name your own price at priceline com strategic bidding and lockout periods a buyer suggests prices to n sellers in a time period and buys from the seller who accepts the bid first the number of bidding rounds is determined by how frequently the buyer can make an offer we show that with no limit on the frequency and without discounting the price path is either kept flat initially with large jumps at the end or increasing steadily over time which class of path occurs in equilibrium depends on the buyer s trade off between committing to a price ceiling versus finely screening the sellers costs with discounting limiting the number of rounds mitigates the delay caused by the reluctance to raise bids in the first class of equilibrium and therefore can benefit the buyer this result suggests why in reality bargaining parties often take measures to make their offers rigid and consequently force themselves to make fewer offers copyright oxford university press

managerial bargaining power in the determination of compensation contracts and corporate investment this paper considers the design of managerial compensation contracts and their impact on corporate investment decisions and the managerial effort decision the model relates the compensation scheme to outside share ownership and managerial bargaining position using the methods of mechanism design under asymmetric information a shift in favor of effort is documented in the case where managerial bargaining strength is weak while a shift toward more use of capital investment results from strong managerial bargaining power the model distinguishes managerial equity holdings from contingent compensation contracts our results are related to the empirical literature on pay performance sensitivities

adverse selection commitment and renegotiation extension to and evidence from insurance markets with asymmetric information full commitment to long term contracts may permit markets to approach first best allocations however commitment can be undermined by opportunistic behavior notably renegotiation we reexamine commitment in insurance markets we present an alternative model which extends laffont and tirole s procurement model to address uncertainty and competition which involves semipooling in the first period followed by separation this and competing models e g single period models and no commitment models have different predictions concerning temporal patterns of insurer profitability a test using california data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks

investor valuation of the abandonment option abstract we investigate whether investors price the option to abandon a firm at its exit value theory prices this real option as an american put with both a stochastic strike price exit value and a stochastic value of the underlying security the value of cash flows the empirical implications are that firm value increases in exit value after controlling for expected going concern cash flows and that more generalizable assets produce more abandonment option value using discounted earnings forecasts to proxy for expected cash flows and prior literature to categorize asset generalizability we find strong support for the predictions of abandonment option theory

imports domestic production and transnational vertical integration a theoretical note suppose a developing country has the choice of importing cars i or producing them at home in a subsidiary s of a transnational company or in a domestic firm under a licensing l contract from a transnational which ties the import of components from the latter if the criterion of national benefit is given by consumer surplus under i or s and by consumer surplus plus the profits of the domestic firm under l we compare the benefits from the alternative regimes i s or l under different market structure assumptions in most cases the regime s seems to dominate the conclusions are then modified by pointing to factors excluded from the basic model

entry strategies for multinational enterprises and host countries abstract a multinational enterprise mne has a number of investment strategies to enter into a foreign market such as foreign direct investment fdi joint venture jv exclusive licensing el and others in contrast a host government also has the choice to introduce a suitable entry strategy into its local market with the objective of maximizing its tax revenue or national social welfare in this paper we explore the optimal strategies for not only a mne but also a host country

optimal strategies for general price quality decision models of new products with learning production costs abstract the question of product quality permeates every level of business and is becoming crucial for the survival of modern manufacturing firms in automotive and high tech industries in this paper we deal with the optimal price and quality policies for the introduction of a new product on the supply side the firm wants to determine the unit price and quality level over time given that unit cost declines along a learning curve and increases if quality is made greater on the demand side dynamic demand is related to price and quality as well as to cumulative sales which represent diffusion and saturation effects we will model this problem in a general framework that includes several previous results as special cases by applying the maximum principle we will derive the optimal price and quality policies and discover the interactions between these two major strategic marketing instruments and the diffusion process several fundamental theoretical results will be established for the model under certain specified conditions higher prices do imply higher quality and under other conditions the optimal price declines over time while the product quality improves to illustrate these results the theoretical results are applied to two specific cases the first one is a simple nonseparable demand growth function in price and quality the other is a separable demand function of price and quality

optimal contracts under adverse selection and moral hazard a continuous time approach this article presents a continuous time agency model in the presence of adverse selection and moral hazard with a risk averse agent and a risk neutral principal under the model setup we show that the optimal controls are constant over time and thus the optimal menu consists of contracts that are linear in the final outcome we also show that when a moral hazard problem adds to an adverse selection problem the monotonicity condition well known in the pure adverse selection literature needs to be modified to ensure the incentive compatibility for information revelation the model is applied to a few managerial compensation problems involving managerial project selection and capital budgeting decisions we argue that in the third best world the relationship between the volatility of the outcome and the sensitivity of the contract depends on interactions between the managerial cost and the firm s production functions contrary to conventional wisdom sometimes the higher the volatility the higher the sensitivity of the contract the firm receiving good news sometimes chooses safer projects or invests less than it does with bad news we also examine the effects of the observability of the volatility on corporate investment decisions copyright 2005 oxford university press

price and quality competition under adverse selection market organization and efficiency firms compete with prices and qualities in markets where consumers have heterogeneous preferences and cost characteristics consumers demand two goods which can be supplied jointly or separately by firms we consider two strategy regimes for firms uniform price quality pairs and screening price quality menus for each regime we compare the equilibria under integration each firm supplying both goods and separation each firm supplying one good integrating and separating markets change quality efficiency and welfare the theory illustrates phenomena such as the carveout of mental health and substance abuse coverage from general health insurance and creaming for low cost students in locales with school choices copyright 2003 by the rand corporation

developing successful trust based international exchange relationships trust is a central construct in relationship marketing yet the literature provides mixed empirical evidence on the trust performance linkage also there is limited research on how to build trusting international buyer seller relations we develop a comprehensive model integrating performance enhancing mechanisms and antecedent processes of trust in import export relationships our survey results from importers trading with overseas manufacturers suggest that existing levels of trust have a positive effect on relationship performance outcomes achieved 1 year later importantly trust takes on greater importance in enhancing performance under conditions of high interdependence whereas in circumstances of low interdependence trust has no discernible effect the findings also indicate that interfirm psychic distance internal uncertainty and exporter transaction specific assets and opportunism are related to importer trust implications for academics and practitioners are addressed

regulatory risk vertical integration and upstream investment abstract we investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors regulatory risk reflects uncertainty about the regulator s commitment to a regulatory policy that promotes the regulated firm s noncontractible investment we show that when the regulator sets the regulatory policy after the vertical industry structure has been established some degree of regulatory risk is ex ante socially beneficial regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost this occurs for moderate costs of high investment and firms small risk aversion our analysis sheds new light on some relevant empirical patterns in vertically related markets

menus of price quantity contracts for inducing the truth in environmental regulation abstract many authors have proposed mechanisms to induce regulated polluting firms to truthfully reveal their private information this paper proposes an alternative scheme in which the regulator offers each firm a menu of linear price quantity contracts faced with this menu each firm s dominant strategy is to truthfully report its private information and self select the contract that is ex post efficient the proposed menu schedule that is more elastic than the firm s residual marginal damage function engenders a positive quantity effect thereby counterbalancing the firm s incentive to misreport prompted by the linearity of price due to its built in price quantity structure the scheme performs as designed regardless of the elasticities of marginal damage and demand functions

contracting with imperfect commitment and noisy communication abstract this paper provides new analytical tools for studying principal agent problems with adverse selection and limited commitment by allowing the principal to use general communication devices we overcome the literature s common but overly restrictive focus on one shot direct communication in addition general communication devices solve two fundamental problems of contracting with imperfect commitment first they allow us to identify the local downward incentive constraints as the relevant ones if the agent s preferences satisfy a single crossing property second we show how one may restrict the cardinality of the message spaces of the communication device an example illustrates our arguments and the suboptimality of one shot direct communication

trust across borders we make the case for fresh approaches to examine the role of trust in international collaborations based on the idea that not only do the levels of trust differ across international borders but also both the nature of trust and the institutional and cultural support for trust can vary across different national contexts collaboration partners from different countries are therefore likely to bring either symmetric or asymmetric conceptions of trust to the business relationship we develop a model and propositions linking symmetry and asymmetry in the institutional and cultural support for trust in international collaborations with the degree of partner interdependence and identify implications for governance and trust building investments we conclude with some suggestions for research that incorporates trust asymmetries between partners

comparative statics of the optimal dynamic incentive contract abstract each period a firm must carry out an indivisible project the cost of which depends on the firm s constant efficiency and its variable level of effort only the cost is observed by the regulator who has to choose the incentive scheme the optimal dynamic mechanism is derived under possible commitment of the regulator over time then under non commitment it is shown that there are four types of continuation equilibria also the profile of effort levels is compared to the commitment case finally some numerical comparative statics is performed and it is shown that all types of equilibria can be optimal

the ratchet effect and the coordination of production in the absence of rent extraction valuable to offset the cost these net gains may help explain why the ratchet has been observed in situations as diverse as managerial reward systems in the soviet union and salesman bonus arrangements in capitalist countries

languages and earnings management abstract we predict that managers of firms in countries where languages do not require speakers to grammatically mark future events perceive future consequences of earnings management to be more imminent and therefore they are less likely to engage in earnings management using data from 38 countries we find that accrual based earnings management and real earnings management are less prevalent where there is weaker time disassociation in the language our study is the first to examine the relation between the grammatical structure of languages and financial reporting characteristics and it extends the literature on the effect of informal institutions on corporate actions

the impact of export strategy on export sales performance export sales are an important route to growth for the small to medium sized firm this article reports the results of an extensive empirical study of the export strategies of a large sample of high technology electronics firms and the performance results of adopting alternate export strategies six strategy scenarios were identified the results show that the types of foreign markets selected segmentation strategies and product strategies all have a pronounced impact on export sales and export growth the best performers a group of firms called the world marketers and representing 13 5 of the sample achieved a dramatic 188 annual growth in exports and exported 52 5 of their output the profiles of firms that elected each strategy scenario were determined also

people s opium religion and economic attitudes since max weber there has been an active debate on the impact of religion on people s economic attitudes much of the existing evidence however is based on cross country studies in which this impact is confounded by differences in other institutional factors we use the worldvalues surveys to id entify the relationship between intensity of religious beliefs and economic attitudes controlling for country fixed effects we study several economic attitudes towardcooperation the government working women legal rules thriftiness andthe market economy we also distinguish across religious denominations differentiating on whether a religion is dominant in a country we find that on average religious beliefs are associated with good economic attitudes where good is defined as conducive to higher per capita income andgrowth yet religious people tendto be more racist andless favorable with respect to working women these effects differ across religious denominations overall we find that christian religions are more positively associatedwith attitudes conducive to economic growth r 2003 elsevier science b v all rights reserved jel classification a1 e0 n4 z1

oligopoly models for optimal advertising when production costs obey a learning curve business policy questions frequently involve competitive encounters among several different firms oligopoly theory in economics was devised to answer similar questions but its results so far are largely confined to cases of monopoly one firm duopoly two firms and many firms wheat farmers the cases with n firms where 3 n 10 are of great interest to business policy but are rarely treated in the economics literature because of their extreme difficulty the natural mathematical model for studying such questions is the theory of differential games originally devised by r isaacs isaacs r 1975 differential games robert e krieger publishing co huntington new york originally published by john wiley sons new york 1965 for pursuer evader games later it was extended by j case case j h 1979 economics and the competitive process new york university press new york to nonzero sum differential games for application to questions of economic competition the problem of characterizing an optimal advertising policy over time is an important question in the field of marketing it is especially important during the period of the introduction of a new product and it is also during this time that the production learning curve phenomenon is most pronounced in this paper we study oligopoly models which combine elements of bass s demand growth model bass f m 1969 a new product growth model for consumer durables management sci 15 january 215 227 the vidale wolfe vidale m l h b wolfe 1957 an operations research study of sales response to advertising oper res 5 370 381 and ozga ozga s 1960 imperfect markets through lack of knowledge quart j econom 74 29 52 advertising models with linear or quadratic costs and the production learning curve hirschmann w p 1964 profit from the learning curve harvard bus rev 42 january february 125 139 the boston consulting group 1972 perspectives on experience the boston consulting group boston in the monopoly case n 1 the optimal advertising function is derived by applying green s theorem in the duopoly n 2 and triopoly n 3 cases we use discrete differential game models and find nash equilibrium solutions in each of these models the form of the optimal policy is easy to find but because of the complicated nature of the resulting differential equations closed form solutions for the optimal state and control trajectories are impossible to find hence we use a computer to compute these optimal trajectories and plot them for various parameter settings because 13n parameters must be chosen to define a model with n players a complete search of the parameter space is clearly impossible we content ourselves in this paper with presenting computer plots of four different interesting encounters of the triopoly model our methods can be extended to work just as well for competitive encounters among n players where 1 n 10 we believe that in this paper we have opened up the way to studying oligopoly theory with a small number of participants and under widely varying conditions although the lack of closed form solutions may disappoint some readers we feel that the easy availability of graphical solutions is a more than adequate substitute

the determinants of trust in supplier automaker relations in the us japan and korea a retrospective this retrospective on the dyer and chu 2000 article the determinants of trust in supplier automaker relationships in the us japan and korea attempts to accomplish a number of objectives first the paper examines the key findings and impact of the original paper and provides additional insights behind the original research notably we further clarify why interpersonal trust between organizational boundary spanners does not translate into inter organizational trust and why inter organizational trust is often based upon processes second the paper briefly discusses relevant research on inter firm trust since 2000 noting that research has shown the contingent value of trust and notably that it is more important when asset specificity and uncertainty are high third we discuss what has happened in the automotive industry over the past 15 years with regard to trust in supplier buyer relationships we show a correlation between automaker trustworthiness and automaker market share performance and suggest a causal link since some automakers e g hyundai kia have been increasing trust with suppliers and then improving market performance finally the retrospective discusses opportunities for future research on the topic of trust in inter organizational relationships

monopoly regulation under asymmetric information prices versus quantities we compare two instruments to regulate a monopoly that has private information about its demand or costs fixing either the price or quantity for each instrument we consider sophisticated screening and simple bunching mechanisms we characterize the optimal mechanisms and compare their welfare performance with unknown demand and increasing marginal costs the sophisticated price mechanism dominates that of quantity whereas the sophisticated quantity mechanism may prevail when marginal costs decrease the simple price mechanism dominates that of quantity when marginal costs decrease but the opposite may arise if marginal costs increase with unknown costs both instruments are equivalent

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

intertemporal non linear pricing this paper examines the impact of variations in temporal parameters in a non linear pricing model the two period model being analysed allows a rather general characterization of the price functions and of the impact of changes in temporal parameters such as the social rate of time discount the marginal costs in the two periods the interest rate and the growth rates in demand comparative statics results are derived under the assumption that price functions satisfy a strong optimality condition examples are given tarification non lineaire dans un cadre intertemporel dans cet article l auteur analyse l impact des variations dans les parametres temporels d un modele de tarification non lineaire on considere un modele i deux penodes qui permet une caracterisation assez generale des fonctions de prix et des impacts de variations dans les parametres temporels tels que le taux social de preference temporelle les cofuts marginaux dans les deux periodes le taux d interet et les taux de croissance de la demande l auteur derive des resultats de statique comparative en posant comme hypothese que les fonctions de prix satisfont une condition d optimalite forte des exemples sont donnes the present paper deals with the problem of designing price functions that would maximize social welfare under the constraint that firms operating under increasing returns and or large fixed costs break even there is an abundant literature on this general problem it is not my intention here to survey this literature but only to mention a few seminal papers namely ramsey 1927 coase 1946 boiteux 1956 baumol and bradford 1970 guesnerie 1980 and laffont and tirole 1984 the specific purpose of the present i am grateful to maurice marchand to the participants in the economic theory workshop queen s university the ceremade seminar universite de paris ix and the mathematical economics seminar at core universit6 de louvain for their comments the current version was written in the spring of 1985 during my visit to the universite de toulouse and was subsequently revised to meet the very helpful comments of two anonymous referees financial support from sshrc is gratefully acknowledged canadian journal of economics revue canadienne d economique xix no 3 august aofit 1986 printed in canada imprim6 au canada 0008 4085 86 539 555 1 50 canadian economics association this content downloaded from 207 46 13 57 on sat 10 sep 2016 05 43 49 utc all use subject to http about jstor org terms

lost in translation the effect of cultural values on mergers around the world we find strong evidence that three key dimensions of national culture trust hierarchy and individualism affect merger volume and synergy gains the volume of cross border mergers is lower when countries are more culturally distant in addition greater cultural distance in trust and individualism leads to lower combined announcement returns these findings are robust to year and country level fixed effects time varying country pair and deal level variables as well as instrumental variables for cultural differences based on genetic and somatic differences the results are the first large scale evidence that cultural differences have substantial impacts on multiple aspects of cross border mergers

an imperfect competition theory of the mne the multinational firm as the central actor in international business has been studied extensively across countries and intensively within companies no single theoretical structure can deal with all important aspects of these firms nonetheless some powerful explanatory tools such as the international product cycle and the transactions cost internalization theory have shed substantial light on mne activities the imperfect competition theory presented here explains 6 major mne decisions for example production location and market servicing methods with a simple model which can be extended to explore other important issues

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

procurement policy and contracting efficiency the contracting literature has emphasized the optimality of using certain contracting instruments such as multiple cost observations full commitment self selection and competition a two period procurement model is constructed incorporating all of the instruments and optimal contracts are characterized numerical examples suggest that the marginal benefits of full commitment self selection and multiple cost observations are small while the benefits of competition are larger to obtain some evidence on contracting costs defense contracting is reviewed it indicates that using these instruments is very costly thus calling into question the optimality of using all of the procurement instruments copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

how legal environments affect the use of bond covenants we examine how country level legal and institutional investor protection shapes contractual creditor protection we examine debt covenant information from foreign corporate bonds issued in the us from more than 50 countries between 1991 and 2007 we find that bonds of firms incorporated in countries with stronger creditor rights use fewer covenants this finding suggests that creditor protection substitutes for covenants in reducing the agency cost of debt in contrast bonds of firms with stronger shareholder rights or firms with stronger firm level corporate governance use more covenants these findings support the notion that firms with stronger shareholder control may face an increase in the shareholder bondholder conflict and therefore prefer to use more covenants however greater shareholder rights are not associated with the use of more covenant restrictions on equity issuance as firms with greater minority shareholder protection are unlikely to suffer such equity dilution

existence of optimal mechanisms in principal agent problems we provide general conditions under which principal agent problems with either one or multiple agents admit mechanisms that are optimal for the principal our results cover as special cases pure moral hazard and pure adverse selection we allow multidimensional types actions and signals as well as both financial and non financial rewards our results extend to situations in which there are ex ante or interim restrictions on the mechanism and allow the principal to have decisions in addition to choosing the agent s contract beyond measurability we require no a priori restrictions on the space of mechanisms it is not unusual for randomization to be necessary for optimality and so it should be and is permitted randomization also plays an essential role in our proof we also provide conditions under which some forms of randomization are unnecessary

gray market trade with product information service in global supply chains abstract this paper investigates the economic effects of a product information service when potential consumers who are segmented by their taste exist in gray markets specifically we construct an economic model that considers a multinational firm mnf who expands business to a country and chooses whether to provide information service regarding product characteristics if receiving the information consumers in a specific segment whose taste suits the characteristics have positive utility from consuming the product while those in other segments have no utility by contrast consumers in all segments have positive expected utility before consuming the product without information with these settings we demonstrate that there arises the equilibrium that the mnf provides no information service when gray market trade i e parallel trade is allowed in the country leading to lower consumer welfare than when it is prohibited a primary finding in the equilibrium is that such a situation arises especially when potential consumers are less segmented in this situation the regulator in the country should ban the parallel imports so as to enhance consumer welfare the result is counterintuitive and notable because one might intuitively infer that gray market trade is less desirable when customers are more minutely segmented and the product information service is thus more specific and necessary

efficiency improving investment and the ratchet effect abstract in a long term relationship between a regulator and a firm the production technology may change due to investment this paper investigates how the introduction of such an investment possibility influences the dynamic regulation problem when long term commitments are infeasible contractible investment is shown to reduce the ratchet effect by increasing separation in the first period due to the separation effect of investment the first period optimal scheme converges toward the optimal scheme with commitment as investment increases finally assuming noncontractible investment the paper analyzes the relationship between separation and the degree of under investment

does social trust affect international contracting evidence from foreign bond covenants abstract building on rational choice institutionalism theory and williamson s j econ lit 38 3 595 613 2000 four level social analysis framework we investigate the influence of the informal institution of social trust on debt contract design in an international setting using a sample of non u s firms that issue bonds in the u s debt market we find that yankee bond creditors impose fewer covenants on bond issuers domiciled in countries with a high degree of social trust we further show that the inverse relationship between debt covenants and the informal institution of social trust is more pronounced for firms from countries with weak formal institutions as well as for firms with poor corporate governance and greater information opacity these findings are robust to endogeneity tests within country analysis various empirical models and measures of trust and alternative hypotheses we also show that while a lower level of informal social trust is associated with higher borrowing costs this relationship weakens when formal covenants are added to the debt contract i e a substitution effect our paper contributes to the international business literature by providing new insights into the role of informal institutions social trust in cross border debt contracting

the role of social capital in financial development to identify the effect of social capital on financial development we exploit social capital differences within italy in high social capital areas households are more likely to use checks invest less in cash and more in stock have higher access to institutional credit and make less use of informal credit the effect of social capital is stronger where legal enforcement is weaker and among less educated people these results are not driven by omitted environmental variables since we show that the behavior of movers is still affected by the level of social capital of the province where they were born

efficient investments in the implementation problem abstract this paper identifies a condition for an efficient social choice rule to be fully implementable when we take into account investment efficiency to do so we extend the standard implementation problem to include endogenous ex ante and ex post investments in our problem the social planner aims to achieve efficiency in every equilibrium of a dynamic game in which agents strategically make investments before and after playing the mechanism our main theorem shows that a novel condition commitment proofness is sufficient and necessary for an efficient social choice rule to be implementable in subgame perfect equilibria the availability of ex post investments is crucial in our model there is no social choice rule that is efficient and implementable in subgame perfect equilibria without ex post investments we also show that our positive result continues to hold in the incomplete information setting

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

corporate fraud and investment distortions in efficient capital markets inefficient investment allocation induced by corporate fraud where informed insiders strategically manipulate outside investors beliefs has been endemic historically and has recently attracted much attention we reconcile corporate fraud and investment distortions with efficient capital markets building on shareholder manager agency conflicts and investment renegotiation in active takeover markets because investments that are ex post inefficient are not renegotiation proof the optimal renegotiation proof contract induces overstatements by managers accompanied by overinvestment in low return states and underinvestment in high return states by rational investors our framework also helps explain why easy access to external capital appears to facilitate corporate fraud

intrafirm trade arm s length transfer pricing rule and coordination failure abstract this paper demonstrates that uniform imposition of the arm s length principle on transfer pricing leads to coordination failure among countries in terms of economic welfare if the countries trade products in the form of intrafirm transactions by multinational firms mnfs to highlight this implication we first show that imposition of the arm s length principle on an mnf induces it to transfer a product among subordinate divisions at marginal cost i e the competitive price which is consistent with the purpose of the principle nonetheless if regulators in each country impose the principle on mnfs all of the following economic welfare measures decrease compared with the situation where the principle is not imposed 1 consumer welfare in each of the trading countries 2 profit of each mnf and thus 3 total world economic welfare this result indicates that it is possible that enforcement of the principle has no positive effect at all in the world because economic welfare of all economic agents deteriorates when the principle is imposed a numerical analysis demonstrates that this possibility arises in a broad range of circumstances even including the situation where a giant economic world power and a small underdeveloped country mutually trade products in these circumstances an agreement among trading countries that no country imposes the arm s length principle may encourage pareto improvement of the world economy

dynamic adverse selection with a patient seller abstract this paper considers dynamic bilateral trade with short term commitment we show that when the seller is more patient than the buyer there exist systematic differences between the optimal selling and renting mechanisms while the former consists of simple price posting the latter induces the buyer to choose between a secure and a random delivery contract allowing for mechanisms more general than price posting reduces the seller s cost of learning the buyer s valuation in the renting case renting leads to more learning than selling but unless the horizon is sufficiently long only when general mechanisms are available our results contrast with the common view that the restriction to price posting is innocuous and that informational asymmetries are more persistent under renting than under selling

interfirm diversity organizational learning and longevity in global strategic alliances organizational theorists have correctly argued that the emergence and maintenance of robust cooperation between global strategic alliance partners is related to the diversity in the partners characteristics yet previous research has failed to systematically delineate the important dimensions of interfirm diversity and integrate the dimensions into a unified framework of analysis this paper develops a multilevel typology of interfirm diversity and focuses on organizational learning and adaptation as critical processes that dynamically moderate diversity s impact on alliance longevity and effectiveness

compliance with agreements in cross cultural transactions some analytical issues assessing whether the other party is likely to fulfil all obligations can be arduous when a transaction is international the mechanisms that underpin compliance with agreements and the functional detail of these mechanisms may vary in relative importance between countries perplexing the foreign operative additionally a foreigner may suffer from informational constraints communications distortions and difficulty in achieving full acceptance in the local business culture

a risk averse buyer s contract design abstract this research focuses on the design of optimal procurement contracts for competitive bidding involving risk neutral contractors and a risk averse buyer individuals or small businesses need to contract services from larger more efficient firms examples of such services include moving expertise or the building of computing facilities a customized office or home in these situations fixed price contracts are typically used we find that the fixed price contract should not always be employed the buyer can more efficiently account for the bidding strategies of the contractors if he absorbs some risk of cost overruns

repeated bargaining with persistent private information the paper analyses repeated contract negotiations involving the same buyer and seller where the contracts are linked because the buyer has persistent but not fully permanent private information the size of the surplus being divided is specified as a two state markov chain with transitions that are synchronized with contract negotiation dates equilibrium involves information cycles triggered by the success or failure of aggressive demands made by the seller because there is persistence in the markov chain generating the surplus a successful demand induces the seller to make another aggressive demand in the next negotiation since the buyer s acceptance reveals that the current surplus is large rejection of an aggressive demand on the other hand leads the seller to be pessimistic about the size of the surplus in the next contract so the seller makes a soft offer that is sure to be accepted then after several such offers have been accepted the seller is optimistic enough to again make an aggressive demand creating an information cycle an interesting feature of this cycle is that the soft price is not constant but declines as the cycle continues so as to offset the buyer s option value of re starting the cycle when the current state is bad an explicit mapping is given for the relationship between the basic parameters and the equilibrium prices and quantities in particular there is a closed form solution for the threshold belief that makes the seller indifferent between hard and soft offers

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

nonparametric identification of a contract model with adverse selection and moral hazard this paper studies the nonparametric identification of a contract model with adverse selection and moral hazard specifically we consider the false moral hazard model developed by laffont and tirole 1986 we first extend this model to allow for general random demand and cost functions we establish the nonparametric identification of the demand cost deterministic transfer and effort disutility functions as well as the joint distribution of the random elements of the model which are the firm s type and the demand cost and transfer shocks the cost of public funds is identified with the help of an instrument testable restrictions of the model are characterized

simple cost sharing contracts we extend rogerson s 2003 intriguing analysis of the performance of simple procurement contracts to consider settings where the supplier s innate production cost is not necessarily distributed uniformly although the simple contract that rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely it can perform poorly when the larger cost realizations are relatively likely we show that in all settings under consideration though a fairly simple pair of contracts one that involves linear cost sharing and one that involves full cost reimbursement can always secure more than 73 of the gain achieved with a fully optimal contract

contracting with imperfect commitment and the revelation principle the single agent case this paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism we show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent in contrast with the conventional revelation principle however the agent may not use this strategy with probability one our results apply to contracting problems between a principal and a single agent by reducing such problems to well defined programming problems they provide a basic tool for studying imperfect commitment

optimal contracting of separable production technologies abstract we analyze the class of agency problems with a risk neutral principal and a risk averse agent in which hidden actions and hidden information on the agent s efficiency are jointly present technological assumptions such as monotonicity of likelihood are no longer sufficient for the optimal contract to be monotone in the sharing rule we show that these regularity properties obtain for the rather wide class of production technologies that are separable in the agent s inputs together with ordinal properties such as monotone differences and affiliation of inputs separability yields the monotonicity in efficiency of the agent s actions and indirect utility

departmentalization and stochastic dissimilarity abstract when activities within the organization are confronted with different types of stochastic environments the owner of the firm has to evaluate the benefits and the costs involved in establishing multiple specialized divisions the benefit from departmentalization is the ability to better match incentives to the extent of uncertainty confronting different activities the cost of departmentalization is the increase in the number of required managerial positions which implies that the owner has to deal with a bigger number of individuals that can assume only limited risk only when the extent of stochastic dissimilarity among activities is significant can the benefit more than outweigh the cost

monopolistic screening under learning by doing this article investigates the design of incentives in a dynamic adverse selection framework where agents production technologies display learning effects and agents learning rates are private knowledge in a simple two period model with full commitment available to the principal we show that whether learning effects are over or underexploited crucially depends on whether more effcient agents also learn faster so costs diverge through learning effects or whether it is the less effcient agents who learn faster so costs converge we further show that an overexploitation of learning effects can occur also if the full commitment assumption is relaxed

on the design of incentive schemes under moral hazard and adverse selection abstract this paper characterizes a class of optimal incentive schemes in a simple principal agent model which allows for moral hazard and adverse selection we show that incentive compatible allocation can always be approximately implemented through a menu of quadratic incentive schemes it is also proved that the set of incentive compatible allocations is independent of the distribution of the additive uncertainty which affects the outcome informational requirements and economic interpretation of quadratic and linear schemes are discussed

trust between international joint venture partners effects of home countries trust is an important factor in interorganizational relations interorganizational trust in cross border relationships is likely to be influenced by the home countries of both partners using data on 165 international joint ventures ijvs we show that the perceived trustworthiness of an ijv partner is influenced by the general propensity to trust in the trustor s home country moreover the trustworthiness perceived by a focal parent firm is also affected by the home country of the other ijv partner this second effect is mitigated by experience between the partners

cartel enforcement with uncertainty about costs what cartel agreements are possible when firms have private information about production costs in order for a cartel agreement to work it must take into account the incentives for firms to misrepresent their cost information and it must provide sufficient reward so that no firm wishes to defect for private cost uncertainty we characterize the set of cartel agreements with side payments that can be supported as bayesian nash equilibria we show that if defection results in either cournot or bertrand competition the incentive problems in large cartels are severe enough to prevent the cartel from achieving the monopoly outcome in contrast with common cost uncertainty the incentive problems become less severe in large cartels allowing perfect collusion

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

lost that lovin feeling the erosion of trust between small high distance partners we investigate the role of high distance in trust erosion between small partners high distance is known to hinder the formation of trust between potential partners but its role in trust erosion in established partnerships is less understood by international business scholars through a qualitative longitudinal study we extend current theory of how high distance affects the trust dynamics between cross border partners specifically we unearth three interrelated mechanisms that together explain how and why trust can erode due to high distance we show that before a partnership is formed high distance can lead partners to erroneously attribute cues to a potential partner s high quality leading to over expectations of partner performance once the partnership is operational high distance hinders actors ability to understand situational factors associated with disappointing outcomes and so they are attributed to failings of the partner at the same time distance related challenges of bounded reliability render partners reluctant to discuss partnership outcomes this can result in a vicious cycle of inertia as partners strive to protect goodwill while abandoning efforts to produce partnership outcomes because of doubts of the other s quality thus our theoretical model illustrates the limitations of trust and explains how paradoxically high distance can facilitate both trust formation and trust erosion

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

the target incentive system vs the price incentive system under adverse selection and the ratchet effect abstract in a dynamic adverse selection type of principal agent relationship where the principal is committed over time to a particular incentive system with fixed structure but variable parameters but not to any intertemporal incentive scheme with both fixed structure and parameters the ratchet effect arises but varies with different incentive systems we show that compared with using prices as the sole planning mode the principal can attenuate the ratchet effect by stipulating targets as well as a result the target incentive system entails higher expected welfare than the price incentive system in a perfect bayesian equilibrium

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

x efficiency and technical efficiency efficiency measurement has become a very popular field in applied economics in recent years and with this interest there has been a large intellectual investment in refining the empirical methods available to researchers in the area in this paper we relate these developments to harvey leibenstein s original 1966 insight into the psychological ideas underlying the notion that economic agents may not achieve maximal efficiency in their productive decisions and behaviour of course it is always possible to argue that apparent inefficiency only arises from a failure of the observer to realise what it is that is being maximized however we evade this easy escape route into non falsifiable hypothesizing and instead take at face value the fact that too many empirical studies have come up with substantial measures of inefficiency for us to ignore its importance for normative economics

revisiting multinational firms tolerance for joint ventures a trust based approach in spite of the increasing popularity of international joint ventures managers express a high level of dissatisfaction with them this paper argues that overemphasis on the outcome has resulted in a neglect of the social processes underlying the outcome the paper elaborates upon the rationale for a cooperative approach towards interorganizational collaborative relationships based on trust and discusses it in the context of joint ventures this is then applied towards understanding multinational ownership preferences and tolerance for joint ventures it is argued that trust centered logic is largely consistent with approaches that emphasize the issue of ownership and deepens and enriches the insights provided by the latter a shift in focus from ownership to relational dynamics is encouraged

optimal regulation of multinationals under collusion this paper analyses the optimal collusion proof mechanism for the regulation of multinational firms mnfs in foreign direct investment fdi projects there is a host country with a profitable investment opportunity either a multinational firm mnf or a local firm lf can undertake this project nonetheless due to its firm specific advantage and the mnf has the potential to create a larger surplus the host government faces an informational constraint such that it cannot observe the extra surplus the mnf can generate using this set up karabay 2010 shows that employing foreign ownership restrictions to force a joint venture jv can help the host government to partially overcome its information disadvantage in this paper we extend karabay 2010 by studying the host government s optimal regulatory policy when the mnf and the lf can collude it turns out collusion imposes no cost on the host government and the expected welfare attained in the absence of collusion can still be secured under collusion

debt buybacks debt reduction and debt rescheduling under asymmetric information in the early nineties there was a significant recovery of many debtridden economies after the shift in debt policy implicit in the socalled brady plan yet the use of scarce resources from debtor countries to buy back part of their debts remains a controversial feature of this plan we use a multiperiod model of debt overhang to show that under asymmetric information this transfer of resources emerges naturally as part of the shift from a strategy of debt rescheduling to one of debt reduction after nearly a decade of suffering from debt ridden economies in the early nineties many countries with large external debts finally reduced their debt service ratios regained access to spontaneous private financing and achieved higher growth and lower inflation imf 1993 many analysts have since attributed at least part of this success to the shift in the international debt strategy in 1989 which took a new direction with the so called brady initiative l a rather controversial feature of this initiative was the use of scarce resources from the debtor countries to buy back part of their debt there are two reasons why this use of a country s resources seems unwise first capital has more value in the debtor country than abroad thus transferring additional current resources from the country to its creditors at fair prices would appear to be welfare reducing second contrary to the idea that by repurchasing its debt in the open market a debtor country benefits from the discount price bulow and rogoff 1988 1991 prove under assumptions that include symmetric information that these buybacks hurt the country since the purchase price2 incorporates and transfers to the seller all the benefits caused by a reduced debt 3

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

is trust the missing root of institutions education and development we report evidence that trust is the missing root relating education institutions and economic development we observe that more trust both increases education and improves legal and bureaucratic institutions which in turn spurs economic development we substantiate this intuition with a series of regressions that provide evidence that trust determines both education and the quality of institutions and that education and institutions in turn affect gdp per capita

a model of the demand for investment banking advising and distribution services for new issues this paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer and the issuer cannot observe the distribution effort expended by the banker the optimal contract under which the offer price decision is delegated to the better informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized the model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues an investment banker performs three functions which may be of value to an issuer of new securities underwriting advising and distribution this paper presents a theory of the demand for investment banking advising and distribution services based on an informational asymmetry between an issuer of new securities and an investment banker ultimately a theory of the organization of the financial intermediary industry is required that would predict which firms would use which types of financial intermediaries for which purposes and which firms would raise capital without engaging the services of a financial intermediary only a limited set of such predictions are developed here in the context of a model of a fixedprice offering under a negotiated contract in which the investment banker is

competition and regulation in vertically related markets in an industry where naturally monopolistic and competitive activities are vertically related should the natural monopolist be allowed also to operate in the deregulated competitive sector unlike much of the literature on vertical integration this paper assumes that monopoly pricing behaviour is regulated and therefore the effect of vertical integration on the task of regulation is central to the analysis in the model there is both imperfect information and imperfect competition when vertical integration by the monopolist is allowed the regulator s task is made harder insofar as the monopolist has anticompetitive incentives to raise rivals costs on the other hand integration may lead to there being fewer firms in the deregulated sector and hence less duplication of fixed costs the overall welfare comparison between separation and integration is ambiguous as two simple examples illustrate various extensions to the analysis are also considered one of the central questions in debates on regulatory reform is how to organize industries that contain both naturally monopolistic and potentially competitive activities electricity transmission and distribution are characterized by natural monopoly cost conditions but electricity generation is not in the gas industry pipeline services may be naturally monopolistic but supply to larger customers is not in telecommunications natural monopoly is more a feature of local network operations than of long distance operations and is not present in apparatus manufacture and supply or in the provision of value added services in railways while the infrastructure of track and stations is naturally monopolistic the supply of train services might not be policy developments notably those associated with privatization in britain and deregulation in the united states have sometimes led to radical structural reform in these industries at t for decades a vertically integrated monopolist was required under the 1982 settlement of its long running antitrust case against the u s government to divest itself of its local network operations the central electricity generating board cegb in england and wales was restructured both vertically transmission grid activities were separated from generation and horizontally before privatization in 1990 1991 by contrast british telecom was privatized as a vertically integrated dominant firm bt now faces competition from mercury and others especially in the long distance market but its dominance of local network operations might affect competition there and in other areas such as apparatus supply the local network monopoly would of course have to be regulated in any event but its link via ownership to vertically related and potentially competitive activities poses additional regulatory questions many of the efforts of the regulatory body oftel notably in relation to interconnection between bt s and rivals 1 for a general account of the theory and british experience of regulatory reform in the utility industries

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

culture openness and finance abstract differences in culture proxied by differences in religion and language cannot be ignored when examining why investor protection differs across countries we show that a country s principal religion predicts the cross sectional variation in creditor rights better than a country s natural openness to international trade its language its income per capita or the origin of its legal system catholic countries protect the rights of creditors less well than protestant countries a country s natural openness to international trade mitigates the influence of religion on creditor rights culture proxies are also helpful in understanding how investor rights are enforced across countries

what s in a p reassessing best practices for conducting and reporting hypothesis testing research social science research has recently been subject to considerable criticism regarding the validity and power of empirical tests published in leading journals and business scholarship is no exception transparency and replicability of empirical findings are essential to build a cumulative body of scholarly knowledge yet current practices are under increased scrutiny to achieve these objectives jibs is therefore discussing and revising its editorial practices to enhance the validity of empirical research in this editorial we reflect on best practices with respect to conducting reporting and discussing the results of quantitative hypothesis testing research and we develop guidelines for authors to enhance the rigor of their empirical work this will not only help readers to assess empirical evidence comprehensively but also enable subsequent research to build a cumulative body of empirical knowledge

repeated signalling games and dynamic trading relationships a seller of a nondurable good repeatedly faces a buyer who is privately informed about the position of his demand curve the seller offers a price in each period the buyer chooses a quantity given the price the quantity demanded reveals information about the buyer an equilibrium is characterized with the feature that buyer types separate completely in the first period this equilibrium uniquely satisfies a modified refinement of the cho kreps criterion despite the immediate separation the buyer distorts his behavior throughout the game the requirement to signal types can raise the utility of all types of informed players copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

presidential address institutions and culture how and why does distant political and economic history shape the functioning of current institutions this paper argues that individual values and convictions about the scope of application of norms of good conduct provide the missing link evidence from a variety of sources points to two main findings first individual values consistent with generalized as opposed to limited morality are widespread in societies that were ruled by non despotic political institutions in the distant past second well functioning institutions are often observed in countries or regions where individual values are consistent with generalized morality and under different identifying assumptions this suggests a causal effect from values to institutional outcomes the paper ends with a discussion of the implications for future research jel a10 d7 e00

conceptualizing and measuring distance in international business research recurring questions and best practice guidelines distance is a central concept in international business research yet there is debate about the construct as well as its operationalization in this editorial we address three of the most important recurring questions posed by authors editors and reviewers by examining the theory methods and data of distance research we discuss 1 how to theorize on distance and 2 what method and 3 what data to use when constructing a distance index we develop practical recommendations grounded in theory illustrating and supporting them by calculating cross country distance indices for all available country pairs and two of the most used distance indices cultural and institutional we show that whereas a specific method to calculate distance may matter to some extent the choice for a specific cultural or institutional framework to measure cultural or institutional distance has a major impact on country pair distances overall this editorial highlights the importance of matching data and method to the theoretical argument

multinational enterprise internal governance and industrial organization abstractthe following sections are included monopoly vs efficiency interpretations of the multinational enterprisehost country controlsdynamic considerationsconclusionreferences this abstract was borrowed from another version of this item

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

the priority structure of corporate liabilities most discussions of corporate capital structure effectively assume that all debt is the same yet debt differs by maturity covenant restrictions conversion rights call provisions and priority here we examine priority structure across a sample of 4995 compustat industrial firms from 1981 to 1991 we analyze the variation in the use of capital leases secured debt ordinary debt subordinated debt and preferred stock both as a fraction of the firm s market value and as a fraction of total fixed claims our evidence provides consistent support for contracting cost hypotheses mixed support for tax hypotheses and little support for the signaling hypothesis

consumer lock in with asymmetric information abstract a two period version of the rothschild and stiglitz 1976 model of competitive screening in an insurance market is presented its features include repeat purchase of insurance among consumers no commitment among insurers or consumers asymmetric information among insurers about a consumer s accident history and state contingent contracts an equilibrium may exist in this model with full pooling in period one and consumer lock in in period two in such an equilibrium high risk consumers are experience rated and firms earn negative profits in period one and positive profits in period two