cores of inventory centralization games abstract consider a set of n stores with single item and single period demands assume an option of centralized ordering and inventory with holding and penalty costs only in this case a cooperative inventory centralization game defines allocations of the cost we examine the conditions under which such an inventory centralization game has a nonempty core we prove the existence of nonempty core for demands with symmetric distributions and the existence of nonempty core for joint multivariate normal demand distribution we establish the equivalency of four different nonempty core conditions for the newsboy problem and demonstrate their efficacy for discrete independent and identically distributed iid demands journal of economic literature classification numbers c44 c62 c71

timing problems in contract breach decisions in contracts susceptible to efficient breach each party has an american option to breach and pay damages rather than perform she will repudiate early if the expected decrease in damages liability resulting from her partner s mitigation exceeds the expected value of the terminated contract including the option to breach in the future we show that each party has the incentive to repudiate earlier than socially optimal because expectation damages compensate the nonrepudiating party only for the loss of the completed exchange and not the value of its lost breach option this inefficiency is particularly acute in long term fixed price contracts in which the cost of performance to the promisor and the value to the promisee are volatile and uncorrelated we explore various responses to this problem including vertical integration changes in contract remedies including specific performance flexible price provisions and the capital structure of each party

the newsvendor game has a nonempty core we settle an open conjecture regarding the newsvendor game we prove that its core is always non empty for all possible joint distributions of the random demands we give sufficient conditions under which the core is a singleton or it contains non negative elements

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

future capacity procurements under unknown demand and increasing costs in this paper we study a situation in which a broker must manage the procurement of a short life cycle product as the broker observes demand for the item she learns about the demand process however as is often the case in practice it becomes either more difficult or more expensive to procure the item as the selling season advances thus the broker must trade off higher procurement costs against the benefit of making ordering decisions with better information about demand problems of this type arise for example in the travel industry where a travel agent s cost of procuring airline and hotel reservations increases as the date of a vacation package approaches we develop a newsvendor like characterization of the optimal procurement policy in a numerical analysis we demonstrate how broker procurements tend to cluster just before price increases and how brokers can benefit from explicitly considering the effects of information about demand in their ordering policies

what does reputation really assure the relationship of trademarks to expectations and legal remedies i introduction klein and leffler 1981 and shapiro 1982 1983 have shown that a firm that engages in repeat transactions has an incentive to use the market as distinct from formal legal processes to assure the quality of its product the firm charges a price above salvageable costs of production and invests the premium in reputation trademark capital that it forfeits wholly or in part if it allows quality to fall below the standards it represents to its customers 1 the quality assurance hypothesis seems to be supported by stock market event studies such as those by jarrell and peltzman 1985 and karpoff and lott 1993 which show that product recalls airline crashes deceptive advertising and fraud result in trademark losses the quality assurance hypothesis however does not explain the massive size of these losses which typically are many times the outlays incurred by the firm as a result of the event the law and economics literature on contracts offers an answer to this and related puzzles suggesting that trademark capital does more than assure quality it assures specific performance that is fulfillment of the precise terms of the contract 2 after developing the specific performance hypothesis section ii we show that it is supported by the evidence from event studies furthermore it explains other phenomena not covered by the quality assurance hypothesis including why competitors of firms whose products are recalled lose wealth why some damages such as those in airline crashes intentionally fail to provide full compensation and why firms who sell to other firms also invest in trademark capital section iii we conclude with a summary and a few remarks on the issue of market versus legal forces section iv ii the specific performance hypothesis the quality assurance hypothesis focuses on the problems that arise when the physical characteristics of a commodity are costly to determine even after purchase and sellers warranties and quality representations are costly to enforce because higher quality usually costs more to produce and can be sold at a higher price producers have an incentive to represent their goods as being of higher quality than they really are or having established a reputation to cut quality and costs when consumers observe that the quality of the goods they purchase is lower than they had been led to believe they shift to lower cost lower quality goods whose quality is easier to determine higher quality goods seemingly are driven off the market klein and leffler 1981 hypothesize that a firm that engages in repeat transactions can gain by producing higher quality goods charging a price above salvageable costs of production and investing the premium in firm specific trademark capital the value of this trademark also described as reputation or goodwill is the present value of the expected stream of price premiums misrepresentation causes a reduction in this income stream and a corresponding loss in trademark capital 3 thus trademarks assure quality without a third party to enforce the contract 4 a buyer however is concerned about other characteristics of a transaction besides the physical attributes of the product the expected harm if the seller breaches the contract for example by misrepresenting the product failing to deliver it on time or failing to provide future service and the ability of the legal system to assure full compensation also matter accordingly a seller who engages in repeat transactions has an incentive to provide a bond that assures specific performance rather than just product quality when a breach results in damages that are hard to measure and the legal system does not enforce contracts costlessly the next task therefore is to examine the limitations of the legal system in enforcing contracts and providing compensation in case of breach specific performance and penalty clauses the courts could require contracting parties to provide specific performance

a three stage model for a decentralized distribution system of retailers we present and study a three stage model of a decentralized distribution system consisting ofn retailers each of whom faces a stochastic demand for an identical product in the first stage before the demand is realized each retailer independently orders her initial inventory in the second stage after the demand is realized each retailer decides how much of her residual supply demand she wants to share with the other retailers in the third stage residual inventories are transshipped to meet residual demands and an additional profit is allocated our model is an extension of the two stage model of anupindi et al abz 2001 which implicitly assumes that all residuals enter the transshipment stage we show however that allocation rules in the third stage based on dual solutions which were used in the abz model may induce the retailers to hold back some of their residual supply demand in general we study the effect of implementing various allocations rules in the third stage on the values of the residual supply demand the retailers are willing to share with others in the second stage and the trade off involved in achieving an optimal solution for the corresponding centralized system

uncertainty about uncertainty and delay in bargaining we study a one sided offers bargaining game in which the buyer has private information about the value of the object and the seller has private information about his beliefs about the buyer s valuation we show that this uncertainty about uncertainties dramatically changes the set of outcomes in particular second order beliefs can lead to a delay in reaching agreement even when the seller makes frequent offers we show that not all types of second order beliefs lead to a delay when the buyer assigns positive probability to the seller knowing the buyer s value then delay not only can occur but it must occur for a class of equilibria however in all other cases delay will never occur

coordinating investment production and subcontracting we value the option of subcontracting to improve financial performance and system coordination by analyzing a competitive stochastic investment game with recourse the manufacturer and subcontractor decide separately on their capacity investment levels then demand uncertainty is resolved and both parties have the option to subcontract when deciding on their production and sales we analyze and present outsourcing conditions for three contract types 1 price only contracts where an ex ante transfer price is set for each unit supplied by the subcontractor 2 incomplete contracts where both parties negotiate over the subcontracting transfer and 3 state dependent price only and incomplete contracts for which we show an equivalence result while subcontracting with these three contract types can coordinate production decisions in the supply system only state dependent contracts can eliminate all decentralization costs and coordinate capacity investment decisions the minimally sufficient price only contract that coordinates our supply chain specifies transfer prices for a small number 6 in our model of contingent scenarios our game theoretic model allows the analysis of the role of transfer prices and of the bargaining power of buyer and supplier we find that sometimes firms may be better off leaving some contract parameters unspecified ex ante and agreeing to negotiate ex post also a price focused strategy for managing subcontractors can backfire because a lower transfer price may decrease the manufacturer s profit finally as with financial options the option value of subcontracting increases as markets are more volatile or more negatively correlated

strategic investments trading and pricing under forecast updating this paper considers two independent firms that invest in resources such as capacity or inventory based on imperfect market forecasts as time progresses and new information becomes available the firms update their forecasts and have the option to trade their resources the trade contract is determined as the bargaining equilibrium or alternatively as the price equilibrium assuming a fairly general form of the profit functions we characterize the nash equilibrium investment levels which are first best under the price equilibrium trade contract but not under the bargaining equilibrium trade contract to gain additional insights we then focus on firms that face stochastic demand functions with constant price elasticity and have contingent pricing power assuming a general forecast evolution process we characterize the impact of the option to trade and the firms cooperation on equilibrium investments expected prices profits and consumer surplus finally to study the main driving forces of trading we employ a well established and empirically tested forecast updating model in which the forecast evolution process follows a two dimensional geometric brownian motion under this model we prove that the equilibrium investments expected prices profits and consumer surplus are nondecreasing in the quality and timing of forecast revisions in market variability and in foreign exchange volatility but are nonincreasing in market correlation

procurement and renegotiation parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information the issue of the parties investment in the relationship before renegotiation is analyzed in a simple two period procurement model the firm invests in the first period it then learns its production cost and the sponsor learns its value for the project williamson s underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm s investment is not observable by the sponsor the introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued the role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed last it is shown that if investment is observable by the sponsor andthus may become a joint decision variable the two parties may choose to under or overinvest

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

decentralizing cross functional decisions coordination through internal markets a firm faces many problems that are inherently cross functional to solve them successfully requires the coordinated actions of many functional representatives acting in a decentralized setting functional managers however respond to their own individual incentives and may consequently fail to maximize the overall profits of the firm we examine this issue in a setting in which the output of early actions limits the range of later actions and we propose an incentive scheme that allows the system to be successfully decentralized our mechanism is based on linear transfer prices for the intermediate output that are implemented through an internal market a market maker buys the output from one function and sells it to another she is not obliged to sell at the same price at which she bought and may set prices solely to provide incentives we illustrate the flexibility of the scheme by applying it to several models in the operations management literature

the equity premium in brock s asset pricing model abstract in this paper we combine dynamic programming methods with projection methods for solving stochastic growth models as an application of these methods we solve brock s asset pricing model with a variety of parameterizations we focused on finding parameterizations that result in an equity premium that is high relative to the variation in consumption we show both analytically and numerically that the equity premium can be higher in a production based asset pricing model than it is in the consumption based asset pricing model even when the real output level is the same in both models

sell the plant the impact of contract manufacturing on innovation capacity and profitability in the electronics industry and others original equipment manufacturers oems are selling their production facilities to contract manufacturers cms the cms achieve high capacity utilization through pooling supplying many different oems meanwhile the oems focus on innovation research and development product design and marketing we examine how this change in industry structure affects investment in innovation and capacity and thus profitability in particular innovation is noncontractible so oems will invest less in innovation than is ideal for the industry as a whole hence although contract manufacturing improves capacity utilization it may reduce the profitability of the industry as a whole by weakening the incentives for innovation contract manufacturing is not the only means to achieve capacity pooling alternatively the oems can pool capacity with one another through supply contracts or a joint venture this may result in underinvestment or overinvestment in innovation and capacity but always increases profitability we find that the sale of production facilities to a cm improves profitability for the industry as a whole if and only if oems are subsequently in a strong bargaining position vis a vis the cm if the oems are indeed very strong the gain from pooling capacity via contract manufacturing is maximized in industries with moderate cost of capacity

cooperation between multiple news vendors with transshipments we study a situation with n retailers each of them facing a news vendor problem i e selling to customers over a finite period of time product with a short life cycle such as fashion groups of retailers might improve their expected joint profit by coordinating their orders followed by transshipments after demand realization is known we analyze these situations by defining a cooperative game called a general news vendor game for such a situation with n retailers we concentrate on whether it makes sense to cooperate by studying properties of general news vendor games our main result states that general news vendor games have non empty cores

efficient reliance and damage measures for breach of contract this article considers a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to prepare to sell it it is assumed that postbreach bargaining is possible and carried out in a cooperative fashion and that buyers and sellers form expectations about the outcome of such bargaining in a specific way without enforceable contracts the potential appropriability of specific rents results in inefficiently low levels of investment three damage measures commonly used to enforce contracts are shown to produce inefficiently high levels of investment and to be pareto ranked from best to worst as follows specific performance expectation damages and reliance damages

implications of breach remedy and renegotiation design for innovation and capacity amanufacturer writes supply contracts with n buyers then the buyers invest in innovation and the manufacturer builds capacity finally demand is realized and the firms renegotiate the supply contracts to achieve an efficient allocation of capacity among the buyers the court remedy for breach of contract specific performance versus expectation damages affects how the firms share the gain from renegotiation and hence how the firms make investments ex ante the firms may also engage in renegotiation design inserting simple clauses into the supply contract to shape the outcome of renegotiation for example when a buyer grants a financial hostage to the manufacturer or is charged a per diem penalty for delay in bargaining the manufacturer captures the gain from renegotiation tradable options which grant buyers the right to trade capacity without intervention from the manufacturer return the gain from renegotiation to the buyers this paper proves that under surprisingly general conditions the firms can coordinate their investments with the simplest of supply contracts fixed quantity contracts this may require renegotiation design and certainly requires that the firms understand the breach remedy and set their contract parameters accordingly

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

signalling and renegotiation in contractual relationships this paper examines how the possibility of renegotiation affects contractual outcomes in signaling games when an infinite number of rounds of renegotiations are allowed before contracts are executed the main results of the paper are 1 contracts may still contain distortions 2 the popular efficient separating equilibrium outcome is never an equilibrium outcome with renegotiation 3 incentive compatibility constraints can be generalized to incorporate renegotiation 4 equilibrium outcomes can be separating and nevertheless depend on the uninformed player s prior and 5 renegotiation in signaling games may lead to outcomes similar to equilibrium outcomes of screening games in which multiple contract purchases are allowed copyright 1993 by the econometric society

the timing of discretionary bonuses effort signals and reciprocity abstract in a real effort experiment we investigate the relationship between reciprocity and the timing of discretionary bonuses in a two period principal agent manager worker setting we vary the timing of the manager s bonus decision in order to examine two main channels reward and trust through which discretionary bonuses may operate average worker performance improves when bonus decisions are made between the two periods since both channels are simultaneously active first period output significantly increases as workers attempt to signal their trustworthiness to managers when the bonus decision is made upfront or at the end average output is no different than in a baseline setting without the bonus mechanism furthermore output after a bonus is not paid decreases substantially consistent with negative reciprocity our main findings are reinforced by using time spent on the available real leisure activity as an alternative measure of subjects effort