competition between exchanges a research agenda this paper describes open research questions related to the competition and market structure of financial exchanges and argues that only a combination of industrial organization and finance can satisfactorily attack these questions two examples are discussed to illustrate how the combination of these two approaches can significantly enrich the analysis the network externality puzzle which refers to the question of why trading for the same security is often split across trading venues and the impact of the multi sided character of financial exchanges on pricing and profitability

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

adverse selection and moral hazard with risk neutral agents abstract this paper surveys some recent developments of the literature on adverse selection and moral hazard in agency problems it is concerned with the case where both aspects coexist and both agents are income risk neutral it shows that in most cases the moral hazard aspect does not entail welfare losses compared to the pure adverse selection case it moreover analyses different ways using a single contract or a family of contracts of deriving the optimal contracts from the optimal pure adverse selection solution

coalition building in a spatial economy abstract we analyze the possibility and consequences of coalition formation among suppliers of retail services we first provide a framework in which producers of substitutes have an incentive to cluster in marketplaces to attract consumers dispersed in space owing to spatial externalities the resulting spatial equilibrium can be welfare suboptimal we characterize regimes in which we find too little and those in which there is too much agglomeration of firms we analyze the role of coalitions of firms e g initiated by a land developer in this framework and show that such coalitions can overcome the suboptimality of the decentralized spatial allocation

desirability of compatibility in the absence of network externalities i compare the incentives firms have to produce individual components compatible with components of other manufacturers instead of systems composed of components that are incompatible with components of competing manufacturers i show that even in the absence of positive consumption externalities network externalities prices and profits will be higher in the regime of compatibility equilibrium total surplus could be higher in either regime both regimes overprovide variety compared to the surplus maximizing solution in today s environment many products are complex specified by a long array of characteristics part of the decision of the firm is to choose if it should break this long array of features into two or more smaller parts and produce the products corresponding to the smaller arrays instead of the product that embodies the full array we will call the products that correspond to these smaller arrays components and the product that corresponds to the full array a system note that components are by their definition complements components produced by different manufacturers are compatible if it is feasible for the consumers to combine them costlessly into a working system in this paper we will assume that there are two components which make up a system we will discuss competition under full compatibility when components produced by all firms are compatible with each other and under incompatibility when no components produced by different firms are compatible and no hybrid systems can exist 2 assuming availability of the same

monetary integration and the cost of borrowing with european monetary union emu there was an increase in the adjusted spreads of euro area sovereign securities over germany corrected from the foreign exchange risk causing a lower than expected fall in borrowing costs the objective of this paper is to study the reasons for this increase and in particular whether the change in the price assigned by markets was due to domestic factors credit risk and or market liquidity or to international risk factors the empirical evidence suggests that it may have been a change in the market assessment of domestic both liquidity and default risk rather than international factors that caused the observed increase in adjusted spreads with monetary integration even though since market size scale economies have increased since emu their effect differs according to the size of the market

do consumers search for the highest price oligopoly equilibrium and monopoly optimum in differentiated products markets we develop a model of search among substitutes for the best combination of commodity variant and price in which the structure of search costs is manipulable by the suppliers of these variants e g by joining an existing market or opening a new one we analyze the subgame perfect equilibria arising in a multistage game involving specialized firms choice of entry variant and price and we compare them to a multiproduct monopolist s optimal choice we show that equilibrium prices increase in the number of substitutes sold in one market and that in the situation considered here monopoly increases welfare

complementarity coordination and compatibility the role of fixed costs in the economics of systems abstract we analyze industry equilibrium and incentive to compatibility when goods produced by different producers generate utility only when consumed as component parts of a system we assume the presence of two systems each composed of some basic component and a set of differentiated complementary products the combination of complementarity between the two components of the system and of fixed costs in the production of the complementary product results in a form of network effect we focus on the role played by the size of the fixed costs in the production of the complementary products in determining the size of this system effect and by this means the structure and types of equilibria that may be observed monopolistic or duopolistic symmetric or asymmetric we also highlight the consequence of the same fixed costs for the private and social incentives to render the systems compatible

from drafts to checks the evolution of correspondent banking networks and the formation of the modern u s payments system 1850 1914 checks remained local payments instruments throughout virtually the entire nineteenth century their significant use in interregional transactions dates only to the 1890s we explain their lagged spatial diffusion by the evolution of centralized payments institutions to coordinate transactions among myriad banks not real technological changes to annihilate distance the pivotal institutions were large correspondent banks especially in new york after the civil war new york funds constituted a national settlement medium and the concentration of bankers balances in new york yielded liquidity and other externalities smoothing the flow of check payments

on market integration and the development of institutions the case of international commercial arbitration abstract this paper suggests that the institutional basis necessary to support efficient international trade is provided not only by treaties among national governments but also by international coalitions of private agents international commercial arbitration is an important example of these private coalitions the paper reviews the provisions and the practice of international arbitration and presents a general equilibrium model of the relationship between the expansion of international trade and the adoption of arbitration the model shows that arbitration alters the size and composition of markets while at the same time responding to exogenous changes in trade

irrational workers the moral economy of labor protest in egypt after comparing the predictions of marxist moral economy and rational choice theories concerning collective actions by workers in egypt in the period since the 1952 free officers coup this article concludes that a moral economy perspective is best able to explain the nature and frequency of these protests the supporting evidence is the correlation between labor protest and violations of workers feelings of entitlement as manifest in declining real wages or disruptions to established patterns of wage differentials the targeting of state institutions combined with the fact that workers have eschewed actual production stoppages in favor of symbolic protests indicates a view of reciprocal rights and obligations between themselves and the state the latter reinforces the moral economy by combining significant concessions with its repressive response to labor protests marxism proves unable to explain the largely defensive and reactive nature of labor protest while rational choice theory is reduced to efforts to quantify workers reactions to this repression

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

why there are organized futures markets i shall present an explanation of the existence of organized futures markets with more predictive power than the two prevailing rival views my explanation briefly is this an organized futures market facilitates trade among strangers one of the rival prevailing views is a defense of futures trading it asserts that an organized futures market furnishes legitimate businessmen with a means of hedging so that they can obtain insurance against price risk the other prevailing view is an attack on organized futures markets it asserts that such markets enable speculators to manipulate prices to the detriment of outsiders who are less well informed and to the detriment of legitimate businessmen such as farmers the attack on organized futures markets likens them to gambling casinos the defense sees them as a form of insurance neither the attack nor the defense is valid the correct explanation is closely related to why we conduct trade using money instead of by barter

price transmission and trader entry in domestic commodity markets abstract using detailed data from three simultaneous surveys of producers traders and exporters this paper examines the transmission of international coffee prices through the domestic value chain in uganda we find that producer price fluctuations are inconsistent with constant transaction costs we investigate three possible explanations for this finding storage and contango marketing costs that increase with price and trader entry that raises search time we test and reject the storage and marketing costs explanation but we find some evidence of trader entry in response to a rise in export price our findings suggest that small itinerant traders enter in response to an export price increase probably taking advantage of farmers ignorance of the rise in wholesale price

do converters facilitate the transition to a new incompatible technology a dynamic analysis of converters abstract this paper analyzes the process of transition in standards between incompatible technologies when converters are available contrary to a common presumption that converters facilitate the transition from an old technology to an otherwise incompatible new technology i find circumstances in which the possibility of transition is blockaded by the existence of converters in the welfare analysis of converters a distinction is made between ex ante and ex post efficiency effects finally i also analyze the equilibrium behavior in the provision of converters and compare it to the socially optimal outcome

size matters for liquidity evidence from emu sovereign yield spreads abstract the objective is to study the relative importance of domestic components of emu sovereign yield spreads since the start of monetary integration the results indicate a change in the market value of liquidity as measured by market size after emu

the division of markets is limited by the extent of liquidity spatial competition with externalities liquidity considerations will limit the number of markets in a competitive economy welfare implications are ambigious since liquidity is a positive externality there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus maximizing market structure but liquidity is also self reinforcing given an existing equilibrium new markets may not open because nobody wants to use a new market with low liquidity there may be too few markets to achieve efficiency a nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers copyright 1988 by american economic association

symmetric equilibrium existence and optimality in differentiated product markets abstract equilibrium existence and optimality are analysed in a market for products differentiated by their variety a game of three stages is analysed firms enter in the first stage choose varieties in the second stage and choose prices in the third stage the existence of subgame perfect equilibria is established at equilibrium products are symmetrically located in the space of characteristics and are offered at equal prices the surplus maximizing solution is characterized and it is shown that surplus maximizing product diversity is lower than the equilibrium one

a note on the idea of the moral economy in their research note robert bates and amy curry 1992 have drawn our attention to the importance for political science of the challenges posed by the moral economic approach using their essay as a springboard and recasting their understanding of the idea of the moral economy i show that the full significance of this controversy would be better illuminated by moving the debate on to a different terrain one that captures the fundamental sources of the antagonism between the moral economic and competing approaches i begin by setting out the central difficulty in bates and curry s reading of the moral economy argument and relate that to how the controversy has been framed in the recent political science literature i then offer a sketch of the core claims of the moral economic approach drawing out the radicalness of their challenge and offer an estimate of their weaknesses and value i conclude with some observations about political philosophy and the idea of the moral economy

incentive contracts for natura 2000 implementation in forest areas the implementation of nature conservation policy is often based on contracts between public authorities and landowners in this article we model incentive contracts in forest areas in the presence of adverse selection and moral hazard when the conservation outcome is uncertain ex ante but observable ex post the results show that agents who are likely to achieve a higher level of conservation should be offered a contract where transfers depend on the final outcome with a bonus for a high ecological level of the forest when conservation measures are correlated with forest management we show that the contractual measures involve distorted transfers we analyse the payment mechanisms used in france and denmark in the context of the natura 2000 policy these mechanisms result in overcompensation and under performance since they do not take the problem of moral hazard and natural variability into account

community versus market a note on corporate villages we return to the literature on collective villages and reexamine its central arguments in doing so we focus on an institution for allocating land that we call the rule as claimed by its advocates the rule secures land allocations that result in outcomes differing from those that would be achieved by markets the outcomes are not constrained to be efficient but the economic costs paid fail to secure the attainment of guarantees of subsistence greater equality or a greater sense of community resulting from the elimination of envy however in the face of high levels of risk the form of collective property rights embodied in the rule may create what we call communities of mis fortune in which no one can envy others gains or losses resulting from the random shocks of nature

rethinking moral economy i establish three closely related claims the first two are interpretive the third theoretical 1 the prevailing conception of moral economy in political science presupposed by opponents as well as advocates rests too heavily on the distinction between nonmarket and market based societies 2 the prevailing conception of moral economy reduces to the unduly narrow claim that economic incorporation of a nonmarket people is the basis for the moral indignation that leads to resistance and rebellion 3 reconceptualizing moral economy in terms of social goods reveals additional grounds for politically significant moral indignation and permits moral economic political analysis of a larger set of cases and phenomena water politics in the arid american west illustrate the power of a conception of moral economy based on social goods

dropout behavior in r d races with learning we examine a game theoretic model of a two firm r d race in which expenditures on r d and the concomitant increase in experience learning enable thefirms to increase their probability of discovering an invention the learning process is stochastic it generates a unique subgame perfect equilibrium for identicalfirms with the characteristic that the leader never drops out but the follower drops out if the leader gains a significant lead the leader can find it optimal to drop out if the firms value the invention differently or have different r d efficiencies thus our analysis generates results between vigorous competition and natural monopoly central to schumpeter s 1934 vision of entrepreneurship are the extraordinary profits associated with innovation the lure of these profits fuels the fires of creative destruction as innovators replace declining firms this article analyzes the competition for the profits obtained by bringing an innovation to fruition and receiving the associated patent we restrict attention to the subclass of innovations known as inventions innovations that are the product of a firm s research and development in particular we are concerned with the conditions that cause a firm after having invested in r d to drop out of the competitive race situations in which the leading firm drops out are of even greater interest competition in r d is often modelled as a race in which the winner receives a patent and reaps most or all of the benefits of the invention as exemplified by kamien and schwartz 1972 the early theoretical literature tended to be based on decision theoretic models the firm seeks an optimal rate of expenditure on r d determined in part by the expected value of the invention the extent of the first mover advantage the economies or diseconomies of scale in r d and the perceived intensity of rivalry it is not anticipated that the firm s decisions will affect the r d efforts of the perhaps unknown rivals kamien and schwartz 1982 p 124 show that the firm does no research if rivalry is sufficiently intense because their model is static however it is never the case that a firm enters the race and then drops out

on the design of incentive schemes under moral hazard and adverse selection abstract this paper characterizes a class of optimal incentive schemes in a simple principal agent model which allows for moral hazard and adverse selection we show that incentive compatible allocation can always be approximately implemented through a menu of quadratic incentive schemes it is also proved that the set of incentive compatible allocations is independent of the distribution of the additive uncertainty which affects the outcome informational requirements and economic interpretation of quadratic and linear schemes are discussed

durable products time inconsistency and lock in many durable products cannot be used without a contingent consumable product e g printers require ink ipods require songs razors require blades etc for such products manufacturers may be able to lock in consumers by making their products incompatible with consumables that are produced by other firms we examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable under a lock in strategy the manufacturer has pricing power over the contingent consumable which she can use to extract additional rents from higher valuation consumers but such pricing power may also reduce consumers willingness to pay for the durable because it subjects them to being held up with higher consumables prices in the future restricting our attention to linear pricing policies we find that if the manufacturer can commit to shutting down production of her durable after an initial one time sale then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers fears of being held up on the other hand when the manufacturer cannot commit to shutting down production of her durable then her own output of additional durables gives her an incentive to keep consumables prices low and competition in the consumables market is less beneficial this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

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

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

simultaneous moral hazard and adverse selection with risk averse agents abstract while the existing literature assumes either agents to be risk neutral or information about the outcome to be perfect in this paper we allow for risk averse agents and find an optimal contract scheme which is robust to errors on the distribution of outcome the optimal payment contract is derived and the comparative statics of the optimal payment scheme are analyzed as the main insight it is shown that in the presence of simultaneous moral hazard and adverse selection the agent strictly prefers to relax the first of the two informational problems

the immediate effect of monetary union on eu 15 sovereign debt yield spreads yield spreads corrected for exchange rate risk over 10 year german securities of european union eu countries that did not join economic and monetary union emu experienced an average decrease of 14 20 basis points during the first 3 years after the beginning of currency union conversely euro area countries adjusted spreads registered an average rise of 11 98 basis points in the same period this article examines the elements a possible change in the relative importance of domestic or international risk factors behind these results using both panel estimations in the two groups of countries and a country by country specification in each of them

the city network paradigm measuring urban network externalities in recent years network behaviour has been analysed extensively as the emerging model for economic growth by network behaviour a metaphor for co operative behaviour among individuals corporate

what makes rational peasants revolutionary dilemma paradox and irony in peasant collective action peasant upheavals are studied from the perspective offered by the selective incentives solution to olson s collective action problem this article presents much evidence from three different forms of peasant struggles everyday forms of peasant resistance unorganized rural movements and organized peasant rebellions that demonstrates the widespread existence of selective incentives questions about the causes and consequences of selective incentives are then examined first what are the conditions under which peasant struggles emphasize material selective incentives rather than nonmaterial altruistic appeals the level of selective incentives in any peasant upheaval is a function of demand and supply considerations peasants demand selective incentives the suppliers include one or more dissident peasant organizations the authorities and the allies of both a political struggle ensues as the suppliers compete and attempt to monopolize the market second what are the conditions under which the pursuit of material self interest hurts rather than helps the peasantry s collective cause selective incentives supplemented by ideology can be effective selective incentives alone are counterproductive these questions and answers lead to the conclusion that the selective incentives solution reveals much more about peasant upheavals than simply that peasants will often be concerned with their own material self interest it is therefore important to study the following three aspects of peasant collective action the dilemma peasants face or how peasant resistance is in the interest of all peasants but in the self interest of none the paradox peasants face or that rational peasants do solve their dilemma for example with selective incentives and participate in collective action and the irony peasants face or that self interest is both at the root of their dilemma and at the foundation of a solution to their paradox

networks and compatibility implications for antitrust in this paper we draw crucial parallels between the concepts of compatibility and networks and the more traditional concepts of complementarity and vertical relationships we also develop the important distinctions between two way networks and one way networks we then apply our framework to a number of current antitrust issues

granger causality in peripheral emu public debt markets a dynamic approach our research aims to analyze the possible existence of granger causal relationships in the behavior of public debt issued by peripheral member countries of the european economic and monetary union emu with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009 with this goal in mind we make use of a database of daily frequency of yields on 10 year government bonds issued by five emu countries greece ireland italy portugal and spain covering the entire history of the emu from its inception on 1 january 1999 until 31 december 2010 in the first step we explore the pair wise granger causal relationship between yields both for the whole sample and for changing subsamples of the data in order to capture the possible time varying causal relationship this approach allows us to detect episodes of significant increase in granger causality between yields on bonds issued by different countries in the second step we study the determinants of these episodes analyzing the role played by different factors paying special attention to instruments that capture the total national debt domestic and foreign in each country

an operational measure of liquidity embedding the process of selling an asset in a search environment enables one to provide an exact definition of liquidity an asset s liquidity is the expected time until it is sold while pursuing an optimal in the sense of maximization of expected discounted net proceeds policy this analysis reveals that this definition is compatible with most other notions of liquidity and in particular with those of john maynard keynes impatience the discount associatedwith a quick sale predictability and flexibility copyright 1986 by american economic association

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

multi task incentive contract and performance measurement with multidimensional types abstract this paper provides a new explanation for the dominance of the low powered incentive contract over the high powered incentive contract using a hybrid model of moral hazard and adverse selection we first show that unobservable risk aversion or cost leads to low powered incentives we then consider the case where both risk aversion and cost of the agent are unobservable to the principal this multidimensional mechanism design problem is solved under two assumptions with regard to the structures of performance measurement system and wage contract it is shown that if the deterministic and stochastic components of performance measures vary proportionally the principal is inclined to provide a low powered incentive contract moreover it is shown that if the base wage depends on a quadratic function rather than the direction of the performance wage vector no incentive is provided for most of the performance measures in an orthogonal performance measurement system