stopping agents from cheating abstract when a principal hires two or more agents to work in a correlated environment each agent s reward will depend on the other s performance unfortunately with just the usual optimal incentive constrained contracts being offered the agents strictly prefer to play equilibrium strategies other than those desired by the principal they cheat however the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost this mechanism uses one agent to police the other and exploits certain properties of the optimal contracts

ex post participation constraint in a principal agent model with adverse selection and moral hazard abstract this paper analyzes optimal contracting when an agent has private information before contracting and exerts hidden effort that stochastically affects the output additionally the contract is constrained to satisfy the agent s ex post participation we highlight three features of this model first the agent faces countervailing incentives second the separation of types is never optimal third the optimal constant bonus rewarding success is distorted downward below its efficient level

inflexible rules in incentive problems in practice contracts involve standard terms or rules allowing for variations only under exceptional circumstances we develop a simple model in which optimal contracts display this feature even in the absence of transactions costs rules arise when an agent has countervailing incentives to misrepresent private information these incentives are created by endowing the agent with a critical factor of production ex ante applications in regulatory labor and legal settings

the impact of perception and other factors on the adoption of agricultural technology in the moret and jiru woreda district of ethiopia the objectives of this study are to examine both the significance of the impact of farmers perceptions regarding new technology for the adoption decision and how perceptions themselves are influenced by the decision to adopt new technology the study is based on data from 96 wheat farms in the moret and jiru woreda district of ethiopia the probit approach is used to analyse the adoption decision while the variables relevant to farmers perceptions are modelled using the ordered probit methodology a simultaneous equations model combining the probit and ordered probit approaches provides a useful approach to modelling the two way relationship between perception and adoption variables such as farm size farm income and soil type have a key role to play in the model perception is measured by eight different components and as there is a strong collinearity among these various measures a principal components analysis is attempted to draw the best possible linear combination of variables

risk sharing in procurement abstract we introduce bilateral risk aversion into the mixed adverse selection moral hazard model of laffont and tirole 1986 the presence of exogenous risk interacts with the adverse selection problem in interesting ways in particular we show that it is never optimal to present the firm with a fixed price contract that the efficient firm typically bears more risk than the inefficient firm and that an increase in exogenous risk may bring about a decrease in expected cost of the project as a by product we also establish that the famous no distortion on the top result in adverse selection models relies on risk neutrality of the agent

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

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

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

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

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

on the effectiveness of liability rules when agents are not identical this paper is about accidents involving two risk neutral parties both parties engage in actions that are profitable but affect the magnitude of possible bilateral accidents we analyse how the action choices can be decentralized by liability rules that assign the accident costs to the two parties if we allow for punitive damages we can implement the first best actions by a liability rule even if agents are not identical under this liability rule some individuals may be in expectation better off in the event of an accident than in the event of no accident we provide conditions under which this problem does not arise

noisy observation in adverse selection models we consider a principal agent contracting problem under incomplete information where some of the agent s actions are imperfectly observable contracts take the form of reward schedules based on the noisy observation of the agent s action we first review situations where the principal can reach the same utility as in the absence of noise then we focus on the use of linear reward schedules which allow universal implementation i e implementation of a given mechanism for any unbiased noise of observation and on quadratic reward schedules which only require the knowledge of the variance of the noise we exhibit sufficient conditions under which linear reward schedules implement a given mechanism finally we characterize necessary conditions for a mechanism to be implementable under noisy observation by a linear schedule and by quadratic schedules we give the geometric intuition behind all results

peanut research and poverty reduction impacts of variety improvement to control peanut viruses in uganda a procedure is developed and applied for predicting ex ante impacts of agricultural research on aggregate poverty using as an example the poverty reducing impact of peanut research in uganda market level information on economic surplus changes is combined with a procedure for allocating income changes to individual households characteristics of farmers that affect their likelihood of technology adoption are used to create a technology adoption profile associated changes in poverty resulting from adoption are computed using poverty indices predicted income changes at the household level are aggregated to the market level and reconciled with calculations of economic surplus changes

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

impacts of food crop improvement research evidence from sub saharan africa abstract the paper reviews and summarizes evidences of impacts of crop improvement research of major food crops in africa it provides evidence of increased availability of improved varieties of major food crops to farmers in africa increased food production in regions where adoption has occurred and positive returns to research investment indicating that agricultural research in africa has had productivity increasing impacts on its agriculture however research impacts vary considerably across countries and regions within a country as a result of agroclimatic factors and policy environment which affects the supply of seeds and other inputs and the continuity and stability of research investments the paper points to a number of important issues both internal and external to the agricultural research system organization that need to be addressed if agricultural research is to provide a stimulus for modernizing african agriculture given the small size of food crop production area in many african countries it is important for research systems to take full advantage of research spill ins from regional and international research organizations there is a great potential to increase the efficiency of research systems by improving the coordination among members of national research systems and continuing improvements in collaborations between narss and regional and international organizations

agricultural technology crop income and poverty alleviation in uganda summary this paper evaluates the ex post impact of adopting improved groundnut varieties on crop income and poverty in rural uganda the study utilizes cross sectional data of 927 households collected in 2006 from seven districts in uganda using propensity score matching methods we find that adopting improved groundnut varieties technology significantly increases crop income and reduces poverty the positive and significant impact on crop income is consistent with the perceived role of new agricultural technologies in reducing rural poverty through increased farm household income this study supports broader investment in agriculture research to address vital development challenges reaching the poor with better technologies however requires policy support for improving extension efforts access to seeds and market outlets that simulate adoption

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

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

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

optimal sharing of foodborne illness prevention between consumers and industry the effect of regulation and liability consumers and the food industry can both prevent foodborne illness two questions are explored what is the socially optimal level of preventative effort by each and can tort and regulatory instruments induce such behavior analysis is complicated by two aspects of food safety technology one party s effort can affect the marginal effectiveness of the other party s effort and damage functions can be nonconvex previous analysis of accidents under torts and regulation fails to consider these generalizations indeed results concerning the ability of tort and regulatory instruments to induce first best and second best behavior often contradict previous results in the literature

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

efficient liability rules for an economy with non identical individuals abstract this paper is about accident situations involving two risk neutral parties both parties engage in activities that are profitable but affect the magnitude of possible bilateral accidents we analyse how the activity choices can be decentralized by liability rules that assign the costs to the two parties to an accident we show that rules which share damages are superior to rules where one party bears the entire accident costs

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

nutrition health birth order and seasonality intrahousehold allocation among children in rural india abstract nutrients available to children are determined largely by intrahousehold allocations there are a number of reasons why birth order may affect these allocations a model is developed to estimate critical parameters of parental preferences regarding the allocation of nutrients among their children latent variable estimates for rural south india indicate that parental preferences have productivity equity tradeoffs and parents favor older children the productivity equity tradeoff however is much less for the lean season therefore when food is scarcest parents follow more closely a pure investment strategy exposing their more vulnerable children to greater malnutrition tisk

motivating wealth constrained actors we examine how owners of productive resources e g public enterprises or financial capital optimally allocate their resources among wealth constrained operators of unknown ability optimal allocations exhibit 1 shared enterprise profit the resource owner always shares the operator s profit 2 dispersed enterprise ownership resources are widely distributed among operators of varying ability 3 limited benefits of competition the owner may not benefit from increased competition for the resource and sometimes 4 diluted incentives for the most capable more capable operators receive smaller shares of the returns they generate implications for privatizations and venture capital arrangements are explored

opportunism in multilateral vertical contracting nondiscrimination exclusivity and uniformity comment an input supplier selling to competing downstream firms would benefit from publicly committing at the outset to all contracts efficient commitment however would require complete contracts the authors study instead bilateral contracting without commitment regarding others terms each firm then fears that the supplier might opportunistically renegotiate another s contract to increase bilateral profit at the firm s expense the authors show that nondiscrimination clauses generally cannot curb such third party opportunism even with symmetric firms to reassure firms crude forms of commitment may be adopted this could explain the pervasiveness of exclusivity arrangements and the striking uniformity and intertemporal rigidity of franchise contracts copyright 1994 by american economic association

an economic analysis of delayed primary school enrollment in a low income country the role of early childhood nutrition this paper investigates why children in low income countries often delay primary school enrollment despite the prediction of human capital theory that schooling will begin at the earliest possible age we explore several explanations for delayed enrollment but focus on the hypothesis that delays are rational responses to early childhood malnutrition we test these alternative hypotheses using recent data from ghana our estimates which address a number of previously ignored econometric issues firmly support the hypothesis that early childhood malnutrition causes delayed enrollment we find little or no support for alternative explanations based on borrowing constraints and the rationing of places in school copyright 1995 by mit press

ex ante investment ex post remedy and product liability low quality products may cause consumer harm a firm can reduce the probability of low quality through ex ante investment before sales and can take remedy actions such as product recalls if it learns after sales that product quality is low an increase in the firm s product liability increases its incentive for ex post remedy more ex post remedy however may reduce the firm s ex ante quality investment on the other hand higher product liability increases consumer demand for the product resulting in high output and hence greater return to ex ante investment the trade off between these two effects the substitution effect and the output effect can lead to an inverted u shaped relationship between ex ante investment and product liability we find that the firm always prefers full liability whereas consumers might be better off with less than full liability full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high otherwise partial liability can be socially optimal

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

welfare and child health the link between afdc participation and birth weight the stated goal of the aid for families with dependent children program is to improve the well being of children in poor families the program has come under considerable attack in recent years from critics who argue that participation in afdc is associated with maternal behaviors that are bad for children we investigate this question using birth weight as a measure of child health we find that participation in afdc during pregnancy is associated with delays in obtaining prenatal care smoking and drinking during pregnancy younger maternal age at the birth and ultimately with lower birth weights even when observable characteristics of the mother are controlled for however we show that when unobservable characteristics of the mother are controlled for there is actually a positive association between participation in afdc and the birth weights of children of white women from poor families we find no association between birth weight and maternal participation in afdc among black children

agricultural technology adoption and child nutrition enhancement improved maize varieties in rural ethiopia adoption of improved crop varieties can lead to multiple benefits to farm households including increased productivity incomes and food consumption however possible impacts of adoption on child nutrition outcomes are rarely explored in the literature this article helps bridge this gap through an impact assessment of the adoption of improved maize varieties imvs on child nutrition outcomes using a recent household survey from rural ethiopia the conceptual linkage between imv adoption and child nutrition is first established using an agricultural household model instrumental variable estimation suggests the overall impacts of adoption on child height for age and weight for age z scores to be positive and significant quantile instrumental variable regressions further reveal that such impacts are largest among children with poorest nutrition outcomes finally by combining a decomposition procedure with system of equations estimation it is found that the increase in own produced maize consumption is the major channel through which imv adoption affects child nutrition

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

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

farmers perceptions and adoption of new agricultural technology evidence from analysis in burkina faso and guinea west africa economists investigating consumer demand have accumulated considerable evidence showing that consumers generally have subjective preferences for characteristics of products and that their demand for products is significantly affected by their perceptions of the product s attributes however the role of farmers preferences in adoption decisions have received very limited attention in adoption studies conducted by economists this paper tests the hypothesis that farmers perceptions of technology characteristics significantly affect their adoption decisions the analysis conducted with tobit models of modern sorghum and rice varietal technologies in burkina faso and guinea respectively strongly supports this hypothesis our results provide a strong case for future adoption studies to expand the range of variables used away from the broad socio economic demographic and institutional factors to include farmers subjective perceptions of the characteristics of new agricultural technologies

prices infrastructure household characteristics and child height household survey data from brazil matched with information collected at the municipio county level are used to examine the relation between parental characteristics primarily education community infrastructure and services and child height data are drawn from 2 sources informacoes basicas municipais 1974 is a periodic survey of 4000 municipios on infrastructure health and education services estudo nacional da despesa familiar 1974 75 is a household survey covering 37000 children under age 8 on income expenditure anthropometry and socio demographic characteristics local food price indices were derived from these data child height is significantly affected by local infrastructure particularly modern sewerage and piped water in urban areas and electricity in rural settings these effects are stronger for children over 2 those of better educated mothers and those in households spending more higher prices for dairy products and sugar are linked to lower urban child height and higher fish prices to lower rural child height significantly for children of illiterate mothers higher prices for meat and rice are associated with taller height possible because men usually eat these foods mothers with elementary schooling can counteract the effects of food prices on child height number of teachers is positively related to height in rural children numbers of nurses and of hospital beds is associated with shorter children suggesting that large hospitals locate in poor urban areas this study has succeeded in identifying some public investments that affect child health