contracting with wealth constrained agents we examine how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input e g effort when potential operators are privately informed about their limited wealth truthful revelation of wealth is induced by promising a higher probability of operation and if necessary a greater share of realized profit the larger the nonrefundable bond that a potential operator posts the project owner benefits when total wealth is widely dispersed among potential operators under plausible conditions limited knowledge of wealth is not constraining for the project owner

on the use of econometric models for policy simulation in marketing abstract in this article the author discusses the properties of useful econometric models for marketing phenomena with particular attention on models for policy simulations the author addresses model diagnostics parameter stability exogeneity and the lucas critique he also presents the results of a search through the 1998 2003 issues of the journal of marketing research finally the author offers practical guidelines

risk allocation and the costs and benefits of public private partnerships we study the agency costs of delegated public service provision focusing on the link between organizational forms and uncertainty at project implementation we consider a dynamic multitask moral hazard environment where the mapping between efiort and performance is ex ante uncertain but new information may come along during operations our analysis points out at the e ciency gains that bundling planning and implementation as under public private partnerships can bring in terms of better project design and lower operational costs bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design procedure technology on the cost of operations the compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which for high operational risk can make unbundling optimal in this context the use of private flnance can help re establishing the beneflt of bundling only if lenders have su cient expertise to help assessing project risks

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

robust dynamic estimation managing marketing resources over time requires dynamic model estimation which necessitates specifying some parametric or nonparametric probability distribution when the data generating process differs from the assumed distribution the resulting model is misspecified to hedge against such a misspecification risk the extant theory recommends using the sandwich estimator this approach however only corrects the variance of estimated parameters but not their values consequently the sandwich estimator does not affect any managerial outcomes such as marketing budgeting and allocation decisions to overcome this drawback we present the minimax framework that does not necessitate distributional assumptions to estimate dynamic models applying minimax control theory we derive an optimal robust filter illustrate its application to a unique advertising data set from the canadian blood services and contribute several novel findings we discover the compensatory effect advertising effectiveness increas

controlling measurement errors in models of advertising competition abstract commercial market research firms provide information on advertising variables of interest such as brand awareness or gross rating points that are likely to contain measurement errors this unreliability of measured variables induces bias in the estimated parameters of dynamic models of advertising consequently advertisers either under or overspend on advertising to maintain a desired level of brand awareness monte carlo studies show that the magnitude of bias can be serious when conventional estimation methods such as ordinary least squares and errors in variables are employed to obtain parameter estimates therefore the authors have developed two new approaches that either reduce or eliminate parameter bias using these methods advertisers can determine an unbiased optimal advertising budget even if advertising variables are measured with error the application of these methods to estimate the extent of measurement noise in empirical advertising data is illustrated

ability moral hazard firm size and diversification agency problem between the firm s managers and owners the agency relationship together with a span of control managerial technology determines an optimalfirm size and degree of diversification that are increasing in the manager s ability and therefore positively correlated cross sectionally i compare the benefits of merger with those achieved by using compensation contracts based on relative performance and show that for a particular parameterization the relative value of merger is a nonmonotonic function of the correlation between the productivity signals of the two firms neoclassical microeconomic theory has generally treated the firm as being identical to a technologically determined production function nevertheless it is widely recognized that this cost curve approach is more appropriately applied to plants within a firm than to the determination of firm size or structure itself one aspect of firm structure that has received especially little attention in the economic literature is diversification in particular the literature has not succeeded in distinguishing the benefits of efficiently using capital in production from the benefits to common ownership of the capital if joint use of capital creates efficiencies in the production of two or more goods the joint use could in principle be achieved by contracting over the use of the separately owned factors this ownership structure does not preclude the efficient use of factors further even if technological scope economies create incentives to diversify they cannot explain all diversification because much that we observe is between products that are apparently unrelated in production technology or demand the purpose of this article is to analyze the incentives of firms to diversify in an economy comprising managers and capital owners whose interests do not necessarily coincide and in which information is generally not perfect i derive the implications of the principalagent relationship between owners and managers of firms for the optimal structure of the firm in a competitive environment diversification is shown to be an optimal response to

conflicting tasks and moral hazard theory and experimental evidence abstract we study a multi task principal agent problem in which tasks can be in direct conflict with each other in theory it is difficult to induce a single agent to exert efforts in two conflicting tasks because effort in one task decreases the success probability of the other task we have conducted an experiment in which we find strong support for the relevance of this incentive problem in the presence of conflict subjects choose two efforts significantly less often when both tasks are assigned to a single agent than when there are two agents each in charge of one task

early marketing matters a time varying parameter approach to persistence modeling are persistent marketing effects most likely to appear right after the introduction of a product the authors give an affirmative answer to this question by developing a model that explicitly reports how persistent and transient marketing effects evolve over time the proposed model provides managers with a valuable tool to evaluate their allocation of marketing expenditures over time an application of the model to many pharmaceutical products estimated through exact initial kalman filtering indicates that both persistent and transient effects occur predominantly immediately after a brand s introduction subsequently the size of the effects declines the authors theoretically and empirically compare their methodology with methodology based on unit root testing and demonstrate that the need for unit root tests creates difficulties in applying conventional persistence modeling the authors recommend that marketing models should either accommodate persistent effects that change over time or be applied to mature brands or limited time windows only

optimal advertising when envisioning a product harm crisis how should forward looking managers plan advertising if they envision a product harm crisis in the future to address this question we propose a dynamic model of brand advertising in which at each instant a nonzero probability exists for the occurrence of a crisis event that damages the brand s baseline sales and may enhance or erode marketing effectiveness when the crisis occurs because managers do not know when the crisis will occur its random time of occurrence induces a stochastic control problem which we solve analytically in closed form more importantly the envisioning of a possible crisis alters managers rate of time preference anticipation enhances impatience that is forward looking managers discount the present even when the crisis has not occurred more than they would in the absence of crisis building on this insight we then derive the optimal feedback advertising strategies and assess the effects of crisis likelihood and damage rate we discover the crossover interaction the optimal precrisis advertising decreases but the postcrisis advertising increases as the crisis likelihood or damage rate increases in addition we develop a new continuous time estimation method to simultaneously estimate sales dynamics and feedback strategies using discrete time data applying the method to market data from the ford explorer s rollover recall we furnish evidence to support the proposed model we detect compensatory effects in parametric shift ad effectiveness increases but carryover effect decreases or vice versa we also characterize the crisis occurrence distribution that shows that ford explorer should anticipate a crisis in 2 1 years and within 6 3 years at the 95 confidence level finally we find a remarkable correspondence between the observed and optimal advertising decisions

effects of brand preference product attributes and marketing mix variables in technology product markets we develop a demand model for technology products that captures the effect of changes in the portfolio of models offered by a brand as well as the influence of the dynamics in its intrinsic preference on that brand s performance to account for the potential correlation in the preferences of models offered by a particular brand we use a nested logit model with the brand e g sony at the upper level and its various models e g mavica fd dsc etc at the lower level of the nest relative model preferences are captured via their attributes and prices we allow for heterogeneity across consumers in their preferences for these attributes and in their price sensitivities in addition to heterogeneity in consumers intrinsic brand preferences together with the nested logit assumption this allows for a flexible substitution pattern across models at the aggregate level the attractiveness of a brand s product line changes over time with entry and exit of new models and with changes in attribute and price levels to allow for time varying intrinsic brand preferences we use a state space model based on the kalman filter which captures the influence of marketing actions such as brand level advertising on the dynamics of intrinsic brand preferences hence the proposed model accounts for the effects of brand preferences model attributes and marketing mix variables on consumer choice first we carry out a simulation study to ensure that our estimation procedure is able to recover the true parameters generating the data then we estimate our model parameters on data for the u s digital camera market overall we find that the effect of dynamics in the intrinsic brand preference is greater than the corresponding effect of the dynamics in the brand s product line attractiveness assuming plausible profit margins we evaluate the effect of increasing the advertising expenditures for the largest and the smallest brands in this category and find that these brands can increase their profitability by increasing their advertising expenditures we also analyze the impact of modifying a camera model s attributes on its profits such an analysis could potentially be used to evaluate if product development efforts would be profitable

the long term effect of marketing strategy on brand sales few studies have considered the relative role of the integrated marketing mix advertising price promotion product and place on the long term performance of mature brands instead emphasizing advertising and price promotion thus little guidance is available to firms regarding the relative efficacy of their various marketing expenditures over the long run to investigate this issue the authors apply a multivariate dynamic linear transfer function model to five years of advertising and scanner data for 25 product categories and 70 brands in france the findings indicate that the total short term plus long term sales elasticity is 1 37 for product and 74 for distribution conversely the total elasticities for advertising and discounting are only 13 and 04 respectively this result stands in marked contrast to the previous emphasis in the literature on price promotions and advertising the authors further find that the long term effects of discounting are one third the magnitude of the short term effects the ratio is reversed from other aspects of the mix in which long term effects exceed four times the short term effects underscoring the strategic role of these tools in brand sales

sales growth of new pharmaceuticals across the globe the role of regulatory regimes prior marketing literature has overlooked the role of regulatory regimes in explaining international sales growth of new products this paper addresses this gap in the context of new pharmaceuticals 15 new molecules in 34 countries and sheds light on the effects of regulatory regimes on new drug sales across the globe based on a time varying coefficient model we find that differences in regulation substantially contribute to cross country variation in sales one of the regulatory constraints investigated i e manufacturer price controls has a positive effect on drug sales the other forms of regulation such as restrictions of physician prescription budgets and the prohibition of direct to consumer advertising dtca tend to hurt sales the effect of manufacturer price controls is similar for newly launched and mature drugs by contrast regulations on physician prescription budgets and dtca have a differential effect for newly launched and mature drugs whereas the former hurts mature drugs more the latter has a larger effect on newly launched drugs in addition to these regulatory effects we find that national culture economic wealth and lagged sales also affect drug sales our findings may be used as input by managers for international launch and marketing decisions they may also be used by public policy administrators to assess the role of regulatory regimes in pharmaceutical sales growth

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

a micromodeling approach to investigate the advertising sales relationship the purpose of this paper is to derive a model of advertising effects on the firm s sales a micromodel is postulated and aggregated across individuals and over time to produce a macromodel of the aggregate sales advertising relationship for a single product the micromodel postulated is very simple it incorporates two factors reach of the ads and rate of decay of their effectiveness over time this approach to modeling advertising effects is shown to be fruitful in several respects 1 the coefficients of the aggregate equation are easily interpretable in terms of the reach and decay parameters 2 the model derived is nonlinear yet estimable 3 a special case of the model is very similar to lag models that have been in use 4 the model can be used whatever the unit of time is 5 the carryover effect of advertising as commonly defined is not constant but depends upon the previous spending levels and 6 the model helps illustrate that the duration of advertising may be greatly overstated if aggregate lagged dependent variable models are simplistically interpreted

is the wto passe the wto has delivered policy outcomes that are very different from those likely to emerge out of the recent wave of preferential trade agreements ptas should economists see this as an efficient institutional hand off where the wto has carried trade liberalization as far as it can manage and is now passing the baton to ptas to finish the job this paper surveys a growing economics literature on international trade agreements and argues on this basis that the wto is not passe rather and subject to some caveats this survey of research to date suggests that the wto warrants strong support while a more cautious view of ptas seems appropriate

exit option in hierarchical agency abstract we explain why organizations that limit the voice of their agents can benefit from granting them an exit option we study a hierarchy with a principal a productive supervisor and an agent communication is imperfect in that only the supervisor can communicate with the principal while the agent has no direct voice to the principal we show that the principal is better off if she grants the agent the option to walk away from the contract by doing so the principal is implicitly giving a veto power to the agent this in turn restricts the manipulation of report by the supervisor thus the exit option can be interpreted as a remedy for limits on communication our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal s welfare while protecting the agent our result is robust to the case of collusion between the supervisor and the agent we also examine the optimal exit option i e whether exit should entail a payment to or from the agent

fast food consumption and the ban on advertising targeting children the quebec experience abstract amid growing concerns about childhood obesity and the associated health risks several countries are considering banning fast food advertising targeting children in this article the authors study the effect of such a ban in the canadian province of quebec using household expenditure survey data from 1984 to 1992 authors examine whether expenditure on fast food is lower in those groups affected by the ban than in those that are not the authors use a triple difference indifference methodology by appropriately defining treatment and control groups and find that the ban s effectiveness is not a result of the decrease in fast food expenditures per week but rather of the decrease in purchase propensity by 13 per week overall the authors estimate that the ban reduced fast food consumption by us 88 million per year the study suggests that advertising bans can be effective provided media markets do not overlap

standard auctions with financially constrained bidders we develop a methodology for analyzing the revenue and efficiency performance of auctions when buyers have private information about their willingness to pay and ability to pay we then apply the framework to scenarios involving standard auction mechanisms in the simplest case where bidders face absolute spending limits first price auctions yield higher expected revenue and social surplus than second price auctions the revenue dominance of first price auctions over secondprice auctions carries over to the case where bidders have access to credit these rankings are explained by differences in the extent to which financial constraints bind in different auction formats

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

incentive schemes with multiple agents and bankruptcy constraints abstract we explore the effects of bankruptcy constraints on incentive schemes when two risk neutral agents operate in correlated environments our focus is on the subgame equilibrium in which each agent is induced via a direct mechanism to truthfully reveal his private information as a nash response to truth telling by his counterpart we identify a class of examples in which in contrast to the case where the agents are risk averse the nash constraints induce a subgame dominant strategy equilibrium thus implementation via direct mechanisms is feasible for this class more generally however the truth telling nash equilibrium may be subgame dominated so the question of implementation via direct mechanisms remains a delicate one

incentives in organizations n 1975 steven kerr published on the folly of rewarding a while hoping for b the argument was simple you get what you pay for kerr distilled this unifying theme from a disparate set of examples involving politicians soldiers doctors orphanage directors professors and students as well as manufacturing and clerical employees and even human resource managers from these examples kerr pp 77980 concluded that two main causes of distorted incentives are fascination with an objective criterion where individuals seek to establish simple quantifiable standards against which to measure and reward performance and overemphasis on highly visible behaviors when some parts of the task are highly visible while others are not it took agency theory 15 years to express kerr s title not to mention to evaluate or extend his conclusions during this period agency theory was obsessed with the tradeoff between incentives and insurance even though clear eyed observations like kerr s about the design and performance of real incentive contracts suggested that several other issues are at least as important fortunately recent work has brought agency theory not only to kerr s position but beyond in this paper i summarize four new strands in agency theory that help me think about incentives in real organizations as a point of departure i begin with a quick sketch of the classic agency model i then discuss static models of objective performance measurement that sharpen kerr s argument repeated game models of subjective performance assessments incentives for skill development rather than simply for effort and incentive contracts between versus within organizations i con

the optimal size of a bank costs and benefits of diversification abstract this paper provides a theory of diversification and financial structure of banks it shows that by diversifying the bank portfolio and financing it with debt the bank can commit to a higher level of monitoring by linking the benefits of diversification to the costs the paper derives an optimal size of the bank which is bounded the costs of diversification lie in the higher overload costs with which the banker is faced by monitoring more projects the benefits of diversification lie in increasing the bank s owner s incentives to monitor the lenders

the impact of economic contractions on the effectiveness of r d and advertising evidence from u s companies spanning three decades the critical role of research and development r d and advertising in the marketing strategy of the firm is well established this paper conceptually and empirically examines why and how much the effectiveness of these two marketing instruments differs between times of economic expansions versus periods of economic contractions and whether these results depend on the cyclicality of the industry in question we consider a key marketing metric market share and a key financial metric firm profit our empirical setting is 1 175 u s firms across a time period spanning over three decades we find that r d and advertising contribute to firm performance but that their effectiveness is not constant across the business cycle increasing advertising share in contractions has a stronger effect on profit and market share than increasing advertising share in expansions likewise investments in r d in contractions lead to higher gains in market share and profit than r d investments in expansions albeit only in subsequent years if in contractions the firm faces tight budget constraints and has to choose between either maintaining r d or advertising our simulation results show that maintaining r d is associated with better company performance we find that advertising effectiveness in general and in contractions in particular is systematically moderated by the degree of cyclicality of the industry in which the firm operates in relatively stable industries advertising effects are small or even nonsignificant and they do not go beyond the year the firm advertises however in highly cyclical industries advertising effects are long lasting its total effect being 50 larger market share and 200 larger profits than in industries of average cyclicality the effect of industry cyclicality on advertising effectiveness is especially pronounced in contractions collectively these findings provide valuable and actionable insights into how firms should respond to contractions in order to grow profits and market share

job design delegation and cooperation a principal agent analysis abstract this paper analyzes how tasks are assigned in organizations tasks can be allocated vertically between a principal and an agent or laterally among agents the resulting organizational job design determines how many tasks are delegated to agents and how the agents tasks are divided among them in the framework of the standard principal agent relationship with moral hazard it is shown that i an incentive consideration causes the principal to group a broad range of tasks into an agent s job rather than hire multiple agents and make each of them specialize in just one task and ii the principal may choose to delegate all the tasks in order to mitigate a conflicting incentive problem with agents

optimal pricing and advertising in a durable good duopoly abstract this paper analyzes dynamic advertising and pricing policies in a durable good duopoly the proposed infinite horizon model while general enough to capture dynamic price and advertising interactions in a competitive setting also permits closed form solutions we use differential game theory to analyze two different demand specifications linear demand and isoelastic demand for symmetric and asymmetric competitors we find that the optimal price is constant and does not vary with cumulative sales while the optimal advertising is decreasing with cumulative sales comparative statics for the results are presented

bounds on the welfare loss from moral hazard with limited liability we study a principal agent problem with discrete outcome and effort level spaces the principal and the agent are risk neutral and the latter is subject to limited liability quantifying welfare loss as the ratio between the first best social welfare and that arising from the principal s optimal pay for performance contract we provide simple parametric bounds for problem instances with moral hazard relying on that we compute the worst case welfare loss ratio among all problem instances with a fixed number of effort and outcome levels as a function of the number of possible effort levels and the likelihood ratio evaluated at the highest outcome as extensions we look at linear contracts and at cases with multiple identical tasks our work constitutes an initial attempt to quantify the losses arising from moral hazard when the agent is subject to limited liability and shows that these losses are non negligible in the worst case

negotiations and exclusivity contracts for advertising exclusive advertising on a given media outlet is usually profitable for an advertiser because consumers are less aware of competing products however for such arrangements to exist media must benefit as well we examine conditions under which such exclusive advertising contracts benefit both advertisers and media outlets referred to as stations by illustrating that exclusive equilibria arise in a theoretical model of the media advertisers and consumers who participate in both the product and media markets in the model stations sell advertising space to advertisers and broadcast advertising messages to consumers conditions leading to higher equilibrium levels of advertising can be unprofitable for advertisers because high levels of advertising make consumers better informed and thus lead to fiercer product price competition as a result media stations may be less profitable as well because their payoff is determined as a fraction of the advertiser surplus generated in the product market stations mitigate this effect by offering advertisers exclusive advertising contracts with such contracts consumers are less informed about competing products yielding higher producer surplus it is profitable for stations to offer exclusivity when commercial advertising is an important means for advertisers to inform consumers about their products

modeling dynamic heterogeneity using gaussian processes marketing research relies on individual level estimates to understand the rich heterogeneity of consumers firms and products while much of the literature focuses on capturing static cross sectio

pulsation in a competitive model of advertising firm s cost interaction the literature reveals contradiction between theoretical results superiority of uniform policy under a concave advertising response function and empirical results concavity of the advertising response function and the superiority of a pulsation policy to reconcile the above difference this paper offers a resolution based on 1 the concavity of the advertising response function 2 the convexity of the firm s cost function and 3 over advertising the resolution is reached upon maximizing the net profit per unit time over the infinite planning horizon subject to an exogenous advertising budget constraint theoretical results for monopolistic markets are found mostly generalized to competitive markets a numerical example is introduced to gain more insight into the theoretical findings and an approach is introduced and implemented to empirically assess the shape of a firm s cost function and the advertising policy to be employed

predicting advertising pulsing policies in an oligopoly a model and empirical test given that firms pulse in advertising should firms pulse in or out of phase it is shown that out of phase maximizes the oligopoly profits and is also the markov perfect equilibrium of the infinite horizon game the basic intuition for this result comes from the following fact it is more profitable to increase consideration when the competitor s consideration is lower evidence from several product categories seems to support this theoretical result

a financial contracting approach to the role of supermarkets in farmers credit access traditional moneylenders monitor farmers to ensure that their investment is not diverted modern farming contracts offered by supermarkets in developing countries often entail a loan component and monitoring arises as well however unlike moneylenders supermarkets do care about the attributes of the product whether such attributes are obtained is influenced largely by the advice and the extension services received by farmers we build a financial contracting model where we show that supermarkets optimally undertake both the monitoring and the advisory missions this contract is shown to potentially enhance credit access for small farmers but sometimes also involves excessive monitoring

wage floors imperfect performance measures and optimal job design we analyze the effects of wage floors on optimal job design in a moral hazard model with asymmetric tasks and imperfect aggregate performance measurement due to cost advantages of specialization assigning the tasks to different agents is efficient a sufficiently high wage floor however induces the principal to dismiss one agent or to even exclude tasks from the production process imperfect performance measurement always lowers profit under multitasking but may increase profit under specialization we further show that variations in the wage floor and the agents reservation utility have significantly different effects on welfare and optimal job design

dynamic optimal control models in advertising recent developments this paper presents a review of recent developments that have taken place in the area of dynamic optimal control models in advertising subsequent to the comprehensive survey of the literature by sethi in 1977 the basic problem underlying these models is that of determining optimal advertising expenditures and possibly other variables of interest over time for a firm or a group of competing firms under consideration this optimization is done subject to some dynamics that define how these variables translate into sales and in turn into profits the purpose of this update is twofold on the one hand new contributions in the areas already treated in the earlier survey are reviewed on the other hand new trends in the advertising literature since 1977 such as quality as an additional marketing instrument cumulative sales models pulsing advertising and advertising as a part of corporate models of the firm are discussed the models covered in this update are organized under six headings models with ca

the role of group size in group lending abstract this paper explores group size in joint liability lending primarily in the adverse selection framework with local borrower information a single standardized contract that imposes full joint liability subject to a limited liability cap is optimal further if gross returns to borrowing are moderately high this contract results in perfectly efficient lending if groups are large enough however raising group size accomplishes nothing if there is no local borrower information these results show that more is required for efficient lending than full within group insurance and highlight a complementarity between group size and social capital very similar results are shown in two different settings ex ante and ex post moral hazard though the type of social capital that complements group size varies across the settings taking a step toward modeling drawbacks of larger groups it is shown that if information deteriorates sufficiently with group size an intermediate group size does better than either extreme simulations suggest that most of the efficiency gains from larger groups are realized in group sizes below ten and that outreach and efficiency can increase dramatically when a moderate group size threshold is crossed

advertising effects in presidential elections presidential elections provide both an important context in which to study advertising and a setting that mitigates the challenges of dynamics and endogeneity we use the 2000 and 2004 general elections to analyze the effect of market level advertising on county level vote shares the results indicate significant positive effects of advertising exposures both instrumental variables and fixed effects alter the ad coefficient advertising elasticities are smaller than are typical for branded goods yet significant enough to shift election outcomes for example if advertising were set to zero and all other factors held constant three states electoral votes would have changed parties in 2000 given the narrow margin of victory in 2000 this shift would have resulted in a different president

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

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

on the superiority of pulsing under a concave advertising market potential function abstract the authors study the superiority of advertising pulsing policy turning advertising on and off in a cyclic fashion over its uniform constant spending counterpart that costs the same under the assumption that sales dynamics follow a modified vidale wolfe aggregate advertising model the authors show that pulsing can be superior if the product of the concave market potential function and the linear or concave advertising response function is convex in advertising similar to previous studies in the literature the average undiscounted profit over the infinite planning horizon is considered as a performance measure according to which alternative advertising pulsation policies are compared employing a well known data set relating advertising to sales the above convexity requirement is empirically supported and the superiority of pulsing is established numerically the performance of the proposed model is found to be superior to two rival models using a one step ahead forecasting procedure the analytical findings of the study are documented into six theoretical results for which proofs are relegated to a separate appendix managerial implications of the study and directions for future research are also discussed

government procurement and international trade abstract we model the bidding for a government contract in which there is imperfect competition each bidder is better informed about his own costs than either his rival bidders or the government and the distribution of the domestic firms costs differs from the distribution of foreign firms costs because of comparative advantage effects we find that the government minimizes its expected procurement cost by operating a price preference policy not necessarily purchasing from the lowest bidder

all or nothing monitoring comment zhao 2008 presents an interesting all or nothing monitoring result for a multitask moral hazard agency problem with partial effort observation we argue that the optimal contract based on the non verifiable observation of the agent s effort in zhao 2008 can be regarded as a limitation on the incentive schemes available to the principal i then propose some arguably more appropriate approaches for analyzing such agency problems d82 d86 m54

multiple tasks and political organization consider an environment such as a political election where a principal requires the completion of multiple tasks but an agent can only be rewarded with a hire fire decision rather than an endogenously chosen monetary payment when the principal hires a single agent to perform multiple tasks the agent allocates effort between the tasks inefficiently i demonstrate that even though hiring multiple agents completely mitigates this effort distortion problem the principal is still better off hiring a single agent if the exogenous rewards for the tasks are sufficiently different in contrast to similar results in the multi task literature this finding is not driven by risk aversion or noise rather it is a direct result of the restricted contract space inherent to the environment

protection in government procurement auctions abstract discrimination against foreign bidders in procurement auctions has typically been achieved by price preferences we demonstrate that in the bidding game each level of protection via a price preference can be achieved by an equivalent tariff when government welfare depends only on net expenditures this equivalence carries over to the government s decision as such this equivalence provides a justification that agreements to eliminate price preferences to be taken in tandem with agreements to lower tariffs e g the government procurement agreement gpa in the broader context of the wto

tariff pass through and the distributional effects of trade liberalization abstract this paper estimates the distribution of welfare gains due to the trade reforms in india by simultaneously considering the effect on prices of tradable goods and wages the cost of consumption for each household is affected by the domestic price changes while wage incomes adjust to these price changes in equilibrium three rounds of the indian employment and consumption surveys are used for the analysis the price transmission mechanisms are estimated for both rural and urban areas to understand the extent to which the trade reforms are able to affect the domestic prices in order to assess the distributional effects a series of nonparametric local linear regressions are estimated the findings show that households at all per capita expenditure levels had experienced gains as a result of the trade liberalization while the average effect was generally pro poor and varied significantly across the per capita expenditure spectrum

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

planning marketing mix strategies in the presence of interaction effects companies spend millions of dollars on advertising to boost a brand s image and simultaneously spend millions of dollars on promotion that many believe calls attention to price and erodes brand equity we believe this paradoxical situation exists because both advertising and promotion are necessary to compete effectively in dynamic markets consequently brand managers need to account for interactions between marketing activities and interactions among competing brands by recognizing interaction effects between activities managers can consider interactivity trade offs in planning the marketing mix strategies on the other hand by recognizing interactions with competitors managers can incorporate strategic foresight in their planning which requires them to look forward and reason backward in making optimal decisions looking forward means that each brand manager anticipates how other competing brands are likely to make future decisions and then by reasoning backward deduces one s own optimal decisions in response to the best decisions to be made by all other brands the joint consideration of interaction effects and strategic foresight in planning marketing mix strategies is a challenging and unsolved marketing problem which motivates this paper this paper investigates the problem of planning marketing mix in dynamic competitive markets we extend the lanchester model by incorporating interaction effects constructing the marketing mix algorithm that yields marketing mix plans with strategic foresight and developing the continuous discrete estimation method to calibrate dynamic models of oligopoly using market data both the marketing mix algorithm and the estimation method are general so they can be applied to any other alternative model specifications for dynamic oligopoly markets thus this dual methodology augments the decision making toolkit of managers empowering them to tackle realistic marketing problems in dynamic oligopoly markets we illustrate the application of this dual methodology by studying the dynamic lanchester competition across five brands in the detergents market where each brand uses advertising and promotion to influence its own market share and the shares of competing brands empirically we find that advertising and promotion not only affect the brand shares own and competitors but also exert interaction effects i e each activity amplifies or attenuates the effectiveness of the other activity normatively we find that large brands underadvertise and overspend on promotion while small brands underadvertise and underpromote finally comparative statics reveal managerial insights into how a specific brand should respond optimally to the changes in a competing brand s situation more generally we find evidence that competitive responsiveness is asymmetric

limited liability and incentive contracting with multiple projects i examine a principal agent model with multiple projects where a risk neutral manager is protected by limited liability the analysis has several interesting implications i incentive problems are shown to be a natural source of economies of scope as combining multiple projects under the management of a single manager relaxes the limited liability constraint ii as a result managers may be overloaded with work and exert inefficiently high effort and iii the analysis has implications for the optimal allocation of projects to different managers copyright 2001 by the rand corporation

competitive targeted advertising over networks recent advances in information technology have allowed firms to gather vast amounts of data regarding consumers preferences and the structure and intensity of their social interactions this paper examines a game theoretic model of competition between firms that can target their marketing budgets to individuals embedded in a social network we provide a sharp characterization of the optimal targeted advertising strategies and highlight their dependence on the underlying social network structure furthermore we provide conditions under which it is optimal for the firms to asymmetrically target a subset of the individuals and establish a lower bound on the ratio of their payoffs in these asymmetric equilibria finally we find that at equilibrium firms invest inefficiently high in targeted advertising and the extent of the inefficiency is increasing in the centralities of the agents they target taken together these findings shed light on the effect of the network structure on the outcome of marketing co

optimal advertising strategies this paper considers advertising policies for a very general class of response functions it is shown that if a pulsing policy is used awareness or sales eventually settle down to a steady cycle and the average response over the cycle is a decreasing function of the length of the cycle when response shows increasing returns to scale it is possible in theory to use a device called chattering to replace the true response by a straight line which lies above the true response in the region in which chattering is used a numerical example is given to show how the optimal policy can be computed when part of the response is linear and the results obtained are compared with those of the best practicable approximation to chattering it is shown that the problem of maximising awareness or sales subject to a budget constraint is structurally identical with maximising profit after advertising with or without a constraint in either case it is possible that for part of the time the optimal policy involves chattering

optimal second stage outsourcing manufacturers have recently begun outsourcing product assembly and completion tasks to their suppliers such outsourcing solves several contracting problems but generates new incentive frictions between manufacturers and their suppliers in this paper we analyze a manufacturer s decision to outsource an assembly second stage task to a preestablished supplier we find that outsourcing second stage tasks becomes more attractive as the cost of either the first or second stage activity rises outsourcing becomes less attractive when the supplier is unable to accept large levels of liability the manufacturer is shown to prefer more testing when she outsources assembly to her supplier as opposed to when she assembles products in house last we find that the contracting frictions identified persist when the supplier s work can be tested individually albeit imperfectly

wearout effects of different advertising themes a dynamic bayesian model of the advertising sales relationship models of advertising response implicitly assume that the entire advertising budget is spent on disseminating one message in practice managers use different themes of advertising for example price advertisements versus product advertisements and within each theme they employ different versions of an advertisement in this study we evaluate the dynamic effects of different themes of advertising that have been employed in a campaign we develop a model that jointly considers the effects of wearout as well as that of forgetting in the context of an advertising campaign that employs five different advertising themes we quantify the differential wearout effects across the different themes of advertising and examine the interaction effects between the different themes using a bayesian dynamic linear model dlm such a response model can help managers decide on the optimal allocation of resources across the portfolio of ads as well as better manage their scheduling we develop a model to show how our response model parameters can be used to improve the effectiveness of advertising budget allocation across different themes we find that a reallocation of resources across different themes according to our model results in a significant improvement in demand

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

multistage multiproduct advertising budgeting abstract we propose and analyze an effective model for the multistage multiproduct advertising budgeting problem this model optimizes the advertising investment for several products by considering cross elasticities different sales drivers and the whole planning horizon we derive a simple procedure to compute the optimal advertising budget and its optimal allocation the model was tested to plan a realistic advertising campaign we observed that the multistage approach may significantly increase the advertising profit compared to the successive application of the single stage approach

optimal bidding in multi item multislot sponsored search auctions we study optimal bidding strategies for advertisers in sponsored search auctions in general these auctions are run as variants of second price auctions but have been shown to be incentive incompatible thus advertisers have to be strategic about bidding uncertainty in the decision making environment budget constraints and the presence of a large portfolio of keywords makes the bid optimization problem nontrivial we present an analytical model to compute the optimal bids for keywords in an advertiser s portfolio to validate our approach we estimate the parameters of the model using data from an advertiser s sponsored search campaign and use the bids proposed by the model in a field experiment the results of the field implementation show that the proposed bidding technique is very effective in practice we extend our model to account for interactions between keywords in the form of positive spillovers from generic keywords into branded keywords the spillovers are estimated using a dynamic linear

planning media schedules in the presence of dynamic advertising quality a key task of advertising media planners is to determine the best media schedule of advertising exposures for a certainbudget conceptually the planner could choose to do continuous advertising i e schedule ad exposures evenly overall weeks or follow a strategy of pulsing i e advertise in some weeks of the year and not at other times previous theoretical analyses have shown that continuous advertising is optimal for nearly all situations however pulsing schedules are very common in practice either the pract ice of pulsing is inappropriate or extant models have not adequately conceptualized the effects of advertising spending over time this paper offers a model that shows pulsing strategies can generate greater total awareness than the continuous advertising when the effectiveness of advertisement i e adquality varies overtime specifically ad quality declines because of advertising wearout during periods of continuous advertising and it restores due to forgetting effects during periods of no advertising such dynamics make it worth while for advertisers to stop advertising when ad quality becomes very low and wait for ad quality to restore beforestarting the next burst again as is common in practice based on the extensive behavioral research on advertising repetition and advertising wearout we extend the classical nerlove and arrow 1962 model by incorporating the notions of repetition wearout copy wearout and ad quality restoration repetition wearout is a result of excessive frequency beca use ad viewers perceive that there is nothing new to be gained from processing the ad they withdraw their attention or they become unmotivated to react to advertising information copy wearout refers to the decline inad quality due to passage of time independent of the level of frequency ad quality restoration is the enhancement of ad quality during media hiatus as a consequence of viewers forgetting the details of the advertised messages thus making ads appear like new when reintroduced later the proposed model has the property that when wearout effects are present a strategy of pulsing is superior to continuous advertising even when the advertising response function is concave this is illustrated by a numerical example that compares the total awareness generated by a single concentrated pulse of varying duration blitz schedules and continuous advertising the even schedule this property can be explained by the tension between the pressure to spend the fixed media budget quickly to avoid copy wearout and the opposing pressure to spread out the media spending over time to mitigate repetition wearout the proposed model is empirically tested by using brand level data from two advertising awareness tracking studies that also include the actual spen ding schedules the first data set is for a major cereal brand while the other is for a brand of milk chocolate such advertising tracking studies are now a common and popular means for evaluating advertising effectiveness in many markets e g millward brown narketmind in the empirical tests the model parameters are estimated by using the kalman filter procedure which is eminently suited for dynamic models because it attends to the intertemporal dependencies in awareness build up and decay via the use of conditional densities the estimated parameters are statistically significant have the expected signs and are meaningful from both theoretical and managerial viewpoints the proposed model fits both the data sets rather well and better than several well known advertising models namely the vidale wolfe brandaid litmus and trackermodels but not decisively better than the nerlove arrow model however unlike the nerlove arrow model the proposed model yields different total awareness for different strategies of spending the same fixed budget thus allowing media planners to discriminate among several media schedules given the empirical support for the model the paper presents an implementable approach for utilizing it to evaluate large numbers of alternative media schedules and determine the best set of media schedules for consideration in media planning this approach is based on an algorithm that combines a genetic algorithm with the kalman filter procedure the paper presents the results of applying this approach in the case studies of the cereal and milk chocolate brands the form of the best advertising spending strategies in each case was a pulsing strategy and there were many schedules that were an improvement over the media schedule actually used in each campaign

the unintended consequences of countermarketing strategies how particular antismoking measures may shift consumers to more dangerous cigarettes countermarketing or efforts to reduce consumption of certain products has become common in categories such as tobacco junk food fossil fuels and furs countermarketing has a particularly long history in the tobacco industry efforts to reduce smoking have included excise taxes that increase the cost of consumption smoke free restrictions that make consumption less convenient and antismoking advertising campaigns that highlight the dangers of tobacco use this article presents an analysis of the relative effectiveness of these different strategies we find that cigarette excise taxes are the most effective tool for reducing overall cigarette sales followed by antismoking advertising smoke free restrictions are not found to have a significant effect on cigarette sales we also investigate how these various policy tools induce product substitution this issue is of considerable importance because some countermarketing techniques may potentially shift consumers to more dangerous higher nicotine and

recent developments in dynamic advertising research a variety of continuous time differential functions have been developed to investigate dynamic advertising problems in business and economics fields since major dynamic models appearing before 1995 have been reviewed by a few survey papers we provide a comprehensive review of the dynamic advertising models published after 1995 which are classified into six categories i nerlove arrow model and its extensions ii vidale wolfe model and its extensions iii lanchester model and its extensions iv the diffusion models v dynamic advertising competition models with other attributes and vi empirical studies for dynamic advertising problems for each category we first briefly summarize major relevant before 1995 models and then discuss major after 1995 models in details we find that the dynamic models reviewed in this paper have been extensively used to analyze various advertising problems in the monopoly duopoly oligopoly and supply chain systems our review reveals that the diffusion models have not been used to analyze advertising problems in supply chain operations which may be a research direction in the future moreover we learn from our review that very few publications regarding dynamic advertising problems have considered the supply chain competition we also find that very few researchers have used the diffusion model to investigate the dynamic advertising problems with product quality as a decision variable and the pricing decision has not been incorporated into any extant lanchester model the paper ends with a summary of our review and suggestions on possible research directions in the future

implementing high powered contracts to motivate intertemporal effort supply we characterize the optimal contract between a principal and a risk neutral wealth constrained agent when an adverse selection problem follows a moral hazard problem the optimal contract in this setting often is more steeply sloped for the largest output levels than is the optimal contract in either the standard moral hazard setting or the standard adverse selection setting the large incremental rewards for exceptional performance motivate the agent to deliver substantial effort both before and after he acquires privileged information about the production environment

multilateral interactions improve cooperation under random fluctuations abstract in an environment subject to random fluctuations when does an increase in the breadth of activities in which individuals interact together help foster collaboration on each activity we show that when players on average prefer to stick to a cooperative agreement rather than reneging by taking their privately optimal action then such an agreement can be approximated as equilibrium play in a sufficiently broad relationship this is in contrast to existing results showing that a cooperative agreement can be sustained only if players prefer to adhere to it in every state of the world we consider applications to favor exchange multimarket contact and relational contracts