a principal agent problem with heterogeneous demand distributions for a carbon capture and storage system abstract mechanism design problems optimize contract offerings from a principal to different types of agents who have private information about their demands for a product or a service we study the implications of uncertainty in agents demands on the principal s contracts specifically we consider the setting where agents demands follow heterogeneous distributions and the principal offers a menu of contracts stipulating quantities and transfer payments for each demand distribution we present analytical solutions for the special case when there are two distributions each taking two discrete values as well as a method for deriving analytical solutions from numerical solutions we describe one application of the model in carbon capture and storage systems to demonstrate various types of optimal solutions and to obtain managerial insights

sharing and anti sharing in teams compared to budget balanced sharing contracts anti sharing may improve the eciency of teams the anti sharer collects a fixed payment from all team members he receives the actual output and pays out its value to them if a team members becomes anti sharer he will be unproductive in equilibrium hence internal anti sharing fails to yield the first best outcome anti sharing is more likely to yield a higher team profit than sharing the larger the team the curvature of the production function or the marginal eort cost sharing is more likely to be better the greater the marginal product the cross partials of the production function or the curvature of the eort cost

a multiplicative model of optimal ceo incentives in market equilibrium this paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium by embedding a moral hazard problem into a talent assignment model by considering multiplicative specifications for the ceo s utility and production functions we generate a number of different results from traditional additive models first both the ceo s low fractional ownership the jensen murphy incentives measure and its negative relationship with firm size can be quantitatively reconciled with optimal contracting and thus need not reflect rent extraction second the dollar change in wealth for a percentage change in firm value divided by annual pay is independent of firm size and therefore a desirable empirical measure of incentives third incentive pay is effective at solving agency problems with multiplicative impacts on firm value such as strategy choice however additive issues such as perk consumption are best addressed through direct monitoring jel d2 d3 g34 j3

risk allocation and the costs and benefits of public private partnerships we study the agency costs of delegated public service provision focusing on the link between organizational forms and uncertainty at project implementation we consider a dynamic multitask moral hazard environment where the mapping between efiort and performance is ex ante uncertain but new information may come along during operations our analysis points out at the e ciency gains that bundling planning and implementation as under public private partnerships can bring in terms of better project design and lower operational costs bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design procedure technology on the cost of operations the compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which for high operational risk can make unbundling optimal in this context the use of private flnance can help re establishing the beneflt of bundling only if lenders have su cient expertise to help assessing project risks

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

socialism and the revenue maximizing leviathan the driving force in the government s progress from a capitalistic system to one with government ownership of capital and relative wage allocated labor socialism to a system involving inframarginal taxation of labor and government ownership of capital communism is the government s desire to increase current revenues 1 each step along the way sacrifices more private resource allocation and replaces it with direct governmental control the government might well realize that it lacks the knowledge to replicate these lost private functions accurately with the passage of time and the appearance of potentially useful technological innovations any losses resulting from this lack of knowledge increase these losses are an anticipated drain on future income a decision maker with a long time horizon and a secure position a low discount rate would find these prospective losses weighing heavily in his calculations and might never take the first step beyond capitalism a less fortunately placed decision maker facing domestic and foreign threats may find that current revenue requirements for internal and external defense and for payments made to supporters force him to mortgage the future for increased current revenue this decision maker may be tempted by socialism not for any ethical or political reasons but merely for the quick revenue returns it offers

delegating pricing decisions in competitive markets with symmetric and asymmetric information delegating pricing decisions to the salesforce has been a salient issue for marketing academics and practitioners we examine this issue in a competitive market using standard agency theory with symmetric and asymmetric information under symmetric information we find that the optimal contracts have a nice property that allows managers to reach the upper bound on firms profit by using either centralized or delegated pricing and hence there are no incentive based reasons to prefer centralized versus delegated contract types thus managers can focus on the design of the optimal incentive scheme without worrying about the contract type under asymmetric information we find that there always exists an equilibrium where all firms use centralized pricing that is either unique or payoff equivalent to equilibria that have a combination of contract types these results are robust to a large class of agent and market parameters however if restrictions are exogenously imposed on contract form or observability the above results are no longer true as in earlier work we demonstrate our results by providing explicit solutions under the holmstrom and milgrom 1987 framework

optimal contracts under adverse selection and moral hazard a continuous time approach this article presents a continuous time agency model in the presence of adverse selection and moral hazard with a risk averse agent and a risk neutral principal under the model setup we show that the optimal controls are constant over time and thus the optimal menu consists of contracts that are linear in the final outcome we also show that when a moral hazard problem adds to an adverse selection problem the monotonicity condition well known in the pure adverse selection literature needs to be modified to ensure the incentive compatibility for information revelation the model is applied to a few managerial compensation problems involving managerial project selection and capital budgeting decisions we argue that in the third best world the relationship between the volatility of the outcome and the sensitivity of the contract depends on interactions between the managerial cost and the firm s production functions contrary to conventional wisdom sometimes the higher the volatility the higher the sensitivity of the contract the firm receiving good news sometimes chooses safer projects or invests less than it does with bad news we also examine the effects of the observability of the volatility on corporate investment decisions copyright 2005 oxford university press

equity efficiency and insurance explaining the structure of miners wage payments in victorian county durham the rules governing payment of hewers wages in late nineteenth century durham coal mines were complex the authors goal in this paper is to provide an economic rationale for them five key features are identified payment by piece rate payment to pairs rather than to individuals indexation of the wage rate to coal price an imperfect earnings equalization system and randomized work assignment caviling the authors construct a model of these institutions explaining them as optimal responses to an environment in which output prices and seam quality are uncertain an d in which the monitoring of worker effort is costly copyright 1993 by royal economic society

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

auctioning incentive contracts this paper draws a remarkably simple bridge between auction theory and incentive theory it considers the auctioning of an indivisible project among several fi rms the firms have private information about their future cost at th e bidding stage and the selected firm ex post invests in cost reduct ion the authors show that 1 the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid 2 the winner faces a linear incenti ve contract 3 the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost and 4 the share of cost overruns borne by the winn er decreases with the winner s announced expected cost copyright 1987 by university of chicago press

perquisites risk and capital structure in a corporate agency problem perquisites and risk interact to produce novel complex comparative statics for example even if additional debt induces risk neutral insiders to increase risk they never seek to increase the market value of their stock instead insiders decrease the present value of their subsequent conditionally optimal perquisites also the firm s optimal capital structure includes a risky bond with an agreement to remove insiders whenever the bond defaults however the optimal sharing rule between corporate claimants cannot be supported solely by standard securities such as bonds stocks options and their hybrids

asset stock accumulation and sustainability of competitive advantage given incomplete factor markets appropriate time paths of flow variables must be chosen to build required stocks of assets that is critical resources are accumulated rather than acquired in strategic factor markets barney barney j 1986 strategic factor markets expectations luck and business strategy management sci october 1231 1241 sustainability of a firm s asset position hinges on how easily assets can be substituted or imitated imitability is linked to the characteristics of the asset accumulation process time compression diseconomies asset mass efficiencies inter connectedness asset erosion and causal ambiguity

strategic investment and timing of entry the authors introduce competition over entry time into a sequential output choice model to show how profit differences will be dissipated this resolves a problem in the standard stackelberg model that the order of moves is exogenously specified yet an earlier position in the order is usually preferred to a later one if capacity costs are not too low the authors solution applies even if firms cannot commit to sell their entire output introducing positive capacity costs slightly modifies the static stackelberg results since endogenous cost asymmetries arise the framework therefore partially rehabilitates the stackelberg model copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

knightian uncertainty and moral hazard abstract this paper presents a principal agent model in which the agent has imprecise beliefs we model this situation formally by assuming the agent s preferences are incomplete as in bewley 1986 2 in this setting incentives must be robust to knightian uncertainty we study the implications of robustness for the form of the resulting optimal contracts we give conditions under which there is a unique optimal contract and show that it must have a simple flat payment plus bonus structure that is output levels are divided into two sets and the optimal contract pays the same wage for all output levels in each set we derive this result for the case in which the agent s utility function is linear and then show it also holds if this utility function has some limited curvature

contract based motivation for keeping records of a manager s reporting and budgeting history this paper analyzes the role of the agent s bankruptcy constraints in multiperiod principal agent models with asymmetric information conditions are provided under which commitment to a long term contract involving n rounds of investment improves upon repetition of n identical single period contracts further when the agent s reservation wage is sufficiently low the optimal contract is always long term keeping records of a manager s history of reporting activity facilitates contracting since optimal contracts may require a link between past reports and future investments over a duration of two or more periods

the conditioning effect of time on firm survival an industry life cycle approach in an effort to reconcile theoretical blind spots we integrated research in technology management organizational ecology and evolutionary economics the central premise underlying the resultan

modeling the dynamics of strategic fit a normative approach to strategic change this study develops and tests a dynamic perspective on strategic fit drawing from contingency and resource based arguments in the strategy and organizational theory literatures we propose a distinctive analytical approach to identify environmental and organizational contingencies that should predict changes in a firm s strategy and the performance implications of such changes we test our model using extensive longitudinal data from over 4000 u s savings and loan institutions during a period when many s ls considered changing strategic direction the findings support our model of dynamic strategic fit specifically we find that 1 the timing direction and magnitude of strategic changes can be logically predicted based on differences in specific environmental forces and organizational resources and 2 organizations that deviated from our model s prediction of dynamic strategic fit i e changed more or changed less than our model prescribed experienced negative performance consequences we conclude by discussing the implications of our approach and findings for future research on strategic fit and strategic change copyright 2000 john wiley sons ltd

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

uncertainty risk and incentives theory and evidence uncertainty has qualitatively different implications than risk in studying executive incentives we study the interplay between profitability uncertainty and moral hazard where profitability is multiplicative with managerial effort investors who face greater uncertainty desire faster learning and consequently offer higher managerial incentives to induce higher effort from the manager in contrast to the standard negative risk incentive trade off this learning by doing effect generates a positive relation between profitability uncertainty and incentives we document empirical support for this prediction this paper was accepted by wei jiang finance

a two stage model of research and development with endogenous second mover advantages this paper describes a simple two stage model of research and development in which the winner of the research stage has the option of moving first in the development stage some unexpected results emerge in equilibrium the leader in the development stage invests less than each follower and is consequently least likely to collect the patent moreover the leader receives a lower expected payoff than each of the followers thus there are endogenous second mover advantages using a game of timing in which the identity of the stackelberg leader is determined to link the two stages i find that firms face quite different incentives in the research stage although the leader invests less than each follower in the research stage as well the leader enjoys higher expected revenue from the complete two stage game than does each follower the equilibrium is inefficient because there is a lag between the time at which research is completed and the time at which development is begun and because aggregate investment is inefficiently asymmetrically distributed across firms

the value of transparency in multidivisional firms we study internal incentives transparency and firm performance in multidivisional organizations two independent divisions of the same firm design internal incentives and decide whether to publicly disclose their performances in each division a risk neutral principal deals with a risk averse exclusive agent under moral hazard each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent we first study the determinants of the optimal principal agent contract with and without performance transparency then we show how effort spillovers affect the equilibrium communication behavior of each division both principals commit to disclose the performance of their agents in equilibrium when efforts are complements while no communication is the only equilibrium outcome when efforts are substitutes

preference representation and randomization in principal agent contracts abstract conditions on an agent s preferences that induce a demand for ex ante randomization are derived when the agent has constant absolute risk aversion in wealth but additive separable preferences in wealth and effort optimal contracts often require randomization under additive separability the principal can use randomization to exploit the interaction between incentive considerations and the agent s outside opportunities however when the agent has constant absolute risk aversion in wealth but multiplicative separable preferences participation and incentive considerations separate hence optimal contracts do not exhibit ex ante randomization

on nationalizing private property and the present value of dictators reply john lott and david reiffen 1986 argue that our explanation of socialism is both inconsistent with rational behavior on the part of government leaders and empirically unsupported they also assert that our revenuemaximizing inframarginal taxes are incorrectly specified we feel that their comments are a result of a misreading of our paper 1984 our primary concern was with the capture of the inframarginal rents of labor suppliers rather than the return on capital labor returns in a capitalistic society typically comprise 70 to 80 percent of income and are therefore a potentially large source of governmental wealth although in framing our argument in a way consistent with brennan and buchanan s 1980 framework we choose to evaluate alternative tax regimes such taxes actually take the form of a governmental labor monopsony all firms are nationalized and workers become government employees by choosing wages which just cover substance governmental profits are increased by what would be workers rent in a capitalistic economy although substance may vary from worker to worker the government would not know this variation and wages would realistically be set at a level sufficient to draw most of the population into the work force any variation in wages seen would reflect not differences in productivity in the usual sense but rather differing political pay offs according to the worker s service towards maintaining the political regime or conversely his potential to disrupt it the resulting wage structure would be independent of economic productivity and the government would have to rely on some form of directed labor allocation the resulting economy would correspond to the soviet model of communism with a total elimination of non governmental employment opportunities in western european countries socialism does not appear to be motivated by the desire to maximize governmental revenue but rather as part of an attempt to achieve employment or other political goals the existence of a private sector economy of a significant size precludes the exercise of monopsony power in the labor market it is interesting to note that these western socialized economies do not prohibit out migration coun

on nationalizing private property and the present value of dictators the empirical and theoretical results in this paper cast doubt upon the explanation of socialism advanced by gifford and kenney the empirical finding that socialism is inversely related to the degree of political instability is directly contrary to the prediction of their model

to build or not to build normative and positive theories of public private partnerships abstract this paper analyzes whether the two tasks of building infrastructures which are socially useful in providing public services and managing these assets should be bundled or not when performance contracts can be written both tasks should be performed altogether by the same firm if a better design of the infrastructure helps also to save on operating costs otherwise tasks should be kept apart and undertaken by different units in incomplete contracting environments we isolate conditions under which either the traditional form of public provision of services or the more fashionable public private partnership emerges optimally the latter dominates when there is a positive externality and the private benefits from owning assets are small enough finally we take a political economy perspective and study how incentive schemes are modified under the threat of capture of the decision makers much of the gains from bundling may be lost in this case

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

strategic incentives for innovations and market competition abstract we consider a principal agent model to provide a general analysis of how risk affects incentives of firms who invest in cost reducing r d and compete in the product market we specify the conditions under which higher risk reduces incentives of all firms we also examine the conditions under which an increase in risk may trigger opposite responses of rivals in the same industry some firms will strengthen while other firms will weaken the incentives provided to their agents this result holds regardless of the mode of competition in the product market cournot or bertrand as long as the rivals r d decisions are strategic substitutes it can generate new empirical implications and can provide an explanation for the lack of strong empirical support in the literature for a negative relationship between risk and incentives we also discuss policy implications regarding the effect of risk on the incentives to innovate and welfare

on the design of piece rate contracts we characterize the optimal piece rate contract in the canonical moral hazard setting with a wealth constrained risk averse agent the contract is shown to have a simple intuitive characterization in a structured but broad class of settings

career concerns contracts and effort distortions a two period career concerns model with symmetric information but uncertainty about each worker s ability is analyzed contracts are unobservable but incomes are observable it is shown that effort is distorted upward by contracts being unobservable and that the distortion depends positively on turnover

a theory of dynamic oligopoly ii price competition kinked demand curves and edgeworth cycles we provide game theoretic foundations for the classic kinked demand curve equilibrium and edgeworth cycle we analyze a model in which firms take turns choosing prices the model is intended to capture the idea of reactions based on short run commitment in a markov perfect equilibrium mpe a firm s move in any period depends only on the other firm s current price there are multiple mpe s consisting of both kinked demand curve equilibria and edgeworth cycles in any mpe profit is bounded away from the bertrand equilibrium level we show that a kinked demand curve at the monopoly price is the unique symmetric renegotiation proof equilibrium when there is little discounting we then endogenize the timing by allowing firms to move at any time subject to short run commitments we find that firms end up alternating thus vindicating the ad hoc timing assumption of our simpler model we also discuss how the model can be enriched to provide explanations for excess capacity and market sharing keiiwords tacit collusion markov perfect equilibrium kinked demand curve edgeworth cycle excess capacity market sharing endogenous timing

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

managerial incentive contracts with a production externality abstract a multi agent model is extended to examine the optimal incentive contract when a production externality is significant in team production a situation is described where relative performance evaluation is ineffective

existence of optimal mechanisms in principal agent problems we provide general conditions under which principal agent problems with either one or multiple agents admit mechanisms that are optimal for the principal our results cover as special cases pure moral hazard and pure adverse selection we allow multidimensional types actions and signals as well as both financial and non financial rewards our results extend to situations in which there are ex ante or interim restrictions on the mechanism and allow the principal to have decisions in addition to choosing the agent s contract beyond measurability we require no a priori restrictions on the space of mechanisms it is not unusual for randomization to be necessary for optimality and so it should be and is permitted randomization also plays an essential role in our proof we also provide conditions under which some forms of randomization are unnecessary

incumbent positioning as a determinant of strategic response to entry existing research has identified different firm characteristics that determine an incumbent s reaction toward market entrants this study widens the perspective from a firm s absolute attributes to its relative positioning within its competitive environment the hypotheses for the empirical analysis are derived from game theoretic models with either vertical or horizontal product differentiation in each of the two theoretical models two incumbents initially choose very different quality and variety levels respectively and move closer to the center when faced by entry of a competitor from the vertical differentiation model we predict a stronger price reduction by high quality firms in our empirical analysis we are using a novel dataset of the high quality restaurant market in germany to test the theoretical findings while the hypotheses with respect to adjustments of prices and varieties are supported we do not find empirical evidence for the predicted quality adjustment

salaries or piece rates on the endogenous matching of harvest workers and crops the objective of this paper is to determine whether the choice of payment schemes hourly vs piece rates is systematically related to the workers risk aversion and ability we derive the equilibrium relationship between agents risk aversion and ability and the power of incentives payment scheme in a market where many heterogeneous principals and agents are endogenously matched the equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice using confidential data from the national agricultural workers survey naws we find evidence of matching between agricultural workers and the riskiness of their jobs crops they harvest based on workers risk aversion and no matching based on ability when controlling for matching we find strong evidence that high risk averse workers choose hourly rates and low risk averse workers choose piece rates we also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker jel j33 d82 q12

the effectiveness of english auctions abstract we study the performance of the english auction under different assumptions about the seller s degree of bayesian sophistication we define the effectiveness of an auction as the ratio between the expected revenue it generates for the seller and the expected valuation of the object to the bidder with the highest valuation total surplus we identify tight lower bounds on the effectiveness of the english auction for general private values environments and for private values environments where bidders valuations are non negatively correlated for example when the seller faces 12 bidders who the seller believes have non negatively correlated valuations whose expectations are at least as high as 60 of the maximal possible valuation an english auction with no reserve price generates an expected price that is more than 80 of the value of the object to the bidder with the highest valuation

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

strategic managerial incentive compensation in japan relative performance evaluation and product market collusion in an oligopolistic product market shareholders strategically use information on rival firms performances when designing management incentive contracts when shareholders use industry performance information through relative performances evaluation rpe they evaluate their manager s effort more easily but hinder collusive behavior in the product market however when compensation is positively linked to the industry performance through strategic group performance evaluation sgpe the credibility of a manager s commitment to product market collusion increases and the sustainability of a collusive outcome increases i test how industry performance affects management incentive compensation using the data from 796 japanese firms during the period 1968 to 1992 the results show that management compensation is positively linked to industry profit suggesting the use of sgpe in management incentive compensation cross sectional analysis shows that the positive effect of industry profit on management compe

insurance within the firm we evaluate the allocation of risk between firms and their workers using matched employer employee panel data unlike previous contributions this paper focuses on idiosyncratic shocks to the firm which are the correct empirical counterpart of the theoretical notion of diversifiable risk we allow for both temporary and permanent shocks to output and find that firms absorb temporary fluctuations fully but insure workers against permanent shocks only partially risk sharing considerations can account for about 15 percent of overall earnings variability the remainder originating from idiosyncratic shocks to individual workers our welfare calculations indicate that firms are an important vehicle of insurance provision

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

testing agency theory with entrepreneur effort and wealth we develop a principal agent model in an entrepreneurial setting and test the model s predictions using unique data on entrepreneurial effort and wealth in privately held firms accounting for unobserved firm heterogeneity using instrumental variables techniques we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk effort increases with ownership and effort increases firm performance the magnitude of the effects in the cross section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity

simple cost sharing contracts we extend rogerson s 2003 intriguing analysis of the performance of simple procurement contracts to consider settings where the supplier s innate production cost is not necessarily distributed uniformly although the simple contract that rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely it can perform poorly when the larger cost realizations are relatively likely we show that in all settings under consideration though a fairly simple pair of contracts one that involves linear cost sharing and one that involves full cost reimbursement can always secure more than 73 of the gain achieved with a fully optimal contract

dynamic contracting with persistent shocks abstract in this paper we develop continuous time methods for solving dynamic principal agent problems in which the agent s privately observed productivity shocks are persistent over time we characterize the optimal contract as the solution to a system of ordinary differential equations and show that under this contract the agent s utility converges to its lower bound immiserization occurs unlike under risk neutrality the wedge between the marginal rate of transformation and a low productivity agent s marginal rate of substitution between consumption and leisure will not vanish permanently at her first high productivity report also the wedge increases with the duration of a low productivity report we apply the methods to numerically solve the mirrleesian dynamic taxation model and find that the wedge is significantly larger than that in the independently and identically distributed i i d shock case

piece rate contracts for other regarding workers when workers are paid with piece rates inequality arises naturally we consider workers who care about income comparisons and are either status seeking or inequality averse we identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise and also circumstances under which workers inequality attitudes lead firms to set lower piece rates than they would otherwise the key behavioral assumption for both of these results to hold when workers are identical is behindness aversion the property that changes in inequality matter more to the worker when he is behind than when he is ahead jel d01 j33 m52

dynamic contracts with moral hazard and adverse selection we study a novel dynamic principal agent setting with moral hazard and adverse selection persistent as well as repeated in the model an agent whose skills are his private information faces a finite sequence of tasks one after the other upon arrival of each task the agent learns its level of difficulty and then chooses whether to accept or refuse each task in turn and how much effort to exert although his decision to accept or refuse a task is publicly known the agent s effort level is his private information we characterize optimal contracts and show that the per period utility of the agent approaches his per period utility when his skills are publicly known as the discount factor and the time horizon increase

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

intertemporal price competition alternating price competition between firms selling differentiated products to nonhomogeneous consumers can yield two different types of equilibria one which we call disciplined arises when products are close substitutes another which we call spontaneous emerges when products are more differentiated in disciplined equilibria an implicit threat to cut price further in response to an initial price cut supports quite collusive outcomes which become less collusive as product differentiation increases in spontaneous equilibria no such threat is needed consumers in the smaller market tend to pay a higher price as do consumers served by the more efficient firm copyright 1990 by the econometric society

the equivalence of lending equilibria and signalling based insurance under asymmetric information i present a model in which a continuum of individuals have stochastic idiosyncratic income shocks complete insurance is physically feasible but unattainable due to an information asymmetry income shocks are observable only by the individuals receiving them any insurance institution must therefore rely on self reporting of income innovations two ways of achieving incentive compatible self reporting are presented the first is a debt market with an explicit lending restriction the second is an insurance contract that linearly filters a signal transmitted by individuals the two are then demonstrated to be identical equilibrium consumption fluctuates in a random walk which is inefficient given the physical potential for complete insurance but is efficient given the information constraints the results are complementary to those of green 1987 but permit more general stochastic processes of income to be analyzed serial correlation of income reduces the efficiency of the insurance

on the equivalence of general and specific control in organizations most principal agent relationships in firms are multidimensional in the presence of multiple tasks and multiple performance signals the contract between principal and agent not only has to motivate the agent but also has to direct the agent to allocate effort among different tasks the value of efforts for a specific task accrues not only through the principal s expected returns but also through its contribution to overall risk and therefore to the risk diversification of the task portfolio hence if the agent is risk averse multitask relationships can be considered as a portfolio problem coupled with incentive constraints we examine the relationship between specific control sc and general control gc for multitask principal agent problems under sc the principal observes the outcome of each individual task and uses this set of information for compensation under gc contracts are based only on the aggregate signal such as cumulative profits of all tasks we describe two sets of multitask problems for which gc and sc are equivalent that is contracts based only on aggregate performance signals impose the same incentives for the agent as a contract that is based on the outcome of each task the first multitask problem is characterized by homogeneous tasks in the second multitask problem all activities are perfect substitutes in the cost function of the agent the equivalence of sc and gc arises since gc provides insurance to the agent and yields the same overall risk premium as specific control moreover gc allows the principal to set the same incentives as sc since the marginal returns from gc are equal to the sum of the marginal returns for each task under sc the results described in this paper can serve as benchmarks where gc and sc are equivalent we show how the equivalence can be relevant for a variety of business situations such as the compensation of sales persons or managers at all hierarchy levels we also discuss the reasons when gc and sc differ suppose for instance that tasks are technologically separable and the precision of the performance of one task is low then the principal is forced under gc to adopt an incentive scheme that implements only a low effort across all tasks since the average precision matters under sc however the principal can tailor the optimal efforts to each task

the target incentive system vs the price incentive system under adverse selection and the ratchet effect abstract in a dynamic adverse selection type of principal agent relationship where the principal is committed over time to a particular incentive system with fixed structure but variable parameters but not to any intertemporal incentive scheme with both fixed structure and parameters the ratchet effect arises but varies with different incentive systems we show that compared with using prices as the sole planning mode the principal can attenuate the ratchet effect by stipulating targets as well as a result the target incentive system entails higher expected welfare than the price incentive system in a perfect bayesian equilibrium

revenue sharing in movie exhibition and the arrival of sound i introduction at least since adam smith economists have been intrigued by share contracts there has been a proliferation of models most of which tend to explain the share contract as resulting from some mix of optimal risk bearing and optimal effort motivation 1 a large number of researchers have attempted to test these models empirically sharecropping contracts not surprisingly are the most intensively examined the bibliography in knoeber 2000 but similar studies have been conducted in many other areas for example martin 1988 and lafontaine 1992 examine franchise arrangements hallagan 1978 investigates contracts used to lease gold claims leffler and rucker 1991 analyze a sample of private timber sale contracts goldberg and erickson 1987 study long term contracts for the sale of petroleum coke aggarwal and samwick 1999 investigate incentive contracts between firms and their executives and chisholm 1997 goldberg 1997 and weinstein 1998 all examine profit sharing contracts between fi lm companies and the talent this article differs in an important respect from most previous studies which analyze a cross section of contracts in an attempt to determine how or whether they vary according to the attributes of the contracting parties or the products being contracted for instead it investigates an area where a sudden technology shock led to the rapid and widespread replacement of one form of contracting by another the industry is the motion picture business and the shock was the arrival of sound during the silent film era the vast majority of first run feature films were rented to cinemas for flat daily or weekly payments within two years of the release of the first sound picture revenue sharing contracts were the norm and they remain the norm to this day 2 my goal is to investigate the degree to which the standard economic concerns moral hazard risk sharing and measurement problems can explain this change because the contracting parties remained the same the question becomes what was altered in the nature of the product or in its provision so as to have altered correspondingly the incentives faced i conclude the following first the advent of sound fundamentally changed the inputs live music and other acts supplied by the exhibitor and central to the show were replaced by a soundtrack and short sound films supplied by the film company the benefit of deterring exhibitor shirking through the use of flat rental fees which made the exhibitor full residual claimant declined accordingly the party whose effort makes the largest contribution to marginal product generally receives the largest proportion of the residual claims and in the decades following the arrival of sound the proportion of residual claims collected by film companies rose steadily in addition average revenue per film increased with sound whereas the cost of ensuring that exhibitors reported attendance revenue honestly done by locating a film company s representative in the theater remained the same the ex post division of revenue necessary for revenue sharing thus became cheaper on a per film basis finally uncertainty ab out the value in terms of expected attendance revenue of the early sound films appears to have raised the cost of negotiating lump sum rental fees and thus promoted experiments with revenue sharing however although this may have contributed initially it cannot explain the practice s persistence uncertainty about film values declined as talking films became better known ii the nature of the problem a film company contracts with an exhibitor so that they may jointly produce the final good a movie presentation 3 to that end each supplies essential inputs the film company provides the movie itself assembled from a variety of inputs and some sort of national advertising support the exhibitor provides the theater which consists of seating projection equipment a refreshment stand and other support activities and some form of local advertising

financing reputation and information disclosure quality in the chinese market abstractin this article we propose a theoretical model based on the reputation theory and hypothesize a positive relation between the information disclosure quality and the company s refinancing decision we collected data from the listed companies which refinances in shenzhen main board and sme board during 2006 2012 as a panel sample and tested the hypothesis empirically the results indicate that there exists a significant positive correction short term relation between refinancing decision and the information disclosure quality but in the long term the relationship between the information disclosure quality and refinancing decision is not significant

defending against rival innovation we analyze how an incumbent defends its competitive advantage with a focus on the under examined methods of actively defending against the threats posed by rival innovation we describe delineate and analyze the set of such defenses and their likely effects the set of such defenses differs substantially from many standard defenses such as those aimed at defeating the threat of imitation the further study of these pre emptive innovation defenses is important because these defenses are different and because they can substantially affect the sustainability of firm profits and the pace of different of types of innovation

second mover advantages in the strategic adoption of new technology under uncertainty abstract this paper introduces technological uncertainty into a timing game of new technology adoption it is shown that the timing neither necessarily involves first mover advantages in precommitment equilibria reinganum review of economic studies xlviii 1981 395 405 nor rent equalization due to the threat of preemption fudenberg and tirole review of economic studies lii 1985 383 401 rather there may be second mover advantages because of informational spillovers furthermore the model predicts that the equilibrium payoffs will typically be discontinuous and non monotonic in the probability that the new technology is profitable a welfare analysis reveals several market failures and suggests that policy intervention should adequately depend on the nature of uncertainty and the rate of technological progress

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

individual preferences organization and competition in a model of r d incentive provision abstract understanding the organization of rd 2 knowledge is not perfectly appropriable 3 scientists are responsive to both monetary and non monetary incentives and 4 firms compete on the product market we show that both knowledge spillovers and market competition affect the incentives given to scientists and these effects interact first high knowledge spillovers lead firms to soften incentives when product market competition is high and to strengthen incentives when competition is low second the relationship between the intensity of competition and the power of incentives is u shaped with the exact shape depending on the degree of knowledge spillovers we also show that the performance contingent pay for both applied and basic research increases with the non pecuniary benefits that scientists obtain from research while the fixed component decreases we relate our findings to the existing empirical evidence and also discuss their implications for management and public policy

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

the dependence of pay performance sensitivity on the size of the firm i analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm s shareholders i use a simple agency model to motivate an econometric model of this relationship estimating this model on chief executive officer ceo compensation data using nonlinear least squares i determine that pay performance sensitivity as defined by jensen and murphy 1990b appears to be approximately inversely proportional to the square root of firm size however measured i also analyze the properties of pay performance sensitivity for teams of executives working for the same firm and show it to have similar properties as ceo pay performance sensitivity

project characteristics incentives and team production we develop a model to show how agency conflicts free rider effects and monitoring costs interact to affect optimal team size and workers incentive contracts team size increases with project risk decreases with profitability and decreases with monitoring costs as a proportion of output our predictions are consistent with empirical evidence that firm specific risk has increased over time average corporate earnings have declined and firms organizational structures have also flattened the predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams further firms with relatively more intangible assets where monitoring costs are likely to be higher are smaller optimal incentive intensities decrease with risk and increase with profitability the endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

career concerns monetary incentives and job design we study optimal incentive contracts when commitments are limited and agents have multiple tasks and career concerns the agent s career concerns are determined by the outside market we show that the principal might want to give the strongest explicit incentives to agents far from retirement to account for the fact that career concerns might induce behavior in conflict with the principal s preferences furthermore we show that maximized welfare might be decreasing in the strength of career concerns that optimal incentives can be positively correlated with various measures of uncertainty and that career incentives have strong implications for optimal job design

a dynamic game of r and d patent protection and competitive behavior a theory of dynamic optimal resource allocation to r and d in an n firm industry is developed using differential games this technique represents a synthesis of the analytic methods previously applied to the problem static game theory and optimal control the use of particular functional forms allows the computation and detailed discussion of the nash equilibrium in investment rules this paper addresses the problem of resource allocation to research and development among the important issues that a firm engaging in r and d must evaluate are uncertainty regarding the feasibility and profitability of a particular innovation the possibility of a protracted development period the possibility that a rival firm may innovate first capturing either a patent or a significant share of the new market the possibility that a rival firm may imitate the innovation and appropriate some of the profits in the new market in what follows we will develop a theory of optimal resource allocation to research and development which incorporates the aspects of r and d enumerated above we will use a dynamic game theoretic analysis determining the nash equilibrium strategies for n identical firms the availability of perfect patent protection is shown to accelerate development of the innovation and the effect of increasing rivalry is addressed the impact of increasing rivalry on nash equilibrium investment in r and d depends upon the degree of appropriability of rewards if patent protection is perfect then increasing the number of nash rivals results in increased r and d effort however when imitation is rewarded the opposite may be true finally some notions of competitive and perfectly competitive equilibrium are examined in the context of the model developed below

symposium on organizations and economics m t r ost production in modern economies occurs within organizations and this production is regulated only to a limited extent by prices the size of some of the largest organizations like general motors or ibm or att if managers didn t they would be replaced and firms that didn t maximize value wouldn t survive accordingly what went on inside the black box was mere detail the behavior of the firm could be described completely without knowledge of those details

managing local commons in developing economies an institutional approach abstract resource degradation has a profound influence on food sustainability of developing economies the breakdown of traditional institutions enhanced this problem and needs an institutional approach many of the traditional policies like regulation and taxation have failed to deliver the required benefits this paper uses principal agency theory to develop a criterion for incentive design three incentive structures are developed based on contractual agreements and restructured property rights that use the criterion two case studies were used to discuss the new institutional arrangement some practical implications of the mechanisms designed include linearity of incentive rules development of an effort reward matrix and gradual reinstatement of local governance