multidimensional mechanism design for auctions with externalities abstract in an auction with externalities a buyer s type is multidimensional and specifies the payoff he would get for each of the n 1 possible outcomes the seller keeps the object or buyer i i 1 n gets the object we provide a characterization of multidimensional incentive compatible mechanisms similar to that for one dimensional mechanisms although reservation utilities are endogenous and type dependent the participation constraint is binding for only one critical type a main difficulty in a multidimensional setting is the integrability condition we present a geometric characterization for discontinuous conservative vector fields in auctions where the buyers submit scalar bids and the seller transfers the object to one of the buyers for sure a second price auction maximizes revenue with two buyers this auction remains optimal even if the seller can set a reservation price journal of economic literature classification numbers c7 c72

centralized versus decentralized provision of local public goods a political economy approach abstract this paper takes a fresh look at the trade off between centralized and decentralized provision of local public goods it argues that the sharing of the costs of local public spending in a centralized system will create a conflict of interest between citizens in different jurisdictions when spending decisions are made by a legislature of locally elected representatives this conflict of interest will play out in the legislature depending on precisely how the legislature behaves the result may be excessive public spending or allocations of public goods characterized by uncertainty and misallocation across districts the extent of the conflict of interest between districts is affected by spillovers and differences in tastes for public spending thus the relative performance of centralized and decentralized systems depends upon spillovers and differences in tastes for public spending but for different reasons than suggested in the existing literature

in or out centralization by majority vote we present a positive theory of centralization of political decisions voters choose centralization or decentralization depending on their forecast of the political organization that will favor the policies they prefer we study the induced preferences for centralization as well results of different forms of referenda

a mechanism design approach to climate change agreements we take a mechanism design perspective to investigate how environmental agreements should account for multilateral externalities incentive compatibility and voluntary participation by sovereign countries the optimal mechanism involves a tradeoff between a free rider problem in the effort provision of participating countries and the necessity of inducing countries to ratify the agreement this mechanism can be approximated by a simple menu with attractive implementation and robustness properties limits on enforcement and commitment might nevertheless hinder the performance of this menu making the business as usual scenario more likely

majority rules and incentives a club s majority rule defines the number of members that must approve a policy proposed to replace the status quo since the majority rule thus dictates the extent to which winners must compensate losers it also determines the incentives to invest in order to become a winner of anticipated projects if the required majority is large members invest too little because of a holdup problem if it is small members invest too much in order to become a member of the majority coalition to balance these opposing forces the majority rule should increase in the project s value and the club s enforcement capacity but decrease in the heterogeneity in preferences externalities can be internalized by adjusting the rule with heterogeneity in size or initial conditions votes should be appropriately weighted or double majorities required

on enhanced cooperation abstract we analyze the issues relative to the formation of sub unions in a federation called enhanced cooperation agreements in the european union when centralization is not politically feasible an agreement among a subset of countries may allow such countries to exploit benefits from coordination that would otherwise be lost other countries in the federation may object to the sub union because it changes the status quo if cooperation at the federal level becomes convenient in the future the change in the status quo may adversely affect the countries which remained initially outside the sub union we show that as long as the countries can commit to coordinate on a policy which takes into account the utility of the excluded countries sub union formation may be optimal the relative advantage of a sub union towards immediate centralization increases when transfers are costly on the other hand if commitment is not possible then the excluded countries may be penalized we use the results to discuss the newly introduced rules for enhanced cooperation agreements in the european union

credence attributes voluntary organizations and social pressure abstract credence attributes of products are unobservable through search or experience some consumers are willing to pay a premium for their provision and in addition citizens can apply social pressure on firms to supply credence attributes firms have formed voluntary organizations to assure the provision of credence attributes and the credible provision provides product differentiation this paper provides a theory of the voluntary provision of credence attributes in the presence of demand pull from consumers and social pressure from ngos where an organization chooses a credence standard and firms compete given the standard the credence standard is lower the larger the organization and social pressure results in a higher standard

when do auctions ensure the welfare maximizing allocation of scarce inputs we determine when an unfettered auction will ensure the welfare maximizing allocation of a scarce input that enhances product quality and may reduce production costs a supplier values the input for this use value and for its foreclosure value because once the input is acquired it is unavailable to rivals an unfettered auction often ensures the welfare maximizing allocation of an input increment however it can fail to do so when the input would increase relatively rapidly the competitive position of a rival with a moderate competitive disadvantage bidder handicapping that ensures auctions generate welfare maximizing input allocations differ from standard handicapping policies

on countervailing incentives abstract this paper extends and unifies previous work on optimal contracts under countervailing incentives shedding light in particular on the relation between countervailing incentives and pooling inflexible rules our main result is that the nature of the optimal contract depends crucially on whether the agent s utility is quasiconcave or quasiconvex in the private parameter the optimal contract is separated in the former case and it may entail pooling in the latter case journal of economic literature classification number d82

extracting information or resource the hotelling rule revisited under asymmetric information we characterize the optimal extraction path when a concessionaire has private information on the initial stock of resource under asymmetric information a virtual hotelling rule describes how the resource price evolves over time and how extraction costs are compounded with information costs along an optimal extraction path in sharp contrast with the case of complete information elds which are heterogeneous in terms of their initial stocks follow di erent extraction paths some resource might be left unexploited in the long run as a way to foster incentives the optimal contract may sometimes be implemented through royalties and license fees with a market of concessionaires asymmetric information leads to a virtual her ndahl principle and to a new form of heterogeneity across active concessionaires under asymmetric information the market price converges faster to its long run limit exhibiting more stability

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

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

two tier public provision comparing public systems abstract the paper considers a two tier institution in which government provides public services but individuals can opt out of public provision but not taxes funding for the public service is chosen endogenously by majority vote and we first provide necessary and sufficient conditions for a majority vote equilibrium in line with existing results the equilibrium tax rate usually falls below the one found in a one tier system opting out of public consumption is prohibited as the public system loses the political support of the rich who exit we prove that when the two tier system majority dominates a purely private system a majority in society always welcomes a transition from a one tier public system to a two tier system it is the only system that is stable in an evolutionary sense otherwise a majority consisting of the middle class may be in favor of staying in a one tier system prohibiting exit because of a slippery slope argument

robust contracting with additive noise abstract we investigate the idea that linear contracts are reliable because they give the same incentives for effort at every point along the contract we ask whether this reliability leads to a microfoundation for linear contracts when the principal is profit maximizing we consider a principal agent model with risk neutrality and limited liability in which the agent observes the realization of a mean zero shock to output before choosing how much effort to exert we show that such a model can indeed provide a foundation for reliable contracts and illustrate what elements are required in particular we must assume that the principal knows a lower bound but not an upper bound on the shocks

reforming an asymmetric union on the virtues of dual tier capital taxation the tax competition for mobile capital in particular the reluctance of small countries to agree on measures of tax coordination has ongoing political and economic fallouts within europe we analyse the effects of introducing a two tier structure of capital taxation where the asymmetric member states of a union choose a common federal tax rate in the first stage and then non cooperatively set local tax rates in the second stage we show that this mechanism effectively reduces competition for mobile capital between the members of the union moreover it distributes the gains across the heterogeneous states in a way that yields a strict pareto improvement over a one tier system of purely local tax choices we also discuss the effects of diverging capital endowments within the union and capital flows to third countries

decentralization externalities and efficiency in the competitive model externalities lead to inefficiencies and inefficiencies increase with the size of externalities however as argued by coase these problems may be mitigated in a decentralized system through voluntary coordination we show how coordination is limited by the combination of two factors respect for individual autonomy and the existence of private information together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large moreover there are instances in which coordination cannot yield any improvement at all despite common knowledge that social gains from agreement exist this occurs when external effects are relatively small and this may help to explain why coordination is so seldom observed in practice when improvements are possible we describe how simple subsidies can be used to implement second best solutions and explain why standard solutions such as pigovian taxes cannot be used possible extensions to issues arising in the structure of research joint ventures assumptions in the endogenous growth literature and the location of environmental hazards are also described

implementing second best environmental policy under adverse selection abstract a key obstacle to practical application of mechanism design theory to regulation is the difficulty of obtaining consistent beliefs regarding information that theoretical models assume to be commonly held this article presents a solution to this problem by developing an easily implemented empirical methodology with which the government can use available data to develop beliefs regarding the technology and distribution of types in a regulated sector characterized by hidden information results are used to calibrate a second best land conservation mechanism and evaluate its cost relative to simpler alternatives

harmonization and side payments in political cooperation for two districts or countries that try to internalize externalities i analyze a bargaining game under private information i derive conditions for when it is efficient with uniform policies across regions with and without side payments and when it is efficient to prohibit side payments in the negotiations while policy differentiation and side payments allow the policy to better reflect local conditions they create conflicts between the regions and thus delay the results also describe when political centralization outperforms decentralized cooperation and they provide a theoretical foundation for the controversial uniformity assumption traditionally used by the fiscal federalism literature

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

information expropriation and moral hazard in optimal second source auctions abstract government mandated technology transfers from the developer of a product to a second source offer a potential gain of reduced information rents and procurement costs to provide appropriate incentives technology must sometimes be transferred even when the second source is less efficient than the first additionally when developer moral hazard exists with respect to investments in cost reducing technology the optimal auction will make the developer s success in the auction more sensitive to the developing firm s announced costs

a coalition formation approach to equilibrium federations the authors develop a model in which states may choose to form coalitions to capture efficiency gains from policy coordination joining a coalition entails setting the policy variable to maximize the coalition s aggregate payoff at a nash equilibrium against nonmembers and to commit to a transfer scheme to share the gains with two states the unique equilibrium structure is complete federation with more than two states incomplete federation can be the unique equilibrium interpreting this result in terms of custom unions the trend to trading bloc formation may be equilibrium behavior even with cooperation and transfers within customs unions copyright 1997 by american economic association

negotiating free trade we develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once we show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining and we identify circumstances in which the grand coalition is the equilibrium outcome leading to worldwide free trade a model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection global free trade is not achieved when the political economy motive for protection is sufficiently large furthermore the model generates both building bloc and stumbling bloc effects of preferential trade agreements in particular we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form a building bloc effect and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden a stumbling bloc effect the analysis identifies conditions under which each of these outcomes emerges

minimum participation rules in international environmental agreements empirical evidence from a survey among delegates in international climate negotiations recent contributions to the theoretical and experimental literature suggest that minimum participation rules mprs are able to reduce free riding incentives and may facilitate cooperation or at least coordination at the extensive margin of international environmental agreements based on a dataset from a world wide survey among delegates in international climate negotiations this paper assesses preferences for different mprs for a future climate treaty among key players the empirical findings provide evidence that small countries with low bargaining power rather opt for large minimum membership requirements while industrialized countries push forward the idea of a small carbon club of the largest emitters only in contrast delegates from countries in transition try to keep emission thresholds rather low which would allow a future agreement to come into force without their signature

do side payments help collective decisions and strategic delegation i investigate when side payments facilitate cooperation in a context with strategic delegation on the one hand allowing side payments may be necessary when one party s participation con straint otherwise would be violated on the other with side payments each principal appoints a delegate that values the project less because this increases her bargaining power reluctant agents in turn implement too few projects i show that side payments are bad if the hetero geneity is small while the uncertainty and the typical value of the project are large with a larger number of parties there may be a stalemate without side payments but delegation becomes more strategic as well and cooperation decreases in either case jel c78 d78 f53 h77

tax limited reaction functions summary this paper models for the first time a spatial process in local tax policies in the presence of centrally imposed fiscal limitations focusing on the frequently encountered case of a tax rate cap we evaluate three empirical approaches to the analysis of spatially dependent limited tax policies i a bayesian spatial approach for censored dependent variables ii a tobit corner solution model augmented with a spatial lag iii a spatial discrete hazard model the evidence arising from an investigation of severely state constrained local vehicle taxes in italy suggests that ignoring tax limitations can lead to substantial underestimation of inter jurisdictional fiscal interaction copyright 2011 john wiley sons ltd

selling an asset to a competitor a seller decides whether to allocate an item among two potential buyers the seller and buyer 1 interact ex post in such a way that each of them suffers a negative externality if the other possesses the item we show that the optimal allocation rule favors buyer 2 who does not interact ex post with the seller and in particular bidder 1 may not obtain the good even if his valuation is highest the auction is therefore subject to resale when resale is possible the seller must distort the original auction we show that the mechanism depends crucially on the way resale is organized ex post the seller may decide to always allocate the good to the agent with the highest valuation when rents are fully extracted by an intermediary on the resale market however she may resort to a stochastic mechanism when the winner of the primary auction has full bargaining power in the resale stage

widening and deepening reforming the european union the european union is the product of a unique institutional process individual states often with a history of belligerent relationships have gradually given up ever more sovereignty to produce an increasing number of common goods including the single market a joint cur rency and common policies in the process the union has integrated increasingly diverse coun tries and achieved institutional progress beyond its borders these achievements are particularly remarkable given that member states have had and still have widely different views of the desirable speed and ultimate depth of integra tion possibly the single most powerful force sustaining the process of integration has been the implicit and often explicit threat by more committed member states to form an inner core a club in the club conversely less enthusias tic members have supported extending member ship to more countries as a strategy to frustrate deeper integration

optimal regional redistribution under asymmetric information this paper studies optimal redistribution among two different regions in a federal state regional governments supply local public goods financed with distorting local taxes they have better information on their tax bases than the federal government we model this both as an adverse selection problem on the size of local tax bases and or as moral hazard problem on local tax enforcement moral hazard alone does not affect the first best redistribution rule which is a lump sum transfer from the rich to the poor region in all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions with the transfer falling short of the first best level in the equilibrium with moral hazard and adverse selection tax evasion occurs only in the poor region even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution this abstract was borrowed from another version of this item

simple menus of contracts in cost based procurement and regulation in an influential paper jean jacques laffont and jean tirole 1986 formulated a principal agent model of cost based procurement and regulation and showed that the principal can implement the optimal mechanism by offering the agent a menu consisting of a continuum of linear contracts two related problems with applying this theory in practice have been that the economic logic and the underlying mathematics involved in calculating the optimal menu are quite complex and the principal must be able to specify the agent s entire disutility of effort function in order to calculate the optimal menu as a result the model has not been widely used in practice to either calculate actual incentive contracts or even to develop useful qualitative guidance about the nature of the optimal solution and how it is affected by various economic factors the purpose of this paper is to show that dramatically simpler menus which are easy to understand and calculate and which have lower informational requirements can at least in some cases capture a substantial share of the gains achievable by the fully optimal complex menu in particular this paper considers two item menus where one item is a cost reimbursement contract and the other item is a fixed price contract such menus are called fixed price cost reimbursement fpcr menus for the case where the agent s utility is quadratic and the agent s type is distributed uniformly it is shown that the optimal fpcr menu always captures at least three quarters of the gain that the optimal complex menu achieves where the gain is measured relative to the result of using a cost reimbursement contract this paper s research was originally motivated by a policy issue in defense procurement in the united states the department of defense dod purchases almost all major weapons systems from sole source contractors using contracting methods that essentially amount to using cost reimbursement contracts the best way to understand why dod uses costreimbursement contracting methods is that they perform precisely the function identified in laffont and tirole s principal agent model they guarantee in a situation that amounts to a bilateral monopoly that dod and the firm can reach an agreement i e they guarantee that the agent will always produce the good of course the use of cost reimbursement contracting methods

intergovernmental political competition in american federalism many policies in the united states are jointly determined by federal and state actions in the game theoretic model offered here politicians in both the state and national governments seek credit for providing goods desired by the public and avoid blame for the taxes necessary to provide the goods in line with peterson s 1995 theory of functional federalism the level of government that is better able to supply particular goods and services tends to take the lead in their provision even to the extent of fully crowding out much less efficient governments however under a broad set of circumstances both state and national politicians seek credit via public spending and their joint provision leads to a relative oversupply of public goods and services and thus to overtaxation under joint provision states vary in their responses to changing federal spending patterns based both on the causes of the national changes and on state characteristics

the breakup of nations a political economy analysis this paper develops a model of the breakup or unification of nations in each nation the decision to separate is taken by majority voting a basic trade off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted the model emphasizes political conflicts over redistribution policies the main results of the paper are i when income distributions vary across regions and the efficiency gains from unification are small separation occurs in equilibrium and ii when all factors of production are perfectly mobile all incentives for separation disappear i introduction following the demise of communism the entire map of europe from the atlantic coast to the urals is being redrawn and issues of separation unification and the redrawing of borders are yet again at the forefront of european concerns many of the issues raised by this process are primarily of a political cultural or linguistic nature however there are also economic considerations that bear on this problem the objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations the starting point of our analysis is to suppose that from an economic efficiency point of view separation of nations is never desirable a unified nation is always more efficient since free trade among regions is guaranteed duplication costs in defense and law enforcement are avoided and local public goods provision such as transportation and communication networks or common standards can be coordinated furthermore any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

incomplete social contracts there is a long normative social contract tradition that attempts to characterize ex post income inequalities that are agreeable to all behind a veil of ignorance this paper takes a similar normative approach to characterize social decision making procedures it is shown that quite generally some form of majority voting is preferred to unanimity behind a veil of ignorance whenever society faces deadweight costs in making compensating transfers deviations from unanimity or ex post pareto optimality are ex ante efficient to the extent that they economize on costly compensating transfers put another way the optimal decision rule trades off the benefits of minority protection and those from greater flexibility jel h11 g33 g34 d63 p16 p48

experimentation in federal systems will decentralization lead to a laboratory in policy experimentation or is centralization necessary to prevent free riding in the innovation process we present a model where experiments have two dimensions all prefer quality but preferences

coordination in heterogeneous federal systems abstract we compare centralized and decentralized policy making in a federation in which policy heterogeneity is inherently costly and preferences vary across jurisdictions all jurisdictions agree that some harmonization is desirable but no one agrees on the direction of harmonization this type of collective choice problem arises when members of a federal system have to coordinate nonbudgetary policies such as laws regulations standards or diplomatic policies contrary to the common wisdom decentralization becomes optimal when coordination becomes very important when coordination costs are symmetric decentralization dominates centralization irrespective of the magnitude of externalities and the heterogeneity of preferences in the case of discontinuous network effects standardization never pareto dominates decentralization

resource allocation auctions within firms there is growing interest in the use of markets within firms proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed in contrast to the use of markets in the broader economy the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating privately informed agents in this paper we study the optimal design of managerial incentives when resources are allocated by an internal auction market as well as the efficiency of the resulting resource allocations we show that the internal auction market can achieve first best resource allocations and decisions but only at an excessive cost in compensation payments we then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second best outcome as determined using a direct revelation mechanism the advantage of the auction is that it is easier to implement than the direct revelation mechanism when the internal auction mechanism is unable to achieve second best we characterize the factors that determine the magnitude of the shortfall overall our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms

federal mandates by popular demand this paper proposes a new framework for studying federal mandates regarding public policies in areas such as environmental quality public health highway safety and the provision of local public goods voters have single peaked preferences along a single policy dimension there are two levels of government federal and local the federal level can constrain local policy by mandating a minimum or maximum policy localities are free to adopt any policy satisfying the constraint imposed by the federal mandate we show that voters choose federal mandates that are too strict which leads to excessively severe mandates we show that similar results can obtain when federal provision of the public provided good is more efficient than local provision

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

externalities vs internalities a model of political integration abstract decentralized government leads to inter regional externalities whereas an integrated jurisdiction solves the externality problem centralized government entails other costs in particular a neglect for minority interests the paper models formally the trade off between these two forces in determining the optimum as well as the equilibrium design of jurisdictions both the relative size of regions and the distribution of tastes are shown to be important parameters of the problem

on the timing of climate agreements a central issue in climate policy is the question whether long term targets for greenhouse gas emissions should be adopted this paper analyzes strategic effects related to the timing of such commitments using a two country model we identify a redistributive effect that undermines long term cooperation when countries are asymmetric and side payments are unavailable the effect enables countries to shift rents strategically via their r d efforts under delayed cooperation in contrast a complementarity effect stabilizes long term cooperation because early commitments in abatement induce countries to invest more in low carbon technologies and create additional knowledge spillovers contrasting both effects we endogenize the timing of climate agreements

good regulatory regimes assuming simple functional forms numerical methods are used to analyze linear regulatory rules that include cost plus and price cap regimes regulators are assumed to observe actual cost but not the disutility of cost reduction and are assumed unable to impose taxes or make transfers best linear regimes depend importantly on the level and form of uncertainty the regulatory objective function and the firm profitability constraint under uncertainty regimes in which price depends in part on actual cost generally substantially outperform pure price caps particularly in terms of consumers surplus

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

coordination and externalities abstract we analyze the gains of coordinating decisions in a regulatory framework in which agents are sovereign and tax inducements are socially costly we consider a general multi agent situation with externalities among agents incomplete information and type dependent reservation utilities when the regulator optimally leaves informational rents to the most efficient agents centralized coordination reduces global activity coordination induces more activity when the principal optimally leaves rents to the most inefficient agents last if we impose budget balance our mechanism can also be interpreted as the optimal auction of a public good with congestion externalities journal of economic literatureclassification numbers d62 d82 l51

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

incentive and sampling effects in procurement auctions with endogenous number of bidders abstract we study an auction contest for a procurement of innovation firms exert effort and the resulting quality of innovation is ex ante uncertain given this uncertainty there is a trade off regarding the number of participating firms in the contest increasing the number of firms reduces each firm s chance of winning the auction leading the firms to reduce effort level meanwhile the chance of obtaining a high quality of innovation increases with the number of firms due to the randomness of the quality thus the procurer faces a nontrivial problem of how many firms to invite we show that in the high level of randomness it is optimal for the procurer to invite many firms as the randomness vanishes however inviting only two firms is optimal we also show that a fixed prize tournament may outperform the auction when the randomness is large

interregional redistribution and mobility in federations a positive approach the paper studies the effects and the determinants of interregional redistribution in a model of residential and political choice we find that paradoxical consequences of inter jurisdictional transfers arise if people are mobile while self sufficient regions are nec essarily identical with respect to policies and average incomes in our model interregional redistribution always leads to the divergence of regional policies and per capita incomes thus interregional redistribution prevents interregional equality at the same time however transfers may allow for more interpersonal equality among the inhabitants of each region the voting population may therefore in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence empirical evidence from panel data from oecd countries and candian provinces is consistent with the theory

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small

rules transparency and political accountability rules of allocation and redistribution in the public sector are often less contingent on available information than normative theory would suggest this paper offers a political economy explanation under different rules even if the observable outcomes of policies remain the same the informational content which can be extracted by these observations is different less contingent rules allow citizens to gain more information on politicians and this improved information may be used to better select politicians this advantage may overcome the efficiency loss induced by flatter rules 2001 elsevier science b v all rights reserved

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

endogenous minimum participation in international environmental agreements an experimental analysis almost all international environmental treaties require a minimum number of countries to ratify the treaty before it enters into force despite the wide spread use of this mechanism little is known about its effectiveness at facilitating cooperation we analyze an agreement formation game that includes an endogenously determined minimum participation constraint and then test the predictions using economic experiments we demonstrate theoretically that players will vote to implement an efficient coalition size as the membership requirement and this coalition will form experimental tests of the theory demonstrate that the minimum participation mechanism is highly effective at facilitating cooperation when efficiency requires the participation of all players however when efficiency requires only a subset of players to participate profitable coalitions are often deliberately blocked in light of our results it is possible that equity concerns can impede the formation of international agreements when membership requirements allow free riders

a theory of economic unions abstract after decades of successful growth economic unions have recently become the focus of heightened political controversy to understand why we develop a theoretical model of the effects on trade income distribution and welfare of economic unions that differ in size and scope our model shows that political support for international unions can grow with their breadth and depth provided member countries are sufficiently similar however differences in economic size and factor endowments can trigger disagreement over the value of unions our model is consistent with some salient features of the process of european integration and statistical evidence from survey data

robustness and linear contracts abstract we consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do she knows some actions available to the agent but other unknown actions may also exist the principal demands robustness evaluating possible contracts by their worst case performance over unknown actions the agent might potentially take the model assumes risk neutrality and limited liability and no other functional form assumptions very generally the optimal contract is linear the model thus offers a new explanation for linear contracts in practice it also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty jel d81 d82 d86

multi issue bargaining with endogenous agenda abstract the first part of this paper shows that in a noncooperative bargaining model with alternating offers and time preferences the timing of issues the agenda matters even if players become arbitrarily patient this result raises the question of which agenda should come up endogenously when agents bargain over a set of unrelated issues it is found that simultaneous bargaining over packages should be a prevailing phenomenon but we also point to the possibility of multiple equilibria involving even considerable delay journal of economic literature classification number c78

motivating with simple contracts abstract in practice incentive schemes are rarely tailored to the specific characteristics of contracting parties however according to economic theory optimal contracts should be highly dependent on individual conditions we reconcile these observations in the context of a principal agent model with both moral hazard and adverse selection motivating an agent could be increasingly costly to the principal because a more productive agent could also be more able to manipulate the terms of the contract as a result the principal may optimally pool some types by offering a contract with constant transfer and bonus we also explore parameterizations where the optimal contract is fully separating but simple contracts attain a significant portion of the optimal welfare

strategic delay in bargaining with two sided uncertainty the role of strategic delay is analyzed in an infinite horizon alternating offer model of bargaining a buyer and seller are engaged in the trade of a single object both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly an equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer a bargainer expecting large gains from trade is more impatient than one expecting small gains and hence makes concessions earlier on trade occurs whever gains from trade exist but due to the private information only after costly delay panmunjom korea upi the american general and the north korean general glared at each other across the table and the only sound was the wind howling across the barren hills outside their hut maj gen james b knapp negotiator for the united nations command unc was waiting for maj gen ri choonsun of the democratic people s republic of north korea to propose a recess they sat there arms folded for 42 hours not a word finally gen ri got up walked out and drove away evening bulletin philadelphia 11 april 1969

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

robustness of simple menus of contracts in cost based procurement abstract we consider a model of cost based procurement in which the principal faces knightian uncertainty about the agent s preferences for cost reduction we show that a particularly simple incentive scheme a menu comprising a fixed price contract and a cost reimbursement contract minimizes the maximum expected payment where this maximum is taken over the set of possible agent preferences for some parameters of the problem a range of alternative incentive schemes also satisfy this criterion we show that the simple incentive scheme is not weakly dominated by any of the alternatives there does not exist an alternative mechanism for which the expected payment is no higher for all realizations of the agent s preferences and strictly lower for some realization

participation constraints in adverse selection models abstract this paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latter s reservation utility depends on his type the informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade the paper identifies conditions for the optimal contract to be separating to be nonstochastic and to induce full participation it also discusses the nature of the solution when bunching occurs the results are applied to nonlinear pricing under price cap regulation and bypass competition and to competition in nonlinear pricing journal of economic literature classification numbers d82 d42 d23 d78 l51 l15

competing with menus of tariff options the nature of numerous strategies of firms is often discrete or countable this adds difficulty to measuring and testing for the existence of complementarities among several strategies this paper introduces a generalized multivariate count data model that allows estimating correlations of any sign among the pricing decisions of competing firms in a manner that is robust to the existence of unobserved heterogeneity leading to either over and underdispersion of the distribution of counts thus it is possible to overcome a major challenge in testing whether two decisions are strategic complements or substitutes namely dealing with the effect of unobserved heterogeneity i study how firms actually compete in nonlinear tariffs by analyzing the interrelation between the incumbent and entrant s decisions to offer a given number of tariff options results document the existence of complementarity among tariff options regardless of whether they are dominated or not this result supports the view that the implementation of nonlinear tariffs by means of a menu of self selecting two part tariffs has some strategic competitive value jel c35 d43 m21

flexible integration mandatory and minimum participation rules should a subset of the eu members be allowed to form inner clubs and enhance cooperation or should integration proceed at the same speed for all while flexible cooperation allows members to participate if and only if they benefit it also generates a free rider problem if potential members choose to opt out the analysis shows that flexible cooperation is better only if the heterogeneity is large and the externality small but rigid cooperation will be the political equilibrium too often flexibility and rigidity can be combined by i mandatory participation rules where participation is voluntary unless a super majority requires everyone to participate and ii minimum participation rules where inner clubs must be sufficiently large the combination of mandatory and minimum participation rules may implement the best possible mechanism

political centralization and government accountability boffa acknowledges financial support from the free university of bolzano ww82 piolatto from the spanish ministry of science and innovation eco 2012 37131 and the government of catalonia 2014 sgr 420 ponzetto from the spanish ministry of science and innovation jci 2010 08414 and eco 2011 25624 the spanish ministry of economy and competitiveness ryc 2013 13838 the government of catalonia 2009 sgr 1157 and 2014 sgr 830 the barcelona gse and the bbva foundation through its first grant for researchers innovators and cultural creators

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

procurement contracts theory vs practice abstract laffont and tirole s laffont j tirole j 1986 using cost observation to regulate firms journal of political economy 94 614 641 classic model of procurement under asymmetric information predicts that optimal contracts will always entail some cost sharing and that payments will be a convex function of realized cost in contrast pure cost reimbursement contracts are common in practice as are contracts in which payments are a concave function of realized cost we consider a straightforward extension of laffont and tirole s model that admits optimal contracts of the forms that prevail in practice the extension simply allows the supplier to be able to reduce production costs more easily when costs are initially high than when they are initially low

on the number and size of nations this paper studies the equilibrium determination of the number of countries in different political regimes and in different economic environments with more or less economic integration we focus on the trade off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations our model implies that i democratization leads to secessions ii in equilibrium one generally observes an inefficiently large number of countries iii the equilibrium number of countries is increasing in the amount of economic integration

distributive politics and the costs of centralization this paper studies the choice between centralization and decentralization of fiscal policy in a political economy setting with centralization regional delegates vote over agendas comprising sets of region specific projects the outcome is inefficient because the choice of projects is insufficiently sensitive to within region benefits the number of projects funded may be non monotonic in the strength of project externalities the efficiency gains from decentralization and the performance of constitutional rules such as majority voting which may be used to choose between decentralization and centralization are then discussed in this framework weaker externalities and more heterogeneity between regions need not increase the efficiency gain from decentralization

calibrated incentive contracts this paper studies a dynamic agency problem which includes limited liability moral hazard and adverse selection the paper develops a robust approach to dynamic contracting based on calibrating the incentive properties of simple benchmark contracts that are attractive but infeasible due to limited liability constraints the resulting dynamic contracts are detail free and satisfy robust performance bounds independently of the underlying process for returns which need not be i i d or even ergodic publication abstract

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

the cost of contract renegotiation evidence from the local public sector the renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts however assessing the cost of such renegotiation remains an open issue from an empirical viewpoint to address this question we fit a structural principal agent model with renegotiation on a set of urban transport service contracts the model captures two important features of the industry first only two types of contracts are used in practice fixed price and cost plus second subsidies increase over time we compare a scenario with renegotiation and a hypothetical situation with full commitment we conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators

bargaining over reform abstract this paper models the delay in a macroeconomic stabilization as the outcome of a bargaining game between two parties who must reach an agreement over how the stabilization cost is to be shared the paper modifies alesina and drazen s 1991 american economic review 81 1170 1189 war of attrition model by endogenizing the distribution of the stabilization costs through a bargaining game using this bargaining framework the paper analyzes the role of crises and foreign assistance in bringing about a settlement to the distributional conflict in the bargaining game a crisis that increases the welfare loss from not stabilizing the economy will lower the probability of delay in contrast foreign aid that is used to reduce the stabilization costs will further increase the delay in reaching an agreement between the two parties

a political economy theory of partial decentralization we revisit the classic problem of tax competition in the context of federal nations and derive a positive theory of partial decentralization a capital poor median voter chooses to use redistributive capital taxes to provide public goods the expectation of high capital taxes however results in a small capital stock which lowers returns to redistribution the median voter therefore wants to commit to a lower level of capital taxes she does so by setting a partial degree of decentralization in the constitution the equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results we show that the degree of decentralization is nonmonotonic in inequality increasing in the redistributive efficiency of public good provision and decreasing in capital productivity when public goods are heterogeneous in their capacity to transfer funds all voters agree that goods with high redistributive capacity should be decentralized

an equilibrium voting model of federal standards with externalities this paper proposes a framework for studying policy making in a federal system in the presence of spillover externalities local jurisdictions choose local policies by majority rule subject to standards that are set by majority rule at the federal level we characterize the induced preferences of voters for federal policies prove existence of local majority rule equilibrium provide an example of non existence of global majority rule equilibrium and explore the welfare properties of federal standards in the presence of spillovers

participation constraints in the vickrey auction abstract economic agents are characterized by two privately observable parameters their willingness to pay for an item being auctioned and their reservation utility level which must be exceeded in expectation to induce them to participate in this auction this creates a situation in which the distribution of willingness to pay among the bidders is endogenous for the case in which the parameters are jointly uniformly distributed the existence of an equilibrium is proven and characterized

decentralization duplication and delay we argue that although decentralization has advantages in finding low cost solutions these advantages are accompanied by coordination problems which lead to delay or duplication of effort or both consequently decentralization is desirable when there is little urgency or a great deal of private information but it is strictly undesirable in urgent problems when private information is less important we also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge

the benefit of crises for economic reforms when expenditures consistently outrun revenue the resulting inflation may have the effect of convincing the public and government that taxes must be raised to finance public investment in the advanced industrial countries income taxation and big spurts in taxation generally have become possible only under the impact of major emergency and crisis mostly in wartime in a number of developing countries in

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

international cooperation for sale abstract this paper shows that strong asymmetry among countries warrants a change in the rules of the game of global public goods provision with the consequence that cooperation by some countries is bought by others and aggregate welfare is increased perhaps substantially side payments on their own have virtually no effect on the outcomes that can be sustained by self enforcing cooperative agreements but when the rules of the game are changed by strong asymmetry when some countries are effectively committed to being non signatories to an agreement eschewing money transfers side payments become the vehicle for increasing participation in a cooperative agreement

efficiency equilibrium and exclusion when the poor chase the rich using a simple adverse selection model we characterize equilibrium when the rich chase the poor if communities are established by competitive entrepreneurs the equilibrium exists is unique and is efficient it involves either complete separation or complete pooling different income groups may rank these qualitative outcomes differently we show how restrictions imposed by a central government may alter the nature of equilibrium such restrictions may be explained as the choice of a low income majority altering the equilibrium to the pooling outcome which they prefer

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

the architecture of federations constitutions bargaining and moral hazard abstract the paper studies a federal system where a a region provides non contractible inputs into the social benefits from a public policy project with spillovers to other regions and b where political bargaining between different levels of government may ensure efficient decision making ex post allowing intergovernmental grants to be designed optimally we ask whether project authority should rest with the region or with the central government centralization is shown to dominate when governments are benevolent with regionally biased governments both centralization and decentralization yield inefficiencies and the second best institution depends on parameter values if political bargaining is prohibited when bargaining is feasible however the first best can often be achieved under decentralization but not under centralization at the root of this dichotomy is the alignment of decision making over essential inputs and project size under decentralized governance and their misalignment under centralization