attitudes toward risk and the risk return paradox prospect theory explanations this study attempted to explain bowman s risk return paradox in terms of recent research in behavioral decision theory and prospect theory the research emphasized the role of reference or target

what money canʼt buy efficient mechanism design with costly signals i study the ex ante efficient allocation of a set of quality heterogeneous objects to a number of heterogeneous risk neutral agents agents have independent private values which represent the maximum cost they are willing to sustain to obtain an object of unitary quality the designer faces a trade off between allocative efficiency and cost of screening because the cost sustained is wasted the optimal mechanism ranks agents based on their marginal contribution to social surplus and distributes objects to higher ranked agents the ranking is independent of the scarcity of objects or the extent of their heterogeneity if the hazard rates of the distributions of values are increasing agents are ranked according to their expected values if hazard rates are decreasing and agents are symmetric the objects are allocated to the agents that sustain the highest costs in general optimal mechanisms combine both pooling and screening of values

strategic group formation and performance the case of the u s pharmaceutical industry 1963 1982 the focus of this paper is on three major questions 1 what is the theoretical rationale for the strategic group concept 2 does strategic group membership have performance implications and 3 are strategic groups and membership in strategic groups stable characteristics of industries a statistical procedure is proposed to longitudinally identify strategic groups the empirical setting is the u s pharmaceutical industry over the period 1963 82 while performance differences are found in terms of market share profitability differences between groups are not observed neither are differences found in terms of risk and risk adjusted performance these results are attributed to the existence of performance variation within each strategic group a dynamic model of competitive repositioning is proposed which helps integrate the findings from the study

prospect theory and the risk return relation some belgian evidence in this study fiegenbaum and thomas s application of prospect theory to empirically derived risk return relations was replicated and extended with belgian accounting data four profitability varia

the future of economics the appropriately educated in pursuit of the knowable thispaper arguesthat currently significant changeistakingplaceineconomics because 1 technological changes in analytic and computing methods are opening up new avenues of study and 2 the low hanging fruit from previous approaches and methods have already been picked it offers a vision of the future of economics that sees economists focusing less on the study of infinitely bright agents operating in information rich environments and more on the study of reasonably bright individuals operating in information poor environments agent based models and computer analysis of data will increase in importance and deductive analytics will decrease in importance

a re examination of the meaning and importance of supplier induced demand abstract despite twenty years of work on supplier induced demand sid there has been little discussion or investigation of how inducement affects the health of patients we develop a conceptual framework for sid which includes the clinical effectiveness of the health services utilized as well as the effectiveness of the agency relationship between the physician and the patient the framework is used to identify several conceptually distinct types of utilization each with its own policy implications which have been intermingled in the sid literature after examining each type of utilization we conclude that a continued focus by health economists on the phenomenon of inducement even within an extended conceptual framework may be too limited for the development of policies regarding health service utilization

equity and equality in health and health care this paper explores four definitions of equity in health care equality of utilization distribution according to need equality of access and equality of health we argue that the definitions of need in the literature are inadequate and propose a new definition we also argue that irrespective of how need and access are defined the four definitions of equity are in general mutually incompatible in contrast to previous authors we suggest that equality of health should be the dominant principle and that equity in health care should therefore entail distributing care in such a way as to get as close as is feasible to an equal distribution of health

optimal allocation with costly verification consider a principal with a good to allocate among a number of agents each of whom wants the good each agent i knows the value the principal receives if he gives the good to i but the principal does not this value need not coincide with the value to i of getting the good the principal can verify the agents private information at a cost but cannot use transfers there are a number of economic environments of interest that roughly correspond to this scenario we discuss a few below how does the principal maximize the expected gain from allocating the good less the costs of verification we characterize optimal mechanisms for such settings we construct an optimal mechanism with a particularly simple structure which we call a favored agent mechanism there is a threshold value and a favored agent say i if each agent other than i reports a value for the good below the threshold then the good goes to the favored agent and no verification is required if some agent other than i reports a value above the threshold then the agent who reports the highest value is checked this agent receives the good if and only if his claims are verified and the good goes to any other agent otherwise in addition we show that every optimal mechanism is essentially a randomization over optimal favored agent mechanisms in this sense we can characterize the

prospect theory and the risk return association an empirical examination in 85 industries a new sample of 85 industries about 3 300 firms defined in terms of homogenous products provides strong evidence that prospect theory can explain the tradeoff between two of the most researched parameters in evaluating organizations namely risk and return in particular organizations below their target level are found to be risk takers hl while organizations above their target level are risk averters h2 moreover the below target tradeofl was generally steeper than the above target with a median below to above slope ratio of about 3 l h3 risk and return are probably the two single parameters most researched by the various and related disciplines of economics finance and management although each one of them has looked at these two parameters from different aspects and for different purposes they have provided a wide understanding of these two factors in the contest of the theory of the firm the purpose of this study is to look closely at the relationship between these two important parameters in order to understand firm s competitive behavior using the recent development in behavioral decision theory namely prospect theory kahneman and tversky 1979 although march 1988 has criticized the discipline of management for its later adaptation in considering risk elements for evaluating organization performance and decision making processes recent studies e g bettis 1981 rumelt 1974 singh 1986 jemison 1987 and baird and thomas 1986 have paid considerable attention to risk aspects in evaluating the performance of firms in general these studies have concluded that the characteristics of the firms environment strategy and implementation processes have significant and important influence on the firm s risk level and its associated rate of return bowman 1980 has looked closely at 85 u s industries and explored the

toward a model of risk in declining organizations an empirical examination of risk performance and decline scholars who study organizational decline have argued that declining organizations reduce or eliminate their riskier activities such as innovation further they cite reduced risk taking as a primary contributor to further decline scholars with an interest in risk per se come to the opposite conclusion low performing firms often take more risks than other firms and such risks reduce subsequent performance this study attempts to resolve these conflicting views by examining the risk of firms in decline our model based on cyert march s cyert r m j g march 1963 a behavioral theory of the firm prentice hall englewood cliffs nj behavioral theory of the firm includes six basic variables 1 performance 2 slack 3 aspirations 4 expectations 5 risk income stream uncertainty and 6 organization size as a measure of decline the estimated model includes prior levels of risk and performance in the risk and performance equations respectively as controls this study uses data on 34

strategic reference point theory how can executives achieve a match between expected external environmental conditions and internal organizational capabilities that facilitates improved performance this paper argues that a firm s choice of reference points can help achieve strategic alignment capable of yielding improved performance and potentially even a sustainable competitive advantage building upon prospect theory and other relevant theoretical perspectives the strategic reference point srp matrix is developed a firm s srp consists of three dimensions internal capability external conditions and time a theory is developed which posits an optimal srp structure and propositions are offered which articulate the expected relationships between the srp strategic choice behavior and firm performance the paper closes with some suggestions for using strategic reference points in both research and practice

reimbursing health plans and health providers efficiency in production versus selection the tradeoff between an insurer s or medical provider s incentives to select good risks and to produce efficiently is governed by the supply price analog to the demand price tradeoff between moral hazard and risk aversion under a variety of models the optimum supply price is a mixture of capitation and fee for service payments empirical literature shows that pure capitation payment leaves strong incentives for selection that are acted upon the presence of contracting costs in a rothschild stiglitz model means a limited pooling equilibrium can exist and that poor risks will not be at their preferred outcome

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

fixed versus variable reference points in the risk return relationship abstract researchers using prospect theory in explaining bowman s risk return paradox have typically assumed a single fixed reference point normally the industry median in defining two decision contexts gain and loss our findings suggest this reference point is elevated above industry median performance and varies over time and across industries independent of industry performance consistent with the prospect theory firms above this reference point were risk averse and those below it were risk seeking we found no evidence of a second survival reference point for firms in trouble

performance feedback and firm risk taking the moderating effects of ceo and outside director stock options we contribute to the behavioral theory of the firm and the behavioral agency model by developing a theoretical framework that predicts the differential interaction effects of performance feedback and values of stock option grants of multiple agents on firm risk taking we explain how chief executive officers ceos versus outside directors awarded with stock option grants perceive negative or positive deviations from prior performance we argue that in a negative attainment discrepancy context high values of option grants will increase the risk aversion of ceos who already bear excessive employment and compensation risks resulting in less risk taking however it will enhance the risk taking propensity of influential outside directors who increase monitoring and support for risky projects because their risk preferences are better aligned with those of shareholders in a positive attainment discrepancy context high values of option grants will amplify risk aversion in both ceos and outside directors who

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

optimal allocation without transfer payments abstract often an organization or government must allocate goods without collecting payment in return this may pose a difficult problem either when agents receiving those goods have private information in regards to their values or needs in this paper we find an optimal mechanism to allocate goods when the designer is benevolent while the designer cannot charge agents he can receive a costly but wasteful signal from them we find conditions for cases in which ignoring these costly signals by giving agents equal share or using lotteries if the goods are indivisible is optimal in other cases those that send the highest signal should receive the goods however we then show that there exist cases where more complicated mechanisms are superior also we show that the optimal mechanism is independent of the scarcity of the goods being allocated

variable risk preferences and adaptive aspirations abstract observations of human decision making indicate that risk preferences depend on the values of possible outcomes relative to levels of aspiration a model of such variable risk preference is specified it suggests that some risk averse behavior may result from a human tendency to focus on targets and from the adaptation of those targets to experience rather than from a fixed trait of risk aversion in addition the model shows how risk preferences varying around adaptive aspirations produce both a greater long run likelihood of survival and a higher average return for survivors than do fixed risk preferences

pandering to persuade a principal chooses one of multiple projects or an outside option an agent is privately informed about the projects benets and shares the principal s preferences except for not internalizing her value from the outside option we show that for moderate outside option values strategic communication is characterized by pandering the agent biases his recommendation toward conditionally better looking projects even when both parties would be better o with some other project a project that has lower expected value can be conditionally better looking we develop some comparative statics of pandering pandering is also induced by an optimal mechanism without transfers

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

note further tests of aspiration level effects in risky choice behavior this note extends the work reported in payne laughhunn and crum payne j w d j laughhunn r crum 1980 translation of gambles and aspiration level effects in risky choice behavior management sci 26 1039 1060 on the need to incorporate a target return reference point or aspiration level concept in the analysis of risky choice behavior two experiments are reported the first experiment provides a more complete test of the model of reference point effects developed by payne laughhunn and crum a translation of outcomes procedure which adds a constant to all outcomes was used to vary the relationship of pairs of gambles to an assumed target or reference point the results fully support the model the second experiment provides evidence of the conceptual validity of the model by using explicit instructions to vary the target levels of managers while holding gamble values constant

collusion and biased tournaments abstract tournaments are vulnerable to collusion this paper finds that biased tournaments can be more effective at preventing collusion than unbiased ones when agents can collude to exert low effort introducing some bias into tournaments generates opposite effects on favored and disfavored agents respective incentives to exert high effort and provides strong incentives for the favored agent to deviate from collusion introducing an adequate degree of bias reduces the principal s incentive cost for preventing collusion however granting excessive bias instead increases the incentive cost we show that the optimal level of bias can be endogenously determined

the ubiquity of habits and rules under what circumstances is it necessary or convenient for an agent to rely on habits or rules this paper focuses on the types of decision situations giving rise to their use even optimization requires the deployment of rules and for this reason mainstream economics cannot legitimately ignore these questions the argument is that habits and rules are ubiquitous in human activity in a new taxonomy seven types of decision situations are considered classified according to the type of information problem involved neither neoclassical nor behavioral economics can provide a complete account of the bases of habits or rules in these cases copyright 1997 by oxford university press

variable organizational risk preferences tests of the march shapira model march and shapira s 1987 1992 model of managers risk preferences allows for shifts in attention between survival and aspiration levels our study provides initial empirical tests of their model

an institutional and evolutionary perspective on health economics neoclassical theoretical approaches dominate modern health economics however the peculiarities of healthcare provision are so unusual that neoclassical theory is especially unsuited to the area even mainstream health economists often abandon paretian welfare considerations to focus on needs instead problems relating to uncertainty and externalities are also widely acknowledged this article shows that there are additional important pecularities of healthcare that are relatively neglected in the literature some of these concern healthcare needs while health itself is a universal need needs for healthcare provision are largely involuntary varied and idiosyncratic these issues have important consequences for the planning of healthcare systems and the extent of transaction costs in any market based system these factors combined with the inherent dynamism of modern healthcare needs and capabilities make institutional and evolutionary approaches especially suitable for healthcare economics

implementation with partial provability we extend implementation theory by allowing the social choice function to depend on more than just the preferences of the agents and allowing agents to support their statements with hard evidence we show that a simple condition on evidence is necessary for the implementation of a social choice function f when the preferences of the agents are state independent and sufficient for implementation for any preferences including state dependent with at least three agents if the social planner can perform small monetary transfers beyond those called for by f if transfers can be large f can be implemented in a game with perfect information when there are at least two players under a boundedness assumption for both results transfers only occur out of equilibrium the use of evidence enables implementation which is robust in the sense that the planner needs little information about agents preferences or beliefs and agents need little information about each others preferences our results are robust to evidence forgery at any strictly positive cost

information constrained insurance the revelation principle extended abstract private information induced incentive constraints can cause allocations to diverge from full information optimal allocations often in the direction of limited insurance but can bring unanticipated anomalies related plausible contract exclusion restrictions can be damaging in welfare terms more generally private information optimal allocations can be sensitive to the information structure suggesting that the latter be specified with an eye toward realism as well as tractability in an effort to make tractability less of a constraint the paper shows how two apparently difficult information structures a costly state verification environment and a multiperiod multilateral private information environment can be handled theoretically by revelation principle methods the paper also shows how solutions can be generated numerically

social accountability to contain corruption in this paper we investigate the welfare properties of simple reappointment rules aimed at holding public officials accountable and monitoring their activity public officials allocate budget resources to various activities delivering public services to citizens officials have discretion over the use of resource and can divert some of them for private ends due to a liability constraint zero diversion can never be obtained in all states the optimal reappointment mechanism under complete information is shown to exhibit some leniency in the absence of information a rule with random verification in a pre announced subset is shown to be optimal surprisingly most common rules make little use of hard information about service delivery when available by way of contrast requesting that the public official defend his record publicly can be very useful if service users can refute false claims with cheap talk complaints the first best complete information outcome can be approached

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

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

testing a causal model of corporate risk taking and performance the determinants of organizational risk taking and its impact on economic performance are critical issues in strategic management using a model that included risk performance performance expecta