the retail price of inequality abstract this paper studies the relation between a city s income distribution and its retail price level using panel data we find that an increase in the presence of lower middle income households relative to poor or upper income households is associated with lower prices our findings suggest that greater income inequality raises the prices that poor households face thus making it harder for them to invest in human capital

information and incentives the agency information problem this paper considers the use of imperfect information for risk sharing and incentive purposes when perfect observation of actions and outcomes is impossible making complete contracting infeasible the incentive insurance problem is defined to consist of two parts the choice of an information system and the design of a sharing rule based on the information system a generalized agency model is formulated to analyse this problem the agency models of ross 1973a b wilson 1968 stiglitz 1974 mirrlees 1976 harris and raviv 1979 holmstrom 1979 a o appear as special cases of the generalized model the analysis focuses on the value of information in the agency information problem the set of information systems which are valuable i e improve risk sharing and incentives in a pareto sense is characterized a problem independent ranking of information systems for the agency information problem is then characterized under the assumption that the agent s preferences are additive in money and actions the ranking may be viewed as a generalization of blackwell s ranking of information systems for decision problems to this particular game when the agent s risk preferences depend on his choice of action on the other hand it is shown that the blackwell ranking may be invalid randomized incentive schemes are shown to be efficient when the incentive effect of risk is positive and sufficiently large relative to the absolute risk aversion of the partners

on the optimal spacing of currency denominations abstract existing theoretical evidence on optimal currency spacing is fragmentary and to some extent contradictory this note brings together the pieces and tries to solve the puzzle it shows that if the spacing of denominations is uniform then the average number of notes and coins exchanged in a transaction can be minimized by spacing denominations apart by a factor of two even when allowing for overpayment and the return of change

optimal bankruptcy code a fresh start for some abstract what is the optimal consumer bankruptcy law i answer this question using an incomplete markets life cycle model with a planner who can choose state contingent bankruptcy costs i develop two main theoretical characterizations first whenever debt discharge is allowed it should occur without cost second bankruptcy should always be allowed for highly indebted households quantitatively the optimal policy can generate a welfare gain as large as 11 6 however attractive informal default asymmetric information and moral hazard can reduce the welfare gain to as little as 0 7

an analysis of the relation between the stewardship and valuation roles of earnings in this paper we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes we explore linkages between weights on earnings in compensation contracts and in stock price formation a distinction between the valuation and incentive contracting roles of earnings in paul 1992 produces the null hypothesis that valuation earnings coefficients vecs and compensation earnings coefficients cecs are unrelated our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971 2000 rejects paul s 1992 hypothesis of no relation we also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation specifically we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings

ex ante randomization in agency models we consider how a principal can use randomized strategies in designing optimal contracts in agency settings we distinguish between ex post randomization overfee schedulesfollowing act selection by the agent and ex ante randomization overfee schedules before act selection we show that ex ante randomization may be efficient in both full information and private information settings under certain assumptions regarding preferences and the production technology it is particularly significant that additive separability and concavity ofthe agent s utility function as well as concavity of the production function do not rule out efficient ex ante randomized contracts in private information settings although as is known they rule out ex post randomization

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

prices and quality effects in cross sectional demand analysis a conceptual clarification of the sources and meaning of cross sectional price variability is used to motivate a theoretical and econometric framework for the estimation of cross sectional demand functions quality effects are distinguished from supply related price variability to identify cross sectional demand for disaggregated food commodities an empirical application using data from the 1977 78 nationwide food consumption survey indicates that parameter differences resulting from a failure to adjust cross sectional prices for quality effects are likely to be small for relatively homogenous disaggregated food commodities in demand analysis with cross sectional household budget data it is usually assumed that prices are constant allen and bowley prais and houthakker george and king given this assumption engel functions are estimated where expenditure or quantity is regressed on income or total expenditures family size and other demographic characteristics the assumption that cross sectional price effects are absent or are captured adequately by spatial and temporal dummy variables has not been evaluated empirically whether cross sectional price effects can be treated in this manner has implications for the specification of cross sectional demand functions as well as the estimation of engel functions there is a considerable literature on estimating price elasticities with cross sectional data most of the applications utilize timeseries cross sectional data annual or quarterly household consumption surveys and

realizing the gains from electronic payments costs pricing and payment choice the growth of electronic payments can substantially reduce the social cost of a country s payment system we provide an estimate of the potential savings in social cost and determine the responsiveness of payment users when relative prices are used to speed up the substitution of electronic for paper based payments while some countries norway japan have encouraged their banking systems to establish explicit prices to promote electronic payments others the united states have not for the first time ever survey data are available to permit estimation of a model of payment choice from which own price cross price and payment substitution elasticities are derived the data which are semiannual panel data concern the use of three methods for making retail payments in norway cash withdrawals at atms writing a check or using a debit card at the point of sale our finding that payment users are quite sensitive to relative prices that reflect the relatively lower cost of electronic payments is generalizable both production techniques and consumer needs for payment instruments are very similar across developed countries even though instrument usage differs

pareto efficient income taxation with stochastic abilities abstract this paper studies pareto efficient income taxation in an economy with finitely lived individuals whose income generating abilities evolve according to a two state markov process the study yields three main results first when individuals are risk neutral in any period the only individuals whose earnings are distorted are those who currently are and have always been low ability in addition the degree to which these perpetual low ability types have their earnings distorted decreases over time converging to zero if the time horizon is long enough second the earnings distortions are continuous with respect to the degree of risk aversion at the risk neutral solution third pareto efficient income tax systems can be time consistent even when the degree of correlation in ability types is large the condition for time consistency suggests a novel theoretical reason why the classic equity efficiency trade off may be steeper in a dynamic environment than previously thought

an empirical analysis of euro cash payments abstract if the denominational structure of the euro is used in an optimal way there should be no preferences for certain coins and notes when making cash payments in kippers et al 2003 an empirical study of cash payments statistica neerlandica 57 484 508 it is documented that the dutch public did have certain preferences concerning the dutch guilder in the sense that a few notes and coins were used less often than they should have been with the advent of the euro which changed the denominational structure from 1 2 1 2 5 guilder to 1 2 5 euro it is of interest to examine whether there are any preferences for euro coins and notes in this paper we use a unique dataset for the netherlands to empirically examine if the euro range is used in an optimal way we find that there are no preferences for certain euro denominations

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

privatizing the mint during the 1 970s and 1 980s interest in the concept of privatization increased among both economists and policymakers numerous studies have suggested that production in the private sector is significantly more efficient than production in the government sector l following the publication of hayek s 1976 seminal work on the denationalization of money a number of proposals for allowing private currency issue have been advanced 2 the free banking literature however has generally focused on the implications of free banking for the financial system or its impact on the conduct of monetary policy this paper will examine a system in which the production and issue of currency both coins and notes is transferred to the private sector while monetary policy is conducted solely by the monetary authority 3 it will be shown that the potential benefits from privatization would exceed the gain in productive efficiency that might be expected from the production cost savings private firms could achieve the general accounting office gao 1990 has estimated that replacing the dollar bill with a dollar coin would save the federal government an average of 318 million per year over thirty years surprisingly savings in production costs accounted for only 41 4 million of this total most of the estimated savings would result from fact that demand for a dollar coin would exceed the demand for the dollar bill by an amount sufficient to increase seigniorage by 284 million per year

contract based motivation for keeping records of a manager s reporting and budgeting history this paper analyzes the role of the agent s bankruptcy constraints in multiperiod principal agent models with asymmetric information conditions are provided under which commitment to a long term contract involving n rounds of investment improves upon repetition of n identical single period contracts further when the agent s reservation wage is sufficiently low the optimal contract is always long term keeping records of a manager s history of reporting activity facilitates contracting since optimal contracts may require a link between past reports and future investments over a duration of two or more periods

variation in retail costs for fresh vegetables and salty snacks across communities in the united states abstract households living in different communities pay different amounts of money for food food costs depend on whether a household lives in an urban community or in a locality with a high incidence of poverty among other factors this study focuses on spatial variation across the united states in the retail costs for fresh vegetables and salty snacks findings reveal that the major economic and demographic characteristics of a household s community affect its costs for these two types of foods differently however households are likely to pay more money for salty snacks in communities where fresh vegetables also cost more

estimation of demand functions using cross sectional household data the problem revisited a procedure that corrects for selectivity bias is proposed to estimate demand functions using cross sectional data under the assumption that prices vary across households this procedure which extends the work by cox and wohlgenant includes a two equation system of expenditure and unit value functions this model is applied to household expenditures for beef steaks and roasts

contracts without memory in multiperiod agency models abstract settings are considered in which optimal multiperiod contracts can have no memory i e where second period payments do not need to depend on first period outcomes if contracts have no memory a repeated agency game can be played myopically there are no gains to long term relationships conditions on preferences for a no memory contract are presented in an agency game with moral hazard on the act selection preference separability and domain additivity imply the existence of a no memory contract in a setting without moral hazard but with asymmetric information on the outcome domain additivity implies no memory

network effects on cash card substitution in transactions and low interest rate regimes we develop a nash game on the adoption of a new eftpos electronic fund transfer at point of sale card payment media given cash is dispensed by a competitive atm automated teller machine network equilibrium conditions when cash and card use coexist entail a specific relationship between the card network coverage parameter super k and the proportion of cash financed expenditures we derive a payments innovation technology constrained transactions demand for money which is highly interest rate sensitive in low interest rate regimes data on cash card use in the uk 1990 97 is used to calibrate the model

quality variation and quantity aggregation in consumer demand for food viewing the problem of quality variation in consumer demand for food as a problem of valid aggregation over goods leads to new insights the simple sum of physical quantities used as the measure of demand in the quality literature is found to be a theoretically arbitrary and potentially misleading measure of demand when goods are heterogenous alternative measures of demand derived from restrictions on quality variation consumer preferences or relative prices are investigated a hypothetical example illustrates the use of a hicksian composite commodity assumption the empirical as well as conceptual merits of the various measures are discussed the usual assumption made about prices in a cross section analysis of household food expenditures is that all households are facing the same prices estimation of price elasticities of demand is commonly left to time series researchers who get price information from intertemporal indices recently however there has been renewed interest in the otential of cross section analysis for estimation of price elasticities of demand for food especially when surveys collect data on both household expenditures for food items and on the physical quantities purchased

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 interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

preference representation and randomization in principal agent contracts abstract conditions on an agent s preferences that induce a demand for ex ante randomization are derived when the agent has constant absolute risk aversion in wealth but additive separable preferences in wealth and effort optimal contracts often require randomization under additive separability the principal can use randomization to exploit the interaction between incentive considerations and the agent s outside opportunities however when the agent has constant absolute risk aversion in wealth but multiplicative separable preferences participation and incentive considerations separate hence optimal contracts do not exhibit ex ante randomization

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

efficient timing of communication in multiperiod agencies this paper examines communication in a two period principal agent model in which the agent receives a private signal about the second outcome before the first outcome is realized no communication is compared with communication at three possible dates before the first outcome early at the first outcome consumption date normal and between the initial consumption date and the second outcome delayed delayed communication is shown to have no value if the agent s information is perfect but can have value if it is imperfect early and normal communication can be used to smooth compensation across periods and hence generally have incremental value over delayed communicationif the agent cannot borrow or save however the smoothing benefits disappear if he can borrow and save early and normal communication are equivalent if the agent has domain additive exponential preferences and the private signal is uninformative about the first outcome if the private signal is informative about the first outcome the incremental value of early compared with normal communication attains its maximum for medium informativeness a unifying example is used throughout

repeated moral hazard with a time inconsistent agent abstract i consider a repeated principal agent model with moral hazard in which the agent has preferences which are widely used to capture time inconsistency i analyze the case where the agent is sophisticated in the sense that he is fully aware of his inconsistent discounting i characterize the optimal wage scheme for such an agent and compare it to time consistent benchmarks the marginal cost of rewarding the agent for high output today exceeds the marginal benefit of delaying these rewards until tomorrow in this sense the principal does not smooth the agent s rewards over time when facing a sophisticated agent it is optimal for the principal to reward the good performance more and punish the bad performance more in the early period relative to the optimal wage scheme for a time consistent agent

more on optimal denominations for coins and currency abstract telser telser l b 1995 optimal denominations for coins and currency economics letters 49 425 427 has shown that the problem of b chet helps answer the question of the optimal denominational structure of currency in the u s and u k this note provides further evidence to support this claim using cross country data 1997 elsevier science s a

optimal denominations for coins and bank notes in defense of the principle of least effort a number of recent articles argue that the problem of bachet the problem of finding the most efficient set of standard weights can shed light on the problem of finding the optimal denominations of coins and bank notes the present note opposes this view and shows that the two problems are different in a key way it also argues that finding the optimal denominational structure is a multicriteria optimization problem in which the principle of least effort should be given the greatest weight

do fast food chains price discriminate on the race and income characteristics of an area this article reports tests for differences in prices charged by fast food restaurants that serve markets with customers of widely divergent incomes and ethnic backgrounds the data contain detailed prices on items sold at over 400 burger king wendy s kfc and roy rogers restaurants in new jersey and pennsylvania locations i find significant differences in price based on the race and income characteristics of a zip code region when income and cost differences are taken into account meal prices rise approximately 5 for a 50 rise in the black population

prices for cash and cash for prices theory and evidence on convenient pricing a transaction between a seller and a buyer incurs a payment cost the payment cost is borne by the seller depending on the payment instrument the buyer chooses cash or card card payment is more costly than cash payment so the seller prefers that the buyer pays cash in this article we study the strategy of the seller setting a convenient price which simplifies transactions and pushes the buyer to pay cash the theoretical analysis which models both the seller and the buyer in a game setting derives two propositions 1 the seller is more likely to set a more convenient price and 2 the buyer is more likely to pay cash a more convenient price the empirical analysis supports both propositions thus sellers adopt a convenience pricing strategy prices for cash and this strategy pushes buyers to pay cash cash for prices

the effects of risk aversion on production decisions in decentralized organizations this paper presents a principal agent model in which subsequent to contracting the risk averse agent becomes informed about the production process communication of the agent s information is always valuable the optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric leading to an efficiency loss comparative statics show that the loss in expected production increases as the agent becomes more risk averse

aggregation without separability a generalized composite commodity theorem this paper provides general conditions for aggregating commodities without separable utility these conditions impose weaker and more empirically plausible restrictions on price movements than the currently existing alternative to separability the hicks leontief composite commodity theorem the idea is to allow departures from hicks leontief that take the form of well behaved error terms utility functions that permit generalized composite commodity aggregation include the aids model the translog all homothetic utility functions and any utility function when demands are aggregated to two groups of goods implications of empirical nonstationarity of relative prices for aggregation and demand estimation are considered copyright 1996 by american economic association

collusion and noncontrollable cost allocation controllability is often alleged to be an important consideration in constructing a managerial accounting system for performance evaluation practically all cost accounting textbooks recommend that a manager s evaluation should be confined to performance aspects that he can directly influence in the time period under consideration in contrast to this recommendation however firms allocate fixed and other joint costs to various departments even though such costs are apparently not controllable by department heads for example reece and cool indicated that 40 of 594 surveyed companies calculated income the same way for both internal decision and control purposes and for external reporting purposes and more than half of the remaining 60 also allocated corporate administrative expenses to calculate income for managerial purposes 2 not much is known about why companies continue to allocate those seemingly noncontrollable costs for internal decision and control purposes even though such allocations are apparently inconsistent with the concept of responsibility accounting 3 this study provides one possible

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

price dispersion and accessibility a case study of fast food this study examines spatial variation in the price and accessibility of fast food across a major urban area we use novel data on the price of a representative fast food meal and the location of fast food restaurants belonging to one of three major chains in the district of columbia and its surrounding suburbs these data are used to test a structural model of spatial competition the results of this study are easily interpreted and compared with a past analysis we find that spatial differences in costs and demand conditions drive variation in the number of firms operating in a market which in turn affects prices

salaries and piece rates compensation can take many forms remuneration can come as pecuniary payments as fringes such as health and pension benefits or as a nonpecuniary reward such as plush office furniture that costs the firm less than it benefits the worker a significant literature has examined the trade offs between pecuniary and nonpecuniary compensation the modern work having been pioneered by rosen 1974 more recently another body of literature has examined the selection of method of total compensation ignoring the distinction between pecuniary and nonpecuniary payment this work has focused on risk and incentive factors it has resulted in comparisons of compensation based on absolute output levels to that based on relative performance it has also led to explorations of the relation of compensation to experience over the work life 2 little attention has been paid to what may be among the most important and obvious distinction in methods of compensation namely the choice between a fixed salary for some period of time that is paying on the basis of input and some workers receive compensation that is specified in advance and not directly contingent on performance instead it depends on an input measure such as hours worked for others compensation is directly related to output this essay is an attempt to predict a firm s choice of compensation method piece rates are defined more rigorously among the more important factors discussed are worker heterogeneity incentives sorting considerations monitoring costs and asymmetric information one result is that salary workers tend to be of lower quality and more homogeneous than are their piece rate counterparts numerous additional results are provided helpful comments by victoria lazear and yoram weiss are gratefully acknowledged support was provided by the department of labor and the national science foundation 1 see lazear and rosen 1981 stiglitz 1981 holmstrom 1982 green and stokey 1983 2 see lazear 1979 1981 and harris and holmstrom in press

is informal risk sharing less effective for the poor risk externalities and moral hazard in mutual insurance abstract poor farm households are less keen to adopt high risk high return technologies than rich households yet the poor are more vulnerable to income shocks we develop a model of endogenous risk taking to explain these facts in autarky poor households adopt less risky production plans and obtain lower expected returns but face higher relative risk than the rich the introduction of risk sharing generates negative risk externalities between agents at the first best the social planner imposes a homogeneous level of risk taking in the group at the second best risk taking is not enforceable and increases with insurance generating moral hazard interestingly the poor s risk taking behavior is more sensitive to insurance the social planner thus mitigates risk taking by applying a lower insurance coverage in poor groups the introduction of risk sharing therefore reinforces the gap between rich and poor in terms of expected income and absolute risk while the effect on relative risk is ambiguous

currency by denomination abstract the distribution of the dutch currency circulation by denomination is related to the requirements of efficient payment i e payment involving a minimum number of coins or banknotes for any amount

adverse selection and finite horizon insurance contracts abstract we use a particular contract to analyze three issues regarding adverse selection monopoly and the use of time within a finite horizon the description and existence of an epsilon equilibrium equilibrium the achievement of a nash equilibrium and the optimality of risk revelation among the results obtained we show that at equilibrium low risk individuals buy full insurance most of the time and high risk individuals always buy full insurance we also show that the equilibrium with risk revelation is a nash equilibrium these results are compared with those of the self selection mechanism stiglitz 1977 and of the equilibrium under moral hazard radner 1981

optimal denominations for coins and currency abstract let all denominations have the same cost let transactions be any amount between 1 and 3 k 1 1 2 since one can make change the least expensive set of weights requires denominations that are powers of 3 from 1 to k

the role of installment payments in contracts for services this article studies the role of installment payments in relationships characterized by moral hazard and sunk costs we rule out vertical integration and payments contingent on the product of the contractor instead each payment is negotiated as and when made in such circumstances an initial down payment serves to redress the weakness of the contractor in ex post renegotiations if higher effort by the contractor in thefirst stage increases the marginal product of effort in the second stage a second installment payment induces the contractor to invest greater effort initially

communication and income smoothing through accounting method choice this paper shows how accounting income smoothing could arise as rational equilibrium behavior i develop a two period agency model in which an agent obtains after the first period s production operation private information regarding future productivity of the operation direct communication of the agent s private signal yields a strict pareto improvement over no communication in this two period world since it allows the agent to achieve signal contingent interperiod consumption smoothing delegation of accounting method choice to the agent is shown to be an alternative pareto equivalent mechanism to direct communication in this paper thus accounting method choice is one way to achieve interperiod signal contingent consumption smoothing by smoothing accounting income one such accounting choice which arises from the structure of the problem is the choice of depreciation method

managerial legacies entrenchment and strategic inertia this paper argues that the legacy potential of a firm s strategy is an important deter minant of ceo compensation turnover and strategy change a legacy makes ceo replacement expensive because firm performance can only partially be attributed to a newly employed manager boards may therefore optimally allow an incumbent to be entrenched moreover when a firm changes strategy it is optimal to change the ceo because the incumbent has a vested interest in seeing the new strategy fail even though ceos have no specific skills in our model legacy issues can explain the empirical association between ceo and strategy change this paper proposes a model of ceo replacement and puts forward a novel determinant for turnover decisions the legacy potential of a firm s strategy we mean by this the extent to which a manager s decisions affect future firm cash flows potentially beyond the manager s own tenure the replacement of a ceo is arguably one of the most important decisions a firm takes yet the theoretical and empirical finance literature has relatively little to say about the firm and manager specific characteristics that lead to one manager being fired and replaced by another as brickley 2003 points out the only variable that predicts turnover empirically is poor firm performance but it has little pre dictive power theoretical papers on managerial turnover tend to reduce ceo successions to a sequence of static interactions see below for more details as such they do not distinguish between a ceo who is hired and can start a fresh project or one who is constrained in this choice because he inherits a prede cessor s long term strategy our paper focuses on this latter phenomenon and investigates turnover decisions when strategy choices have a legacy potential the fact that a dynamic link exists between a ceo and his predecessor is probably more recognized in the accounting literature than in finance pourciau both authors are from the toulouse school of economics and the institut d administration des

incentive efficiency of compensation based on accounting and market performance abstract this paper analyzes how earnings and price are used in executive compensation contracts risk averse shareholders collectively design a contract and individually trade in the stock market in the optimal linear contract the use of earnings and price depends critically on incentive efficiency i e how precisely the measures convey the true outcome the relative weight of price to earnings exaggerates the true relative importance of price because price impounds traders overall information while its informational value lies in the incremental information it provides the use of price allows shareholders to share trading risks with managers

noncontrollable costs and responsibility accounting an important characteristic of management control systems is the use of responsibility accounting as baiman 1982 p 197 notes responsibility accounting states that a person should be evaluated only on the basis of those factors that he controls this is usually interpreted to mean that a person should be evaluated only on the basis of those outcomes that he affects emphasis in the original this notion gives rise to the desire to distinguish between controllable and noncontrollable costs because the latter presumably should not be used to evaluate an individual s performance for example solomons 1965 p 83 states that it is almost a self evident proposition that in appraising the performance of divisional management no account should be taken of matters outside the division s control however this interpretation of responsibility accounting is often violated in practice for example we often observe a division manager who has profit responsibility for his division being evaluated and compensated on the basis of his division s capacity costs over which he exercises no control in this paper we reexamine the process of constructing performance

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

the way we pay with money we assess the sample distribution of payments in the netherlands using survey data for 1984 1986 the payment pattern fits a lognormal distribution with peaks caused by the price tags of the purchased items the results are used to simulate the use of coins and notes which indicates a rather efficient denominational mix but a high degree of hoarding for the large bank notes

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

optimal incentives and asymmetric distribution of information abstract the problem of designing optimal incentive schemes arises if information is asymmetrically distributed among individuals the existence and the welfare properties of optimal incentive schemes are discussed for cases where the information asymmetry refers either to the quality of a product or to the behaviour of an individual

the multiperiod principal agent problem in repeated principal agent models long term contracts can improve on short term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short term contract negotiated if that circumstance occurs we show that efficient contracting under moral hazard alone does not require long term commitment from the principal provided a short term contract can punish the agent sufficiently in a sense made precise it requires no commitment from the agent either then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing

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 asymmetry participation and long term contracts this paper examines the economic value of participative processes in the setting of long term incentives when informational asymmetries arise between employers supervisors and employees subordinates about future states questions arise as to whether and when resolving these informational asymmetries produces economic gains to address these questions i use a two period principal agent contracting framework in which the agent employee receives imperfect private information about the second period state in the first period and make a welfare comparison between two alternative communication regimes in the delayed communication regime a report from the agent is considered only for second period contract in the early communication regime the report is considered for first period contracting as well this regime can therefore be viewed as encouraging participation in long term contracts i identify conditions under which the early communication regime is strictly preferable to the delayed communication regime further given some additional structure on the agent s preferences this result obtains even if the agent can access capital markets to smooth inter temporal consumption finally i examine the setting in which the principal at the time of contracting has the option of whether or not to install an information system that provides the agent with private information about the future period state i identify conditions under which installing the information system and resolving the consequent information asymmetry through participation is strictly preferable to not installing the information system

investor protection optimal incentives and economic growth does investor protection foster economic growth to assess the widely held affirmative view we introduce investor protection into a standard overlapping generations model of capital accumulation better investor protection implies better risk sharing because of entrepreneurs risk aversion this results in a larger demand for capital this is the demand effect a second effect the supply effect follows from general equilibrium restrictions better protection i e higher demand increases the interest rate and lowers the income of entrepreneurs decreasing current savings and next period s supply of capital the supply effect is stronger the tighter are the restrictions on capital flows our model thus predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions cross country data provide support for this prediction as does the detailed examination of the growth experiences of south korea and india

imperfect commitment altruism and the family evidence from transfer behavior in low income rural areas in this paper we examine empirically whether risk pooling is more advantageous among altruistic compared to selfish agents in a framework where individuals cannot make binding commitments in particular we incorporate altuism into a model of risk sharing under imperfect commitment and use simulation methods to establish tests of the roles of both altruism and commitment problems in determining the extent of insurance and the intertemporal movements in interhousehold transfers the tests are carried out using three panel data sets from two countries of rural south asia that provide detailed information on transfers and enable the measurement of income shocks the estimates provide strong support for the notion that imperfect commitment substantially constrains informal transfer arrangements whether kin based or not but also provide evidence that altruism plays an important role in ameliorating commitment constraints and thus in increasing the gains from income pooling