optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

corporate conservatism and relative compensation this paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability most managers may refrain from undertaking innovations that stochastically dominate an industry standard common components of uncertainty lead to market inferences of managerial ability based on relative performance managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating discontinuities in compensation when performance is low because of firings lead managers to have differing valuations of an accurate benchmark depending on type in particular very high and very low ability managers are more likely to undertake superior innovations than those of average ability

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

sick pay provision in experimental labor markets sick pay is a common provision in most labor contracts this paper employs an experimental gift exchange environment to explore two related questions using both managers and undergraduates as subjects first do workers reciprocate sick pay in the same way as they reciprocate wage payments second do firms benefit from offering sick pay firms may benefit in two different ways directly from workers reciprocating higher sick pay with higher efforts and indirectly from self selection of reciprocal workers into contracts with higher sick pay our main finding is that the direct effect is rather weak in terms of effort and negative in terms of profits however when there is competition among firms for workers sick pay can become an important advantage consequently competition leads to a higher provision of sick pay relative to a monopsonistic labor market

moral hazard and the portfolio management problem this paper investigates the significance of nonlinear contracts on the incentive for portfolio managers to collect information in addition the manager must be motivated to disclose this information truthfully we analyze three contracting regimes 1 first best where effort is observable 2 linear with unobservable effort and 3 the optimal contract within the bhattacharya pfleiderer quadratic class we find that the linear contract leads to a serious lack of effort expenditure by the manager this underinvestment problem can be successfully overcome through the use of quadratic contracts these contracts are shown to be asymptotically optimal for very risk tolerant principals

analyst forecasts and herding behavior the use of analyst forecasts as proxies for investors earnings expectations is commonplace in empirical research an implicit assumption behind their use is that they reflect analysts private information in an unbiased manner as demonstrated here this assumption is not necessarily valid there is shown to be a tendency for analysts to release forecasts closer to prior earnings expectations than is appropriate given their information further analysts exhibit herding behavior whereby they release forecasts similar to those previously announced by other analysts even when this is not justified by their information these results are shown to have interesting empirical implications article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

microeconomic adjustments in uruguay during 1973 1981 the interplay of real and financial shocks abstract this paper uses the financial statements of industrial firms to develop an integrated firm s eye view of the changes in the uruguayan economy during 1973 1981 in the first of three subperiods 1973 1975 real financial costs were very negative and tended to offset low returns on operating assets during 1976 1978 the dismantling of interest rate controls increased real financial costs but other factors increased the returns on operating assets more rapidly during 1979 1981 financial costs jumped enough to more than absorb increases in gross earnings which were probably due to argentine demand the rates of earning and capital formation were highest among exporters in the second subperiod when a major export promotion program was in place this pattern was reversed in the third subperiod as the promotion programs were dismantled and real currency appreciation seemed to squeeze gross earnings of exportables relatively more this unequal squeezing was probably due to redundant tariff and other protection for import competing producers

tariff liberalization policy and financial restrictions abstract the purpose of this paper is to assess how restrictions on capital mobility affect adjustment to a tariff liberalization policy this is done by comparing the adjustment process under free and restricted convertibility of foreign assets in a regime where the commercial exchange rate is pegged it is shown that starting from an equilibrium characterized by significant scarcity of foreign assets a policy of simultaneous liberalization of both current and capital account would cause a larger drop in domestic goods prices than would the short run effects of tariff liberalization alone in such an economy the effect of liberalization of capital controls is to generate current account surplus whereas tariff liberalization generates current account deficit

capital controls the case of argentina abstract in this paper the effects of capital controls on the observed nominal interest rate differential adjusted for exchange rate changes between argentina and the united states are examined a simple model of portfolio behavior is used which is based on dooley and isard s 1980 work the model separates the component of the observed nominal interest rate differential adjusted for exchange rate changes between the argentinian rate and the dollar rate which was due to political and exchange risk premia associated with prospective controls from the component of the differential due to the existing controls the empirical analysis shows that both the existing and prospective contrls combined explain about 83 per cent of the nominal interest rate differential

mandatory sick pay provision a labor market experiment the question whether a minimum rate of sick pay should be mandated is much debated we study the effects of this kind of intervention in an experimental labor market that is rich enough to allow for moral hazard adverse selection and crowding out of good intentions to occur we find that higher sick pay is reciprocated by workers through higher effort but only if sick pay is not mandated we also study adverse selection effects when workers have different probabilities of getting sick and can reject the hypothesis that this leads to market breakdown overall we find that mandating sick pay actually leads to a higher voluntary provision of sick pay by firms

welfare effects of liberalization reforms with distortions in financial and labor markets abstract liberalization can have ambiguous effects on welfare and produce unexpected macroeconomic changes because of conflicting effects stemming from distortions in other markets both within the same period and across time this approach presents a two period intertemporal model of a small open economy to examine the welfare effects of removing one distortion financial repression tariffs while others wage and price rigidity remain in place the equilibrium conditions from this model are used to derive welfare effects of various liberalization policies and to determine optimal levels of the policy variables

partial gift exchange in an experimental labor market impact of subject population differences productivity differences and effort requests on behavior we report a gift exchange experiment firms make wage offers workers respond by determining an effort level higher effort is more costly to workers and firms have no mechanism for punishing or rewarding workers consistent with the gift exchange hypothesis workers provide more effort at higher wages but undergraduates provide substantially less effort than mbas evidence suggests this results from differences in prior work experience firms nonbinding effort requests are at least partially honored resulting in increased overall effort for undergraduates although higher wages are relatively more costly for lower productivity firms workers do not provide them with more effort

anticipated protectionist policies real exchange rates and the current account the case of rigid wages abstract in this paper we develop a general equilibrium model of an economy with short run unemployment to analyze how anticipated protectionist policies affect real exchange rates the current account and aggregate employment we find that a key transmission channel is the change in current employment induced by future changes in tariffs we show that the direction and magnitude of this effect will depend on relative factor intensities and on real exchange rate behavior if a future tariff generated a current real exchange rate appreciation and if nontradables are labor intensive the anticipation of protectionist policies will generate an increase in current employment

the expectations management approach to stabilization in argentina during 1976 1982 abstract the main goals of the economic authorities in argentina during 1976 1982 were to open the economy to foreign trade and to reduce inflation the stabilization plan relied first on the control of money and wages later on a preannounced schedule of a declining future exchange rate actions that were supposed to be accompanied by a fiscal policy to reduce the public sector deficit the stabilization plan was abandoned in the first quarter of 1981 for two reasons an important financial crisis during the second quarter of 1980 and a deterioration of fiscal discipline that could no longer assure coherence between the deficit and the preannouncement schedule the paper also argues that the political situation in argentina undermined the credibility of the reforms and particularly the stabilization attempts with the abandonment of the stabilization schedule new commercial and exchange rate measures were gradually introduced reversing the policy of opening the economy to foreign trade the financial reform was reversed in 1982 with the virtual nationalization of deposits the experience of argentina suggests that capital inflows responding to interest rate arbitrage play a fundamental role in the short run dynamics of real exchange rates they can promote the adjustment or they can precipitate a run on the foreign exchange market the lesson is that a stabilization plan based on the preannouncement of future exchange rates is highly risky for an economy like argentina s

cooperation and competition in intergenerational experiments in the field and the laboratory there is economic pressure towards the postponement of the retirement age but employers are still reluctant to employ older workers we investigate the comparative behavior of juniors and seniors in experiments conducted both onsite with the employees of two large firms and in a conventional laboratory environment with students and retirees we show that seniors are no more risk averse than juniors and are typically more cooperative both juniors and working seniors respond strongly to competition the implication is that it may be beneficial to define additional incentives near the end of the career to motivate and retain older workers

the welfare effects of trade and capital market liberalization treatise on the welfare effects of trade and capital market liberalization consquenses of the capital account liberalization in the presence of trade restrictions specifies on the liberalization of trade in the presence of foreign borrowing constraints proves superiority of gradual liberalization of trade to an abrupt liberalization

bond issues as a replacement for bank lending to ldcs a reconsideration of the lessons of the 19th century for the present day abstract following the debt crisis the record of commercial bank long term lending to ldcs has been severely questioned instability with overlending yielding to underlending is attributed to distortions arising from official measures intended to protect the payments mechanism substituting the 19th century practice of bond issues appears to offer market based regulation of stable long term financing obviating official involvement this paper questions the diagnosis of bank lending instability and argues that 19th century bond markets evidenced similar tendencies through the competitive behavior of merchant banks prudential regulation and limitation of deposit insurance rather than bank exclusion is the appropriate response

the theory of commercial policy in a monetary economy with sticky wages abstract in a two country two commodity two factor international trade model the monetary sector is introduced by way of a transaction constraint under the assumption of fixed nominal wages in the domestic country import tax and export subsidies imposed by the domestic country have opposite effects on employment under the small country assumption money supply policy has no effect on the exchange rate

promises in contract design in this paper we propose a new channel of contract design to boost efficiency if deviating from one s own words induces a self imposed moral burden the optimal contracting procedure with regard to cheap talk shall assign the responsibility for installing the nonbinding promise in the contract to whoever has the residual right to break such promise in the spirit of grossman and hart 1986 and hart and moore 1990 to study whether a worker s own promise of effort level governs his real choice of effort in a gift exchange game we implement four treatments in our experiments by varying two factors 1 who the firm or the worker takes the position of the proposer to propose the contract and 2 whether the proposed contract includes a nonbinding specification of the worker s effort level our key finding is that when it is the worker who proposes the contract and the contract includes the worker s promised effort level both the worker s actual effort choice and the aggregate profits are significantly higher than in each of the

microeconomic adjustments in chile during 1977 1981 the importance of being a grupo abstract this paper uses the financial statements of industrial firms to provide an integrated firm level view of the changes in the chilean economy during 1977 1981 both real side and financial shocks had major effects on the performance of some types of firms exportable goods producers did relatively poorly in real activities for reasons probably tied to chile s real prolonged exchange rate appreciation import competing firms that began the period with high protection did even worse apparently reflecting the larger change in their output prices as protection was dismantled the reforms thus shifted demand away from industries least in line with the country s comparative advantage but they also hurt exportables the very sector authorities intended to promote on the financial side the highly positive real cost of peso borrowing reduced industrial profits considerably a handful of powerful conglomerates grupos generated large but presumably unrealized capital gains by investing in the securities of related enterprises such activities allowed them to offset relatively poor returns on real operations and their ownership of the country s major banks allowed them to consolidate control of a large volume of assets with debt finance these two results explain why the grupos were suddenly in considerable financial difficulty when the chilean boom ended in 1982

dual exchange rate systems and capital controls an investigation abstract the welfare aspects of dual exchange rate systems are analyzed in this paper the requirement that domestic financial transactions with the rest of the world be undertaken at a special foreign exchange rate is found to be equivalent to levying a tariff on this class of international transactions hence a dual exchange rate system and capital controls are shown to be essentially identical in light of the above statements the dual exchange rate system should be regarded as a form of commercial policy and be evaluated in this context by applying the applicable standard real trade theorems

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

in search of workers real effort reciprocity a field and a laboratory experiment we present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages work effort neither reacts to an increase of the own wage nor to a positive or negative peer comparison this result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort in an additional real effort laboratory experiment we show that explicit cost and surplus information that enables an exact calculation of an employer s surplus from the work contract is a crucial prerequisite for a positive wage effort relation this demonstrates that an employee s reciprocity requires a clear assessment of the surplus at stake jel c91 c92 j41

trade as the engine of growth in developing countries revisited economic growth in developed countries since the mid 1970s the only way to keep the engine of ldc growth beating at a satisfactory rate so the argument goes is to turn to an alternative source of fuel this lewis argues lies in trade among the developing countries which he asserts can take up the slack left by mdcs more developed countries as mdcs slow down 1980 p 560 pessimism about demand for ldc exports in developed countries markets is a recurrent theme in the development literature also familiar is the approach taken by lewis to dismiss past successes of ldcs in world trade by declaring the alleged engine of past growth to be no longer operating satisfactorily the intellectual foundations of the import substitution strategy laid in the 1950s by prebisch myrdal and most importantly nurkse rested on similar grounds arguing that the demand for periphery countries exports in the 20th century is far weaker than it was in the 19th century trade was dismissed as an engine of growth a function nurkse alleged it had served in the 19th century the solution prescribed in the 1950s was to look inward in effect to scrap the trade engine altogether lewis remedy coming two decades later when most importsubstitution possibilities in many ldcs have been all but exhausted retains the trade engine but seeks an alternative source of fuel to drive it the classic critique by irving kravis 1970 of nurkse s thesis of trade as a faltering engine of growth showed that export expansion did not serve in the nineteenth century to differentiate successful from unsuccessful countries p 850 this followed from two findings first that successful 19th century countries showed few signs of export dominated growth second that unsuccessful periphery countries enjoyed export expansion in the second half of the 19th century of the same order of magnitude as the temperate regions of recent settlement this led kravis to conclude that a more warranted metaphor

commitment through renegotiation proof contracts with third parties the paper analyzes contracts as means of strategic commitment that is commitment against outside parties to the agreement it considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry it assumes away the possibility for the parties to precommit not to make pareto improving renegotiations of the agreement once entry has taken place under symmetric information the contract is thus found to be useless for entry deterrence if the incumbent firm or workers possess some private information excessive post entry production levels can however be sustained ex post since output reductions may not be incentive compatible while information asymmetries are usually welfare decreasing when the goal is optimal risk sharing they can thus be welfare improving for the contracting parties when commitment against outsiders is the goal of the contract the role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper and the general relevance of strategic contractual commitment is discussed

the dynamics of portfolio management contracts we consider the multiperiod relationship between a client and a portfolio manager and the resulting problem of motivating a manager of unknown ability to acquire valuable information we explore the contractual forms and the optimal retention policy of the client and find that the optimal initial set of contracts features a smaller performance based fee component paid to the manager than in a first best contract and the contract choice elicits only partial information about the manager as a result ex post performance measurement is critical to future recontracting in general managers are retained only if the returns on their portfolio exceed the benchmark by an appropriate amount article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the indirect approach to trade liberalization dynamic consideration on liberalization cum stabilization policies in latin america abstract recent experience of some latin american countries has shown that a switch to an outward oriented development strategy involves difficult adjustment problems these problems may overburden the economy s adjustment capacity when the heritage of an extended period of import substitution has to be overcome together with severe macroeconomic imbalances when these conditions apply priority should be given to the elimination of the anti export bias even at the expense of new temporary export subsidies and of the macroeconomic disturbances before trade liberalization in the proper meaning of the word would have to be realized

on relative performance contracts and fund manager s incentives abstract for pension schemes mutual funds banks and other financial intermediaries large portfolio decisions are increasingly delegated to fund managers recently there has been growing concern that these managers seem to adopt extremely similar investment strategies one possible explanation for this phenomenon may be found in reward schemes based on relative performance we show how relative performance reward schemes may arise as optimal contracts our focus is the fund owners fund manager relationship in which the manager before making a portfolio decision on behalf of the owners may acquire at some cost information that is not available to the owners payment schemes based on relative performance afford the owners tighter control of their manager s activities however if two managers of different funds both accept contracts that depend on their relative as well as absolute performances then there may exist equilibria in the managers subgame that result in undesirable outcomes for the owners

gift exchange in a multi worker firm one of the main findings of a large body of gift exchange experiments is that in an incomplete contracts environment workers on average do not shirk and usually provide more than the minimum enforceable effort level in general 40 to 60 percent of the workers reward higher wages with higher effort these results are observed for simple one employer one worker relationships in this paper we investigate whether they generalize to the more realistic situation in which the employer employs several workers we compare a bilateral gift exchange game with a treatment in which each employer has four workers we find that effort levels in the latter treatment are only marginally lower gift exchange thus appears to be robust to increases in the size of the workforce and intention based reciprocity rather than social preferences seems to be the main driving force behind gift exchange

the macroeconomics of trade liberalization abstract this paper analyzes the short run macroeconomic consequences of trade liberalization in ldcs it is shown that linkages between the tradables and nontradables sectors the effect of imported inputs on the economy s productive structure and certain patterns of factor substitution can go a long way toward explaining the perverse contractionary effects frequently seen in liberalization programs

the price of worker reliability abstract worker absenteeism is costly to firms that use assembly line production processes this paper shows why an assembly line firm may prefer to pay higher average wages and reduce sick pay entitlement relative to firms with constant returns

microeconomic adjustments in argentina during 1976 1981 the importance of changing levels of financial subsidies abstract this paper uses the financial statements of argentine industrial firms to study the micro level impact of recent liberalization and reform attempts the main lesson is that extremely large subsidies were provided to the industrial sector by way of negative effective financial costs these negative costs appeared first in the late 1970s because of real currency appreciation and unconstrained access to foreign credit then again in 1981 because of an exchange insurance program we also find that the argentine government s announced intention to promote exporting activities did not translate into relatively favorable product market conditions for exporting firms to the contrary the real currency appreciation squeezed exporters profits while redundant tariff protection insulated import competing firms from world competition at least until 1980

gaming against managers in incentive systems experimental results with chinese students and chinese managers we examine strategic interactions between firms and planners in china comparing behavior between i students and managers with field experience with this situation ii standard versus increased monetary incentives and iii sessions conducted in context making explicit reference to interactions between planners and managers and those without any such references the dynamics of play are similar across treatments with play only gradually and incompletely converging on a pooling equilibrium a fivefold increase in incentives significantly increases initial levels of strategic play games played in context generated greater levels of strategic play for managers with minimal impact on students

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

the effects on sick leave of changes in the sickness insurance system to get a more complete picture of how labor supply is affected by economic incentives the effects on absenteeism should be taken into account in particular absenteeism due to sick leave can be considerable we examine whether the level of sick leave compensation affects sick leave behavior using long time series data 1955 99 for sweden with numerous changes of the compensation level we generally find strong effects reforms implying more generous compensation for sick leave tend to be associated with permanent increases in sick leave and vice versa these findings are reinforced in a panel study covering the 1983 91 period

herding in delegated portfolio management when is comparative performance information desirable abstract we address the issue of investors asset allocation decisions when portfolio management is delegated to an agent contrary to predictions from traditional financial theory it is shown that investors may not induce their manager to allocate funds to the asset with the highest return instead they may herd in their asset allocation decision and induce trade in a particular asset because another manager is trading in it and despite the presence of a more profitable alternative doing so allows investors to write an efficiency improving relative performance contract on the other hand herding leads investors to design wage contracts strategically resulting in more aggressive and thus less profitable trade in equilibrium we show that herding occurs when the cost of information is high information precision is low and when managers are sufficiently risk averse moreover when investors can decide whether or not to disclose information about their manager s performance they will not do so

does it all add up benchmarks and the compensation of active portfolio managers in this article the authors examine theoretically the use of benchmark portfolios in the compensation of privately informed portfolio managers they find that the use of a benchmark and particularly the types of benchmarks often observed in practice cannot be easily rationalized specifically commonly used benchmark adjusted compensation schemes are generally inconsistent with optimal risk sharing and do not lead to the choice of an optimal portfolio for the investor moreover benchmarks do not help in solving potential contracting problems such as inducing the manager to expend effort or trying to screen out uninformed managers copyright 1997 by university of chicago press

trade and capital account liberalization in a keynesian economy this paper analyzes the process of trade and capital account liberalization in a keynesian framework with unemployed resources previous studies on this subject have ignored the potential interactions between the liberalization process and the pre existing distortions in the economy this paper derives the optimal liberalization policy given the keynesian context and solves for explicit formulas for the import tariffs and the capital account tax in a two period general equilibrium model it is argued that a trade reform is likely to have recessionary effects in the short run if the capital account has already been liberalized

experimental labor markets and policy considerations incomplete contracts and macroeconomic aspects this survey focuses on experimental labor markets investigating two aspects that are important for a better understanding of labor market relations and their consequences for labor market policies the first part of the survey is dedicated to papers that assess the prevalence of reciprocal considerations in incomplete labor contracts the second part summarizes the relatively small but growing experimental literature exploring labor market issues in macroeconomics and public finance studying the interaction between taxation and labor market outcomes

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

sickness absence an international comparison this paper shows how internationally and intertemporally consistent information on sickness absence can be constructed from labour force surveys and describes some important features of data that we have generated using the luxembourg employment study we also analyse sickness absence rates by age gender and other socio economic characteristics of workers these relationships prove to be similar across countries with widely differing mean rates of absence in this dataset workers with longer tenure tend to have higher absence rates even when age is controlled for absence is also positively correlated with higher usual hours of work we show how internationally and intertemporally consistent information on sickness absence can be constructed from labour force surveys lfs and describe some important features of data that we have generated using the luxembourg employment study les such data fill an important gap in available information about absence since they have the potential to provide answers to a number of issues that remain unresolved in its study there is now substantial evidence going back to the work of the industrial fatigue research board in the 1920s and 1930s i that sickness absence is not purely a response to a medical condition workers who have access to compensation payments are more likely to be absent than those without buzzard and shaw 1952 the higher the rate of compensation the more absences workers are likely to take buzzard and shaw 1952 furthermore the higher the rate of compensation the longer absences are likely to be barmby et al 1991 the analysis of sickness absence is placed firmly in the agenda of economics by the idea that sickness absence rates are the consequence of choices that can be mediated by financial and other incentives the provision and level of sickpay is typically determined at two levels by negotiation between firms and their workforces and by government regulation interfirm variations in absence and their correlates are not well understood coles and treble 1996 have argued that the marginal cost of an absence is partially in the control of firms and can be usefully seen as driven by the nature of the technology adopted these theoretical arguments remain largely unexplored empirically but the ability to compare similar industries across different countries is likely to be revealing this paper was drafted during a visit to ceps instead in the summer of 1999 the research was funded by a grant of the european commission under the tmr programme access to large scale facilities hosted by iriss c i at ceps instead in differdange luxembourg we are also grateful for support from the leverhulme foundation through a grant to the institute for labour research at the university of essex and to colleagues at the ilr for their constructive comments acknowledgements to les data providers are given at the end of the paper we would also like to thank paul alkemade elena bardasi and pascal garin for their help any remaining errors are our own and the views expressed herein are not necessarily those of ceps instead 1 see for example vernon and bedford 1928

risk in international banking this paper differentiates between country risk the probability that a country will default on its obiigations and two forms of international banking risk 1 the extent to which a bank s foreign activities affect the cost of equity capital and 2 the extent to which a bank s foreign activities affect the probability of bankruptcy the paper focuses on the latter form of international banking risk using chebyshev s inequality it is pointed out that the risk of bankruptcy is influenced by the mean as well as the variance of the return distribution consequently restrictions on the international composition of a bank s portfolio may increase rather than reduce the probability of bankruptcy

competing vertical structures precommitment and renegotiation we consider a model where two agents privately informed about their own characteristics play a normal form game on behalf of two uninformed principals we analyze the existence of precommitment effects through public announcements of contracts in a model where agency contracts designed ex ante can always be secretly renegotiated at the ex ante and interim stages we show that the existence of precommitment effects depends both on the strategic complementarity of the agents actions and on the direct effect of the opponents actions on each principal s welfare in our model the possibility of renegotiation is crucial for the existence of precommitment effects the results are introduced through an example of cournot and bertrand competition between firms viewed as vertical structures

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies