the hold up problem in government contracting a two period procurement model is considered in an incomplete contract framework in contrast to o hart and j moore 1988 the welfare maximizing government as the buyer is able to accomplish ex ante optimal contracts which guarantee first best specific investments of both buyer and seller these contracts are precisely characterized regardless of the underlying supports of cost and benefit distributions renegotiation inevitably occurs in some states of nature this renegotiation always increases the ex ante fixed trade price hence the empirical observation of soft budget constraints in government contracting can be rationalized furthermore in accordance with common beliefs the seller s rents accrue only at the production stage copyright 1996 by the editors of the scandinavian journal of economics

defence procurement theory and uk policy since the early 1980s competition as a means of obtaining best value for money has dominated uk defence procurement policy this paper describes the uk defense equipment market and the procurement problem there are sections on the economic theory of procurement contracting regulation and competition the conclusion evaluates uk defence procurement policy and assesses some of the policy issues for the 1990s copyright 1996 by oxford university press

behavioral demand effects when buyers anticipate inventory shortages abstract firms often worry about how buyers will react when there is an inventory shortage but the anticipation of facing a shortage may also impact buyer behavior in this paper we use a combination of theoretical modeling computational methods and laboratory experiments to understand buyers search behavior in markets where there is potential for either a costly or costless inventory shortage when inventory shortages are costly to buyers we find their equilibrium purchasing strategy generates a newsvendor problem among the firms in turn experimental data suggests buyer behavior can be explained by prospect theory better than by standard assumptions of fully rational expected utility maximizing agents indicating that potential inventory shortages generate loss aversion among buyers and there is systematic mis identification of the probability with which they will be able to procure an item using computational methods we find firms are able to extract more surplus from behavioral buyers via higher prices than would be predicted by the standard model on the other hand when inventory shortages are not costly to buyers the effect of behavioral biases on the part of buyers is not relevant but in this case there can be a benefit to reducing inventory via a reduction in price competition

price adjustment in long term contracts the case of coal in two recent papers i examined the effects of relationship specific investment on the duration of contracts negotiated between electric utilities and coal suppliers that work demonstrated that when relationshipspecific investment is important for a cost minimizing supply relationship contracts are frequently utilized that specify ex ante the terms and conditions of trade over many future years in this article i examine the characteristics of the price adjustment provisions specified in these long term coal contracts i utilize a sample of about 250 coal contracts to analyze the structure of formal price adjustment provisions in coal contracts in order to determine the factors that affect initial negotiated contract prices and to examine actual transaction price behavior over time there has been much recent theoretical work as well as some related empirical work that has focused on the benefits of long term contracts when relationship specific investments are important 2 there has also been some theoretical work that focuses on the contractual arrangements that may be chosen to mitigate opportunism problems and guard against

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

optimal allocation of ownership rights in dynamic r d alliances we explore the dynamic evolution of property rights regimes in r d alliances using the incomplete contract approach pioneered by grossman hart and moore in contrast to the standard analysis the productive asset is an excludable public good such as a patent moreover both firms can decide whether to disclose their know how and invest effort know how that has once been released cannot be concealed later we characterize different scenarios in which the optimal ownership structure may change over time due to a trade off between inducing know how disclosure and ensuring maximum effort

efficient adaptation in long term contracts take or pay provisions for natural gas to mitigate the inflexibility of long term contracting for natural gas parties will look for terms that minimize the need for costly adjudication while maintaining incentives for appropriate adaptation the authors examine the incident of take or pay provisions in contracts between natural gas producers and pipelines from this perspective they argue that take obligations can be viewed as a mechanism for effecting appropriate incentives for contractual performance and show that efficient breach considerations define an optimal take percentage as a function of characteristics of the transaction these incentives are distorted by regulated price ceilings which cause the adoption of take obligations in excess of optimal levels the findings refute the common perception that take or pay provisions are just an artifact of wellhead price regulation and serve no useful purpose in the absence of regulation 20 references 1 figure 1 table

the risk averse newsvendor problem under spectral risk measures a classification with extensions abstract we study the risk averse newsvendor problem by defining the objective function as a spectral risk measure we analyze the problem under different types of return formulations focusing on the impact of risk aversion and cost parameters on the optimal ordering decision we show that the monotonicity of the return function with respect to random demand determines the structural properties of the problem when the return function is monotone in demand realization optimal order quantity does not depend on the return margin but only on the overage and underage costs and it has a monotone relation to risk aversion however if return is non monotone in demand impact of risk aversion depends on the specific setting and it can also be non monotone additionally it is non increasing in the margin which leads to varying impact of selling price under distinct settings

money does not grow on trees an argument for usury usury charging a higher interest rate than thought by some to be fair has had and still has a bad press historically it was heavily punished it was then and all too often is now thought to be exploitative yet as even the most economically unsophisticated must realize both sides of these transactions must necessarily gain at least in the ex ante sense otherwise one or the other would refuse to enter into the deal in the first place the present paper is an attempt to justify the practice of charging interest on loans at any rate agreeable to both borrowers and lenders

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

renegotiation design and contract solutions to the hold up problem abstract this paper surveys the literature on contractual solutions to the hold up problem which has addressed the issue of how to design the optimal contractual arrangement to achieve efficient investments in the presence of contract incompleteness although scholars have argued that renegotiation design is a necessary condition to avoid the hold up problem some recent papers have seriously questioned this condition we mainly show that renegotiation design remains a necessary condition to implement efficient investments

would a risk averse newsvendor order less at a higher selling price we model a risk averse newsvendor s decision making behavior with some commonly used classes of utility functions within the expected utility theory eut framework under fairly general conditions of eut we show that a risk averse newsvendor will order less than an arbitrarily small quantity as selling price gets larger if price is higher than a threshold value i e the optimal order quantity decreases as the selling price increases

real wages over the business cycle evidence from panel data one topic on which keynes did not disagree with classical economists was the cyclical behavior of real wages keynes 1936 as well as various classical writers predicted that real wages should move countercyclically quoting the general theory p 17 in general an increase in employment can only occur through the accompaniment of a decline in real wages thus i am not disputing this vital fact which the classical economists have rightly asserted as indefeasible this prediction is based on the premise of competition and a given short run capital stock increases in employment then correspond to more intensive use of capital and through diminishing product lower real wages for this reason evidence by dunlop 1938 and tarshis 1939 that real wages move procyclically was viewed as paradoxical both dunlop and tarshis based their findings on an observed positive correlation between real and money wages which given the procyclical movement of money wages implies a positive correlation between

contract duration and relationship specific investments empirical evidence from coal markets this paper examines the importance of specific relationship investments in determining the duration of coal contracts negotiated between coal suppliers and electric utilities data for 277 coal contracts are used to perform the analysis the results provide strong support for the view that buyers and sellers make longer commitments to the terms of future trade at the contract execution stage and rely less on repeated bargaining when relationship specific investments are more important

newsvendor solutions via conditional value at risk minimization abstract in this paper we consider the minimization of the conditional value at risk cvar a most preferable risk measure in financial risk management in the context of the well known single period newsvendor problem which is originally formulated as the maximization of the expected profit or the minimization of the expected cost we show that downside risk measures including the cvar are tractable in the problem due to their convexity and consequently under mild assumptions on the probability distribution of products demand we provide analytical solutions or linear programming lp formulation of the minimization of the cvar measures defined with two different loss functions numerical examples are also exhibited clarifying the difference among the models analyzed in this paper and demonstrating the efficiency of the lp solutions

timing of investments holdup and total welfare abstract we explore holdup with simultaneous and sequential investment with simultaneous investment both investors are held up with sequential investment contracting becomes possible after the project has commenced so the second investor avoids being held up if the investments are independent sequential investment increases cost of delay reduces the incentive for the first player to invest and increases the second player s incentive to invest the paper shows the timing of investment can act as an additional form of holdup if they have the option when to invest a party may choose the regime that does not maximize total welfare

can coasean bargaining justify pigouvian taxation the fact that according to the celebrated coase theorem rational parties always try to exploit all gains from trade is usually taken as an argument against the necessity of government intervention through pigouvian taxation in order to correct externalities however we show that the hold up problem which occurs if non verifiable investments have external effects and parties cannot be prevented from always exploiting ex post gains from trade through coasean bargaining may be solved by government intervention in this sense the impossibility of ruling out coasean bargaining after investments are sunk may in fact justify pigouvian taxation

the risk averse and prudent newsboy the effects of risk and risk aversion in the single period inventory newsboy problem are examined comparative static effects of changes in the various price and cost parameters are determined and related to the newsboy s risk aversion the addition of a random background wealth and of an increase in the riskiness of newspaper demand are also examined although many of the comparative effects generally are ambiguous some fairly simple restrictions on preferences and or risk increases are shown to lead to qualitatively deterministic results

delegating the decision making authority to terminate a sequential project abstract this paper considers a two stage project which requires investments to be made by different agents who have career concerns at each stage the principal needs to decide whether the project should be continued or not after the first stage outcome is realized the principal can either keep the decision making authority regarding the termination policy or else delegate it to one of the agents with career concerns the first stage agent always wants to continue the project in which case the sunk cost fallacy occurs on the contrary the second stage agent may prefer to stop it voluntarily to protect his reputation therefore when the career concerns are strong the principal should delegate the authority to the second stage agent if an early termination of the project is also the best policy for the principal while if the career concerns are weak the principal should keep the authority

newsvendor problem with random shortage cost under a risk criterion abstract we study profit maximization vs risk approaches for the standard newsvendor problem with uncertainty in demand as well as a generalized version with uncertainty in the shortage cost as often applies in practice we consider two well known risk approaches value at risk var included as a constraint and conditional value at risk cvar we first derive the explicit expressions of the optimal solution with uncertainty of shortage cost under different risk measures and then perform a numerical analysis to quantify the effect of uncertainty in shortage cost and risk measures for the standard newsvendor problem we find that the optimal quantity under cvar is always lower than that under the var constraint which in turn is lower than the order quantity that maximizes the expected profit insightful explanations for this result are that a a higher degree of risk aversion drives the newsvendor to order fewer products increasing the likelihood that all will be sold b this effect is stronger for the cvar approach as this does not consider the expected profit at all another interesting and counter intuitive observation for the cvar approach is that a higher retail price may lead to a smaller order quantity as fewer items need to be sold in order to attain a sufficient profit these results show that one should be careful in employing the cvar risk measure for newsvendor type problems the results remain valid if the shortage cost becomes uncertain however increased uncertainty of this type does improve the relative profitability under the cvar approach by increasing the order quantity under that criterion whilst there is no effect under the other criteria

the hold up problem in a repeated relationship abstract much of the literature on what determines the scope of operations of a producer has centered on the hold up problem the standard results indicate the hold up problem may lead to suboptimal investments and therefore integration may improve the organization of production in this paper we consider a repeated relationship with durable investments and show the possibility of integration improves the choice of investments and there is no integration in equilibrium the equilibrium contract is non exclusive in order to allow the buyer to choose integration in later periods we derive this result in the presence of very simple and incomplete contracts

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

incomplete contracts the hold up problem and asymmetric information abstract given symmetric information in a standard hold up problem a buyer s investment incentives are always increasing in his bargaining power while this result is robust under one sided private information it can be overturned under two sided private information

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

the effect of implicit contracts on the movement of wages over the business cycle evidence from micro data in this paper we address the question of whether wages are affected by labor market conditions in a manner more consistent with a contract approach than with a standard spot market model from a simple implicit contract model we derive implications about the links between wages and past labor market conditions using individual data from the current population survey and the panel study of income dynamics we find that an implicit contract model with costless mobility describes these links better than either a simple spot market model or an implicit contract model with costly mobility

non cooperative bargaining theory an introduction the paper provides an informal introduction to some of the main themes of the recent literature on non cooperative or sequential bargaining models it focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by nash bargaining theory it illustrates the new insights offered by the non cooperative approach by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome finally the difficulties which arise in extending this analysis to two person bargaining with incomplete information and to n person bargaining are discussed this is a revised version of the fourth review of economic studies lecture presented in april 1985 at the joint meeting of the association of university teachers of economics and the royal economic society held in oxford the choice of lecturer is made by a panel whose members are currently professors hahn mirrlees and nobay and the paper is refereed in the usual way this paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years the approach involves writing down some particular sequence of moves offers and replies to be made over time in the course of negotiations and then looking for a non cooperative equilibrium in the game thus specified in practice a perfect equilibrium or in games of incomplete information a sequential equilibrium while the approach appears at first sight to be very different in spirit from the traditional axiomatic approach in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations the two approaches are in fact complementary while the

the design of contracts and remedies for breach in the first part of this article hypothetical contracts providing for all possible uncertain contingencies are considered in the next part contracts providing for only some contingencies are examined and are shown to be advantageous due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them in the following major part of the article two of these substitutes for contingent terms are analyzed remedies for breach and the opportunity for renegotiation the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts

shared quality uncertainty and the introduction of indeterminate goods the purpose of this paper is to introduce a new category of goods indeterminate goods which will be compared with the classical framework of experience search and credence goods nelson 1970 darby and karni 1973 this concept sheds new light on the nature and status of quality uncertainty through the following hypothesis uncertainty about the product s quality can be shared by all agents of the market and this uncertainty can be non neutral and disrupt the market we identify three types of shared uncertainty about the product s characteristics and the corresponding problems that can arise shared uncertainty due to the emergence of a product hirschman 1974 shared uncertainty concerning the past of a product basing ourselves on the art market and finally shared uncertainty regarding the future impacts of a product through empirical data on product safety

after you sir hold up direct externalities and sequential investment we propose a solution to the hold up problem the parties in a contract can avoid the inefficiencies caused by the possibility of opportunistic behaviour and implement the first best level of investment if they make their investment decision sequentially one party observing the choice made by the other party before making his own choice unlike the existing literature the proposed solution leads to the efficient choice of investment even when there are two sided direct externalities journal of economic literatureclassification numbers d23 d82

a benchmark solution for the risk averse newsvendor problem in this paper we derive the first order conditions for optimality for the problem of a risk averse expected utility maximizer newsvendor we use these conditions to solve a special case where the utility function is any increasing differentiable function and the random demand is uniformly distributed this special case has a simple closed form solution and therefore it provides an insightful and practical interpretation to the optimal point we show some properties of the solution and also demonstrate how it can be used for assessing the newsvendor utility function parameters

the moral hazard of budget breaking it has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget balancing constraint and that this facilitates the design of contracts that can sustain the pareto optimum as a perfect nash equilibrium this note offers an explanation for why the use of budget breaking schemes is not so widespread as that of active monitoring despite the fact that such schemes would save the resources expended on supervision the note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party which could render the proposed equilibrium incredible

inventory control with an exponential utility criterion a base stock policy is shown to be optimal when a dynamic version of the news vendor model is optimized with respect to an exponential utility criterion

efficient reliance and damage measures for breach of contract this article considers a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to prepare to sell it it is assumed that postbreach bargaining is possible and carried out in a cooperative fashion and that buyers and sellers form expectations about the outcome of such bargaining in a specific way without enforceable contracts the potential appropriability of specific rents results in inefficiently low levels of investment three damage measures commonly used to enforce contracts are shown to produce inefficiently high levels of investment and to be pareto ranked from best to worst as follows specific performance expectation damages and reliance damages

an equilibrium model of the supply chain network under multi attribute behaviors analysis abstract this paper studies a supply chain network scn equilibrium model considering decision makers multi attribute behaviors from the perspective of behavioral finance in this paper an equilibrium model of an uncertain snc is constructed in which retailers choose their decisions according to their risk averse behavior loss averse behavior and regret averse behavior by using different weights to represent retailers attitudes to these three behaviors the retailers multi attribute utility functions are developed the equilibrium conditions of the manufacturers the retailers together with the network are established by the finite dimensional variational inequality formulation three numerical examples are solved in the first numerical example we illustrate the effect of each of these three behaviors on the equilibrium decisions the profits and the utilities of the decision makers in the other two numerical examples we explore the effects of changes in attitudes to these three behaviors on the equilibrium decisions profits and utilities of the decision makers the numerical results show that the equilibrium decisions are affected by each of these three behaviors very much moreover they are sensitive to the changes in attitudes to these behaviors

ownership access and sequential investment we extend the property rights framework to allow for a separation of the ownership rights of access and veto and sequential investment parties investing first ex ante do so before contracting is possible parties that invest second ex post can contract on at least some of their investment costs along with this cost sharing effect the incentive to invest is affected by a strategic effect generated by sequential investment together these effects can overturn some of the predictions of the property rights literature for example the most inclusive ownership structure might not be optimal even if all investments are complementary

renegotiation of sales contracts this paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort unlike in previous models a contract here contains only one compensation scheme and the agent has all the bargaining power in the renegotiation stage using a relatively weak forward induction refinement all equilibria are shown tb be second best efficient renegotiation occurs in every equilibrium if the effort set is rich the only equilibrium initial contract is a sales contract i e a scheme which sells the project to the agent this captures the idea that a party the principal who has an inherently weak renegotiation position will sometimes insist on a simple initial contract

when and why usury should be prohibited usury ceilings seem indefensible their opponents insist these caps harm the consumers they are intended to help low ceilings are said to prevent the least advantaged agents from accessing legal credit and drive them into the black market where prices are higher and collection methods are harsher but in this paper i challenge these arguments and show that the benefits of interest rate limitations in the most expensive credit markets clearly outweigh the costs the test case is payday lending deregulated pricing in this market produces negative externalities that justify usury restrictions unless prices are capped the more solvent majority of borrowers is compelled to cross subsidize the least solvent debtors who have a high rate of default rationing the riskiest debtors out of this market by means of a moderate usury cap puts an end to this unfairness and produces fewer bad consequences than the advocates of deregulated pricing recognize i argue that only an extreme principle like maximizing the minimum could justify a free market in payday credit

the performance of long term contracts further evidence from coal markets this article extends my previous work on price adjustment in long term coal contracts to cover a period in which the nominal market prices for coal were below the prices specified in the preexisting long term contracts two related sets of questions are explored first did actual transactions prices for coal delivered pursuant to old contracts follow contractual pricing formulas leading to higher rather than lower prices or did they adapt quickly to changing market conditions second what were the relative roles offormal contractual provisions voluntary renegotiation and breach of contractual promises in determining actual transactions prices quantities and the durability of contractual relations it appears that actual transactions prices for coal delivered pursuant to old contracts were rigid downward following written contractual provisions rather than changes in current market values changing economic conditions led to an increase in renegotiation breach and litigation but the vast majority of existing long term contracts endured through the market downturn without major changes in prices or quantities from those previously agreed to by contract the threat of legal sanctions appears to have played an important role in sustaining contractual promises

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

search wage bargains and cycles in this paper i describe an equilibrium model of job matchings with perfect foresight that has the following property the number of people looking for work changes temporarily when there is a temporary shock to the value of labour s marginal product it does not change when the shock is permanent by contrast real wages change temporarily by a small amount when the shock is temporary but change permanently and by a bigger amount when the shock is permanent thus the model offers an explanation for the observation that over the cycle small wage changes are associated with changes in unemployment whereas secularly wage growth does not seem to affect the rate of unemployment the two most common explanations for this observation in the literature the phelps lucas misperceptions model and the lucas rapping intertemporal substitution model are well grounded in equilibrium theory but they have not stood up well to empirical testing the misperceptions model requires more ignorance of aggregate changes than can be reasonably assumed whereas the intertemporal substitution model requires bigger wage elasticities of labour supply than those estimated in the model of this paper neither misperceptions nor changes in the supply of labour play a role in generating the unemployment cycle all agents observe the shocks when they occur and they anticipate correctly the economy s adjustment path but like the new classical explanations of the cycle the model is an equilibrium one in the sense that all private gains from trade are fully exploited at all phases of the cycle although the social gains from trade may not be fully exploited because of search externalities the cycle i derive here is not due to externalities unlike other related perfect foresight models such as diamond s 1982a the structure of the model is such that the externalities do not give rise to multiple equilibria the key element of the model which is responsible for the transmission of output shocks to unemployment is the equation for wages in markets where the allocation of jobs takes place through search both firms and workers have some monopoly power a point emphasised by mortensen 1970 though he attributed only temporary monopoly power and only to firms i use the nash bargaining solution to solve for the equilibrium wage rate and show that the firm s and worker s alternative returns threat points or

hold up and sequential specific investments we explore the hold up problem when parties can make investments simultaneously or sequentially sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime however a cost of sequencing is that it can disadvantage some parties reducing their incentive to invest the mere possibility of sequential investment can prevent trade from occurring this can be interpreted as a new form of hold up if both parties prefer to invest second as the number of potential investment periods is increased the subgame perfect equilibrium can switch between a prisoners dilemma and a coordination game

decision making with expected shortfall and spectral risk measures the problem of comparative risk aversion abstract we analyze spectral risk measures with respect to comparative risk aversion following arrow 1965 and pratt 1964 for deterministic wealth and ross 1981 for stochastic wealth we argue that the arrow pratt concept per se well matches with economic intuition in standard financial decision problems such as willingness to pay for insurance and simple portfolio problems different from the literature we find that the widely applied spectral arrow pratt measure is not a consistent measure of arrow pratt risk aversion instead the difference between the antiderivatives of the corresponding risk spectra is valid within the framework of ross we show that the popular subclasses of expected shortfall and exponential and power spectral risk measures cannot be completely ordered with respect to ross risk aversion thus for all these subclasses the concept of ross risk aversion is not generally compatible with arrow pratt risk aversion but induces counter intuitive comparative statics of its own compatibility can be achieved if asset returns are jointly normally distributed the general lesson is that these restrictions have to be considered before spectral risk measures can be applied for the purpose of optimal decision making and regulatory issues

can a contract solve hold up when investments have externalities a comment on de fraja 1999 abstract this comment finds an error in de fraja 1999 the correction of which overturns its main result in contrast to his claim under a mild condition the suggested contract is not only unable to solve the hold up problem but it can provide almost no incentive for specific investments when they exhibit sufficiently large direct externalities his result holds primarily when the investments have no externalities we remark on a related result in the literature and propose an alternative contract that achieves efficiency journal of economic literature classification numbers c70 j41 k12 l22