the impact of national culture on software piracy this paper examines the impact of the level of economic development income inequality and five cultural variables on the rate of software piracy at the country level the study finds that software piracy is significantly correlated to gnp per capita income inequality and individualism implications for anti piracy programs and suggestions for future research are developed

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

managerial bargaining power in the determination of compensation contracts and corporate investment this paper considers the design of managerial compensation contracts and their impact on corporate investment decisions and the managerial effort decision the model relates the compensation scheme to outside share ownership and managerial bargaining position using the methods of mechanism design under asymmetric information a shift in favor of effort is documented in the case where managerial bargaining strength is weak while a shift toward more use of capital investment results from strong managerial bargaining power the model distinguishes managerial equity holdings from contingent compensation contracts our results are related to the empirical literature on pay performance sensitivities

financial contracting under imperfect enforcement we develop a model ofnancial contracting under imperfect enforcement financial contracts are designed to keep entrepreneurs from diverting project returns but enforce ment is probabilistic and penalties are limited the model rationalizes the prevalence of straight debt and common stock and its predictions are consistent with a host of empirical capital structure regularities across countries acrossrms and across time

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

price and quality competition under adverse selection market organization and efficiency firms compete with prices and qualities in markets where consumers have heterogeneous preferences and cost characteristics consumers demand two goods which can be supplied jointly or separately by firms we consider two strategy regimes for firms uniform price quality pairs and screening price quality menus for each regime we compare the equilibria under integration each firm supplying both goods and separation each firm supplying one good integrating and separating markets change quality efficiency and welfare the theory illustrates phenomena such as the carveout of mental health and substance abuse coverage from general health insurance and creaming for low cost students in locales with school choices copyright 2003 by the rand corporation

is post smoking cessation weight gain a significant trigger for relapse while the surgeon general s consumer guide lists weight gain as an important relapse trigger the 2001 surgeon general s report on women and smoking concludes paradoxically that actual weight gain during cessation does not appear to predict relapse this dichotomous view reflects longstanding scientific uncertainty about the role of weight gain in triggering relapse this scientific uncertainty which stems from mixed clinical trial results is problematic for insurance coverage decisions such as state medicaid programme decisions to cover or exclude smoking cessation and weight control pharmaceuticals analysts hypothesize that selection bias may explain the inconsistency between the negative clinical results and the persistent view that weight gain triggers relapse if weight concern is both a key determinant of the transition from smoker to ex smoker and a key moderating variable in the relationship between weight gain and relapse we therefore use the nationally representative 1997 national lon

do expenditures on tobacco control decrease smoking prevalence effectiveness of tobacco control programmes in reducing smoking prevalence during 2001 to 2005 is examined tobacco control spending is found to exert no significant effects on smoking prevalence across the 50 states cigarette prices are found to lower prevalence of daily smokers but exert no effect on nondaily smoking prevalence several reasons are suggested for why these results might conflict with previous research these include that most previous studies examined two states california and massachusetts with long standing tobacco control programmes and that most studies examined periods in which many of the states in their samples did not actively fund their programmes another reason may be that unlike most previous studies this study controls for the possibility that tobacco control spending is endogenous when for example states exhibiting relatively low smoking prevalence are also states with relatively high distaste for smoking and accordingly fund tobacco control programmes more generous

costs of smoking and attempts to quit using recent cross sectional state level data for the us this article examines smoking quitting behaviour by smokers in particular we uniquely focus on how the costs of smoking both direct and indirect costs induce smokers to quit results show that the price of cigarettes and home smoking restrictions are the primary thrusts behind smokers quit decision the indirect costs due to workplace smoking restrictions medical costs and a lack of insurance do not seem to significantly matter the habit forming effect of cigarettes is shown to lead to greater quit attempts policy implications are discussed

regulatory risk vertical integration and upstream investment abstract we investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors regulatory risk reflects uncertainty about the regulator s commitment to a regulatory policy that promotes the regulated firm s noncontractible investment we show that when the regulator sets the regulatory policy after the vertical industry structure has been established some degree of regulatory risk is ex ante socially beneficial regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost this occurs for moderate costs of high investment and firms small risk aversion our analysis sheds new light on some relevant empirical patterns in vertically related markets

dynamic yardstick mechanisms abstract this paper shows that the inability of principals to commit to long term contracts is irrelevant when dealing with several agents whose private information is correlated this sharply contrasts with the dynamics of contracting without such correlation the paper also explores what limitations on yardstick mechanisms can justify the use of long term contracts we found that the inability of a principal to commit not to renegotiate long term contracts is without consequence even if there is a bound on transfers that an agent can be asked to pay in contrast short term contracting fails to implement the commitment solution with constraints on transfers second absent current yardstick the possibility of using correlated mechanisms in the future allows the principal to implement the first best with a renegotiation proof long term contract whereas this cannot be achieved with short term contracting

the effectiveness of anti smoking legislation a review abstract this survey focuses on government efforts to curb the use of undesirable goods notably tobacco products we synthesize the economics literature and examine the effectiveness of government curbs on tobacco consumption through non price controls such as bans on cigarette advertising health warnings and workplace smoking bans and price measures or higher prices through higher taxes this literature review is unique in that we do not merely aim to provide a summary of the literature rather our main focus is to draw conclusions from the literature regarding the effectiveness of alternate policy measures across countries in checking smoking and to provide directions suggestions for extending the scope of government intervention to other tobacco products

perceptions of country corruption antecedents and outcomes globalization has increased the need for managers and future managers to predict the potential for country corruption this study examines the relationship between hofstede s cultural dimensions and how country corruption is perceived power distance individualism and masculinity were found to explain a significant portion of the variance in perceived corruption a significant portion of country s risk trade flow with u s a foreign investment and per capita income was explained by perceived corruption

menus of price quantity contracts for inducing the truth in environmental regulation abstract many authors have proposed mechanisms to induce regulated polluting firms to truthfully reveal their private information this paper proposes an alternative scheme in which the regulator offers each firm a menu of linear price quantity contracts faced with this menu each firm s dominant strategy is to truthfully report its private information and self select the contract that is ex post efficient the proposed menu schedule that is more elastic than the firm s residual marginal damage function engenders a positive quantity effect thereby counterbalancing the firm s incentive to misreport prompted by the linearity of price due to its built in price quantity structure the scheme performs as designed regardless of the elasticities of marginal damage and demand functions

managerial incentives on the near linearity of optimal compensation contracts are examined when outcomes depend on managers choices as well as efforts as the cost of effort shrinks relative to payoffs the optimal contract converges to a linear payoff if the control space of the agent has full dimensionality but not otherwise thus when the agent can trade expected return for greater correlation with other returns it is better to ignore relative performance when the cost of effort is small when the choices include all fair gambles and hedges the linear schedule is no more expensive than any other schedule that induces effort unfair gambles are examined as well

robustness and linear contracts abstract we consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do she knows some actions available to the agent but other unknown actions may also exist the principal demands robustness evaluating possible contracts by their worst case performance over unknown actions the agent might potentially take the model assumes risk neutrality and limited liability and no other functional form assumptions very generally the optimal contract is linear the model thus offers a new explanation for linear contracts in practice it also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty jel d81 d82 d86

information and strategic political polarisation we develop a model of electoral competition in which two opportunistic candidates select their policy position and invest in quality policy positions are observed and during the campaign the press reveals some information about quality we demonstrate that when information is imperfect the blackdowns median voter theorem fails to hold for intermediate information levels the unique equilibrium is such that candidates propose policies different from the median voter s bliss point by contrast convergence to the median occurs when quality is almost always or almost never revealed we also show that a profit maximising press may collect more information than socially optimal during the 1995 electoral campaign in belgium the vld a traditionally right wing

unemployment insurance and smoking using recent state level data from the united states this article examines new influences on cigarette demand in particular we uniquely focus on the effects of unemployment and health insurance coverage on smoking results show that higher cigarette prices a lack of health insurance and restrictions on smoking at home all lead to reduced smoking on the other hand literacy income unemployment workplace smoking restrictions smokeless tobacco taxes and tobacco producing states do not seem to have an appreciable impact the magnitude of the price elasticity of demand is greater than that found in the pre msa era policy implications are discussed

wealth culture and corruption this paper examines the impact of national wealth income distribution government size and four cultural variables on the perceived level of corruption in a country the study finds that corruption is significantly correlated to gnp per capita power distance masculinity and uncertainty avoidance significant interaction effects occur in collectivistic and high power distance countries suggestions for future research are developed

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

monopoly regulation under asymmetric information prices versus quantities we compare two instruments to regulate a monopoly that has private information about its demand or costs fixing either the price or quantity for each instrument we consider sophisticated screening and simple bunching mechanisms we characterize the optimal mechanisms and compare their welfare performance with unknown demand and increasing marginal costs the sophisticated price mechanism dominates that of quantity whereas the sophisticated quantity mechanism may prevail when marginal costs decrease the simple price mechanism dominates that of quantity when marginal costs decrease but the opposite may arise if marginal costs increase with unknown costs both instruments are equivalent

intertemporal non linear pricing this paper examines the impact of variations in temporal parameters in a non linear pricing model the two period model being analysed allows a rather general characterization of the price functions and of the impact of changes in temporal parameters such as the social rate of time discount the marginal costs in the two periods the interest rate and the growth rates in demand comparative statics results are derived under the assumption that price functions satisfy a strong optimality condition examples are given tarification non lineaire dans un cadre intertemporel dans cet article l auteur analyse l impact des variations dans les parametres temporels d un modele de tarification non lineaire on considere un modele i deux penodes qui permet une caracterisation assez generale des fonctions de prix et des impacts de variations dans les parametres temporels tels que le taux social de preference temporelle les cofuts marginaux dans les deux periodes le taux d interet et les taux de croissance de la demande l auteur derive des resultats de statique comparative en posant comme hypothese que les fonctions de prix satisfont une condition d optimalite forte des exemples sont donnes the present paper deals with the problem of designing price functions that would maximize social welfare under the constraint that firms operating under increasing returns and or large fixed costs break even there is an abundant literature on this general problem it is not my intention here to survey this literature but only to mention a few seminal papers namely ramsey 1927 coase 1946 boiteux 1956 baumol and bradford 1970 guesnerie 1980 and laffont and tirole 1984 the specific purpose of the present i am grateful to maurice marchand to the participants in the economic theory workshop queen s university the ceremade seminar universite de paris ix and the mathematical economics seminar at core universit6 de louvain for their comments the current version was written in the spring of 1985 during my visit to the universite de toulouse and was subsequently revised to meet the very helpful comments of two anonymous referees financial support from sshrc is gratefully acknowledged canadian journal of economics revue canadienne d economique xix no 3 august aofit 1986 printed in canada imprim6 au canada 0008 4085 86 539 555 1 50 canadian economics association this content downloaded from 207 46 13 57 on sat 10 sep 2016 05 43 49 utc all use subject to http about jstor org terms

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

procurement policy and contracting efficiency the contracting literature has emphasized the optimality of using certain contracting instruments such as multiple cost observations full commitment self selection and competition a two period procurement model is constructed incorporating all of the instruments and optimal contracts are characterized numerical examples suggest that the marginal benefits of full commitment self selection and multiple cost observations are small while the benefits of competition are larger to obtain some evidence on contracting costs defense contracting is reviewed it indicates that using these instruments is very costly thus calling into question the optimality of using all of the procurement instruments copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

conflicts between principals and agents evidence from residential brokerage abstract when a homeowner uses an agent to sell his property he may have less information than his agent and be disadvantaged in price setting and negotiating this study examines whether the percentage commission structure in real estate brokerage creates agency problems we investigate whether agents are able to use their information advantage to either sell their own property faster or for a higher price than their clients properties the empirical results confirm our theoretical predictions of agency problems as we find that agent owned houses sell no faster than client owned houses but they do sell at a price premium of approximately 4 5

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

procurement and renegotiation parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information the issue of the parties investment in the relationship before renegotiation is analyzed in a simple two period procurement model the firm invests in the first period it then learns its production cost and the sponsor learns its value for the project williamson s underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm s investment is not observable by the sponsor the introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued the role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed last it is shown that if investment is observable by the sponsor andthus may become a joint decision variable the two parties may choose to under or overinvest

efficient investments in the implementation problem abstract this paper identifies a condition for an efficient social choice rule to be fully implementable when we take into account investment efficiency to do so we extend the standard implementation problem to include endogenous ex ante and ex post investments in our problem the social planner aims to achieve efficiency in every equilibrium of a dynamic game in which agents strategically make investments before and after playing the mechanism our main theorem shows that a novel condition commitment proofness is sufficient and necessary for an efficient social choice rule to be implementable in subgame perfect equilibria the availability of ex post investments is crucial in our model there is no social choice rule that is efficient and implementable in subgame perfect equilibria without ex post investments we also show that our positive result continues to hold in the incomplete information setting

health risk and the decision to quit smoking this study contributes to the understanding of the decision to quit smoking by taking into account the learning of new risk information the specific hypothesis tested is that smokers learn new risk information and hence create an incentive to quit from their own experience probit models are estimated for the decision to quit smoking based on longitudinal data obtained from taiwan it is shown that health risk measured by the observed change in health status over the period between two surveys has a relatively substantial positive effect on the probability of quitting smoking in addition the results indicate that schooling has a significantly positive effect on the probability of quitting these findings are consistent with the predictions of a bayesian learning framework and suggest that the risk information obtained from individual experience which is the sole source of information available to smokers in most developing countries plays the same role that public information does

overconfidence compensation contracts and capital budgeting a risk averse manager s overconfidence makes him less conservative as a result it is cheaper for firms to motivate him to pursue valuable risky projects when compensation endogenously adjusts to reflect outside opportunities moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects still too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

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

departmentalization and stochastic dissimilarity abstract when activities within the organization are confronted with different types of stochastic environments the owner of the firm has to evaluate the benefits and the costs involved in establishing multiple specialized divisions the benefit from departmentalization is the ability to better match incentives to the extent of uncertainty confronting different activities the cost of departmentalization is the increase in the number of required managerial positions which implies that the owner has to deal with a bigger number of individuals that can assume only limited risk only when the extent of stochastic dissimilarity among activities is significant can the benefit more than outweigh the cost

nonparametric identification of a contract model with adverse selection and moral hazard this paper studies the nonparametric identification of a contract model with adverse selection and moral hazard specifically we consider the false moral hazard model developed by laffont and tirole 1986 we first extend this model to allow for general random demand and cost functions we establish the nonparametric identification of the demand cost deterministic transfer and effort disutility functions as well as the joint distribution of the random elements of the model which are the firm s type and the demand cost and transfer shocks the cost of public funds is identified with the help of an instrument testable restrictions of the model are characterized

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

a risk averse buyer s contract design abstract this research focuses on the design of optimal procurement contracts for competitive bidding involving risk neutral contractors and a risk averse buyer individuals or small businesses need to contract services from larger more efficient firms examples of such services include moving expertise or the building of computing facilities a customized office or home in these situations fixed price contracts are typically used we find that the fixed price contract should not always be employed the buyer can more efficiently account for the bidding strategies of the contractors if he absorbs some risk of cost overruns

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

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

inefficient sorting under output sharing abstract i study sorting in a frictional market asset owners post their terms then workers direct their search when the owners switch from prices to shares the competition between workers is handicapped the unique equilibrium features inefficient positive assortative matching the queue lengths are distorted even though the hosios efficiency condition holds for every pair of types for any distribution of types all workers pair up with better assets the best workers suffer while the weakest workers gain the opposite occurs on the asset side competition drives the asset owners to post flatter contracts it leads to constrained efficiency whenever prices are feasible otherwise handicapped competition results in inefficient sorting

cutting through the smoke separating the effect of price on smoking initiation relapse and cessation i employ a large national representative dataset current population survey tobacco use supplements to investigate how cigarette prices affect smoking decisions a standard econometric approach is to estimate the relationship between cigarette prices and smoking participation at a point in time i extend this approach to model past year decisions to start resume or quit smoking considering reverse causality i apply an instrumental variable excise taxes for cigarette prices i include an index of state level anti smoking sentiment to control for omitted variable bias after estimating separate models for smoking initiation relapse and cessation and for different age groups i find no evidence that increasing taxes on cigarettes can prevent the onset of youth smoking neither does it effectively induce young smokers to quit however cigarette prices do play an important role to prevent relapse and encourage quitting at older ages

optimal contracting of separable production technologies abstract we analyze the class of agency problems with a risk neutral principal and a risk averse agent in which hidden actions and hidden information on the agent s efficiency are jointly present technological assumptions such as monotonicity of likelihood are no longer sufficient for the optimal contract to be monotone in the sharing rule we show that these regularity properties obtain for the rather wide class of production technologies that are separable in the agent s inputs together with ordinal properties such as monotone differences and affiliation of inputs separability yields the monotonicity in efficiency of the agent s actions and indirect utility

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

contractual externalities and systemic risk we study effort and risk taking behaviour in an economy with a continuum of principal agent pairs where each agent exerts costly hidden effort principals write contracts based on both absolute and relative performance evaluations ape and rpe respectively to make individually optimal risk return trade offs but do not take into account their impact on endogenously determined aggregate variables this results in contractual externalities when these aggregate variables are used as benchmarks in contracts contractual externalities have welfare changing effects when principals put too much weight on ape or rpe due to information frictions relative to the second best if the expected productivity is high risk averse principals over incentivize their own agents triggering a rat race in effort exertion resulting in over investment in effort and excessive exposure to industry risks the opposite occurs when the expected productivity is low inducing pro cyclical investment and risk taking behaviours

which countries protect intellectual property the case of software piracy david g steel using data on software piracy we examine how protection of intellectual property varies across countries consistent with other studies we find that intellectual property receives greater protection in developed economies high income countries have lower piracy rates we also find that protection depends on cultural factors countries with an individualist culture have lower piracy rates than do countries with a collectivist culture piracy rates are also lower in countries that have strong institutions that enforce contracts and protect property from expropriation these results suggest that national policies toward intellectual property reflect not only economic concerns but also national culture and institutions jel 034 l86 i introduction intellectual property rights are a recurring focus of international negotiation developed nations argue that such rights are essential for promoting innovation and economic growth many developing nations on the other hand argue that intellectual property rights inhibit economic development by restricting use of existing knowledge a generation of theoretical research has demonstrated that there is truth in both arguments depending on circumstances individual countries may reasonably favor different levels of protection for intellectual property 1 surprisingly little is known however about how such protection is actually determined only a handful of previous studies have analyzed cross national variation in intellectual property rights 2 these studies relate patent rights as formalized in the laws of individual countries to a range of social and economic variables the main empirical finding is that developed countries provide stronger patent protection in this article we extend this line of research by examining cross national variation in piracy of computer software the business software alliance and the software publishers association 1998 have estimated piracy rates the ratio of illegally copied units to total units for business software in more than 70 countries for 1994 97 these rates vary substantially in some countries essentially all new software was pirated in other countries less than 40 of software was pirated what explains these differences consistent with previous studies we find that developed countries provide greater protection for intellectual property than do developing countries high income countries tend to have lower piracy rates this is true both in a simple comparison of piracy rates with per capita income and to a lesser extent in regressions that control for other factors as we discuss below the causal interpretation of this correlation is not obvious the correlation is consistent with the hypothesis that intellectual property rights promote economic development however it may also reflect reverse causality e g if developing nations offer less protection so that they can use the intellectual property of developed nations or common causation by other factors many commentators have suggested that culture may also explain differences in piracy rates western countries they argue have individualist cultures that naturally embrace individual ownership of intellectual property whereas many non western countries have collective cultures that emphasize sharing over individual ownership as a result these societies have been reluctant to adopt western conceptions of intellectual property rights to test whether differences in culture lead to differences in intellectual property rights we relate piracy rates to an index of individualism and collectivism developed by hofstede 1980 1983 we find strong evidence that culture matters 3 countries with a tradition of individualism pirate much less than do countries with a tradition of collectivism this is true both in simple comparisons of piracy rates with individualism and in regressions that control for other factors

cartel enforcement with uncertainty about costs what cartel agreements are possible when firms have private information about production costs in order for a cartel agreement to work it must take into account the incentives for firms to misrepresent their cost information and it must provide sufficient reward so that no firm wishes to defect for private cost uncertainty we characterize the set of cartel agreements with side payments that can be supported as bayesian nash equilibria we show that if defection results in either cournot or bertrand competition the incentive problems in large cartels are severe enough to prevent the cartel from achieving the monopoly outcome in contrast with common cost uncertainty the incentive problems become less severe in large cartels allowing perfect collusion

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

x efficiency and technical efficiency efficiency measurement has become a very popular field in applied economics in recent years and with this interest there has been a large intellectual investment in refining the empirical methods available to researchers in the area in this paper we relate these developments to harvey leibenstein s original 1966 insight into the psychological ideas underlying the notion that economic agents may not achieve maximal efficiency in their productive decisions and behaviour of course it is always possible to argue that apparent inefficiency only arises from a failure of the observer to realise what it is that is being maximized however we evade this easy escape route into non falsifiable hypothesizing and instead take at face value the fact that too many empirical studies have come up with substantial measures of inefficiency for us to ignore its importance for normative economics

pay for performance and beyond incentives are often associated with narrow financial rewards such as bonuses or executive stock options but in general such rewards are just a small part of the design of incentives properly designed incentive systems have to take into account the full portfolio of activities that the agent can engage in the array of instruments many nonfinancial that are available to influence individuals and consider the factors that motivate them in different settings thinking about incentives as a system of interacting instruments and influences has been a major advance in the economics of incentives in recent years in this lecture i will describe the path from pay for performance to the broader view of incentive systems

optimal regulation of multinationals under collusion this paper analyses the optimal collusion proof mechanism for the regulation of multinational firms mnfs in foreign direct investment fdi projects there is a host country with a profitable investment opportunity either a multinational firm mnf or a local firm lf can undertake this project nonetheless due to its firm specific advantage and the mnf has the potential to create a larger surplus the host government faces an informational constraint such that it cannot observe the extra surplus the mnf can generate using this set up karabay 2010 shows that employing foreign ownership restrictions to force a joint venture jv can help the host government to partially overcome its information disadvantage in this paper we extend karabay 2010 by studying the host government s optimal regulatory policy when the mnf and the lf can collude it turns out collusion imposes no cost on the host government and the expected welfare attained in the absence of collusion can still be secured under collusion

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality

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

a model of the demand for investment banking advising and distribution services for new issues this paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer and the issuer cannot observe the distribution effort expended by the banker the optimal contract under which the offer price decision is delegated to the better informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized the model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues an investment banker performs three functions which may be of value to an issuer of new securities underwriting advising and distribution this paper presents a theory of the demand for investment banking advising and distribution services based on an informational asymmetry between an issuer of new securities and an investment banker ultimately a theory of the organization of the financial intermediary industry is required that would predict which firms would use which types of financial intermediaries for which purposes and which firms would raise capital without engaging the services of a financial intermediary only a limited set of such predictions are developed here in the context of a model of a fixedprice offering under a negotiated contract in which the investment banker is

wages or fringes some evidence on trade offs and sorting the two key predictions of hedonic wage theory are that there is a trade off between wages and nonmonetary rewards and that the latter can be used as a sorting device by firms to attract and retain the kind of employees they desire we use the vignettes method to estimate individuals willingness to pay for fringe benefits and job amenities we find negative wage fringe trade offs considerable heterogeneity in willingness to pay for fringe benefits and signs of sorting

competition and regulation in vertically related markets in an industry where naturally monopolistic and competitive activities are vertically related should the natural monopolist be allowed also to operate in the deregulated competitive sector unlike much of the literature on vertical integration this paper assumes that monopoly pricing behaviour is regulated and therefore the effect of vertical integration on the task of regulation is central to the analysis in the model there is both imperfect information and imperfect competition when vertical integration by the monopolist is allowed the regulator s task is made harder insofar as the monopolist has anticompetitive incentives to raise rivals costs on the other hand integration may lead to there being fewer firms in the deregulated sector and hence less duplication of fixed costs the overall welfare comparison between separation and integration is ambiguous as two simple examples illustrate various extensions to the analysis are also considered one of the central questions in debates on regulatory reform is how to organize industries that contain both naturally monopolistic and potentially competitive activities electricity transmission and distribution are characterized by natural monopoly cost conditions but electricity generation is not in the gas industry pipeline services may be naturally monopolistic but supply to larger customers is not in telecommunications natural monopoly is more a feature of local network operations than of long distance operations and is not present in apparatus manufacture and supply or in the provision of value added services in railways while the infrastructure of track and stations is naturally monopolistic the supply of train services might not be policy developments notably those associated with privatization in britain and deregulation in the united states have sometimes led to radical structural reform in these industries at t for decades a vertically integrated monopolist was required under the 1982 settlement of its long running antitrust case against the u s government to divest itself of its local network operations the central electricity generating board cegb in england and wales was restructured both vertically transmission grid activities were separated from generation and horizontally before privatization in 1990 1991 by contrast british telecom was privatized as a vertically integrated dominant firm bt now faces competition from mercury and others especially in the long distance market but its dominance of local network operations might affect competition there and in other areas such as apparatus supply the local network monopoly would of course have to be regulated in any event but its link via ownership to vertically related and potentially competitive activities poses additional regulatory questions many of the efforts of the regulatory body oftel notably in relation to interconnection between bt s and rivals 1 for a general account of the theory and british experience of regulatory reform in the utility industries

an analysis of the impact of economic wealth and national culture on the rise and fall of software piracy rates a number of studies have investigated and found a significant relationship among economic wealth hofstede s national culture dimensions and software piracy rates spr no study however has examined the relationship between economic wealth culture and the fact that national sprs have been declining steadily since 1994 using a larger sample than has previously been available 57 countries we confirm the expected negative relationship between economic wealth culture individualism and masculinity and levels of software piracy the rate of decline in software piracy however is found to be a cultural phenomenon with two factors power distance pdi and uncertainty avoidance uai working in opposition similar results are found for a subset of 37 relatively poor countries this suggests that while the rise in economic wealth seen for most countries should lead to a reduction in software piracy the rate of decline is determined by cultural factors global strategies for dealing with software piracy are discussed

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

incentives for effective risk management under the new capital accord banks choose between two different types of risk management systems the standard or the internal rating based approach the paper considers how a bank s preference for a risk management system is affected by the presence of supervision by bank regulators the model uses a principal agent setting between a bank s owner and its risk management the main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated i e the presence of regulation may induce a bank to decrease the quality of its risk management system

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

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had