consistent modeling of s p 500 and vix derivatives abstract this study introduces a model that identifies relationships between stylized features on s p 500 vix and derivatives on vix the paper considers a specification with discontinuous correlated jumps in stock prices and stock price volatility with state dependent arrival intensity and examines how these factors impact vix option pricing and hedging the paper finds strong evidence for jumps in volatility and jumps in returns implicit in vix option data

how do payments for environmental services affect land tenure theory and evidence from china we gratefully acknowledge the financial support from renmin university for the research on land market development in the forest tenure reform project no 11xnc002 the british academy reference sg121920 the cambridge humanities research grants scheme and the economy and environment program for southeast asia reference pco13 0308 009

bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

trade policy and mixed enterprises this paper demonstrates that the degree of state ownership affects neither the level of socially optimal activities nor welfare if the government chooses optimal trade policy instruments in the case of rivalry in the home market the optimal import tariff is independent of the degree of state ownership and the optimal production subsidy decreases with state ownership if the optimal tariff is positive for the case of cournot rivalry in a third market the optimal export subsidy increases with state ownership while in the case of bertrand rivalry with differentiated products the optimal export tax increases

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

product market competition and managerial slack this article analyzes the effect of product market competition on managerial incentives in contrast to hart 1983a i show that competition may actually exacerbate the incentive problem the difference in results derives from our different assumptions about managerial preferences the importance of assumptions about preferences suggests that we do not yet understand the precise mechanism through which competition affects incentives

common ground between free traders and environmentalists we use a north south model with property right differences and resource dynamics to study the effects of trade on resource use and welfare autarky is likely to pareto dominate free trade in the long run when the environment is quite fragile and the result is reversed when the environment is quite resilient trade may cause an environmentally poor country to drag down its richer trading partner when they degrade their stocks which would be preserved under autarky it may enable the environmentally richer country to pull up its partner when they preserve their stocks which would be degraded under autarky

innis lecture environmental crises past present and future environmental crises are distinguished by rapid and largely unexpected changes in environmental quality that are difficult if not impossible to reverse examples would be major extinctions and significant degradations of an ecosystem i argue there are three preconditions for crisis failures in governance an ecological system exhibiting a tipping point and an economy environment interaction with positive feedbacks i develop a simple model to illustrate how a crisis may arise and draw on our knowledge of past and present crises to highlight the mechanisms involved i then speculate as to whether climate change is indeed a crisis in the making les crises environnementales sont caracterisees par des changements rapides et largement non anticipes dans la qualite de l environnement qui sont difficiles sinon impossibles a renverser des exemples pourraient etre des extinctions d especes et des degradations significatives d un ecosysteme l auteur suggere qu il faut trois conditions pour qu il y ait crise faillites de gouvernance un systeme ecologique au point de bascule et une interface environnement economie riche de retroactions positives l auteur developpe un modele simple pour illustrer comment une crise peut emerger et s appuie sur la connaissance des crises passees et presentes pour souligner les mecanismes en jeu on specule en fin de texte sur la question a savoir si le changement climatique est une crise en train de prendre

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

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

the transmission of sustainable harvesting norms when agents are conditionally cooperative experimental and observational studies have highlighted the importance of agents being conditionally cooperative when facing a social dilemma we formalize this mechanism in a theoretical model that portrays a small community having joint access to a common pool resource the diffusion of norms of cooperation takes place via interpersonal relations while individual agents face the temptation of higher profits by overexploiting the resource agents remain conditionally cooperative unless other individuals are misbehaving already we can observe a bubble of conditional cooperators slowly building up followed by a sudden burst which means that a transition from a cooperative social norm to non cooperation occurs interestingly in some parameter regions alternative stable states and limit cycles arise the latter implies that the same community goes through such a transition repeatedly over long time spans history thus repeats itself in the form of the creation and erosion of social capital

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

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

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

dynamic yardstick mechanisms abstract this paper shows that the inability of principals to commit to long term contracts is irrelevant when dealing with several agents whose private information is correlated this sharply contrasts with the dynamics of contracting without such correlation the paper also explores what limitations on yardstick mechanisms can justify the use of long term contracts we found that the inability of a principal to commit not to renegotiate long term contracts is without consequence even if there is a bound on transfers that an agent can be asked to pay in contrast short term contracting fails to implement the commitment solution with constraints on transfers second absent current yardstick the possibility of using correlated mechanisms in the future allows the principal to implement the first best with a renegotiation proof long term contract whereas this cannot be achieved with short term contracting

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

technology driven inequality leads to poverty and resource depletion the rapid rise in inequality is often seen to go in hand with resource overuse examples include water extraction in pakistan land degradation in bangladesh forest harvesting in sub saharan africa and industrial fishing in lake victoria while access to ecosystem services provided by common pool resources mitigates poverty exclusive access to technology by wealthy individuals may fuel excessive resource extraction and deplete the resource thus widening the wealth gap we use a stylised social ecological model to illustrate how a positive feedback between wealth and technology may fuel local inequality the resulting rise in local inequality can lead to resource degradation and critical transitions such as ecological resource collapse and unexpected increase in poverty further we find that societies may evolve towards a stable state of few wealthy and many poor individuals where the distribution of wealth depends on how access to technology is distributed overall our results illustrate how access to technology may be a mechanism that fuels resource degradation and consequently pushes most vulnerable members of society into a poverty trap

information and strategic political polarisation we develop a model of electoral competition in which two opportunistic candidates select their policy position and invest in quality policy positions are observed and during the campaign the press reveals some information about quality we demonstrate that when information is imperfect the blackdowns median voter theorem fails to hold for intermediate information levels the unique equilibrium is such that candidates propose policies different from the median voter s bliss point by contrast convergence to the median occurs when quality is almost always or almost never revealed we also show that a profit maximising press may collect more information than socially optimal during the 1995 electoral campaign in belgium the vld a traditionally right wing

explaining the african food riots of 2007 2008 an empirical analysis abstract a sharp escalation in worldwide commodity prices precipitated the global food crisis of 2007 2008 affecting the majority of the world s poor causing protests in developing countries and presenting policymakers with the challenge of simultaneously addressing hunger poverty and political instability these food price shocks fomented violent civil responses in some countries but not others offering a unique opportunity to assess the factors that contributed to these disturbances we explore this question empirically with specific reference to africa where food riots occurred in at least 14 countries by examining the socio economic and political conditions facing african countries we attempt to answer why only some countries in africa witnessed food riots in late 2007 and early 2008 while others did not our empirical analysis demonstrates that higher levels of poverty as proxied by the human poverty index restricted access to and availability of food urbanization a coastal location more oppressive regimes and stronger civil societies are associated with a higher likelihood of riots occurring we also examine three country cases egypt mozambique niger which represent different circumstances and responses to the food crisis and identify specific factors that were associated with food protests in each case our study highlights the importance of pro poor policies and investments and improved governance in addressing the problems facing the poor and in helping secure political stability as the frequency and variability of natural disasters increase in response to climate change such policies can serve to protect the poor from the debilitating consequences of the resulting shocks

the world stock markets under geopolitical risks dependence structure this paper reveals joint stochastic behaviours of the world s stock markets and geopolitical risk by a copula approach for the 37 world s stock markets over the period of june 1997 to december 2017 the various bivariate copulas show the different degrees of tail dependences and rank correlations the differences between overall geopolitical risk index and action related geopolitical risk index lie in the higher tail dependence with overall geopolitical risk index the dominancy of concordant movements of stock market indexes with overall geopolitical risk and that of discordant movements of stock market indexes with action related geopolitical risk index the results illustrate that action related geopolitical risk is more often adversely related to the world s stock market performances with less tail dependence

capital structure with countervailing incentives the regulatedjirm s choice of capital structure is affected by countervailing incentives the jirm wishes to signal high value to capital markets to boost its market value while also signalling high cost to regulators to induce rate increases when the jim s investment is large countervailing incentives lead both high and low cost jims to choose the same capital structure in equilibrium thus decoupling capital structure from private information when investment is small or medium sized the model may admit separating equilibria in which high cost jirrns issue greater equity and low cost jims rely more on debt jinancing

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

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

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

common pool resource appropriation under costly cooperation abstract in addition to the usual fixed costs we introduce variable costs in a community s effort to cooperate in extracting from a common pool resource using a standard supervision mechanism these variable costs are shown to be an increasing function of individual members incentives to default the model explains why we frequently observe communities that all cooperate and have relatively similar resource endowments and yet achieve very different levels of extraction

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

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

tipping and the dynamics of segregation schelling dynamic models of segregation journal of mathematical sociology 1 1971 143 186 showed that extreme segregation can arise from social interactions in white preferences once the minority share in a neighborhood exceeds a tipping point all the whites leave we use regression discontinuity methods and census tract data from 1970 through 2000 to test for discontinuities in the dynamics of neighborhood racial composition we find strong evidence that white population flows exhibit tipping like behavior in most cities with a distribution of tipping points ranging from 5 to 20 minority share tipping is prevalent both in the suburbs and near existing minority enclaves in contrast to white population flows there is little evidence of nonlinearities in rents or housing prices around the tipping point tipping points are higher in cities where whites have more tolerant racial attitudes

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

contagious development neighbor interactions in deforestation article i nfo we estimate neighbor interactions in deforestation in costa rica to address simultaneity and the presence of spatially correlated unobservables we measure for neighbors deforestation using the slopes of neighbors and neighbors neighbors parcels we find that neighboring deforestation significantly raises the probability of deforestation policies for agricultural development or forest conservation in one area will affect deforestation rates in non targeted neighboring areas correct estimation of the interaction reverses the naive estimate s prediction of multiple equilibria

procurement and renegotiation parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information the issue of the parties investment in the relationship before renegotiation is analyzed in a simple two period procurement model the firm invests in the first period it then learns its production cost and the sponsor learns its value for the project williamson s underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm s investment is not observable by the sponsor the introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued the role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed last it is shown that if investment is observable by the sponsor andthus may become a joint decision variable the two parties may choose to under or overinvest

the organizational cost of protection abstract this paper offers another explanation for the proposition that protection induces slack it employs a model of a hierarchic firm in which the firm s owner cannot observe the cost type or the effort level of his manager a production subsidy by stimulating output may increase the marginal information rents that have to be paid to the manager for higher effort the resulting increase in the firm s marginal cost of effort leads to reduced managerial effort amplifying the intra firm effort distortion if effort is initially below the optimal level and yielding an organizational cost of protection additional to the standard deadweight cost

to innovate or not to innovate incentives and innovation in hierarchies hierarchical organizations often perform poorly in inducing the adoption of innovations the authors examine a principal offering contracts to agents who make unobservable effort and adoption of innovation choices yielding moral hazard who occupy jobs of differing unobserved productivities yielding adverse selection and who engage in a repeated relationship with the principal causing a ratchet effect to arise increasing the rate of adoption of an innovation in such an organization causes the incentive costs of adoption to increase at an increasing rate relatively low rates of adoption may then be a response to the prohibitive incentive costs of higher adoption rates copyright 1990 by american economic association

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

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

innovation diffusion in heterogeneous populations contagion social influence and social learning new ideas products and practices take time to diffuse a fact that is often attributed to some form of heterogeneity among potential adopters this paper examines three broad classes of diffusion models contagion social influence and social learning and shows how to incorporate heterogeneity into each at a high level of generality without losing analytical tractability each type of model leaves a characteristic footprint on the shape of the adoption curve which provides a basis for discriminating empirically between them the approach is illustrated using the classic study of ryan and gross 1943 on the diffusion of hybrid corn

optimal contracts for teams in a team subject to both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed optimal contracts are under certain conditions linear in the team s output the outcome is the same whether the principal observes just the total output or each individual s contribution thus monitoring is not needed to prevent shirking by team members instead the role of monitoring is to discipline the monitor production is a collective enterprise by workers in a firm or firms in a joint venture the synergy that is the reason for the team s existence may mean that an individual s contribution to the team s output is not distinguishable so that it is impossible to pay him according to his own productivity how should the principal remunerate the team members so as to maximize his own profit in this paper we analyze incentives in teams with asymmetric information both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed directly holmstrom 1982 showed that in a team model with moral hazard the principal can ensure an outcome arbitrarily close to the full information ideal by using a contract that punishes each team member arbitrarily severely whenever team output falls below some target however this seems to be an unrealistically drastic way of solving the moral hazard problem in our model we in effect prevent the principal from using such a contract by introducing adverse selection in addition to moral hazard and by assuming that ability and effort interact in such a way that the principal is unable to disentangle an agent s effort from his ability under the assumption that the principal and the team members are risk neutral we shall show that the principal can implement his information constrained optimum simply by offering each agent a payment linear in the team s output although the essential feature of our analysis is the interaction between adverse selection and moral hazard this result can be understood by first considering the special case in which the agents abilities are common knowledge in this case the moral hazard problem can be completely solved the principal can do as well as he

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

incentive regulatory policies the case of public transit systems in france we assess the empirical relevance of the new theory of regulation using a principal agent framework to study the regulatory schemes used in the french urban transport industry taking the current regulatory schemes as given the model of supply and demand provides estimates for the firms inefficiency the effort of managers and the cost of public funds it allows us to derive the first best and second best regulatory policies for each network and compare them with the actual situation in terms of welfare loss or gain fixed price policies lie between fully informed and uninformed second best schemes cost plus contracts are dominated by any type of second best contract from these results we may conjecture that fixed price contracts call for better informed regulators

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

optimal management with potential regime shifts we analyze how the threat of a potential future regime shift affects optimal management we use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics and exogenous versus endogenous probabilities of regime shift prior work in economics has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions on whether the potential for regime shift will increase or decrease intensity of resource use and level of resource stock we show that all other cases yield unambiguous results in particular with endogenous probability of regime shift that affects system dynamics the potential for regime shift causes optimal management to become precautionary in the sense of maintaining higher resource stock levels

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

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

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

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

incentives allocation and labour market reforms during transition the case of urban china 1986 1990 has the reform process in china resulted in the introduction of incentives directed at a more efficient allocation of resources using data on individual earnings in urban liaoning province for the period 1986 1990 and a wage equation approach we address this issue in the context of labour market reforms focusing specifically on returns to education our results indicate that failure to address the issue of endogenous selection of more able individuals into state owned enterprises soes can severely bias returns downwards unlike in soes returns in collective owned enterprises coes increased the latter having been allowed to grow out of the plan more quickly and subject to more competition in factor and product markets we conclude that decentralization without competition is unlikely to result in the introduction of an efficient incentive mechanism the more administratively determined regular wages are one avenue for increased returns we find evidence of differentiated bonuses in coes but

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

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

on the sustainability of common property resources abstract we provide a model where a common property resource is managed by two types of agents cooperators and non cooperators who adjust their extraction strategies in response to persistent differential payoffs in our model the social approval of cooperators works as a reward mechanism which as we show favors both the pervasiveness of cooperative behavior and the sustainable management of natural resources specifically we show that in the presence of such a reward mechanism a stable equilibrium can be reached with both strategies being practiced simultaneously and a decentralized and sustainable management of common property resources is possible

contagious cooperation temptation and ecosystem collapse real world observations suggest that social norms o f cooperation can be effective in overcoming social dilemmas such as the joint management of a c ommon pool resource but also that they can be subject to slow erosion and sudden collapse we show that these patterns of erosion and 15 collapse emerge endogenously in a model of a closed community harvesting a renewable natural resource in which individual agents face the tempta tion to overexploit the resource while a cooperative harvesting norm spreads through the community via interpersonal relations we analyze under what circumstances small changes in key parameters including the size of the community and the rate of technological progress trigger catastrophic transitions from 20 relatively high levels of cooperation to widespread norm violation causing the social ecological system to collapse

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

privatization of public enterprises in this paper the following results of a transition from public to private ownership are obtained the manager of a public firm engages in less effort than is efficient in a privatized firm the manager s effort is chosen efficiently the reward to the manager of a public firm is more differentiated than efficient in the case of an unfavourable economic environment the reward is higher than efficient on the other hand the manager in a privatized firm is always rewarded efficiently it is irrelevant whether the public manager is incompletely informed about the particular mix of government s multiple objectives as long as the government chooses the incentive compatible reward for the manager

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

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

incentive effects of bonus taxes in a principal agent model several countries have implemented bonus taxes for corporate executives in response to the current financial crisis using a principal agent model this paper investigates the incentive effects of bonus taxes by analyzing the agent s and principal s behavior specifically we show how bonus taxes affect the agent s incentives to exert effort and the principal s decision regarding the composition of the compensation package fixed salary and bonus rate we find that surprisingly a bonus tax can increase the bonus rate and decrease the fixed salary if the agent is highly risk averse additionally a bonus tax can induce the principal to pay higher bonuses even though the agent s effort unambiguously decreases nevertheless a bonus tax reduces the overall salary of the agent further results are derived with respect to the existence and uniqueness of the equilibrium for a general effort cost function

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

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

profit fluctuations signal eroding resilience of natural resources abstract a common pattern of environmental crises is a vicious cycle between environmental degradation and socio economic disturbances here we show that while such feedbacks may give rise to critical transitions in social ecological systems at the same time they can offer novel opportunities for anticipating them we model a community that has joint access to the harvest grounds of a resource that is prone to collapse individuals are tempted to overexploit the resource while a cooperative harvesting norm spreads through the community via interpersonal relations both social and ecological collapses can be induced by environmental or socio economic driving forces regardless of the type and cause of collapse we find that upcoming transitions may be detected using simple socio economic response variables such as individual profits our findings suggest that such alternative sources of information can be used to detect upcoming critical transitions in social ecological systems however we also find that robust detection of critical transitions may be confounded by recovery attempts undertaken by resource users in the vicinity of an upcoming collapse which may be falsely interpreted as a stabilization of the social ecological system

nonlinear behavior of the socio economic dynamics for lake eutrophication control abstract to succeed in combating lake eutrophication cooperation of local inhabitants small factories and farmers in reducing phosphorus discharge is very important but the willingness of each player to cooperate would depend on the cooperation of other players and on the level of environmental concern of the society in general here we study the integrated dynamics of people s choice of behavior and the magnitude of eutrophication assumptions are there are a number of players who choose between alternative options a cooperative and environment oriented option is more costly than the other the decision of each player is affected by social pressure as well as by economical cost of the options the lake pollution increases with the total phosphorus released and a high pollution level in the lake would enhance the social pressure the model includes a positive and a negative feedback loops which create diverse dynamical behavior the model often shows bistability having an equilibrium with a high level of cooperation among people and clean water and the other equilibrium with low cooperation and polluted water which are simultaneously stable the model also shows fluctuation between a high and a low levels of cooperation in alternating years cycle with a longer periodicity or chaotic fluctuation conservatism of people stabilizes the system and sometimes helps maintaining cooperation the system may show unexpected parameter dependence the improved phosphorus removing efficiency might make water more polluted if it causes the decline in the environmental concern and cooperation among people

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

trade tragedy and the commons we develop a theory of resource management where the degree to which coun tries escape the tragedy of the commons and hence the de facto property rights regime is endogenously determined three forces determine success or failure in resource management the regulator s enforcement power the extent of har vesting capacity and the ability of the resource to generate competitive returns without being extinguished the model can explain heterogeneity across coun tries and resources in the effectiveness of resource management and it predicts that changes in prices population and technology can cause transitions to better or worse management regimes jel p14 q21 q22 q23 q32 many of the world s major renewable resource stocks are in a state of decline this is true for capture fisheries for forests in developing countries and for many measures of the biosphere s health other renewable resources including many species of wildlife marine mammals and coral reefs are also under threat while poverty and government corruption are surely respon sible for some of this record particular emphasis is often placed on the potentially damaging role played by international trade this emphasis is not surprising given that natural resource products are a key export for much of the developing world and property rights over renewable resources are both difficult to define and poorly enforced but property rights are not an immutable country characteristic such as weather mineral deposits or topography they are instead market institutions developed to facilitate transactions and protect scarce resources consequently changes in prices technology and other effects of market integration may alter the de facto property rights regime and lead to impacts quite dif ferent from those predicted by existing analyses the purpose of this paper is to examine renew able resource use within a framework where the enforcement of property rights and hence the efficacy of resource management is endogenously determined we develop a theory where an existing government regulates the use of a renewable resource by a set of agents who have a right to harvest the resource could be a fishery forest stock aquifer etc and we assume it is local and therefore contained within one country the govern ment sets rules limiting harvests but agents may cheat on these allocations and risk punishment property rights are endogenous in this framework because the government must account for agents incentive to cheat as a result the effective protection for the resource or what we refer to as the de facto property rights regime may be far from perfect even though property rights would be perfectly enforced if there was no monitoring problem

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

the economical management of multispecies fisheries resource based theory implicitly assumes that property rights to resources are secure extant property rights theory enables us to relax this assumption to take into account processes where there are struggles in establishing property rights that enhance

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

the dynamic efficiency costs of common pool resource exploitation we conduct the first empirical investigation of common pool resource users dynamic and strategic behavior at the micro level using real world data fishermen s strategies in a fully dynamic game account for latent resource dynamics and other players actions revealing the profit structure of the fishery we compare the fishermen s actual and socially optimal exploitation paths under a time specific vessel allocation policy and find a sizable dynamic externality individual fishermen respond to other users by exerting effort above the optimal level early in the season congestion is costly instantaneously but is beneficial in the long run because it partially offsets dynamic inefficiencies jel d24 q21 q22

conflict between groups of players in coupled socio economic and ecological dynamics conflict among multiple groups is a major source of difficulty in environmental conservation people are often divided into various groups that have different social factors sometimes leading to differences in the degree to which they cooperate in environmental conservation this obstructs the social consensus needed to solve the environmental problems here we study the coupled dynamics of human socio economic choice and lake water pollution and examine the magnitude of the difference in cooperation levels between two groups in the model many players choose between a costly but cooperative option and a selfish option the former results in a reduced phosphorus discharge into the lake each player s choice is affected by an economic cost and social pressure social pressure is a psychological factor that promotes cooperation it becomes stronger when more players in the society are cooperative conformist tendency and when the problem at hand is a greater concern to society in the model two groups sometimes show large differences in their cooperation levels even when both have exactly the same social factors however cooperation levels are more likely to differ between groups that have different social factors enhancement of the cross group conformist tendency is the most effective way to minimize differences in cooperation levels and to mitigate conflict between groups

wages or fringes some evidence on trade offs and sorting the two key predictions of hedonic wage theory are that there is a trade off between wages and nonmonetary rewards and that the latter can be used as a sorting device by firms to attract and retain the kind of employees they desire we use the vignettes method to estimate individuals willingness to pay for fringe benefits and job amenities we find negative wage fringe trade offs considerable heterogeneity in willingness to pay for fringe benefits and signs of sorting

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

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

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

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

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

the evolution of social norms in common property resource use the problem of extracting commonly owned renewable resources is examined within an evolutionary game theoretic framework it is shown that cooperative behavior guided by norms of restraint and punishment may be stable in a well defined sense against invasion by narrowly self interested behavior the resource stock dynamics are integrated with the evolutionary game dynamics effects of changes in prices technology and social cohesion on extraction behavior and the long run stock are analyzed when threshold values of the parameters are crossed social norms can break down leading generally to the lowering of the long run stock and possibly to its extinction copyright 1996 by american economic association