testing informational assumptions in common value bidding models this paper provides an example of a means of linking mathematical theory laboratory experiments and standard empirical work theory by necessity abstracts from the naturally occurring world and experiments designed to test theory must incorporate the same abstractions on the other hand empirical tests are generally performed on naturallyoccurring data which may not reflect those same abstractions given this possible divergence naturally occurring data should be tested for consistency with theoretical assumptions whenever possible on the basis of standard symmetric bidding theory this paper reports on a preliminary version of such a test for off shore oil bidding data

delays in claiming social security benefits this paper focuses on social security benefit claiming behavior a takeup decision that has been ignored in the previous literature using financial calculations and simulations based on an expected utility maximization model we show that delaying benefit claim for a period of time after retirement is optimal in a wide variety of cases and that gains from delay may be significant we find that approximately 10 of men retiring before their 62nd birthday delay claiming for at least one year after eligibility we estimate hazard and probit models using data from the new beneficiary data system to test four cross sectional predictions while the data suggest that too few men delay we find that the pattern of delays by early retirees is generally consistent with the hypotheses generated by our theoretical model

currency and credit in a private information economy in an environment with private information spatial separation and limited communication a currency like object and more standard named credits can be distinguished the credit objects can be used among agents in an enduring relationship that is among agents with known trading histories whereas the currency like object must be used among relative strangers in this environment collectively determined pareto optimal rules make the level of the currency like object and the mix of currency to named credits responsive to individual needs and to economywide states total indebtedness is determined by the number of lenders that is by preference or demand shocks and the mix of currency to credits is determined by transaction patterns among the agents

characterization of a class of moral hazard adverse selection games abstract studying a principal agent game in which the agent alone observes the state of the world and reports it but the moral hazard is not reducible shows that if the principal uses all signals then no solution exists i e there is no contract that elicits truth telling and motivates the agent to exert effort when the principal does not use signals on the state of the world that seem irrelevant a solution exists in which some of the ex post signals on outcome are not used even though they obey the informativeness condition of holmstrom bell journal of economics 1979 10 74 91

price dispersion and seller heterogeneity in retail food markets price dispersion i e a homogeneous product being sold at different prices by different sellers is among the most replicated findings in empirical economics the paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores alongside large supermarkets the extent of observed price dispersion is quite high when prices in an urban area where the spatial concentration of sellers is higher are compared with those in smaller towns and rural areas differences in search costs and the potentially higher degree of competition do not yield lower prices other counteracting factors including differences in seller costs and consumer incomes make prices on average higher in the urban area for 11 of the 14 products considered for many but not all the products supermarkets proved to be less expensive than traditional retailers although average savings from food shopping at supermarkets were extremely low finally the results of the study provide evidence that retailers have different pricing strategies and these differences also emerge for supermarkets belonging to the same chain the results presented in the paper suggest that a variety of factors play a role in explaining price dispersion in addition to differences in seller costs the contemporaneous heterogeneity of retailers in terms of services provided and consumers in terms of search costs and preferences makes the emergence of monopolistic competition possible as well as allowing small traditional food retailers to remain in business

optimal redistribution and monitoring of labor supply this paper extends the mirrlees 1971 model of optimal non linear income taxation with a monitoring technology that allows the government to verify labor supply at a positive but non infinite cost we analyze the joint determination of the non linear monitoring and tax schedules and the conditions under which these can be implemented monitoring of labor supply reduces the distortions created by income taxation and raises optimal marginal tax rates possibly above 100 the optimal intensity of monitoring increases with the marginal tax rate and the labor supply elasticity our simulations demonstrate that monitoring strongly alleviates the trade off between equity and efficiency welfare gains of monitoring are around 2 8 of total output the optimal intensity of monitoring follows a u shaped pattern similar to that of optimal marginal tax rates our paper can explain why large welfare states optimally rely on work dependent tax credits active labor market policies benefit sanctions and work bonuses in welfare programs

sequential procurement auctions abstract two auctions are held in sequence with the possibility of learning between the second and the first the buyer optimally chooses to discriminate against the winner of the first auction in the second the optimal mechanism has a discontinuity in the winner s second bid this strictly dominates a sequence of independent sealed bid auctions

worker response to a menu of implicit contracts the literature on implicit contracts between workers and firms suggests that workers face a variety of such contracts allowing each to choose the optimal trade off between earnings level and earnings stability this study tests some implications of that theory through an examination of the risk behavior of individual heads of households the data source is the university of michigan panel study of income dynamics which includes a measure of the worker s taste for risk avoidance additionally several predictions derived from arrow s postulate of increasing relative risk aversion are examined the results confirm a tendency of risk averse individuals to choose jobs offering lower wages and lower financial risk the results also provide indirect support for arrow s postulate the paper s findings suggest that studies of the earnings effects of discrimination may possibly understate those effects just as studies of the value of a human life may understate that value

effort observability and worker productivity towards an explanation of economic dualism this paper suggests an explanation of the wage and productivity differentials between formal and informal sectors in developing countries this explanation is based on differences in the observability of effort that arise from technological differences such as size of operation the authors argue that observability of effort is lower in the formal sector and then show that under reasonable conditions this leads to higher wages and higher effort productivity this is because with lower observability the marginal cost of effort is lower when existing employees are induced to work harder than when more workers are hired explanations for intersectoral differences in factor intensities and sector specific unemployment rates also follow from the authors basic assumptions copyright 1989 by royal economic society

the role of options in the resolution of agency problems a comment the aim of the contracting literature in economics is to explain observed contractual arrangements or organizations as minimizing the costs of incentive conflicts in the agency cost literature of financial economics the contractual arrangement at issue is the mix of securities held by inside management of a firm and outside suppliers of capital the ownership structure of the firm in jensen and meckling s 8 terminology in explaining the ownership structure of a corporation jensen and meckling focus on two sources of agency or incentiveconflict costs a the manager s tendency to consume excessive perquisites and b the manager s tendency to invest in prospects of high risk so as to effect an ex post transfer from bondholders to stockholders a recent article in this journal by haugen and senbet 61 examines the role of stock options in resolving these agency problems and claims to show in particular that a call option in the insider portfolio can eliminate the first type of agency costs this article re examines the role of options in the resolution of agency problems we argue in section i that options cannot eliminate the agency problem of excessive perquisite consumption contrary to haugen and senbet the essential point is that unless outside financing can be provided entirely by riskless debt then outsiders must have a residual claim on the net income of the firm in some states of the world outsiders therefore share in the costs of increased perquisite consumption whatever the ownership structure of the firm this negative externality means that excessive perquisite consumption is inevitable the question remains do call options nonetheless have a role in the mitigation of agency costs an insider portfolio consisting only of equity leaves the manager with the same proportion of residual claim in each state of the world we show using a formal principal agent model that the efficient insider s share of profits is relatively high in favorable high profit states of the world insider call options arise as means of transferring residual claim to the manager in favorable states of the world relative to low profit states the basic agency model has been solved in substantial generality by holmstrom 7 and others we employ here a more specific model that draws on the techniques developed by green and kahn 4 and that is an extension to continuous states of the finite state model of sappington 12 the extension allows a simple characterization of the optimal contract a characterization that

market equilibrium with private knowledge the effect of asymmetric information between buyers and sellers on product quality was first explored by akerlof 1970 in his pathbreaking paper on the market for lemons he showed that if all purchasers have imperfect information on quality then a market for the product may not exist or if it does function it may not be efficient these results have led to a number of papers concerning insurance and labor markets under different assumptions regarding how agents discriminate between products of varying quality see pauly 1974 rothschild and stiglitz 1976 wilson 1977 miyasaki 1977 and spence 1978

multi period insurance contracts this paper examines the form of insurance contracts in the presence of asymmetric information about consumers accident probabilities our goal is to understand the adjustment in contract terms as a function of accident histories in a finite horizon model we also compare these adjustments between alternative market structures our principal findings indicate that history dependent insurance contracts serve a useful sorting role individuals who declare themselves low risks to insurance companies face adverse contracturai terms if they subsequently have many accidents these adjustments are strongest in the case of a single insurance seller but are present in the competitive model as well

a revelation scheme for allocating organizational resources abstract efficient resource allocation in a hierarchical organization frequently requires top management to obtain information from division managers but division managers may place personal interests above those of the organization and communicate distorted information designing simple and robust optimal game theoretic revelation schemes is difficult instead of making another attempt at this we analyze a project valuation scheme actually used by several us government agencies under certain environments the scheme encourages managers to truthfully reveal the relative benefits of alternative projects while some aspects of these environments do not have nice mathematical properties we argue that they may well represent better characterizations of the way managers actually view their situation

money as the mechanism of exchange abstract the existence and use of money remained an embarrassing puzzle for monetary analysis we observe over man s history that social groups without generally accepted media of exchange exhibit poor survival characteristics most social groups do not use assets or commodities at random in the execution of exchanges one observes that a small subset of assets is dominantly used in transactions these transaction dominating assets are usually referred to as money the literature contains many suggestive attempts to explain the emergence and role of money the classic writers made passing references in somewhat pictorial language to the extension markets and increasing labor productivity induced by the use of a general medium of exchange this idea has never been systematically developed however karl brunner 1971

the rise and decline of managerial development alfred d chandler s work highlighted the complicated interplay between markets and firms especially the arrangements created by firms to buffer and manage market forces arguably his most important work examines one aspect of firms organizational structure and how it changed in response to the competitive needs of growing businesses much the same approach can be applied to understanding other aspects of firms such as the structure of the most important jobs in corporations executive positions and how those positions have been filled over time here the interplay includes a different market the labor market the arguments that follow trace the evolution of executive roles from the early days of corporations where executive jobs were largely shaped by the labor market to internalized and bureaucratized arrangements consistent with the idea of an integrated chandlerian firm after the 1950s back to something much closer to the market dominated approach following the 1982 recession in large measure the change seems driven by the different context that business faced and the interplay with labor markets that made internal development more difficult the implications for the future of large scale chandlerian firms may be considerable copyright 2010 the author 2010 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

on governing multilateral transactions with bilateral contracts bilateral contracts while neither negotiated nor enforced in an integrated way are nevertheless often interrelated both economically and strategically owing to production or consumption complementarities and to asymmetric information a set of bilateral contracts forms a mechanism with special properties this mechanism forms a contract equilibrium if there is no joint incentive for a supplier and any individual customer unilaterally to alter the terms of their contract if agents preferences are risk neutral in money income and if their private information is independent then there exists a contract equilibrium that implements efficient transactions if in addition preferences are strictly concave and differentiable in goods and services and technologically feasible sets are suitably convex then this equilibrium is essentially unique

optimal contracts with public ex post information abstract we are concerned with the value of public ex post information about a seller s costs to an initially uninformed buyer we derive necessary and sufficient conditions for a public ex post signal s s that is correlated with the risk neutral seller s costs to render the initial information asymmetry inconsequential to the buyer the first best outcome for the buyer is shown to be feasible if 1 the dimension of s is at least that of or 2 the conditional likelihood function of s given is for one of its realizations sj a strictly increasing function of and more concave in than is the seller s cost function

patterns of retail price variation we examine retail price variation across a range of goods and regions of the united states we find that the typical grocery product has a regular price and stays at that price at least 50 of the time and that most deviations from that regular price are downward temporary discounts or sales while infrequent account for 20 to 50 of the annual variation in retail prices for most product categories although existing models of retail sales yield predictions consistent with some aspects of the retail pricing distributions all of these models fail to explain other important aspects of retail pricing identified here

balanced bayesian mechanisms in the transferable utility case a number of authors have identified conditions on beliefs that guarantee the existence of bayesian incentive compatible mechanisms with balanced transfers we present a new easy to interpret condition and we show that it is strictly more general than all the other conditions found in the literature we also study conditions guaranteeing the bayesian implementability of all social decision rules with balanced budget mechanisms

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

bridge jobs and partial retirement the job stopping process of older workers often includes some combination of postcareer bridge employment partial retirement and reverse retirement fewer than two fifths of household heads retire directly from career jobs over half partially retire at some point in their working lives and a quarter reenter the labor force after initially retiring in addition postcareer employment is frequently located outside the industry and occupation of the career job and there are important differences in postcareer labor force experiences by gender permanent income and career job pension status

the efficiency of competitive equilibria in insurance markets with asymmetric information abstract this paper addresses the relationship between competitive equilibria and efficient allocations in an insurance market with asymmetric information using the definition of second best efficiency proposed by harris and townsend 1981 for environments characterized by informational assmmetry the efficiency properties of several proposed market equilibria are examined we find an analogue to the first optimality theorem a miyazaki wilson equilibrium always results in a second best allocation

the dynamic structure of optimal debt contracts abstract in a two period model of costly state verification the optimal contract is characterized and shown to exist the optimal contract is interpreted as a bond contract the model extends the result of one period models that the verification region must be a left tail interval to a multi period setting conditions are identified for the optimal contract to exhibit features such as call prepayment option coupon payment or sinking fund the optimality of certain bond covenants such as refinancing covenants and dividends covenants is also studied

teachers unions and wages in the 1970s unionism now pays this paper provides evidence that confirms the results of previous studies that teacher unionism produced relatively small wage gains during the early 1970s but it also shows that union gains increased substantially in the late 1970s the evidence is based on an application of two complementary research designs cross section wage level regressions and cross section wage change regressions to national samples of teacher data for 1974 75 and 1977 78 the authors conclude that the union nonunion wage differential among teachers reached 12 to 22 percent by the late 1970s and during the period 1974 78 the real wages of unionized teachers increased while those of nonunionized teachers declined they offer several possible explanations for these trends

optimal environmental regulation under asymmetric information abstract a market model of environmental regulation with interdependent production and pollution abatement costs and heterogeneous firms is developed firms have private information about costs which have a quadratic form firms pursue bayes nash strategies in communication with the regulator the full information optimum cannot be attained unless gains from trade in the product market net of external damages exceed the information rents earned by firms aggregate output and externality levels are lower at the regulated equilibrium than at the full information social optimum

the effect of social security on retirement in the early 1970s we analyze detailed longitudinal data on a cohort of males aged 58 67 in 1969 1973 a period of substantial increases in real social security benefits we find the following 1 the accelerating decline in labor force participation of elderly men in 1969 1973 can be explained by the large increase in real social security benefits 2 there is evidence of a liquidity constraint effect for an important subgroup of the elderly 3 the magnitude of this induced retirement effect is large enough that ignoring it can lead to serious underestimation of the fiscal implications of changes in benefit provisions our results are interpreted in the historical context of a particular cohort undergoing major unanticipated transfers of wealth the steady state effects of social security on retirement may not be the same

price stabilization as a bonding mechanism in new equity issues abstract underwriters have an incentive to overstate investor interest in order to persuade some investors to purchase shares at a price in excess of their initial estimate of the fair value we show that this incentive is eliminated when the underwriter commits to secondary market price stabilization destroying the underwriter s incentive to overstate interest reduces the total surplus captured by initial investors in initial public offerings further efficiency gains are associated with penalty bid systems that permit the underwriter to make the stabilization commitment selectively price stabilization can thus be viewed as a bonding mechanism that improves the efficiency of the primary equity market

do pensions increase the labor supply of older men this paper investigates the relationship between pension coverage and the retirement behavior of older men pensions are associated with higher work involvement for males in their late fifties and early sixties but with lower rates of job holding for those aged 65 69 age of entry into pension employment is shown to be positively correlated with future labor supply when combined with evidence on age specific changes in labor force participation rates this pattern casts doubt on the hypothesis that broadened pension coverage explains a substantial portion of the trend towards earlier male retirement

retail price dynamics and retailer heterogeneity uk evidence we examine retailer heterogeneity in price adjustment in uk supermarkets considerable variation in the price change frequency of identically bar coded products among retail chains is found decomposition analysis suggests that price adjustment is evenly split between sales and reference prices with substantive variation across retailers

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

adverse selection and pay compression a fundamental result of the principal agent literature is that pay will be linked to performance when it is difficult for the principal to monitor the agent s actions however performance pay can lead to adverse incentives in these models high powered incentives encourage workers to neglect some aspects of their job or to sabotage their coworkers efforts this paper offers another explanation for the weak link between pay and performance worker heterogeneity when workers are heterogeneous and labor contracts are contests the nash equilibrium often pools workers i show that this implies that the link between pay and performance is weaker than would be the case if firms could observe workers types before contracting and offer each type their respective optimal contests a fundamental result of the principal agent literature is that pay will be linked to performance when it is difficult for the principal to monitor the agent s actions but in the real world we often find this link to be weak several authors lazear 1989 holmstrom and milgrom 1991 garvey and swan 1992 have shown that weaker incentives may be optimal when performance pay leads to undesired behavior on the part of workers in lazear s tournament model firms weaken the link between pay and performance when workers can sabotage their coworkers efforts holmstrom and milgrom show that straight salaries are optimal when the worker s job includes some activities that cannot be easily monitored and garvey and swan show that a hybrid compensation scheme that is part tournament and part managerial discretion is optimal when workers can sabotage coworkers efforts and managers face adverse incentives the common thread in these papers is that principals weaken the link between pay and performance to mitigate adverse incentives this is what garvey and swan call pay compression in this paper i show that adverse incentives while sufficient are not necessary for pay compression to occur i consider a labor market where workers are heterogeneous with respect to ability measured as cost of effort with more able workers having a lower cost of effort jobs have a single

sales and monetary policy this paper analyses the efiect of monetary policy in a model where sales occur in equilibrium some consumers are loyal to a particular brand of a good others are bargain hunters as a result producers flnd it optimal to sell their goods at a normal price through some retailers and at a sale price through others the margin of adjusting the amount sold on sale is potentially very important if producers can adjust the fraction sold on sale with sticky prices and wages money is approximately neutral if we ignore the reasons behind sales but that result changes dramatically when we consider that producers optimally choose to sell some of their goods on sale owing to strategic substitutabilities in the sales decision money has strong procyclical efiects

information acquisition in an incomplete information model of business cycle abstract this paper studies the consequences of allowing information acquisition in a version of lucas barro incomplete information model of business cycle we apply the information equilibrium concept to show that an agent s information acquisition is not invariant to fluctuations of price level and that it has a significant effect on the size of output inflation tradeoff using the optimality criteria developed by muench we find that a change in mean money growth rate does not have any real consequences and that a constant money growth rule is superior to any monetary policy that induces all the agents to be fully informed

monitoring of performance in organizational contracting the case of defense procurement this paper contains an agency theoretic analysis of procurement contracts in which the government designs optimal linear contracts for a risk averse supplier in the presence of moral hazard private information and imperfect monitoring optimal contracts deviate from first best risk sharing the direction of the deviation depends on the relative severity of the moral hazard and private information problems and on the precision of the monitor in contrast to the usual result in the moral hazard literature the government may in some cases prefer that the effort of the supplier be taxed choice of the precision of the monitor and the categories of costs covered by the monitor are also studied

incentives in academics why is there tenure this paper models ancademic department as an internal labor market the major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates academic tenure is seen to be a necessary condition for this the analysis is also consistent with other aspects of the academic environment including tenure track appointments contract buy outs early retirement plans and when a budget crunch hits the elimination of entire departments the results extend in a simple way to other organizations in which members have an input into overall decisions

contracts and asymmetric information in the theory of the firm abstract this paper extends the coase notation of firms as intermediaries between consumers and input owners to incorporate asymmetric information we show that in some cases it is optimal for consumers to pay a fixed price for a product and to ignore how the firm operates and the profit that it makes if firms have private information that consumers cannot cheaply obtain however we demonstrate that the optimal contract may require constraints on firms internal operations and profits our work provides conditions under which cost plus contracts are optimal and demonstrates when nonprofit firms are the preferred organization structure

pass through in retail and wholesale this paper studies how prices comove across products firms and locations to gauge the relative importance of retailer versus manufacturer level shocks in determining prices i make use of a large panel data set on prices for a cross section of retailers in the u s i analyze prices at the barcode or universal product code upc level for individual stores i find that only 16 of the variation in prices is common across stores selling an identical product 65 of the price variation is common to stores within a particular retail chain but not across retail chains while 17 is completely idiosyncratic to the store and product product categories with frequent temporary sales exhibit a disproportionate amount of completely idiosyncratic price variation my results suggest that most of the observed price variation arises from retail level rather than manufacturer level demand and supply shocks however the behavior of prices is difficult to relate to observed variation in costs and demand at the retail level this suggests that retail prices may vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers rather than static demand and supply shocks this abstract was borrowed from another version of this item

planning stochastic shocks and labour contracts of female workers and their welfare implications in this paper we analyse labour contracts for female workers when there are planned shifts or stochastic shocks to their leisure preference which arise as a result of planned or unplanned pregnancy it will be shown that when female workers plan their pregnancy contract firms can induce self selection among workers through a contract that stipulates a wage profile steeper than the spot wage profile so that self selected workers who accept the contract will not quit even though information on shifts in leisure preference is asymmetric first best efficiency can be achieved through self selection when female workers do not plan childbirths however self selection contracts are not possible when the stochastic shocks are realized there will be quits planning is pareto superior to no planning at equilibrium workers will be allocated optimally workers who have low marginal value of home time will join contract firms and make specific investments while those who have high marginal value will seek employment in the walrasian market and make no specific investments some implications of these results are also discussed in the paper

noncooperative regulation of a nonlocalized externality with a nonlocalized pollution externality different groups bear the costs and benefits of abatement in the case of acid rain these groups are respectively consumers in the midwest and pollutees in the northeast these groups have conflicting interests that are represented respectively by a public utilities commission and an environmental regulator we analyze a model in which the environmental protection agency acting as a von stackelberg leader regulates pollution and the public utility commission regulates the price for a monopolist that has private information about the effectiveness of its abatement alternatives we characterize a noncooperative equilibrium and compare it with a cooperative equilibrium a nonlocalized pollution externality poses special regulatory problems when the benefits and the costs of abatement are borne by distinct groups whose interests are represented by different regulatory agencies a relevant example is acid rain which is believed to be caused in part by coal fired electricity generating plants these emit sulfur dioxide and nitrogen oxide which upon contact with moisture in the atmosphere form acid that falls with rain measures to reduce these emissions are of concern to the residents of the states in which the coal fired generating plants are located because abatement costs increase the prices they pay for electricity a number of plans have been proposed for distributing those costs more broadly but the costs of reducing the emissions of generating plants located in ohio will likely be borne in large part by ohio consumers and utilities while the benefits from abatement will largely be realized by the residents of the northeast and canada the control of a nonlocalized externality such as acid rain raises the issue of the relationship between the environmental regulator the environmental protection agency epa and the public utility commission the former is responsible for achieving an acceptable balance between the damage from pollution and the cost of abatement the latter is responsible for pricing electricity on the basis of the costs of production and pollution control one possibility is that cooperation between the two regulators leads to the joint regulation of emissions and prices cooperation would internalize the conflicting interests and mandates of the regulators but the distributive consequences of the regulatory alternatives inhibit cooperation the public utility commission for example has an interest in avoiding abate

the effect of social security on labor supply a cohort analysis of the notch generation this article uses aggregate birth year calendar year level data derived from the current population survey cps to estimate the effect of social security wealth on the labor supply of older men in the 1970s and 1980s the analysis focuses on measuring the impact of the 1977 amendments to the social security act which created a substantial unanticipated reduction in social security wealth for individuals born after 1916 this differential in benefits has become known as the benefit notch results indicate that labor supply continued to decline for the notch babies who received lower social security benefits than earlier cohorts

a dual characterization of incentive efficiency we show that incentive efficient allocations in economies with adverse selection and moral hazard problems can be determined as optimal solutions to a linear programming problem and we use duality theory to obtain a complete characterization of the optima our dual analysis identifies welfare effects associated with the incentives of the agents to truthfully reveal their private information because these welfare effects may generate non convexities incentive efficient allocations may involve randomization other properties of incentive efficient allocations are also derived

incentive contracting with asymmetric and imperfect precontractual knowledge abstract the pareto optimal contract between principal and risk neutral agent is analyzed for the case in which the agent s information is initially imperfect but better than that of the principal in contrast to the case where precontractual information is symmetric the final contract between principal and agent will not always guarantee an efficient outcome however in contrast to the case where the agent s information is initially perfect the agent may be unable to command rents from his superior information and the outcome will always be efficient the conditions under which efficient or inefficient outcomes are guaranteed differ qualitatively according to whether the random stete of nature follows a continuous or a discrete distribution journal of economic literature classification numbers 022 026 611

adverse selection private information and lowballing in insurance markets recent contributions to the adverse selection literature have focused on a multiperiod competitive environment in this setting a clean distinction arises between the predictions of competing models cooper and hayes extend the model of rothschild and stiglitz to multiple periods the result is a self selecting equilibrium characterized by price highballing or systematically overcharging new business kunreuther and pauly suggest that information asymmetries between competing insurance firms render such price quantity policies infeasible their model results in a pooling equilibrium that is characterized by price lowballing or systematically undercharging new business our evidence is consistent with the kunreuther and pauly model and reveals the persistence of adverse selection in the automobile insurance market copyright 1990 by the university of chicago

on imperfect evaluation and earning differentials this paper investigates the relationship between the technology for evaluating performance and optimal contract choice specifically the paper examines the different compensation packages that arise when occupations differ in evaluation technology workers are risk averse work effort is endogenous and there exists asymmetric information in occupations in which it is less difficult to measure output it is shown that compensation is more closely tied to output the implications for work effort the sorting of workers by ability and average compensation are developed analysis of a new data set confirms our predictions concerning earning differentials and wage growth the powerful 1 6 million member national education association and other teacher organizations have traditionally fought the notion of rewarding better teachers with more money arguing that there is no objective way to measure a teacher s competence and that it would lead to favoritism and bad morale time june 20 1983

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

salaries and piece rates compensation can take many forms remuneration can come as pecuniary payments as fringes such as health and pension benefits or as a nonpecuniary reward such as plush office furniture that costs the firm less than it benefits the worker a significant literature has examined the trade offs between pecuniary and nonpecuniary compensation the modern work having been pioneered by rosen 1974 more recently another body of literature has examined the selection of method of total compensation ignoring the distinction between pecuniary and nonpecuniary payment this work has focused on risk and incentive factors it has resulted in comparisons of compensation based on absolute output levels to that based on relative performance it has also led to explorations of the relation of compensation to experience over the work life 2 little attention has been paid to what may be among the most important and obvious distinction in methods of compensation namely the choice between a fixed salary for some period of time that is paying on the basis of input and some workers receive compensation that is specified in advance and not directly contingent on performance instead it depends on an input measure such as hours worked for others compensation is directly related to output this essay is an attempt to predict a firm s choice of compensation method piece rates are defined more rigorously among the more important factors discussed are worker heterogeneity incentives sorting considerations monitoring costs and asymmetric information one result is that salary workers tend to be of lower quality and more homogeneous than are their piece rate counterparts numerous additional results are provided helpful comments by victoria lazear and yoram weiss are gratefully acknowledged support was provided by the department of labor and the national science foundation 1 see lazear and rosen 1981 stiglitz 1981 holmstrom 1982 green and stokey 1983 2 see lazear 1979 1981 and harris and holmstrom in press

salesforce compensation plans in environments with asymmetric information in this paper we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans although such contractual arrangements are not commonly used in the industry they have been introduced and implemented by firms such as ibm and st regis paper as in our previous work on salesforce compensation plans basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 we use an agency theory framework in this paper we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans we also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 is still optimal insights gained from the analyses are discussed in the context of an existing compensation scheme

implicit contracts with asymmetric information and bankruptcy the effect of interest rates on layoffs this paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors firms have more information than do the owners of the factors of production and they are also subject to limited liability we show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information the firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined we show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates recent literature in the area of implicit contracts has shown considerable interest in the assumption of asymmetric information henceforth a i papers by azariadis 1982 green and kahn 1982 and grossman and hart 1981 have all shown that a i will interfere with optimal risk sharing but although these models produce non walrasian outcomes it is not clear that they are capable of explaining the observed variations in employment over the business cycle in the absence of a link between the level of employment and other macroeconomic variables these new versions of contract theory are open to the charge that they are presenting a complicated explanation of frictional unemployment one potential link between variations in output and variations in intertemporal prices is suggested by models which explicitly allow for the possibility of bankruptcy sappington 1983 has shown that bankruptcy will generate inefficient outcomes even between risk neutral agents and farmer 1984 has shown that if sappington type contracts are incorporated into a macroeconomic structure then the resulting model predicts that bankruptcies will vary countercyclically over the business cycle although bankruptcy is important however it is unlikely that bankruptcies alone will account for all of the output loss during a recession the purpose of this paper is to show that the assumptions of a i and limited liability will generate a model in which the employment level is inefficient and in which the magnitude of this inefficiency varies systematically with the expected real rate of interest this model predicts that the observed increase in the incidence of layoffs during recessions is directly attributable to the effects of high interest rates on aggregate supply some evidence of the phenomenon to be explained is presented below

partial retirement as a separate mode of retirement behavior partial retirement is a quantitatively important retirement state that shows significant structural differences from behavioral functions of either full retirement or full time work alternative models of the choice of retirement state are estimated on a sample of white married males from the retirement history survey 1967 1973 findings suggest that while partial retirement appears to take several different forms the critical choice for a large number of older workers appears to be that of labor force participation first with either partial or full time employment determined conditionally among participants the model has good explanatory power and conforms to expectations of the effects of various relevant variables on labor supply decisions

firms choice of method of pay using data from the bls industry wage survey the author tests the theory that firms choose their methods of pay by balancing the gains from more precise links between performance and pay against m

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

examining the behaviour of individual uk consumer prices this article examines how uk consumer prices behave using two databases with millions of price observations the microdata that underpin official consumer prices index data and a database of supermarket prices prices do not change continuously but our key finding is the marked heterogeneity in the data that is not consistent with standard microeconomic foundations that typically form the basis of macroeconomic policy models declining hazard functions and the distribution of price changes also argue against representative agent models our results suggest further work is needed to find a model of price setting that genuinely corresponds to how individual uk consumer prices behave

labor market shocks and retirement do government programs matter abstract this paper argues that labor market conditions are an important and often overlooked determinant of retirement transitions in our analysis we examine how the unemployment rate affects retirement and whether the social security ss system and unemployment insurance ui system influence how older workers respond to labor market shocks we use pooled cross sectional data from the march current population survey cps in our analysis we find that downturns in the labor market increase retirement transitions and that the magnitude of this effect is comparable to that associated with moderate changes in financial incentives to retire and to the threat of a health shock facing older workers interestingly retirements only increase in response to an economic downturn once workers become ss eligible suggesting that retirement benefits may help to alleviate the income loss associated with a weak labor market we also estimate the impact of ui generosity on retirement and find little consistent evidence of an effect this suggests that in some ways ss may serve as a more effective form of unemployment insurance for older workers than ui

the cyclicality of sales regular and effective prices business cycle and policy implications author s coibion olivier gorodnichenko yuriy hong gee hee abstract we study the cyclical properties of sales regular price changes and average prices paid by consumers effective prices using data on prices and quantities sold for numerous retailers across many us metropolitan areas inflation in the effective prices paid by consumers declines significantly with higher unemployment while little change occurs in the inflation rate of prices posted by retailers this difference reflects the reallocation of household expenditures across retailers a feature of the data which we document and quantify rather than sales we propose a simple model with household store switching and assess its implications for business cycles and policymakers jel d12 e31 e32 l25 l81

early retirement provisions and the labor force behavior of older men evidence from canada we examine the sequential introduction of early retirement provisions to canada s two public pension plans these reforms provide a unique opportunity to assess the effect of public pension plan parameters on labor supply behavior free of the biases that potentially affect the simple time series or cross section inference presented in many previous studies we find that the reforms led to an increase in pension receipt but had little immediate effect on labor market behavior this is due to the fact that men who initially took advantage of the early retirement provisions would otherwise have had limited labor market participation

a collective tournament abstract traditional tournaments among workers yield suboptimal levels of helping efforts while collective incentives generate free riding or lack incentive compatibility we confront these problems using a tournament between workplaces under fairly restrictive conditions the collective tournament is first best and incentive compatible

optimal forestry contracts under asymmetry of information in this paper i analyze optimal royalty contracts in forestry when the harvesting firm has private information on the cost of harvesting this infinite horizon forest rotation model with asymmetry of information on the cost parameter results in a dynamic incentive problem depending on whether the costs are correlated over time or not the firm either receives rent or receives no rent associated with the continuation part of the rotation choice i characterize the optimal contract explicitly in both cases i also examine the loss in expected welfare surplus resulting from the use of a linear contract instead of the more general non linear contract

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

structuring international cooperative ventures we examine the effect of bargaining power and informational asymmetry on the design of international cooperative ventures in the presence of restrictions on equity participation and investment when the bargaining advantage rests with the multinational equity participation restrictions can increase the profits to domestic firms and encourage sub optimal investment policies overinvestment occurs when the multinational s bargaining advantage is reinforced by an informational advantage while underinvestment occurs when the domestic firm possesses the informational advantage in contrast when the bargaining advantage rests with the domestic firm equity participation restrictions do not affect investment levels

future social security entitlements and the retirement decision abstract a critical question for social security policy is how program incentives affect retirement behavior we use the health and retirement survey hrs to examine the impact of social security incentives on male retirement we implement forward looking models whereby individuals consider the incentives to work in all future years we find that forward looking incentive measures for social security are significant determinants of retirement we also find that private pension incentives have roughly similar effects our findings suggest that social security policies that increase the incentives to work at older ages can significantly reduce the labor force exit rate of older workers

what is a liquidity crisis abstract this paper investigates the role of liquidity it is argued that the firm holds money as a guarantee of solvency to its contractual partners by holding liquid assets the firm is able to increase the efficiency of its contracts variations in the opportunity cost of holding money cause variations in the firm s demand for money and consequent variations in the frequency of contract failures this mechanism is suggested as an alternative explanation of the observed relationship between money income and interest rates

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

secular changes in the work and retirement patterns of older men this paper examines trends in the work and retirement patterns of males aged 58 to 63 in 1969 and 1989 respectively the labor force attachments of this group have fallen for reasons unrelated to changes in individual characteristics or occupational attainment especially sharp reductions at age 62 hint at an increasingly important role for the early retirement provisions in social security attachments to longest jobs have also declined substantially beginning at age 55 although pension incentives may be significant the observed correlations between pensions and employment status may also reflect the role of confounding factors such as poorly measured nonpension wealth

job search requirements for unemployed at the end of working life effects on unemployment dynamics and self employment probabilities this paper investigates the extent to which job search requirements in unemployment insurance u i increase the probability of self employment as a retirement route for causal identification we apply a difference in differences approach using a dutch 2004 policy reform that introduced job search requirements in u i for persons aged 57 5 and older unemployment dynamics and self employment probabilities are studied using a dynamic multinomial logit model with unobserved heterogeneity the results suggest that job search requirements stimulated people to exit unemployment and discouraged older workers to enter unemployment the probability of self employment as an exit route to retirement increased relative to u i but not relative to paid employment

reference prices costs and nominal rigidities we assess the importance of nominal rigidities using a new weekly scanner dataset we find that nominal rigidities take the form of inertia in reference prices and costst defined as the most common prices and costs within a given quarter reference prices are particularly inertial and have an average duration of roughly one year even though weekly prices change roughly once every two weeks we document the relation between prices and costs and find sharp evidence of state dependence in prices we use a simple model to argue that reference prices and costs are useful statistics for macroeconomic

monetary non neutrality in a multisector menu cost model empirical evidence suggests that as much as one third of the u s business cycle is due to nominal shocks we calibrate a multisector menu cost model using new evidence on the cross sectional distribution of the frequency and size of price changes in the u s economy we augment the model to incorporate intermediate inputs we show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non neutrality generated by the model we furthermore show that the introduction of intermediate inputs raises the degree of monetary non neutrality by another factor of three without adversely affecting the model s ability to match the large average size of price changes a single sector model with a frequency of price change equal to the median rather than the mean generates monetary non neutrality similar to that in our multisector model our multisector model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23 of the u s business cycle

on delegating price authority to a regulated firm this article models a regulatory environment in which the regulated firm possesses better information about demand conditions than does the regulator the regulator would like to tie prices to the firm s private information in a socially optimal way to do so the regulator must induce the firm either truthfully to reveal private information or equivalently unilaterally to set socially optimal prices this is accomplished by assessing lump sum subsidies or taxes that depend in an appropriate way on the prices announced by the firm this mechanism can be reinterpreted as a two part tariff scheme whereby both the service fee and price per unit respond to shifting demand conditions

on employer specific information and internal labor markets the human capital literature of which becker s 2 paper is the seminal work stresses the productivity enhancing effects of schooling and on the job training later work by spence 21 and others emphasizes the fact that it is difficult for employers to ascertain the productivity of potential employees and suggests that activities such as schooling may provide employers with signals as to workers productivities in the signalling literature it is assumed that information generated concerning an individual s abilities is general in that it is known to all potential employers yet the information that an employer gathers concerning his workers abilities is not likely to be completely transferable to other employers as a consequence as rosen 18 249 points out there are limitations on the ability of the price system to achieve efficient assignments if the price system is incomplete there is a role for entrepreneurial activity of assembling an optimal work force this paper analyzes the employment relations that arise when employers information concerning new workers abilities is incomplete until after a period of employment the acquisition of such employer specific information is shown to lead to what has been referred to in the literature as internal labor markets internal labor markets as identified by dunlop 5 32 are the complex of rules which determine the movement of workers among job classifications within administrative units these movements may be transfers promotions demotions or layoffs to the exterior labor markets doeringer and piore 3 emphasize skill specificity and on the job training as the key factors in the emergence of the internal labor market along similar lines williamson wachter and harris 22 point out that job idiosyncracy can result in employment relations with attributes like those of internal labor markets by way of contrast this paper emphasizes the role of employer specific information in generating internal labor markets the theory provides an explanation as to why employers dismiss current employees at the same time that new employees are hired evidence that dismissal rates are not insignificant is presented in section iv the theory also provides a new rationale for long term em

dynamic labor contracts under asymmetric information abstract this paper discusses the distortion of employment within a two period asymmetric information contracting model in which an exogenous demand shock is serially correlated and is known only to firms the obtained results show that serial correlations of the state of nature can cause not only underemployment but also overemployment even when overemployment never occurs in the context of a static asymmetric information contracting model

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

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

a rationalization of bonuses penalties and kinked payment functions within an agency model abstract the optimal payment schedule of the simplest principal agent problem can be continuous smooth or kinked or semicontinuous depending on the specifications of objective functions of the principal and or of the agent using the nonsmooth mathematical analysis this article determines a mapping from classes of objective functions into classes of optimal payment functions examples provide illustrations

rules or discretion in public sector decision making rules and discretion in public sector decision making are compared in a macroeconomic setting where there is a potential role for an active stabilization policy when the policymaker has private information about nominal shocks the credibility of announcements about the state of nature is shown to depend critically on both the policymaker s preferences over output and inflation and on the institutional setting rules or discretion the issue of rules versus discretion is found to depend on the flexibility lost under a rule relative to the timeinconsistency problem arising under discretion

the design of supply contracts as a problem of delegation we consider the design of a supply contract as a problem of delegation in a buying firm in general the agent who acts on behalf of a principal in the firm cannot be assumed to transform her information in probability estimates like the principal would do possessing the same information in the investigated case of incomplete information the design of contracts is affected by the beliefs about characteristics of the supplier therefore it is important to analyze in which way the expected profit depends on these probabilities in order to find the principal s optimal instruction the best instruction is determined by a trade off between the costs due to the time the principal spends on dealing with the problem and formulating the instructions and the costs due to a suboptimal menu of contracts offered by the agent

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

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts