the timing of industry and firm earnings information in security prices a re evaluation abstract this paper re evaluates evidence in ayers and freeman ayers f freeman r 1997 market assessment of industry and firm earnings information journal of accounting and economics 24 205 218 suggesting that investors anticipate industry wide components of earnings earlier than firm specific components and that post earnings announcement drift following annual earnings announcements is due primarily to firm specific components of earnings our tests indicate that post announcement drift is entirely attributable to coefficient bias due to measurement errors in the use of realized earnings changes as proxies for unexpected earnings also coefficient differences in the market s anticipation of subsequent year industry and firm specific earnings become insignificant when we introduce suitable controls for non linearity in the return earnings relation

but who will monitor the monitor suppose that providing incentives for a group of individuals in a strategic context requires a monitor to detect their deviations what about the monitor s deviations to address this question i propose a contract that makes the monitor responsible for monitoring and thereby provides incentives even when the monitor s observations are not only private but costly too i also characterize exactly when such a contract can provide monitors with the right incentives to perform in doing so i emphasize virtual enforcement and suggest its implications for the theory of repeated games jel c78 d23 d82 d86

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

non linear pricing with budget constraint abstract this paper purports to study the non linear pricing problem when a budget constraint limits the magnitude of the monetary transfer we show that distortions even affect consumers for which the constraint does not bind

industry classifications and return comovement a company s industry affiliation is commonly used to construct homogeneous stock groupings for portfolio risk management relative valuation and peer group comparisons a variety of industry classification systems have been adopted however creating disagreements as to companies industry assignments this analysis of the global industry classification system gics and fama french system indicates that common movement in returns and operating performance resulting from industry effects is stronger for stocks of large companies than for those of small companies also increasingly fine levels of disaggregation improve discrimination up to six digit gics codes after which the benefits tail off stock groupings based on industry exhibit stronger out of sample homogeneity than groups formed from statistical cluster analysis

natural groups and economic characteristics as driving forces of wage discrimination we investigate whether the origin of an employee provides different motives for wage discrimination in gift exchange experiments with students and migrant workers in china in a lab and an internet experiment subjects in the role of employers can condition their wages on the employees home provinces the resulting systematic differences in wages can be linked to natural groups and economic characteristics of the provinces in group favoritism increases wages for employees who share the same origin as the employer while an increased probability of being matched with an employee with a different ethnicity reduces wages furthermore wages in the laboratory increase with the actual wage level in the employees home province nevertheless employees effort is not influenced by these variables only the wage paid in the experiment influences effort

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

a theory of contracts with limited enforcement we present a theory of contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset public enforcement relies on remedies for breach private enforcement comes from severing relationships we first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly whether a long term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller while under complete information the optimal contract would remain stationary non stationarity might arise under asymmetric information enforcement constraints are time dependent and easier to satisfy as time passes indeed a high cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on yet such take the money and run strategy becomes less attractive as time passes and can be prevented with backloaded payments the optimal contract thus goes through two different phases first quantities and prices increase at the inception of the relationship later on the contract looks more stationary the public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting long run screening distortions encapsulate the quality of enforcement offering de facto a link between the quality of the legal system and contractual performances

underreaction to industry wide earnings and the post forecast revision drift we test whether the post forecast revision drift is mainly attributable to investors underreaction to industry wide earnings news conveyed by analysts forecast revisions we find a large drift associated with industry wide earnings news but no drift associated with firm specific earnings news consistent with the functional fixation hypothesis we provide evidence that the post forecast revision drift is driven by investors underreaction to the higher persistence of industry wide earnings although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals

nonstationary relational contracts with adverse selection i develop a model of nonstationary relational contracts in order to study internal wage dynamics workers are heterogeneous and each worker s ability is both private information and fixed for all time learning therefore occurs within employment relationships the inferences however are confounded by moral hazard incentive provision is restricted by an inability to commit to long term contracts relational contracts which must be self enforcing must therefore be used the wage dynamics in the optimal contract which are pinned down by the tension between incentive provision and contractual enforcement are intimately related to the learning effect

incomplete contracts and strategic ambiguity why are observed contracts so often incomplete in the sense that they leave contracting parties obligations vague or unspecified traditional answers to this question invoke transaction costs or bounded rationality in contrast the authors argue that such incompleteness is often an essential feature of a well designed contract specifically once some aspects of performance are unverifiable it is often optimal to leave other verifiable aspects of performance unspecified the authors explore the conditions under which this occurs and investigate the structure of optimal contracts when these conditions are satisfied copyright 1998 by american economic association

race and gender discrimination in bargaining for a new car more than three hundred paired audits at new car dealerships reveal that dealers quoted significantly lower prices to white males than to black or female test buyers using identical scripted bargaining strategies ancillary evidence suggests that the dealerships disparate treatment of women and blacks may be caused by dealers statistical inferences about consumers reservation prices but the data do not strongly support any single theory of discrimination copyright 1995 by american economic association

what s my line a comparison of industry classification schemes for capital market research this study compares four broadly available industry classification schemes in a variety of applications common to capital market research standard industrial classification sic codes have been available since 1939 but are being replaced by north american industry classification system naics codes the global industry classifications standard gics sm system jointly developed by standard poor s and morgan stanley capital international msci is popular among financial practitioners whereas the fama and french 1997 algorithm is used primarily by academics our results show that gics classifications are significantly better at explaining stock return comovements as well as cross sectional variations in valuation multiples forecasted and realized growth rates research and development expenditures and various key financial ratios the gics advantage is consistent from year to year and is most pronounced among large firms the other three methods differ little from each other in most applications

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

anonymous job applications of fresh ph d economists abstract this paper analyzes anonymous job applications of ph d economists in the academic job market we use data on interview invitations from a randomized experiment at a european based research institution results show that the underrepresented gender was hurt by anonymous applications

contract duration and relationship specific investments empirical evidence from coal markets this paper examines the importance of specific relationship investments in determining the duration of coal contracts negotiated between coal suppliers and electric utilities data for 277 coal contracts are used to perform the analysis the results provide strong support for the view that buyers and sellers make longer commitments to the terms of future trade at the contract execution stage and rely less on repeated bargaining when relationship specific investments are more important

a meta analysis of the international gender wage gap abstract since the early 1970s a number of authors have calculated gender wage differentials between women and men of equal productivity this meta study provides a new quantitative review of this vast amount of empirical literature on gender wage differentials as it concerns not only differences in methodology data and time periods but also different countries we place particular emphasis on a proper consideration of the quality of the underlying study which is done by a weighting with quality indicators the results show that data restrictions i e the limitation of the analysis to new entrants never marrieds or one narrow occupation only have the biggest impact on the resulting gender wage gap moreover we are able to show what effect a misspecification of the underlying wage equation like the frequent use of potential experience has on the calculated gender wage gap over time raw wage differentials worldwide have fallen substantially however most of this decrease is due to better labor market endowments of females

the firm as a nexus of treaties part 1 knowledge its acquisition sharing and or asymmetry the participatory generation of information rents and the theory of the firm masahiko aoki common knowledge and the co ordination of economic activities jacques cremer profit sharing information and employment matti pohjola part 2 vertical integration and the strategic management of the enterprise what is vertical integration michael h riordan vertical integration transaction costs and learning by using kurt lundgren the firm as a nexus of internal and external contracts torger reve part 3 issues of labour organization the viability of worker ownership an economic perspective on the political structure of the firm henry hansmann intellectual skill and the role of employees as constituent members of large firms in contemporary japan kazuo koike the implicit contract for corporate law firm associates ex post opportunism and ex ante bonding robert h mooking part 4 finance and the political structure of the firm capital structure as a mechanism of control a comparison of financial systems erik berglof long term contracts in financial markets hakan lindgren the principle of external accountability in competitive markets herbert gintis union militancy and plant designs kar ove moene can transaction cost economics explain trade associations marc schneiberg and j rogers hollingsworth

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

do investors see through mistakes in reported earnings this study investigates whether investors see through materially misstated earnings and whether they anticipate earnings restatements for firms that restate at least one annual report we find that investors are misled by mistakes in reported earnings at the time of initial earnings announcements investors react positively to the component of the favorable earnings surprise that will subsequently be restated and they attach the same valuation to it as to the true earnings surprise we also find that investors anticipate the subsequent downward restatements and start marking stock prices down several months before a restatement announcement so that the full impact of a restatement is about three times as large as the restatement announcement effect indeed we show that investors punish restating firms because the stock price gains that shareholders enjoy when firms initially announce overstated earnings are more than reversed by the time of the restatement announcement

the interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

stick to the fundamentals and discover your peers the use of industry as a criterion for selecting peers for multiples based valuation rests on the notion that companies operating in the same industry are more likely to share fundamental value drivers i e profitability growth and risk however such companies may not have similar characteristics in terms of these drivers and thus should not be traded at the same multiple we analyze this issue by developing the sum of absolute rank differences sard approach the sard approach can account for an infinite number of proxies for profitability growth and risk while remaining independent of industry classifications our results indicate that the sard approach yields significantly more accurate valuation estimates than the industry classification approach

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

is there gender discrimination in named professorships an econometric analysis of economics departments in the us south this study examines the correlates of the probability that an individual academician holds a named professorship named professorships like other positions within an organization are determined by a mixture of market and non market forces thus both merit both past and expected future productivity and discrimination may play a role regression results and blinder oaxaca decomposition tests presented here support a conclusion of gender discrimination in the named professorship process at american institutions of higher education specifically it is found that gender discrimination results in a 7 6 percentage point disadvantage for females relative to males regarding the likelihood of holding a named professorship in economics

are emily and greg more employable than lakisha and jamal a field experiment on labor market discrimination we study race in the labor market by sending fictitious resumes to help wanted ads in boston and chicago newspapers to manipulate perceived race resumes are randomly assigned african american or white sounding names white names receive 50 percent more callbacks for interviews callbacks are also more responsive to resume quality for white names than for african american ones the racial gap is uniform across occupation industry and employer size we also find little evidence that employers are inferring social class from the names differential treatment by race still appears to still be prominent in the u s labor market jel j71 j64

gender disparity in angel financing this study uses unique hand collected data from a televised entrepreneurial pitch competition to examine gender differences in obtaining angel financing results indicate that while the yield rates between male and female teams do not differ a gender disparity in the amount of angel funding does in fact exist female teams receive less capital and provide more equity relative to their male counterparts even when controlling for typical determinants of investment such as industry and prior company success further we find that female teams receive investments with lower valuations than their male counterparts largely because they initially offer higher equity stakes for less capital thus this suggests that limitations to angel financing of female entrepreneurial ventures may be partly self imposed

the impact of strategic interaction on earnings expectations associated with corporate product strategies abstract we examine how strategic interaction in an industry influences the earnings expectations of financial analysts with regard to new product strategies we find that following announcement of new products analysts revise earnings forecasts upward more for announcing firms competing in low strategic interaction industries than for firms competing in high strategic interaction industries for value enhancing value reducing product strategies earnings forecast revisions are more favorable for rivals competing under a high low degree of strategic interaction than for rivals competing under a low high degree of strategic interaction overall empirical evidence indicates that the nature of strategic competition within the industry is important in assessing the market expectations of earnings for new product announcers and their rivals

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

a measure of competition based on 10 k filings in this paper we develop a measure of competition based on management s disclosures in their 10 k filing and find that firms rates of diminishing marginal returns on new and existing investment vary significantly with our measure we show that these firm level disclosures are related to existing industry level measures of disclosure e g herfindahl index but capture something distinctly new in particular we show that the measure has both across industry variation and within industry variation and each is related to the firm s future rates of diminishing marginal returns as such our measure is a useful complement to existing measures of competition we present a battery of specification tests designed to explore the boundaries of our measure and how it varies with the definition of industry and the presence of other measures of competition

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

relational contracts and the value of loyalty this paper examines how relational contracting afiects the pattern of trade across the economy we suppose a flrm principal repeatedly chooses among of a set of potential trading partners agents under the threat of holdup the possibility of ex post opportunism allows agents to collect rents which act like a flxed cost that the principal must pay when initiating a new relationship the principal responds by dividing agents into insiders with whom she has previously traded and outsiders with whom she has never traded if the principal is su ciently patient the proflt maximising contract then uses insiders e ciently while being biased against outsiders this optimal strategy can be implemented by a maintenance contract that is robust to asymmetric information

renegotiation proof relational contracts abstract we study infinitely repeated two player games with perfect monitoring and assume that each period consists of two stages one in which the players simultaneously choose an action and one in which they can transfer money to each other in the first part of the paper we derive simple conditions that allow a constructive characterization of all pareto optimal subgame perfect payoffs for all discount factors in the second part we examine different concepts of renegotiation proofness and extend the characterization to renegotiation proof payoffs

reexamining staggered boards and shareholder value abstract cohen and wang 2013 cw2013 provide evidence consistent with market participants perceiving staggered boards to be value reducing amihud and stoyanov 2016 as2016 contests these findings reporting some specifications under which the results are not statistically significant we show that the results retain their significance under a wide array of robustness tests that address the concerns expressed by as2016 our empirical findings reinforce the conclusions of cw2013

managing conflicts in relational contracts a manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker we show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously to manage a conflict the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict finally we show that liquidity constraints limit the manager s ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less jel c73 d74 d86 j33 j41 m12 relational contracts often suffer from conflicts during which workers punish managers for broken promises a common cause for such conflicts is disagreement over the availability and efficient use of funds in a typical conflict of this sort workers demand that a bonus be paid while managers insist that the necessary funds are either nonexistent or would be better spent on something else such as an exceptional investment opportunity one source of disagreement over the availability and efficient use of funds is asymmetric information managers are typically better informed about the challenges and opportunities that their firms face and therefore often have private information about the opportunity costs of paying their workers the aim of this article is to explore optimal relational contracts in such a setting for this purpose we examine the repeated relationship between a manager and a worker in which the manager s opportunity costs of paying the worker are stochastic and privately observed by her in the optimal relational contract the manager promises a bonus if opportunity costs are low but none if they are high conflicts therefore arise whenever the manager does not pay the bonus to manage these conflicts the manager relies on a combination of informal promises and formal commitments that evolves with the duration of the conflict as a result effort and expected profits decline during a conflict only gradually and then recover instantaneously the same pattern is repeated over time

information revelation in relational contracts we explore subjective performance reviews in long term employment relationships we show that firms benefit from separating the task of evaluating the worker from the task of paying him the separation allows the reviewer to better manage the review process and can therefore reward the worker for his good performance with not only a good review contemporaneously but also a promise of better review in the future such reviews spread the reward for the worker s good performance across time and lower the firm s maximal temptation to renege on the reward the manner in which information is managed exhibits patterns consistent with a number of well documented biases in performance reviews

a comparison of industry classification schemes a large sample study in a large sample setting we compare four broadly available industry classification schemes in their effectiveness to group stocks with similar operating characteristics we demonstrate the advantage of the global industry classification scheme to be consistent across different application schemes common to capital market research and across different groups of firms

efficiency in games with markovian private information we study repeated bayesian games with communication and observable actions in which the players privately known payoffs evolve according to an irreducible markov chain whose transitions are independent across players our main result implies that generically any pareto efficient payoff vector above a stationary minmax value can be approximated arbitrarily closely in a perfect bayesian equilibrium as the discount factor goes to 1 as an intermediate step we construct an approximately efficient dynamic mechanism for long finite horizons without assuming transferable utility publication abstract

optimal contracts when enforcement is a decision variable a reply in a simple debt contract the investor seizes all of a firm s assets when the project return is below some threshold and receives a constant payment when the return is higher krasa and villamil 2000 show that simple debt contracts that are optimal ie give the investor the highest payoff among the class of deterministic contracts in the costly state verification model and that satisfy technical conditions al a2 and a reservation utility constraint are optimal in a more general costly enforcement model even when stochastic monitoring is possible 2 the italicized segment of this statement was not made explicit in theorem 1 in krasa and villamil 2000 as sharma points out this restriction is necessary for the result to hold sharma also points out that assumption a2 had a typographical error assumption a2 in krasa and villamil 2000 should have appeared

on the efficiency of intra industry information transfers the dilution of the overreaction anomaly abstract we revisit the stock market anomaly documented by thomas and zhang 2008 and show that the apparent mispricing of information transfers has decayed over time as the us markets experienced rapid improvements in the efficiency of the underlying price formation processes utilizing recent advancements in market microstructure research to estimate firm specific proxies for market efficiency we demonstrate that the existence of the overreaction anomaly where stock prices of late announcers in response to the earnings reported by early announcers in the same industry are negatively related to subsequent price responses of late announcers to their own earnings reports is specific to an earlier sample period and results from the inefficient incorporation of information into prices largely attributable to an environment with high barriers to arbitrage our results indicate that the pricing efficiency of intra industry information transfers has increased in the recent years of increased liquidity and markedly higher trading activity

the design of contracts and remedies for breach in the first part of this article hypothetical contracts providing for all possible uncertain contingencies are considered in the next part contracts providing for only some contingencies are examined and are shown to be advantageous due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them in the following major part of the article two of these substitutes for contingent terms are analyzed remedies for breach and the opportunity for renegotiation the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts

endogenous verifiability and relational contracting for contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract the strict requirements of verifiability make it costly if not impos sible for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court a way out is then to rely on self enforcing relational con tracts through repeated transactions the parties can make it costly for each other to breach the contract by letting breach ruin future trade but the self enforcing range of contracts is limited so the court s ability to enforce a contract is not without consequence for the contracting parties if possible the parties may thus have incentives to take costly actions that affect the ability of the court both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement in this paper we focus on the former assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications we assume that careful contracting can improve the court s ability to verify whether an action conforms to the one described in the contract then we ask what happens to the self enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification in order to provide some answers we analyze a simple repeated principal agent game where the verifiability of the agent s actions is endogenously determined by the principal s investments in drafting an explicit contract pertaining to the quality of the agent s output the model makes it possible to identify some subtle effects of two key enforcement devices legal courts and repeated interaction note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness and the equilibrium level of incompleteness will depend on the verification technology i e the resource costs that are necessary to achieve various verifiability levels this verification technology will be influenced in an essential way by the quality of courts in fact we can use the model to study relationships between two distinct aspects of courts namely their ability which influences the verification technology and their predictability which manifests itself in the equilibrium level of verifiability i e the probability with which the court in fact will verify the relevant action the repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it the discount factor is then a proxy for the trust level in the relationship by studying the effect of variations in verification technology and the discount factor we can gain insight into the rela tionship between court ability explicit contracting trust and relational contracting below we summarize the results

relational contracts and the value of relationships this article studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known i consider a principal agent setting where the principal has persistent private information about her outside option i show that if the principal has the bargaining power she wants to understate her outside option to provide strong incentives and then renege on promised payments while if the uninformed agent has the bargaining power the principal wants to overstate her outside option to capture more surplus i characterize how information is revealed how the relationship evolves and how this depends on bargaining power jel c78 d82 d83 d86

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

imperfect accounting and reporting bias errors and bias are both inherent features of accounting in theory while errors discourage bias by lowering the value relevance of accounting they can also facilitate bias by providing camouflage consistent with theory we find a hump shaped relation between a firm s propensity to engage in intentional misstatement and the prevalence of unintentional misstatements in the firm s industry for the whole economy and a majority of the industries the result is robust to using firms number of items in financial statements and exposure to complex accounting rules as alternative proxies for errors and to using the restatement amount in net income to quantify the magnitude of bias and errors to directly test for the two effects of errors we show that when errors are more prevalent the market reacts less to firms earnings surprises and bias is more difficult to detect our results highlight the imperfectness of accounting advance understanding of firms reporting incentives and shed light on accounting standard setting

on quitting rights in mechanism design quitting rights play a major role in many economic interactions whether in the precontractual phase or after contracts have been signed clearly no party can be forced to sign a contract if she is unwilling to thus implying that quitting rights can be exerted at the ex ante stage when no contract has been signed but quitting rights can also be exerted after explicit contracts have been signed in a number of instances for example most labor contracts allow employees to leave their job if they want to also quitting rights may be asymmetric across agents as labor contracts illustrate employers are generally constrained in their ability to replace their employees

reputation and competition this paper shows how competition generates reputation building behavior in repeated interactions when the product quality observed by consumers is a noisy signal of firms effort level there are two types of firms and good firms try to distinguish themselves from bad firms although consumers get convinced that firms which are repeatedly successful in providing high quality are good firms competition endogenously generates the outside option inducing disappointed consumers to leave firms this threat of exit induces good firms to choose high effort allowing good reputations to be valuable but its uncompromising execution forces good firms out of the market jel c7 d8

orchestrating impartiality the impact of blind auditions on female musicians a change in the audition procedures of symphony orchestras adoption of blind auditions with a screen to conceal the candidate s identity from the jury provides a test for sex biased hiring using data from actual auditions in an individual fixed effects framework we find that the screen increases the probability a woman will be advanced and hired although some of our estimates have large standard errors and there is one persistent effect in the opposite direction the weight of the evidence suggests that the blind audition procedure fostered impartiality in hiring and increased the proportion women in symphony orchestras

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

long term contracting with markovian consumers to study how a firm can capitalize on a long term customer relationship we characterize the optimal contract between a monopolist and a consumer whose preferences follow a markov process the optimal contract is nonstationary and has infinite memory but is described by a simple state variable under general conditions supply converges to the efficient level for any degree of persistence of the types and along any history though convergence is history dependent in contrast as with constant types the optimal contract can be renegotiation proof even with highly persistent types these properties provide insights into the optimal ownership structure of the production technology

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

do industry level analyses improve forecasts of financial performance prior research documents mean reversion in firm profitability and growth under the implicit assumption that profitability and growth of all firms revert to a common benchmark at the same rate however a large body of academic research suggests that there are systematic interindustry differences e g industry barriers to entry that differentially affect firm performance based on industry membership we evaluate the relative forecast accuracy of mean reverting models at the industry and economywide levels and find that industry specific models are generally more accurate in predicting firm growth but not profitability

do contracts make them care the impact of ceo compensation design on corporate social performance using the behavioral agency model we analyze how two compensation design characteristics pay performance sensitivity and duration of ceo compensation taking into account multiple vesting periods affect corporate social performance we find that the performance sensitivity of ceo pay is negatively associated with poor social performance but also negatively affects strong social performance these results suggest that pay performance sensitivity increases the relevance of potential negative consequences of poor social performance however the insurance benefits of strong social performance may also become less relevant with respect to the duration of ceo compensation we find that it reduces poor social performance this finding confirms arguments that a long term compensation time horizon increases the perceived threat that the negative effects of poor social performance will become visible with our findings we integrate behavioral agency theory with the traditional stakeholder views

an intra and inter industry evaluation of three classification schemes common in capital market research we compare the standard industry classification sic the north american industry classification system naics and the global industry classification standard gics schemes in their effectiveness to group stocks with similar operating characteristics we are the first to analyse and compare individual functional category levels within and across each industry classification and test whether the three industry classifications show significant improvement in homogeneity with finer industry partitions across a wide range of research applications our results suggest that the gics system offers advantages over the other two systems in grouping firms across all its levels of industry categories and across different application schemes common to capital market research however the sic and naics offer additional advantages across their finest industry partitions our study has important implications for users of industry classifications in various financial and economic analyses research settings and regul

on the value of commitment with asymmetric information several recent papers have emphasized that long term relationships can be efficiently governed by short term contracts provided that there is no asymmetric information at the contracting dates this excludes not only adverse selection problems but also moral hazards problems in which hidden actions generate private information over the future in this paper we show in the context of a multiperiod principal agent relationship with adverse selection that renegotiable short term contracts can be as efficient as long term renegotiation proof contracts on the other hand spot contracting may fail to achieve long run efficiency not only because of intertemporal smoothing as with symmetric information but also because of ratchet effects and time inconsistency in the optimal structure of informational rents thus some limited commitment seems to be a necessary and sufficient condition to achieve long run efficiency

racial discrimination among nba referees the nba provides an intriguing place to assess discrimination referees and players are involved in repeated interactions in a high pressure setting with referees making split second decisions that might allow implicit racial biases to become evident we find that more personal fouls are awarded against players when they are officiated by an opposite race officiating crew than when they are officiated by an own race refereeing crew these biases are sufficiently large so that they affect the outcome of an appreciable number of games our results do not distinguish whether the bias stems from the actions of white or black referees

accounting information disclosure and the cost of capital in this paper we examine whether and how accounting information about a firm manifests in its cost of capital despite the forces of diversification we build a model that is consistent with the capital asset pricing model and explicitly allows for multiple securities whose cash flows are correlated we demonstrate that the quality of accounting information can influence the cost of capital both directly and indirectly the direct effect occurs because higher quality disclosures affect the firm s assessed covariances with other firms cash flows which is nondiversifiable the indirect effect occurs because higher quality disclosures affect a firm s real decisions which likely changes the firm s ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market we show that this effect can go in either direction but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital

do ceos encounter within tenure settling up a multiperiod perspective on executive pay and dismissal we consider a central puzzle surrounding ceo accountability what explains the payoffs and penalties that ceos receive invoking fama s concept of settling up we examine how a ceo s entire perfo

compensation across executive labor markets what can we learn from cross listed firms there is wide consensus that chief executive officers ceos of us firms earn significantly more than their canadian counterparts using a matched sample we find that the majority of this difference is due to us ceos earning 50 more than ceos of canadian non cross listed firms we find no such us premium for canadian cross listed firms because the use of options allows the cross listed firms to keep pace with their neighbors to the south while firms that list only in canada compete in the labor market defined by their national boundary cross listed firms appear to be competing directly with their us counterparts for executive talent in investigating alternative explanations for the elimination of the compensation differential for canadian cross listed firms we find evidence consistent with both the bonding and the rent extraction hypotheses

the optimal degree of cooperation in the repeated prisoners dilemma with side payments abstract in the infinitely repeated prisoners dilemma with side payments we characterize the pareto frontier of the set of subgame perfect equilibrium payoffs for all possible combinations of discount factors play paths implementing pareto dominant equilibrium payoffs are uniquely determined in all but the first period full cooperation does not necessarily implement these payoffs even when it maximizes total stage game payoffs rather when the difference in players discount factors is sufficiently large pareto dominant equilibrium payoffs are implemented by partial cooperation supported by repeated payments from the impatient to the patient player when both players are sufficiently patient such payoffs while implemented via full cooperation are supported by repeated payments from the impatient to the patient player we characterize conditions under which public randomization has no impact on the pareto dominant equilibrium payoffs and conditions under which such payoffs are robust to renegotiation

determinants of securing academic interviews after tenure denial evidence from a zero inflated poisson model this paper uses a new data set to estimate empirically the optimal job search strategies for recently non tenured economists seeking to obtain an academic job estimates from a zero inflated poisson model suggest that a portion of interview counts is beyond the candidate s control as age colour of skin gender and citizenship all play a part in the interview decision a candidate can substantially enhance the probability of obtaining initial interviews by maintaining quality research and teaching portfolios however

countervailing incentives in agency problems abstract we analyze countervailing incentives in agency problem countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations and to overstate it for others when countervailing incentives arise pooling generally characterizes the equilibrium contract furthermore performance is distorted both above and below efficient levels in addition the agent s rents generally increase with the realization of his private information over some ranges and decrease over other ranges we demonstate that the creation of countervailing incentives can enhance aggregate welfare

asymmetric information bargaining problems with many agents a yes or no decision must be made about some issue all agents must agree the coase theorem asserts that the efficient outcome will always result suppose the value positive or negative that an individual attaches to an affirmative decision is privately known to that individual it is proved under very mild conditions that with independent types as the number of agents increases the probability of an affirmative efficient decision goes to zero an example in which it is common knowledge that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given

optimal contracts when enforcement is a decision variable this paper analyzes choice theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur an intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions the goal of the analysis is to characterize the effect of choice theoretic costly enforcement on the structure of optimal contracts the paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable theorem 1 in contrast stochastic contracts are optimal when agents can commit to the ex ante optimal decisions theorem 2 the paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect bayesian nash equilibrium

investing in a relationship a principal can make an investment anticipating a repeated relationship with an agent but the agent may appropriate the returns through ex post bargaining i study how this holdup problem and efficiency depend on the contracting environment when investment returns are observable informal contracts ex post can be more efficient than formal contracts as they induce higher investment ex ante the principal invests not only to generate direct returns but also to improve relational incentives unobservability of returns increases the principal s ability to appropriate the returns but reduces her ability to improve incentives the optimal information structure depends on bargaining power

on the persistence and pricing of industry wide and firm specific earnings cash flows and accruals economic theory suggests that the industry wide component of firm performance is more persistent than the firm specific component this paper tests whether investors fail to fully appreciate the relatively higher lower persistence of industry wide firm specific earnings consistent with predictions we find that the industry wide component of earnings is a significant predictor of future stock returns we show that this form of mispricing is distinct from the accrual anomaly sloan 1996 a hedge portfolio trading strategy that exploits signals from both industry fundamentals and accounting accruals generates abnormal returns in excess of either strategy alone additional evidence suggests that the market underreacts overreacts to industry wide cash flows firm specific accruals but correctly prices both industry wide accruals and firm specific cash flows

evidence on discrimination in consumer markets economists have contributed to the measurement of racial and ethnic discrimination in consumption and to the identification of its causes especially in housing markets and car sales to test the hypothesis that discrimination exists economists have turned to regression analysis and to audits a matched pair survey technique economists also have developed audit based measures of the incidence and severity of discrimination audit studies find continuing high levels of discrimination against minorities in the marketing of available housing and in car prices audit studies also find that discrimination can be caused both by economic agents prejudice and by their search for profits

relational incentive contracts with persistent private information this paper investigates relational incentive contracts with continuous privately observed agent types that are persistent over time with fixed agent types full separation is not possible when continuation equilibrium payoffs following revelation are on the pareto frontier of attainable payoffs this result is related to the ratchet effect in that 1 a type imitating a less productive type receives an information rent and 2 with full separation one imitating a more productive type receives the same future payoff as that more productive type however the reason for 2 is fundamentally different than with the ratchet effect it arises from the dynamic enforcement requirement in relational contracts not from the principal having all the bargaining power and applies whatever the distribution between principal and agent of the future gains from the relationship i e whatever the point on the pareto frontier this result extends to sufficiently persistent types under certain conditions

bringing the market inside the firm academics consultants and practitioners have long advocated bringing the market inside the firm for example in the 1950 s and 1960 s economists proposed that the transferpricing problem should be solved by charging market prices for internal transactions similarly in the 1980 s financial economists suggested that the capital allocation problem should be solved by charging the external cost of capital for internal investments and wave after wave of organizational restructuring has advocated radical decentralization empowerment intrapreneurship and the like in short making employees feel like owners proponents of making transactions within firms more market like often seem to ignore the factors that brought these transactions inside firms in the first place but bengt holmstrom and paul milgrom 1991 1994 holmstrom and jean tirole 1991 and holmstrom 1999 hereafter referred to collectively as hmt remind us that in some cases integration is efficient precisely because it eliminates market incentives in such cases bringing the market inside the firm would clearly be undesirable in this paper we show that bringing the market inside the firm is often not feasible even if it would be desirable more precisely if some aspects of the market transaction are noncontractible as we define below then it is impossible to replicate spot market payoffs inside a firm this result would be trivial if the firm s only instruments were court enforceable contracts it is impossible by definition for such contracts to replicate payoffs that were noncontractible in a spot market our contribution is to show that this result also applies to relational contracts i e self enforcing agreements in repeated games to establish this result we follow sanford grossman and oliver hart 1986 hart and john moore 1990 and hart 1995 hereafter referred to collectively as ghm in using asset ownership to determine whether a particular transaction is inside a firm and hmt in adding court enforceable contracts to asset ownership models we also draw on our own work baker et al 2001 to model relational contracts the resulting model is the first we know of that simultaneously analyzes asset ownership courtenforceable contracts and relational contracts

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

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

young stars in economics what they do and where they go we construct a data set of job flyouts for junior economists between 2013 and 2018 to investigate three aspects of the market for stars first what is the background of students who become stars second what type of research does the top of the market demand third where do these students take jobs among other results we show that stars are more likely to be international and male than phds overall that theoretical and semi theoretical approaches remain dominant that american programs both produce the most stars and hire even more that almost none are hired by the private sector and that there is a strong shift toward having pre phd full time academic research jobs jel a11 a12 a23 j24