diverse information and market efficiency in a monetary model of the exchange rate tests of informational efficiency of a given market involve testing two hypotheses simultaneously the first is the hypothesis about the structure determining equilibrium prices or returns and the second is the hypothesis about the information used in formulating expectations and the ability of agents to set current prices to conform with their expected values we examine this issue in the context of the foreign exchange market by setting up a simple model of exchange rate determination and using equilibrium properties of the model to examine market efficiency the model of exchange rate determination involves monetary equilibrium and rational expectations by virtue of the latter equilibrium prices by definition fully reflect available information yet we show that conventional tests of market efficiency would fail when confronted by data generated by such a model we then proceed to define more restrictive and more appropriate concepts of informational efficiency we also illustrate and clarify a fundamental misconception with current rational expectations models we believe that the current models employing the rational expectations hypothesis overemphasize the distinction between monetary and real shocks and underemphasize the distinction between permanent and transitory distinctions for expectations formation the conventional efficiency tests it is the latter distinction that is the essential one this abstract was borrowed from another version of this item

cost characterizations of supply chain delivery performance abstract this paper addresses strategies for improving delivery performance in a serial supply chain when delivery performance is evaluated with respect to a delivery window contemporary management theories advocate the reduction of variance as a key step in improving the overall performance of a system models are developed that incorporate the variability found in the individual stages of the supply chain into a financial measure that serves as a benchmark for justifying the capital investment required to improve delivery performance within the supply chain to meet a targeted goal

inflation and elections theory and evidence for six oecd economies i introduction political business cycle pbc models feature the idea that governments stimulate demand prior to elections in order to improve election prospects while the first generation of pbc models developed by nordhaus 1975 and macrae 1977 assume that voters are naive and retrospective rogoff and sibert 1988 and rogoff 1990 have developed a rational pbc rpbc model where voters are rational and forward looking most empirical studies of political business cycles examine whether unemployment falls the growth rate increases or fiscal and monetary policies become more expansive prior to elections 1 to my knowledge only alesina and roubini 1992 and alesina cohen and roubini 1992 have studied election cycles on inflation based on a large number of elections in 18 oecd countries the authors find evidence of a post election surge in the inflation rate lasting for 3 5 quarters this paper examines whether the existence of election cycles on inflation can be interpreted as supportive evidence of the rpbc theory by focusing on the theory s implications for the relation between post election inflation and the government s re election chances prior to the election in the theoretical part of the paper it is shown that the rpbc theory does not produce unambiguous predictions the functional form of the relation depends on the government s preferences and the election date if electoral terms are fixed or the election takes place close to the mandatory election date average post election inflation will be higher the closer is the election race provided the government always cares about the social costs of election cycles in the empirical part of the paper i generate estimates of the incumbent s election win probability for a sample of 50 elections in six oecd countries three alternative probability series are generated the probability estimates are interacted with dummies turned on after each election and included as regressors in panel data regressions on inflation the three probability series produce the same conclusion the relation between post election inflation and the incumbent s election win probability is hump shaped if the election race is close the inflation rate increases by 0 014 0 018 during the first year after an election i find no indication of an upward jump in inflation after elections when the incumbent s win probability is close to zero or one as noted in the theoretical part of the paper these results are consistent with the rpbc theory the paper is organized as follows the theoretical model is developed in section ii section iii presents the data sample election win probabilities are computed in section iv section v presents the panel data regressions section vi concludes ii theoretical model the theoretical framework is the signalling game developed by persson and tabellini 1990 extended to accommodate the fact that governments always face some uncertainty about the election outcome i first examine a two period game with fixed electoral terms where the election takes place at the end of period one i then consider a three period game where the incumbent chooses whether to call an election in the first or in the second period the output level and the inflation rate in each period t are denoted x sub t and pi sub t respectively pi sub t is determined by the policymaker output is given by the following supply function 1 mathematical expression omitted where mathematical expression omitted are inflation expectations and mu sub t is the policymaker s competence mu sub t is private information for the policymaker and follows a ma 1 process mu sub t eta sub t eta sub t 1 mathematical expression omitted theta with probability 0 5 eta sub t theta with probability 0

national animosity and cross border alliances we extend the cross border strategic alliance knowledge base by introducing dyad specific antagonism animosity between nation pairs and hold that the formation and the type of firm level cross border alliances are nontrivially impacted by conflicting relations and animosity between their home nations we examine the formation of alliances between firms among nation dyads with and without a history of conflicts the frequency and magnitude of conflicts increase the perception of likelihood of opportunism and dyad specific risks materially affect the context in which firms make alliance decisions as animosity between two nations increases the number and the probability of forming alliances within the dyad the nations form decreases conditional on the expected number of alliances increased antagonistic actions of nations outside the dyad and dissimilarity in the historical conflicts that each nation has engaged in outside the dyad i increase the number of equity alliances and ii decrease the number of nonequity alliances as a proportion of total alliances we find positive main effects of learning to contract through prior experience only for equity vs nonequity alliances the reputation effects of antagonism based on relationships with nations outside of the dyad negatively moderate the positive learning effects of prior equity alliance experience abstract from author

inflation and output volatility under asymmetric incomplete information abstract the assumption of asymmetric and incomplete information in a standard new keynesian model creates strong incentives for monetary policy transparency we assume that the central bank has better information about its objectives than the private sector and that the private sector has better information about shocks than the central bank transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised our analysis improves upon existing work by endogenising the volatility of both output and inflation improved transparency most likely manifests itself in falling output volatility

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

economies of scale and barriers to entry dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry entry deterrence in a slight modification of this model involves the classical limit price output under linear or concave demand however the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry it is argued that this suggests the general unimportance of entry barriers erected by scale economies

overcoming the dual liability of foreignness and privateness in international corporate citizenship partnerships responding to increased demands from stakeholder groups many companies have instituted corporate citizenship programs in recent years leveraging their specialized resources to create public goods and services at home and abroad significant suspicion nonetheless remains about the motives and impact of corporations acting in domains traditionally served by government and third sector organizations we argue that such ambivalence undermines the perceived legitimacy of private investments in public goods and that this fundamental liability of privateness lop constitutes a significant obstacle to corporations acting in the public domain through corporate citizenship initiatives for multinational corporations mncs the challenges stemming from the lop are further amplified by the liability of foreignness lof commonly associated with international business operations we discuss the origins of the lop and derive implications of the dual liability of lop and lof for partnering choices in mncs corporate citizenship programs we highlight limitations on the set of credible governance mechanisms available to participants in these partnerships describe a set of alternative governance arrangements that serve to realign incentives among alliance partners and link these to the severity of the lop in a particular setting we illustrate our arguments with a case description of microsoft s partners in learning program

gift giving and the evolution of cooperation gift giving is a practice common to many societies in an evolutionary model the social custom of giving gifts at the beginning of a relationship can lead to trust and cooperation the evolutionary approach makes predictions about the character of the goods that can be used as gifts for example gift goods may have little use value even at low levels of consumption although the gifts themselves are useless the institution is not

trust interlinking transactions and credit in the industrial district an essential feature of the industrial district is trust among individuals and firms within it this paper focuses mainly on trust based on investments in building up a good reputation that is a personal capital that can even substitute for collateral in obtaining credit informal credit often linked to other transactions and especially subcontracting is therefore an important way of financing economic development in the industrial district moreover the importance of trust as personal capital gives rise to a double financial intermediation in the industrial district this double intermediation constitutes a device to reduce information problems that are usually responsible for credit rationing c 1994 academic press inc copyright 1994 by oxford university press

internal bargaining and strategic innovation in the theory of the firm abstract the transaction cost analysis of the firm has identified asset idiosyncrasy and the risk of ex post opportunism as key determinants of organizational form simultaneously several writers have modeled the distribution of quasi rents among input suppliers as a bargaining game these complementary ideas are used to formalize the notion of strategic innovation where capital and labor attempt to redistribute firm income after specialized assets are in place through unilateral modifications in production technology because strategic behavior can enlarge the quasi rent component of fifirm income this process may persist in equilibrium asset idiosyncrasy therefore creates room for an autonomous theory of organizational dynamics partially insulated from events at the market level of analysis

explaining interfirm cooperation and performance toward a reconciliation of predictions from the resource based view and organizational economics interfirm cooperation and its performance implications are examined in the context of two widely cited theoretical approaches to organizations broadly speaking the resource based view suggests that firms seek to capitalize on and increase their capabilities and endowments whereas organizational economics asserts that firms focus on minimizing the costs of organizing although these perspectives agree on managers likely actions in many areas their predictions diverge when interfirm cooperation is considered we take a step toward reconciling these differences by positing that firms place resource based concerns in front of considerations from organizational economics when deciding whether or not to engage in interfirm cooperation we examined this prediction using data from 94 publicly held restaurant chains the results support our integrated view but also suggest that giving primacy to resource concerns detracts from the performance of some firms we derive several implications of these findings in an effort to guide subsequent inquiry copyright 1999 john wiley sons ltd

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

leadtime reduction in a q r inventory system an agency perspective abstract we examine the problem of designing and implementing a continuous review q r inventory system from an agency perspective in which the agent s effort influences the item s replenishment leadtime our results are as follows if the agent is risk neutral a linear or quadratic contract achieves first best for a risk averse agent with an exponential utility function assuming a normal leadtime distribution we determine the optimal linear contract extensive numerical experiments suggest that ignoring the possible influence of the agent on the replenishment leadtime can be costly but that the cost penalty of ignoring agency can be significantly reduced by a simple contract

mandated countertrade as a strategic commitment abstract mandated countertrade is a policy to restrict unilateral imports a country s government thereby in effect commits domestic firms not to purchase from a foreign trading partner unless there are reciprocal sales we argue that the policy may be a rational response to fundamental contracting failures our key assumption being that sellers are incompletely informed about buyers valuations in line with observed practices the analysis suggests that an optimal mandated countertrade policy will target high mark up imports and low mark up exports implications for global welfare are ambiguous and depend upon the extent of a double coincidence of wants

why corporations insure corporations insure to reduce the shirking information problem of joint production insurance encourages specialization in ownership increasing the returns to monitoring and lowering shareholders demand for a more diversified portfolio it enhances the credibility of specific capital as a performance bond and it lowers the cost to shareholders of compensating other members of the team for investing in firm specific assets tax and other factors may further encourage individual corporations to insure

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

shirking or work morale abstract standard economics assumes that rational agents shirk and that they have to be disciplined by monitoring and regulating however under specific circumstances regulating systematically worsens workers morale and thereby negatively affects their behavior when a principal attributes a lower work morale to the agents than they actually have an implicit contract is unilaterally violated and agents reduce their excess morale this reaction is theoretically and empirically well supported by the notions of reciprocity and of overjustification the theoretical propositions are applied to a specific employment relationship but hold more generally they are consistent with empirical observations

beware of the watchdog rethinking the normative justification of gatekeeper liability one of the prevailing explanations of the corporate scandals of the enron era and the recent financial crisis is the failure of professional gatekeepers such as auditors corporate lawyers and securities analysts to detect and disrupt corporate misconduct the alleged solution to this failure typically proposed and justified on consequentialist grounds is to impose legal liability on professionals the purpose of this paper is to critically examine the normative foundations of gatekeeper liability in the course of this paper i shall defend the claim that gatekeeper liability may be morally objectionable not only on grounds of fairness but also on consequentialist grounds the expected contribution of this paper is threefold first it systematizes the framing and moral justification of gatekeeping duties second it calls into question the normative underpinnings for targeting intermediaries instead of primary wrongdoers third it anticipates some negative and often overlooked results of gatekeeping strategies in the accounting profession specifically in the realm of clientele selection the expectation gap and auditor compensation

firm survival and industry evolution in vertically related populations this paper examines how the density and governance of vertically related populations affect the life chances of organizations we integrate the literatures on organizational ecology and vertical integration to develop a theory of how 1 specialized upstream industries affect downstream survival rates 2 the prevalence of different governance forms among upstream and downstream organizations moderates this relationship and 3 different forms of governance exert differential competitive pressures on focal organizations we find evidence supporting our hypotheses in an empirical examination of the downstream laser printer industry and upstream laser engine industry this paper was accepted by jesper sorensen organizations

analysis of supply contracts with minimum total order quantity commitments and non stationary demands abstract in this paper we address a buyer supplier arrangement of particular importance total order quantity commitment toqc under the toqc contract that has been negotiated between the buyer and the supplier the former agrees to an obligation to procure a certain quantity of an item from the latter over the predetermined period of time additional quantity can be obtained maybe at a different price the optimal inventory replenishment policy is shown to be dual order up to levels under a given toqc and the optimal toqc is also demonstrated to be mathematically straightforward to obtain

rational bias in macroeconomic forecasts do professional forecasters provide their true unbiased estimates or do they behave strategically in our model forecasters have common information confer actively and thus know the true pdf of future outcomes intensive users of economic forecasts monitor forecasters performance closely occasional users are drawn to the forecaster who fared best in the previous period in the resulting nash equilibrium even though economists have identical expectations they make a range of projections that mimics the true probability distribution of the forecast variable those whose wages depend most on publicity produce forecasts that differ most from the consensus empirical evidence supports the model

a general tce model of international business institutions market failure and reciprocity in this study i propose a general transaction cost economics tce model of international business institutions in which cross border transactions can be conducted at multiple market levels e g output asset and equity and the buyer seller relationship can go both ways a sells to b and b sells to a this general model addresses two major gaps in the literature first although market failure is the driving force behind the rise of multinational enterprises mnes most researchers have focused on the failure of a single market without exploring the presence of substitute markets for cross border transactions second many previous studies have begun their analysis with a bilateral setup between an mne and an indigenous firm for example a licensing agreement but concluded with a unilateral decision made by the mne to evade the indigenous firm in the case of direct investment in bridging the two literature gaps i propose a general tce model to integrate all institutional modes available to firms for governing international business such as licensing outsourcing acquisitions and joint ventures built on a multi market framework my analysis reveals that the choice of the optimal international business institution is tantamount to the selection of the most efficient market to conduct cross border transactions drawing on a bilateral setup it explicitly recognizes the power of reciprocity in solving the problem of market failure this distinct approach points out promising directions for future researchers to advance international business studies particularly after my transaction level analysis has been expanded to also consider institutional contexts and firm capabilities

long term sustainability of third party facilitated market linkages evidence from the usda marketing assistance program in the armenian dairy industry abstract public private partnerships are increasingly seen as an important tool to build agri food supply chains and develop markets for agri food products in emerging economies however many of these initiatives fail when the public component of the program ends one exception is the usda market assistance program map that facilitated the redevelopment of the armenian dairy sector after privatization this paper presents a case study of this initiative and hypothesize that the usda map facilitated farmer investment in private enforcement capital this investment resulted in sustainable market relationships between farmers and dairy processors even after the usda map expired we find empirical evidence to support this hypothesis using a panel dataset collected from 172 armenian dairy farmers in 2004 and 2009

a transaction cost rationale for private branding and its implications for the choice of domestic vs offshore outsourcing in this study i take a transaction cost approach to explore the coincidence of private branding with offshore outsourcing two retail trends that have attracted substantial attention but have never been analyzed concurrently retailers now play an increased role in marketing a product to shoppers although their marketing efforts are usually specific to the supplier who brands the product this is called brand specificity a special case of asset specificity that drives up the cost of conducting the manufacturer retailer transaction especially when the parties are located in different nations with the right to brand a product being shifted from manufacturers to retailers private branding can eliminate this problem of brand specificity that inflicts a transaction cost penalty on offshore outsourcing which is why the two seemingly unrelated retail trends coexist data obtained from a national chain reveal that the retailer is more likely to brand a product that needs its marketing efforts but less motivated to outsource the product offshore before putting a private brand on it these results establish a transaction cost link between private branding and offshore outsourcing from which important theoretical and practical implications can be drawn

licensee technological potential and exclusive rights in international licensing a multilevel model granting of exclusive rights is an important consideration for firms using licensing as a mode of entry into foreign markets as exclusive contracts reduce licensors flexibility in a given market during the term of the agreement by granting exclusivity to a licensee with greater technological potential the exchange partners can increase the potential transactional value of the licensing agreement at the same time a licensee with strong technological potential will increase the threat of transactional hazards due to underinvestment and rent appropriation in this paper we develop and empirically test a model that evaluates the balancing of transactional value and transaction costs in exclusive licensing in particular we identify the conditions under which exclusive contracts are likely to be granted to foreign licensees with strong technological potential empirical results from a multilevel model based on 375 international licensing agreements of us firms in high technology industries during 1995 2008 show that licensees with a stronger technological potential are more likely to be granted exclusive rights in countries with strong intellectual property rights protection and in industries with a high rate of technological change but are less likely to be granted exclusive rights when there is a high degree of overlap between licensor and licensee products

how to deliver foreign aid the case of projects governed by the spanish international agency summary international agencies use two alternative modes of governance to deliver international aid projects under bilateral agreements with recipient governments in house or through incumbent ngos through the lenses of institutional and transaction cost economics this article examines 95 international aid projects delivered in morocco and ecuador by the spanish international agency finding that those projects delivered in house present different features than those projects outsourced through incumbent ngos specifically international aid projects delivered in house involve important investments in specific assets are much more complex and can turn the public agency into a hostage of its own disbursement

instabilities of strategic alliances an internal tensions perspective the instabilities of strategic alliances have been examined in the literature through a number of theoretical approaches alliance instabilities refer to major changes or dissolutions of alliances that are unplanned from the perspective of one or more partners although the literature identifies certain characteristics of strategic alliances that may lead to their unplanned dissolution the extent of our understanding of this subject appears to be fragmented and incomplete in this article we propose a comprehensive framework for adequately understanding alliance instabilities based on the notion of internal tensions we suggest that strategic alliances are sites in which conflicting forces develop and which can be viewed as being constituted by three key pairs of competing forces namely cooperation versus competition rigidity versus flexibility and short term versus long term orientation this tensions framework helps us in explaining the intrinsic vulnerability of alliances in terms of a wide range of internal contradictions and enables us to examine in an integrated manner the incidence dynamics and eventual dissipation of the inherent instabilities we discuss the interrelationships among the different internal tensions and their impacts on different types of strategic alliances we also examine the termination of alliances through mergers acquisitions and dissolution finally we suggest ways to empirically test the various ideas and propositions developed here and indicate directions for further research

gifts as economic signals and social symbols gift giving has often puzzled economists especially because efficient gifts like cash or giving exactly what a person asks for seem crass or inappropriate it is shown in a formal game theoretic model that gifts serve as signals of a person s intentions about future investment in a relationship and inefficient gifts can be better signals other explanations for the inefficiency of gift giving are advanced and some stylized facts about gift giving practices are described many of which are consistent with the signaling view of gifts

indicator variables for optimal policy the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment an example of optimal monetary policy with a partially observable potential output and a forward looking indicator is examined the optimal response to the optimal estimate of potential output displays certainty equivalence whereas the optimal response to the imperfect observation of output depends on the noise in this observation

bureaucrats legislators and the size of government some recent theories have blamed the growth of government on budget maximizing bureaucrats who are assumedly capable of imposing their most preferred budget output combination on legislatures subject to cost and demand constraints however theoretical examination of the range of bargaining outcomes that might occur between bureau and legislature shows that budget maximizing behavior does not necessarily lead to super optimal levels of production nor do the suggested reforms of competition and privatization necessarily improve the situation in this bargaining model the central determinants of governmental growth are not budget maximizing bureaucrats but the legislature s decisions regarding mode of oversight and form of internal organization

why are professional forecasters biased agency versus behavioral explanations professional forecasters may not simply aim to minimize expected squared forecast errors in models with repeated forecasts the pattern of forecasts reveals valuable information about the forecasters even before the outcome is realized rational forecasters will compromise between minimizing errors and mimicking prediction patterns typical of able forecasters simple models based on this argument imply that forecasts are biased in the direction of forecasts typical of able forecasters our models of strategic bias are rejected empirically as forecasts are biased in directions typical of forecasters with large mean squared forecast errors this observation is consistent with behavioral explanations of forecast bias

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

watta satta bride exchange and women s welfare in rural pakistan in a setting where husbands wield considerable coercive power forms of marriage should adapt to protect the interests of women and their families the authors study the pervasive marriage custom of watta satta in rural pakistan a bride exchange between families coupled with a mutual threat of retaliation they show that watta satta may be a mechanism to coordinate the actions of two sets of in laws each of whom wish to restrain their sons in law but who only have the ability to restrain their sons the authors empirical results support this view the likelihood of marital inefficiency as measured by estrangement domestic abuse and wife s mental health is significantly lower in watta satta arrangements as compared with conventional marriages but only after properly accounting for selection

indicator variables for optimal policy under asymmetric information the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment the private sector is assumed to have more information about the state of the economy than the policymaker certainty equivalence holds for the optimal reaction function in state space form t he coefficients are independent of the degree of uncertainty about the state of the economy however in the case of commitment certainty equivalence does not hold for the reaction function in integrative form the policy instrument cannot be written as a distributed lag of past estimates of past states of the economy instead optimal policy will generally depend on new estimates of past states of the economy and in ways that depend on the information structure furthermore the usual separation principle does not hold since the estimation of the state of the economy is not independent of optimization and is in general quite complex we present a general characterization of optimal filtering and control in settings of this kind and discuss an application of our methods to the problem of the optimal use of real time macroeconomic data in the conduct of monetary policy

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

buyers strategies entry barriers and competition in markets where sellers have customer specific investments and buyers can make credible but costly commitments to switch suppliers buyers strategies attenuate the market power of sellers furthermore since current prices and a buyer s decision to switch suppliers are related limit pricing becomes an equilibrium limit prices increase with the time it takes a buyer to switch suppliers and with buyers switching costs but fall with the level of sunk investments thus sunk investments may restrain the sellers ability to exert market power the paper questions then the standard inverse relationship between market performance and sunk investments

social knowledge as a control system a proposition and evidence from the japanese fdi behavior building upon the concept of clans this paper introduces the value of social knowledge as a control mechanism available for an mnc to manage its foreign subsidiaries social knowledge is defined as one s ability to understand and predict others general patterns of behavior the hypotheses are empirically tested with japanese fdi data into four host countries the united states singapore taiwan and korea the results offer broad support for the proposition that for mncs with social knowledge the need to resort to ownership for control purposes is reduced

optimal monetary policy with imperfect common knowledge we study optimal nominal demand policy in a flexible price economy with monopolistic competition where firms have imperfect common knowledge about the shocks hitting the economy information imperfections emerge endogenously because firms are assumed to have finite shannon capacity to process information we then ask how policy that minimizes a quadratic objective in output and prices depends on firms processing capacity when price setting decisions of firms are strategic complements we find that policy should nominally accommodate white noise mark up shocks for a large range of capacity values this fi nding is robust to the policy maker observing shocks imperfectly or being uncertain about firms processing capacity when mark up shocks are persistent accommodation may even have to increase in the medium term but has to decrease in the long run thereby generating a hump shaped price response and a slow reduction in output instead when prices are strategic substitutes policy tends to react with nominal demand contractions to mark up shocks in addition there might exist discontinuities between common knowledge equilibria and equilibria with small amounts of imperfect common knowledge

indenturing banknotes as a mechanism to induce cooperation in conflict games abstract a principal wants an agent to do something for him but does not want to pay him the agent wants to get the money but does not want to work for it how can the socially efficient result of working and paying be achieved if no enforceable contract can be concluded and the game is played only once a class of one shot games indenture games is analyzed where efficient behaviour is the unique stable equilibrium

a dynamic model of the choice of mode for exploiting complementary capabilities this paper examines the choice of mode for a multinational enterprise and a local firm to exploit their complementary capabilities we develop a combined real options and game theoretic model of modal choice by incorporating a range of factors drawn from the dynamic capabilities theory and transaction cost or organizational economics the factors scrutinized in the model include the parties absorptive capacities frictions in knowledge and asset markets and associated incentive problems cost of switching from one mode to another and cost associated with power jockeying the model uses simulation to examine how these factors interact to influence the choice of mode the results identify a number of conditions for one factor to dominate another and help to reconcile different theories that have made contradicting predictions with regard to the effects of such factors as uncertainty and capability divergence on the optimal choice of mode

explaining bureaucratic optimism theory and evidence from u s executive agency macroeconomic forecasts we offer a theory of intertemporal bureaucratic decision making which proposes that an agency s forecast optimism is related to the extent to which it discounts future reputation costs associated with bureaucratic incompetence agency forecasts of the distant future are more likely to be optimistic than short term forecasts we claim that unstable organizations will discount reputation costs at a steeper rate than stable organizations and therefore will produce more optimistic forecasts we test our theory using macroeconomic forecasts produced by the office of management and budget omb and the social security administration ssa across six forecast horizons from 1979 to 2003 the statistical results are generally consistent with our theory omb generates more optimistic long term forecasts than ssa further differences in forecast optimism between these executive branch agencies widen as the forecast horizon increases our evidence suggests that more stable agencies place a premium on minimizing reputation costs conversely less stable agencies are more likely to accommodate political pressures for forecast optimism these findings underscore the importance of institutional design for understanding how executive agencies balance the conflicting goals of political responsiveness and bureaucratic competence within the administrative state

coordinating supply chains with competition capacity allocation in semiconductor manufacturing abstract this paper motivated by the experiences of a major us based semiconductor manufacturer presents an integrated model of incentive problems arising in forecasting and capacity allocation our model involves multiple product managers and multiple manufacturing managers who forecast the means of their respective demand and capacity distributions a central coordinator is responsible for allocating capacities to product lines when these distributions are unknown to the central coordinator and capacity is scarce the managers misrepresent their forecasts a product manager inflates his forecast to gain a greater allocation of the capacity a manufacturing manager deflates his forecast to cover for the uncertainties in production we propose a game theoretic model and design a mechanism a bonus scheme for all managers and an allocation rule to allocate realized capacity to the product managers that elicits truthful reporting by all managers the results herein show that the structure of the truth eliciting bonus schemes is rather simple with easily calculable parameters we also show that large classes of allocation rules including the current allocation practice of the firm are manipulable a bonus is often required for elicitation of truthful information we synthesize the implications of our results for the practitioners

trust and inter firm relations in developing and transition economies the role of trust in facilitating economic growth has been highlighted in previous contributions to this journal in order to take this debate forward this article argues 1 that more attention needs to be given to the relationship between sanctions and trust and 2 that it is worth distinguishing between the minimal trust for making markets effective and the extended trust required for deeper kinds of inter firm co operation to work the article goes on to ask why minimal trust is lacking and so hard to construct in the republics of the former soviet union it then examines how extended trust grows or can be made to grow in industrial supply chains and clusters in developing countries

cross function and same function alliances how does alliance structure affect the behavior of partnering firms firms collaborate to develop and deliver new products these collaborations vary in terms of the similarity of the competencies that partnering firms bring to the alliance in same function alliances partnering firms have similar competencies whereas in cross function alliances partners have very different competencies on examining managers view of these alliances we find that on average same function alliances are expected to perform better than cross function alliances holding fixed the level of inputs a game theoretic analysis shows that this apprehension about cross function alliances is consistent with a pareto inferior equilibrium a pareto superior equilibrium however suggests that partners in cross function alliances may invest more in their alliances than those in same function alliances it is also often believed that increasing the number of partnering firms is not conducive for collaborative effort our analysis shows that this belief is correct for same function alliances but not for cross function alliances we test these equilibrium predictions in an experiment where we exogenously vary the type of alliance and the number of partnering firms the experimental results lend support for the pareto superior equilibrium partners in cross function alliances invested more than their counterparts in same function alliances and this difference in investment levels increased with the number of partnering firms we extend our model to consider alliances where firms have an opportunity to learn from their partners and later leverage this knowledge outside the scope of their alliance though such learning increases the resources committed by alliance partners in the learning phase it decreases investment in the subsequent competition and also dampens the overall investment across the two stages in addition an increase in interalliance competition decreases investments in the focal alliance but increases investment in the competition outside the scope of the alliance

transactions cost economics and the multinational enterprise an assessment abstract this paper applies transactions cost principles to the multinational enterprise in order to ascertain its distinctive properties as a mode of economic organization the analysis helps identify just when and where contractual alternatives to the multinational firm are likely to be viable this turns out to depend upon the nature of the technology the regime of appropriability within which the firm operates and the characteristics of the markets in question transactions cost analysis is also extended to the multinational enterprise host country relationship implications for management and public policy are derived

the neglect of society in the theory of the firm a systems theory perspective the prevailing theories of the firm acknowledge the importance of trust and loyalty but neglect such behaviour in the substance of their analyses the present paper unravels this paradox by drawing on niklas luhmann s ground breaking insight that the complexity reducing function of social systems leads them to neglect their critical environmental dependencies thereby compromising their own sustainability if the firm is conceived as a social system luhmann s theory implies that the neglect of social behaviour by the predominant theories of the firm can be explained as reflecting the neglect of society by actual firms this argument promises to not only furnish the theory of the firm with a concern for sustainability but also render it more amenable to unconventional institutions such as cooperatives and non profit organisations that help compensate for the damage inflicted by conventional firms on the social environment

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

a note on countertrade contractual uncertainty and transaction governance in emerging economies this paper develops a conceptual framework for analyzing organizational responses to contractual uncertainty in the context of emerging economies elaborating on hennart s 1989 transaction cost rationale for countertrade we develop a typology of exchange and transaction governance pertinent to the study of emerging economies contract trust and hostage notwithstanding the traditional explanation based on foreign exchange shortage we argue that the persistence of international countertrade illustrates organizational remedies to institutional deficiency in transaction governance

leniency policies and illegal transactions abstract we study the consequences of leniency reduced legal sanctions for wrongdoers who spontaneously self report to law enforcers on sequential bilateral illegal transactions such as corruption manager auditor collusion or drug deals it is known that leniency helps deterring illegal relationships sustained by repeated interaction here we find that when not properly designed leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence

the role of installment payments in contracts for services this article studies the role of installment payments in relationships characterized by moral hazard and sunk costs we rule out vertical integration and payments contingent on the product of the contractor instead each payment is negotiated as and when made in such circumstances an initial down payment serves to redress the weakness of the contractor in ex post renegotiations if higher effort by the contractor in thefirst stage increases the marginal product of effort in the second stage a second installment payment induces the contractor to invest greater effort initially

effective incomplete contracts and milestones in market distant r d collaboration abstract r d outsourcing is often conducted during the early market distant stages of the innovation process however the main obstacle to this potentially efficient interfirm specialization is the high danger of moral hazard most organizational mechanisms fail to control that type of opportunism because of information asymmetries even ex post in the theory of incomplete contracts this problem is mitigated by assigning the control rights to the supplier to date empirical studies have mainly investigated the interfirm distribution of the control rights however we do not know yet which concrete control right is crucial with regard to supplier opportunism which is the decisive dependent variable our study addresses this research gap for the first time we extend the empirical focus from biotechnology and pharmaceutical firm alliances to a cross industry sample of 113 collaboration cases the results show the effectiveness of contracts that ex ante assign patent ownership rights to the supplier the findings are also relevant for management practice because the majority of practitioners do not use this contract type yet although there is no sign of an effective alternative

a model of incentive contracts for just in time delivery abstract a mathematical model is used to analyze how to structure on time delivery incentives in a contract between a buyer and a single supplier of raw materials when early shipments are forbidden the buyer s choice of incentives takes the supplier s cost minimizing response to incentives into account the least cost incentive a buyer can select is specified by a probability of on time delivery and an incentive scheme to achieve that probability these optimal solutions are characterized without specifying the flow time distribution a method of selecting incentives that can help buyers improve on time delivery performance is provided however the limitations of incentives are also considered achieving exactly 100 on time delivery is shown to be non optimal and only feasible under specific conditions when management can not specify the shortage cost their selection of a desired probability of on time delivery allows for the determination of an imputed shortage cost

natural gas contracts in an emerging competitive market natural gas is being viewed by many as the fuel of the 1990s and beyond because of its environmental qualities relatively low cost and significant domestic resource base however in the fall of 1991 a group of electric utility executives met with then deputy secretary of energy henson moore and asserted that an inability to obtain long term gas contracts meant that supplies are unreliable and construction of gas fueled generating stations is being discouraged this study was requested by the deputy secretary to address the issues surrounding long term gas contracts and supply reliability the relationship between supply reliability and contracts is explained in terms of the number of buyers and sellers in a market with the appropriate state regulatory policies utilities can contract for gas and obtain reliable supplies at competitive market prices public utility commissioners are encouraged to permit utilities a free choice in signing gas contracts but to allow only competitive market prices to be reflected in allowable fuel costs

the antecedents and performance implications of cooperative exchange norms our study investigates the antecedents and performance implications of cooperative exchange norms we argue that in early relationships the level of expected cooperative norms in an exchange is the result of a calculative process facilitated by transaction attributes joint transaction specific investments and observability the greater the level of these two exchange attributes the greater the level of cooperative exchange norms all else being equal we further argue that the realized level of cooperative exchange norms can deviate from the expected level because the development of such norms is the result of social processes that management cannot directly and fully control this gap between realized and expected norms affects exchange performance performance suffers when the realized level of cooperative exchange norms falls below the expected level but overshooting expectations lays a critical groundwork for repeat transactions the analysis of a survey of 182 collaborative r d alliances provides initial support for our theory

modes of foreign entry a transaction cost analysis and propositions a frontier issue in international marketing is the appropriate choice of entry mode in foreign markets the objective of this paper is to offer a transaction cost framework for investigating the entry mode decision this framework provides 1 a theoretical basis for systematically interrelating the literature into propositions 2 propositions about interactions which resolve the apparently contradictory arguments advanced to date specifically the paper illustrates the feasibility of clustering 17 entry modes into the degree of control the mode provides the entrant proposes that the most appropriate i e most efficient entry mode is a function of the tradeoff between control and the cost of resource commitment advances testable propositions delimiting the circumstances under which each mode maximizes long term efficiency

the theory of the firm as governance structure from choice to contract the propositions that organization matters and that it is susceptible to analysis were long greeted by skepticism by economists one reason why this message took a long time to register is that it is much easier to say that organization matters than it is to show how and why the prevalence of the science of choice approach to economics has also been an obstacle as developed herein the lessons of organization theory for economics are both different and more consequential when examined through the lens of contract this paper examines economic organization from a science of contract perspective with special emphasis on the theory of the firm

a cooperative game theory model of quantity discounts quantity discounts offered by a monopolist are considered in the context of a bargaining problem in which the buyer and the seller negotiate over the order quantity and the average unit price all units and incremental quantity discounts that permit transaction at a negotiated outcome are described the effects of risk sensitivity and bargaining power on quantity discounts are discussed for alternative bargaining models

contracting over multiple parameters capacity allocation in semiconductor manufacturing abstract this paper is a generalization of mallik and harker mallik s harker p t 2004 coordinating supply chains with competition capacity allocation in semiconductor manufacturing european journal of operational research 159 330 347 that presented an integrated model of incentive problems arising in forecasting and capacity allocation in that model multiple product managers and multiple manufacturing managers forecast the means of their respective demand and capacity distributions and a central coordinator allocates capacities based on these forecasts a mechanism that elicits truthful information from the managers was the main contribution of that paper the objective of this paper is to generalize our previous results to multiple statistics reporting this work assumes that the central coordinator can ask the managers to report multiple statistics mean and variance for example about their respective distributions we propose a game theoretic model and design a mechanism a bonus scheme and an allocation rule that elicits truthful reporting of all statistics by all managers it turns out that the structure of the optimal bonus schemes are rather simple with easily calculable parameters we also show that a large class of allocation rules are manipulable a bonus is often required for elicitation of truthful information we compare our results of multiple statistics reporting with those from mallik and harker 2004 we also characterize under what conditions the reporting of the extra information is of limited use

the long run effects of communication as a conflict resolution mechanism abstract the paper studies an experimental conflict in a repeated game and tests the robustness of communication as an intermediate conflict resolution instrument the results show a strong and persistent impact of communication most conflict parties refrain from conflict expenditures even after the opportunity for communication has expired third party involvement with punishment options does not enhance this effect while contesting one prize rather than multiple prizes reduces it conflict resolution is less successful even in the long term if initial conflict intensity is rather high

cluster sample methods in applied econometrics inference methods that recognize the clustering of individual observations have been available for more than 25 years brent moulton 1990 caught the attention of economists when he demonstrated the serious biases that can result in estimating the effects of aggregate explanatory variables on individual specific response variables the source of the downward bias in the usual ordinary least squares ols standard errors is the presence of an unobserved state level effect in the error term more recently john pepper 2002 showed how accounting for multi level clustering can have dramatic effects on t statistics while adjusting for clustering is much more common than it was 10 years ago inference methods robust to cluster correlation are not used routinely across all relevant settings in this paper i provide an overview of applications of cluster sample methods both to cluster samples and to panel data sets

on the economic efficiency of liquidated damages abstract recently aghion and bolton american economic review 1987 77 388 401 have shown that liquidated damages can serve as a barrier to entry and may therefore be socially harmful in this paper i show that liquidated damages remain excessive and continue to serve as a barrier to entry even in the presence of relationship specific investment but may nevertheless have an overall positive effect on welfare

asset specificity and the political behavior of firms lobbying for subsidies in norway previous research into endogenous trade policy has described extensively the political incentives of firms with specific assets but no studies have shown directly that firms behave as predicted we adopt insights from transaction costs economics to develop measures of asset specificity and to investigate how variation in these measures affects the political behavior of firms in particular we examine the lobbying choices of norwegian firms in the 1980s given available subsidy funds from norway s oil boom and some government decisions in the 1970s firms with more specific assets faced potentially greater losses from adjusting to new activities in the face of competitive pressures and thus had greater incentives to lobby for subsidies to protect themselves joint contacting of parliament and government on behalf of firm interests by representatives of both management and labor should be particularly likely where firms had specific assets data analysis shows that asset specificity as indicated by r d intensity and job immobility predicts joint contacting independently of plausible alternative explanatory variables like firm size and export orientation

sophisticated reaction in the u s soviet arms race evidence of rational expectations because of the pervasive security rivalry between the united states and the soviet union information about the expected future behavior of the rival state proves useful to domestic political actors competing to influence budgetary allocations this article examines the hypothesis that in the aggregate this process of sophisticated reaction approximates the behavior of two unitary rational actors capable of forming rational expectations of each other s behavior this rational expectations arms race model implies that the military expenditure series of arms racers should be independent in the granger causal sense but that their residuals should be correlated contemporaneously the latter prediction is inconsistent with bureaucratic process models or alternative expectational formulations and empirical analysis of u s and soviet yearly military expenditures is provided that supports the predictions of the rear model finally some implications of this intimate linkage between the domestic policy processes of these two rival superpowers are briefly discussed

investing in a relationship a principal can make an investment anticipating a repeated relationship with an agent but the agent may appropriate the returns through ex post bargaining i study how this holdup problem and efficiency depend on the contracting environment when investment returns are observable informal contracts ex post can be more efficient than formal contracts as they induce higher investment ex ante the principal invests not only to generate direct returns but also to improve relational incentives unobservability of returns increases the principal s ability to appropriate the returns but reduces her ability to improve incentives the optimal information structure depends on bargaining power

product complementarities capabilities and governance a dynamic transaction cost perspective the organization and governance of the transactions that comprise a bundling arrangement depend on the distribution of capabilities among firms and the amount of time during which the window of opportunity for earning rents is expected to remain open firms engaged in inter firm collaboration must undertake support transactions related to billing marketing customer support and product repair these support transactions differ from the core transactions that have traditionally been perceived as sufficient to provide a product bundle since support transactions create costs of their own the market may turn out to be an expensive means of governing collaborative arrangements undertaken for bundling purposes the telecommunications service sector provides an illustration copyright 1997 by oxford university press

uncertain potential output implications for monetary policy abstract a small forward looking model of the euro area economy is used to investigate the implications of incomplete information about potential output for the conduct of monetary policy three results emerge first under optimal monetary policy output gap uncertainty leads to persistent deviations between the actual and the perceived output gap in response to supply and cost push shocks second in first difference form a simple policy rule such as the taylor rule continues to perform relatively well as long as the output gap is optimally estimated third incomplete information implies that it is optimal to appoint a more hawkish central bank

disorganization and financial collapse since the fall of communism the former soviet union experienced a strong output decline and a dramatic increase in arrears and barter we develop a model which explains how these three phenomena are connected we introduce liquidity and credit constraints into a model of disorganization and show how these problems can alleviate the hold up problem we argue further that barter creates a hostage that allows to deal with disorganization when credit enforcement becomes prohibitively costly based on a firm survey in ukraine in 1997 we test how input shortages financial shortages and barter affect output growth of firms

bundling governance mechanisms to efficiently organize small firm loans abstract bank loans are a common source of financing for small firms while scholars have examined specific conditions that affect small firm loan approval and interest rates practical questions remain about how these loans are structured to address characteristically acute challenges from asymmetric information this paper suggests collateral reputation and relationship banking each perform unique exchange organizing tasks and that small firms systematically use them in predictable combinations a multiple discriminant analysis of 796 small firm loans suggests four governance bundles are commonly employed in this setting the implications for managers focus on how loan governance mechanisms are most efficiently bundled together

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