable the choice between monopoly and duopoly does not change with respect to the verifiable case but if there are fixed costs assumed to be quality dependent and the monopoly is the optimal market structure the quality level of the operative hospital decreases asymmetry of information introduces informational rents that can be reduced by increasing the most efficient hospital s market share a monopoly is chosen more often

the distribution of regional earnings in the uk utilizing a micro sample of 7317 individuals extracted from the general household survey 1973 we show that money earnings and real earnings vary considerably across british regions even when other factors such as education and industry mix are held constant we also find that real earnings do not follow the pattern of money earnings if anything quite the reverse whereas monetary rewards are the greatest in the south east of england real rewards are the greatest in the midlands and the north east of england scottish regions however appear to fare the worst in both money and real terms

moonlighting public service and private practice we study job incentives in moonlighting when public service physicians may refer patients to their private practices some doctors in the public system are dedicated and behave sincerely but others the moonlighters are utility maximizers allowing moonlighting always enhances aggregate consumer welfare but equilibrium public care quality may increase or decrease if quality increases moonlighting improves each consumer s expected utility unregulated moonlighting may reduce consumer welfare as a result of adverse behavioral reactions such as moonlighters shirking more and dedicated doctors abandoning their sincere behavior price regulation in the private market limits such adverse behaviors in the public system and improves consumer welfare

compensating differences and interregional wage differentials interregional differences in average wages and earnings have been observed particularly in the north and south of the united states ever since the mid 1800s that observation has motivated several empirical attempts to determine the source of those differentials measured both in nominal and real terms and to explain why they have been maintained over time the general conclusion reached by the overwhelming majority of these studies is that the labor market has not eliminated these wage differentials even in the face of substantial interregional migration this result has at least two alternative interpretations first it would appear to contradict the theory of compensating differences as applied to the labor market thaler and rosen 1975 which stresses that under the assumptions of perfect information free geographic and intersectoral labor mobility and homogeneous consumer tastes the nominal wage rates of workers who have similar human capital characteristics live and work in similar environments and experience similar living costs are driven to equality second this result may only reflect an aggregation error in other words there may be several types of labor that are each paid different equilibrium wage rates and comprise different percentages of the workforce in each region even if the real wage paid to each class of workers is interregionally invariant a situation that instead would support the theory of compensating differences failure to distinguish accurately between labor types could produce the illusion of a wage differential this paper considers the two alternative interpretations given above as to why interregional wage differentials might exist hedonic real wage equations are estimated for four regions of the united states using observations on individual household heads drawn from the 1976 panel study in income dynamics psid this sample is of interest because the 1976 psid data contain unusually detailed measures of education work experience and occupation as well as information on workplace and job characteristics thus a more complete specification of the wage equation is permitted and the possibility of aggregation error is reduced particularly in comparison with other interregional wage differential studies several of these studies for example have been based on aggregate data from the census of manufactures fuchs and perlman 1960 gallaway 1963 scully 1969 and coelho and ghali 1971 which provide no direct measurements on the human capital of workers the remainder of the discussion is organized into three sections section ii specifies the wage equation and describes the psid data section iii then reports empirical results which are consistent with the findings based on aggregate data of bellante 1979 and coelho and ghali 1971 in that they support the theory of compensating differences more specifically for full time workers the rewards to attributes relevant in determining real wages apparently are interregionally invariant however because this result conflicts with most previous research on interregional wage differentials based on aggregate data and virtually all such research based on microdata welch 1966 hanoch 1967 hanushek 1973 1981 hirsch 1978 and sahling and smith 1983 a number of empirical comparisons are made between the present study and the approaches taken by other investigators conclusions and implications are drawn out in section iv

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