optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

repeated partnership games with imperfect monitoring and no discounting in a partnership game each player s utility depends on the other players actions through a commonly observed consequence e g output profit price which is itself a function of the players actions and an exogenous stochastic environment if a partnership game is repeated infinitely and each player s payoff in the infinite game supergame is the long run average of his expected one period utilities then efficient combinations of one period actions can be sustained as nash equilibria of the supergame even if the players cannot observe other players actions or information but can only observe the resulting consequences

the housing market s of san diego this paper uses an assignment model to understand the cross section of house prices within a metro area movers demand for housing is derived from a lifecycle problem with credit market frictions equilibrium house prices adjust to assign houses that dier by quality to movers who dier by age income and wealth to quantify the model we measure distributions of house prices house qualities and mover characteristics from micro data on san diego county during the 2000s boom the main result is that cheaper credit for poor households was a major driver of prices especially at the low end of the market

income distribution and housing prices an assignment model approach we present a framework for studying the relation between the distributions of income and house prices that is based on an assignment model where households are heterogeneous by incomes and houses by quality each household owns one house and wishes to live in one house thus everyone is potentially both a buyer and a seller in equilibrium the distribution of prices depends on both distributions in a tractable but nontrivial manner we show how the impact of increased income inequality on house prices depends on the shapes of the distributions and can be inferred from data in our empirical application we find that increased income inequality between 1998 and 2007 had a negative impact on average house prices in 6 us metropolitan areas jel d31 r21

residential income segregation a behavioral model of the housing market abstract we represent the functioning of the housing market and study the relation between income segregation income inequality and house prices by introducing a spatial agent based model abm differently from traditional models in urban economics we explicitly specify the behavior of buyers and sellers and the price formation mechanism buyers who differ by income select among heterogeneous neighborhoods using a probabilistic model of residential choice sellers employ an aspiration level heuristic to set their reservation offer price prices are determined through a continuous double auction we first provide an approximate analytical solution of the abm shedding light on the structure of the model and on the effect of the parameters we then simulate the abm and find that i a more unequal income distribution lowers the prices globally but implies stronger segregation ii a spike in demand in one part of the city increases the prices all over the city iii subsidies are more efficient than taxes in fostering social mixing

unique implementation of incentive contracts with many agents in this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions we distinguish two cases i when actions are mutually observable among agents ii when actions are not observable at all in i there is a mechanism in which the first best arises as a unique perfect equilibrium in ii we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules however we prove that the principal can use these optimal sharing rules as a starting point and construct a multi stage mechanism that has a unique second best perfect bayesian equilibrium

house allocation with transfers we consider the shapley scarf house allocation problem where monetary transfers are allowed we characterize the class of mechanisms that are strategy proof ex post individually rational ex post budget balanced and collusion proof in these mechanisms the price of each object is fixed in advance and the objects are reallocated according to the unique core assignment of the shapley scarf economy associated with the prices the special case in which all prices are zero is the core mechanism studied by shapley and scarf our mechanisms are compelling alternatives to the groves mechanisms which satisfy neither budget balance nor our condition of collusion proofness journal of economic literature classification numbers c71 c78 d71 d78 d89

are tournaments optimal over piece rates under limited liability for the principal a highly acclaimed result is that tournaments are superior to piece rates when the agents are risk averse and their production activities are subject to a relatively large common shock the reason is that tournaments allow the principal to trade insurance for lower income to the agents our analysis shows that this celebrated result does not carry over to the case when a limited liability bankruptcy constraint limits the payments the principal can make provided that the liquidation value of the firm is sufficiently small this finding has important implications for the vast number of limited liability firms even though limited liability becomes an issue for different ranges of liquidation values under the two schemes tournaments are still superior when the liquidation value of the firm is intermediate or large even though the limited liability constraint is still binding for intermediate values surprisingly uncertainty in the price of output strengthens the need for tournaments by expanding the range of liquidation values over which tournaments are dominant because price uncertainty introduces additional bankruptcy risk these findings provide insight into policy implications in the contracting out of services by state and local governments in procurement in rent seeking contests and in tournaments used by hmos

rent seeking and international commodity agreements the case of coffee although quotas are known to create opportunities for rent seeking such effects have not been examined in the context of international commodity agreements we hypothesize that export quotas imposed by the international coffee agreement ica by creating quota rents in coffee exporting countries encourage directly unproductive dup behavior by domestic groups seeking to capture such rents such behavior can cause substantial economic waste and undesirably alter income distribution the allocational and distributional effects of even moderate rent seeking behavior could be sufficient to transform a coffee exporting country s expected welfare gain from ica quotas into a welfare loss an understanding of these effects and a measure of their magnitude is crucial to any evaluation of the ica the classic analyses of international commodity agreements have focused on how such agreements affect the commodity terms of trade and export revenue instability 2 surprisingly little work exists on the welfare effects of commodity agreements within exporting countries particularly on the income distribution effects or dup activity the agreements might engender 3 the papers by g mcmahon and h dick and colleagues are partial exceptions 4 mcmahon shows that kenya s response to ica quotas the government banned new coffee plantings in an effort to control output was inefficient and had regressive income effects dick and colleagues compare the effects of buffer stocks and export quotas on a domestic economy using a general equilibrium model and find that quotas are better because they shift resources from

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

why and when do governments initiate public enterprise reform initiating public enterprise reform is a complex decision influenced by economic factors as well as the ideological biases and personalities of political leaders nevertheless the use of a contracting framework yields important generalizations about what drives the decision this article argues that the decision depends fundamentally on the potential efficiency gains from the reform and its associated transactions costs costs arise because of asymmetries in information and opportunism problems that usually plague contract negotiations the article identifies observable variables that may affect either the potential gains or the transactions costs uses them to construct a simple probit decision making model and tests the model using data from fifteen developing countries over a twenty year period

dynamic risk sharing with two sided moral hazard abstract a group of risk averse agents repeatedly produce a perishable consumption good individual outputs are observable but efforts are not the contracting problem admits a recursive formulation and the optimal value function is the fixed point of a contraction mapping when the agents can be punished to the full extent in a single period every continuation contract of an optimal contract is itself optimal the marginal utility ratio between one agent and another is a submartingale the results imply that it is in general important to restrict an agent whose moral hazard constraint is binding from saving through another agent within the risk sharing group limited commitment and long run implications of optimal contracting are also examined

incentive contracts in two sided moral hazards with multiple agents abstract the paper studies a contracting problem in which a principal enters in two sided moral hazards withnindependent agents there are no technological or informational linkages among thenagency problems despite this independence optimal incentive schemes essentially eliminate the principal s incentive problem when team size is large enough reputation like effects appear in a static setting through an improved aggregation of information about the actions of the principal one implication of this result is that it is generally suboptimal to require an agent s compensation to depend only on his own outcome another implication is the existence of purely informational economies of scale to increasing team size thus the concentration of otherwise unrelated transactions in a single firm creates wealth through a more efficient use of information about the principal s actions the paper also shows that extremely simple statistical contracts are approximately optimal in large teams the outcome of such contracts is observationally indistinguishable from standard principal agent contracts this provides a theoretical justification for using standard principal agent contracts in environments that involve two sided hazard in a fundamental way journal of economic literatureclassification numbers d21 d23

double sided moral hazard and the nature of share contracts contractual arrangements involving revenue profit sharing are often based on fairly simple often linear rules in addition in many contexts these contracts are not finely adjusted to the particular circumstances of individual agents or markets nor do they vary over time to the extent current theories based on optimal contracting suggest they should we develop a simple model of such revenue or profit sharing arrangements based on double sided moral hazard and show that this model can account for many of these stylized facts more specifically the model shows that linear contracts can be optimal and that benefits from customizing terms can in some cases be quite limited if not zero

the state and industrial strategy abstract the debate about the role of the state in promoting industrial growth in developing economies is reviewed we begin with the ideas of the early development economists of the 1950s and 1960s then take up two waves of neoclassical criticism respectively emphasizing the primacy of the market and the lack of autonomy and competence of the developmentalist state and sketch the elements of a countercritique the fact that all successfully developing economies apply industrial strategies incorporating institutional change is emphasized and boundary conditions and lessons from experience which delimit sensible strategic choices are pointed out

controls corruption and competitive rent seeking in ldcs the paper establishes that equality between the average return of factors engaged in rent seeking and those in productive activity does not generally imply equality between the efficiency losses from rent seeking and the rents themselves such equality is often assumed in the literature a stylized cge model is used to illustrate the sensitivity of the estimated losses to the specification of the rent seeking mechanism it also illustrates the interdependence between the effects of taxes or subsidies and rent seeking for example when rent seeking involves post secondary graduates competing for government jobs which yield incomes from corruption the efficiency losses are affected by subsidies to education

the economics of special interest politics the case of the tariff this paper investigates the interaction of politicians and special interest lobbies the goal is to model the equilibrium levels of redistributive policies such as taxes subsidies tariffs and regulatory decisions the model is applied throughout to the setting of tariffs by contributing to political campaigns special interest lobbies generate economic returns higher tariffs generate revenue for import competing industries through higher product prices higher milk support prices raise dairy farm income and so forth the lobby invests to maximize these net economic returns in evaluating their chances of election politicians weigh the favorable effects of special interest money against the unfavorable association with the lobby and the social cost of the redistributive policy section i explores the lobby s problem it describes a formalization of mancur olson s discussion of the voluntary provision of public goods and optimal contributions by lobbies to political campaigns section ii describes determination of the equilibrium tariff positions of each politician in a political campaign

do tournaments solve the two sided moral hazard problem abstract the paper analyzes the optimality of relative performance evaluation via two part piece rate tournaments in incentive contracting with multiple agents and two sided moral hazard if the agents are risk averse it is shown that a tournament is optimal only when the following conditions hold i there is common uncertainty inflicted on the activities of the agents that is not contingent on their actions but can be contingent on the principal s action ii the principal sufficiently saves in transaction costs by employing a tournament iii the number of agents is sufficiently large then the feedback effect of using a tournament to monitor the agents is that the principal s moral hazard problem is relaxed when the principal takes a single action it can also be relaxed when the principal can vary her actions with the agents but there are economies of scale in her activity absent common uncertainty the optimum scheme is shown to be a fixed performance standard rather than a tournament but if the agents are risk neutral a tournament can still be optimal provided that ii and iii hold

the short run comparative statics of a rental housing market abstract this paper examines the short run effects of changes in exogenous variables including several government policies on the schedule relating market equilibrium rent to quality level the basic model differs from sweeney econometrica 42 147 167 1974 by use of a bid rent closed city approach rather than a supply and demand partially open city approach the mathematics changes completely the analytics simplify and the results change somewhat housing is treated as a durable quality differentiated good but frictional forces and the multidimensionality of the housing package are ignored the exception is an extension to a monocentric city context so that housing units vary in both quality and location

classical statistics as a theory of incentives abstract the use of likelihood ratio contracts in principal agent situations is common they are known to be optimal for the principal in complete information situations although they do not take explicit account of the strategic interaction between principal and agent this paper extends the comparison between bayesian nash equilibrium and likelihood ratio contracts to incomplete information environments it is shown that likelihood ratio contracts may be equilibrium contracts when the principal is ignorant of the agent s costs but that they typically are not when the agent has private information about the effects of his action

urban economic theory land use and city size this book examines the economic reasons why people choose to live where they live and develops through analysis of the bid rent function a unified theory of urban land use and city size the first part of the book explicates the basic theory of urban land use and optimal city size residential location behavior of households is examined in a microeconomic framework and equilibrium and optimal patterns of residential land use are discussed the corresponding equilibrium and optimal city sizes are studied in a variety of contexts part two extends the classical theories of von thunen and alonso with the addition of externality factors such as local public goods crowding and congestion and racial prejudice the rigorous mathematical approach and theoretical treatment of the material make urban economic theory of interest to researchers in urban economics location theory urban geography and urban planning

the determinants and welfare implications of us workers diverging location choices by skill 1980 2000 abstract from 1980 to 2000 the rise in the us college high school graduate wage gap coincided with increased geographic sorting as college graduates concentrated in high wage high rent cities this paper estimates a structural spatial equilibrium model to determine causes and welfare consequences of this increased skill sorting while local labor demand changes fundamentally caused the increased skill sorting it was further fueled by endogenous increases in amenities within higher skill cities changes in cities wages rents and endogenous amenities increased inequality between high school and college graduates by more than suggested by the increase in the college wage gap alone jel d31 i26 j24 j31 j61 r23

rent seeking and the two track price system in china a simple general equilibrium model is specified to analyse the impact on the chinese economy of the introduction of a two track price system on to a centrally planned economy it is shown that national income will rise as a result together with a fall in the costs associated with rent seeking some estimates of welfare gains and costs of rent seeking are provided for seven commodities within a partial equilibrium framework they are shown to be dependent on the price elasticities of demand and supply the latter determine the ratio of plan to market prices and the share of plan in total output

why has house price dispersion gone up we calibrate a dynamic general equilibrium island model to investigate the 30 year increase in the level of house prices and their dispersion across u s metropolitan areas the model is based on two main assumptions households o w in and out metropolitan areas in response to local productivity shocks and the housing supply cannot adjust instantly because of technological and regulatory constraints the calibration reveals that the observed tightening of housing supply regulation cannot quantitatively account for the rise in the level and dispersion of house prices in equilibrium workers o w out of tightly regulated towards less regulated metropolitan areas undoing most of the price impact of local supply restrictions in contrast the observed increase in wage dispersion across metropolitan areas does create the observed increase in the level and dispersion of house prices workers o w towards exceptionally productive metropolitan areas and drive house prices up the calibration also suggests that the welfare eects of housing supply regulation are large when wages become more dispersed

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

the wage distribution in a model of the assignment of skills to jobs this paper discusses a general equilibrium model of the assignment of heterogeneous workers to heterogeneous jobs both jobs and workers are measured along a continuous one dimensional scale the c

spatial asset pricing a first step people choose where to live and how much to invest in housing traditionally the first decision has been the domain of spatial economics while the second has been analyzed in finance spatial asset pricing is an attempt to combine equilibrium concepts from both disciplines in the finance context we show how spatial decisions can be framed as an expanded portfolio problem within spatial economics we identify the consequences of hedging motives for location decisions we characterize a number of observable deviations from standard predictions in finance e g the definition of the relevant market portfolio for the pricing of risk includes homeownership rates and in spatial economics e g hedging considerations and the pricing of risk affect the geographic allocation of human capital

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

efficiency in partnerships we provide the necessary and sufficient condition for a partnership to be able to sustain efficiency when the output is stochastic when limited liability is imposed we show that only the level of the average liability of the partnership is important the individual levels of liability are irrelevant however the allocation of the total liability among the partners is crucial when additional conditions such as neutrality or individual rationality are imposed

maintaining a reputation when strategies are imperfectly observed this paper studies reputation effects in games with a single long run player whose choice of stage game strategy is imperfectly observed by his opponents we obtain lower and upper bounds on the long run player s payoff in any nash equilibrium of the game if the long run player s stage game strategy is statistically identified by the observed outcomes then for generic payoffs the upper and lower bounds both converge as the discount factor tends to 1 to the long run player s stackelberg payoff which is the most he could obtain by publicly committing himself to any strategy

housing over time and over the life cycle a structural estimation we estimate a structural model of optimal life cycle housing and nonhousing con sumption in the presence of labor income and house price uncertainties the model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost our estimationts the cross sectional and time series household wealth and housing proles from the panel study of income dynamics 1984 to 2005 reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0 487 the low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost we then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011 we show that the responses depend importantly on the housing adjustment cost and the elasticity of sub stitution between housing and nonhousing consumption in particular compared with the benchmark the impact of the shocks on homeownership rates is reduced but the impact on nonhousing consumption is magnied when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable

income taxes property values and migration we consider the effects of income redistribution when people can migrate from one country to another and when land within each country is heterogeneous taxes related to income can then affect property values and can induce migration which further affects property values we show that under these conditions a utilitarian government should never equalize after tax incomes if migration is impossible it may even transfer income from the poor to the rich reducing the rents earned by absentee landlords the redistributive tax on the rich may be higher or lower when the rich can migrate than when they cannot a rawlsian government in the absence of mobility will equalize after tax incomes under mobility rawlsian governments cut their taxes if and only if the relative pre tax income of the poor is sufficiently low