the dynamics of the leverage cycle abstract we present a simple agent based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a value at risk constraint based on historical observations of asset prices the value at risk constraint implies that when perceived risk is low leverage is high and vice versa a phenomenon that has been dubbed pro cyclical leverage we show that this leads to endogenous irregular oscillations in which gradual increases in stock prices and leverage are followed by drastic market collapses i e a leverage cycle this phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle we introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro cyclical to countercyclical leverage when the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point while there is always a leverage ceiling above which the dynamics are unstable countercyclical leverage policies can be used to raise the ceiling we also study the impact on leverage cycles of direct temporal control of the bank s riskiness via the bank s required value at risk quantile under such a rule the regulator relaxes the value at risk quantile following a negative stock price shock and tightens it following a positive shock while such a policy rule can reduce the amplitude of leverage cycles its effectiveness is highly dependent on the choice of parameters finally we investigate fixed limits on leverage and show how they can control the leverage cycle

electricity fuel contracting relationships with coal and gas suppliers the growth of competition in the electricity generation industry along with changes in natural gas and coal regulation have led to renewed interest in the nature of efficient transactional arrangements for procuring coal and gas this study examines the evolution of major influences on the incentives for choosing among different transactional forms we find that the asset specificity hypothesis continues to be an important explanation for transactional arrangements in fuel acquisition the degree of asset specificity in a fuel supply arrangement is a function of technological factors of inherent market characteristics and of regulatory rules the expanding role of more flexible fuel supply arrangements in gas and to a lesser extent coal markets is a natural response to current regulatory and technological trends

taxation and international migration of superstars evidence from the european football market we analyze the effects of top tax rates on international migration of football players in 14 european countries since 1985 both country case studies and multinomial regressions show evidence of strong mobility responses to tax rates with an elasticity of the number of foreign domestic players to the net of tax rate around one around 0 15 we also find evidence of sorting effects low taxes attract highability players who displace low ability players and displacement effects low taxes on foreigners displace domestic players those results can be rationalized in a simple model of migration and taxation with rigid labor demand jel f22 h24 h31 j44 j61 l83

asset specificity and the fear of exploitation if asset specificity renders the investing party dependent ex post why would the ex ante willingness to make relationship specific investments vary we show how specific investments generate both positive and counter negative cooperative incentives we also observe the influences of trust and time horizon on these incentives which are aggregated to derive the specific investments effect sie our result suggests that while the fear of exploitation increases proportionally to the magnitude of specific investments and the attendant quasi rents it grows exponentially with the deterioration of inter personal trust and or inter temporal time horizon contexts

price adjustment in long term contracts the case of coal in two recent papers i examined the effects of relationship specific investment on the duration of contracts negotiated between electric utilities and coal suppliers that work demonstrated that when relationshipspecific investment is important for a cost minimizing supply relationship contracts are frequently utilized that specify ex ante the terms and conditions of trade over many future years in this article i examine the characteristics of the price adjustment provisions specified in these long term coal contracts i utilize a sample of about 250 coal contracts to analyze the structure of formal price adjustment provisions in coal contracts in order to determine the factors that affect initial negotiated contract prices and to examine actual transaction price behavior over time there has been much recent theoretical work as well as some related empirical work that has focused on the benefits of long term contracts when relationship specific investments are important 2 there has also been some theoretical work that focuses on the contractual arrangements that may be chosen to mitigate opportunism problems and guard against

contract renewal under uncertainty abstract the incentive to adjust prices is considered from a bilateral perspective in a setting where changes in outside opportunities drive the incentive to renew contracts and costs preclude continuous renewal a model encompassing several contract forms is formulated and the existence of an equilibrium to the bilateral renewal game is established prices display inertia and the incumbent contract is found to be more resistant to changes in outside opportunities the larger the costs of contract renewal the variability of outside opportunities and the lower the discount rate the model is shown to match a number of empirical observations on contracts

multitask agency and contract choice an empirical exploration the multitask agency problem is examined empirically using contracts between private integrated oil companies and their service stations in the city of vancouver the empirical tests assess how variations in the characteristics of one task affect the choice of agent compensation scheme for another comparative statics from the model predict that higher powered incentives will be offered for gasoline sales when the secondary activity is not highly complementary with gasoline retailing where complementarity is measured by the cross price demand effect the covariation in uncertainty and the degree of effort substitutability copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

price formats for branded components in industrial markets an integration of transaction cost economics and the resource based view in this paper we propose an approach to show how the capability based perspective of the resource based view of the firm can be integrated with the comparative governance approach of transaction cost economics to shed light on governance issues in interfirm relationships we argue that transacting parties create value not only through the employment of partner specific investment and coordination activities but also through the employment of heterogeneous firm specific resources that each firm brings to the relationship and that in turn governance structures reflect a discriminating alignment with these two distinct forms of value creating activities and resources our thesis is empirically tested in the context of industrial original equipment manufacturers employing branded component contracts with independent component vendors specifically we investigate the conditions under which the price terms for branded components are agreed upon more fixed ex ante versus negotiated more flexible ex post our results offer two insights first the chosen governance form reflects a trade off between safeguarding and adaptation motives even among parties engaged in cooperative relationships second valuable firm specific resources that preexist outside of the exchange relationship are at stake in these cooperative yet contractually incomplete relationships they together with relationship specific investments and activities have a significant impact on governance design

pretia ex machina prices and process in long term contracts aimong the primary motives for writing contracts identified in both the law and economics literatures is the desire to protect against the hazards inherent to exchange where one or both parties have invested in reliance or relationship specific assets in support of the transaction because such investments have a higher value in their intended than in their next best use parties have an incentive to engage in haggling or other forms of opportunism in hopes of influencing the distribution of the resulting quasi rents contracts promote efficiency by securing the distribution of those rents ex ante thereby avoiding costly repetitive bargaining over the terms of trade and reducing the risk for each party of relying on the performance of the other in reality this description of the role and functioning of contracting is oversimplified as a number of legal and economic scholars have emphasized contracts are not the precise mechanically enforced documents often encountered in economic theory 2 indeed contracts are extremely

the impact of risk regulation on price dynamics most financial risk regulations assume that asset returns are exogenous where risk is estimated from historical data this assumption fails to take into account the feedback effect of trading decisions on prices we investigate the consequences of risk constrained trading by means of simulations of a general equilibrium model with a value at risk constraint and compare the results to the case when risk constraints are not present prices are lower on average in the presence of risk regulation while volatility is higher risk regulation may have the perverse effect of exacerbating price fluctuations

altruism jealousy and the theory of optimal non linear taxation abstract this paper studies optimal non linear taxes in a world in which there is altruism and jealousy a formula for optimal marginal tax rates is derived which turns out to be a simple and intuitively appealing extension of a result due to mirrlees the paper shows that in this sort of economy all of optimal tax theory s general results either no longer hold or need not hold and it sets out appropriate modifications to standard tax rules

take or pay contract robustness a three step story told by the brazil bolivia gas case abstract neo institutional economics nei has long shown that take or pay top long term contracts provide a robust framework for safeguarding the interests of both upstream and downstream parties in the gas industry the case of gas trade between brazil and bolivia presents an opportunity to re examine empirically and to review the robust nature of the top framework over time this case reveals that the positions of the contractors actually change giving rise to a veritable lifecycle of the contractual arrangement such a contract can be seen to span three successive phases the first phase of the contract cycle begins when it is signed allowing the investments to begin the second phase starts when investments have been completed and the actual trade in gas begins the third phase of the contract cycle comes when the increasing flow of gas comes close to saturating capacity and the volume levels for downstream market volume have been reached these three contract phases are thus distinguished by how robust the alignment of the parties interests is the added value of the paper is then both empirical and analytical the case study provides a brand new lifecycle analysis of the performance of top long term contracting into an nei framework

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

relativity mobility and optimal nonlinear income taxation in an open economy abstract recent evidence suggests that globalization has reduced the barriers to international labor mobility and induced more cross country social comparisons in an open economy with tax driven migration and consumption externalities relativity we derive an optimal tax formula that subsumes existing ones obtained under a maximin social objective and additively separable utility and sign the second best mirrleesian marginal tax rates for all skill levels we establish the thresholds of the elasticity and level of migration to determine when relativity and inequality act as complements or substitutes in shaping the optimal top tax rate under both nash and stackelberg tax competition if the migration probability of top income workers is approximately 50 numerical calculation using parameter estimates from empirical studies shows that the country with labor inflow outflow implements over 10 lower higher marginal tax rates than suggested by the autarky equilibrium of kanbur and tuomala 2013

transaction costs and contractual incompleteness the case of electricite de france abstract this paper explores the incompleteness of inter firm contracts through the lens of recent developments in transaction cost economics we built a non truncated contract database representing all the relationships of electricite de france edf with its coal carriers over the period 1977 1997 we tested and corroborated most propositions derived from transaction cost theory relating contractual incompleteness to transaction characteristics even when we considered the complete set of the theory s propositions by endogeneizing the asset specificity at stake in transactions to our knowledge this kind of test has never been conducted before

the strategic alliance of the biotechnology firm this article applies the relevant theories of firm organization and inter firm relationships in the high tech environment to explain the institutional reasons that firms choose between internal or external approaches particularly this study tries to understand to what extent and in what way strategic alliances have impacts on individual firms organizational structure financial structure and firms activities also it tries to find out what type of firms tend to benefit most from alliances and thus use more inter firm agreements the theoretical findings are that due to liquidity constraint and asymmetric information reasons young research intensive firms need to use more alliances to survive in the fast changing high technology industry the empirical analysis employs 3 year panel data and finds that the results are consistent with the theoretical predictions

transactional characteristics institutional environment and joint venture contracts this study examines how transactional characteristics and the institutional environment influence contractual governance for international joint ventures ijvs unlike previous studies that view joint venture contractual governance as a unidimensional construct clause specificity thus causing a debate upon whether ijv contracts should be more specific contractual governance herein is defined as a three dimensional construct that includes the extent to which contractual terms are clearly specified term specificity possible contingencies are accounted for contingency adaptability and joint venture parties are legally bound to the contract contractual obligatoriness our analysis of ijvs in china suggests that term specificity and contractual obligatoriness increase when the proprietariness of resources to be invested in the ijv or the incompleteness of the host country s legal system increase contractual obligatoriness appears to be an increasing function of economic exposure and environmental volatility whereas contingency adaptability in a contract rises when interparty dependency investment uncertainty and knowledge proprietariness intensify or when environmental hazards escalate these results suggest that an ijv contract if structured multidimensionally as above can curtail opportunism and guide venture evolution at the same time these contractual dimensions should not be prefixed but properly aligned with transactional and institutional characteristics this alignment has strong implications in reducing transaction costs and spurring ijv evolution in the complex and volatile institutional environment

an empirical investigation of procurement contract structures this article presents a model of procurement contracting with asymmetric cost information and investigates whether two of the model s predictions are consistent with actual contracts between hospitals and california s medicaid program the article first tests for the presence of a fixed price payment region where medicaid s payments are independent of hospitals actual but unobservable production costs and then tests whether the size of the fixed price region depends upon expectations about hospitals costs to conduct these tests the article must first estimate hospitals unobservable costs attributable to medicaid patients the article finds evidence of a fixed price region but cannot confirm that the size of the fixed price region depends upon expectations about hospitals costs

the market for tradable renewable energy credits abstract as states seek to foster the development of renewable energy resources some have introduced renewable portfolio standards rpss which require retailers of electricity to derive a specified amount of their energy supply from renewable energy resources rpss in texas arizona wisconsin and nevada allow for or require the use of tradable renewable energy credits the price of such credits is expected to reflect the cost premium for generating electricity from renewable resources relative to the market price of conventionally generated electricity using the market to trade renewable energy credits exposes buyers and sellers to risks of imperfect information poor performance and opportunism these risks can be managed through contractual arrangements and regulatory requirements pertaining to property rights in credits pricing term of the contract and assurance of performance

optimal marginal and average income taxation under maxi min using the mirrlees optimal income tax model with a maxi min social welfare function we derive conditions for a decreasing marginal tax rate throughout the skill distribution a strictly concave tax function in income and a single peaked average tax schedule with additive preferences and a constant labor supply elasticity marginal tax rates are decreasing below the modal skill level and will also decrease above the mode if aggregate skills are non decreasing with the skill level in this case and with a bounded skill distribution or with a constant hazard rate the tax function is strictly concave in income and the average tax rate single peaked when quasilinear utility functions apply in either consumption or leisure under fairly mild restrictions on the truncated or untruncated distribution function marginal tax rates are decreasing in skill and the average tax profile is single peaked the distribution of skills has the same quantitative influence for either case of quasilinearity these results continue to hold when there is bunching at the bottom due to a binding non negativity constraint we also illustrate how relaxing the assumption of constant elasticity of labor supply generally used in the literature modifies the results

specific investments flexible adaptation and requirement contracts i introduction in bilateral procurement relationships ex post opportunism may cause underinvestment in relationship specific investments as is shown by klein et al 1978 and williamson 1985 in such situations long term contracts can help to mitigate this so called hold up problem in a world of positive transaction costs long term contracts are necessarily incomplete 1 an inflexible incomplete contract may lead to ex post maladaptation in the presence of uncertainty as in williamson 1985 therefore a transaction cost economizing contract needs to provide both incentives for efficient relationship specific investments and flexibility for efficient adaptation 2 in a simple hold up model with contractible cost related variables i show that efficient adaptation and investments can be achieved through a requirement contract which gives the buyer the right to decide on how much to buy ex post and contains a price provision with a two part tariff structure including a fixed component and a unit charge that may vary with quantities and cost related variables this result provides a formal explanation of contractual arrangements observed in vertical procurement relationships formally my result can be viewed as an extension of williamson s 1983 hostage model in which only the seller makes investments the procurement quantity is fixed and there is no cost uncertainty my result is also related to previous formal studies on the take or pay contracts as in hubbard and weiner 1986 crocker and masten 1988 and masten 1988 in a simpler model without cost uncertainty and specific investments they show that a unilateral options contract with a take or pay feature gives the buyer the right incentives to make efficient quantity decisions particularly crocker and masten 1988 and masten 1988 emphasize the take or pay contract s ability to induce efficient adaptation another related paper is by bos 1996 who shows that when the production cost is contractible a target cost pricing contract that requires the seller to share a portion of the cost overrun can achieve the first best outcome the rest of the article is organized as follows section ii provides the background of the issue studied section iii lays out the model and characterizes the first best benchmark section iv derives the optimal contract section v concludes ii background a growing recent literature has attempted to find contractual solutions to the hold up problem most of the papers in the literature use hart and moore s 1988 classical model or its variation in that model there are two risk neutral firms a buyer and a seller of an intermediate good each firm can before production make a relationship specific investment to enhance the future value of the good in the case of the buyer or to reduce the production cost of the good in the case of the seller neither the investments nor the value nor the cost of the intermediate good are contractible ex ante in the absence of a contract there will generally be underinvestment some of the contractual solutions to the underinvestment problem rely on complex direct revelation mechanisms that utilize private or unverifiable information to implement efficient investments as in for example rogerson 1992 and maskin and tirole 1999 but they are not robust to renegotiation several articles have focused on contracts that make explicit use of ex post renegotiation to achieve efficiency particularly aghion et al 1994 chung 1991 and edlin and reichelstein 1996 show that simple fixed price fixed quantity contracts may suffice to achieve the first best outcome such contracts are in general not efficient ex post but as long as mutually beneficial renegotiation of the initial contract is allowed both ex ante and ex post efficiency can be achieved either by a properly designed renegotiation game as in aghion et al

impact of value at risk models on market stability abstract financial institutions around the world use value at risk var models to manage their market risk and calculate their capital requirements under basel accords var models as any other risk management system are meant to keep financial institutions out of trouble by among other things guiding investment decisions within established risk limits so that the viability of a business is not put unduly at risk in a sharp market downturn however some researchers have warned that the widespread use of var models creates negative externalities in financial markets as it can feed market instability and result in what has been called endogenous risk that is risk caused and amplified by the system itself rather than being the result of an exogenous shock this paper aims at analyzing the potential of var systems to amplify market disturbances with an agent based model of fundamentalist and technical traders which manage their risk with a simple var model and must reduce their positions when the risk of their portfolio goes above a given threshold we analyse the impact of the widespread use of var systems on different financial instability indicators and confirm that var models may induce a particular price dynamics that rises market volatility these dynamics which we have called var cycles take place when a sufficient number of traders reach their var limit and are forced to simultaneously reduce their portfolio the reductions cause a sudden price movement raise volatility and force even more traders to liquidate part of their positions the model shows that market is more prone to suffer var cycles when investors use a short term horizon to calculate asset volatility or a not too extreme value for their risk threshold

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

structure and price adjustments in long term contracts the case of coking coal trade in the asian pacific market abstract much of the trade in resource goods takes place within a framework of long term contracts in this paper contract structure and price adjustments are analysed by using samples of long term coking coal supply contracts between japanese importers and coal mines in australia canada and the usa long term contracts have been widely used in japan s coking coal imports although the contracts signed in recent years have been shortened and are more flexible the empirical analyses show that while in general contract prices have tracked market prices japan s coking coal import prices have been considerably stabilized by using long term contracts

retail contracting theory and practice we summarize a number of regularities that arise in the empirical literature on contractual relationships between manufacturers and their exclusive resellers we do this using studies of traditional and business format franchise relationships as well as studies of salesforce integration decisions some of the patterns that we uncover are consistent with a standard incentive cum insurance theory of organization while others are not we brie y review some theoretical extensions that seem promising in terms of reconciling seeming con icts between theory and practice i introduction manufacturers of retail products must decide whether to sell their products to consumers themselves vertical integration or to sell via independent retailers vertical separation when manufacturers do not perform the sales function internally but want exclusive retailers they usually choose some form of franchising 1 many theories attempt to explain the choice of retail organizational form moreover a considerable body of empirical evidence concerning this choice is accumulating we attempt to evaluate this econometric evidence and relate it to the theories to accomplish this task we assess studies of franchising arrangements as well as studies of sales force organization in industrial settings the paper is organized as follows in the next section we highlight a number of regularities that arise in the empirical literature on retail contracting in particular we nd that i risk is positively related to the use of high powered incentives vertical separation ii the importance of the agent s eiort in production is positively related to the use of high powered incentives

contract renegotiation and rent re distribution who gets raked over the coals policy shocks affect the rent distribution in long term contracts which can lead to such contracts being renegotiated we seek an understanding of what aspects of contract design in the face of a substantial policy shock affect the propensity to renegotiate we test our hypotheses using data on u s coal contracts after the policy shock of the 1990 clean air act amendments contracts are divided into two categories those that were renegotiated following the shock and those that were not characteristics of the contract are used to explain whether or not the contract was ultimately renegotiated results provide guidance on rent re distribution and contract renegotiation more generally and are applicable to contemporary policy issues such as climate change legislation

what do facilitating practices facilitate an empirical investigation of most favored nation clauses in natural gas contracts long term contracts often include most favored nation clauses mfns which are nondiscrimination guarantees that obligate a buyer or seller to treat all trading partners symmetrically in pricing decisions recent theoretical work has shown that such clauses can facilitate tacit collusion by increasing the cost of selective price changes aimed at attracting new business an alternative view is that mfns serve to facilitate efficient price adjustment in extended exchange relationships we test these competing hypotheses using data from long term natural gas contracts many of which employ mfns our conclusion is that the pattern of mfn adoption in conjunction with the structure of the nondiscrimination regions and the parallels with other nonstrategic price escalation provisions lends strong support to the efficiency rationale

regulation and contract design the impact of relationship specific investment a primary explanation for variation in contract structure is the extent to which contracting parties make investments specific to their transaction investment decisions are typically endogenous in contract choice however frustrating attempts at causal verification i analyze the impact of a major environmental regulation the clean air act amendment of 1990 on coal procurement strategies of u s utilities i exploit a key feature of the amendment s design to define a difference in difference model that is arguably less susceptible to endogeneity concerns i find wide support for the theoretical prediction reduced specificity leads to shorter length fixed price contracts

the structure of payments as a way to alleviate contractual hazards in international technology licensing this article proposes an empirical model in which the option of choosing between royalties fixed payments or a combination of the two is made to mitigate contractual hazards in licensing contracts we examine licensing contracts between spanish and foreign firms during the 1960s and early 1970s using a new data source of 925 contracts the link between patenting and licensing is also analyzed the work provides evidence to support the hypothesis that the moral hazard problem truly influences the type of payment established in arm s length contracts when there is an important technological gap between unaffiliated firms this study also shows that the payment chosen depends on the size of the licensee firm copyright 2009 the author 2009 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

contractual flexibility rent seeking and renegotiation design an empirical analysis of information technology outsourcing contracts this paper examines renegotiation design in contracts for outsourced information technology it services whereas prior literature in information systems has highlighted the likelihood of ex post rent seeking engendered by renegotiation we build upon literature on incomplete contracts to posit that renegotiation can be pareto improving by incorporating contingencies revealed ex post research on contract renegotiation has been hampered by two sets of challenges the lack of appropriate data and empirical challenges in identification we circumvent this problem both by appropriate data collection and by employing an identification strategy to address alternate causal explanations we propose a measure pareto improving amendments to assess renegotiation outcomes that enhance the value from outsourcing by hazard equilibration and by incorporating learning using a unique sample of 141 it outsourcing contracts we examine the role of decision rights delineated ex ante in enabling pareto improving amendments and in resolving the trade off between adaptation and rent seeking we find that flexibility provisions termination for convenience rights and contractual rights whereby vendors are granted rights to reuse know how are associated with pareto improving amendments the results are robust to potential endogeneity of contractual provisions when parties have feasible foresight and to the possibility of adverse selection in the sample we also examine alternate explanations from the literature on contractual breach implications for practitioners and researchers are discussed this paper was accepted by sandra slaughter information systems

interfirm cooperation in strategic relationships the role of formal contract in this paper we use a large database of more than 3 700 strategic relationships in force between french firms in 2003 to study the way they achieve cooperation we find that cooperation is enhanced by a partner s reputation and the perceived balance of the relationship our results also suggest that while formal contracts have a negative impact on ex post cooperation when relationships are simple contracts are an enhancing factor of cooperative behaviors as soon as the intrinsic hazards of the relationship require higher ex ante contractual safeguards to secure agreements as a result formal contracts can on the one hand have a pernicious effect on the willingness of firms to implement cooperative behaviors and on the other and under precise circumstances appear a prerequisite allowing the emergence of ex post interfirm cooperation

should public policy respond to positional externalities abstract a nice suit is one that compares favorably with those worn by others in the same local environment more generally a positional good is one whose utility depends strongly on how it compares with others in the same category 1 a positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated 2 for example if some job candidates begin wearing expensive custom tailored suits a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers from any individual job seeker s point of view the best response might be to match the higher expenditures of others lest her chances of landing the job fall but this outcome may be inefficient since when all spend more each candidate s probability of success remains unchanged all may agree that some form of collective restraint on expenditure would be useful in such cases however it is often impractical to negotiate private solutions do positional externalities then become legitimate objects of public policy concern in attempting to answer this question i employ the classical libertarian criterion put forth by john stuart mill 3 who wrote the state may not legitimately constrain any citizen s freedom of action except to prevent harm to others i argue that many positional externalities appear to meet mill s test causing not just negative feelings but also large and tangible economic costs to others who are ill equipped to avoid them i also discuss an unintrusive policy remedy for positional externalities one modeled after the use of effluent charges to curb environmental pollution the paper is organized as follows section 1 notes the deep similarity between the conditions that give rise to positional arms races and those that give rise to conventional military arms races section 2 follows with a review of evidence concerning the strength of concerns about relative position section 3 describes some of the tangible economic costs that people experience as a result of positional externalities arising from such concerns section 4 takes up the question of whether collective action directed against positional externalities is consistent with respect for individual rights section 5 describes how a progressive consumption tax could neutralize many of the most costly effects of positional externalities

hedging in coal contracts under the acid rain program tradable permit schemes introduce uncertainty into the cost of regulatory compliance due to the permits uncertain price regulated firms can hedge this uncertainty through their contracts for fuel procurement data on coal contracts are used to estimate how the option not to be delivered higher sulfur coal is priced results show that under a tradable permit scheme coal prices are reduced for an increase in the sulfur bound controlling for reductions in price due to higher delivered sulfur content jel q48 q53

evolving traders and the business school with genetic programming a new architecture of the agent based artificial stock market in this paper we propose a new architecture to study arti cial stock markets this architecture rests on a mechanism called school which is a procedure to map the phenotype to the genotype or in plain english to uncover the secret of success we propose an agent based model of school and consider school as an evolving population driven by single population gp sgp the architecture also takes into consideration traders search behavior by simulated annealing traders search density can be connected to psychological factors such as peer pressure or economic factors such as the standard of living this market architecture was then implemented in a standard arti cial stock market our econometric study of the resultant arti cial time series evidences that the return series is independently and identically distributed iid and hence supports the e cient market hypothesis emh what is interesting though is that this iid series was generated by traders who do not believe in the emh at all in fact our study indicates

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

who compares to whom the anatomy of income comparisons in europe this article provides unprecedented direct evidence from large scale survey data on both the intensity how much and direction to whom of income comparisons income comparisons are considered to be at least somewhat important by three quarters of europeans they are associated with both lower levels of subjective well being and a greater demand for income redistribution the rich compare less and are happier than average when they do which latter is consistent with relative income theory with respect to the direction of comparisons colleagues are the most frequently cited reference group those who compare to colleagues are happier than those who compare to other benchmarks

the price dynamics of common trading strategies a deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices this paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies showing how they amplify noise induce structure in prices and cause phenomena such as excess and clustered volatility

institutional constraints and organizational changes the case of the british rail reform this paper analyzes how institutional constraints determine organizational choices and investments decisions more precisely we examine how private parties adjust when policymakers impose a mode of organization with no or very little consideration for some major characteristics of the transactions that arrangement is intended to support our analysis uses original data related to the reform of the british rail industry notwithstanding their specific aspects the problems raised by the radical transformation of this sector in the mid 1990s carry important lessons about what happens when a misaligned arrangement is implemented in a context that requires interfirm coordination

ronald coase and methodology ronald coase wrote two great theoretical articles that earned him the nobel prize the nature of the firm in 1937 and the problem of social cost in 1960 he also wrote many articles dealing with the methodology of economics often in the setting of a discussion of a particular economist such as adam smith or alfred marshall the methodological articles will be my particular focus here

looking for a theory of the firm future challenges in this paper we present the main developments of the theories of the firm rooted in coase s coase r h 1937 the nature of the firm economica new series 4 386 405 seminal article we show that the two important topics of the nature and boundaries of the firm as well as the internal organization of the firm give place to essential contributions we present those contributions and their limits and then their possible developments finally we introduce the papers of this issue

the quantity flexibility contract and supplier customer incentives consider a supply chain consisting of two independent agents a supplier e g a manufacturer and its customer e g a retailer the latter in turn serving an uncertain market demand to reconcile manufacturing procurement time lags with a need for timely response to the market such supply chains often must commit resources to production quantities based on forecasted rather than realized demand the customer typically provides a planning forecast of its intended purchase which does not entail commitment benefiting from overproduction while not bearing the immediate costs the customer has incentive to initially overforecast before eventually purchasing a lesser quantity the supplier must in turn anticipate such behavior in its production quantity decision this individually rational behavior results in an inefficient supply chain this paper models the incentives of the two parties identifying causes of inefficiency and suggesting remedies particular attention is given to the quantity flexibility qf contract which couples the customer s commitment to purchase no less than a certain percentage below the forecast with the supplier s guarantee to deliver up to a certain percentage above under certain conditions this method can allocate the costs of market demand uncertainty so as to lead the individually motivated supplier and customer to the systemwide optimal outcome we characterize the implications of qf contracts for the behavior and performance of both parties and the supply chain as a whole

why hold ups occur the self enforcing range of contractual relationships one of my most enjoyable intellectual experiences was working with armen alchian on the klein crawford and alchian 1978 hold up paper in this paper i extend the basic framework presented in that paper pointing out what i now consider to be its shortcomings and providing insights into the nature of hold ups and the form of contracts chosen by transactors to avoid hold ups the major analytical extension entails combining hold up analysis with my work on private enforcement because private enforcement capital is limited and written contract terms are necessarily imperfect transactors must optimally combine court enforced written terms together with privately enforced unwritten terms to define what i call the self enforcing range of their contractual relationship hold ups occur when unanticipated events place the contractual relationship outside the self enforcing range this probabilistic framework where transactors enter contractual relationships knowing that a hold up may take place but believing that the expected gains from trade outweigh the expected rent dissipating costs associated with the hold up risk is shown to have important implications for understanding the structure of contracts adopted by transactors in the marketplace i why do hold ups occur i begin with a simple example that illustrates the basic economic forces involved in a hold up assume that a builder constructs a house on a piece of land the builder does not own but rather only leases short term after the initial land lease expires the landowner could hold up the builder by raising the land rent to reflect the costs of moving the house to another lot this example illustrates all the hold up factors emphasized in klein crawford and alchian a the builder has made an investment that is highly specific to a particular piece of land and b the landowner has taken advantage of the incompleteness of the contract that governs the relationship in particular the fact that the lease does not cover future years to c expropriate the quasi rents on the builder s specific investment the obvious question is why anything like this would ever occur that is why would someone be so naive as to build a house on land for which they had only a short term lease our primary goal in klein crawford and alchian was not to explain the existence of hold ups but rather the institutions adopted by transactors to avoid hold ups for example we would expect that builders anticipating a potential hold up problem would decide to purchase the land or at least to sign a long term ground lease before starting construction however we do present some examples in the paper of hold ups that actually occurred the implicit reason we give for the occurrence of these hold ups is transactor ignorance apparently transactors are not always smart enough to choose the contractual arrangement that would eliminate the hold up problem oliver williamson provides a similar but much more explicit answer to the question of why hold ups occur when defining opportunism he states by opportunism i mean self interest seeking with guile this includes but is scarcely limited to more blatant forms such as lying stealing and cheating opportunism more often involves subtle forms of deceit more generally opportunism refers to the incomplete or distorted disclosure of information especially to calculated efforts to mislead distort obfuscate or otherwise confuse 1 for example the hold up may have occurred in our illustrative house construction example because the landowner deceived the builder with a low up front land rental price and vague promises about the future relying on the ability of one transactor to take advantage of the naivete or ignorance of another transactor is a highly unsatisfactory way to explain the incidence of hold ups simple examples of deception such as a builder constructing a house on land that is only rented short term rarely if ever occur

formal contracts in the presence of relational enforcement mechanisms evidence from technology development projects formal contracting addresses the moral hazard problems inherent in interfirm deals via explicit terms designed to achieve incentive alignment alternatively when firms expect to interact repeatedly relational mechanisms may achieve similar results without the associated costs however as we now know from a growing body of theoretical and empirical work the resulting intuition that relational mechanisms will be substituted for formal ones whenever possible does not generally hold the extent to which firms substitute relational mechanisms for formal ones in the presence of repeated interaction is an empirical question that forms the basis of this paper we study a sample of 52 joint technology development contracts in the telecommunications and microelectronics industries and devise a coding scheme to allow empirical comparison of contract terms counter to the above intuition but consistent with recent research we find that a firm s contracts are more detailed and more likely to include penalties when it engages in frequent deals whether with the same or different partners our results suggest complementarity between formal and relational contracts and have implications for optimal contracting particularly in high technology sectors