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

debt and financial expectations an individual and household level analysis in this article we show that optimistic financial expectations impact positively on both the quantity of debt and the growth in debt at the individual and household levels our theoretical model shows that this association is predicted under a variety of plausible scenarios in the empirical analysis we explore the determinants of debt and of growth in debt using british data we find convincing support for our theoretical priors and show that it is optimistic financial expectations per se that are important in influencing debt rather than the accuracy of individuals predictions regarding their future financial situation jel d18 d84 d91

optimal lot sizing for an unreliable production system based on net present value approach abstract the paper considers the net present value npv approach to determine the economic manufacturing quantities for an unreliable production system over an infinite planning horizon the npv of the expected total cost is obtained under general failure time and general repair time distributions and its asymptotic characteristics are examined by perturbation of the instantaneous discount rate the criteria for the existence and uniqueness of the optimal production time lot size are derived under exponential failure and constant zero repair time the performance of the npv model is compared with the traditional long run average cost model in terms of the npv of the expected total cost based on the optimal decisions of the two models from numerical experiments it is observed that the decision based on the average cost can be 10 worse than the decision based on the npv depending upon the machine failure rate

comparing the welfare effects of public and private health care subsidies in the united kingdom we use a calibrated analytical model to compare the welfare costs gross of externalities of increasing subsidies for public and private health care in the uk the model incorporates wait costs for rationed public care burdens that subsidies impose on the tax system and distributional weights for different households welfare costs are significantly higher for expanding public health care over a range of parameter scenarios both policies reduce average wait times but for public health care this is offset by new waiting costs incurred on extra treatments and the burden on the tax system is much larger for expanding public health care

optimal redistribution and monitoring of labor supply this paper extends the mirrlees 1971 model of optimal non linear income taxation with a monitoring technology that allows the government to verify labor supply at a positive but non infinite cost we analyze the joint determination of the non linear monitoring and tax schedules and the conditions under which these can be implemented monitoring of labor supply reduces the distortions created by income taxation and raises optimal marginal tax rates possibly above 100 the optimal intensity of monitoring increases with the marginal tax rate and the labor supply elasticity our simulations demonstrate that monitoring strongly alleviates the trade off between equity and efficiency welfare gains of monitoring are around 2 8 of total output the optimal intensity of monitoring follows a u shaped pattern similar to that of optimal marginal tax rates our paper can explain why large welfare states optimally rely on work dependent tax credits active labor market policies benefit sanctions and work bonuses in welfare programs

bailouts time inconsistency and optimal regulation a macroeconomic view a common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets we propose an alternative view even when private markets are efficient costly bankruptcies will occur and benevolent governments without commitment will bail out firms to avoid bankruptcy costs bailouts then introduce inefficiencies where none had existed although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome the sustainably efficient outcome this outcome respects governments incentives to intervene when they lack commitment

do informal risk sharing networks crowd out public voluntary health insurance evidence from vietnam many governments in low income countries have promoted voluntary health insurance schemes in recent years with the principal aim of improving access to services amongst those working in the informal economy few attempts to understand demand for such schemes exist particularly in light of the importance of informal social security arrangements for many households a model of demand for health insurance is developed reflecting this context and estimated using data from vietnam the results show that informal financial networks may crowd out government promoted health insurance implications for theory and policy are discussed

strategic pricing signalling and costly information acquisition abstract consider a market where an informed monopolist sets the price for a good or asset with a value unknown to potential buyers upon observing the price buyers may pay some cost for information about the value before deciding on purchases under a belief restriction which generalizes the idea of the cho kreps intuitive criterion we establish a version of the grossman stiglitz paradox there is no separating equilibrium with fully revealing prices yet we also resolve the paradox there is a unique equilibrium and as the cost of information becomes small the equilibrium approaches the full information outcome and prices become perfectly revealing

income tax evasion and the fear of ruin this paper characterizes the optimal income tax function when the agent is risk averse and the objective of the principal is to maximize a social welfare function we show that the optimal tax function is generally non decreasing and concave if the principal s objective is maximin and the agent s utility function satisfies a reasonable condition which we call repetitive risk aversion it is shown further that in many cases the optimal tax function is similarly concave when the social welfare function is utilitarian into income and that while ability and effort cannot be observed at any cost income which is the product of the two can be observed perfectly and costlessly mirrlees makes this latter unrealistic assumption only in order to emphasize the supply side effects of income taxation or the problem of moral hazard if individual effort and therefore income is exogenous the optimal income tax problem becomes trivial since by assumption income can be observed perfectly and costlessly on the basis of numerical simulations mirrlees 1971 shows that in the presence of moral hazard the optimal income tax function is approximately linear in at least some cases 2 the more recent literature on optimal income tax enforcement goes to the other extreme 3 on the one hand it rules out the moral hazard problem as individual income is treated exogenous and on the other it assumes that individual income can be observed only by performing an audit which is costly such an assumption introduces certain realistic features into the model besides tax rates a policy must now include an audit strategy and a scheme of penalties or fines for misreporting in this setting the equity versus efficiency issue arises in a form that is different from the one in mirrlees s optimal income tax problem a progressive tax function generates stronger incentives for taxpayers to underreport income and thus its enforcement requires more auditing since audit expenditure is a direct resource cost an optimal policy must weigh the redistributive gains from more progressive taxes against the concomitant rise in audit expenditure indeed chander and wilde 1998 show that the optimal tax function is generally non decreasing and concave if the principal s objective is to maximize net revenue 4 but under the rather strong assumption that the agent is risk neutral the same result need not hold when the agent is risk averse since the incentive to underreport income which is equivalent to taking a risk is weaker if the agent is risk averse and even weaker if the agent s income is higher and aversion to risk is increasing with income 5 both of these effects can weaken the incentive to underreport income so much that a progressive tax function may

catching the agent on the wrong foot ex post choice of monitoring abstract in a principal agent model with multiple performance measures we show that the principal benefits by choosing ex post which variables will be monitored if it is too costly for one type of agent to mimic all performance measures expected from another type the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type for cases of small asymmetry of information the principal can implement the first best contract for more serious asymmetries of information the first best is not implementable then the low type may be required to overproduce which is in contrast to the traditional result of second best contracting we also obtain a ranking of monitoring instruments according to the frequency of their use

delegation of monitoring in a principal agent relationship this paper studies a principal agent relationship with moral hazard in which the principal or the supervisor can monitor the agent s hidden action by using identical monitoring technologies the paper shows that delegation of monitoring to the supervisor is profitable because of two effects with delegation the principal can better regulate the incentives incentive effect and can commit to wage structures to which she could not commit without delegation commitment effect as a logical step collusion is introduced and it is shown that even with the possibility of collusion delegation is an optimal strategy

how good are standard debt contracts stochastic versus nonstochastic monitoring in a costly state verification environment the authors investigate ex ante efficient contracts in an environment in which implementation is costless in this environment standard debt contracts will typically not be optimal optimal contracts may involve defaults even in states in which the borrower is fully able to repay the authors then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts when model parameters are calibrated to realistic values the welfare loss from exogenously imposing this restriction is extremely small thus if implementation costs are actually nontrivial as seems likely standard debt contracts will be very close to optimal copyright 1994 by university of chicago press

the friedman rule in an overlapping generations model with nonlinear taxation and income misreporting this paper models a two period overlapping generations economy with money populated with individuals of different skills they face a nonlinear income tax schedule and can engage in tax evasion money serves two purposes the traditional one modeled through a money in the utility function it also facilitates tax evasion the main message of the paper is that income tax evasion in this framework leads to the violation of the friedman rule the paper also shows that even in the absence of tax evasion when optimality requires differential commodity taxation complementarity of real cash balances and labor supply does not guarantee the optimality of the friedman rule as a boundary solution an additional assumption is required

targeting the poor using community information abstract governments and aid agencies target transfers to the poor but audits to deter the rich are costly this paper analyzes how community information can improve targeting if each community is given a hard budget constraint then targeting costs can be substantially reduced by asking recipients to make reports about each other audits are threatened in the event of a disagreement but never carried out in equilibrium this scheme is immune to collusion

public vs private demand for covering long term care expenditures this article studies the determinants of the willingness to pay wtp for long term care ltc insurance coverage two alternatives are considered one compulsory financed through taxes the other purchased on a voluntary basis and paid through a premium wtp was elicited through open ended contingent valuation within a survey conducted in the italian region emilia romagna about ltc population needs we model information on individual wtp as a two stage process where respondents first establish their interest for ltc cover then state their wtp results show that interest and wtp are influenced by different variables and that differences arise also between the wtp for public and private coverage

an eoq model with random variations in demand this paper presents a model that incorporates variations in the demand rate at random time points into the inventory planning decision these changes in demand may occur due to economic recessions labor strife starting or ending or other events that result in a period of time during which the rate of demand is shifted up or down from its current level the paper uses system point level crossing theory to derive expressions for the distribution and expected value of on hand inventory ordering rate and the expected total cost rate for a given ordering policy a sensitivity analysis is conducted and a number of qualitative properties are provided to illustrate the use of the results to obtain optimal order quantities

a dynamic analysis of the demand for health insurance and health care we find that asymmetric information is important for the uptake of supplementary private health insurance and health care utilization we use dynamic panel data models to investigate the sources of asymmetric information and distinguish short run selection effects into insurance from long run selection effects short run selection effects i e responses to shocks are adverse but small in size also long run effects driven by differences in for example preferences and risk aversion are small but we find some evidence for multidimensional asymmetric information for example mental health causes advantageous selection estimates of health care utilization models suggest that moral hazard is not important

the quest for robust counterfeit and piracy figures custom agencies as statistical decision makers and recent evidence based on german imports based on unique custom seizure data we extrapolate robust figures on the amount of counterfeit and piracy in german imports we therefore outline a simple model which explores estimation biases in counterfeit statistics provided by utility maximising custom agencies our empirical strategy sets out to i provide evidence on bias and ii guided by theory identify an unbiased subsample of the data upper bound population estimates counterfeit shares for 2010 11 suggest that around 17 per cent of all german imports are counterfeit in addition we highlight differences in counterfeit trade by commodity and distribution channel and conclude with policy advice

tax evasion and the optimum general income tax abstract this paper incorporates tax evasion into an optimum general income tax problem with endogenous labor supply it posits a two group model with high and low wage individuals to investigate the properties of optimal audit and tax structures the following main results are obtained first high wage persons are never audited while low wage persons are audited with a probability strictly less than one secondly high wage persons should face a zero marginal tax rate thirdly low wage individuals who have been audited and found innocent should pay a lower tax than those who are not audited fourthly there are two possible tax regimes low wage persons face a positive marginal tax rate under one regime and a zero rate under the other fifthly even if honesty cannot be rewarded the other results of the paper continue to hold

monitoring the monitor an incentive structure for a financial intermediary this paper studies financial intermediation i e delegated monitoring in a costly state verification model there are a finite number of agents thus the intermediary cannot fully diversify its portfolio and is subject to default risk the role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders two questions arise when a delegated monitor is subject to non trivial default risk a what arrangement solves the problem of monitoring the monitor b what intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders unlike previous delegated monitoring studies the law of large numbers is not sufficient to obtain our results instead we appeal to a stronger results the large deviation principle which establishes that convergence in the law of large numbers is exponential

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

repeated insurance relationships in a costly state verification model with an application to deposit insurance abstract we consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs the insurer wishes to minimize the expected cost of providing these agents a certain expected utility level we characterize the optimal contract between the insurer and the insured agents we then apply the analysis to the provision of deposit insurance our results suggest in a deposit insurance context that it may be optimal to utilize the discount window early on and to make deposit insurance payments only later or not at all

certification and market transparency we provide elementary insights into the effectiveness of certification to increase market transparency in a market with opaque product quality sellers use certification as a signaling device while buyers use it as an inspection device this difference alone implies that seller certification yields more transparency and higher social welfare under buyer certification profit maximizing certifiers further limit transparency but because seller certification yields larger profits active regulation concerning the mode of certification is not needed these findings are robust and widely applicable to for instance patents automotive parts and financial products

evading auditing and taxing the equity compliance tradeoff tax evasion and auditing are analyzed in a model of linear income taxation taxpayers minimize expected tax payments including penalty for underreporting while the tax administration sets its audit policy to maximize expected net revenue under the restriction of only two audit rates per class of taxpayers given the reaction of taxpayers and tax administration we derive the optimal income tax that the government should adopt to maximize social welfare there are several classes of taxpayers each characterized by a given distribution of pretax income and specific audit policy parameters

income distribution and equilibrium multiplicity in a stigma based model of tax evasion abstract this paper incorporates continuous income distribution into the stigma based model of tax compliance the paper investigates the effect of income distribution on the existence of multiple equilibria and characterizes the conditions under which multiple equilibria emerge precisely multiple equilibria exist if taxpayer incomes are sufficiently homogeneous because the social coordination effect dominates the individual characteristics effect numerical simulations show that the main proposition is robust to allowing two step audit policies on the part of the tax agency under the presumption that the best or good equilibrium is selected whenever there are multiple equilibria as a byproduct the effect of various forms of tax reforms on the optimal two step audit policy the equilibrium compliance and fiscal revenue is analyzed

risk bearing and entrepreneurship abstract in the knightian theory of entrepreneurship entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production this paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as occupational self selection moral hazard prevents full insurance increases in an agent s wealth then entail increases in risk borne thus even under decreasing risk aversion there are robust instances in which workers are wealthier than entrepreneurs this empirically implausible result suggests that risk based explanations for entrepreneurship are inadequate

the eqq model with stochastic demand and discounting abstract we generalize bather s eqq model with stochastic demand to the case with discounting we consider two cases one with and one without demand backlogging important implications of discounting are investigated useful insights and formulas are provided

quasi markets and social policy introduction j le grand w bartlett the theory of quasi markets w bartlett j le grand quasi markets contracts and quality in health and social care the us experience c propper quasi markets and the nhs reforms l harrison w bartlett quasi markets and the reform of community care l hoyes r means quasi markets and educational reforms w bartlett the quasi market in social housing g bramley quasi markets and regulation c propper quasi markets and social policy the way forward j le grand w bartlett references index

two period financial contracts with private information and costly state verification townsend 1982 and others have argued that in a multiperiod context linked contracts may be pareto efficient relative to the private information environment the similarities with the supergame literature are well documented townsend 1982 p 1169 remarks the key idea of supergames is that future payoffs to the decision maker are tied to present actions of the decision maker in this context by linking contracts together an informed agent may be induced to report more honestly than in a singleperiod agreement in other words honesty may become the best policy in recent work allen 1985 and fudenberg et al 1990 show that in a private information environment with no precommitment the gains to long term contracting income smoothing in models such as townsend 1982 are in fact due to restrictions on borrowing and saving in particular if the entrepreneur can access capital markets freely and on the same terms as the bank then long term contracts will be no better than a sequence of short term contracts in the repeated model the role of tie ins then reflects little more than the fact that opportunities depend upon wealth as in the full information decentralized solution in this paper the entrepreneur only cares about his final payoff so that we do not establish a role for long term contracts as a means of smoothing income instead as suggested by hart and holmstrom 1986 we argue that long term contracts derive from an inability to costlessly verify contingencies in particular if output realizations of projects are not costlessly verifiable a long term contract may then be used to induce truthful revelations that cannot be supported by a sequence of short term contracts this leads to a saving of verification costs over allocations achieved with unlinked contracts this argument contributes to understanding why firms with known future prospects do not finance projects separately but instead enter into long term relationships with banks we examine a two period version of the borrower lender problem of gale and hellwig 1985 and townsend 1979 in this

pretrial bargaining and the design of fee shifting rules legal rules for allocating the private costs of civil litigation or fee shifting rules provide powerful incentives for settlement within the context of a direct revelation mechanism the fee shifting rule that generates the highest probability of settlement bases the allocation of costs upon the proximity of the court s award to the pretrial announcements this mechanism resembles rule 68 of the federal rules of civil procedure and other offer based rules in a simple extensive form game if the litigants have asymmetric information about the level of damages probability of prevailing then rule 68 increases decreases the settlement rate

optimal auditing with heterogeneous income sources the optimal enforcement policy when households are heterogeneous with respect to both income level and to income source leads to more intense income auditing for easy to monitor sources we obtain the common result that within each income source any taxpayer reporting less than a predetermined cut off level will be audited while taxpayers reporting at least this level will never be audited however this audit policy leads to very different reporting behavior depending on the income source the internal revenue service does not audit only honest taxpayers and an increase in the audit budget may lead to a larger segment of full evaders

a general characterization of optimal income tax enforcement this paper develops a general approach to characterizing optimal income tax and enforcement schemes our analysis clarifies the nature of the interplay between tax rates audit probabilities and penalties for misreporting in particular it is shown that for a variety of objective functions for the principal the optimal tax schedule is in general concave at least weakly and monotonic the marginal tax rates determine the audit probabilities and less harsh penalties lead to higher enforcement costs our results imply that there exists a tradeoff between equity and efficiency considerations in the enforcement context which is similar to that in the moral hazard context for tax policy it is well accepted by now that informational asymmetries generate important constraints on the formulation of economic policy an early and classic example is given by mirrlees 1971 who considers the problem of optimal income taxation when individuals differ in their ability to transform effort into income it is assumed that ability and effort of an individual cannot be observed at any cost whereas income which is the product of these two unobservables is perfectly and costlessly observable taxes can thus depend only on final income under these informational conditions the equity efficiency tradeoffs that constrain the choice of tax policy arise only because of the presence of moral hazard associated with taxation of income if there were no moral hazard i e individual efforts and therefore incomes were exogenous the problem of optimal income taxation would be a trivial one since by assumption individual incomes are perfectly and costlessly observable in much of the recent literature on optimal income taxation in the presence of costly enforcement reinganum and wilde 1985 border and sobel 1987 and others on the other hand individual incomes are treated as exogenous i e there is no moral hazard however informational constraints arise from another important consideration namely an individual s income cannot be directly observed it can only be verified through a costly

efficient committed budget for implementing target audit probability for many inspectees strategic models of auditor inspectee interaction have neglected implementation details in multiple inspectee settings with multiple inspectees the target audit probability derived from the standard analysis can be implemented with sampling plans differing in the budgets committed to support them overly committed audit budgets tie up unneeded resources that could have been allocated for better uses this paper studies the minimum committed budget required to implement a target audit probability when i the audit sample can be contingent on red flags due to signals of inspectees private information e g from self reporting and ii the number of inspectees is large it proposes an audit rule called bounded simple random sampling srs which is shown to require no more committed budget to support than two other rules naturally generalized from the one to one analysis when the number of inspectees is large enough bounded srs is nearly as good as any efficient audit rule which demands the lowest committed budget necessary to implement the target audit probability the results offer insights on how audit sampling plans may be formulated to reduce inefficiency and what budget usage ratios should be expected accordingly

costly state verification with varying risk preferences and liability abstract in the scenario of loan contracts with costly state verification we examine how the properties of the set of states different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments in particular we show that with risk averse debtors a general set of states a constant observation cost and both unlimited and limited lender liability the debtor is strictly better off revealing the true state of nature when his realized revenue is low which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states if the debtor can destroy revenue or if the debtor is risk neutral this non monotonicity of consumption disappears moreover given the loan size there is more monitoring under debtor risk aversion than risk neutrality we present simulations showing that a contract with unlimited lender liability and debtor risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability finally we discuss the problems of commitment to verification and contract renegotiation in this framework

the discounted r q inventory model the shrewd accountant s heuristic abstract the discounted continuous review r q inventory model with continuous and stochastic demand is investigated new optimality conditions are derived clarifying the difference to the average cost case also graphically supported by depreciation theory applied to the value of a setup the results suggest an insightful and very precise approximation the shrewd accountant s heuristic based on a new average cost model it deepens and extends the work of hadley 1964 three examples are worked out in detail and the model is generalized to poisson demand and to stochastic lead times

hardball and the soft touch the economics of optimal insurance contracts with costly state verification and endogenous monitoring costs abstract we examine an environment of costly state verification in which insureds possess private information about the magnitude of an insurable loss insurers can verify the actual loss suffered only by incurring a positive resource cost and insureds may verification and may lead to more generous settlements optimal insurance contracts are shown to mitigate the incentives to evade by a combination of incentives which include the overpayment of easily monitored losses and undercompensation for claims exhibiting higher verification costs

capital structure under costly enforcement we consider financial structure and repayment behavior in a setting where cash flows are private information to the entrepreneur and the cost of enforcing repayment differs across security holders if enforcement costs are lower for shareholders than for creditors a mixed capital structure with debt and equity can obtain in equilibrium under a mixed capital structure creditors intervene in low cash flow states while shareholders intervene in high cash flow states moreover strategic defaults costly bankruptcy shareholder intervention and violation of absolute priority occur with positive probability on the equilibrium path several of the predictions from our framework are consistent with evidence not readily explainable by existing theories

optimal insurance under costly falsification and costly inexact verification abstract this paper integrates the often dichotomized models of costly state verification and costly claim falsification it is found that when verification is inexact it is possible for an optimal insurance contract to consist of both positive claim falsification and positive insurer verification provided that falsification cost and verification cost are sufficiently low and the insured is risk averse satisfying constant absolute risk aversion this result certainly contrasts with the common belief that falsification and verification are mutually exclusive in an optimal insurance contract some characteristics of the optimal falsification verification and indemnification profiles including implementability are analyzed

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

self regulation and government oversight self regulation is a feature of a number of professions for example in the u s the government delegates aspects of financial market regulation to self regulatory organizations sros like the new york stock exchange and the national association of securities dealers we analyse one regulatory task of an sro enforcing antifraud rules so agents will not cheat customers specifically we model contracting enforcement as a two tier problem an sro chooses its enforcement policy the likelihood that an agent is investigated for fraud and a penalty schedule given an enforcement policy agents compete by offering contracts that maximize customers expected utility we assume that the sro s objective is to maximize the welfare of its members the agents we show that the sro chooses a more lax enforcement policy meaning less frequent investigations than what customers would choose a general conclusion is that control of the enforcement policy governing contracts confers substantial market power to a group of otherwise competitive agents we also investigate government oversight of the self regulatory process the threat of government enforcement leads to more enforcement by the sro just enough to pre empt any government enforcement copyright 2005 wiley blackwell

are tax subsidies for private medical insurance self financing evidence from a microsimulation model this paper develops an empirical strategy to estimate whether subsidies to private medical insurance are self financing in countries where public and private insurance coexist and the latter covers the same treatments as the former we construct a simulation routine based on a micro econometric discrete choice model that allows us to evaluate the impact of premium changes on the utilization of outpatient and inpatient health care services as an application we estimate the budgetary effects of scrapping a subsidy from the purchase of individual private policies using micro data from catalonia our results suggest that the subsidy is not self financing this result is driven by the fact that private medical insurance holders make concurrent use of public and private services and by the price inelasticity of the demand for private policies

tax enforcement problems we study an income tax enforcement problem using a principal agent model where the government sets the tax and inspection functions these are announced to the agents and there is no commitment problem the penalty function for dishonest taxpayers is given exogenously and satisfies certain social norms we prove that for a large family of penalty functions this policy is such that honesty implies regressiveness this result does not depend on the fact that agents know the true probability of inspection

a contest with the taxman the impact of tax rates on tax evasion and wastefully invested resources abstract we develop a moral hazard model with auditing where both the principal and the agent can influence the probability that the true state of nature is verified this setting is widely applicable for situations where fraudulent reporting with costly state verification takes place however we use the framework to investigate tax evasion we model tax evasion as a concealment detection contest between the taxpayer and the authority we show that higher tax rates cause more evasion and increase the resources wasted in the contest additionally we find conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources

honesty and evasion in the tax compliance game conventional models of tax compliance emphasize that taxpayers make strategic tax reports underreporting income to the extent that this behavior is functionally rewarded in contrast to this view considerable empirical evidence suggests that many taxpayers are inherently honest reporting truthfully regardless of the incentive to cheat in this article we build a game theoretic model of tax compliance that includes both honest and potentially dishonest taxpayers we show that including honest taxpayers significantly alters the model leading to much improved empirical predictions and somewhat different and novel policy implications

optimal allocation with ex post verification and limited penalties several agents with privately known social values compete for a prize the prize is allocated based on the claims of the agents and the winner is subject to a limited penalty if he makes a false claim if the number of agents is large the optimal mechanism places all agents above a threshold onto a shortlist along with a fraction of agents below the threshold and then allocates the prize to a random agent on the shortlist when the number of agents is small the optimal mechanism allocates the prize to the agent who makes the highest claim but restricts the range of claims above and below

an econometric analysis of the demand for private health insurance in england and wales this paper discusses the nature of demand for private health insurance in a health care market in which the consumer can neither opt out of tax payments for nor lose his entitlement to public health care a single equation econometric model of the demand for private health cover is estimated using the 1982 general household survey the results indicate that income and employment status are significant determinants of the probability of health insurance purchase

income tax compliance in a principal agent framework previous analyses have modeled income tax evasion as a portfolio problem deriving the optimal consumption of the risky asset unreported income under the assumption of a fixed probability of detection the purpose of this paper is to examine some of these issues in tax compliance starting from a different set of assumptions in particular we compare alternative audit policies to the standard random audit policy we focus on an audit cutoff policy in which an agent triggers an audit if his or her reported income is too low and is not audited if reported income is sufficiently high this paper establishes two major results first random audit rules are weakly dominated by audit cutoff rules it can be shown given lump sum taxes and fines that these audit cutoff rules are the least cost policies which induce truthful reporting of income second the dominance of audit cutoff rules over random audit rules holds for lump sum as well as proportional taxation in fact the equilibrium consequences of the two are equivalent

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

economic lot sizing with learning and continuous time discounting is it significant abstract learning curves are a means of representing continuous improvement in firms such improvements bring savings in production costs this may also allow smaller batches to be produced more frequently and hence bring further savings in holding costs earlier research advocated that for more realistic modelling of inventory problems the holding cost should be evaluated means of the internal discount rate of the firm c van deft j p vail international journal of production economics 44 1996 255 265 this paper examines whether when learning is considered it is reasonable to ignore the effect of continuous time discounting of costs by investigating the effect of learning and time discounting both on the economic manufacturing quantity and minimum total inventory cost numerical examples are provided to illustrate the solution procedure for the mathematical model developed although the analysis yields different economic order quantities the difference in cost from the quantities derived using wilson lot size formula is not significant

workers compensation moral hazard and the composition of workplace injuries this paper provides evidence that workers compensation insurance wc affects not only the occurrence but also the composition of reported injuries in our theoretical approach wc is the source of two interrelated moral hazard problems underprovision of accident preventing efforts by the insured worker ex ante moral hazard and false reporting of injuries ex post moral hazard our model predicts that under certain assumptions the impact of wc benefits is stronger on the probability of reporting a difficult to diagnose injury than on the probability of reporting an injury that is easy to diagnose panel data on 9 800 workers in the quebec construction industry over each month of the period 1977 86 combining administrative data from the quebec construction board with data from the quebec workers compensation board are used for the estimates the parameters of the model are estimated using a threealternative logit kernel hybrid multinomial probit mnp framework with individual random effects our results confirm our theoretical pre

statistical models for zero expenditures in household budgets household budget surveys are an important source of data on consumer s expenditure not just for individual consumers but also for estimating national aggregates however it is a widespread finding that for certain commodities most notably tobacco and alcohol the estimate from the household survey falls short of the known consumption total calculated with some confidence from data on production imports exports and excise duties for example in the british family expenditure survey with which we shall largely be concerned total tobacco expenditure was underestimated in 1976 by 21 percent see kemsley redpath and holmes 1980 p 51 much of this understatement together with that on alcohol is thought to occur because of the design of the survey which excludes many persons amongst whom consumption of such items is thought to be atypically high e g prisoners hoteliers and their residents merchant seamen even so the possibility remains that some of the understatement is due to various types of misreporting by households included in the survey in this paper we consider a model in which the standard tobit specification tobin 1958 is supplemented by the operation of a simple binary censor the tobit model is essentially a linear regression model in which non positive observations of the dependent variable are replaced by zero we take this specification as our starting point but add a second censoring process that randomly replaces a fraction of the observations generated by the tobit model bv zeroes the combined model can serve as a representation of several types of

constrained choice sets in the u k demand for private medical insurance abstract the paper examines the demand for a privately supplied good private medical insurance in a market dominated by a large public supplier it is argued that the high political visibility of the public alternative means that individual demand for private medical insurance is the outcome of two processes the first process is one of choice set generation the second process is that of the choice between the insurance and the no insurance prospects the factors affecting these processes are discussed and an econometric specification suggested the estimation results indicate the importance of political belief in determining choice sets and of income and health in determining choice between the two prospects

sensitivity of the eoq model to parameter estimates the economic order quantity eoq model for independent demand is well known to be somewhat insensitive to the choice of order quantity the cost goes up as the square root of the ratio of the actual order quantity to that of the optimal order quantity the question arises as to how sensitive this cost is to parameter estimates this paper extends the work by t j lowe and l b schwarz to show that under minimax and expected value criteria the sensitivity of the cost to the parameters of the model grows as the fourth root of the uncertainty in the values of the parameters furthermore for a wide class of distributions including the beta hence uniform and the gamma hence exponentials a tight bound exists for the expected error

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

tax policy and the demand for health insurance estimates of the price and income elasticities of demand for health insurance are derived from econometric estimates of the parameters of a discrete choice model of health insurance demand using data from a survey of plan choices among a sample of federal government employees the estimated income elasticity 0 01 is similar to most previous estimates the estimated price elasticity 0 16 is in absolute value much less than the earlier previous estimates and somewhat less than the more recent previous estimates possible causes of these differences in price elasticity estimates are discussed

environmental auditing in management systems and public policy abstract new international standards for environmental auditing are now being actively promoted by public authorities and adopted by private firms one important feature of these standards is their emphasis on managerial systems and incentives that support a wiser use of environmental resources this paper studies such a system in which incentive compensation may be based in part on the results of an environmental audit it is found that optimal wages after an environmental audit is performed should have a greater range than wages paid when no audit has occurred it is also shown that the decision to conduct an environmental audit and the size of the expected wage in this case depend crucially on whether the agent s prudence or precautionary motives dominates his aversion to risk it is finally found that the insertion of environmental audits within current management systems would certainly induce a manager to care more about the environment although this may come at the expense of less concern for other activities we find plausible circumstances in which properly designed environmental audits overcome such a tradeoff and increase the manager s attention tobothenvironmental and traditional tasks some implications of the analysis for environmental public policy are also discussed briefly

a double hurdle model of cigarette consumption this paper shows the importance of the double hurdle approach for modelling individuals cigarette consumption using data from the uk general household survey and argues that participation and consumption should be treated as separate individual choices the likelihood function for the full double hurdle is derived and it is shown how restrictions on the stochastic specification of the model and auxillary information which identifies ex smokers allow it to be decomposed the empirical results highlight the value of the sample separation information and the need to model starting and quitting as separate decisions

timing of verification procedures monitoring versus auditing abstract this paper studies the strategic effect of a difference in timing of verification in an agency model a principal may choose between two equally efficient verification procedures monitoring and auditing under auditing the principal receives additional information due to a double moral hazard problem there exists a tension between incentives for effort and incentives for verification auditing exacerbates this tension and consequently requires steeper incentive schemes than monitoring hence auditing is suboptimal if 1 steep incentives structures are costly to implement due to bounded transfers or 2 steep incentive schemes induce higher rents due to limited liability

production and inventory model using net present value using the net present value is the standard methodology in theoretical analysis and the most frequently used method for making financial decisions however net present value is rarely used in production and inventory decisions the main reasons appear to be the complexity of the formulae and the robustness of the eoq model we investigate the general multiproduct multistage production and inventory model using the net present value of its total cost as the objective function a power of two heuristic gives us a near optimal solution to this problem if the base period is fixed or varied the solution based on the best power of two heuristic will be within 6 2 or 2 1 of the optimal this result is surprisingly similar to models using the long term average cost the average cost does not reflect the time value of money does this mean that decisions based on average cost are significantly inferior to those based on net present value the answer is quite surprising if we include discounted production cost in the holding cost it turns out that the decision based on average cost is only 9 6 in terms of the net present value of the total cost worse than the decision based on the net present value however the reorder interval based on the average cost could be much longer than that derived using net present value this result shows that average cost is a good approximation to the net present value when the demands are deterministic

delegated monitoring versus arm s length contracting abstract this paper analyzes the optimal organization of input suppliers in a procurement context we discuss when a top firm chooses to induce information sharing and active coordination between its suppliers consolidation rather than having them contract at arm s length delegation in designing the organization the firm anticipates that different supplier networks have different costs of inducing information revelation from suppliers when the cost of information sharing varies the optimal organization exhibits various discrete degrees of consolidation there is excessive arm s length contracting compared to the case where the top firm controls this organizational choice itself the paper offers also a methodology to study in a unified framework various organizational forms separately analyzed in the literature

optimal long term financial contracting we develop an agency model of financial contracting we derive long term debt a line of credit and equity as optimal securities capturing the debt coupon and maturity the interest rate and limits on the credit line inside versus outside equity dividend policy and capital structure dynamics the optimal debt equity ratio is history dependent but debt and credit line terms are independent of the amount financed and in some cases the severity of the agency problem in our model the agent can divert cash flows we also consider settings in which the agent undertakes hidden effort or can control cash flow risk

incentive and selection effects of medigap insurance on inpatient care the medicare program which provides insurance coverage to the elderly in the united states does not protect them fully against high out of pocket costs for this reason private supplementary insurance named medigap has been available to cover medicare gaps this paper studies how medigap affects the utilization of inpatient care separating the incentive and selection effects of supplementary insurance for this purpose we use two alternative estimation methods a standard recursive bivariate probit and a discrete multivariate finite mixture model we find that estimated incentive effects are modest and quite similar across models there seems to be very significant selection with the presence of both adversely and advantageously selected individuals stemming from the multidimensional nature of residual heterogeneity

self reporting investigation and evidentiary standards abstractself reporting schemes have become a substantial part of law enforcement this paper analyzes the optimal use of such schemes when the authority cannot commit to an ex post investigation effort i show that this leads to a negative relationship between self reporting incentives and investigation effort three main conclusions arise first violators self report with a probability of 1 if and only if full amnesty is offered second self reporting schemes are not efficient when the level of harm of the act is high finally authorities can increase the incentives to self report when they convict without hard evidence however a hard evidence standard provides more deterrence and is weakly welfare superior

auditing claims in the insurance market with fraud the credibility issue abstract this paper characterizes the equilibrium of an insurance market where opportunist policyholders may file fraudulent claims we assume that insurance policies are traded in a competitive market where insurers cannot distinguish honest policyholders from opportunists the insurer policyholder relationship is modelled as an incomplete information game in which the insurer decides to audit or not the market equilibrium depends on whether insurers can credibly commit or not to their audit strategies we show that a no commitment equilibrium results in a welfare loss for honest individuals which may even be so large that the insurance market completely shuts down we also show that transferring monitoring costs to a budget balanced common agency would mitigate the commitment problem

the desirability of a permanent tax amnesty abstract there are two main concerns about tax amnesty first if it is anticipated it may increase cheating and reduce the efficiency of the tax system second amnesty may be inequitable by letting cheaters off the hook however several federal governments currently hold a policy of long term or permanent tax amnesty in apparent defiance of these concerns this paper examines fully anticipated tax amnesty and finds that it is possible for a permanent tax amnesty to actually increase rather than decrease the efficiency and equity of the tax system

correlated default and financial intermediation financial intermediation naturally arises when knowledge about the aggregate state is valuable for managing investments and lenders cannot easily observe the aggregate state i show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans and borrowers payoffs are correlated when projects have correlated outcomes learning the state of one project via enforcement provides information about the states of other projects a large correlated portfolio provides ex post incentives for enforcement as a result intermediation dominates direct lending intermediaries are financed with risk free deposits earn positive profits and hold systemic default risk

corporate financial policy and the theory of financial intermediation this paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard multiple information problems are shown to generate a role for multiple classes of financial claimants we then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets consequlently our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions the purpose of this paper is to provide an analysis of the complementary roles of direct financial contract markets and intermediated financial contract markets in the modern theory of corporate finance the need to formulate such a model has been emphasized elsewhere by stiglitz 1985 and fama 1985 among others however an adequate explanation of this phenomenon has yet to be formulated the model described in this paper focuses on the role of multiple information problems in a theory of complex financial structure specifically in an environment with private action i e unobservable investment allocations and private information i e partially unobservable project cash flows multiple claimant classes arise to resolve the separate inefficiencies induced by moral hazard in our model the interaction of project risk and observability creates investment distortions which can be mitigated by increasing the number of outside claimant classes our results demonstrate explicitly the way in which a firm s optimal financial structure depends on the assumed configuration of an investment project s risk and observability characteristics under certain conditions we show that the optimal contractuai allocation in an economy with only direct financial contract markets consists of a debt contract and an outside equity claim this contractual configuration restores the efficient investment allocation decision we then consider the feasibility of an intermediated financial contract market in this setting we show that the existence of an intermediated financial contract market improves economic efficiency due to the reduced aggregate costs of

constrained efficient fine cum tax rate structures the case of constant relative risk aversion this paper explores the possibility that fines and tax rates impose different welfare costs on different types of taxpayer so that the government may want to apply different fine tax rate treatments to different types of taxpayer under the assumption that taxpayers exhibit constant relative risk aversion we characterize the constrained pareto efficient fine tax rate structure showing that i the co existence of compliers the above ground economy and evaders the underground economy is typical at the pareto optimum and ii pareto efficiency requires compliers to face tax rates no higher and fines no lower than those faced by evaders

samurai accountant a theory of auditing and plunder a risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know but may verify through a costly auditing procedure we characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent the main results are that efficient schemes involve preaudit payments which are increasing in the agent s wealth audit probabilities are decreasing in the agent s wealth and also satisfy certain constraints as equalities in general such schemes involve stochastic auditing and rebates after an audit in this paper we analyse the problem of a principal extracting wealth from an agent who is reluctant to part with it and is also better informed than the principal as to the amount he owns we assume that the principal has a costly means of discovering the agent s

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts

optimality of debt under flexible information acquisition we study the optimality of debt through the interaction between se curity design and information acquisition an impatient seller designs an asset backed security and a buyer decides whether to buy it to provide liquidity facing dierent securities the buyer has incentives to acquire in formation from dierent aspects of the fundamental which in turn aects security design speci cally the buyer bene ts from information acqui sition at the expense of the seller through adverse selection the seller hence deliberately designs the security to induce the buyer to acquire the information least harmful to the seller s interest since securities can be designed in arbitrary ways the resulting incentive to acquire information is very exible thus we introduce exible information acquisition to capture this interaction we show that debt is uniquely optimal com pared with the security design literature we neither assume monotonicity of the feasible securities nor impose various distributional assumptions on the fundamental or information structures fixed aggregate cash ow and homogeneous information cost are two key factors driving the results jel d86 d82 g32

performance based wages in tax collection the brazilian tax collection reform and its effects we use panel data from the brazilian tax collection authority to examine the effects of a major incentive reform instituted in 1989 to improve tax enforcement beforehand fine collections per inspection were relatively stable however a striking trend break occurred afterwards which we attribute to the incentive reform not to changes in the macroeconomy or personal and corporate income tax rates our estimates suggest the growth in fines per inspection after the reform is about 75 above what it would have been without it and that there is substantial heterogeneity in the impact of the reform across tax regions