the cost of contract renegotiation evidence from the local public sector the renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts however assessing the cost of such renegotiation remains an open issue from an empirical viewpoint to address this question we fit a structural principal agent model with renegotiation on a set of urban transport service contracts the model captures two important features of the industry first only two types of contracts are used in practice fixed price and cost plus second subsidies increase over time we compare a scenario with renegotiation and a hypothetical situation with full commitment we conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators

factors determining the location decisions of spanish mnes an analysis based on the investment development path on the basis of theoretical assumptions approached via the investment development path idp this study examines the most important factors for and against the location decisions in foreign direct investment taken by multinational enterprises considering host countries at very different stages of economic development latin american and european union countries we carry out different kinds of analysis on a sample of 103 firms belonging to a medium sized country that has recently achieved the status of developed country the results reveal that the importance that home country firm managers give to diverse location factors depends to a certain extent on the stage that each group of host countries has reached in the idp in line with prior research we find that firm managers consider mainly the group of factors associated with strategic asset seeking when deciding to locate their investments in the group of more developed countries european union in contrast our results show that when these firm managers choose the group of less developed countries latin america social and cultural factors play a more determinant role thus suggesting the importance of historical and cultural ties between the home and host countries

consumer scores and price discrimination we study the implications of aggregating consumers purchase histories into scores that proxy for unobserved willingness to pay a long lived consumer interacts with a sequence of firms each firm relies on the consumer s current score a linear aggregate of noisy purchase signals to learn about her preferences and to set prices if the consumer is strategic she reduces her demand to manipulate her score which reduces the average equilibrium price firms in turn prefer scores that overweigh past signals relative to applying bayes rule with disaggregated data as this mitigates the ratchet effect and maximizes the firms ability to price discriminate consumers with high average willingness to pay benefit from data collection because the gains from low average prices dominate the losses from price discrimination finally hidden scores those only observed by the firms reduce demand sensitivity increase average prices and reduce consumer surplus sometimes below the naive consumer level

career concerns incentives and endogenous learning in labour markets models of career concerns provide a framework for analyzing the actions that may be taken by a manager in an attempt to influence performance signals that the market uses to update its beliefs on her productivity and the incentive problem that arises if such actions do not coincide with those that maximize the financial return to a firm s owner this survey provides a formal introduction to the main types of models of career concerns hidden action and hidden information and discusses some extensions of these models applications of the career concerns framework to explain aspects of managerial behavior and the form of labor market institutions are emphasized copyright 1992 by blackwell publishers ltd

nominal shocks endogenous growth and the business cycle the paper proposes a simple model of wage setting and imperfect competition that takes into account knowledge and human capital accumulation we show that given increasing returns to reproducible factors transitory disturbances to output that originate on the demand side of the economy produce permanent upward shifts in the aggregate production function this implies that the presence of a stochastic trend in the process for income may not be informative per se about the forces driving the cycle

research note optimal selling in dynamic auctions adaptation versus commitment this paper analyzes optimal selling strategies of a monopolist facing forward looking patient unit demand bidders in a sequential auction market such a seller faces a fundamental choice between two selling regimes adaptive selling that involves learning about remaining demand from early prices and commitment selling that forgoes such learning and makes all selling decisions in the beginning of the game a model of the game between the seller and the bidders is proposed to characterize the optimal regime choice the model implies that the relative profitability of the two regimes depends on the expected gains from trade when the expected gains from trade are low commitment dominates adaptation and vice versa

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

planning under incomplete information and the ratchet effect abstract central planning of production is usually performed under asymmetric information the firm in general has more information about its productive possibilities than the central planner from now on for short cp this justifies the use of incentives schemes in which the cp does not directly fix activity levels casual observation of such existing schemes suggests that the time dimensions is crucial for their working typically the cp revises the incentive scheme over time to take into account the information provided by the firm s performance managers of centrally planned economies as well as economists have long recognized that this revision induces firms to underproduce in order to avoid demanding schemes in the future this is the ratchet effect it is purpose of the present paper to study the ratchet effect under the non commitment assumption which we believe to be more realistic the inadequacy of conceptual tools made if difficult in the past to consider such an assumption now basic research on dynamic games with incomplete information recently resulted in new ideas which look particularly relevant for a theoretical analysis of the problem

business cycle theory and econometrics we outline in turn criticisms made by econometricians of the methods used in empirical business cycle research and then criticisms made by business cycle researchers of some methods used by econometricians the aim is to clarify and in some cases correct thesecriticisms overall there is no conflict in using rigourous statistical procedures to study modern dynamic stochastic general equilibrium models we also provide a concise bibliographyof recent research on statistical methods for business cycle models

the determinants of developing countries access to the international capital market the traditional analysis of western credit relations with developing countries mainly focuses on the possibilities of debtor countries meeting their debt obligations and tries to find factors behind possible default the present study explicitly considers flows of funds between creditors and debtors and investigates the determinants of developing countries access to the international capital market a combination of gdp per capita net debt to gdp and the investment share predicts access to the 1985 87 capital market correctly in 75 per cent of the cases

the ratchet tautness and managerial behavior in soviet type economies suppose a manager receives a fixed bonus for reaching a target plus an overfulfillment reward each period the target is fixed by the manager s superiors in a manner that takes into account past performance this is the ratchet managers facing this incentive scheme will choose an activity level which takes into account the dynamic effects of current behavior on future earnings the conventional wisdom contends that managers will understate capacity by producing below maximum potential we show that this behavior occurs only under certain conditions more importantly we also show that the ratchet can be used to induce managers to reveal the growth rate of average capacity

ex post redistribution in a federation implications for corrective policy abstract this paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy according to the existing literature assuming an ex ante choice of transfers the corrective grant is equal to the marginal damage benefit inflicted by externality generation when the federal government accommodates state finances ex post the grant differs in formula from existing prescription allocative federal policy corrects state policy incentives twofold it entails a correction for the distortion in the marginal benefit of state spending as in earlier literature and for the distortion in the marginal cost of public funds induced by the ex post provision of transfers the required grant rule is generically disproportionate to the equilibrium externality even with lump sum taxation furthermore the ex post provision of transfers is critical for the nature of the equilibrium inefficiency equalizing transfers at least partly internalize consumption spill overs but simultaneously establishes a new source of inefficiency as a final result the existing prescription for allocative federal policy continues to apply if the public good is pure

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

mode of entry mode into a foreign market the case of u s mutual funds in canada abstract u s mutual fund companies offer funds in canada through two channels foreign direct investment or trade in advisement services the total value of u s controlled funds amounts to 18 of the canadian equity fund market this paper investigates how the fund level and firm level characteristics affect the channel used to enter the canadian market empirical results indicate that the funds offered through fdi are not especially successful in the u s market but are associated with dominant companies whereas the funds offered through trade in advisement services are highly successful in the u s market and are from companies with relatively few successful funds

choice of foreign market entry mode impact of ownership location and internalization factors firms interested in servicing foreign markets face a difficult decision with regards to the choice of an entry mode the options available to a firm include exporting licensing joint venture and sole venture several factors that determine the choice of a specific foreign market entry mode have been identified in previous literature these factors can be classified into three categories ownership advantages of a firm location advantages of a market and internalization advantages of integrating transactions this study examines the independent and joint influences of these factors on the choice of an entry mode multinomial logistic regression model is employed to test the hypothesized effects

business cycle models with endogenous technology this paper compares real and monetary business cycle models with and without endogenous technical change if technology is endogenous the properties of these models change significantly in particular both real and monetary models yield very similar output processes if growth is endogenous and changes in aggregate demand can result in permanent changes in productivity employment and output the effect of depreciation of technology is examined and the pattern of real wage movements over the cycle when money wages are fixed but technology is changing is briefly considered copyright 1990 by american economic association

two sided learning and the ratchet principle i study a class of continuous time games of learning and imperfect monitoring a long run player and a market share a common prior about the initial value of a gaussian hidden state and learn about its subsequent values by observing a noisy public signal the long run player can nevertheless control the evolution of this signal and thus affect the market s belief the public signal has an additive structure and noise is brownian i derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long run player s actions depend on the history of the game only through the market s correct belief using these conditions i demonstrate the existence of pure strategy equilibria in markov strategies for settings in which the long run player s flow utility is nonlinear the central finding is a learning driven ratchet principle affecting incentives i illustrate the economic implications of this principle in applications to monetary policy earnings management and career concerns

incentive plans for productive efficiency innovation and learning in many industries where production or sales is delegated to a number of subunits the central management faces the classical problem how to induce continuous efficiency improvements organizational learning and transfer of knowledge with a minimum of control exercised this paper draws on recent results regarding regulatory frameworks to construct simple yet powerful incentive schemes for decentralized production under asymmetric information the theoretical foundation is based on principal agent theory cf laffont and tirole econometrica 56 1986 614 641 and extensions to production theory by bogetoft management science 40 1994 959 968 the proposed incentive system is operational and makes use of available information to provide positive incentives for participation in the dynamic development of the entire organization

essential facility financing and market structure abstract the paper analyzes the funding of an infrastructure project when an incumbent operator has private information about market profitability and the regulator does not have access to taxpayers money an open access policy raises welfare but may make the project non viable since funding must be provided by operators capital contributions we characterize the optimal market structure the regulator can ask the incumbent to bear a higher share of investment cost if the latter insists on an exclusive use yet the incumbent is willing to pay more for exclusivity the higher the demand that is precisely when competition yields the highest benefits at the optimum the incumbent s information is not used to determine market structure we further investigate the implications of this basic result in a dynamic context we show that the monopoly franchise policy is time consistent while an open access policy is not we also demonstrate that a threat of regulatory capture creates an open access presumption last we show that when the decision involves multiple projects monopoly segments should cross subsidize open access ones

self selection and monitoring in dynamic incentive problems with incomplete contracts a dynamic trading problem is examined in which a monopsonistic employer tries to hire workers whose productivities and reservation wages are private information the employer can only observe an employee s quality indirectly by monitoring a non verifiable measure of on the job performance the employer makes contract offers which employees can accept or reject once a contract has been accepted it is impossible for the employer to exchange messages with individual employees on the unique stationary equilibrium path for the contracting game the employer chooses between two mutually exclusive outcomes in the market outcome the employer offers long term contracts and information is conveyed entirely through self selection and delayed production in the monitoring outcome the employer offers short term contracts and contract renegotiation is conditioned by an employee s past performance a simple characterization theorem is provided which illustrates the often surprising effects of improvements in information in this setting for example an employer who is initially offering short term contracts to exploit performance information may stop monitoring and shift to market screening when the monitoring technology becomes more informative

the game form approach to redistribution this paper reviews the game form approach to redistributive policies this approach provides a justiucation for studying tax systems as good institutional arrangements for reallocating resources in a heterogeneous society after situating the problem of asymmetric information for public policy the paper provides a short overview of the main concepts and results in implementation theory next these tools are used to inquire about the possibility to decentralise the reallocation of resources in a production economy with the help of tax transfer systems finally the paper deals with some recent extensions of the theory a simple example is used throughout to illustrate the different results

costs of control the source of economic rents for mcdonald s franchisees the main purpose of this article is to establish empirically using financial data that there are both ex ante and ex post rents left downstream at mcdonald s we find that the present value of the ex ante rents is around 300k 455k 1982 dollars ex post rents are of course even larger we argue that the ex post rents represent an incentive mechanism that complements the use of profit sharing rights at mcdonald s we also argue that ex ante rents arise here because franchisees wealth constraints prevent the up front extraction of the full present value of the ex post rents finally we note that mcdonald s desire for a particular type of individual to operate its franchises namely owner operators whose livelihoods are tied to the success of their outlets increases the likelihood that downstream operators face liquidity constraints this in turn contributes to the need for mcdonald s to leave ex ante rents downstream

international banking a survey two distinct sets of issues are involved in the analysis of international banking one set the industrial organization issues centers on the patterns of expansion of foreign branches and subsidiaries of banks headquartered in the united states great britain japan and a few other industrial countries and on the nature of the advantage that these branches and subsidiaries have in relation to their host country competitors the second set the international finance issues involves the role of banks in cross border and cross currency financial flows both from their head offices and from their foreign branches and subsidiaries despite the attention to international banking there are few uniquely international institutions rather international banks are a subset of domestic banks with significant numbers of foreign branches and subsidiaries moreover there are few uniquely international banking activities although foreign exchange trading may seem to be one in many countries most or all foreign exchange trading involves domestic banks with few if any foreign branches the growth of foreign branches and subsidiaries of major banks occurred in two waves the first occurred in the decades before world war i when the war started

job transfers and incentives in complex organizations thwarting the ratchet effect many complex organizations such as planned soviet enterprises and the u s military routinely transfer employees between jobs since this sacrifices job specific human capital the practice is puzzling this article shows that regular job transfers may be part of an optimal incentive scheme in organizations plagued by the ratchet effect the ratchet effect arises when an employer is uncertain as to the productivity of the various positions or jobs within an organization workers in highly productive jobs then have an incentive to disguise the productivity of their jobs by expending low effort and producing low output this avoids having the employer construct more demanding remuneration schemes once the high productivity of a job becomes known job transfers break the link between current performance and future incentive schemes and hence remove the incentive stifling implications of the ratchet effect this article examines the tradeoff between providing more effective incentives via job transfers and the accompanying sacrifice of job specific human capital establishes conditions under which job transfers are optimal and develops comparative static results

real business cycles and the test of the adelmans abstract this paper conducts a modern variant of the test proposed and carried out by adelman and adelman 1959 using the methods developed by burns and mitchell 1946 we see if we can distinguish between the economic series generated by an actual economy and those analogous artificial series generated by a stochastically perturbed economic model in the case of the adelmans the model corresponded to the klein goldberger equations in our case the model corresponds to a simple real business cycle model the results indicate a fairly high degree of coincidence in key economic aggregates between the business cycle characteristics identified in actual data and those found in our simulated economy

pricing and entry in regulated industries the role of regulatory design abstract this paper studies the optimal regulatory policy in a market where entry may occur in the event of entry the regulator regulates the incumbent but not the entrant we show that the effect of entry on prices depends on the length of the interval between regulatory reviews if the gap is long then the market outcome following entry has a higher price than it would have with a shorter gap 1997 elsevier science s a

arm s length relationships without moral hazard i show that cutting the flow of information between a principal and an agent can increase the power of the incentives of the agent to reveal private information jel d23 d82 d86 l20

policy theory and the cycle the paper sets out some simple statistical models and shows that they are capable of generating the ob served characteristics of classical cycles in three countries australia the united kingdom and the united states both analytical and simulation work is used for this purpose these models emphasize the fact that to generate a realistic business cycle requires some deterministic trend growth near unit root behaviour in the deterministically detrended data and innovations of a certain magnitude with this information we examine some popular models of the cycle asking how they produce these features and then explore the implications of the analysis for economic policy

dissecting the cycle a methodological investigation following burns and mitchell we define the cycle as a pattern in the level of aggregate economic activity an algorithm to locate turning points is developed as is a new measure of pro cyclicality a link between turning points and the moments of the series is established thereby providing the statistical foundation that burns and mitchell s work lacked using these tools we are able to dissect cycles in terms of the contributions made by trend growth volatility serial correlation and non linear effects we dissect several models and find little evidence that certain non linear effects are important to the nature of business cycles

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

factors affecting the performance of foreign owned banks in australia a cross sectional study abstract this study extends the existing literature of international banking by constructing a model of foreign intermediaries in australia an unresolved question is establishing those factors that result in banking across borders while a variety of theories attempt to explain international banking empirical tests are sparse mahajan a rangan n zardkoohi a 1996 journal of banking and finance 20 283 306 this study considers if the results to date apply in non us settings foreign bank size was found to be a positive function of bank licence parent size and time in australia and a negative function of australian net interest margins and fees the negative sign on net interest margins and fees is consistent with de young r nolle d 1996 journal of money credit and banking 28 622 636 foreign bank profits were a positive function of australian net interest margins and fees there was limited evidence of defensive expansion this paper concludes that foreign bank size is explained well by the existing theories of international banking but a wider model is appropriate for foreign bank profits

credit rationing and payment incentives a model of borrowing for production is presented where default leads to exclusion from the capital market this means contracts are enforceable provided the current payment is less than or equal to the value of future access to the capital market the main result of the paper is to show that if this constraint binds then credit is rationed

the performance implications of relationship banking during macroeconomic expansion and contraction a study of japanese banks social relationships and overseas expansion we propose a social perspective emphasizing the opportunities and constraints of bank firm relationships to understand the determinants of relationship banks performance using japanese banks to test our theory using social exchange and role theories we found banks that have strong social relationships performed differently during japan s macroeconomic expansion and contraction cycles however our results indicate that social exchange and role relationships are context specific banks benefited from internationalization during a domestic macroeconomic expansion as a result of their home country social relationships but they were less constrained by the same social relationships in their international operations during a domestic macroeconomic contraction

resale markets and the assignment of property rights the consumption of an indivisible good causes identity dependent externalities to non consumers we analyse resale markets where the current owner designs the trading procedure but cannot commit to future actions we ask the following questions 1 doer the identity of the initial owner matter for the determination of the final consumer 2 is the outcome always efficient the major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency this result complements the coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency

the strategic impact of references in business markets we investigate a business to business context and ask when and why a firm should announce a reference program that commits the firm to facilitating the flow of information about the efficacy of its products from early adopters to potential late adopters we model a monopolist manufacturer with a new innovation that can be sold to two potential customers we demonstrate here two benefits of a reference program that relate not to an increase in later adopters willingness to pay but to an increase in the willingness to pay of the early adopters themselves the impact on the early adopters willingness to pay arises in two ways as a result of their observation of the firm s commitment to information transmission first in a model of symmetric uncertainty we show that the announcement of a reference program facilitates dynamic pricing by the manufacturer in the sense that it allows the firm to provide temporary exclusive use of the technology to one of the customers this creates more value which the manufacturer can extract via a higher price in this way a reference program can serve as a partial substitute for an exclusive use contract in a model with asymmetric information we demonstrate that under certain conditions the firm is able to use the reference program as a signal again to the early adopting customer that its technology is of high quality however such a signal requires significant discounts to early adopters to ensure separation as a result a pooling equilibrium dominates in which the manufacturer fosters references regardless of its quality finally by allowing the firms private information to be stochastic we show that separation may be a dominant outcome

contracting with imperfect commitment and the revelation principle the single agent case this paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism we show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent in contrast with the conventional revelation principle however the agent may not use this strategy with probability one our results apply to contracting problems between a principal and a single agent by reducing such problems to well defined programming problems they provide a basic tool for studying imperfect commitment

disease forecasts and livestock health disclosure a shepherd s dilemma we analyze how to induce sellers to disclose food safety with repeated interactions and safety correlated over time cash transfers alone do not ensure disclosure perfect but costly testing ensures disclosure with a complex lottery that may be difficult to implement in practice in contrast even a noisy quality forecast allows the buyer to induce perfect disclosure with a simple pricing scheme forecast introduction may benefit or harm sellers after introduction sellers may suffer from increases in forecast precision as an illustration we cast our model in the context of rift valley fever in an east african livestock market copyright 2010 oxford university press

learning about the future and dynamic efficiency we analyze the conditions under which an efficient allocation of resources is achievable in a dynamic private values setting where the designer gradually learns about the distribution of agents values as an application consider the sequential allocation of scarce spectrum to emerg ing technologies whenever a new technology appears a benevolent designer is faced with a problem should he allocate a valuable chunk of spectrum right now while forfeiting for a long period of time the option of allocating it to a possibly superior future technology it makes sense to assume here that current firms have a better knowledge of their technological prow ess than the designer and that the designer s assessment of future technological possibilities is improved by observing the current technology if technology owners are strategic we show below that the learning process about the future disturbs the ability to extract the information necessary for efficient decision making another good example is hiring by an organization that fills positions at different hierarchy levels over time while all candidates prefer higher level positions some aspect of their ability to perform the needed tasks at each level is privately known to the candidates if contracts with current employees are difficult to adjust the designer must carefully compare the quality of present candidates which can serve as a signal about the market to the expected quality of candidates that may become available in the future finally consider a firm allocating franchises in a country where it did not operate before and where contractual clauses or other impediments prevent reallocation during a significant period of time local potential franchisees may have some superior information regarding future prof itability in the respective market and hence the elicitation of private information is crucial for a franchisor that is supposed to get a share of the future profits

optimal forestry contracts under asymmetry of information in this paper i analyze optimal royalty contracts in forestry when the harvesting firm has private information on the cost of harvesting this infinite horizon forest rotation model with asymmetry of information on the cost parameter results in a dynamic incentive problem depending on whether the costs are correlated over time or not the firm either receives rent or receives no rent associated with the continuation part of the rotation choice i characterize the optimal contract explicitly in both cases i also examine the loss in expected welfare surplus resulting from the use of a linear contract instead of the more general non linear contract

real business cycle models and the forecastable movements in output hours and consumption the authors study the movements in output consumption and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real business cycle models they show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model the authors also find that forecastable changes in the three series are strongly positively correlated with each other on the other hand for parameters whose implications are plausible in other respects the model implies that output consumption and hours should not all be expected to move in the same direction copyright 1996 by american economic association

real business cycle analysis a needed revolution in macroeconometrics the contention of this paper is that real business cycle rbc analysis has highlighted fundamental flaws in the underlying macroeconomic theory and econometric methodology of traditional macroeconometric model building but by stating its message crudely and proposing an inferior statistical procedure has failed to receive the recognition it deserves properly understood the lessons to be learned from rbc analysis combined with the new approach of bringing evidence to bear proposed here would amount to a revolution in macroeconometric methodology the outcome of this revolution would be a macroeconometrics better based on macroeconomic theory and a macroeconomics more consistent with the evidence the main failing of most macroeconometric models is in not taking macroeconomic theory seriously enough with the result that little or nothing is learned about key parameter values a fault no amount of econometric sophistication will compensate for consequently macroeconometrics has had surprisingly little influence on macroeconomic theory or macroeconomics teaching and even the main users of macroeconometric models business government the monetary authorities and other national and international bodies are reluctant to employ them for anything other than short term forecasting the popular view of rbc analysis is that it is about whether technology shocks are the predominant cause of aggregate output fluctuations and whether calibration rather than standard econometric methods should be used to analyse this question although this may be a reasonable description of the initial work of kydland and prescott i982 and prescott i 986 subsequent developments make it outdated and obscure its fundamental insights in fact rbc theory is part of a research programme which can be traced back to ramsey and is associated in modern times with lucas in which the aim is to bring out the general equilibrium inter temporal characteristics of macroeconomics before turning to the more difficult issues of disequilibrium in large part the stimuli for adopting the ramsey approach were the now well known criticisms of macroeconometric models made by lucas i976 who argued that macroeconomics should be built on the same theoretical foundations as microeconomics in addition to the weak theoretical foundations of these models lucas objected to the way in which the econometric methods used lent themselves to ambiguous interpretations a good example of this is the difficulty of deciding what meaning to give to observed dynamics the new

standard incentive regulation hinders the integration of renewable energy generation the connection and distribution of growing decentralized electricity generation from renewable energy sources res e is leading tomassive investment needs besides investing in additional conventional assets e g cables grid operators can also invest in innovative smart solutions like local storage capacities or voltage regulation appliances which may be a more suitable way of integrating res e this paper investigates the influence of incentive regulation on the investment decision of grid operators to integrate res e we describe the technical and regulatory background explain the advantages of smart solutions and present an approach for comparing investment scenarios as an example we calculate the profitability of investments in a case study of the german electricity market we apply data envelopment analysis dea and stochastic frontier analysis sfa to show the influence of the investment alternatives on grid operator efficiency objectives we demonstrate that under current standard incentive regulation the grid operators gain profitability by avoiding investments and if they are forced to invest by not implementing smart solutions the results highlight the need to consider innovation in the regulation design further research should investigate specific instruments that can be used to account for innovation our brief discussion of such instruments provides a starting point

a note on the location choice of multinational banks the case of japanese financial institutions abstract there are many studies investigating the location choice of foreign direct investment fdi of us banks nigh et al journal of international business studies 17 1986 59 72 find that the choice does not depend on local banking opportunity this paper examines what factors affect the location choice of japanese multinational financial institutions our results are consistent with previous studies analyzing us banks in that the fdi of the manufacturing industry is an important determinant of the location choice of japanese financial institutions however our results differ from nigh et al in that japanese financial institutions choose their locations at least partially based on the local banking opportunity in the host countries

the target incentive system vs the price incentive system under adverse selection and the ratchet effect abstract in a dynamic adverse selection type of principal agent relationship where the principal is committed over time to a particular incentive system with fixed structure but variable parameters but not to any intertemporal incentive scheme with both fixed structure and parameters the ratchet effect arises but varies with different incentive systems we show that compared with using prices as the sole planning mode the principal can attenuate the ratchet effect by stipulating targets as well as a result the target incentive system entails higher expected welfare than the price incentive system in a perfect bayesian equilibrium

the duration of international joint ventures an foreign wholly owned subsidiaries an international joint venture is formed when the partners contribute different benefits to the venture each party learns from the others through the joint venture however the literature suggests that joint ventures are unstable so it is hypothesized that on average an international joint venture will have a shorter duration than a foreign wholly owned subsidiary data on us foreign direct investment fdi abroad and fdi in the united states are applied to test the instability of joint ventures the proportional hazards model is applied while exponential distribution and weibull distribution are used to cross check the results on the whole the results are consistent with the hypothesis in particular the two types of us affiliates are significantly different in duration although the support for the hypothesis from fdi in the united states is weak

patterns in the expansion of u s banks foreign operations combining foreign direct investment theory with data on 32 countries from the federal reserve board we examined u s banks patterns of foreign operations including their levels of banking services and choice of organizational forms in host countries results generally supported predictions but only in developed countries the lack of support in rapidly growing markets of asia and latin america raises serious theoretical concerns and presents fresh research opportunities into the global banking industry

intertemporal common agency and organizational design how much decentralization abstract in common agency where one agent contracts with several principals to what extent should the principals cooperate and centralize provision of incentives if the agency is over contract complements where an increase in activity for one principal increases the marginal value of contracting with other principals complete centralization seems optimal since this internalizes all externalities we show that this intuition is not generally valid for dynamic agency situations for although centralization provides more accurate incentives to the agent it also aggravates the ratchet effect and this negative effect may dominate the optimal degree of decentralization is discussed and partly characterized

permanent and transitory shocks and the uk business cycle in this paper the business cycle properties of uk data are investigated using a var technique a real business cycle rbc model is formulated the model includes both permanent and transitory shocks to technology the business cycle properties of the data and the model are investigated by deriving the expected changes over various forecast horizons from a var model it is found contrary to evidence in rotemberg and woodford 1996 that the model can account for many features of the data and that temporary shocks are pertinent in order to explain the business cycle moments the main difference between theory and data is present in hours worked c 1997 by john wiley sons ltd

favoring the winner or loser in repeated contests should a firm favor a weaker or stronger employee in a contest despite a widespread emphasis on rewarding the best employees managers continue to tolerate and even favor poor performers contest theory reveals that evenly matched contests are the most intense which implies that a contest designer can maximize each player s effort by artificially boosting the underdog s chances we apply this type of handicapping to a two period repeated contest between employees in which the only information available about their abilities is their performance in the first period in this setting employees are strategic and forward looking such that they fully anticipate the potential impact of the first period contest result on the second period contest and thus adjust their behaviors accordingly the manager also incorporates these strategic behaviors of employees when determining an optimal handicapping policy if employees abilities are sufficiently different favoring the first period loser in the second period increases the total effort over both periods however if abilities are sufficiently similar we find the opposite result occurs total effort increases the most in response to a handicapping strategy of favoring the first period winner

worker cooperation and the ratchet effect workers paid by the piece should be happy to introduce new techniques that increase output but firms always seem to reduce the piece rate when workers start earning too much money workers respond by restricting output and keeping good new ideas to themselves we show that this outcome is inevitable in a competitive environment however there are noncompetitive situations where firms can use piece rates to get cooperation from their workers these predictions are consistent with case history evidence from the cotton spinning industry in england in the nineteenth century and the lincoln electric company in the united states even today

do expiring budgets lead to wasteful year end spending evidence from federal procurement many organizations fund their spending out of a fixed budget that expires at year s end faced with uncertainty over future spending demands these organizations have an incentive to build a buffer stock of funds over the front end of the budget cycle when demand does not materialize they then rush to spend these funds on lower quality projects at the end of the year we test these predictions using data on procurement spending by the u s federal government using data on all federal contracts from 2004 through 2009 we document that spending spikes in all major federal agencies during the 52nd week of the year as the agencies rush to exhaust expiring budget authority spending in the last week of the year is 4 9 times higher than the rest of the year weekly average we examine the relative quality of year end spending using a newly available dataset that tracks the quality of 130 billion in information technology i t projects made by federal agencies consistent with the model average project quality falls at the end of the year quality scores in the last week of the year are 2 2 to 5 6 times more likely to be below the central value to explore the impact of allowing agencies to roll unused spending over into subsequent fiscal years we study the i t contracts of an agency with special authority to roll over unused funding we show that there is only a small end of year i t spending spike in this agency and that the one major i t contract this agency issued in the 52nd week of the year has a quality rating that is well above average

an application of the theory of foreign direct investment to multinational banking in ldcs for assessing the determinants of mnbs expansion into ldcs a model that incorporates both supply and demand factors is constructed a reduced form of the model is tested by using pooled data over the period 1975 1982 for a sample of twenty three ldcs the results of the study indicate that market size the presence of multinational corporations from the home country the extent of economic development and the balance of payments are all significant determinants of the growth of mnbs in ldcs

the determinants of u s banks international activities abstract this paper develops a model and structural dynamic estimation of bank behavior to map the relationship between u s banks choices of foreign banking activities and bank and foreign market traits this estimation framework is applied to a unique bank level dataset compiled from regulatory sources covering u s banks foreign activities in 83 host markets over the 2003 2013 period bank traits are better able to explain the evolving patterns of foreign banking than host market characteristics after controlling for these traits the post financial crisis period shows a structural shift away from cross border claims towards foreign affiliate activities structural estimates of foreign market entry costs and regulatory attitudes towards risk are derived simulation exercises confirm the strong impact of banks and regulators risk stance on bank profits and portfolio composition

determinants of the performance of japanese financial institutions in australia 1987 1992 this paper constructs a model that attempts to explain the performance of japanese financial institutions in australia in general the model proposed performs well for size measures but comparatively poorly for measures of profitability size as measured by home country equity was found to increase both australian assets and australian profitability institutional features in both australia and japan were found to have their greatest impact upon size measures net interest margin differences were found to have no significant relationship with any performance measure used however the results are not sufficiently conclusive to produce a definitive model to explain the performance of foreign owned banks in australia

wealth effects of foreign expansion by u s banks abstract the effects of foreign expansion on the market values of u s banks usbs are examined in this study the results show that shareholders of usbs experience significant abnormal returns of 0 17 percent when banks announce foreign expansions abnormal returns are insignificant when the announced mode of expansion is through a representative office are significantly positive for announcements related to branches and are significantly negative when the announced mode of expansion is through formation of a joint venture or a subsidiary or through an acquisition abnormal returns are significantly negative when banks announce expansion into developed countries and are significantly positive when announcements relate to risky developing countries post announcement changes in the total variance of returns and in the unsystematic risk of usbs are inversely related with abnormal returns higher wealth effects are associated with higher levels of prior overseas experience

competitive markets without commitment in the presence of a time inconsistency problem with agency contracts we show that competitive markets can implement allocations that pareto dominate those achieved by a benevolent government and they induce more effort we analyze a model with moral hazard and a two sided lack of commitment after agents have chosen their work firms can modify contracts and agents can switch firms if the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals it is pareto superior to a government s allocation with a complete breakdown of incentives moreover competitive markets without commitment implement more effort in equilibrium under general conditions

the strategic use of innovation to influence regulatory standards this paper investigates the welfare consequences of strategic behavior by firms to affect the amount of environmental regulation they face environmental regulation often attempts to force an industry to develop cleaner technology but the regulator may have no means to commit to a specific standard this lack of regulatory commitment induces firms to choose innovation strategically it is well known that firms have incentives to suppress innovation to induce the regulator to ratchet down the standard and this strategic behavior lowers welfare this paper explores a countervailing incentive in oligopoly settings firms have heightened incentives to innovate so as to increase regulation and raise rivals costs in equilibrium the incentive to raise rivals cost can mitigate the welfare loss arising from no regulatory commitment also a regulator who is unable to commit ex ante to the stringency of a regulatory standard can induce more clean technology than a regulator with a commitment mechanism

sequentially optimal mechanisms this paper establishes that posting a price in each period is a revenue maximizing allocation mechanism in a finite period model without commitment a risk neutral seller has one object to sell and faces a risk neutral buyer whose valuation is private information and drawn from an arbitrary bounded subset of the real line the seller has all the bargaining power she designs a mechanism to sell the object at t but if trade does not occur at t she can propose another mechanism at t 1 we show that posting a price in each period is an optimal mechanism a methodological contribution of the paper is to develop a procedure to characterize optimal dynamic incentive schemes under non commitment that is valid irrespective of the structure of the agent s type 2006 the review of economic studies limited

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

the life cycle of regulatory agencies dynamic capture and transaction costs the dynamics of regulation is analysed in a model where regulatory capture comes from the repeated interaction between an interest group and a regulatory agency regulatory institutions offer a framework for this dynamic process they put constraints on the interest group s influence the dynamics of regulation and its long run outcome depend on the political principal s the regulator s and the regulated firm s time preferences and their information some foundations for the transaction costs of side contracting used in the standard literature on collusion are provided those transaction costs are linked to the precise nature of regulatory institutions

international demand and liquidity shocks in a svar model of the australian economy a structural vector autoregressive model of the australian economy that allows for international shocks from the usa japan as well as world commodity prices is specified and estimated for the period 1979 1999 a block exogenous structure linking the three countries is imposed the international linkages are modelled using a factor structure to circumvent problems from estimating large scale dynamic models the factors are estimated recursively using a kalman filter and are found to represent aggregate demand and liquidity shocks for the usa and japan respectively the key empirical result is the usa shocks are the dominant source of international shocks on the australian economy with the japanese economy having a dampening effect on the usa shocks the empirical results also show that australian monetary policy responds to domestic conditions rather than international monetary policy

the multiperiod principal agent problem in repeated principal agent models long term contracts can improve on short term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short term contract negotiated if that circumstance occurs we show that efficient contracting under moral hazard alone does not require long term commitment from the principal provided a short term contract can punish the agent sufficiently in a sense made precise it requires no commitment from the agent either then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing

consumer lock in with asymmetric information abstract a two period version of the rothschild and stiglitz 1976 model of competitive screening in an insurance market is presented its features include repeat purchase of insurance among consumers no commitment among insurers or consumers asymmetric information among insurers about a consumer s accident history and state contingent contracts an equilibrium may exist in this model with full pooling in period one and consumer lock in in period two in such an equilibrium high risk consumers are experience rated and firms earn negative profits in period one and positive profits in period two

the dynamics of corruption with the ratchet effect this paper provides a simple model of corruption dynamics with the ratchet effect as in shleifer and vishny 1993 we consider the sale of government property entry permit by government officials as the prototype of corruption activities in a dynamic version of the shleifer vishny model corrupt officials have ex post the incentive to price discriminate entrepreneurs based on the entry decisions made in an earlier period we show that the inability of government officials to commit to future money demands induces the ratchet effect in that entrepreneurs have incentives to delay entry in order to receive a discount in the permit price later the ex post opportunism erodes the official s extortion power and reduces his revenues from selling permits even though the dynamic setting leaves the corrupt official with less extortion power we cannot rule out the possibility that the official s ability to apply dynamic discrimination decreases the intertemporal aggregate social welfare we also explore the effect of the official s tenure stability on the extent of corruption this allows us to identify circumstances under which the often observed practice of job rotation can help mitigate corruption