involuntary unemployment in economies with efficient risk sharing abstract we study economies where employment lotteries determine random layoffs and incomes for employed and unemployed agents allocate risk efficiently we ask for which specifications are unemployed agents worse off a situation we call involuntary unemployment we show unemployed agents are worse off iff an exogenous increase in wealth decreases aggregate unemployment in a monetary economy we show that in equilibrium the unemployed are worse off iff high inflation implies high unemployment our model also generates nominal wage stickiness as an equilibrium phenomenon but neither involuntary unemployment nor nominal stickiness implies these economies are operating inefficiently or are out of equilibrium

an adverse selection model of optimal unemployment insurance abstract we ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population we adopt a repeated moral hazard framework as in shavell and weiss 1979 supplemented by unobserved heterogeneity about agents job opportunities our main theoretical contribution is a quasi recursive formulation of our adverse selection problem including a geometric characterization of the state space our main economic result is that optimal contracts for bad searchers tend to be upward sloping due to an adverse selection effect this is in contrast to the well known optimal decreasing time profile of benefits in pure moral hazard environments that continue to be optimal for good searchers in our model

beauty and the labor market the authors examine the impact of looks on earnings using interviewers ratings of respondents physical appearance plain people earn less than average looking people who earn less than the good looking the plainness penalty is 5 to 10 percent slightly larger than the beauty premium effects for men are at least as great as for women unattractive women have lower labor force participation rates and marry men with less human capital better looking people sort into occupations where beauty may be more productive but the impact of individuals looks is mostly independent of occupation suggesting the existence of pure employer discrimination copyright 1994 by american economic association

why doesn t technology flow from rich to poor countries what determines the technology that a country adopts while there could be many factors the e ciency of the country s nancial system may play a signi cant role to address this question a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation the ability of an intermediary to monitor and control the cash ows of a rm plays an important role in a rm s decision to adopt a technology can such a theory help to explain the

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

the impact of obesity on wages abstract previous studies of the relationship between body weight and wages have found mixed results this paper uses a larger data set and several regres sion strategies in an attempt to generate more consistent estimates of the effect of weight on wages differences across gender race and ethnicity are explored this paperjnds that weight lowers wages for white females ols esti mates indicate that a difference in weight of two standard deviations roughly 65 pounds is associated with a difference in wages of 9 percent in absolute value this is equivalent to the wage effect of roughly one and a half years of education or three years of work experience negative cor relations between weight and wages observed for other gender ethnic groups appear to be due to unobserved heterogeneity i introduction several previous studies have found among females a negative cor relation between body weight and wages there exist three broad categories of ex planations for this finding the first explanation is that obesity lowers wages for example by lowering productivity or because of workplace discrimination the sec ond is that low wages cause obesity this would be true if poorer people consume

a recursive formulation for repeated agency with history dependence abstract we present general recursive methods to handle environments where privately observed variables are linked over time we show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility and promise keeping conditions journal of economic literature classification numbers d30 d31 d80 d82

dynamic financial constraints distinguishing mechanism design from exogenously incomplete regimes we formulate and solve a range of dynamic models of constrained credit insurance that allow for moral hazard and limited commitment we compare them to full insurance and exogenously incomplete financial regimes autarky saving only borrowing and lending in a single asset we develop computational methods based on mechanism design linear programming and maximum likelihood to estimate compare and statistically test these alternative dynamic models with financial information constraints our methods can use both cross sectional and panel data and allow for measurement error and unobserved heterogeneity we estimate the models using data on thai households running small businesses from two separate samples we find that in the rural sample the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption business assets investment and income family and other networks help consumption smoothing there as in a moral hazard constrained regime in contrast in urban areas we find mechanism design financial information regimes that are decidedly less constrained with the moral hazard model fitting best combined business and consumption data we perform numerous robustness checks in both the thai data and in monte carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation a prototypical counterfactual policy evaluation exercise using the estimation results is also featured

redistribution and social insurance we study optimal redistribution and insurance in a life cycle economy with private idiosyncratic shocks we characterize pareto optima show the forces determining optimal labor distortions and derive closed form expressions for their limiting behavior the labor distortions for high productivity shocks are determined by the labor elasticity and the higher moments of the shock process the labor distortions for low productivity shocks are determined by the autocorrelation of the shock process redistributive objectives and past distortions in a model calibrated using newly available estimates of idiosyncratic shocks the labor distortions are u shaped and the savings distortions generally increase in current earnings jel d82 d91 h21 h23 i38 j22 j24

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

labor contracts in a model of imperfect competition we propose a definition of involuntary unemployment which differs from that traditionally used in implicit labor contract theory we say that a worker is involuntarily unemployed if the marginal wage implied by the optimal contract exceeds the marginal rate of substitution between leisure and consumption we construct a model where risk neutral firms have monopoly power and show that such monopoly power is necessary for involuntary unemployment to arise in the optimal contract we numerically compute examples and show that such unemployment occurs for a wide range of parameter values

multi period contracts between principal and agent with adverse selection abstract multi period contracts with adverse selection at the time of contracting are studied with risk neutrality and independent private information all inefficiency arises in the first period only with positive serial correlation inefficiency is more pervasive but declines over time

privatization in latin america what does the evidence say privatization is under attack criticisms run from corrupt deals to abuse of market power and social welfare losses we evaluate the empirical record on privatization relying on recent comprehensive studies from latin america the paper presents four main results first the increased profitability of privatized firms is not explained by sample selection biases second in the quest to identify the sources of increased profitability after privatization we find little evidence that validates concerns of generalized market power abuses exploitation of workers and lack of fiscal benefits third the manner in which privatization is carried out matters transparency and homogeneity in procedures speed and limited restructuring prior to privatization lead to better outcomes and less room for corruption and discretion finally privatization s success is enhanced by two complementary policies deregulation or reregulation of industries previously shielded from competitive forces and an effective corporate governance framework that facilitates privatized firms access to capital at lower cost overall the empirical record shows that privatization leads to increased profitability and productivity firm restructuring fiscal benefits output growth and even quality improvements most cases of privatization failure can be linked to poor contract design opaque processes with heavy state involvement lack of reregulation and a poor corporate governance framework

optimal dynamic capital budgeting i study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire building preferences privately observes the arrival and properties of investment projects and headquarters can audit projects at a cost under certain conditions a budgeting mechanism with threshold separation of financing is optimal headquarters 1 allocate a spending account to the manager and replenish it over time 2 set a threshold such that projects below it are financed from the account while projects above are financed fully by headquarters upon an audit further analysis studies when co financing of projects is optimal and how the size of the account depends on past performance of projects

efficient allocations in dynamic private information economies with persistent shocks a first order approach this article studies efficient allocations in a dynamic private information economy with a continuum of idiosyncratic shocks that are persistent i develop a first order approach for this environment and show that the problem has a simple recursive structure that relies on only a small number of state variables making the problem tractable i find sufficient conditions that guarantee that the first order approach is valid to illustrate the first order approach i numerically compute the efficient allocations in a mirrleesean economy with productivity shocks that follow a random walk and verify the validity of the first order approach i show that persistent shocks create a new trade off where the social planner decreases the informational rent of the agent today at the cost of providing higher insurance in the future copyright 2013 oxford university press

insurance and taxation over the life cycle we consider a dynamic mirrlees economy in a life cycle context and study the optimal insurance arrangement individual productivity evolves as a markov process and is private information we use a first order approach in discrete and continuous time and obtain novel theoretical and numerical results our main contribution is a formula describing the dynamics for the labour income tax rate when productivity is an ar 1 our formula resembles an ar 1 with a trend where i the auto regressive coefficient equals that of productivity ii the trend term equals the covariance productivity with consumption growth divided by the frisch elasticity of labour and iii the innovations in the tax rate are the negative of consumption growth the last property implies a form of short run regressivity our simulations illustrate these results and deliver some novel insights the average labour tax rises from 0 to 37 over 40 years whereas the average tax on savings falls from 12 to 0 at retirement we compare the second best solution to simple history independent tax systems calibrated to mimic these average tax rates we find that age dependent taxes capture a sizable fraction of the welfare gains in this way our theoretical results provide insights into simple tax systems copyright 2013 oxford university press

optimal contract to induce continued effort we consider a basic model of a risk neutral principal incentivizing a risk neutral agent to exert effort to raise the arrival rate of a poisson process the effort is costly to the agent is unobservable to the principal and affects the instantaneous arrival rate each arrival yields a constant revenue to the principal the principal therefore devises a mechanism involving payments and a potential stopping time to motivate the agent to always exert effort we formulate this problem as a stochastic optimal control model with an incentive constraint in continuous time over an infinite horizon although we allow payments to take general forms contingent on past arrival times the optimal contract has a simple and intuitive structure which depends on whether the agent is as patient as or less patient than the principal toward future income this paper was accepted by manel baucells decision analysis

repeated moral hazard and recursive lagrangeans dynamic agency models with endogenous state variables or many agents are numerically intractable or at least very difficult to solve this problem prevented researchers from analizying an important class of economic problems e g extensions of the basic unemployment insurance framework models of international risk sharing in production economies with private information and optimal executive compensation schemes in this paper i show how to solve these models by building a general theoretical framework for the analysis of repeated moral hazard problems the main contribution is the extension of the recursive

repeated moral hazard with effort persistence abstract i study a problem of repeated moral hazard where the effect of effort is persistent over time each period s outcome distribution is a function of a geometrically distributed lag of past efforts i show that when the utility of the agent is linear in effort a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard the solutions for consumption in the two problems are observationally equivalent implying that the main properties of the optimal contract remain unchanged with persistence for illustration i present the computed solution of an example

truthful equilibria in dynamic bayesian games this paper characterizes an equilibrium payoff subset for markovian games with private information as discounting vanishes monitoring might be imperfect transitions depend on actions types correlated or not values private or interdependent it focuses on equilibria in which players report their information truthfully this characterization generalizes those for repeated games and reduces to a collection of one shot bayesian games with transfers with independent private values the restriction to truthful equilibria is shown to be without loss except for individual rationality in the case of correlated types results from static mechanism design can be applied resulting in a folk theorem

health human capital height and wages in china abstract we estimate the returns to height using data from 12 chinese cities we present both ordinary least squares ols and two stage least squares tsls estimates in the latter height is instrumented using proxies for health human capital accumulated in childhood and adolescence which influence adult height the tsls estimates are much higher reflecting the fact that the ols estimates are determined by the random genetic factors influencing height while the tsls estimates also take into account returns from investment in health human capital during childhood and adolescence these results imply considerable returns to investment in health human capital

the efficient mechanism for downsizing the public sector this article analyzes the efficient mechanism for downsizing the public sector focusing on adverse selection in productive efficiency each worker is assumed to have two type dependent reservation utilities the status quo utility in the public sector before downsizing and the utility that the worker expects to obtain by entering the private sector the efficient mechanism consists of a menu of probability of remaining in the public sector and transfer pairs that induces self selection a worker s full cost is defined by the sum of production cost in the public sector and reservation utility in the private sector it is optimal to start by laying off the agents with higher full cost when the public sector before downsizing is discriminating as the differential of private information about productive efficiency suggests there are countervailing incentives this makes the size of downsizing smaller under asymmetric information than under complete information

an analysis of mortgage contracting prepayment penalties and the due on sale clause the due on sale clause contained in most conventional home mortgage contracts is equivalent to a prepayment penalty equal to the difference between the face value and market value of the loan we analyze a bilateral game with asymmetric information and show that the bank demands the full penalty unless the market value of the loan is sufficiently low in that case the bank demands a prepayment penalty which is independent of the market value of the loan in order to induce additional prepayments we also demonstrate by a risk sharing argument that the due on sale clause is optimal in some settings even though it eliminates some beneficial home sales almost all conventional fixed rate home mortgage contracts written in the last decade contain a due on sale clause which gives the lender the contractual right to declare the total indebtedness due immediately if the mortgaged property is transferred as mortgage rates rise lending institutions suffer capital losses on fixed rate mortgage loans while borrowers earn capital gains equal to the difference between the face value and market value of their loans the due onsale clause gives the lending institution the right to demand the borrower s capital gain as a prepayment penalty in order to increase the probability of prepayment it can be optimal for the bank to accept a partial settlement in this paper we analyze the bank s strategy for setting the prepayment penalty it demands under the due on sale clause and examine the optimality of the clause the model we develop also applies to other types of prepayment penalties i e loan covenants which require payment of a premium over market value in order to extinguish

nonrevelation in employment contracts the author considers an employment contracting model in which firms have private information that is directly payoff relevant to workers and workers are always free to quit in contrast to existing models firms will sometimes fail to reveal adverse information to workers in equilibrium because of the effect this will have on quits risk averse workers can prefer such pooling contracts to separating ones because inducing truth telling requires firms to cut wages in states that are already bad for the worker applications to firms incentives to reveal unsafe working conditions and impending layoffs or plant closures are discussed copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

unemployment insurance and involuntary unemployment the case of adverse selection abstract this paper studies the private and public provision of unemployment insurance in a model where equilibrium unemployment results from the use of the wage as a worker selection device it is shown that private provision will not occur essentially because those workers most desired by a firm place least value on such coverage respecting the same informational constraints public provision necessarily gives rise to some distortions in participation decisions but nonetheless is welfare improving in the aggregate

incentives and aggregate shocks this paper presents an incentive based theory of the dynamics of the distribution of consumption in the presence of aggregate shocks the paper builds on the models concerning the distribution of income or consumption and incentive problems of green 1987 thomas and worrall 1991 phelan and townsend 1991 and atkeson and lucas 1992 by incorporating aggregate production shocks the model allows an examination of the interactions between individual and aggregate consumption series given incomplete insurance further the methodology outlined allows the incorporation of incentive considerations to macroeconomic environments similar to rogerson 1988 and hansen 1985

a note on the height wage differential in the uk cross sectional evidence from the bhps abstract using bhps data for the first time evidence for the height earnings relationship is updated for the uk in contrast to prior findings baseline height differentials mainly vanish once individuals occupation and non linear height gradients are accounted for

making sense of the labor market height premium evidence from the british household panel survey we use data from the british household panel survey to examine the labor market premium in height most of the premium is explained by higher average educational attainment and sorting into higher status occupations and industries by those who are taller

restricted feedback in long term relationships abstract this paper studies long term relationships modeled as repeated games with restricted feedback players condition current play on summary statistics of past play rather than the entire history as may be the case in online markets our state strategy equilibrium framework allows for arbitrary restrictions on strategies we derive a recursive characterization for the set of equilibrium payoffs similar to that of abreu pearce and stacchetti 1986 1990 2 3 for perfect public equilibria and show that the set of equilibrium payoffs is the largest fixed point of a monotone operator we use our characterization to derive necessary and sufficient conditions for efficient trade in a repeated product choice game where costumers condition their purchase decisions only on the last performance signal

optimal labour contracts and involuntary unemployment under costly and imperfect monitoring this paper provides an explanation for the concurrence of rigid wages and involuntary unemployment we consider cases in which a firm monitors its workers but at some cost a key assumption in the model is that the firm cannot perfectly distinguish shirkers from nonshirkers thus the firm has to rely on negotiated compensation and work effort as well as monitoring to reduce the incentive to shirk we find that rigid wages and involuntary unemployment arise simultaneously when monitoring costs are large and the effectiveness of monitoring is low

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

dynamic optimal taxation with private information we study dynamic optimal taxation in a class of economies with private information optimal allocations in these environments are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is similar to that in bewley 1986 agents supply labour and trade risk free claims to future consumption subject to a budget constraint and a debt limit optimal taxes are conditioned only on two observable characteristics an agent s accumulated stock of claims or wealth and her current labour income we show that optimal taxes are generally non linear and non separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences this paper studies optimal taxation in a class of dynamic economies with private information we consider an environment in which agents preferences are defined over consumption and labour and each agent receives a privately observed sequence of i i d preference shocks incentivecompatibility constraints stemming from private information imply that socially optimal or constrained efficient allocations in this environment are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is identical to that in bewley 1986 huggett 1993 or aiyagari 1994 agents can trade current consumption for claims to future consumption subject to a budget constraint and a borrowing limit these claims have a non contingent pre tax return crucially taxes are conditioned upon only two observable characteristics of an agent current wealth given by the agent s accumulated stock of claims and current labour income they do not depend on any other aspect of an agent s past history most models of dynamic optimal taxation follow the ramsey approach in which the set of fiscal instruments available to the government is exogenously specified 1 linear labour and capital income taxes are typically included in this set while lump sum taxes are ruled out the exclusion of the latter is justified by appealing to incentive or administrative constraints but these are not explicitly modelled these exogenous restrictions on fiscal instruments represent frictions that the government seeks to ameliorate through its optimal choice of tax rates the approach we adopt in this paper builds on the optimal taxation literature initiated by mirrlees 1971 mirrlees assumes that agents receive privately observed shocks to their

labor contracts with voluntary quits this paper considers labor contracts between the risk neutral firm and risk averse workers with heterogeneous outside opportunities alternative wages which become known to the worker after a costly on the job search in the case of a deterministic alternative wage self selection over a menu of contract wages would achieve the first best contract if the alternative wages are stochastic the second best contract emerges as a trade off between productive efficiency and risk sharing workers who voluntarily search are fewer and workers who search are less likely to quit if the search effort is not monitored even fewer workers search

an equilibrium model of quits under optimal contracting abstract this article develops an equilibrium model of quits in a labor market and examines the effect of contracting under asymmetric information when compared with symmetric information and noncontractual base lines we demonstrate that quits increase in periods of high output without postulating exogenous price rigidity

optimal unemployment insurance this paper considers the design of an optimal unemployment insurance system the problem is modeled as a repeated principalagent problem involving a risk averse agent the unemployed worker and a risk neutral principal which cannot monitor the agent s search effort the optimal long term contract subject to the associated incentive constraints is characterized this contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that under some mild regularity conditions increases with the lenght of the unemployment spell some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large the performance of this optimal contract is also compared to alternative liquidity provision mechanisms

fiscal rules and discretion under persistent shocks this paper studies the optimal level of discretion in policymaking we consider a fiscal policy model where the government has time inconsistent preferences with a present bias toward public spending the government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending we analyze the optimal fiscal rule when the shocks are persistent unlike under independent and identically distributed shocks we show that the ex ante optimal rule is not sequentially optimal as it provides dynamic incentives the ex ante optimal rule exhibits history dependence with high shocks leading to an erosion of future fiscal discipline compared to low shocks which lead to the reinstatement of discipline the implied policy distortions oscillate over time given a sequence of high shocks and can force the government to accumulate maximal debt and become immiserated in the long run

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

pension portability and labor market efficiency a survey of the literature this paper reviews the theoretical and empirical literature evaluating the labor market effects of policies to enhance pension portability one perspective is that reducing the cost of job change w

wage secrecy as a social convention there is a time to keep silent and a time to speak out ecclesiastes 3 7 ask anyone who works for a living how much money he or she makes and you are likely to encounter a range of responses from evasion to outright hostility such responses however should not be surprising according to organizational etiquette it is considered gauche to ask others their salaries in a study at e i du pont de nemours all employees were asked if the company should disclose more payroll information so that everyone would know everyone else s pay only 18 voted for an open pay system dolan and schuler 1987 315 m any organizations have strict policies and norms about the secrecy of pay it is seen as inappropriate in most companies for employees to talk about what they earn and data are rarely given out even internally on salaries some organizations even fire individuals who release salary data this is one way to make it very clear that the organization means it when it says it believes in pay secrecy lawler 1990 239 t he issue of openness or secrecy in the communication of compensation information is one of the most important issues facing senior management henderson 1985 379 i introduction despite the general belief that a free flow of information enhances efficiency social convention appears to call for secrecy regarding individuals wages this paper provides an explanation for this convention we suggest that the role of wage secrecy is to reduce effective labor mobility and thereby enhance the feasibility of risk shifting contracts wage secrecy may yield a mix of mobility and risk shifting that is superior both to a spot market for labor and to a social convention that binds workers to their employers in promising to pay a worker a pre agreed wage rate labor contracts shift uncertainty from workers to employers and provide workers with insurance in particular if workers are risk averse and firms are risk neutral such contracts may enhance the welfare of workers without imposing a cost on firms since a risk shifting contract shields workers from the vicissitudes of the market wage rates need not equal the marginal product of labor in good outcomes workers pay the firm an insurance premium by accepting a wage rate that is lower than their marginal product in bad outcomes workers collect on their insurance policy earning a wage rate that exceeds their marginal product 1 if workers can move freely from one firm to another however risk shifting labor contracts may not be feasible given such freedom of movement workers will stay with their firm if the wage rate exceeds that offered elsewhere and move if they can obtain a higher wage rate in another firm hence without restrictions on labor mobility risk shifting contracts will not be offered and wage rates will vary with the marginal product of labor in this case the market in labor is a spot market the risk shifting role of labor contracts may be salvaged by a social convention that binds workers to their firms this would require that a worker who leaves his employer earlier than the accepted norm would be viewed as breaking a social convention and develop a damaging reputation we shall refer to this type of convention as a binding convention 2 it appears that a binding convention is assumed in most of the implicit contract literature binding however comes at a cost while facilitating risk shifting it may lead to inefficient resource allocation with a binding convention the tradeoff between the loss in output and the extent of workers exposure to risk depends on the nature of risks faced by the firm when the only risk that firms face is an aggregate shock defined as a shock that affects all firms in a sector in the same way binding does not reduce production efficiency if the marginal product of labor is the same in all firms the worker s place of employment does not affect output

the effect of adolescent experience on labor market outcomes the case of height taller workers receive a wage premium net of differences in family background the disparity is similar in magnitude to the race and gender gaps we exploit variation in an individual s height over time to explore how height affects wages controlling for teen height essentially eliminates the effect of adult height on wages for white men the teen height premium is not explained by differences in resources or endowments the teen height premium is partially mediated through participation in high school sports and clubs we estimate the monetary benefits of a medical treatment for children that increases height

collusion with persistent cost shocks we consider a dynamic bertrand game in which prices are publicly observed and each firm receives a privately observed cost shock in each period although cost shocks are independent across firms within a firm costs follow a first order markov process we analyze the set of collusive equilibria available to firms emphasizing the best collusive scheme for the firms at the start of the game in general there is a trade off between productive efficiency whereby the low cost firm serves the market in a given period and high prices we show that when costs are perfectly correlated over time within a firm if the distribution of costs is log concave and firms are sufficiently patient then the optimal collusive scheme entails price rigidity firms set the same price and share the market equally regardless of their respective costs when serial correlation of costs is imperfect partial productive efficiency is optimal for the case of two cost types first best collusion is possible if the firms are patient relative to the persistence of cost shocks but not otherwise we present numerical examples of first best collusive schemes

dynamic insurance with private information and balanced budgets this paper studies a dynamic insurance problem with bilateral asymmetric information and balanced budgets there are two infinitely lived agents in our model both risk averse and each has an i i d random endowment stream which is unobservable to the other in each period each agent must have a non negative consumption and together they must consume the entire aggregate endowment dynamic incentive compatibility in the nash sense is defined we give sufficient and necessary conditions for the existence of a constrained efficient contract we show that a constrained efficient contract can be characterized in a bellman equation we demonstrate that the long run distribution of expected utilities of each agent is not degenerate we also develop an algorithm for computing the efficient contract and in a numerical example we find that the consumption processes of the agents form stationary markov chains

repeated moral hazard and one sided commitment abstract this paper considers a repeated unobserved endowment economy with a restriction that agents can walk away from insurance contracts at the beginning of any period and contract with another insurer one sided commitment an equilibrium is derived characterized by a unique market determined insurance contract with the property that agents never want to walk away from it the paper shows that trade or insurance still occurs and that a non degenerate long run distribution of consumption exists a numerical example shows that this distribution is nearly log normal journal of economic literature classification numbers d30 d31 d80 d82

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

dynamic compensation contracts with private savings this article studies a dynamic agency problem in which a risk averse agent can save privately in the optimal contract i cash compensations exhibit downward rigidity to failures ii permanent pay raises occur when the agent s historical performance is sufficiently good iii and when the agent is dismissed due to poor performance he walks away with severance pay to support his post firing consumption at the current compensation level thus the theory can simultaneously explain the popularity of optionslike compensation contracts and the increasing incidence of forced turnovers with sizeable severance pay jel d86 j31 j33

optimal taxation with private government information the ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances in contrast empirical labour tax processes are smooth in the sense of being random walks they provide prima facie evidence for incomplete government insurance this paper considers whether private government information might lie behind such incomplete insurance it shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt and it argues that they are better approximations to empirical fiscal policies than those implied by the ramsey model the paper also establishes that optimal incentive compatible allocations converge to allocations such that the government s incentive compatibility constraint no longer binds generally these limiting allocations are ones in which the government is maximally indebted their credibility and the interaction of incentive compatibility and credibility is briefly discussed

optimal taxation in a habit formation economy abstract this paper studies habit formation in consumption preferences in a dynamic mirrlees economy we derive optimal labor and savings wedges based on a recursive approach we show that habit formation creates a motive for subsidizing labor supply and savings in particular habit formation invalidates the well known no distortion at the top result we demonstrate that the theoretical findings are quantitatively important in a parametrized life cycle model average labor and savings wedges fall by more than one third compared with the case of time separable preferences

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

optimal severance pay with incomplete information this paper contrasts optimal employment contracts in a world of full information and in a world in which the worker s alternative employment possibilities cannot be observed by the firm the difference between income and severance pay that is the opportunity cost of separating will be higher in more productive states of nature with complete wage insurance no longer possible we therefore have an explanation of higher ability individuals receiving high wages in the short run in long term contracts the explanation does not rely as past explanations have done on the imperfections in bonding arrangements or in loan markets

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

risky human capital and deferred capital income taxation abstract we study the structure of optimal wedges and capital taxes in a dynamic mirrlees economy with endogenous distribution of skills human capital is a private stochastic state variable that drives the skill process of each individual building on the findings of the labor literature we construct a tractable life cycle model of human capital evolution with risky investment and stochastic depreciation in this setting we demonstrate the optimality of a a human capital premium i e an excess return on human capital relative to physical capital b a large intertemporal wedge early in the life cycle and c a non zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life cycle the main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital the average marginal tax rate on physical capital held in every period is zero in present value however expected capital tax payments do not equal zero in every period necessarily agents face negative expected capital tax payments early in the life cycle and positive expected capital tax payments late in the life cycle

labor contracts under asymmetric information when workers are free to quit this paper examines the impact of workers ability to quit on the performance of labor contracts between workers and privately informed firms while the need to induce workers to remain with the firm necessarily lowers total welfare the effect on employment levels is to reduce the magnitude of the inefficiency due to asymmetric information whether this inefficiency is under or overemployment the model predicts that employment distortions increase with the strength of lock in effects on workers a prediction which contrasts with the results of efficiency wage models and which may help in empirical testing of labor contract theory

managerial short termism turnover policy and the dynamics of incentives i study managerial short termism in a dynamic model of project development with hidden effort and imperfect observability of quality the manager can complete the project faster by reducing quality to preempt this behavior the prin cipal makes payments contingent on long term outcomes i analyze the dynamics of the optimal contract and its implications for the level of managerial turnover i show that optimal contracts might be stationary and entail no termination in general i show that the principal reduces the manager s temptation to behave myopically by reducing the likelihood of termination and deferring compensation the model predicts a negative relation between the rate of managerial turnover and the use of deferred compensation that is consistent with evidence of managerial compensation contracts received may 23 2016 editorial decision may 27 2017 by editor francesca cornelli

equilibrium subprime lending this paper develops an equilibrium model of a subprime mortgage market our goal is to offer a benchmark with which the recent subprime boom and bust can be compared the model is tractable and delivers plausible orders of magnitude for borrowing capacities as well as default and trading intensities we offer simple explanations for several phenomena in the subprime market such as the prevalence of teaser rates and the clustering of defaults in our model both nondiversifiable and diversifiable income risks reduce debt capacities thus debt capacities need not be higher when a larger fraction of income risk is diversifiable

redundancy payments and firm specific training this paper attempts to provide an economic rationale for the existence and pattern of redundancy payments a model of firm specific training with uncertain returns to training and uncertainty about the outside options of workers is constructed for this purpose the central result is that an optimal contract will involve the firm in bearing only a part of the training costs because workers may quit since workers bear part of the cost of training they will have to be compensated by a redundancy payment if dismissed furthermore the optimum level of this redundancy payment will vary across firms with large payments being offered by firms where the returns to training are highly variable these insights into the nature of redundancy payments differ from those of other models where they are viewed either as a transfer fee or as representing the difference between inside and outside wages for contracted workers