strategic behavior in contests comment almost by definition contests involve strategy this is especially true in contests between unevenly matched contenders in a recent article avinash dixit 1987 explored strategic commitment in contests between a favorite and an underdog the favorite is defined as the player whose chance of victory exceeds one half at the nash equilibrium an underdog s chance is less than one half dixit concludes that if the favorite has the opportunity to move first then he will overcommit effort compared with the nash equilibrium an important implication of the favorite overcommitting effort is that strategic behavior leads to greater social costs see gordon tullock 1980 the opposite holds if the underdog has the opportunity to move first this paper demonstrates that the favorite will never overcommit effort given endogenous order of moves the favorite finds it advantageous to wait until the underdog moves surprisingly the underdog s best strategy is not to wait but to make the first move throwing the first punch the equilibrium order of play is for the underdog to move before the favorite in this equilibrium one never observes overcommitment of effort consequently extending dixit s model to allow for endogenous order of moves suggests that strategic behavior in contests will lead to undercommitment compared with nash behavior

effort levels in contests with two asymmetric players a contest is a situation in which players compete with one another by expending effort to win a prize examples abound firms compete by spending rd 26 krueger 14 posner 20 rogerson 23 appelbaum and katz 1 hillman and riley 12 hirshleifer 13 ellingsen 8 nitzan 18 and baik 2 3 have studied rent seeking contests lazear and rosen 15 o keeffe viscusi and zeckhauser 19 and rosen 24 have examined performance incentives associated with reward schemes riley 22 has analyzed the war of attrition and auctions dixit 7 has considered strategic commitments in contests with different applications these are only a part of the literature on the theory of contests despite the vast literature however the effects of asymmetries between players have not been clarified except by harris and vickers 11 who analyze in a patent race model the strategic consequences of asymmetries the purpose of this paper is to examine the effects of asymmetries between two players on individual and total effort levels in a model with a logit form probability of winning function effort levels expended by the players deserve attention effort in a rent seeking contest is interpreted as social costs and thus total effort level is a measure of economic efficiency effort in an r d contest is interpreted as r d expenditures and thus effort levels determine the expected date of invention we focus on asymmetries between the players resulting from their different valuations of the prize their different abilities to convert effort into probability of winning or both such asymmetries are common in contests for example people in different locations may receive different

how large are search frictions textabstractthis paper presents strong evidence for the concavity of wages in job and worker characteristics by adding second order terms to a mincerian earnings function for 6 oecd countries under a standard normality assumption this concavity cannot be attributed to unobserved components in those characteristics an assignment model with search frictions provides a parsimonious explanation for our findings this model yields two restrictions on the coefficients which fit the data very well the impact of search frictions on wages is large our results relate to the literature on industry wage differentials on structural identification in hedonic models and on wage posting versus nash bargaining in search models

optimal employment contracts with bankruptcy constraints abstract consider the optimal incentive compatible contract offered by a firm with private information to its risk averse employees if the firm is subject to a binding limited liability or bankruptcy constraint then the contract will yield underemployment in low productivity states relative to full information efficiency such contracts either yield underemployment in all states or excessively high variability in employment

caps on political lobbying the cost of political campaigns in the u s has risen substantially in recent years for example real spending on congressional election campaigns doubled between 1976 and 1992 steven d levitt 1995 there are many reasons why increased campaign spending might be socially harmful first increased spending means increased fund raising which may keep politicians from their legislative duties 1 second a lobbyist who makes a large campaign contribution may have undue influence on electoral outcomes on the shaping of legislation or on the outcome of regulatory proceedings 2 that is the socially preferred candidate or legislation may not prevail likewise a lobbyist involved in a regulatory matter or a competition for a government contract may benefit unduly from a legislator s intervention 3 third a perception that campaign contributions purchase influence may lead to increased tolerance of corruption in the private sector a desire to control campaign spending has spawned many initiatives to limit both campaign contributions and spending beginning with the passage of the federal election campaign act feca political action committees pacs can contribute at most 5 000 per election to a candidate while individuals can contribute at most 1 000 restrictions have also been put on in kind contributions making it more difficult to circumvent these limits 4 while direct restrictions on campaign spending have proven difficult to implement recent initiatives aim to impose voluntary spending limits and stricter limits on contributions 5 despite the existing legislation and the proposals to limit contributions little is known about the impact of contribution limits on aggregate expenditures while it is intuitively appealing that aggregate expenditures would drop we challenge that intuition here we study a lobbying game and show that a cap on individual lobbyists expenditures may have the perverse effect of increasing aggregate expenditures and loweri this abstract was borrowed from another version of this item

default and aggregate income abstract this paper studies how default varies with aggregate income we analyze a model in which optimal contracts enable risk sharing of privately observed idiosyncratic income by allowing for default default provisions allow agents with low idiosyncratic income realizations to repay less and thus provide insurance default penalties ensure that only these agents default we show that default can occur under the optimal contract and that default provisions vary with aggregate income we provide conditions such that both the amount of default and default penalties vary countercyclically with aggregate income and show that the default rate can be discontinuous

can markets stimulate rights on the alienability of legal claims the alienability of legal claims holds the promise of increasing access to justice and fostering development of law i develop a principal agent framework where litigation funders provide expertise in reducing uncertainty in agents disutility of production the model leads to the counterintuitive prediction that litigation funders prefer cases with novel issues and social surplus is positively correlated with legal uncertainty consistent with the model court backlog court expenditures and a slowing in average time to completion are associated with third party funding cases with third party funding receive more citations and are reversed less often than comparable cases without such arrangements

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

sorting and the output loss due to search frictions we analyze a general search model with on the job search ojs and sorting of heterogeneous workers into heterogeneous jobs for given values of nonmarket time the relative efficiency of ojs and the amount of search frictions we derive a simple relationship between the unemployment rate mismatch and wage dispersion we estimate the latter two from standard micro data our methodology accounts for measurement error which is crucial to distinguish true from spurious mismatch and wage dispersion we find that without frictions output would be about 9 5 higher if firms can commit to pay wages as a function of match quality and 15 5 higher if they cannot noncommitment leads to a business stealing externality which causes a 5 5 drop in output

endogenous timing in contests with delegation i introduction contests with delegation where each player hires a delegate to expend effort or resources on the player s behalf to win a prize are common 1 an example is litigation between a plaintiff and a defendant in which each litigant hires an attorney who expends his effort to win the lawsuit on behalf of his client another example is a rent seeking contest in which each firm hires a lobbyist who expends his effort to acquire a monopoly or a procurement contract from the government on behalf of his client yet another example is a patent contest in which each firm hires a group of independent researchers or university professors who conduct research to obtain a patent on behalf of their employer delegation is attractive to players because they each can use superior ability by hiring a delegate with more ability than herself and achieve strategic commitments through delegation in such contests with delegation we believe delegates decide endogenously when to expend their effort after signing delegation contracts indeed pursuing their self interest the delegates may well endogenize the order of their moves and communicate it with each other before they expend their effort we believe also that players take it into account when designing their contracts for the delegates that the delegates will endogenize the order of their moves it is these ideas that motivate this paper accordingly the purpose of this paper is to systematically study contests with delegation in which delegates decide endogenously when to expend their effort after signing delegation contracts and before they expend their effort we study two player contests with delegation focusing on not only the equilibrium delegation contracts between players and their delegates but also the equilibrium orders of the delegates moves specifically we set up and analyze the following three stage game in the first stage two players each hire a delegate and they simultaneously announce their contracts written with their delegates each player s contract specifies how much her delegate will be paid if he wins the contest and how much if he loses it in the second stage each delegate decides when to expend his effort and the delegates announce their decisions simultaneously in the third stage the delegates expend their effort according to their decisions in the second stage to win the prize on behalf of their employers we show that in equilibrium the delegate hired by the higher valuation player chooses his effort level after observing his counterpart s and his expected payoff is greater than that of his counterpart this advantage of the delegate of the higher valuation player can be explained by the fact that his employer the higher valuation player offers better contingent compensation as it will be defined in section ii to him than the lower valuation player does to her delegate we compare the outcomes of the endogenous timing framework the three stage game presented above with those of the simultaneous move framework the game which is the same as the three stage game with the exception that the delegates choose their effort levels simultaneously and this order of their moves is given exogenously an interesting result is that each player offers her delegate a better contract in the endogenous timing framework than in the simultaneous move framework another interesting result is that unless the valuation for the prize of the higher valuation player is significantly greater than that of the lower valuation player then each delegate s expected payoff is greater in the endogenous timing framework than in the simultaneous move framework whereas each player s expected payoff is less in the endogenous timing framework than in the simultaneous move framework in summary pursuing their self interest the delegates decide endogenously when to expend their effort given contracts between the players and the delegates

two player asymmetric contests with ratio form contest success functions i examine players equilibrium effort levels in two player asymmetric contests with ratio form contest success functions i first characterize the nash equilibrium of the simultaneous move game i show that the equilibrium effort ratio is equal to the valuation ratio and that the prize dissipation ratios for the players are the same i also show that the prize dissipation ratio for each player is less than or equal to the minimum of the players probabilities of winning at the nash equilibrium and thus never exceeds a half then i examine how the equilibrium effort ratio the prize dissipation ratios and the players equilibrium effort levels respond when the players valuations for the prize or their abilities change jel d72 c72 i introduction a contest is a situation in which players compete with one another by expending irreversible effort to win a prize typical examples are various types of rent seeking contests competition among firms to win a monopoly rent secured under government protection or by a government procurement contract competition between domestic and foreign firms to obtain governmental trade policies favorable to them competition among firms to acquire a rent generated by rights of ownership to an import quota and competition among firms to capture rents created by governmental decisions to establish tariffs or other trade barriers other examples of contests include auctions patent races research and development r d competition among firms litigation competition for jobs among job candidates competition among candidates to win promotion to higher ranks election campaigns between political candidates and competition between local governments to invite business firms government institutions or government owned corporations into their districts naturally due to their prevalence and importance in economies such contests have been studied by many economists loury 1979 lee and wilde 1980 tullock 1980 rogerson 1982 rosen 1986 appelbaum and katz 1987 dixit 1987 hillman and riley 1989 hirshleifer 1989 ellingsen 1991 nitzan 1991 1994 krishna and morgan 1997 che and gale 1998 hurley and shogren 1998 and konrad 2000 to name a few in this vast literature on the theory of contests one of the main issues is how much effort do the players exert in pursuit of the prize indeed it is of great interest because the players effort levels determine the profitability of the players engaging in the contest and in some cases they are revenues collected by the contest organizer or bribes given to government officials furthermore they account for other important outcomes of the contest for example in a rent seeking contest efforts expended by the players are viewed as social costs due to rent seeking activities so that total effort level is a measure of economic efficiency in an r d contest effort levels expended by the players these are r d expenditures of the firms determine the expected date of invention this article also addresses the issue how much effort do the players exert in pursuit of the prize but it differs from previous research by dealing with contests with ratio form contest success functions 1 specifically the novelty of this article is to consider two player asymmetric contests in which each player s probability of winning is a function of the ratio of the two players effort levels two player contests with ratio form contest success functions or two player contests that can be best modeled with ratio form contest success functions are easily observed in the real world examples include various types of two player rent seeking contests litigation between a plaintiff and a defendant election campaigns between two parties or candidates and r d competition between two firms consider for example a rent seeking contest in which two firms potential monopolists compete with each other to win a government monopoly franchise contract

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

valuation by conflict abstract nonmarket valuation remains a central issue in ecological and environmental economics this paper examines the properties of an ex post revealed preference approach to value nonmarket goods valuation through observed effort expended in an environmental conflict we consider the strategic interaction between players in a conflict address the implied nash equilibrium and report a benchmark 4x rule as an ex post valuation estimate for a symmetric player conflict we then illustrate the degree of bias that exists once one allows for asymmetries in delegation ability and valuation the benchmark tends to overestimate value if a firm hires a powerful delegate who receives a large contingency fee

on the job search and the wage distribution the article structually estimates an on the job search model of job separations given each employer pays observably equivalent workers the same but wages are dispersed across employers an employer s separation flow is the sum of an exogenous outflow unrelated to the wage and a job to job flow that decreases with the employer s wage using data from the danish integrated database for labour market research the empirical results imply as predicted by theory that search effort declines with the wage furthermore the estimates explain the employment effect defined as the horizontal difference between the distribution of wages earned and the wage offer distribution

equilibrium search with continuous productivity dispersion theory and nonparametric estimation in this article we develop an equilibrium search model with a continuous distribution of firm productivity types within a given labor market we characterize equilibrium derive expressions for the endogenous equilibrium wage distributions and characterize the set of wage distributions that can be generated by the model we develop a structural nonparametric estimation method for the productivity distribution we estimate the model using french longitudinal survey data on labor supply and we compare the results with those from a french panel data set of firms the results are informative on the degree to which firms exploit search frictions

frictional wage dispersion in search models a quantitative assessment we propose a new measure of frictional wage dispersion the mean min wage ratio for a large class of search models we show that this measure is independent of the wage offer distribution but depends on statistics of labor market turnover and on preferences under plausible preference parameterizations observed magnitudes for worker flows imply that in the basic search model and in most of its extensions frictional wage dispersion is very small notable exceptions are some of the most recent models of on the job search our new measure allows us to rationalize the diverse empirical findings in the large literature estimating structural search models

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

legal fee restrictions moral hazard and attorney rents abstract when attorney effort is unobservable and certain other simplifying assumptions such as risk neutrality hold it is efficient for an attorney to purchase the rights to a client s legal claim however the american bar association model rules of professional conduct prohibit this arrangement we show that this ethical restriction which is formally equivalent to requiring a minimum fixed fee of zero can create economic rents for attorneys even though they continue to compete along the contingent fee dimension the contingent fee is not bid down to the zero profit level because such a fee does not induce sufficient attorney effort we thereby provide a political economy explanation for these restrictions

asymmetric two stage group rent seeking comparison of two contest structures two variations of a two stage rent seeking contest areconsidered in the first stage of the between groupmodel groups compete through the expenditure of resources bytheir members based on group expenditures one winning groupis probabilistically determined on the second stage membersof the winning group compete with one another for an exogenousprize in the semi finals model a player is chosen fromeach group and then these players compete for the prize groups differ in size or in their valuation of the prize subgame perfect equilibrium solutions are constructed forthese two contest structures

observable contracts strategic delegation and cooperation the role of commitments in noncooperative games is well acknowledged and documented one way to achieve commitments is by letting delegates represent the players of a game in this paper the authors study a delegation game in which the players can use agents strategically to play on their behalf and the contracts they sign with them are common knowledge they show that in such cases every pareto optimal outcome of the game can become the unique subgame perfect nash equilibrium of the delegation game the authors demonstrate this result by discussing the cournot type duopolistic game copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

labor market reforms an evaluation of the hartz policies in germany abstract how do workers and firms respond to comprehensive labor market reforms we use detailed micro data to analyze the german hartz reforms through the lens of a structural model of the labor market these reforms aimed at reducing unemployment by increasing working hour flexibility job matching and work incentives in our setting reforms directly affect the model parameters which are estimated using matched data on 430 000 workers in 340 000 firms contrary to previous findings our analysis shows that although the reforms shortened the typical duration of unemployment they did not reduce unemployment as a whole and led to a decline in wages low skilled workers suffered the most in terms of employment and wage losses furthermore we decompose the contribution of each reform wave to employment and wage changes finding that the reduction in generosity of unemployment benefits was the principle driver in reducing wages

an empirical model of wage dispersion with sorting we estimate an equilibrium on the job search model with endogenous search intensity workers differ by skill firms by productivity workers respond to mismatch by intensive search and sorting may result from complementarities in the match level production function the model is estimated on danish matched employer employee data firms are ranked through revealed preference by the fraction of hires that is poached from other firms the poaching rank identification is obtained by firm rank conditional mobility and wage patterns wage variation is decomposed into four sources sorting 40 worker heterogeneity 32 firm heterogeneity 18 and frictional competition 10 a social planner can improve output net of search cost by 1 5 relative to the decentralized solution

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

tenure experience human capital and wages a tractable equilibrium search model of wage dynamics we develop and estimate an equilibrium job search model of worker careers allowing for human capital accumulation employer heterogeneity and individual level shocks wage growth is decomposed into contributions of human capital and job search within and between jobs human capital accumulation is largest for highly educated workers the contribution from job search to wage growth both within and between job declines over the fi rst ten years of a career the job shopping phase of a working life after which workers settle into high quality jobs using outside o ffers to generate gradual wage increases thus reaping the bene fits from competition between employers

the distribution of talent across contests do the contests with the largest prizes attract the most able contestants to what extent do contestants avoid competition in this paper we show theoretically and empirically that the distribution of abilities plays a crucial role in determining contest choice complete sorting exists only when the proportion of high ability contestants is sufficiently small as this proportion increases high ability contestants shy away from competition and sorting decreases such that reverse sorting becomes a possibility we test our theoretical predictions with a large panel data set containing contest choice over twenty years we use exogenous variation in the participation of highly able competitors to provide empirical evidence for the relationship among prizes competition and sorting

on the job search and wage dispersion new evidence from time use data this paper provides new evidence on time devoted to job search by the employed in the u s i find that search effort decreases with the current wage with an elasticity between 0 7 and 1 3

seeking rents by setting rents the political economy of rent seeking in recent years there has been a large number of papers on the subject of rent seeking most such works on rent seeking have taken the rent as exogenously determined by regulators regulators howeve r may also be expected and indeed have been shown to be rent seeke rs and hence the determination of the rent itself should be endogeniz ed to reflect the fact that the rent setters are themselves rent se ekers in this paper the authors do this by presenting an analysis o f the interaction of regulators firms and consumers within a rent s eeking framework where all three groups are assumed to be self motiva ted the analysis is carried out under alternative assumptions regard ing the nature of the market and the reaction functions of the partic ipants policy implications are drawn where appropriate copyright 1987 by royal economic society

the optimal allocation of prizes in contests we study a contest with multiple not necessarily equal prizes contestants have private information about an ability parameter that affects their costs of bidding the contestant with the highest bid wins the first prize the contestant with the second highest bid wins the second prize and so on until all the prizes are allocated all contestants incur their respective costs of bidding the contest s designer maximizes the expected sum of bids our main results are 1 we display bidding equlibria for any number of contestants having linear convex or concave cost functions and for any distribution of abilities 2 if the cost functions are linear or concave then no matter what the distribution of abilities is it is optimal for the designer to allocate the entire prize sum to a single first prize 3 we give a necessary and sufficient conditions ensuring that several prizes are optimal if contestants have a convex cost function

the economic design of sporting contests what is the optimal number of entrants in a race or the optimal number of teams in a baseball league what is the optimal structure of prizes for a golf tournament or degree of revenue sharing for a football championship how evenly balanced should the competing teams be in the nascar or formula one championships what is the maximum number of entrants per nation to the olympic games that should be permitted what quota of qualifying teams to the soccer world cup should be allocated to the developing nations

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

efficiency and equality in a simple model of efficient unemployment insurance abstract this paper describes the efficient allocation of consumption and work effort in an economy in which workers face idiosyncratic employment risk and considerations of moral hazard prevent full insurance we impose a lower bound on the expected discounted utility that can be assigned to any agent from any date onward and show with this feature added that the efficient unemployment insurance scheme induces an invariant cross sectional distribution of individual entitlements to utility the paper thus provides a simple prototype model suited to the study of the normative question what is the trade off between equality and efficiency in resource allocation journal of economic literature classification numbers d31 d63 d82 j65

optimal design of research contests procurement of an innovation often requires substantial effort by potential suppliers motivating effort may be difficult if the level of effort and quality of the resulting innovation are unverifiable if innovators cannot benefit directly by marketing their innovations and if the buyer cannot extract up front payments from suppliers we study the use of contests to procure an innovation in such an environment an auction in which two suppliers are invited to innovate and then bid their prizes is optimal in a large class of contests if contestants are asymmetric it is optimal to handicap the most efficient one

rigging the lobbying process an application of the all pay auction textabstractin a world where a politician can explicitly auction off a prize to the high bidder the standard auction literature can be used to analyse political behavior the justice system however precludes politicians from explicitly selling the prize to the highest bidder thus politicians cannot let it become public knowledge that they are in the business of selling political favors an institution has emerged in political markets to overcome this constraint which are termed as lobbying lobbyists make implicit payments to the politician through campaign contributions if these up front payments were rebated to those failing to receive the prize it would be clear that the politician was selling favors this article has examined an interesting principle arising in all pay auctions this principle states that a politician wishing to maximize political rents may find it in his best interest to exclude certain lobbyists from participating in the lobbying process particularly lobbyists valuing most the political prize

conflict and rent seeking success functions ratio vs difference models of relative success the rent seeking competitions studied by economists fall within a much broader category of conflict interactions that also includes military combats election campaigns industrial disputes lawsuits and sibling rivalries in the rent seeking literature each party s success pi which can be interpreted either as the probability of victory or as the proportion of the prize won has usually been taken to be a function of the ratio of the respective resource commitments alternatively however pi may instead be a function of the difference between the parties commitments to the contest the contest success function csf for the difference from is a logistic curve in which as is consistent with military experience increasing returns apply up to an inflection point at equal resource commitments a crucial flaw of the traditional ratio model is that neither onesided submission nor two sided peace between the parties can ever occur as a cournot equilibrium in contrast both of these outcomes are entirely consistent with a model in which success is a function of the difference between the parties resource commitments

arm breaking consumer credit and personal bankruptcy the consumer credit transaction is analyzed as a contract which provides insurance as well as present consumption for the borrower creditors remedies such as arm breaking are shown to facilitate provision of insurance forgiveness of debts when lenders cannot monitor outcomes alternatively if outcomes are observable but lenders do not ex ante know the risk associated with each borrower the market may generate an excessive amount of arm breaking and agreements to forgo discharge following bankruptcy as low risk borrowers signal their characteristics suggesting that government limitations on such provisions might be efficient the secured credit transaction is shown to be a complex contract which attempts to provide efficient repayment seller incentives for performance and mitigation following default and insurance for the borrower garnishment and discharge of debts following bankruptcy are also considered

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

equilibrium contingent compensation in contests with delegation we consider two player contests in which each player hires a delegate who expends his effort to win a prize on the player s behalf endogenizing delegation contracts we focus on the equilibrium contracts between the players and their delegates we first show that each player s equilibrium contract is a no win no pay contract then we examine the delegates equilibrium compensation spreads effort levels probabilities of winning expected payoffs and the players equilibrium expected payoffs we show that economic rents for the delegates may exist

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

strategic decisions on lawyers compensation in civil disputes i introduction a plaintiff and a defendant usually bargain to settle a civil dispute when they cannot reach a settlement the case goes to trial naturally through the settlement and trial stages the litigants behave strategically a few researchers study such a situation by developing contest models 1 examples include plott 1987 katz 1988 farmer and pecorino 1999 wfirneryd 2000 and hirshleifer and osborne 2001 there exists however some discrepancy between the contest models and the mainstream articles in the law and economics literature the contest models deal with the legal battle itself to use the words of hirshleifer and osborne 2001 by contrast the mainstream articles focus on one or some of the important aspects of the negotiation and litigation process such as the likelihood of settlement the reasons for lawsuits the efficient levels of precautions the burden of proof the comparison of alternative fee shifting systems and the compensation for lawyers in the presence of an agency problem 2 this article attempts to reconcile the two strands a bit further to do so we develop a contest model in which the negotiation and litigation stages are combined as in the previous contest models but unlike the previous ones two lawyers one for a plaintiff and the other for a defendant are introduced using this contest model with delegation we are able to analyze some of the important issues in legal disputes for instance a plaintiffs lawyer in the united states routinely charges one third of the award if his client wins and nothing if his client loses a natural question which we can address using our model is then why the lawyer s contingent fee is not one half of the award nor two thirds but one third using our model we can also address the following issues does the plaintiff have an incentive to choose an hourly fee arrangement if feasible does delegation to the lawyers increase the total legal expenditure of the plaintiff and defendant compared with the case of no delegation why do a plaintiff and a defendant hire lawyers in litigation a straightforward reason for such delegation is that a litigant can benefit by hiring a lawyer who has more capacity than herself throughout the article we use she to refer to a litigant and he to refer to a lawyer another explanation is that a litigant can benefit by achieving strategic commitments through delegation specifically the litigant can change her opponent s behavior in her favor by using a lawyer whose objective function differs from hers baik and kim 1997 consider a contest model that carries both aspects of delegation for the first time in the delegation literature but the idea that strategic delegation benefits a main player has long been emphasized in many contexts examples include schelling 1960 fershtman and judd 1987 katz 1991 and warneryd 2000 this article extends the delegation model of baik and kim 1997 to the case where a plaintiffs lawyer works on a contingent fee basis but a defendant s lawyer on an hourly fee basis 3 we assume that the litigants and lawyers are risk neutral to be more precise our two stage game runs as follows in the first stage knowing that the defendant adopts the hourly fee the plaintiff determines the contingent fee fraction for her lawyer and announces it publicly in the second stage the lawyers exert their effort simultaneously and independently to win the lawsuit the plaintiff s lawyer chooses the effort level on his own but the effort level of the defendant s lawyer is chosen by the defendant the defendant has to incur a monitoring cost because she hires her lawyer under the hourly fee we use logit form probability of winning functions after solving for the subgame perfect equilibrium of the game we first derive the condition on relevant parameters under which delegation to the lawyers brings both litigants more payoffs compared with the case of no delegation

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

the cost of job loss this article identifies an equilibrium theory of wage formation and endogenous quit turnover in a labour market with on the job search where risk averse workers accumulate human capital through learning by doing and lose skills while unemployed optimal contracting implies the wage paid increases with experience and tenure indirect inference using german data determines the deep parameters of the model the estimated model not only reproduces the large and persistent fall in wages and earnings following job loss a new structural decomposition finds foregone human capital accumulation while unemployed is the worker s major cost of job loss

efficiency and the role of default when security markets are incomplete this paper argues that default plays an important positive role in the economy if markets are incomplete and traders are only able to enter into contracts that they will be able to execute regardless of future events contingent contracting may be severely restricted moreover opening new markets may not relieve these restrictions default promotes efficiency in a way that opening new markets does not by making it possible for traders to enter into contracts that they will be able to execute with high probability but not with certainty copyright 1993 by american economic association

why don t lenders renegotiate more home mortgages redefaults self cures and securitization we document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007 having performed payment reducing modifications on only about 3 percent of seriously delinquent loans we show that this reluctance does not result from securitization servicers renegotiate similarly small fractions of loans that they hold in their portfolios our results are robust to different definitions of renegotiation including the one most likely to be affected by securitization and to different definitions of delinquency our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans we use a theoretical model to show that redefault risk the possibility that a borrower will still default despite costly renegotiation and self cure risk the possibility that a seriously delinquent borrower will become current without renegotiation make renegotiation unattractive to investors

firm wage differentials and labor market sorting reconciling theory and evidence why do firms pay different wages empirical evidence suggests the presence of substantial differences in firm pay controlling for worker skill moreover these differences are uncorrelated with ski

ranking firms using revealed preference this article estimates workers preferences for firms by studying the structure of employer to employer transitions in u s administrative data the article uses a tool from numerical linear algebra to measure the central tendency of worker flows which is closely related to the ranking of firms revealed by workers choices there is evidence for compensating differentials when workers systematically move to lower paying firms in a way that cannot be accounted for by layoffs or differences in recruiting intensity the estimates suggest that compensating differentials account for over half of the firm component of the variance of earnings

the empirical content of the job search model labor mobility and wage distributions in europe and the us abstract job search models of the labor market hypothesize a very tight correspondence between the determinants of labor turnover and individual wage dynamics on one hand and the determinants of wage dispersion on the other this paper offers a systematic examination of whether this correspondence is present in the data by estimating a rudimentary partial equilibrium job search model on a three year panel of individual worker data covering 10 european countries and the u s we find that our basic job search model fits the data surprisingly well this also allows us to point at a number of interesting empirical regularities about wage distributions our results suggest that cross sectional data on individual wages contain the basic information needed to obtain a reliable measure of the magnitude of labor market frictions as measured by a parameter of the canonical job search model finally we use our results in a cross country comparison of the intensity and nature of job to job turnover we arrange countries into two different groups according to their turnover intensity we further show that the nature of job to job turnover is very different between those two groups turnover is predominantly voluntary in low turnover countries whereas it is to a large extent involuntary in high turnover countries

financial networks contagion commitment and private sector bailouts i develop a model of financial networks in which linkages not only spread contagion but also induce private sector bailouts where liquid banks bail out illiquid banks because of the threat of contagion introducing this bailout possibility i show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible however in some cases e g when liquidity is concentrated among a small group of banks the whole network may collapse i also characterize the optimal network size and apply the results to joint liability arrangements and payment systems linkages among agents in financial markets are a concern because of the risk of financial contagion that is the risk that a small shock to one agent will spread to other agents in a domino effect whether we should worry about these linkages is an open question the main goal of this paper is to show that a network in which agents are closely interlinked may be optimal both because of and despite the potential for contagion another goal is to characterize optimal networks that is whether and how agents should be linked to one another the basic intuition is as follows linkages present the threat of contagion to prevent collapse of the whole network agents who are lucky ex post may be willing to bail out those who are not in this way agents obtain the benefits of mutual insurance even though they cannot precommit to making payments

an equilibrium model of health insurance provision and wage determination we investigate the effect of employer provided health insurance on job mobility rates and economic welfare using a search matching and bargaining framework in our model health insurance coverage decisions are made in a cooperative manner that recognizes the productivity effects of health insurance as well as its nonpecuniary value to the employee the resulting equilibrium is one in which not all employment matches are covered by health insurance wages at jobs providing health insurance are larger in a stochastic sense than those at jobs without health insurance and workers at jobs with health insurance are less likely to leave those jobs even after conditioning on the wage rate we estimate the model using the 1996 panel of the survey of income and program participation and find that the employer provided health insurance system does not lead to any serious inefficiencies in mobility decisions

identifying sorting in theory assortative matching between workers and rms provides evidence of the complementarities or substitutes in production the presence of complementarities is important for policies that aim to achieve the optimal allocation of resources for example unemployment insurance we argue that using wage data alone it is virtually impossible to identify whether assortative matching is positive or negative even though we cannot identify the sign of the sorting we can identify the strength i e the magnitude of the cross partial and the associated welfare loss we show rst that the wage for a given worker is non monotonic in the type of his employer this is due to the fact that in a sorting model wages reect the opportunity cost of mismatch we show analytically that this non monotonicity prevents standard rm xed eects to correlate with the true type of the rm we then propose an alternative procedure that measures the strength of sorting in the presence of search frictions knowing the strength of sorting facilitates the measurement of the output loss due to mismatch

internal debt crises and sovereign defaults internal and sovereign debt crises occur together and happen more frequently in economies with weak bankruptcy institutions this paper provides a novel explanation internal crises arise because of the inability to liquidate private debtors when many default in an optimal contract a successful entrepreneur repays yet an unsuccessful one defaults and liquidates his assets the bounds on liquidation generate however a second equilibrium where domestic borrowers default because others are also defaulting during these coordinated defaults tax collections fall which increases sovereign default risk in the model joint debt crises are an optimal response to informational problems in private sector lending

endogenous timing of contest with asymmetric information simultaneous moves have been conventionally assumed in modeling rent seeking competition however in reality many forms of contests involve contestants sequentially choosing their effort entries this study allows agents to choose the timing of their moves before the contest takes place in contrast to the previous literature we introduce information asymmetries across agents we find that in all sequential move equilibria the uninformed agent moves first more generally we show that the order of agents moves in a sequential contest is a regularity stemming from information asymmetries furthermore under plausible assumptions sequential moves pareto dominate simultaneous moves from the view point of the players and also result in lower rent seeking expenditures our result explains the timing pattern in national presidential conventions observed from 1948 through 2004 our result also applies to many other formal or informal institutions which give rise to sequential contests

an empirical equilibrium search model of the labor market in structural empirical models of labor market search the distribution of wage offers is usually assumed to be exogenous however because in setting their wages profit maximizing firms should consider the reservation wages of job seekers the wage offer distribution is essentially endogenous we investigate whether a proposed equilibrium search model in which the wage offer distribution is endogenous is able to describe observed labor market histories we find that the distributions of job and unemployment spells are consistent with the data and that the qualitative predictions of the model for the wages set by employers are confirmed by wage regressions the model is estimated using panel data on unemployed and employed individuals we distinguish between separate segments of the labor market and we show that productivity heterogeneity is important to obtain an acceptable fit to the data the results are used to estimate the degree of monopsony power of firms further the effects of changes in the mandatory minimum wage are examined

using elasticities to derive optimal bankruptcy exemptions this article studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting in a large class of economies knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal or should be increased or decreased these variables are 1 the composition of households liabilities 2 the sensitivity of the credit supply schedule to exemption changes 3 the probability of filing for bankruptcy with non exempt assets and 4 the value given by households to a marginal dollar in different states which can be mapped to changes in households consumption i recover empirical estimates of the sufficient statistics using u s data over the period 2008 16 and find that increasing exemption levels improves overall welfare although there is substantial variation in estimated welfare gains across u s states and income quintiles

in defense of lawyers moral hazard as an aid to cooperation abstract this paper studies strategic delegation in two player contests for an indivisible prize as in e g litigation where one party s probability of winning is determined by the relative investments of both even though neither player stands to gain anything from precommitment both players ex ante prefer compulsory representation by agents e g lawyers whose efforts are unobservable this delegation equilibrium is unaffected by secret renegotiation opportunities equivalently it does not matter whether contracts are observable or not hence the paper points out a role for delegation with moral hazard in facilitating cooperation an effect quite separate from precommitment journal of economic literature classification numbers c72 d72 d82 k41

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

contingent fees meet the british rule an exploratory study compensation schemes in which lawyer s fees are contingent on winning the suit are becoming increasingly popular throughout europe at the same time the british rule of legal cost allocation is applicable in many european countries as a result it is of policy relevance how their coexistence may be harmonized this paper uses the litigation contest framework to analyze the consequences of three different cost allocation regimes if a plaintiff s attorney is compensated on a contingent fee basis we compare the equilibrium contest effort justice and payoffs for affected parties in the different regimes and find arguments in favor of not reimbursing contingent fees

effort levels in a cournot nash contest with asymmetric information abstract many contests exist where one player does not know his opponent s value of a fixed prize e g unobservable non market preferences for preservation this paper explores how changes in the nature of a one sided information asymmetry affect effort levels in a cournot nash contest the results indicate that the uninformed player s effort is an uncertain input such that his effort is inversely related to risk this reduces his average odds of success comparative static results are driven by the perceived odds of success and risk for the uninformed player and the actual odds of success for the informed player

sorting by search intensity abstract in this paper i characterize matching in an on the job search model with endogenous search intensity heterogeneous workers and firms and match surplus is shared between workers and firms through bargaining i provide proof of existence and uniqueness of steady state equilibrium given equally efficient matched and unmatched search the worker skill conditional distribution of firm productivity over matches is stochastically increasing decreasing in worker skill if the production function is supermodular submodular i also show that this strong notion of sorting does not obtain everywhere for the firm productivity conditional match distribution

search bargaining and signalling in the market for legal services over the last eight centuries lawyers in common law countries have generally been precluded from buying their clients cases recently a number of economists and lawyers have argued that sale should be allowed so as to eliminate moral hazard particularly when contingent fees are used this argument is based on full information reasoning however if the lawyer has private information about the case value then compensation demands potentially signal this value when the client can search over lawyers we provide a formal model and a family of computational examples that show that allowing possibly partial purchase can reduce expected social efficiency

wage differentials employer size and unemployment the unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a continuum of workers search by sequentially sampling from the set of offers is characterized wage dispersion is a robust outcome provided that workers search while employed as well as when unemployed the unique nondegenerate equilibrium distribution of wage offers is constructed for three cases 1 identical workers and employers 2 identical employers and an atomless distribution of worker supply prices and 3 identical workers and an atomless distribution of job productivities copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

dispute rates and contingency fees an analysis from the signaling model 1 introductioncontingency fee contracts under which the plaintiff pays her lawyer a percentage of the judgment if she wins at trial and nothing if she loses are very common in the united states but are banned or severely restricted in many other countries 1 their use in the united states generates great controversy and while their use is restricted in some states further calls for restrictions on contingency fee contracts are often heard 2 although contingency fee contracts are quite simple their effects on the litigation process are complex and wide ranging previous studies have considered the effect of contingency fees on the frequency of litigation danzon 1983 miceli and segerson 1991 and nuisance suits miceli 1993 1994 and on various aspects of the lawyer client relationship miller 1987 dana and spier 1993 rubinfeld and scotchmer 1993 watts 1994 hay 1996 1997 in this article we focus on the effects of contingency fees on the selection of disputes for trial and the overall dispute rate in the signaling model of reinganum and wilde 1986 3 along with bebchuk 1984 this is one of the two canonical models of pretrial settlement in addition since the solution to a model with two sided informational asymmetries has a strong signaling element daughety and reinganum 1994 it is particularly important to understand how contingency fees affect dispute rates in the signaling model as in the standard literature on pretrial settlement e g bebchuk 1984 reinganum and wilde 1986 we assume that the plaintiff controls all aspects of the case 4 in the reinganum and wilde model an informed plaintiff makes a take it or leave it offer to an uninformed defendant who rejects these offers with some probability in equilibrium in order to conduct a complete analysis of the contingency fee in a signaling model we also consider the case in which an informed defendant makes a single offer to the uninformed plaintiff reinganum and wilde first develop a signaling model in which the plaintiff s lawyer is paid via a fixed fee and then go on to present pp 562 3 a very general solution to the model in the presence of a contingency contract we use the general framework of reinganum and wilde to focus on specific forms for the contingent fee contracts our contribution lies not in the derivations of the model solutions as these follow from the reinganum and wilde framework rather closely instead our contribution lies in the analysis of how these specific contingency fee contracts affect pretrial settlement patterns we analyze the effects both on overall dispute rates and on the selection of disputes for litigation in section 2 we will further note the relationship between our work and the earlier analysis provided by reinganum and wilde we examine two types of contracts in this article a bifurcated contingency fee and a unitary contingency fee under a unitary contract the same contingency payment is made by the client to her lawyer regardless of whether there is an out of court settlement or a victory at trial 5 under a bifurcated fee the contingency percentage at trial is generally higher than the percentage for cases that settle 6 while unitary fees appear to be more common a significant use of bifurcated fees has been noted in the literature 7 in a model with attorney moral hazard hay 1997 notes that bifurcated fees are generally optimal from the perspective of the plaintiff on the other hand bebchuk and guzman 1996 argue that a unitary fee can lead to a larger net settlement for the plaintiff since both types of contracts appear to be relevant empirically we examine both in this article one robust finding from our article is that unitary fees lead to an unambiguous increase in the incidence of trial relative to both the fixed fee contract and the bifurcated contingency fee contract

comparative statics of contests and rent seeking games this paper develops the comparative statics properties of a contest encountered in patent races and rent seeking games the author shows that symmetric equilibrium expenditure and profit per player decrease with the number of competitors and the discount rate but increase with the value of the prize a fundamental lemma established in the paper shows that a stability condition usually imposed on the model is automatically satisfied the author identifies a class of likelihood or hazard rate functions for which aggregate expenditure increases with the number of competitors and total profits converge to zero copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association