spillovers investment incentives and the property rights theory of the firm this paper examines the property rights theory of the firm when a manager s relationship specific investment can be partially appropriated by the owner of an asset even if cooperation breaks down the investments of non owners may then be devalued but are seldom wholly lost to the owner with such spillovers the outside option principle can be incorporated into the grossman hart moore framework without implying that ownership demotivates enriched predictions on the determinants of integration emerge

control rights in complex partnerships this paper develops a theory of the allocation of authority between two players who are in a complex partnership that is a partnership which produces impure public goods we show that the optimal allocation depends on technological factors the parties valuations of the goods produced and the degree of impurity of these goods when the degree of impurity is large control rights should be given to the main investor irrespective of preference considerations there are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party s investment is more important than the other party s if the parties investments are of similar importance and the degree of impurity is large shared authority is optimal with a greater share going to the low valuation party if the importance of the parties investments is similar but the degree of impurity is neither large nor small the low valuation party should receive sole authority we analyze an extension in which side payments are infeasible we check for robustness of our results in several dimensions such as allowing for multiple parties or for joint authority and apply our results to interpret a number of complex partnerships including those involving schools and child custody jel d02 o23 h41 l31

the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

racial discrimination in the labor market theory and empirics we review theories of race discrimination in the labor market taste based models can generate wage and unemployment duration differentials when combined with either random or directed search even when strong prejudice is not widespread but no existing model explains the unemployment rate differential models of statistical discrimination based on differential observability of productivity across races can explain the pattern and magnitudes of wage differentials but do not address employment and unemployment at their current state of development models of statistical discrimination based on rational stereotypes have little empirical content it is plausible that models combining elements of the search models with statistical discrimination could fit the data we suggest possible avenues to be pursued and comment briefly on the implication of existing theory for public policy jel j15 j31 j64 j71

standard promotion practices versus up or out contracts this article develops a theory concerning the choice between standard promotion practices and up or out contracts our theory is based on asymmetric learning and promotion incentives we find that firms employ up or out contracts when firm specific human capital is low and standard promotion practices when it is high we also find that if commitment to a wage floor is feasible and effort provision is important up or out is employed when low and high level jobs are similar these results are consistent with many of the settings in which up or out is typically observed such as law firms and academia

discrimination in an equilibrium search model i construct an equilibrium search model where some employers have a distaste for hiring minority workers and show that this bias results in economic discrimination against minority workers although only unprejudiced firms hire minority workers minority workers receive lower wages than workers not facing discrimination whenever any employers in the market have a distaste for minority workers one implication of the model is that gender or racial wage differentials understate the utility loss from discrimination in addition the wages of minority workers increase when their proportion increases in the labor market

building and managing facilities for public services abstract we model alternative institutional arrangements for building and managing facilities for provision of public services including the use of the private finance initiative pfi by exploring the effects on innovative investment activity by providers the desirability of bundling the building and management operations is analyzed and it is considered whether it is optimal to allocate ownership to the public or the private sector we also examine how the case for pfi is affected by the voluntary or automatic transfer of ownership from the private to the public sector when the contract expires asset specificity and service demand risk play critical roles

information gathering transaction costs and the property rights approach the property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives while bargaining is ex post efficient in contrast transaction cost economics emphasizes ex post inefficiencies in the present paper a party may invest and acquire private information about the default payoff that it can realize on its own inefficient rent seeking can overturn prominent implications of the property rights theory in particular ownership by party b may be optimal even though only the indispensable party a makes an investment decision

noncooperative bargaining hostages and optimal asset ownership this paper re examines the effect of asset ownership on investment decisions for a joint relationship in the absence of contracts on investment levels it obtains some results which contradict findings by sanford j grossman oliver d hart and john moore in particular it finds that the loss of ownership of an asset may increase the asset loser s investment incentive the difference between this paper and those authors papers stems from the different interpretations of the roles of the threat point and outside options in bargaining this paper also clarifies the role of relationship specific investments as a cause of integration copyright 1998 by american economic association

the cost of servicing demand deposits the cost of the demand deposit service interests bankers because it affects their profits it interests students of banking and industrial organization because it figures in scale economies it interests monetary analysts because it may affect the supply or demand for money the former through deposit service charges which may affect the public s currency deposit ratio and the latter through the implicit yield on deposits 2 6 7 10 but the cost is difficult to analyze because the complete cost function of the banking firm is subadditive meaning that the cost of jointly providing several services is less than the sum of the costs of providing those services separately economies of scope 3 in terms of the recently published research by panzar and willig see 9 for instance the demand deposit service corresponds to a particular boundary ray in the output space and this part of the associated cost surface is unobservable for in practice the demand deposit service never varies by itself here we obtain the demand deposit cost function by process analysis that is we decompose the service into its constituent activities and ascertain the minimum labor time capital equipment and space required for each activity in this way we

optimal ownership of public goods reconsidered consider a non governmental organization ngo that can invest in a public good should the government or the ngo own the public project in an incomplete contracting framework with split the difference bargaining besley and ghatak 2001 argue that the party who values the public good most should be the owner we demonstrate the robustness of their insight when the split the difference rule is replaced by the deal me out solution our finding is in contrast to the private good results of chiu 1998 and de meza and lockwood 1998 who show that the optimal ownership structure crucially depends on whether the split the difference rule or the deal me out solution is used

the signaling role of promotions further theory and empirical evidence an extensive theoretical literature investigates the role of promotions as a signal of worker ability we extend the theory by focusing on how the signaling role of promotion varies with education and then investigate the resulting predictions using a longitudinal data set that contains detailed information concerning the internal labor market history of a medium sized firm in the financial services industry our results support signaling being important for understanding the differences between promotion practices concerning bachelor s and master s degree holders while the evidence concerning the importance of signaling for high school graduates and phds is mixed

government versus private ownership of public goods there has been a dramatic change in the division of responsibility between the state and the private sector for the delivery of public goods and services in recent years with an increasing trend toward contracting out to the private sector and public private partnerships this paper analyzes how ownership matters in public good provision we show that if contracts are incomplete then the ownership of a public good should lie with a party that values the beneets generated by it relatively more this is true regardless of whether this party is also the key investor or other aspects of the technology

public service motivation as an argument for government provision a public service motivation psm inclines employees to provide effort out of concern for the impact of that effort on a valued social service though deemed to be important in the literature on public administration this motivation has not been formally considered by economists when a psm exists this paper establishes conditions under which government bureaucracy can better obtain psm motivated effort from employees than a standard profit maximizing firm the model also provides an efficiency rationale for low powered incentives in both bureaucracies and other organizations producing social services 2000 elsevier science s a all rights reserved

power in a theory of the firm transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this within the contractibility assumptions of this literature we identify a potentially superior mechanism the regulation of access to critical resources access can be better than ownership because i the power agents get from access is more contingent on their making the right investment and ii ownership has adverse effects on the incentive to specialize the theory explains the importance of internal organization and third party ownership

asymmetric tournaments equal opportunity laws and affirmative action some experimental results this paper assesses whether affirmative action programs and equal opportunity laws affect the output of economic agents more precisely we find that equal opportunity laws and affirmative action programs always benefit disadvantaged groups equal opportunity laws also increase the effort levels of all subjects and hence the profits of the tournament administrator usually the firm the effects of affirmative action programs depend on the severity of a group s cost disadvantage when the cost disadvantage is severe these programs significantly increase effort levels and hence profits the opposite is true when the disadvantage is slight

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

glass ceilings or sticky floors statistical discrimination in a dynamic model of hiring and promotion i show that when two groups differ in i their average skill level ii the precision with which they can signal their skill prior to entering the labour market and or hi the frequency with which they have the opportunity to signal their skill prior to entering the labour market then even if firms become increasingly informed regarding each worker s skill over time equally skilled workers from different groups will have different likelihoods of making it to top jobs in the economy even though there is no discrimination when it comes to promotion to these top jobs in 1995 95 of senior level managers in the top fortune 1000 industrial and 500 service companies in the us were male 97 of whom were also white federal glass ceiling commission 1995 in the uk females make up just 8 3 of the senior judi ciary 9 7 of top business leaders and 9 1 of newspaper editors eoc 2005 at the end of the 2004 american football season only 5 of the 32 nfl head coaches were black and only 2 of the 117 division i college football teams had black head coaches rosenburg 2004 in 1999 there were only 68 female full professors at the 120 phd granting economics departments in the us cswep 1999 this severe underrepre sentation of females and minorities at the highest levels of occupational achievement throughout a wide range of occupations has often been referred to as the glass ceiling 1

job assignments signalling and efficiency this article analyzes a model in which information about a worker s ability is only directly revealed to the firm employing the worker other firms however use the worker s job assignment as a signal of ability three results recur throughout the analysis first wage rates tend to be more closely associated with jobs than with ability levels second there is frequently an inefficient assignment of workers to jobs i e even when a firm has complete information about a worker s output third the severity of this inefficiency tends to be negatively correlated with the level of firm specific human capital in the economy

affirmative action and labor markets affirmative action remains controversial the controversy extends from the original antidiscrimination legislation and its interpretation to estimates of affirmative action s effect on the labor market this paper provides a progress report on our recent efforts at detecting the effects of affirmative action on minority wages and employment although we find a substantial increase in wages for black men and black women over our sample period the timing of these wage changes is surprising most of the wage gains came prior to 1974 before the establishment of an effective monitoring structure for affirmative action indeed when the powers of the eeoc and ofcc are greatest the wage effects for young blacks are somewhat perverse using eeo 1 reports we find a major shift in black employment toward firms most vulnerable to the monitoring and potential sanctions of the affirmative action programs as with wages the shift in minority employment came prior to the expansion of the powers and budgets of the ee

will affirmative action policies eliminate negative stereotypes a key question concerning affirmative action is whether the labor market gains it brings to minorities can continue without it becoming a permanent fixture in the labor market the authors argue that this depends on how the policy affects employers beliefs about the productivity of minority workers they study the joint determination of employer beliefs and worker productivity in a model of statistical discrimination in job assignments the authors prove that even when identifiable groups are equally endowed ex ante affirmative action can bring about a situation in which employers correctly perceive the groups to be unequally productive ex post copyright 1993 by american economic association

what do nongovernmental organizations do nongovernmental organizations are one group of players who are active in the efforts of international development and increasing the welfare of poor people in poor countries nongovernmental organizations are largely staffed by altruistic employees and volunteers working towards ideological rather than financial ends their founders are often intense creative individuals who sometimes come up with a new product to deliver or a better way to deliver existing goods and services they are funded by donors many of them poor or anonymous yet these attributes should not be unfamiliar to economists development ngos like domestic nonprofits can be understood in the framework of not for profit contracting it is easy to conjure up a glowing vision of how the efforts of ngos could focus on problem solving without getting bogged down in corruption or bureaucracy but the strengths of the ngo model have some corresponding weaknesses in agenda setting decision making and resource allocation we highlight three factors in explaining the increased presence of ngos in the last few decades a trend towards more outsourcing of government services new ventures by would be not for profit entrepreneurs and the increasing professionalization of existing ngos

classic promotion tournaments versus market based tournaments as initially formulated in the seminal analysis of lazear and rosen 1981 an important perspective for understanding the role of promotions in firms is the tournament perspective that is a promotion and in particular the wage increase associated with a promotion is a prize that serves as an incentive for workers to exert effort and take other actions beneficial to the firm such as the accumulation of human capital in this paper i consider whether the best way to model promotion tournaments is by having firms commit to prizes ex ante as in lazear and rosen s initial formulation or whether promotion prizes should be modeled as arising from the signaling role of promotions and the competition between firms for promoted workers

promotion signaling discrimination and positive discrimination policies this article studies discrimination in a model in which promotions are used as signals of worker ability the model can account for statistical and taste based discrimination in the short run a positive discrimination policy is beneficial for workers in the middle of the ability distribution because these workers are promoted if and only if the policy is in place instead workers of either high or low ability suffer from the policy in the long run the policy benefits all targeted workers the model can explain empirical findings about the effects of a gender quota on the boards of norwegian companies

job discrimination market forces and the invisibility hypothesis the invisibility hypothesis holds that the job skills of disadvantaged workers are not easily discovered by potential new employers but that promotion enhances visibility and alleviates this problem then at a competitive labor market equilibrium firms profit by hiding talented disadvantaged workers in low level jobs consequently those workers are paid less on average and promoted less often than others with the same education and ability as a result of the inefficient and discriminatory wage and promotion policies disadvantaged workers experience lower returns to investments in human capital than other workers

promotion turnover earnings and firm sponsored training i develop a model in which different technological conditions lead to distinct equilibria with different patterns in labor mobility promotion earning distribution and provision of firm sponsored training key is the asymmetric learning of workers characteristics because of the information that is conveyed to the market by promotion firms have incentives to adopt strategic promotion policies which result in different patterns in the use of internal labor market the theory explains well the differences between the japanese and the united states labor markets

public versus private ownership quantity contracts and the allocation of investment tasks abstract the government wants a certain good or service to be provided should the required assets be publicly or privately owned or should a partnership be formed building on the incomplete contracting approach we argue that the initially specified quantity of an ex ante describable basic good can have important effects on investment incentives which has been neglected in the literature so far we also study how the tasks of investing in quality improvements and cost reductions should be assigned we show how the optimal contracts and governance structures depend on the exogenous parameters of the model such as the nature of the investments and the parties bargaining powers

does asset ownership always motivate managers outside options and the property rights theory of the firm this paper studies the grossman hart moore ghm property rights approach to the theory of the firm under alternating offers bargaining when managers can pursue other occupations while negotiating over the division of the gains from cooperation the ghm results obtain if taking the best alternative job terminates bargaining outcomes are very different sometimes an agent with an important investment decision should not own the assets he works with sometimes independent assets should be owned together sometimes strictly complementary assets should be owned separately

nature of human capital technology and ownership of public goods abstract besley and ghatak 2001 show that a public good should be owned by the agent who values the public good the most irrespective of technological factors in this paper we relax their assumptions in a natural way by allowing the agents to be indispensable and we show that the relative valuations are not the sole determinant of an optimal ownership structure but also the nature of human capital and technology matter

the economics of child custody i develop a model of marriage in which spouses decide on investments in child quality during marriage and on the allocation of child custody should they divorce the custodial allocation determines the share of the marital surplus each spouse appropriates which in turn influences spouses investment incentives the custodial allocation therefore has both distributional and efficiency consequences i derive the equilibrium investments and optimal custodial allocation and identify three channels through which making divorce easier affects child welfare investments in child quality during marriage the likelihood of divorce and the allocation of custody if divorce occurs

competition and incentives with motivated agents a unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission as opposed to profit as an organizational goal such mission oriented organizations are frequently staffed by motivated agents who subscribe to the mission this paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency matching economizes on the need for high powered incentives it can also however entrench bureaucratic conservatism and resistance to innovations the framework developed in this paper is applied to school competition incentives in the public sector and in private nonprofits and the interdependence of incentives and productivity between the private for profit sector and the mission oriented sector through occupational choice jel d23 d73 h41 l31 the late twentieth century witnessed a historic high in the march of market capitalism with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods moreover this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms when it comes to the provision of collective goods no such consensus has emerged debates about the relative merits of public and private provision still dominate this paper suggests a contracting approach to the provision of collective goods it focuses on two key issues how to structure incentives and the role of competition between providers at its heart is the idea that organizations that provide collective goods cohere around a mission 2 thus production of collective goods can be viewed as mission oriented

government versus private ownership of public goods the role of bargaining frictions abstract the government and a non governmental organization ngo can invest in the provision of a public good who should be the owner of the public project in an incomplete contracting model in which ex post negotiations are without frictions the party that values the public good most should be the owner regardless of technological aspects however under the plausible assumption that there are bargaining frictions the optimal ownership structure depends on technological aspects and on the parties valuations we show that the differences between incomplete contracting models with public goods and private goods are thus smaller than has previously been thought

government mandated discriminatory policies theory and evidence we study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector government regulation allows native majority workers to be employed in the public sector with positive probability while excluding the minority from it we show that even when the public sector offers the highest wage rate it is still possible that the discriminated group is on average economically more successful the widening chinese malay wage gap in malaysia since the adoption of its new economic policy in 1970 supports our model

optimal ownership of public goods in the presence of transaction costs a non governmental organization ngo can make a non contractible investment to provide a public good only ownership can be specified ex ante so ex post efficiency requires reaching an agreement with the government besley and ghatak 2001 argue that the party with the larger valuation should be the owner we show that when transaction costs have to be incurred before the bargaining stage can be reached ownership by the government can be optimal even when the ngo has a larger valuation our finding also contrasts with the standard private good setup where the investing party i e the ngo should always be the owner

strategic promotion and compensation within a hierarchical firm structure this paper details how the composition of a worker s skills and the non observability of a worker s ability affect wage and promotion paths promotionbased compensation schemes derive naturally from the worker s asymmetrically observed ability promotion takes place over time and is inefficient since employers strategically exploit their knowledge of an able worker s ability conversely employers may be unable to efficiently demote and retain bad managers without paying bonuses employers are led to promote educated employees before their equally or more able but uneducated counterparts explanations for fast track promotions plans and other empirical regularities are provided

public goods and the hold up problem under asymmetric information an agent can make an observable but non contractible investment a principal then offers to collaborate with the agent to provide a public good private information of the agent about his valuation may either decrease or increase his investment incentives depending on whether he learns his type before or after the investment stage