entrepreneurial rents and the theory of the firm abstract the creation of entrepreneurial rents occurs under conditions of uncertainty yet current theories of rent appropriation such as transactions cost theories of the firm focus their efforts primarily on how quasi rents rents that have already been created are appropriated by parties to that exchange entrepreneurs face a dual challenge that of creating entrepreneurial rents and appropriating some of these rents moreover this challenge usually exists at a time when the entrepreneurial rents that might be created are not known or anticipatable indeed entrepreneurs not only concern themselves with ensuring that they are able to appropriate at least some of the rents that might be eventually created but in fact they may not create any rents or potentially lose value understanding the dual nature of the rent creation and the rent appropriation problem has a variety of implications for the study of entrepreneurial organizations and generally for theory of the firm discussions

two remarks on the property rights literature we first point out that the recent property rights literature is based on three assumptions 1 that contracts are always subject to renegotiation 2 that the exercise of a property right confers a private benefit and 3 that parties are risk neutral building on hart moore 1999 we provide conditions under which an optimal contract consists of nothing more than an assignment of property rights we also examine the robustness of some of the literature s standard predictions about asset ownership to the introduction of mechanisms for eliciting parties ex post willingness to pay for the assets such as options or financial markets to illustrate the issue we revisit the hart moore 1990 proposition that joint ownership is suboptimal and argue that ownership by a single party is dominated by joint ownership with put options

differential awareness ambiguity and incomplete contracts a model of contractual disputes we focus on aspects of differential awareness that give rise to contractual disputes parties to a contract are boundedly rational as the state space available to them is coarser than the complete state space hence they may disagree as to which state of the world has occurred and therefore as to what actions are required by the contract such disagreement leads to disputes we show that the agents may prefer simpler less ambiguous contracts when facing potential disputes

implementing a surplus division rule we show that in the class of surplus division problems where the size of the surplus may be dependent on how it is shared the nash bargaining solution is the unique symmetric and nash implementable division rule d 2005 published by elsevier b v

future orientation promotes climate concern and mitigation abstract climate change entails uncertainties in the timing and scale of future impacts imposing challenges to decision making with intertemporal trade offs when making intertemporal trade offs future impacts are often considered distant and discounted in present decision making and policy design the future however is not only temporally distant but also perceived in culturally and psychologically different ways based on national statistics and individual level survey data statistical analyses show that both national and individual differences in future orientation affect climate perception and mitigation at the national level countries with languages that grammatically highlight the future are associated with higher climate concern lower carbon emissions and energy use and more progress in climate mitigation individual level evidence suggests that future orientation helps the public understand complicated climate issues make more personal mitigation but not necessarily collective action or policy support the findings indicate the important role that subjective future orientation plays in climate perception and decision making both behavioral intervention and climate communication can be designed based on future orientation to better address climate change

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

pretia ex machina prices and process in long term contracts aimong the primary motives for writing contracts identified in both the law and economics literatures is the desire to protect against the hazards inherent to exchange where one or both parties have invested in reliance or relationship specific assets in support of the transaction because such investments have a higher value in their intended than in their next best use parties have an incentive to engage in haggling or other forms of opportunism in hopes of influencing the distribution of the resulting quasi rents contracts promote efficiency by securing the distribution of those rents ex ante thereby avoiding costly repetitive bargaining over the terms of trade and reducing the risk for each party of relying on the performance of the other in reality this description of the role and functioning of contracting is oversimplified as a number of legal and economic scholars have emphasized contracts are not the precise mechanically enforced documents often encountered in economic theory 2 indeed contracts are extremely

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

asset specificity and economic organization abstract this paper examines the optimization problem of firm and market organization in which both production cost and transaction cost differences are expressed as a function of asset specificity in general markets enjoy advantages by aggregating the demands of many buyers thereby realizing economies of scale or scope such production cost savings need to be assessed in relation to the transaction cost advantages that internal organization sometimes enjoys over markets in adapting to changed circumstances as it turns out both production cost economies and the transaction cost differences between firm and market organization vary systematically with the characteristics of the investments this paper employs a unified framework to assess the choice of organization form the condition of asset specificity is featured

is grameen lending efficient repayment incentives and insurance in village economies many believe that a key innovation by the grameen bank is to encourage borrowers to help each other in hard times to analyse this we study a mechanism design problem where borrowers share information about each other but their limited side contracting ability prevents them from writing complete insurance contracts we derive a lending mechanism which efficiently induces mutual insurance it is necessary for borrowers to submit reports about each other to achieve efficiency such cross reporting increases the bargaining power of unsuccessful borrowers and is robust to collusion against the bank copyright 2004 wiley blackwell

toward a theory of regulation for developing countries following jean jacques laffont s lead the efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction however recent reforms aimed at improving the performance of these sectors have had limited success evidence suggests that in many instances this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries this article surveys more recent theoretical work focusing on problems with regulation in these countries at the heart of the survey is the work of jean jacques laffont who in the last decade of his life set about developing a theoretical framework for regulation in developing countries we consider the implications of his work which focused on the key institutional limitations faced in developing countries we then discuss where experience suggests that there are important omissions from this modeling bringing in extensions and alternative approaches pursued by other authors we conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak overall we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries

efficient informal trade theory and experimental evidence from the cape town taxi market informal sectors in developing countries are often thought of as responses to rigid and cumbersome market regulations in this paper i study informal trade as a first best outcome in the model i propose rigid regulations can be necessary to achieve efficiency even though they are always sidestepped the key assumption is that the regulations define the trading parties fall back position in case the informal bargaining process breaks down i set up a field experiment to test the model s mechanisms in the cape town market for metered taxis consistent with the model i find that sidestepping the regulations increase cost efficiency taxis take the shortest route the price is however unaffected suggesting informal bargaining leads to a pareto improvement

subjective discount rates in the general population and their predictive power for energy saving behavior why do people sometimes refrain from saving energy even if it would pay off in monetary terms subjective discount rates present one possible explanation for this lack of foresight but little is known about their level and reliability in the general population with regard to behavior persons with lower discount rates are expected to accept additional costs upfront more readily than those with higher discount rates based on a representative nation wide study the swiss environmental survey 2007 and a follow up survey our analyses reveal that on average subjective discount rates are well above market interest rates and moderately stable over a time interval of four years income and education are negatively correlated with discount rates contrary to expectations we did not find convincing support for an impact of discount rates on energy saving behavior

energy conservation investment do consumers discount the future correctly we argue that the apparently high discount rates attributed to investors making energy conservation investments are not irrational or the result of some market failure rather they may result from an investor recognizing that many conservation investments entail substantial sunk costs in the presence of these costs and uncertainty over future conservation savings consumers should use a higher hurdle rate for investment than if there were no uncertainty simulations suggest that the hurdle rate should be about four times greater than the standard rate an implication of our model is that tax subsidies for the purchase of conservation capital are likely to be ineffective we discuss alternative policy approaches which are more likely to increase energy efficient investment namely mandatory efficiency standards and energy taxes

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

the reference point approach to the theory of the firm an introduction there is a small but growing literature on the reference point approach to incomplete contracts as formulated by hart and moore the reference point approach has begun to be applied to the theory of the firm in 3 recent papers this introduction reviews the main theoretical aspects of each of these papers it then discusses the relationship between the reference point approach to the firm the transaction cost approach and the property rights approach here it is argued that the reference point approach is a step back towards ex post inefficiencies away from reliance on ex ante inefficiencies

incomplete contracts and the theory of the firm what have we learned over the past 25 years incomplete contracts and the theory of the firm what have we learned over the past 25 years

supplier performance in vertical alliances the effects of self enforcing agreements and enforceable contracts the paper examines the significance of enforceability and adaptability in governing vertical alliances and their performance ramifications for suppliers literature on supplier relations suggests that suppliers are skeptical of close ties with their buyers helper 1991 helper and sako 1995 such skepticism persists in spite of the fact that buyers are writing longer enforceable contracts with fewer suppliers in this context the paper develops a transaction cost economics tce based model that distinguishes between the verifiable and nonverifiable aspects of governance attributes of safeguards incentive intensity and adaptability in explaining supplier performance variations the paper argues that the following factors prove valuable for suppliers 1 the adaptive and collaborative orientation fostered by the original equipment manufacturer s oem s credible commitment to the exchange and by information sharing on the part of the supplier 2 the presence of certain nonverifiable safeguards and 3 the incentives inherent in target pricing these assertions have been tested using data from the home appliance industry results indicate that information sharing together with 1 oem dependence and 2 target pricing does indeed enhance supplier performance also results suggest that while nonverifiable safeguards can help verifiable safeguards do not have a positive association with supplier interests under certain conditions then suppliers can venture into closer relationships with buyers and benefit

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

amendment rules in constitutions i study a formal model where the founder of a constitutiondetermines the amendment rule that minimizes constitutionalchanges by a future lobbyist the founder has to consider thattoo flexible an amendment rule will make constitutional changevia amending too easy while too rigid an amendment rule willforce the lobbyist to look for other ways to achieve change icharacterize the optimal amendment rule under two alternativeformulations and study the comparative statics with respect tothe relative costs of amending and the other possibilities forchange

managerial compensation contract and bank bailout policy abstract under the incomplete contract framework we consider an optimal regulatory policy for motivating bank equity owners and bank managers to restructure the bad loans of their banks in the presence of managerial compensation contracts with stock options the regulatory policy studied in this paper is mainly concerned with the design of repayment schedules in the scheme of injection of cash funds into insolvent banks by the regulator we show that the regulator cannot necessarily attain the social optimal allocation by injecting cash funds into insolvent banks through the purchase of subordinated bonds with the risk free interest rate however even in that case we also suggest that if the regulator injects cash funds into active restructuring banks through the purchase of subordinated bonds or preferred stocks with less stringent repayment conditions and nationalizes passive restructuring banks the regulator can attain the social optimal allocation by performing such a non linear injection scheme under certain conditions

optimal ownership of public goods reconsidered consider a non governmental organization ngo that can invest in a public good should the government or the ngo own the public project in an incomplete contracting framework with split the difference bargaining besley and ghatak 2001 argue that the party who values the public good most should be the owner we demonstrate the robustness of their insight when the split the difference rule is replaced by the deal me out solution our finding is in contrast to the private good results of chiu 1998 and de meza and lockwood 1998 who show that the optimal ownership structure crucially depends on whether the split the difference rule or the deal me out solution is used

making the implicit explicit a look inside the implicit discount rate implicit discount rates idrs are employed in energy models to capture household investment decisions yet the factors behind the idr and their respective implications for policy making usually remain blurred and fractional the proposed comprehensive framework distinguishes three broad categories of factors underlying the idr for household adoption of energy efficient technologies eets preferences notably over time risk loss debt and the environment predictable ir rational behavior bounded rationality rational inattention behavioral biases and external barriers to energy efficiency existing empirical findings suggest that the factors underlying the idrs that differ across household characteristics and technologies should be accounted for in energy models furthermore the framework allows for a fresh look at the interplay of idrs and policies we argue that a simple observation of high idrs or observing correlations between idrs and socio economic characteristics does not provide guidance for policy making since the underlying sources cannot be identified instead we propose that some of the factors underlying the idr notably external barriers can be changed through directed policy interventions whereas other factors notably preferences and predictable ir rational behavior are innate and can only be taken into account through reactive policy interventions

price stabilization and the risk averse firm an analytically simple and tractable approach to firm level welfare analysis of complete and partial mean preserving price stabilization for producers with general risk averse preferences facing a stochastic technology is developed necessary and sufficient conditions for price stabilization to be welfare enhancing are derived under different assumptions of the producer s preferences and the producer s technology existing stabilization results for the risk averse firm are shown to be corollaries of these more general results

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

transaction costs and contractual incompleteness the case of electricite de france abstract this paper explores the incompleteness of inter firm contracts through the lens of recent developments in transaction cost economics we built a non truncated contract database representing all the relationships of electricite de france edf with its coal carriers over the period 1977 1997 we tested and corroborated most propositions derived from transaction cost theory relating contractual incompleteness to transaction characteristics even when we considered the complete set of the theory s propositions by endogeneizing the asset specificity at stake in transactions to our knowledge this kind of test has never been conducted before

make buy or ally a transaction cost theory meta analysis since the publication of williamson s markets and hierarchies many empirical articles have investigated the tenets of transaction cost theory using meta analytic techniques we quantitatively syn

exploring the diffusion of low energy houses an empirical study in the european union abstract diffusion of low energy houses is an important part of energy and climate policy in the european union eu and in individual eu countries key barriers to the adoption of low energy houses include additional construction costs and uncertainty surrounding actual energy and cost savings in this paper we econometrically analyze determinants of low energy house adoption including time and risk preferences we rely on original data from a large survey conducted among households in eight eu countries to our knowledge this is the first empirical study of low energy building adoption to rely on a demographically representative sample our set of covariates includes parameters of time and risk preferences that were elicited via state of the art incentivized multiple price list experiments and via self assessment scales we find mixed results for the effects of time discounting on low energy house adoption risk preferences do appear to matter as risk proneness increases so does the adoption of zero net or energy plus building but not passive houses consistent with the low cost hypothesis about environmental attitude and action we find no results for environmental attitudes and social norms

a large scale test of the effects of time discounting risk aversion loss aversion and present bias on household adoption of energy efficient technologies abstract this paper empirically and jointly analyses the relations between standard time discounting risk aversion loss aversion and present bias and household stated adoption of low to high stake energy efficiency technologies eets light emitting diodes leds energy efficient appliances and retrofit measures the analysis relies on a large representative sample drawn from eight european union countries preferences over time risk and losses were elicited and jointly estimated from participant choices in incentivized context free multiple price list experiments the findings from econometrically estimating eet adoption equations provide some support for the hypothesis that individuals who are more loss averse or more risk averse or who exhibit a lower time discount factor are less likely to have adopted eets yet some of the results significance levels and effect sizes appeared sensitive to the addition of covariates which may be an indication of bad controls finally omitting one or several of the parameters capturing preferences over time risk and losses when estimating the eet adoption equations did not appear to cause omitted variable bias

decision making over time and under uncertainty a common approach this paper considers a number of parallels between risky and intertemporal choice we begin by demonstrating a one to one correspondence between the behavioral violations of the respective normative theories for the two domains i e expected utility and discounted utility models we argue that such violations or preference reversals are broadly consistent with three propositions about the weight that an attribute receives in both types of multiattribute choice specifically it appears that 1 if we add a constant to all values of an attribute then that attribute becomes less important 2 if we proportionately increase all values of an attribute or if we change the sign of an attribute from positive to negative then that attribute becomes more important the generality of these propositions as well as the constraints they would impose on separable representations of multiattribute preferences is discussed

transactional characteristics institutional environment and joint venture contracts this study examines how transactional characteristics and the institutional environment influence contractual governance for international joint ventures ijvs unlike previous studies that view joint venture contractual governance as a unidimensional construct clause specificity thus causing a debate upon whether ijv contracts should be more specific contractual governance herein is defined as a three dimensional construct that includes the extent to which contractual terms are clearly specified term specificity possible contingencies are accounted for contingency adaptability and joint venture parties are legally bound to the contract contractual obligatoriness our analysis of ijvs in china suggests that term specificity and contractual obligatoriness increase when the proprietariness of resources to be invested in the ijv or the incompleteness of the host country s legal system increase contractual obligatoriness appears to be an increasing function of economic exposure and environmental volatility whereas contingency adaptability in a contract rises when interparty dependency investment uncertainty and knowledge proprietariness intensify or when environmental hazards escalate these results suggest that an ijv contract if structured multidimensionally as above can curtail opportunism and guide venture evolution at the same time these contractual dimensions should not be prefixed but properly aligned with transactional and institutional characteristics this alignment has strong implications in reducing transaction costs and spurring ijv evolution in the complex and volatile institutional environment

ambivalent investment and the hold up problem in this paper we add to the foundations of incomplete contracting literature we study the hold up problem with ambivalent investment where investment benefits the investing party if ex post the right decision is undertaken but harms the investing party if the wrong decision is made in this context we show that the power of contracts to provide investment incentives depends on three factors the commitment value of contracts the amount of quasirents that the investing party can expect in the case of out of contract renegotiation and the degree of ambivalence of investment first contracts provide first best investment incentives when parties can commit to a contract regardless of the type of investment second with sufficiently ambivalent investment if parties cannot commit not to renegotiate a contract and if the investing party s bargaining power is intermediate contracts cannot improve investment incentives above those provided by no contract in contrast a simple buyer or seller option contract is optimal when the investing party s bargaining power is extreme jel d23 k12 l22

a critical assessment of the incomplete contracts theory for private participation in public services the case of the water sector in ghana this paper provides a critical analysis of the recent developments in the incomplete contracts theory and its conclusions for privatisation of public services drawing on a case study of management contract for urban water services in ghana and highlighting the flaws in the theory the article argues that contractual incompleteness does not provide a uniform guidance on efficient forms of ownership we argue that methodological individualism utilised in the theory is particularly ineffective for its application to public services where direct or indirect contractual role of the state cannot be eliminated the sterility of the theory with respect to political institutional and distributional context of public service delivery is identified as an important weakness copyright oxford university press

contracts entrepreneurs market creation and judgement the contemporary mainstream theory of the firm in perspective this survey gives an overview of the theory of the firm as it is formulated within the contemporary mainstream of economics two groupings of theories are briefly discussed principal agent and incomplete contract models next three of the most recent contributions regarding firms are considered the reference point approach is looked at first followed by a discussion of spulber s book the theory of the firm last we consider the entrepreneurial judgement perspective

does evolution solve the hold up problem abstract the paper examines the theoretical foundations of the hold up problem at the first stage one agent decides on the level of a relationship specific investment there is no contract so at the second stage the agent must bargain with a trading partner over the surplus that the investment has generated we show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the choice of equilibrium concept in particular we prove the following two results i if bargaining proceeds according to the nash demand game any investment level is subgame perfect but only a particular efficient outcome is stochastically stable ii if bargaining proceeds according to the ultimatum game with the trading partner as proposer only the minimal investment level is subgame perfect but any investment level is stochastically stable journal of economic literature classification numbers l14 c78

separation and hedging results with state contingent production a state contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty producer behaviour with both production and price risk in the presence and in the absence of futures and forward markets is analysed in this state contingent framework conditions for the optimal hedge to be positive or negative are derived we also show that under plausible conditions a risk averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a nonstochastic technology new separation results which hold in the presence of both price and production risk are then developed these separation results generalize townsend s spanning results by reducing the number of necessary forward markets by one

marginal costs and co benefits of energy efficiency investments the case of the swiss residential sector abstract key elements of present investment decision making regarding energy efficiency of new buildings and the refurbishment of existing buildings are the marginal costs of energy efficiency measures and incomplete knowledge of investors and architects about pricing co benefits and new technologies this paper reports on a recently completed empirical study for the swiss residential sector it empirically quantifies the marginal costs of energy efficiency investments i e additional insulation improved window systems ventilation and heating systems and architectural concepts for the private sector first results on the economic valuation of co benefits such as improved comfort of living improved indoor air quality better protection against external noise etc may amount to the same order of magnitude as the energy related benefits are given the cost benefit analysis includes newly developed technologies that show large variations in prices due to pioneer market pricing add on of learning costs and risk components of the installers based on new empirical data on the present cost situation and past techno economic progress the potential of future cost reduction was estimated applying the experience curve concept the paper shows for the first time co benefits and cost dynamics of energy efficiency investments of which decision makers in the real estate sector politics and administrations are scarcely aware

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

producer attitudes toward output price risk experimental evidence from the lab and from the field a number of agricultural and food policy instruments are predicated on the idea that producers dislike output price risk we test experimentally some theoretical predictions about the behavior of producers in the face of output price risk namely sandmo s 1971 prediction that price risk at the extensive margin causes risk averse producers to decrease how much they produce and batra and ullah s 1974 prediction that price risk at the intensive margin causes producers whose preferences exhibit decreasing absolute risk aversion to further decrease how much they produce we do so in labs with us college students as well as in the field with peruvian farmers first as regards price risk at the extensive margin we find no support for sandmo s prediction second consistent with batra and ullah s prediction we find that output decreases in response to price risk at the intensive margin when imposing a linear relationship between output and price risk when relaxing the assumption of linearity between output and price risk however we find a nonmonotonic relationship between output and price risk taken together these results are broadly inconsistent with expected utility theory alternative models of behavior in the face of risk such as prospect theory may explain the behavior we observe

expected utility violations implications for agricultural and natural resource economics nomic toolkit they compare the dogged defense of eu by economists to that of a monty python character playing the role of a petstore owner disputing the state of an obviously dead parrot the shop owner goes through incredible machinations to avoid replacing the bird let us consider another analogy the behavior of a caged parrot can likely tell us very little about the behavior of parrots in the wild a biologist may want to incorporate the behavior of caged parrots into the study of wild birds but would undoubtedly need to be extremely careful about understanding the underlying differences in the opportunities and constraints faced by caged versus wild birds before inferring much about wild parrot behavior to some extent experimental violations of eu present us with the same problem as the hypothetical parrot biologist subjects in these risk experiments are in a setting and are completing tasks very different from the setting and tasks they face in their everyday economic and social context what is missing relates to the power of the rationality assumption discussed in friedman that relies not only on the person s skill but also on the feedback they receive from the market friedman s expert billiards players are selected by a market because of their skill in billiards and th se are the players who fit friedman s as if description 1 risk researchers should not ignore experimental data however before we eliminate eu we should more fully understand the underlying reasons for the experimental behavior that violates eu agricultural and natural resource economists are well suited to assess

complexity and renegotiation a foundation for incomplete contracts the paper considers a hold up model where only one of n future trading opportunities will prove to be efficient and where ex post renegotiation of the ex ante contract cannot be prevented as the environment becomes more complex n the outcome under any message contingent long term contract converges to that of the incomplete contracting model where trade is contractible ex post but not ex ante when trades are costly to describe both ex ante and ex post the incomplete contracting result is extended to a broader class of environments

evolution of time preference by natural selection this paper entertains the hypothesis that human time preferences are in evolutionary equilibrium i e that no mutation changing time preferences could be favored by natural selection this hypothesis implies that the marginal rate of substitution mrs holding darwinian fitness constant must equal the mrs holding utility constant furthermore in a market economy the latter must equal the mrs in exchange exploiting these principles the author finds that the long term real interest rate should equal ln 2 per generation about 2 percent per year and that young adults should discount the future more rapidly than their elders copyright 1994 by american economic association

the next generation of urban maccs reassessing the cost effectiveness of urban mitigation options by integrating a systemic approach and social costs abstract many cities are implementing policies and climate action plans yet local climate policies suffer from a lack of scientific understanding and evaluation methods able to support the definition of efficient mitigation strategies the purpose of this paper is to build on classical approaches in the energy policy field that exist at the national and international level to propose an urban maccs methodology able to fulfill this lack and inform local debates the methodology is an extension of static expert based maccs it combines a land use transport integrated model and an abatement cost methodology that integrates co benefits and takes into account the spatial and systemic dimensions of cities the methodology is implemented for the transportation sector of a mid sized european city grenoble france our results present the cost effectiveness and political feasibility of several proposed measures we find that the inclusion of co benefits can profoundly change the cost benefit assessment of transport mitigation options moreover we underline the key parameters determining the cost effectiveness ranking of mitigation options these urban maccs aim to serve as a bridge between urban planning and mitigation policies and can thus contribute to strengthen and align sustainable and climate change agendas at the local level

strategic fit in industrial alliances an empirical test of governance value analysis abstract the exclusion of firm specific considerations in the standard economizing calculus approach to buyer supplier ties makes the large variations in the types of contracts used within the same industry unexplainable this article tests ghosh and john s 1999 strategizing calculus model that purports to close this gap the core organizing principle of this model is a three way fit among firm resources investments and governance that yields the highest net receipts from this principle the authors derive predictions and test them using data from 193 original equipment manufacturers that engage independent component suppliers the data show that investments must be aligned with more complete contract terms e g fixed prices hard designs to yield cost reduction outcomes for all firms however investments must be aligned with more incomplete contracts e g cost plus prices soft designs to yield end product enhancement outcomes but only for firms with relatively small downstream market

let them cheat abstract we consider the problem of fairly allocating a bundle of infinitely divisible goods among a group of agents with classical preferences we propose to measure an agent s sacrifice at an allocation by the size of the set of feasible bundles that the agent prefers to her consumption as a solution we select the allocations at which sacrifices are equal across agents and this common sacrifice is minimal we then turn to the manipulability of this solution in the tradition of hurwicz 1972 we identify under some mild assumptions on preferences the equilibrium allocations of the manipulation game associated with this solution when all commodities are normal for each preference profile each equal division constrained walrasian allocation is an equilibrium allocation conversely each equilibrium allocation is equal division constrained walrasian furthermore we show that if normality of goods is dropped then equilibrium allocations may not be equal division constrained walrasian

dynamic bargaining with action dependent valuations abstract an infinite horizon dynamic bargaining model is presented in which actions affect the expected future value of the buyer seller match because actions directly affect the future surplus to be bargained over the model is unlike other models that tie the dynamic process to nature alone focusing on a subset of weak markov equilibria several results come about that are not found in static bargaining models using similar bargaining protocols in particular optimal price demands can be lower higher than the buyer s lowest highest possible valuation and several empirical features concerning wage settlements and strike incidence from labor union contract negotiations can be explained

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

a theory of time preference grant a taylor this article proposes that people generally prefer present consumption to future consumption because their expected utility from consumption eventually falls as their mental and physical abilities eventually decline with age moreover contrary to the ubiquitous intertemporal formulation with a constant rate of time preference and contrary to three recent theories of time preference that predict decreasing discounting as people age this article asserts that discounting increases over the life cycle this hypothesis is supported by data from the panel study of income dynamics as well as evidence from numerous previous studies jel d91 1 introduction despite the almost universal assumption of time preference in models of intertemporal choice an adequate explanation of why people discount the future has not been provided 1 olsen and bailey 1981 make a convincing case for positive time preference by contradiction i e without time preference models of intertemporal choice do not yield predictions consistent with observed behavior but they do not explain why individuals would rationally discount the future 2 three recent studies have attempted to provide the explanation rogers 1994 argues that societies that discount the future at a rate of about 2 will be the long run survivors in an evolutionary fitness situation 3 posner 1995 argues that discounting occurs because individuals have multiple selves that is people are weighting their present consumption far more heavily than their future consumption because the present self and the future self are in some meaningful sense separate persons 92 becker and mulligan 1997 argue that discounting occurs because of a rational defective recognition of future utilities 730 but as will be shown these three theories are inconsistent with empirical evidence on consumption over the life cycle in at least one important aspect this article constructs and empirically supports a new theory of time preference the hypothesis is that people do not have an intrinsic preference for present consumption relative to future consumption instead the instantaneous utility function also known as the felicity function is expected to vary with age just as people s physical and mental abilities vary with age in other words the ability to enjoy consumption eventually deteriorates over the life cycle along with other abilities this life cycle view of the expected utility function causes people to rationally devalue consumption in periods of low expected felicity that is discount future consumption perhaps this is what is meant by the cliche don t wait until you are too old to enjoy it moreover this causes individuals implicit discount rates to vary systematically with age 4 in fact this provides the testable implication of the theory the standard specification of intertemporal preferences holds the discount rate constant over th e life cycle 5 to be more precise in the early stage of the life cycle the capacity to enjoy consumption may be expected to rise hence a young individual s discount rate may be negative figure 1 illustrates this possibility with a hypothetical adult life cycle marginal felicity function for a given level of consumption u sub c c a c denotes consumption and a denotes age and its corresponding discount rate function rho a the vast majority of wealth is held by older people that is those in the declining stage of their abilities thus the preference for present consumption over future consumption appears to hold in the aggregate this view of intertemporal preferences may at first seem inconsistent with practically all dynamic analyses which are based on the notion of stationary utility on further consideration however the hypothesis is quite consistent with modern consumer theory since becker 1965 it has been widely accepted that households derive utility from commodities that are produced with market goods combined with household time and skills i

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

contracting with imperfect commitment and the revelation principle the single agent case this paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism we show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent in contrast with the conventional revelation principle however the agent may not use this strategy with probability one our results apply to contracting problems between a principal and a single agent by reducing such problems to well defined programming problems they provide a basic tool for studying imperfect commitment

role of risk sharing and transaction costs in contract choice theory and evidence from groundwater contracts empirical modeling of contract choice has been problematic because routine large scale surveys do not contain sufficient information on matched partners and on contractual terms this paper is based on a primary level survey of groundwater contracts in india we discuss several different measures for riskiness and transaction costs and use them to test for alternative theories of contract choice although the risk sharing explanation has been most popular in the theoretical literature it is not found to be significant the data are more consistent with a double sided incentive model where the need for giving proper incentives to the buyer and the seller determines contract choice

revisiting the techno economic analysis process for building mounted grid connected solar photovoltaic systems part two application part one in this two part paper identified monte carlo analysis as an improved approach over traditional deterministic techno economic methods for solar pv prosumers in deregulated markets in this

incomplete contracts and the governance of complex contractual relationships even the simplest of economic transactions can be so complex that it is practically impossible to list the entire range of outcomes and contingencies that might affect contractual performance scholars outside the formal economic field of contract theory have long recognized that this complexity implies that real world contracts will almost never provide an exhaustive description of the rights and obligations of the contracting parties in every possible contingency the central role of contractual incompleteness in transaction cost economics contract law and the law and economics movement should be contrasted with the minor role it played in the formal theory of contracts developed by economic theorists over the past two decades the starting point of most formal contracting models e g the principal agent model with moral hazard is the feasibility of a complete description of the set of possible contingencies and the ability to write contracts that are sensitive to even the most minute details of the events arising in the course of the transaction one reason that might help explain this neglect of the role of incomplete contracts is the lack of a well developed theory of contract enforcement governance by focusing on explicit written contracts as the only available method of governance many models abstract from the role of other instruments such as ownership rights contract law as interpreted by courts reputation in long term relationships and social conventions that define what constitutes acceptable

cost effective subsidy incentives for room air conditioners in china an analysis based on a mcfadden type discrete choice model abstract based on a mcfadden type conditional logit cl discrete choice model this paper estimates the most economic subsidy level mesl for room air conditioners racs in china that minimizes the net cost of subsidy per unit of electricity saved the analysis reveals that given the current price and efficiency spectrum of racs in the chinese market as well as the electricity price and cooling demand of chinese households the mesl for racs in china should be around 60 which is much higher than the current subsidy level of 5 15 a sensitivity analysis suggests that the high mesl 60 is mainly a consequence of relatively low electricity price and household cooling demand in the country if china s household cooling demand increases further and its electricity price were to rise to a higher level the mesl for racs could possibly drop to about 5 15 as household cooling demand varies among chinese cities in different climatic zones and at different levels of economic development the rac subsidy incentives should be region specific with necessary modifications the method for analysis proposed in this paper can also be applied to other household appliances to prioritize the types of appliances requiring subsidies

contract renegotiation and rent re distribution who gets raked over the coals policy shocks affect the rent distribution in long term contracts which can lead to such contracts being renegotiated we seek an understanding of what aspects of contract design in the face of a substantial policy shock affect the propensity to renegotiate we test our hypotheses using data on u s coal contracts after the policy shock of the 1990 clean air act amendments contracts are divided into two categories those that were renegotiated following the shock and those that were not characteristics of the contract are used to explain whether or not the contract was ultimately renegotiated results provide guidance on rent re distribution and contract renegotiation more generally and are applicable to contemporary policy issues such as climate change legislation

household bargaining and microfinance abstract this paper examines a household bargaining problem where one household member can use external finance to invest in an uncertain business project faced with limited income generating opportunities we show that the household member will consistently choose safe investment projects we also explain why other members of the household can be made worse off from investment even when aggregate household consumption is expected to rise in a dynamic version of the bargaining problem we study incentives for the household to contribute towards loan repayments and identify conditions under which the borrower will transfer control over her loan to her partner

innovation management in organizations abstract this paper poses the question of how a firm should optimally choose both its organization and its compensation in the pursuit of innovation one key result is that incentive pay arises as a robust instrument of innovation management both with and without delegation although in the present model its primary purpose is not to elicit more effort for the creation of new ideas but to ensure that new ideas are implemented if and only if this is efficient while without delegation the firm may underinvest in innovation with delegation the opposite bias may arise as new ideas may be implemented too often overinvestment the optimal organizational choice trades off these two biases

interfirm cooperation in strategic relationships the role of formal contract in this paper we use a large database of more than 3 700 strategic relationships in force between french firms in 2003 to study the way they achieve cooperation we find that cooperation is enhanced by a partner s reputation and the perceived balance of the relationship our results also suggest that while formal contracts have a negative impact on ex post cooperation when relationships are simple contracts are an enhancing factor of cooperative behaviors as soon as the intrinsic hazards of the relationship require higher ex ante contractual safeguards to secure agreements as a result formal contracts can on the one hand have a pernicious effect on the willingness of firms to implement cooperative behaviors and on the other and under precise circumstances appear a prerequisite allowing the emergence of ex post interfirm cooperation

discount rates inferred from decisions an experimental study two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 4 4 factorial design scenario postponing a receipt postponing a payment expediting a receipt expediting a payment time delay 0 5 1 2 and 4 years and size of cashflow 40 200 1000 and 5000 individual discount rates were inferred from the responses and then used to test competitively four hypotheses regarding the behavior of discount rates the classical hypothesis asserting that the discount rate is uniform across scenarios time delays and sums of cashflow was flatly rejected a market segmentation approach was found lacking the results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position

the comparative advantages of firms markets and contracts a unified theory the most efficient labour market mechanism depends on the advantages of specialization workers costs of switching between entrepreneurs and the frequency with which needs change multilateral mechanisms are more efficient when specialization is more advantageous when it is cheap for workers to switch between entrepreneurs and when individual entrepreneurs cannot occupy a worker on a full time basis given a bilateral mechanism employment a firm is more efficient than contracts when in process adjustments arise more frequently there exist three regions in which firms markets and sequences of bilateral contracts are weakly more efficient than all other mechanisms in a big class

informational lobbying and political contributions abstract interest groups can potentially influence political decision makers by offering contributions and by providing relevant information that sways the decision in the group s favor what mix of these two instruments should an interest group choose and how does the use of one instrument affect the effectiveness of the other in this paper we identify an information externality that raises the cost of offering contributions and show that this indirect search cost reduces the group s incentive to gather information when contributions are allowed furthermore we analyze how competition among lobby groups as providers of information and contributions affect the choice and effectiveness of the instruments we show that the information externality rewards the group that can abstain from information search and focus its influence on contributions

output price subsidies in a stochastic world this article studies the comparative statics of output subsidies for firms with monotonic preferences over costs and returns that face price and production uncertainty the modeling of deficiency payments support price schemes and stochastic supply shifts in a state space framework is discussed it is shown how these notions can be used via a simple application of shephard s lemma to analyze input demand shifts once comparative static results for supply are available a range of comparative static results for supply are then developed and discussed

do investments in specialized knowledge lead to composite good industries we try to understand why firms producing goods by means of complementary components do not merge especially in industries in which investments in component based knowledge matters as audretsch we state that these activities are developed by individuals who do their best to appropriate the return from their knowledge and whose effort is non contractible the organization of the industry into firms is identified to a partition of the set of individuals in this context we prove that an organization in which each individual hold his own firms is both stable with respect to unilateral deviation and optimal in the line of the property right approach if the returns are high enough this structure is even the only one which shares both properties

indescribability and asymmetric information at the contracting stage abstract maskin and tirole maskin e tirole j 1999 unforeseen contingencies and incomplete contracts review of economic studies 66 83 114 show that indescribability does not matter for contractual incompleteness when there is symmetric information both at the contracting stage and at the trading stage following their setup i show that with asymmetric information at both stages indescribability can matter

sincere and sophisticated players in an equal income market abstract we study the simultaneous direct revelation mechanism associated with each equal income competitive social choice function in the allocation of objects and money among sincere and strategic agents strategic agents take advantage of sincere agents they non cooperatively coordinate on the equal income competitive allocations for the true preferences that are pareto undominated for them within the set of equal income competitive allocations sincere agents are protected to some extent however their welfare is usually above their maximin payoff

unforeseen contingency and renegotiation with asymmetric information this article considers a buyer seller contracting model in which the seller possesses private information about all relevant aspects of the state of nature including how much each action is worth to the buyer i argue that given asymmetric information the buyer may not entirely dismiss an unforeseen contingency claim by the seller then if the buyer lacks the foresight awareness to expect the unexpected the model admits an equilibrium in which a seemingly complete contract is written and then renegotiated along its outcome path to generate inefficiency ex post

investments in physical capital relationship specificity and the property rights approach abstract we reconsider the property rights approach to the theory of the firm based on incomplete contracts we explore the implications of different degrees of relationship specificity when there are two parties a and b who can make investments in physical capital instead of human capital if relationship specificity is exogenously given it turns out that joint asset ownership can be optimal only if the degree of relationship specificity is sufficiently small if relationship specificity can be freely chosen and if party a s investments are more productive then the parties deliberately choose a strictly positive level of relationship specificity and they always agree on sole ownership by party a

commodity price stabilization in a peasant economy the peasant household s preferences for price stabilization are shown to depend on observable parameters describing consumption and production decisions a measure of willingness to pay is obtained for the case where the household is engaged in both the production and the consumption of the commodity in question for plausible parameter values it appears likely that the peasant household will prefer price stabilization and that stabilization of the producer price alone dominates complete stabilization

estimating individual discount rates in denmark a field experiment we estimate individual discount rates with respect to time streams of money using controlled laboratory experiments these discount rates are elicited by means of field experiments involving real monetary rewards the experiments were carried out across denmark using a representative sample of 268 people between 19 and 75 years of age individual discount rates are estimated for various households differentiated by socio demographic characteristics such as income and age our conclusions are that discount rates are constant over the 12 month to 3 year horizons used in these experiments and that discount rates vary substantially with respect to several socio demographic variables hence we conclude that it would be reasonable to assume constant discount rates for specific household types but not the same rates across all households

markets and hierarchies and mathematical economic theory over the past decade transaction cost economics has been partially translated in the more mathematical language of game theory and understanding of the costs of transactions has been deepened refined and extended but the translation is incomplete a great deal of human behaviour is missed and doing game theory with more life like models of individuals will bring theory closer to phenomena transaction cost economics particularly the economics of relational contracts provides a major arena for these developments since the important issues of bounded rationality and individual behavior are central to the topic copyright 1996 by oxford university press

looking for a theory of the firm future challenges in this paper we present the main developments of the theories of the firm rooted in coase s coase r h 1937 the nature of the firm economica new series 4 386 405 seminal article we show that the two important topics of the nature and boundaries of the firm as well as the internal organization of the firm give place to essential contributions we present those contributions and their limits and then their possible developments finally we introduce the papers of this issue

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

court efficiency and procurement performance disputes over penalties for breaching a contract are often resolved in court a simple model illustrates how inefficient courts can sway public buyers from enforcing a penalty for late delivery in order to avoid litigation therefore inducing sellers to delay contract delivery by using a large dataset on italian public procurement we empirically study the effects of court inefficiency on public work performance we find that where courts are inefficient i public works are delivered with longer delays ii delays increase for more valuable contracts iii contracts are more often awarded to larger suppliers and iv a higher share of the payment is postponed after delivery other interpretations receive less support from the data

the new institutional economics and the theory of behaviour under uncertainty the new institutional economics nie is diverse in terms of the theory of behaviour under uncertainty some views are close to neoclassical economics but others are similar to those held by heterodox economists distinctions between procedural and substantive uncertainty weak and strong uncertainty and ambiguity and fundamental uncertainty help to identify different approaches to uncertainty in nie regarding the influence of institutions on economics behaviour not all nie focuses on institutions as constraints and takes individuals as given the dominant views of rationality in nie are standard neoclassical maximization and bounded rationality but alternative notions have also been defended

material transfer agreements an economic and econometric analysis this paper uses econometric analysis for understanding the determinants that affect the payment mechanism in material transfer agreements mtas these contracts regulate the exchange of peculiar ecosystem services genetic and biological materials between a provider and a recipient of the service the paper uses a set of model contracts from the late 2000s gathered from the u n world intellectual property organization wipo and the convention of biological diversity cbd empirical results show that the probability that a payment scheme is included in the contract negatively depends on the presence of an acknowledgment obligation to the provider of the material probably aware of the complexity and uncertainty of the recipient s research activity the provider and the cbd requires to be compensated through the recognition of his her important input to the research venture in economics this can be interpreted as payment in terms of moral satisfaction