repeated moral hazard and contracts with memory the case of risk neutrality we consider a repeated moral hazard problem where both the principal and the wealth constrained agent are risk neutral in each of two periods the agent can exert unobservable effort leading to success or failure incentives provided in the second period act as carrot and stick for the first period so that the effort level induced in the second period is higher after a first period success than after a failure if renegotiation cannot be prevented the principal may prefer a project with lower returns i e a project may be too good to be financed or similarly an agent can be overqualified this article offers a new perspective on dynamic moral hazard problems consider a riskneutral principal who can hire a risk neutral but wealth constrained agent the agent can exert unobservable effort which increases the likelihood of success in the one shot problem there is a well known trade off between effort incentives and rent extraction which leads to a downward distorted effort level compared to the first best solution we extend the standard model by assuming that there is a second period in which the principal can make an investment to continue the project and the agent can again exert unobservable effort it turns out that there are several interesting insights that so far have escaped the literature on repeated moral hazard which was focused on the case of risk averse agents in particular if the principal can commit not to renegotiate the second period incentives can be used to partially circumvent the limited liability constraint in the second period the principal induces the agent to choose a particularly high effort level following a first period success and a particularly low effort level following a first period failure the prospect of a higher second period rent following a first period success motivates the agent to exert more effort in the first period i e rents in the second period act as reward and punishment for the first period it should be emphasized that we assume no technological impact of a first period success or failure on the second period technology nevertheless an optimal dynamic contract exhibits memory hence if an outsider observed today a principal agent pair that was successful and another identical pair that was not successful he would be right to predict that the first pair also is more likely to succeed tomorrow in other words a serial correlation across periods which we sometimes refer to as a hot hand effect is generated endogenously merely based on incentive considerations 2

stock price reactions as surrogates for the net cash flow effects of corporate policy decisions abstract this paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions the focus is on testing cross sectional associations between cash flow effects and the underlying characteristics of affected firms we find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process

the form of incentive contracts agency with moral hazard risk neutrality and limited liability the analysis obtains a complete characterization of the optimal agency contract with moral hazard risk neutrality and limited liability we introduce a critical ratio that indicates the returns to providing the agent with incentives for effort in each random state the form of the contract is debt a capped bonus when the critical ratio is increasing decreasing in the state an increasing critical ratio in the state space setting corresponds to the hazard rate order for the reduced form distribution of output which we term the decreasing hazard rate in effort property dhrep the critical ratio also yields insights into agency with adverse selection

the international debt crisis and bank loan loss reserve decisions the signaling content of partially anticipated events the huge increases in loan loss provisions by major bank holding companies bhcs in 1987 were a signal of impending asset writedowns of loans to less developed countries ldcs 1 since loan loss reserve decisions like asset write downs are simply bookkeeping adjustments significant market reactions to such announcements should not be expected strong and meyer 1987 however found a positive and statistically significant cumulative average residual after the announcement of asset write downs 2 thakor 1987 argues that write downs have a price effect not because they mean much by themselves but because they signal events to come specifically he sees write downs as a signal of economic value enhancing corporate restructuring to come in the future p 662 we use event study methods to examine security returns for the twenty five largest u s bank holding companies surrounding citicorp s 3 billion loan loss

rank order contracts for a principal with many agents for a principal with many agents rank order contracts remain incentive compatible even when information about agents performance is known only to the principal because the total payment from the principal to all agents taken together is independent of the outcome that occurs under wider conditions than those considered previously in the literature there is shown to exist a rank order contract equivalent exactly or approximately to any nonlinear piece rate contract under those conditions therefore results that depend on the unenforceability of piece rates under such asymmetric information disappear if rank order contracts can be used in principal agent models compensation paid to agents is based on their outputs because their inputs are not public information in this context information is public if it is verifiable in court so that a contract contingent on it is legally enforceable rank order contracts also called tournaments and contests make each agent s compensation a function solely of the ranking of his output relative to the outputs of other agents in contrast individual piece rate contracts make each agent s compensation a function only of his own output lazear and rosen 1981 green and stokey 1983 and nalebuff and stiglitz 1983 all have results comparing the two when agents actions are not observed by the principal but only for the case in which the principal is risk neutral and the utility function of agents additively separable in income and action the main purpose of the present paper is to show that for the case of a continuum of agents these two kinds of contract are in fact formally equivalent or in some cases approximately equivalent under somewhat more general conditions than those considered so far in the

dividend changes abnormal returns and intra lndustry firm valuations previous empirical research has established that dividend changes are associated with sig nificant abnormal returns this association is rationalized on the basis that the dividend announcement acts as a signal of future earnings another body of research has documented the existence of intra industry transfers of information where news about one firm is extrapolated to other companies in the same industry earnings information transfers have been found to be positive in nature with good news about one company leading to stock price increases for rival firms linking dividend signaling and information transfer tests were constructed to ascertain whether the dividend change of one firm is associated with the stock price performance of other companies in the same industry the results indicate there is some small positive information transfer the magnitude of information transfer is related to the degree of the dividend surprise the recent dividend history of the other companies and correlations in stock returns between the dividend announcer and the other companies information transfer is found to affect earnings and earnings growth estimates of the other firms and this leads to revisions in their stock prices

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

the supply of charity services by nonprofit hospitals motives and market structure this article studies provision of charity care by private nonprofit hospitals we demonstrate that in the absence of large positive income effects on charity care supply convex preferences for the nonprofit hospital imply crowding out by other private or government hospitals extending our model to include impure altruism rivalry provides a possible explanation for the previously reported empirical result that both crowding out and income effects on indigent care supply are often weak or insignificant empirical analysis of data for hospitals in maryland provides evidence of rivalry on the supply of charity care

additions to bank loan loss reserves good news or bad news abstract this paper examines the effects of citicorp s and succeeding banks loan loss reserve announcements in 1987 it was found that while the average effect on bank stock return portfolios was weak the effect on individual bank returns was heterogeneous tests were undertaken to determine which bank specific variables explained the latter result two significant variables were the size of a banks ldc debt exposure and its position in ldc rescheduling committees

internal competition for corporate resources and incentives in teams invoking thefree rider problem in teams many observersfind profit sharing in large organizations puzzling because it should have negligible incentive effects we show that a firm can be decomposed into two separate teams whose outputs can be observed thenprofit sharing combined with competition between these two teamsfor internal resourcesfrequently solves thefree rider problem using this result we endogenize thefirm s organizational structure and show that in the presence of economies of scale small firms tend to organize as unita y firms while largefirms choose the multidivisional organizationalform

measuring the effects of regulation with stock price data this article examines the usefulness of stock returns in measuring the effects of regulation when the dates on which market expectations change are not known and standard sources e g the wall street journal are used to choose announcement dates twenty major changes in regulatory constraint since 1887 are considered tests using either monthly or daily data are found to have surprisingly little ability to detect the effects of regulation the evidence shows that formal regulatory announcements are generally anticipated in cases where it is unclear when expectations change

learning from coarse information biased contests and career profiles an organization s promotion decision between two workers is modelled as a problem of boundedly rational learning about ability the decision maker can bias noisy rank order contests sequentially thereby changing the information they convey the optimal final period bias favours the leader reinforcing his likely ability advantage when optimally biased rank order information is a sufficient statistic for cardinal information the leader is favoured in every period in other environments bias in early periods may i favour the early loser ii be optimal even when the workers are equally rated and iii reduce the favoured worker s promotion chances this paper presents a model of boundedly rational learning by an organization the aims are to represent in a simple form the costs of gathering processing or transmitting information and to analyse their implications for the procedures selected to handle information as well as for the decisions actually made like other recent work on the internal organization of firms this work explores to what extent organizational structure and behaviour as well as organizational performance can be explained by adaptation to the costs associated with information in the learning model we formulate the decision maker not only selects a rule specifying what action to take as a function of his observations but also chooses sequentially the information partitions generating those observations this general problem is interpreted in the context of an organization which needs to make an important promotion decision and which attempts to maximize the value of the information generated during the observation periods that precede the decision one of the motivations for this analysis was the finding by organizational sociologists that earnings and promotions in the later stages of a worker s career are strongly correlated with earnings and promotions in the early stages kanter 1977 rosenbaum 1984 later success is positively associated with early success even when one controls for the effect of observable characteristics likely to affect performance such as education one obvious source of this correlation is differences in ability that persist over time and that are not captured by the observable covariates in this paper we focus on differences in ability which are initially unobservable by organizations and their workers as well as by researchers we present a simple model of an organization trying to learn about differences in ability and show

demand for collective goods in private nonprofit markets can fundraising expenditures help overcome free rider behavior abstract economic theory ascribes the primary role in the provision of public goods to government this emphasis on government overlooks the role of the not for profit sector in providing collective type goods in this paper we seek to determine the factors influencing charitable contributions to private nonprofit organizations by estimating a demand function for the output of these collective good providers specifically we test the hypothesis that voluntary giving is responsive to conventional market variables such as advertising expenditures price and quality overall the results are strongly supportive

loan loss provisions bank valuations and discretion a comparative study between conventional and islamic banks this study investigates the use of reported loan loss provisions llp by investors in their valuations of banks within the middle east and north africa region between the years 2006 and 2011 we decompose llp into discretionary and non discretionary components to test for differential valuations in the two banking sectors we use alternative criteria to define the components of llp in banks loan quality size and earnings management manipulation incentives we employ a price level valuation model estimated using two stage analyses we find that llp has positive value relevance to investors in both banking sectors investors in islamic banks price the discretionary component relatively lower than their conventional counterparts we attribute this result to differences in product and governance structures as well as to the religious perception of islamic banking in both banking sectors investors construe an increase in the non discretionary component as irrelevant valuation information our results are relevant to bank regulators in showing the signalling effect of llp to bank value and stability

a step back as donors shift institution building from the public to the private sector abstract frustrated with public sectors in developing countries donors have shifted support to nonprofit nongovernmental organizations this paper questions the preferability of the nonprofit or public sector from the donor and host country perspectives case study experience from agriculture and natural resource institutions in ecuador and the dominican republic is presented to expand upon current thinking about the role of the nonprofit sector nonprofits are found to possess substantially increased flexibility for donor purposes and avoid many of the pitfalls of the political process they are however subject to free rider problems and bear no responsibility to the general public

board composition and nonprofit conduct evidence from hospitals abstract this study uses data from hospitals to test the hypothesis that management representation on nonprofit boards leads to excessive ceo pay defined as compensation that exceeds the level predicted by a market wage model we document a relatively small but statistically significant positive association between ceo pay and insider boards that include the ceo and other employees as members additional tests confirm that this result is not driven by endogenous board structure and that excess pay is greater in the absence of competition from for profit hospitals we then examine whether management board representation is associated with larger underlying agency concerns that lead to reduced donations our tests do not support this hypothesis but do however reveal a negative correlation between donations and physician representation on the board suggesting a potential conflict between the interests of donors and non employee physicians our overall evidence provides empirical support for modeling nonprofit organizations as consisting of competing stakeholders

economic contests comparative reward schemes contests are situations in which an individual s reward depends on his performance relative to others students are graded on a curve the candidate with the most votes gets the political office the underling who performs best is promoted to the executive position contests are useful in dealing with indivisible rewards reducing monitoring costs and minimizing risks from common uncertainties they are employed to sort potential participants and once they have entered to induce appropriate effort from them with monitoring precision and prize spreads as potential choice variables optimal contest structures are derived for fair and unfair contests among equal and unequal participants the converse problems of climbing low ability individuals enter the contest designed for high ability candidates and slumming are shown to be manageable

market expectations of the effects of the tax reform act of 1986 on banking organizations abstract this study investigates market expectations regarding the effect of the tax reform act of 1986 on the banking industry the evidence shows that overall the tax reform did not adversely affect the stocks of banking institutions the findings suggest that overall banking organizations were expected to largely mitigate any negative effects of the tax reform on their cash flow by rebalancing and or repricing their portfolios of assets and liabilities the most significant provision of the new act was the limitation on foreign tax credits interestingly the markets did not expect any adverse valuation effects from the recapture of loan loss reserves or the elimination of the interest deductibility for carrying tax exempt securities

bonus pools and the informativeness principle abstract previous work on moral hazard problems has shown that under certain conditions bonus contracts create optimal individual incentives for risk neutral workers in our paper we demonstrate that if a firm employs at least two workers it may further benefit from combining worker compensation via a bonus pool contract and relative performance evaluation such combination leads to saved rents under a wide class of luck distributions in addition if the employer is wealth constrained complementing individual bonus contracts by the possibility of pooling bonuses can increase the set of implementable effort levels all our results hold even though workers outputs are technically and stochastically independent so that in view of holmstrom s informativeness principle individual bonus contracts would be expected to dominate bonus pool contracts

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

voluntary contributions and local public goods in a federation abstract this paper considers nonneutral effects of government spending in a federation of multiple jurisdictions both government spending and private donations finance local public goods redistributive programs that provide transfers for the poor in the standard model government spending has no effect on the public goods as donors reduce their donations one for one in response to an increase in government spending in a federation donors of a jurisdiction donate through federal charities to help the poor in the jurisdiction and the poor in other jurisdictions as well jurisdictions are thus linked through donations such linkage influences donors behavior beyond the traditional crowding out effect as a result government spending has nonneutral effects on the level of public goods

more powerful portfolio approaches to regressing abnormal returns on firm specific variables for cross sectional studies ols regression ignores both heteroscedasticity and cross correlations of abnormal returns therefore tests of regression coefficients are weak and biased a portfolio ols pols regression accounts for correlations and ensures unbiasedness of tests but does not improve their power we propose portfolio weighted least squares pwls and portfolio constant correlation model pccm regressions to improve the power both utilize the heteroscedasticity of abnormal returns in estimating the coefficients pwls ignores the correlations while pccm uses intra and inter industry correlations simulation results show that both lead to more powerful tests of regression coefficients than pols cross sectional studies that attempt to explain event period abnormal returns on firms securities by economic and or firm specific variables generally use cross sectional ordinary least squares ols regression abnormal returns of different securities are heteroscedastic of unequal variances and contemporaneous abnormal returns may be cross correlated ols ignores both heteroscedasticity and correlations therefore it leads to inefficient and biased tests of significance of regression coefficients for these reasons sefcik and thompson 1986 suggested using generalized least squares gls regression when sufficient data are available to obtain a reliable estimate of the covariance matrix of abnormal returns and portfolio time series ols pols regression should be used when that matrix cannot be estimated reliably in pols regression a cross sectional ols is used to estimate the regression coefficients and a time series of portfolio of estimation period unsystematic returns to estimate the standard errors of those estimates the resulting coefficients estimates are unbiased and their standard errors account for correlations among abnormal returns thus unbiasedness of tests is insured however concern for the power of tests lingers on because cross sectional

the revealed objective functions of nonprofit firms although assertions have often been made about the objectives underlying the behavior of nonprofit firms there has been no empirical confirmation of these assertions this article proposes a way to infer a nonprofit organization s objective function by estimating the marginal donative product of its fundraising panel data estimates derived by using hildreth and houck s 1968 random coefficients model suggest that welfare education and arts firms are service maximizers that health firms are budget maximizers and that the objective of research firms cannot be ascertained within the family of objective functions considered

asymmetric tournaments equal opportunity laws and affirmative action some experimental results this paper assesses whether affirmative action programs and equal opportunity laws affect the output of economic agents more precisely we find that equal opportunity laws and affirmative action programs always benefit disadvantaged groups equal opportunity laws also increase the effort levels of all subjects and hence the profits of the tournament administrator usually the firm the effects of affirmative action programs depend on the severity of a group s cost disadvantage when the cost disadvantage is severe these programs significantly increase effort levels and hence profits the opposite is true when the disadvantage is slight

the demise of hospital philanthropy the demise of hospital philanthropy i introduction until the beginning of this century most hospitals primarily served the poor and derived a major portion of their revenue from private philanthropy the more affluent avoided hospital care and were treated in doctors offices and at home starr 1982 rosenberg 1987 this situation changed largely because of technological improvements such as anesthesia and asepsis and the nonpoor began to demand care in hospitals private insurance plans offering the nonpoor nearly complete coverage for hospital care began in the 1930s and spread rapidly after world war ii major health legislation medicare and medicaid was enacted in 1965 extending hospital insurance to the elderly and the poor by the late 1960s hospitals derived nine tenths of their revenue from insurance real donations for medical facility construction rose from 76 million in 1935 to a peak of 2 1 billion in 1965 and fell to 603 million by 1981 1984 dollars 1 in 1984 only 5 percent of the total spent on such construction was funded by philanthropy levit et al 1985 the conventional wisdom has it that private and public hospital insurance has crowded out philanthropic support of hospitals the public insurance argument is consistent with that of abrams and schmitz 1978 and roberts 1984 who maintain that public welfare expenditures reduce or eliminate private giving to the poor this argument appears to extend to private insurance as well this article describes the decline in donations to hospitals from conceptual as well as empirical perspectives we first describe a simple one period model of hospital and donor behavior hospitals choose utility maximizing levels of output while altruistic donors decide how much to contribute to hospitals and how much to spend on other goods the model is used to analyze how insurance various government subsidies and other factors affect hospital and donor behavior the major insight from this model is that although rising insurance coverage tends to increase hospital output in the same way as a lump sum government subsidy the two have different effects on donations to the hospital growing insurance coverage may increase or decrease donations while lump sum subsidies to the hospital will unambiguously crowd out private donations the empirical work following the model incorporates empirical counterparts of the exogenous and donation variables examined in the theoretical section data come from 1 a time series spanning 1935 81 and 2 a single cross section of nonprofit hospitals in 1978 the results indicate that increased insurance coverage for hospital care especially the enactment of medicare and medicaid in the mid 1960s reduced giving to hospitals the contribution of public subsidies for construction varied depending on whether the subsidy more closely resembled a matching or a lump sum subsidy ii model the model consists of a single not for profit hospital and a single representative donor 2 the hospital chooses output n to maximize its utility from output 3 while the donor chooses donations d to maximize utility from total hospital output and other goods y the donor behaves altruistically in that he does not use hospitals himself the behavior of hospital patients is not explicitly modeled although their presence will be felt the output and donation decisions are interrelated since the donor likes hospital output and the level of donations affects the hospital s budge get constraint to untangle the endogenous feedback effects between output and donations the problem is described as a two stage sequential game in the first stage the donor decides how much to donate in the second stage the hospital chooses how much output to produce given the previously determined level of donation of course the donor is acutely aware that the hospital s subsequent output decision will affect his utility

collusion delegation and supervision with soft information this paper derives an equivalence principle between organizational forms of supervisory and productive activities we consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent s type in a centralized organization the principal can communicate and contract with both the supervisor and the agent however these two agents can collude against the principal in a decentralized organization the principal only communicates and contracts with the supervisor who in turn sub contracts with the agent we show that the two organizations achieve the same outcome we discuss this equivalence and provide various comparative statics results to assess the e ciency of supervisory structures

on the design of piece rate contracts we characterize the optimal piece rate contract in the canonical moral hazard setting with a wealth constrained risk averse agent the contract is shown to have a simple intuitive characterization in a structured but broad class of settings

ideals versus dollars donors charity managers and government grants this paper demonstrates how changes in untied lump sum government grants or income from unrestricted endowments will affect the behavior of charities operated by managers with strong philosophical or professional commitments an increase in such funds will reduce the charity s accountability to private donors and lower its fund raising activities the grant will not be spent entirely on raising the quantity of output instead it will permit the charity manager to reduce his or her dependence on the costly solicitation of donors who do not completely share the manager s preferences in order to understand nonprofit charities one must recognize both their diversity and the independent role of their managers in furthering this diversity we will miss much of their special character if we view them as mere conduits seeking faithfully to reify the wishes of their contributors in this paper i demonstrate how an increase or a fall in untied lump sum government grants or income from unrestricted endowments will affect the behavior of charities operated by managers with strong philosophical or professional commitments to some service mixes rather than others an increase in such funds will reduce the charity s accountability to private donors and lower its fund raising activities the grant will not be spent entirely on raising

do new brooms sweep clean when and why dismissing a manager increases the subordinates performance abstract if a manager stays in office for a long time he will have learned much about his subordinates thus competition among them will be weak as the manager has made up his mind who is suited best for which position with a new manager the race for favorable tasks is restarted leading subordinates to exert higher effort but for the firm owner the trade off arises that with a new manager effort is larger but the quality of task allocation is worse since information is lost the optimal dismissal policy will be nonmonotonic in the expected heterogeneity of the subordinates abilities

on cross sectional analysis in accounting research abstract this paper examines cross sectional analysis procedures common to many market based accounting research papers both the economic and econometric properties of levels and returns studies are discussed topics covered include the relations between the accounting studies and cash flow valuation models the role of expectations of accounting variables deflators spurious inference risk adjustment and its relation to growth size and leverage residual dependence dependence among explanatory variables and the effect of scale differences across firms major conclusions are that market value is the correct deflator in returns studies and that levels and returns studies are economically but not econometrically equivalent

the role of promotion in inducing specific human capital acquisition workers routinely carry out activities that increase their productivity with their current employer for which they are not directly compensated for example a worker may be asked to develop relationships with clients or shop floor staff or he may develop a better understanding of how his firm operates firmspecific human capital of this type is difficult to quantify so that it is likely to be difficult to directly compensate the worker for its acquisition this paper is concerned with designing compensation schemes for employees to induce them to collect nonverifiable firm specific human capital if firms develop reputations for fairly compensating workers for skill collection the vagueness of these skills may not provide a significant incentive problem i consider the case where firms do not have the opportunity to develop reputations as a result the acquisition of human capital is subject to a dual moral hazard problem first noted in kahn and huberman 1988 first a worker only collects skills if there is a promise of a higher wage if he does so second the employer has an incentive to claim that the worker has not collected these skills even when he in fact has in order to save on wage costs so on the one hand it is difficult to repay the worker after skills are collected as the firm has an incentive to renege however the worker cannot be repaid before collecting skills as he has no subsequent incentive to collect them following the institutional literature i assume that the firm can commit to a labor contract which attaches wages to different tasks the principal purpose of the paper is to show that the firm can use this ability to commit to a wage scale for different tasks to induce a worker to collect firm specific human capital in the presence of this dual moral hazard problem where the worker is rewarded for skill acquisition by promotion to another job assume that a worker can be assigned to one of two jobs d and

work incentives hierarchy and internal labor markets this paper argues that contracts with payment based on a ranking of employee performance can provide performance incentives even under asymmetric information that prevents payment based on individual performance only being enforceable such contracts also fit with five features of labor markets that have aroused considerable interest 1 hierarchical wage structures 2 internal promotion 3 wage rates that rise with seniority and experience more than productivity 4 the variance of earnings increasing with experience and 5 wage rates attached to jobs rather than individuals with differentials set by administrative procedures rather than by reference to external market wages

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

tournaments with gaps a standard tournament contract specifies only tournament prizes if agents performance is measured on a cardinal scale the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize we analyze a tournament with two risk averse agents under unlimited liability the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs if the agents are protected by limited liability the principal sticks to the standard tournament

exemption or taxation for profits of non profits an answer from a model incorporating managerial discretion many non profit organizations engage in bothcharitable and purely commercial activities whereprofits from the latter are used to finance theformer should business income be tax exempted becauseof its cross subsidization function the effects ofexemption on the product mix are analysed using amodel incorporating managerial discretion acrucially different assumption from that of thecurrent literature under given assumptions tax exemption of commercial income emerges as a lessefficient means of supporting the charitable productthan alternative government measures such as anoutput subsidy

discretionary profit in subsidised housing markets in the subsidised housing sector building corporations can use their market power as purchasers to raise output of subsidised housing to a level higher than it is with perfect competition on both sides of the market this holds true if the building society is perfectly x efficient the proposition is not necessarily true if the corporation maximises a utility function in which discretionary profit or organisational slack is an argument the x inefficient building society may set output higher or lower than with perfect competition if the government grants a fixed subsidy per house and tries to constrain x inefficiency by imposing a maximum price this might be an incentive for the building corporation to maintain a planned shortage of subsidised houses however housing shortages will be smaller and welfare possibly greater than it is with perfect competition the existence of a perfectly competitive non subsidised housing sector is for the building corporation an incentive to increase strategically the output of subsidised housing and reduce planned shortages but it does not necessarily eliminate such shortages

the heterogeneous impact of brexit early indications from the ftse abstract the uk s decision to leave the eu is surrounded by several studies simulating its potential effects we take an alternative approach by examining how news of brexit affected expectations as embodied in stock returns using a two stage estimation process while most firms had negative returns following news of the referendum s result with nearly 3 trillion wiped off global markets there was considerable heterogeneity in their changes relative to expectations we show that this heterogeneity can be explained by the firm s global value chain with firms heavily exposed to the eu and uk doing worse in addition we find that firms reliant on imported intermediates also perform worse this however is partially offset via intra firm trade in intermediates when sterling fell relative to host currencies these changes were primarily in the first two trading days and highly persistent understanding these movements gives a better understanding of brexit s potential effects

on the efficiency of least squares regression with security abnormal returns as the dependent variable monte carlo procedures are used to compare the finite sample performance of several estimators that may be used in cross sectional regressions with security abnormal returns as the dependent variable alternative models of event induced increases in stock return variance are examined for the event clustering scenario event clustering implies crosssectional correlation and heteroskedasticity in market model prediction errors violating one of the fundamental ordinary least squares ols assumptions i i d disturbances nonetheless provided that the conditions for asymptotic validity derived by greenwald 1983 are met the ols estimator is well specified in finite samples further for sufficiently large cross sections there is no advantage to several other more complex estimators

the international debt crisis and bank security returns in 1982 this research investigates the reaction of bank security returns to the 20 august 1982 mexican request for the rescheduling of its external debt empirical results show that the reaction of bank stocks was rapid and significantly negative within six days of the published announcem ent prices had adjusted to reflect levels of individual bank exposure which re futes the much longer time impliedin other studies of this event the authors c onclude that the marketreaction was essentially efficient rational and orderly copyright 1987 by ohio state university press

state passage of interstate banking legislation an analysis of firm legislative and economic characteristics abstract forty nine states and the district of columbia enacted legislation reducing interstate banking restrictions between july 1982 and april 1993 for these 50 banking bills deregulation increased the average price of bank stocks returns vary cross sectionally by firm characteristics regulatory features and economic conditions returns are positively related to the characteristics of acquisition targets furthermore returns are positively related to legislative features that increase the bargaining power of potential targets and economic conditions that are likely to encourage bank acquisition these findings are consistent with the relaxation of geographic restrictions increasing activity in the corporate control market

organizational slack in subsidized nonprofit institutions informal objectives of managers next to the formal objective of the organization can be a source of organizational slack or x inefficiency in nonprofit organizations if the organization is subsidized the donor can restrain organizational slack by choosing an appropriate subsidy system four subsidy systems are discussed output input revenue and lump sum subsidy output subsidy reduces slack most the ranking of input subsidy compared with lump sum subsidy depends on the elasticity of demand for output revenue subsidy equals input subsidy changes in the subsidy regime for residential adult educations in the netherlands turn out to have been inconsistent

a prisoner s dilemma model of collusion deterrence abstract we examine a hierarchy formed by a principal a supervisor and an agent wherein the supervisor and the agent can collude we consider a case where collusion free supervisors are not available we demonstrate first that it is easy for the principal to deter collusion by introducing a second supervisor and designing a mechanism similar to the prisoner s dilemma so that the two supervisors control each other since it could prove too costly for the principal to send two supervisors a new question arises whether it would be possible to deter collusion by sending the second supervisor with a probability less than one we find that under reasonable assumptions on the size of rewards and punishments the principal can prevent collusion only by creating a new type of supervisor through sometimes informing the second supervisor of his position

an approach to statistical inference in cross sectional models with security abnormal returns as dependent variable several recent event studies test hypotheses about the association between event related abnormal security returns and firm characteristics using a three step procedure first forecast model parameters are estimated usually parameters of a market model second prediction errors or residuals are computed over an event period third prediction errors are regressed cross sectionally on firm characteristics hypothesized to influence the impact of the event on share values results of these regressions are used to draw inferences about the relation between abnormal returns and firm characteristics researchers who employ three step procedures acknowledge that crosssectional ols regressions lead to valid inferences if the disturbances are iid normal in cross section see for example leftwich 1981 p 23 and lustgarten 1982 p 138 while sufficient assumptions to draw valid inferences from ols regressions are clear these assumptions are violated if there is cross correlation and cross sectional heteroscedasticity in the firm return processes from which the prediction errors are estimated assumptions about the processes generating these prediction

heterogeneous creditors and the market value of bank ldc loan portfolios abstract a standard proposition used in many empirical studies is that the value of an ldc loan does not depend on the identity of the lender i test this proposition using bank securities prices and prices for ldc loans trading in the secondary market i find significant cross sectional differences in the sensitivity of bank stocks to changes in the price of ldc loans differences in sensitivity appear to be related to changes in bank exposure to ldcs i also find evidence consistent with the hypothesis that cds are implicitly insured

cross sectional dependence and problems in inference in market based accounting research this paper provides a framework and some empirical evidence to evaluate the seriousness of problems in inference that arise in stockreturn based studies when the data are cross sectionally dependent the study is motivated on the grounds that statistical procedures designed to address such problems are often infeasible and even when they can be implemented they sometimes introduce other more serious difficulties thus researchers have frequently adopted an approach that ignores the cross sectional dependence e g ordinary least squares ols the objective of this paper is to help identify the contexts in which ignoring the dependence would lead to serious misstatement of significance levels cross sectional dependence in stock returns data is likely to exist when at least some of the returns are sampled from common time periods this would be the case in all studies of the reaction of stock prices to a

partners in giving the crowding in effects of uk government grants abstract this study examines the determinants of voluntary donations to uk charities using empirical specifications that combine error component and simultaneous equations methods in a series of tests we identify the one way fixed effects endogenous representation for government grants as the best empirical model when this endogeneity is taken into account government grants cause significant crowding in for the full sample and the two largest cohorts price coefficients are negative and fund raising coefficients are positive religion charities are net revenue maximizers whereas other charity cohorts fund raise short of net revenue maximization

the brazilian default announcement and the contagion effect hypothesis abstract in this paper we use stocl market data to test several hypotheses regarding possible investor reaction to the february 20 1987 brazilian default both the traditional event study approach and a generalized least squares regression using brazilian exposure as an explanatory variable for abnormal returns are used a sample of 46 bank holding companies all listed on the new york or american srock exchanges is divided into groups of no low and high brazilian exposure we find that the initial stock market reaction to the default represents a rational investor response to new bank specific information however the stock market reaction also reveals that not all relevant information was contained in the disclosure announcement further we find some evidence of a contagion effect related to size

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives

wealth effects of regulatory reform abstract this paper investigates the effect of california s proposition 103 on the market value of publicly traded property and liability insurance companies the passage of this referendum on november 8 1988 moved california from a market oriented to a heavily regulated insurance pricing system during the period surrounding the election the average stock price of insurance companies doing business in california declined by 6 91 the decline is positively related to the proportion of a firm s premiums affected by the referendum and the proportion generated in other states where insurance regulation is likely to change and negatively related to the firm s profitability

collusion and biased tournaments abstract tournaments are vulnerable to collusion this paper finds that biased tournaments can be more effective at preventing collusion than unbiased ones when agents can collude to exert low effort introducing some bias into tournaments generates opposite effects on favored and disfavored agents respective incentives to exert high effort and provides strong incentives for the favored agent to deviate from collusion introducing an adequate degree of bias reduces the principal s incentive cost for preventing collusion however granting excessive bias instead increases the incentive cost we show that the optimal level of bias can be endogenously determined

stock market reaction to financial statement certification by bank holding company ceos in 2002 the sec mandated that the ceos of large publicly traded firms certify the accuracy of their company financial statements the sec s certi fication order provides a natural experiment that gives insight into the question of whether banks are opaque we find that the bhcs subject to the sec s order experienced positive and significant average abnormal returns from certification characteristics associated with greater opaqueness liquid asset holdings information intensive lending and split credit ratings are systematically associated with the size of abnormal returns

standard errors in event studies even if true abnormal returns are uncorrelated estimated abnormal returns are not this paper presents a simple formula for the variance of estimated cumulative abnormal re turns both returns and dummy variable procedures for estimating the standard error correctly taking account of both intertemporal and contemporaneous correlation of esti mated residuals are discussed they are then applied to an event study of post merger performance it is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors

event studies in management research theoretical and empirical issues we examined the use of event studies in management research and found that there was inadequate attention paid to theoretical and research design issues this lack of attention may lead to false in

performance promotion and the peter principle this paper considers why organizations use promotions rather than just monetary bonuses to motivate employees even though this may conflict with efficient assignment of employees to jobs when performance is unverifiable use of promotion reduces the incentive for managers to be affected by influence activities that would blunt the effectiveness of monetary bonuses when employees are risk neutral use of promotion for incentives need not distort assignments when they are risk averse it may sufficient conditions for this are given the distortion may be either to promote more employees than is efficient the peter principle effect or fewer

contests with draws axiomatization and equilibrium we introduce and axiomatize a class of single winner contest success functions that embody the possibility of a draw we then analyze the game of contest that our success functions induce having different prizes delivered in the occurrence of a win and a draw we identify conditions for the existence and uniqueness of a symmetric interior nash equilibrium and show that equilibrium efforts and equilibrium rent dissipation can be larger than in a tullock contest with no possibility of a draw due to increased competition even if the draw prize is null these results suggest that a contest designer may profit from introducing the possibility of a draw finally we show that this approach naturally extends to multiprize contests with multiple draws across different subsets of the set of players jel c72 d72 d74

contests with three or more heterogeneous agents abstract we study monotone equilibrium behavior in contests with observable effort bid where three or more participants have distinct risk attitudes and the monetary value for the prize of each is drawn independently from a distinct distribution these differences can either cause a player to drop out that is always choose zero effort regardless of his valuation or use all or nothing strategies with discontinuous effort choice neither complete drop out nor discontinuous bidding with finitely many gaps is consistent with pure strategy monotone bayesian nash equilibrium in a contest with either ex ante identical players or only two distinct participants

moral hazard with bounded payments we study the moral hazard problem with general constraints on how little or much the agent can be paid as a function of output we provide a characterization and existence result using only very simple methods in the dual problem of minimizing costs for a given effort level a constraint that harms the principal will always result in a contract that pays according to the constraint on some range of outcomes for the case of a simple fixed minimum feasible payment the resultant contract will be option like we show how the strike price and intensity of incentives once the strike price is exceeded vary in the minimum payment and the outside option of the agent when the principal can also choose the effort to induce then even if the constraint harms the principal he may optimally choose a contract that never pays the minimum or maximum we show that this can only occur if the problem without the payment constraints fails a form of concavity

job design with conflicting tasks reconsidered a principal wants two sequential tasks to be performed by wealth constrained agents suppose that there is an outcome externality i e a first stage success can make second stage effort more or less effective if the tasks are conflicting the principal s profit maximizing way to induce high efforts is to hire one agent to perform both tasks so that the prospect to get a larger second stage rent after a first stage success motivates the agent to work hard in the first stage in contrast when there is an effort externality i e first stage effort reduces or increases the probability of a second stage success then the principal prefers to hire two agents whenever the tasks are conflicting

the social role of not for profit organizations hospital provision of charity care during the 1980s the state of new york shifted from a straight block grant to a matching grant method for reimbursing hospitals with the matching rate varying from 0 to 75 percent across years these changes allow estimation of pure income and price effects for hospitals supply of uncompensated care charity and bad debts the price efrect is positive and significant but no income effect was found hospitals in more concentrated markets provide more charity care as do teaching hospitals and the presence of public hospitals in a market reduces private hospitals provision of charity care

pareto optimal redistribution and private charity abstract when private charity exists and is motivated by utility interdependence a non pareto optimal outcome the free rider problem typically arises nevertheless incremental fiscal redistribution cannot achieve a paretian welfare improvement so long as private charity continues at positive levels donors respond to incremental fiscal redistribution by reducing their voluntary contributions by exactly a dollar for every dollar transferred in this way no net transfer is achieved unless incremental fiscal redistribution is pursued to the point where private contributions have been driven to zero alternatively a net transfer may be achieved by fiscal measures which affect donors marginal incentives to donate

ex post unbalanced tournaments tournaments create strong incentives under the assumption that the competition between the agents is balanced if at the outset one agent is stronger than the other the tournament is ex ante unbalanced and incentives break down handicaps can in this case restore incentives in practice competing agents are often overall equally strong but have different sorts of strengths then competition will typically be unbalanced ex post and incentives break down but handicaps cannot be used we show how a simple means introducing the possibility of a tie can often resolve the problem we examine under what conditions incentives are maximized by ties

incentives in lottery contests with draws abstract we investigate the incentive consequences of introducing the possibility of draws into lottery contests equilibrium total effort unambiguously decreases when draws are introduced whereas the equilibrium expected winner s effort increases when the contestants valuations of the prize become sufficiently dispersed