financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

the form of incentive contracts agency with moral hazard risk neutrality and limited liability the analysis obtains a complete characterization of the optimal agency contract with moral hazard risk neutrality and limited liability we introduce a critical ratio that indicates the returns to providing the agent with incentives for effort in each random state the form of the contract is debt a capped bonus when the critical ratio is increasing decreasing in the state an increasing critical ratio in the state space setting corresponds to the hazard rate order for the reduced form distribution of output which we term the decreasing hazard rate in effort property dhrep the critical ratio also yields insights into agency with adverse selection

sharing intellectual property rights an exploratory study of joint patenting amongst companies joint patenting by companies the sharing of property rights on inventions is a relatively unknown phenomenon that is generally seen by patent lawyers and firms alike as a second best option that if possible should be avoided however the number of joint patents has increased during the last couple of decades and despite its impopularity firms frequently engage in co ownership of patents this exploratory study is one of the first contributions that provides insight into relevant international legal complications of joint patenting sectoral trends and patterns and the motivation of companies to enter into these specific patenting agreements

setting standards for credible compliance and law enforcement in this paper we examine the setting of optimal legal standards to simultaneously induce parties to invest in care and to motivate law enforcers to detect violators of the law the strategic interaction between care providers and law enforcers determines the degree of efficiency achieved by the standards our principal finding is that some divergence between the marginal benefits and marginal costs of providing care is required to control enforcement costs further the setting of standards may effectively substitute for the setting of fines when penalties for violation are fixed in particular maximal fines may be welfare reducing when standards are set optimally nous considerons dans cet article la determination en information incomplete de normes legales optimales pour a la fois inciter les citoyens a faire preuve de diligence prevention et motiver les agents de la paix a veiller au respect des lois l interaction strategique entre citoyens et agents de la paix determine l efficacite des normes choisies notre resultat principal est a l effet qu un ecart entre benefices marginaux et couts marginaux de la diligence est necessaire afin de reduire les couts d application des lois de plus les normes peuvent etre un substitut aux amendes lorsque les penalites pour infraction sont fixes des amendes maximales peuvent en particulier etre contre indiquees lorsque les normes sont optimalement determinees

legal principles in antitrust enforcement we study antitrust enforcement to channel price fixing incentives of cartels through setting fine schedules and detection levels fines obey legal principles punishments fit the crime proportionality bankruptcy considerations and minimum fines bankruptcy considerations limit maximum fines ensure abnormal cartel profits and impose a challenge for optimal antitrust enforcement we derive the fine schedule and detection level that are constrained optimal under legal principles and sustainability of cartel prices this fine schedule lies below the maximum fine makes collusion on lower prices more attractive than on higher prices and hence relates to marginal deterrence literature this article is protected by copyright all rights reserved

the strategic equivalence of rent seeking innovation and patent race games abstract we establish the strategic equivalence of a variety of rent seeking contests innovation tournaments and patent race games the results allow us to disentangle negative and positive externalities and to apply theorems and results intended for rent seeking games to other games and vice versa we conclude with several examples that highlight the practical utility of our results

contractibility and the design of research agreements we analyze how contractibility affects contract design a major concern when designing research agreements is that researchers may use their funding to subsidize other projects we show that when research activities are not contractible an option contract is optimal the financing firm obtains the option to terminate the agreement and in case of termination broad property rights the threat of termination deters researchers from cross subsidization and the cost of exercising the termination option deters the financing firm from opportunistic termination we test this prediction using 580 biotechnology research agreements contracts with termination options are more common when research is non contractible

reaching for the stars who pays for talent in innovative industries innovative firms need to hire and motivate highly talented workers this article connects the potential returns to innovation to the structure of compensation for skilled employees we show that the software firms that operate in software sectors with high potential upside gains to innovation pay more to star workers than do other firms that operate in stable markets firms operating in product domains with highly skewed positive returns pay employees more in up front starting salaries and offer higher compensation growth the large estimated effects on earnings are robust to the inclusion of a wide range of controls for worker and firm characteristics

the optimal enforcement of insider trading regulations regulating insider trading lessens the adverse selection problem facing market makers enabling them to quote better prices an optimal enforcement policy must balance these benefits against the costs of enforcement such a policy must specify i the conditions under which the regulator conducts an investigation ii the penalty schedule imposed if an insider is caught and iii a transaction tax to fund enforcement we derive the policy that maximizes investors welfare this policy entails investigations following large trading volumes or large price movements or both insiders caught making large trades are assessed the maximum penalty but small trades are not penalized given this policy insiders trade most aggressively on news with an intermediate price impact but refrain from trading on moderate or extreme news

mixed markets and crime abstract this paper specifies and solves a two stage game theoretic model of a mixed market for crime control in the first stage of the model private targets and the government choose levels of policing in the second stage criminals choose targets and the severity of the crimes that they commit the paper s key results are as follows first private policing can both divert crime to targets that lack private protection and also increase the severity of the crime that these less protected targets suffer second an increase in private policing reduces the aggregate expenditure on traditional policing this is an instance of a political incentive externality where private policing affects the objective function of the government specifically it reduces the level of traditional policing that is consistent with the samuelson condition for efficient provision of a public good third the substitution of private for public policing carries with it a change in the technology of policing in effect private policing leads to a shift from enforcement and punishment towards monitoring and target hardening this in turn may lead to an increase in the severity of crime fourth the mixed policing equilibrium is inefficient and in some situations mixing may reduce the utility of all targets

legal uncertainty as a welfare enhancing screen consider legal uncertainty as uncertainty about the legality of a specific action in particular suppose that the threshold of legality is uncertain i show that this legal uncertainty raises welfare legal uncertainty changes deterrence in opposite directions the probability of conviction increases for firms below the threshold while the probability of conviction decreases for firms above the threshold hence legal uncertainty acts as a welfare enhancing screen and increases welfare legal uncertainty discourages some actions with low private benefits while it encourages other actions with high private benefits

incentives to innovate and social harm laissez faire authorization or penalties abstract when firms research can lead to potentially harmful innovations public intervention may thwart their incentives to undertake research by reducing its expected profitability average deterrence and may guide the use of innovation marginal deterrence we compare four policy regimes laissez faire ex post penalties and two forms of authorization lenient and strict if fines are unbounded laissez faire is optimal if the social harm from innovation is sufficiently unlikely otherwise regulation should impose increasing penalties as innovation becomes more dangerous if fines are bounded by limited liability for intermediate levels of expected social harm it is optimal to adopt indifferently penalties or lenient authorization while strict authorization becomes optimal if social harm is sufficiently likely

on the differential behaviour of national and multinational firms a within and across sectors approach this paper looks for different patterns of behaviour of national firms and multinational enterprises mnes its main contribution is the use of a computable general equilibrium perspective to analyse firms performance the model is calibrated for the case of the czech republic which has been a very attractive foreign direct investment location in the last three decades we replicate the arrival of mnes to different sectors of this country in turn and analyse the responses of both types of firms across the 20 different sectors in which the czech economy has been split our results grasp the short run impact the higher labour intensity of national firms leads them to different patterns of production and labour demand compared with mnes operating within the same sector the demand side of the model particularly exports and private consumption drives the evolution of production and labour demand across sectors regarding prices we also find a differential pattern between both types of firms within and across sectors our analysis offers detailed evidence on how the impact of mnes will differ depending on the sector to which they arrive finally the aggregate results suggest that a completely different microeconomic panorama may underlie rather similar macroeconomic outcomes

managing innovation optimal incentive contracts for delegated r d with double moral hazard abstract managing innovation involves double moral hazard because the principal delegates r d to a specialized agent and then makes decisions to apply the resulting invention double moral hazard is significant because innovation by the principal implies that the optimal incentive contract satisfies monotonicity conditions the analysis shows that the optimal incentive contract for delegated r d is an option delegated r d with simultaneous sampling results in shirking but delegated r d with sequential sampling attains the efficient outcome the analysis considers a combined problem with simultaneous and sequential search and gives sufficient conditions under which delegated r d attains the first best the discussion also considers delegated r d with stochastic innovation and with stochastic quality of inventions

the stabilizing effect of inventory in supply chains this paper presents a hierarchical model framework for the analysis of the stabilizing effect of inventories in multiechelon manufacturing distribution supply chains this framework is used to compare the variance of demand to the variance of replenishment orders at different echelons of the system e g retailer wholesaler empirical data and experience with management games suggest that in most industries inventory management policies can have a destabilizing effect by increasing the volatility of demand as it passes up through the chain the bullwhip effect our model helps to explain these observations and indicates mechanisms that can promote stabilization the analysis results also define sufficient conditions for the existence of stabilization and relate these conditions to the optimality of myopic control policies

breaking the law when others do a model of law enforcement with neighborhood externalities abstract a standard assumption in the economics of law enforcement is that the probability of a violator being punished depends only on the resources devoted to enforcement however it is often true that the productivity of enforcement resources decreases with the number of violators in this paper an individual who violates the law provides a positive externality for other offenders because the probability of being punished decreases with the number of individuals violating the law this externality explains the existence of correlation between individuals decisions to break a law the model evaluates the implications when determining the socially optimal enforcement expenditure focusing specifically on the case of neighborhood crime in particular using a parametrized functional form i show that neighborhood externalities will enhance or impede enforcement depending on the crime rate

the quality of innovation and the extent of the market abstract i present a comprehensive model of international trade in technology that considers both the demand for inventions and the supply of inventions on the demand side domestic and foreign firms make strategic technology adoption decisions on the supply side inventors compete to sell licenses for their technology to domestic and foreign firms countries benefit from international trade in technology because they obtain the best invention from a larger pool of inventions international trade in technology increases the extent of the market for inventions and thereby improves the quality of innovation technology trade lowers prices increases outputs and increases the volume of trade in differentiated products when traded products are not close substitutes international markets for technology generate gains from trade the results of the analysis are robust to the possibility of technology transfer either through expropriation or imitation protection of intellectual property rights preserves incentives for entry of inventors and improves the quality of innovation

optimal cartel pricing in the presence of an antitrust authority the dynamic behavior of a price fixing cartel is explored when it is concerned about creating suspicions that a cartel has formed consistent with preceding static theories the cartel s steady state price is decreasing in the damage multiple and the probability of detection however contrary to those theories it is independent of the level of fixed fines it is also shown that the cartel prices higher when a more competitive benchmark price is used in calculating damages

enforcement costs and the optimal magnitude and probability of fines whenever the government uses fines to control harmful activities it incurs certain costs in connection with the enforcement process this article will show how these costs affect the optimal magnitude of fines and the optimal degree of enforcement effort that is the optimal probability of detection of those who commit harmful acts we will distinguish between two types of enforcement costs fixed enforcement costs are costs that do not depend on the number of individuals who commit harmful acts these costs would include for example the expenses borne by a pollution control agency in testing water quality in a lake variable enforcement costs are costs that do depend on the number of individuals who commit harmful acts such as the costs of prosecuting and penalizing polluters in our basic model we assume that the fixed enforcement costs are the costs of maintaining the probability of detection at a certain level and that the variable enforcement costs are the costs of fining individuals the main conclusions of this article may be summarized as follows the optimalfine equals the harm properly inflatedfor the chance of not being detected plus the variable enforcement cost of imposing the fine if the fine is of this magnitude the expected fine will equal the harm caused by the harmful act plus the expected increase in enforcement costs occasioned by it for instance suppose that the probability of detecting a

optimal antitrust policy under different regimes of fines abstract this paper shows how antitrust laws against price fixing can be enforced efficiently in the presence of asymmetric information between the authorities and the industry and under different regimes of pecuniary punishment we consider two regimes of fines that are often used in practice the first involves a fine based on revenues of the industry while the second is related to the damage caused to consumers the analysis shows that since investigation is costly it is optimal from a welfare point of view to tolerate some degree of collusion in both cases comparing the deterrence levels we show that no regime is a priori better than the other in addition we show that for industries where the possibilities of collusion are small the first system dominates the second in terms of efficiency conversely for high possibilities of collusion the second system is better

hierarchical design and enforcement of income tax policies abstract a hierarchical model of tax compliance is studied in which the government selects a tax policy and then delegates the responsibility to collect taxes to the irs there is a fixed distribution of income in the economy individuals differ by their income which is known niether to the government nor to the irs we completely characterize the solution to the irs s revenue maximizing problem when taxpayers are risk neutral the optimal auditing policy divides the reported incomes into at most three groups we show that the government provides a smaller budget to the irs than the irs would wish

competition policy collusion and tacit collusion in this paper i pursue three goals the first is to model collusion in a way that is distinct from noncooperative collusion the second and third are to develop a particular specification of a standard model of noncooperative collusion that permits explicit solution for equilibrium outputs and reversion thresholds and to extend this analysis to allow for a deterrence based competition policy that investigates conduct based on observed high prices investigation thresholds

ceo stock based compensation an empirical analysis of incentive intensity relative mix and economic determinants the use of stock based compensation for u s ceos has increased significantly throughout the 1990s research interest in particular on stock option compensation has similarly increased yet contradictory results create questions about the theoretical underpinnings therefore we revisit the controversy surrounding stock option awards and we further the understanding of restricted stock grants which have escaped similar research focus using a recent data set we obtain convincing empirical support for most theoretical predictions about stock option awards we also find that restricted stock due to its linear payoffs is relatively inefficient in inducing risk averse ceos to accept risky value increasing investment projects copyright 2000 by university of chicago press

ideas for rent an overview of markets for technology this article surveys some of the recent literature on technology markets and summarizes its main issues and insights we structure our analysis in three parts the supply and demand of technology the factors that condition the formation and growth of technology markets industry structure and dynamic issues in addition we summarize some of the studies that have tried to document the size and growth of these markets we find that the literature has focused mainly on the supply of technology but several other aspects of these markets remain under studied including the demand for external technology the role of uncertainty in technology markets and the dynamic interaction between industry structure and the market for technology understanding these will illuminate whether markets for technology will continue to grow or remained confined to pockets of the economy copyright 2010 the author 2010 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

small sample uncertainty aspects in relation to bullwhip effect measurement abstract the bullwhip effect as a concept has been known for almost half a century starting with the forrester effect the bullwhip effect is allegedly observed in many supply chains and it is generally accepted as a potential malice despite this the bullwhip effect still seems to be first and foremost a conceptual phenomenon some even simply denies that the phenomenon exists at all in practice this of course makes it important to perform measurements because only what gets measured gets done as the saying goes in analytics few measurements are reported in the literature however typically based on standard statistical assumptions in the case of a standard measurement of the bullwhip effect independence amongst the participating variables are required amongst others but this is definitely known not to be perfectly true if any systematic control at all have taken place in the supply chain this paper analyses the bullwhip measurement implications in case the standard test assumptions are violated and illustrates how to improve on the testing setup this is further done with a special emphasis on the unavoidable small sample aspects relating to such measurement in practice which typically renders all statistical asymptotic or robust arguments quite unusable it is shown how h 0 95 confidence test intervals still easily can be obtained numerically in such cases

fines and reputational sanctions the case of cartels abstract in this article we revive an old debate in the law and economics literature the relative role of public and reputational sanctions in deterring misconduct we propose an empirical framework which accounts for public sanctions in our case cartel fines and a more direct measure of reputational sanctions harnessing recent developments in opinion mining we use the intensity and the sentiment of media exposure of misconduct as a measure of reputational effect and thus approximation of the reputational sanction as a demonstration we combine an event study approach sentiment analysis and econometric techniques on a sample of 339 listed cartel member firms prosecuted by the european commission between 1992 and 2015 our results offer evidence that in the context of cartels public and reputational sanctions act as substitutes where there is a reputational penalty increasing this penalty reduces the effect of the public sanction one the other hand in the absence of a reputational punishment the effect of the cartel fine steps in

information distortion in a supply chain the bullwhip effect this article originally appeared in management science april 1997 volume 43 number 4 pp 546 558 published by the institute of management sciences consider a series of companies in a supply chain each of whom orders from its immediate upstream member in this setting inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions this paper claims that the information transferred in the form of orders tends to be distorted and can misguide upstream members in their inventory and production decisions in particular the variance of orders may be larger than that of sales and distortion tends to increase as one moves upstream a phenomenon termed bullwhip effect this paper analyzes four sources of the bullwhip effect demand signal processing rationing game order batching and price variations actions that can be taken to mitigate the detrimental impact of this distortion are also discussed

antitrust enforcement under asymmetric information optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting the antitrust authority does not know cartel costs and so cannot distinguish between a high cost competitive industry and a low cost cartel the problem differs from principal agent models since firms can choose competitive or collusive behavior with costly enforcement the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price collusive firms moderate markups to reduce the risk of being prosecuted copyright 1989 by royal economic society

a theory of delegated search for the best alternative searching for the best worker a reliable supply alternative or the most profitable investment is frequently delegated to an agent this article develops a theory of delegated search we show that the principal s ability to delegate depends on the agent s luck her initial resources and the contract that governs her search with moral hazard the optimal contract is characterized by performance deadlines with bonuses for early completion if performance cannot be specified the optimal search is implemented by an option to buy contract for the principal if performance is partially specified the optimal contract is a standard pay for performance arrangement

modeling and analysis of cash flow bullwhip in supply chain abstract the bullwhip effect that occurs in supply chain inventory can distort demand forecasts and lead to inefficiencies such as excessive inventory stock outs and backorders in this paper we theorize that inventory bullwhip also leads to cash flow bullwhip cfb specifically this paper focuses on studying cfb by developing mathematical and simulation models to analyze the relationship between inventory and cash flow bullwhip by using cash conversion cycle ccc as a metric the mathematical models for inventory bullwhip are developed for two stage and generic multi stage supply chains and then by extending these inventory models the cfb models are developed for two stage cfb predicted by the proposed mathematical models approximately differ 14 from detailed simulation models we find that increasing variability increases inventory and cash flow bullwhip along with lead time whereas increasing the demand observation period has the opposite effect the average marginal impact of the bullwhip effect on the cfb is approximately 20 additionally the cfb is also an increasing function of an expected value of inventory and a decreasing function of an expected value of demand

information distortion in a supply chain the bullwhip effect commentary consider a series of companies in a supply chain each of whom orders from its immediate upstream member in this setting inbound orders from a downstream member serve as a valuable informational input to upstream production and inventory decisions this paper claims that the information transferred in the form of orders tends to be distorted and can misguide upstream members in their inventory and production decisions in particular the variance of orders may be larger than that of sales and distortion tends to increase as one moves upstream a phenomenon termed bullwhip effect this paper analyzes four sources of the bullwhip effect demand signal processing rationing game order batching and price variations actions that can be taken to mitigate the detrimental impact of this distortion are also discussed

the bullwhip effect progress trends and directions the bullwhip effect refers to the phenomenon where order variability increases as the orders move upstream in the supply chain this paper provides a review of the bullwhip literature which adopts empirical experimental and analytical methodologies early econometric evidence of bullwhip is highlighted findings from empirical and experimental research are compared with analytical and simulation results assumptions and approximations for modelling the bullwhip effect in terms of demand forecast delay replenishment policy and coordination strategy are considered we identify recent research trends and future research directions concerned with supply chain structure product type price competition and sustainability

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

agency costs and innovation abstract stylized facts indicate that small firms are responsible for a disproportionate share of innovative research there are many possible explanations for this fact the paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations it is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes mixing hard to measure activities innovation with easy to measure activities routine is particularly costly since it will either lead to misallocation of attention across tasks or to misallocation of risk larger firms are at a comparative disadvantage in conducting highly innovative research because of the costs associated with managing a heterogeneous set of tasks it is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets both of which are hostile to innovation

auctionin entry into tournaments a research tournament model with heterogeneous contestants is presented for a large class of contests the optimal number of competitors is two this insight makes designing the tournament easier and highlights the importance of selecting highly qualified contestants while customary uniform price and discriminatory price auctions are intuitively appealing mechanisms for solving this adverse selection problem in practice they generally will not be efficient mechanism for selecting contestants instead we propose an alternative auction format that is equally simple to implement and efficiently selects the most qualified contestants to compete regardless of the form of contestant heterogeneity

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

marginal deterrence in enforcement of law we characterize optimal enforcement in a setting in which individuals can select among various levels of some activity all of which are monitored at the same rate but may be prosecuted and punished at varying rates for less harmful acts marginal expected penalties ought to fall short of marginal harms caused indeed some range of very minor acts should be legalized for more harmful acts whether marginal expected penalties should fall short of or exceed marginal harms depends on the balance between monitoring and prosecution punishment costs we also explore how the optimal enforcement policy varies with changes in these costs

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

determination of optimal penalties for antitrust violations in a dynamic setting we analyze a differential game describing the interactions between a firm that might be violating competition law and the antitrust authority the objective of the authority is to minimize social costs loss in consumer surplus induced by an increase in prices above marginal costs it turns out that the penalty schemes which are used now in eu and us legislation appear not to be as efficient as desired from the point of view of minimization of consumer loss from price fixing activities of the firm in particular we prove that full compliance behavior is not sustainable as a nash equilibrium in markovian strategies over the whole planning period and moreover that it will never arise as the long run steady state equilibrium of the model we also investigate the question which penalty system enables us to completely deter cartel formation in a dynamic setting we found that this socially desirable outcome can be achieved in case the penalty is an increasing function of the degree of offence and is negatively related to the probability of law enforcement

reasonable doubt and the optimal magnitude of fines should the penalty fit the crime models of the enforcement compliance relationship have assumed that both the probability and magnitude of fines are independent choice variables of policy makers these models indicate that it may be optimal to monitor with lowfrequency but to inflict uniformly maximal penalties for all infractions detected this article shows that if the judicial system is built on the reasonable doubt test then the penalty and the probability of conviction are not independent in particular as the penalty increases the probability of conviction falls as a result uniformly maximal penalties may actually encourage crime rather than deter it this article shows that optimal fines should rise with the severity of the infraction that is the penalty should fit the crime models of the enforcement compliance relationship generally treat both the probability and magnitude of fines as independent choice variables of the government this approach has led becker 1968 and others to conclude that it is optimal to set uniformly maximal penalties for all crimes and to set the probability of conviction at the minimum level necessary to enforce compliance with the law while this normative prescription is natural and intuitive there still remains a larger positive question of why in most nations of the world penalties are not uniformly high but rather rise with the severity of the crime one possible resolution of the positive and normative questions may lie in the fact that penalties and probabilities of conviction are not generally independent convictions are typically determined by judges or jurors who are instructed to convict only if the evidence convinces them beyond a reasonable doubt that the accused is guilty psychologists however have found that a juror s willingness to convict may be influenced by more than just the evidence jurors are very sensitive to the potential penalties that defendants may pay

a microcredit contract model with a black scholes model under default risk microfinance has emerged as a new promise for alleviating poverty and improving the limited access to financial services by offering small loans with no pledged collateral requirement to the poor due to the unique features of microfinance the credit relationship between the lender and the borrower is considered to be the foundation of the business based on the concept of supply chain microfinance this paper develops scenario based stochastic microcredit contract models for a group case in order to obtain a minimum interest rate a black scholes debt model estimates volatility directly from market observable returns on a borrower s equity next incorporating the minimum interest rate the stochastic microcredit models are developed to calculate a proper interest rate while maintaining the financial sustainability of a corporation the stochastic microcredit models also include financial statement analysis through financial ratios to reflect the microfinance business environment through the comparison of the effect of cash flow bullwhip this study illustrates that the proposed model has the potential to decrease the bullwhip effect by determining a proper interest rate in microcredit the proposed models could be used by microfinance institutions as an effective credit risk tool

inventories and the volatility of production a stylized fact associated with inventory behavior is that the variance of production exceeds the variance of sales this paper presents a model of production decisions with demand uncertainty that incorporates no nnegativity constraints on inventories even with no productivity shocks optimal behavior by the firm is consistent with this stylized fact either if demand exhibits positive serial correlation or if the firm can backlog excess demand the reason is that a demand shock affects both the actual inventory level given unchanged production and the desired level production must replenish the stock and adjust to the new desired level copyright 1987 by american economic association

conditions of reverse bullwhip effect in pricing under joint decision of replenishment and pricing abstract a reverse bullwhip effect in pricing rbp occurs when an amplification of price variability takes place moving from the upstream suppliers to the downstream customers in a supply chain in this study we investigate rbp conditions for supply chains where joint replenishment and pricing decisions are made commencing with a single stage supply chain in which a retailer faces a random and price sensitive demand we extend the results to a multi stage supply chain using a leader follower game theoretical framework we discuss rbp conditions for supply chains where newsvendor and continuous review inventory policies are employed and present numerical examples for commonly used demand functions

asymmetric responses in the timing and magnitude of changes in australian monthly petrol prices to daily oil price changes abstract this article investigates whether uncompetitive pricing tactics are being employed in the retail petrol market in australia through examining the effect of a change in daily oil prices on monthly petrol prices to do so we incorporate asymmetry into the coefficients of a normalised beta weighting function within an asymmetric mixed data sampling amidas framework this enables us to examine both the timing and the lagged marginal effects of a change in retail petrol prices in response to a change in the oil price we find evidence of asymmetries in both the timing and magnitude of retail petrol prices to a change in the oil price specifically we find that while price falls are slowly and symmetrically passed onto consumers price increases are more delayed but higher in intensity over time depending on the capital city when retailers eventually do increase petrol prices in response to an oil price rise with delay the price rise is between 2 1 and 3 4 times more than when retailers reduce petrol prices in response to a fall in the price of oil this finding is consistent with retailers delaying substantial petrol price rises in order to mask the existence of uncompetitive practices

cartel pricing dynamics in the presence of an antitrust authority cartel pricing is characterized when firms are concerned about creating suspicions that a cartel has formed balancing concerns about maintaining the stability of the cartel with those of avoiding detection the cartel may either i gradually raise price to its steady state level or ii gradually raise price and then have it decline to its steady state level antitrust laws may have a perverse effect as they make cartel stability easier and thus allow for higher cartel prices

cartel pricing dynamics with cost variability and endogenous buyer detection this paper characterizes collusive pricing patterns when buyers may detect the presence of a cartel buyers are assumed to become suspicious when observed prices are anomalous we find that the cartel price path is comprised of two phases during the transitional phase price is generally rising and relatively unresponsive to cost shocks during the stationary phase price responds to cost but is much less sensitive than under non collusion or simple monopoly the length of the transition phase is decreasing in the variance of cost shocks it is also shown that the cartel price path may overshoot its long run level so that price converges from above

entry and r d in procurement contracting abstract a model of competitive procurement and contracting is presented in this paper the key features of the model include precontract r d an endogenous number of homogeneous firms and sealed bid auction rules both diminishing and constant returns to scale drs and crs in r d expenditure technologies are considered i find that the sealed bid first price auction fpa is equivalent to the second price auction spa under drs technology the revenue equivalence theorems breaks down under crs because multiple equilibria arise in the r d stage when spa is used howerer spa yields a unique perfect equilibrium given sufficient heterogeneity among potential firms the free entry perfect equilibrium is also characterized the buyer prefers free entry through an appropriate selection of the reservation price

effective incomplete contracts and milestones in market distant r d collaboration abstract r d outsourcing is often conducted during the early market distant stages of the innovation process however the main obstacle to this potentially efficient interfirm specialization is the high danger of moral hazard most organizational mechanisms fail to control that type of opportunism because of information asymmetries even ex post in the theory of incomplete contracts this problem is mitigated by assigning the control rights to the supplier to date empirical studies have mainly investigated the interfirm distribution of the control rights however we do not know yet which concrete control right is crucial with regard to supplier opportunism which is the decisive dependent variable our study addresses this research gap for the first time we extend the empirical focus from biotechnology and pharmaceutical firm alliances to a cross industry sample of 113 collaboration cases the results show the effectiveness of contracts that ex ante assign patent ownership rights to the supplier the findings are also relevant for management practice because the majority of practitioners do not use this contract type yet although there is no sign of an effective alternative

stochastic financial analytics for cash flow forecasting abstract accurate cash flow forecasting is essential for successful management of firms and it becomes especially critical during uncertain market and credit conditions without accurate cash flow forecasting a firm may fail to meet its short term obligations and risk bankruptcy accurate cash flow forecasting can be limited by a number of factors including changes in macro economic conditions that influence liquidity in the economy customer payment behavior that can vary from time to time as well by industry and dynamics of the particular supply chain itself we develop stochastic financial analytics for cash flow forecasting for firms by integrating two models 1 markov chain model of the aggregate payment behavior across all customers of the firm using accounts receivable aging and 2 bayesian model of individual customer payment behavior at the individual invoice level as the stochastic dynamics of cash flow evolves every day the forecast can be updated every time an invoice is paid the proposed model is back tested using empirical data from a small manufacturing firm and found to differ 3 6 from actual monthly cash flow and differs approximately 2 4 compared to actual annual cash flow the forecast accuracy of the proposed stochastic financial analytics model is found to be considerably superior to other techniques commonly used furthermore in computer simulation experiments the proposed model is found to be largely robust to supply chain dynamics including when subjected to severe bullwhip effect the proposed model has been implemented in excel which allows it to be easily integrated with the accounts receivable aging data making it practicable for small and large firms

imperfect competition law enforcement competition policy is a subject of often heated debate competition authorities seeking to prevent or battle anticompetitive acts in complex cases to the best of their abilities regularly find themselves advised by rival economic theories and disputed empirical analyses as a consequence there is a real possibility that they may occasionally err missing true violations of competition law or finding firms liable that actually had no other intentions than good competition in this paper possible consequences of such imperfect competition law enforcement on firm strategies are considered in a simple model of collusion it is found that the incidence of anti competitive behavior increases in both types of enforcement errors type ii errors decrease expected fines while type i errors encourage industries to collude precautionary when they face the risk of a false conviction hence fallible antitrust enforcement may stifle genuine competition thus stimulating the very behavior competition policy is meant to deter when enforcement errors are non negligible competition authorities run the risk of being over zealous in the sense that welfare is best served by an authority that is selective and conscientious in its targeting of alleged anticompetitive acts

looking behind the curtain effects from modernization of european union competition policy abstract the european commission issued a proposal for reform of some aspects of communitary competition policy in particular proposes a shift from ex ante control notification system to an ex post control regime of agreements or decisions conflicting with article 81 ex article 85 we highlight the expected effects of this shift on the type of agreements that firms will implement the type of agreements has been taken as exogenous in most analysis of the reform proposal we contend that significant economic effects may result from recognizing the endogeneity of agreements we predict that the proposed reform will result in general in firms implementing less restrictive agreements

on allocative distortions in problems of self selection this article considers the general structure of self selection models by imposing conditions which permit the ordering of agents by their preferences we provide a characterization of the distortions inherent in the sorting process

why zero tolerance of misconduct is undesirable in contests competition can foster misconduct in any circumstance where the organizer of a contest cannot perfectly monitor contestants actions or when doing so is prohibitively costly although misconduct comprises all actions that are contrary to the interest of the organizer it is not necessarily the case that it is optimal to prohibit all such behavior in this paper we determine the equilibrium level of misconduct chosen by players in a symmetric rank order tournament between two competitors in which the organizer tolerates some level of misconduct in addition to showing that zero tolerance may not minimize the level of misconduct in equilibrium we show that there exists a range of tolerated misconduct where a symmetric mixed strategy equilibrium exists with players cheating i e misconduct above the tolerated level with some probability when the gain from misconduct is uncertain and unknown the contest organizer faces a tradeoff tolerating more misconduct will reduce such behavior when the state of temptation is high but increase it when temptation is low jel j33 k42

patents as options some estimates of the value of holding european patent stocks in many countries holders of patents must pay an annual renewal fee in order to keep their patents in force this paper uses data on the proportion of patents renewed and the renewal fees faced by post world war ii cohorts of patents in france the united kingdom and germany in conjunction with a model of patent holders renewal decisions to estimate the returns earned from holding patents in these countries since patents are often applied for at a nearly stage in the innovation process the model allows agents to be uncertain about the sequence of returns that will be earned if the patent is kept inforce formally then the paper presents and solves a discrete choice optimal stochastic control model derives the implications of the model on aggregate behaviour and then estimates the parameters of the model from aggregate data the estimates enable a detailed description of the evolution of the distribution of returns earned from holding patents over their life spans and calculations of both the annual returns earned from holding the patents still in force or the patent stocks in the alternative countries and the distribution of the discounted value of returns earned from holding the patents in a cohort this abstract was borrowed from another version of this item

optimising criminal behaviour and the disutility of prison we use rich microdata on bank robberies to estimate individual level disutilitiesities of imprisonment the identification rests on the money versus apprehension trade off that robbers face inside the bank when deciding whether to leave or collect money for an additional minute the distribution of the disutility of prison is not degenerate generating heterogeneity in behaviour our results show that unobserved heterogeneity in robber ability is important for explaining outcomes in terms of haul and arrest furthermore higher ability robbers are found to have larger disutilities suggesting that increased sentence lengths might effectively target these more harmful criminals

cash flow management and manufacturing firm financial performance a longitudinal perspective abstract a firm s cash flow policies which manage working capital in the form of cash receivables from customers inventory holdings and cash payments to suppliers are inexorably linked to the firm s operations building on earlier research this study i extends prior studies by examining the relationships between changes in cash flow measures and changes in firm financial performance using a longitudinal sample of firm data and ii investigates the direction of the relationship between quarterly changes in cash flow positions and firm financial performance this study is conducted using the generalized estimating equations gee methodology to analyze a longitudinal sample of eight quarters of cash flow and financial performance data from 1233 manufacturing firms the analyses find that changes in the widely used cash conversion cycle ccc metric do not relate to changes in firm performance however changes in the less used operating cash cycle occ metric are found to be significantly associated with changes in tobin s q this examination of how changes in specific cash flow measures relate to changes in tobin s q shows that both reductions in accounts receivables measured as days of sales outstanding dso and reductions in inventory measured as days of inventory outstanding dio relate to firm financial performance improvements that persist for several quarters endogeneity tests of whether a firm s cash flow management strategy leads to changes in firm performance or if the cash flow strategy is a byproduct of firm performance suggest that reductions in dso lead to improved firm financial performance

marginal deterrence at work abstract the marginal deterrence principle of law enforcement implies that penalties must be scaled according to the severity of crimes in order to deter individuals from committing more severe offenses in this paper we test whether the us legal system is consistent with the rational economic model of marginal deterrence to this purpose we use novel and unique data on sentence length for a large sample of inmates in us correctional facilities combined with an official ranking of crimes by severity and with proxies for the maximum possible punishment and for the cost of monitoring criminals specifically the cost of policing in each us state over a period spanning up to 50 years we find that sentences are on average longer in states where maximum punishment is higher and monitoring cost is lower we document that these relations are systematically stronger in states where the private benefits from crime are more heterogeneous finally we show that sanctions increase relatively faster with the severity of crimes in states with higher maximum punishment and lower monitoring cost overall these results point to the rational economic model of marginal deterrence as providing a reasonable description of the actual enforcement policies chosen by regulators

the optimal use of fines and imprisonment abstract this paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities these sanctions are analyzed separately as well as together first for identical risk neutral individuals and then for two groups of risk neutral individuals who differ by wealth when fines are used alone and individuals are identical the optimal fine and probability of apprehension are such that there is some underdeterrence if individuals differ by wealth then the optimal fine for the high wealth group exceeds the fine for the low wealth group when imprisonment is used alone and individuals are identical the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence if individuals differ by wealth the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group when fines and imprisonment are used together it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term the effects of risk aversion of these results are also discussed

marginal deterrence when offenders act sequentially marginal deterrence concerns the incentives created by criminal penalties for offenders to refrain from committing more harmful acts we show that when offenders act sequentially it is often optimal for the level of the sanction not just the expected sanction to rise with the severity of the act even when enforcement is specific

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

compulsory or voluntary pre merger notification theory and some evidence abstract we compare the prevailing system of compulsory pre merger notification with the australian system of voluntary pre merger notification it is shown that for a non trivial set of parameter values a perfect bayesian equilibrium exists in mixed strategies in which the regulator investigates un notified mergers with probability less than one and the parties choose notification with probability less than one thanks to the signaling opportunity that arises when notification is voluntary voluntary notification leads to lower enforcement costs for the regulator and lower notification costs for the merging parties some of the theoretical predictions are supported by exploratory empirical tests using merger data from australia overall our results suggest that voluntary merger notification may achieve objectives similar to those achieved by compulsory systems at lower costs to the merging parties as well as to the regulator

sources of technical innovation in the network of companies providing chemical process plant and equipment abstract the purpose of this paper is to explore issues concerning technological innovation in the network of firms linked to the chemical industry with particular reference to the process plant contracting industry while technological and economic maturity inhibit the research and development activities of plant contractors little evidence was found of contractors adopting novel strategies to capture special advantage from technology developed by equipment manufacturing firms it is suggested that the changing economic and technological environment is creating a climate where new or closer contractor equipment manufacturer relationships should receive greater attention appropriate alliances between contractors and equipment manufacturers can not only help to reduce plant design procurement and erection costs but also offer a means to counter the competitive threat from more specialist firms in particular the large equipment manufacturers that possess their own project contracting skills furthermore collaboration in niche and technology fusion type innovation offers a means of generating scope for technological competitive advantage whilst sharing cost and risk whilst contractor equipment manufacturer alliances are one option the nature of the market demands operating company involvement to facilitate commercialisation

optimal environmental taxation and enforcement policy abstract we study the optimal environmental taxation and enforcement policy when i the regulator does not know the firms abatement costs ii penalties for tax evasion are limited and iii monitoring of pollution is costly we show that the threat of being audited alter the usual firms incentives to over estimate their abatement costs in particular depending on the firms abatement costs the optimal policy may involve over or under deterrence compared to the full information outcome we then investigate the properties of a pollution standard we show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered