economics of leadership and hierarchy this paper explores leadership within hierarchical organizations for each hierarchy i consider a dynamic signaling game in which each player observes only the actions of his direct superiors before choosing his action at the top of the hierarchy are the leaders who learn the state from nature the hierarchy controls the flow of information and the timing of the game and determines the equilibrium output and welfare i show that the welfare optimal hierarchy is the chain because it maximizes the incentive of players to lead by example for their subordinates the chain remains optimal even in the presence of verifiable or unverifiable costly information acquisition by the leaders

the optimal mechanism for selling to a budget constrained buyer abstract this paper finds an optimal mechanism for selling a good to a buyer who may be budget constrained we consider a seller with one unit of a good facing a buyer with a quasilinear utility function if the buyer does not face a binding budget constraint textbook monopoly pricing is optimal by contrast the possibility of a binding budget constraint can make it optimal for the seller to use nonlinear pricing to commit to a declining price sequence to require the buyer to disclose his budget or to offer financing journal of economic literature classification numbers c70 d42 d45 d89 l12

the privatization of electricity distribution in turkey a legal and economic analysis this paper analyzes the recent regulatory reform in the turkish electricity distribution market from a legal and economic perspective we highlight tensions between the judiciary politicians and bureaucracy and discuss their economic consequences the paper engages in a discussion of economic consequences of legal procedures we stress interactions between legal decisions and economic institutions the historical positions of the constitutional court and danistay council of state on privatizations have been ambivalent and it is hard to qualify them as an incentive for privatization and reform despite some recent liberal decisions we address reasons behind their decisions and offer some suggestions toward improving the privatization process

discriminatory dealing with downstream competitors evidence from the cellular industry one concern about regulated monopolies entering unregulated vertically related markets is that they will discriminate against competitors of their unregulated affiliates however prohibiting regulated monopolies from offering related goods may preclude production by the most efficient provider we take advantage of variation across geographic cellular phone markets in the us to examine the effect of integration on output quality and prices we find some evidence consistent with efficiencies greater concentration of lines to users is associated with greater output and higher quality and some consistent with discrimination greater interconnection facility ownership concentration is associated with lower output and quality

the design of procurement contracts this paper investigates the interaction between bidding for procurementprograms and fractional buys this problem is analyzed from the standpoint of a cost minimizing procuring agent it is shown that underimperfect competition a multiple source purchase is generally preferred to a single source contract similarly the author demonstrates that a strictly intermediate cost sharing arrangement i e an incentive contract dominates either the cost plus or the firm fixed price arrangements copyright 1986 by american economic association

second sourcing and the experience curve price competition in defense procurement we examine a dynamic model ofprice competition in defense procurement that incorporates the experience curve asymmetric cost information and the availability of a higher cost alternative system we model acquisition as a two stage process in which initial production is governed by a contract between the government and the developer competition is then introduced by an auction in which a second source bids against the developer for remaining production we characterize the class of production contracts that are cost minimizing for the government and that induce the developer to reveal private cost information when high costs are revealed these contracts result in a credible cutoff of new system production in favor of the still higher cost alternative system

auctioning incentive contracts this paper draws a remarkably simple bridge between auction theory and incentive theory it considers the auctioning of an indivisible project among several fi rms the firms have private information about their future cost at th e bidding stage and the selected firm ex post invests in cost reduct ion the authors show that 1 the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid 2 the winner faces a linear incenti ve contract 3 the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost and 4 the share of cost overruns borne by the winn er decreases with the winner s announced expected cost copyright 1987 by university of chicago press

the frontier of telecommunications deregulation small countries leading the pack interconnection equal access unbundling and industry structure are four key determinants of facilities based competition in telecommunications using these building blocks this paper analyzes the differences in telecommunications regulatory regimes in australia chile guatemala and new zealand assessing the effect on competition and consumer welfare some regulation is necessary as incumbents can prolong their market power after demonopolization by exploiting positive externalities inherent to telecommunications networks the authors emphasize the superiority of market mechanisms over traditional regulatory processes to achieve efficient transactions among operators such market mechanisms need clear rules and credible enforcement

confidence building and politics in privatization some evidence from spain abstract this paper analyzes privatization on the stock market and has two main findings first sips underpricing is consistent with the confidence building hypothesis derived from political risk under asymmetric information larger initial returns occurred in the early stages of privatization which is consistent with the hypothesis that governments use underpricing to be credible privatizators second evidence gives support to the hypothesis that explicit political motives influence the design of privatization which is affected by the political majority

the option value of renewable energy the case of climate change decision makers receive mixed signals from the investment literature on when it is appropriate to develop renewable energy technology substitutes for fossil fuels this question is becoming more important as attention has become focused on climate change with the assumptions that information is revealed as time passes and the new technologies take a long time to develop renewable energy alternatives are more attractive than they appear on the basis of the net present value criterion that ignores option value option value represents the value of flexibility to use or discard new technologies

standard auctions with financially constrained bidders we develop a methodology for analyzing the revenue and efficiency performance of auctions when buyers have private information about their willingness to pay and ability to pay we then apply the framework to scenarios involving standard auction mechanisms in the simplest case where bidders face absolute spending limits first price auctions yield higher expected revenue and social surplus than second price auctions the revenue dominance of first price auctions over secondprice auctions carries over to the case where bidders have access to credit these rankings are explained by differences in the extent to which financial constraints bind in different auction formats

the implications of the liberalization in telecommunication markets for market structure and price policy evidence from a small open economy this study analyses the impact of liberalization on market structure and pricing in the greek telecommunication market from 1992 to 2005 the data refers to 44 of the most prominent companies of fixed telephony mobile telephony and internet services and was compiled by means of interviews with the help of a questionnaire our descriptive analysis concluded that liberalization of the telecommunication market reduced its concentration degree increased competition and induced price cuts this conclusion is supported by other research studies concerning other countries of the eu since greece as an eu member country has also implemented the respective european policy in the specific industry as far as the econometric level is concerned we used panel feasible generalized least squares fgls fgls is an appropriate tool for samples such as our own composed by intersectoral data that extend to more than one time periods and without correlation between the unobserved effects and the interpretative variable

cable franchise renewals do incumbent firms behave opportunistically systematic empirical evidence has heretofore been lacking on the extent to which supplier opportunism at the time of contract renewal is a fundamental problem associated with franchise bidding schemes at least for the case of local cable television distribution this article suggests several theoretical reasons why bad behavior by an incumbent supplier may be the exception rather than the rule and a simple test for supplier opportunism at the time of franchise renewal the simple test is employed to empirically analyze the terms of trade in a cross sectional sample of recent cable franchise renewal contracts

contracting with qualified suppliers in an extension of the laffont tirole model a buyer fully qualifies a set of suppliers ex ante and awards production to the most efficient ex post the buyer s incomplete information about production costs biases ex ante market structure in favor of a greater number of qualified suppliers further extensions that allow product differentiation and learning by doing suggest explanations for split production awards and less than fully qualified suppliers it may be difficult to specify ex ante precisely how the assets will be employed in production grossman and hart 1986 once relationship specific assets are in place the characteristics of the transaction and the gains from trade will be determined by ex post contracting between the buyer and the seller a safeguard for the buyer is to contract with more than one potential supplier to invest in the relationship specific assets required for production then after production require ments become clear the buyer can structure a competition between these suppliers for the right to produce this article analyzes when a second sourcing policy is desirable and how the buyer should structure it asanuma s 1989 description of the two vendor policy of automobile manufac turers in japan provides a context for the analysis japanese automobile manufac turers contract out for various kinds of components for example headlamps brakes or steering columns the common practice is to purchase each component from a small and relatively stable group of qualified suppliers with the purposes of assuring supply and of creating competition moreover for a particular part for a particular model there is a tendency for an automobile manufacturer to purchase from a single supplier in the group for the life of the model my understanding from interviews and the trade press is that u s automobile manufacturers also sole source from a select group of qualified suppliers but with

separation of regulators against collusive behavior we show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture splitting regulatory tasks and monitoring technologies among several nonbenevolent regulators may reduce their discretion in engaging in socially wasteful activities when regulators make collusive offers that are accepted by the agent whatever his characteristics competition between regulators relaxes collusion proofness constraints and improves social welfare this result is robust to different specifications of the agent s preferences and to the timing of the game as long as one insists on safe side contracting offers we also discuss how separation affects both allocative efficiency and the distribution of rents in the economy

price regulation of access to telecommunications networks abstract without access of networks to each other competition in the telecommunications sector would hardly have spread so quickly such mutual access is necessary for carriers to provide ubiquitous service and enable endusers to call and be called by anybody without subscribing to a system wide monopolist one way access concerns bottleneck inputs provided by an incumbent network to entrants while two way access concerns the interconnection between networks whereas one way access regulation is exclusively driven by containment of market power two way access is additionally affected by collusion possibilities among the numerous pricing rules discussed none clearly dominates this article provides a roadmap vis a vis the competing policy objectives for access price regulation

awarding monopoly franchises the authors analyze how to award a monopoly franchise when the objective is to maximize expected consumers surplus net of transfer payments to the producer potential producers initially possess independent private information about uncertain production costs only the chosen producer subsequently observes realized production costs after awarding the franchise to the producer with the lowest expected costs prices are optimally set above realized marginal cost these ex post distortions foster more competitive bidding ex ante the distortions for any bid cost pair are invariant to the number of bidders n though expected distortions and profits decline with n copyright 1987 by american economic association

the financial and operating performance of newly privatized firms an international empirical analysis this study compares the pre and postprivatization financial and operating performance of 61 companies from 18 countries and 32 industries that experience full or partial privatization through public share offerings during the period 1961 to 1990 our results document strong performance improvements achieved surprisingly without sacrificing employment security specifically after being privatized firms increase real sales become more profitable increase their capital investment spending improve their operating efficiency and increase their work forces furthermore these companies significantly lower their debt levels and increase dividend payout finally we document significant changes in the size and composition of corporate boards of directors after privatization the last fifteen years have witnessed a significant global shift away from state socialism towards entrepreneurial capitalism one of the most important and visible aspects of this trend has been the enthusiasm with which governments of all political persuasions have sold their state owned enterprises soes to private investors in hopes that the generally unsatisfactory economic performance of these firms can be improved by the discipline of private ownership this denationalization process given its current title of privatization by the conservative government of margaret thatcher in

the role of consumers in competition and competition policy abstract this paper develops the idea that consumers behaviour matters significantly from the viewpoint of industry performance this is examined through some theoretical propositions on search and switching behaviour but then at greater length through some case study examples these demonstrate how even in potentially competitive industries reluctance by consumers to search or to switch suppliers can lead to sub competitive outcomes comparisons are made between industries where search and switching is easy and those where it is not the significance of non traditional competition policy remedies such as enforcement of annual contracts in changing the outcome is drawn out

government intervention in production and incentives theory a review of recent contributions national science foundation the commissariat general du plan and the center for energy policy research at m i t

cadillac desert revisited property rights public policy and water resource depletion to alleviate arizona s dependence on groundwater the federal government subsidized construction of the central arizona project cap to import water from the colorado river in exchange for the subsidy arizona reformed its groundwater law to eliminate common property pumping and to ban groundwater mining after the year 2025 we build a model of water resource development in which imported water is a capacity constrained backstop the model is applied to quantify the welfare effects of alternative cap construction dates and arizona groundwater laws we reach two general conclusions first cap was completed 86 years too early in 1987 at a deadweight loss of 2 612 billion ironically construction in 1987 yielded lower surplus than never constructing cap second the political exchange of reform for subsidy introduced a greater loss 2 612 billion than it corrected 0 810 billion the exchange was worse than doing nothing at all

the impact of global warming on agriculture a ricardian analysis reply we measure the economic impact of climate on land prices using cross sectional data on climate farmland prices and other economic and geophysical data for almost 3 000 counties in the united states we find that higher temperatures in all seasons except autumn reduce average farm values while more precipitation outside of autumn increases farm values applying the model to a global warming scenario shows a significantly lower estimated impact of global warming on u s agriculture than the traditional production function approach and in one case suggests that even without co sub 2 fertilization global warming may have economic benefits for agriculture 16 refs 5 figs 5 tabs

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

pricing regulation under bypass competition we analyze optimal pricing policies in local telecommunications subject to bypass for the access of long distance carriers we first consider the case of a regulated monopoly that operates the local network and has access to an additional technology bypass more efficient for large customers we then study how competition in bypass affects the optimal nonlinear pricing policy and the resulting allocation when transfers are allowed between the regulator and the network operator bypass competition benefits consumers at the expense of the taxpayer otherwise it benefits large consumers but hurts small ones

economic implications of climate change for u s agriculture assessing recent evidence recent studies estimate potential economic impacts of climate change on u s agriculture while results are not directly comparable several big picture lessons can be drawn these broader findings are developed and put into a policy context while the estimated impacts on u s agriculture and the u s economy do not yet justify costly adaptation or mitigation strategies some regional and environmental impacts could be quite severe current policy efforts should focus on reducing climate change uncertainties and increasing farm sector flexibility from a national perspective future agreements to limit greenhouse gas emissions could be partially met through adjustments of farm practices

designing a private industry government auctions with endogenous market structure abstract this paper considers government mechanisms for auctioning production rights in which both the winners and the market structure doupoly dual sourcing monopoly sole sourcing or government owned production are a function of the bids in designing the optimal mechanism the government considers the tradeoffs among consumer surplus producer surplus and revenue under incomplete information doupoly is implemented less frequently and government production more frequently than under complete information when bidders are symmetric the optimal mechanism can be implemented as a modified second price auction applications to privatization deregulation and defense procurement are discussed

state owned and privately owned firms an empirical analysis of profitability leverage and labor intensity for some it is an article of faith that governmentowned firms must be less efficient or at least less profitable than privately owned firms maxim boycko et al 1996 argue that politicians cause government owned firms to employ excess labor inputs anne o krueger 1990 suggests that such firms may be pressured to hire politically connected people rather than those best qualified to perform desired tasks more generally government owned firms are thought to forgo maximum profit in the pursuit of social and political objectives such as wealth redistribution in addition the residual cash flow claims of these firms are not readily transferable like the shares of a private corporation this impairs residual claimant incentives to monitor managers and ultimately degrades firm performance as a consequence one expects government owned firms to be technically less efficient and therefore less profitable than private firms the implication is that in competitive markets without significant externalities private ownership is the superior organizational form the view that government firms are inherently less efficient than private ones however remains controversial among economists john vickers and george yarrow 1991 among others point out that agency problems arise in private firms as well as public ones in most large private corporations managers own little of the stock because monitoring managers is costly a divergence arises between their objectives and those of private shareholders private shareholders typically hold a small stake in any one firm and it may not pay any shareholder to bear the cost of monitoring management it follows from this discussion that whether government firms are more or less efficient than private firms is primarily an empirical issue to date the body of empirical evidence is mixed in this paper we report further empirical evidence on the relative efficiency of public and private enterprises we build on previous work by studying larger samples over longer time periods and by allowing for additional factors that influence firm performance in particular our analysis controls for time series variation in the general level of economic activity that may otherwise confound performance comparisons between government and private firms 2 we approach the issue in two different ways first using accounting numbers we conduct a large sample cross sectional comparison of government owned and privately owned corporations this comparison is similar in design to that of boardman and vining 1989 but our sample is three times the size of theirs and includes three

the new economics of regulation ten years after the new economics of regulation is an application of the principal agent methodology to the contractual relationship between regulators and regulated firms after a critique of the traditional paradigms of regulation from the point of view of information economics a canonical model of regulation under asymmetric information is developed a survey of the main results obtained in the new economics of regulation is then provided in particular concerning the implementation of optimal contracts by a menu of linear contracts the dichotomy between pricing and cost reimbursement rules the auctioning of incentive contracts the dynamics of contracting under limited commitment and the hierarchical problems in regulation empirical implications are then discussed and avenues of further research are described in the conclusion

access pricing and competition abstract in many industries electricity telecommunications railways the network can be described as a natural monopoly a central issue is how to combine the necessary regulation of the network with the organization of competition in activities which use the network as an input and are potentially competitive generation of electricity value added services road transportation in this paper we derive access pricing formulas in the framework of an optimal regulation under incomplete information first we study how access pricing formulas take into account the fixed costs of the network and the incentive constraints of the natural monopoly over the network second we examine the difficulties coming from the accounting impossibility to disentangle costs of the network and costs of the monopoly s competitive goods third the analysis is extended to the cases where governmental transfers are prohibited where the competitors have market power and where competitors are not regulated fourth the possibility some consumers bypass the network is taken into account finally the role of access pricing for inducing the best market structure is assessed the conclusion summarizes our results and suggests avenues of further research

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

on the irrelevance of input prices for make or buy decisions this paper demonstrates that input prices need not reflect the costs of an efficient incumbent supplier in order to induce entrants to implement efficient make or buy decisions because of strategic downstream considerations entrants may always undertake efficient make or buy decisions regardless of the prices at which they are authorized to buy key inputs from incumbent suppliers

trigger price regulation we consider the difficulty of achieving efficient prices and investments when returns on a public utility s projects are vulnerable to opportunistic ratemaking we model the long term relationship between a firm and its regulator as a time dependent supergame in which the regulator sets price ceilings to maximize surplus and the firm invests to maximize profit we find history dependent strategies that support self enforcing mutually beneficial equilibria equilibrium payoffs are close to the planning solution provided interest rates are small enough and capital depreciates fast enough we concentrate on trigger price regulation where in response to inefficient behavior the regulator cuts price down to operating cost and the firm curtails investment this mechanism performs well even with production economies and with restrictions on players threats

regulation vertical integration and sabotage we consider the incentive of a dominant firm that supplies a necessary input to a bertrand competitive differentiated products downstream industry to 1 vertically integrate forward and 2 raise its downstream rivals costs through non price activities which we characterize generally as sabotage we examine these incentives both in the absence and presence of a regulatory constraint on the upstream price we find that while an incentive for vertical integration is present regardless of the existence of the regulatory constraint the incentive for sabotage emerges only in the presence of binding input price regulation welfare effects are also explored

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

an econometric analysis of telecom competition privatization and regulation in africa and latin america this paper explores the effects of privatization competition and regulation on telecommunications performance in 30 african and latin american countries from 1984 through 1997 fixed effects regressions reveal that competition measured by mobile operators not owned by the incumbent is correlated with increases in the per capita number of mainlines payphones and connection capacity and with decreases in the price of local calls privatization combined with an independent regulator is positively correlated with telecom performance measures privatization alone however is associated with few benefits and is negatively correlated with connection capacity

the economics of career concerns part ii application to missions and accountability of government agencies the paper uses a simple multitask career concern model in order to analyse the incentives of government agencies officials incentives are impaired by the agency pursuing multiple missions a lack of focus is even more problematic in the case of fuzzy missions that is when outsiders are uncertain about the exact nature of the missions actually pursued by the agency consequently agencies pursuing multiple missions receive less autonomy the paper further shows that professionalization creates a sense of mission for the agency and that the specialization of officials raises their incentives last the paper compares its predictions with the stylized facts on government bureaucracies 1999 the review of economic studies limited

collusive conduct in duopolies multimarket contact and cross ownership in the mobile telephone industry the deregulation of the telecommunications industry has resulted in a variety of industry structures which have been created in hopes of increasing competition one example is the licensing of cellular telephone services in the united states where the fcc created duopolies in which two firms were granted licenses to compete in strictly defined product and geographic markets taking advantage of the unique regulatory environment we test to what degree duopolistic competition leads to competitive market outcomes we find that cross ownership and multimarket contact are important factors in explaining non competitive prices

the consequences of de regulation on employment duration and efficiency an experimental study i introduction when little is known about the future market conditions offering an employment contract that regulates working conditions for many periods can be dangerous if market wages drastically decline one may hire labor more cheaply furthermore an employee may turn out less reliable than expected such risks are by no means farfetched rather they relate to crucial aspects of long term employment 1 so why is long term employment still predominant and short term employment for example in the form of rented labor rare albeit increasing see alewell et al 2007 an explanation might be the increasing institutional flexibility regarding wage adjustments institutional downward flexibility is usually not legally codified but often a consequence of court rulings and thereby based on social norms 2 see for instance bewley 1995 in our paper we want to investigate whether more flexibility in wage adjustment from none to full flexibility increases the duration of accepted employment contracts our first hypothesis hypothesis a which we wish to test experimentally is that contract duration depends on contract flexibility one obvious argument for long term employment is that offering a short term contract reveals distrust in the newly hired worker and encourages shirking but what is wrong with long term employment resulting from both partners employer and employee repeatedly and mutually opting for rematching another reason for long term employment could be that in the long run it allows the interacting parties more easily to overcome efficiency losses due to opportunistic behavior in our experimental scenario regulations prevent efficient employment contracts when workers react opportunistically but do long term employees care more for efficiency and therefore invest more than optimal efforts deregulation 3 has been the major policy recommendation for nearly all developed market economies for the most part the effects of de regulation are predicted by rational choice analyses of labor markets an interesting exception that takes into account the empirical evidence from behavioral labor economics fehr gotte and zehnder 2009 is the analysis of agell 1999 in whose tradition we want to provide a behaviorally informed discussion of de regulation rather than doing this by field data our empirical approach is an experimental one our earlier experimental findings berninghaus bleich and giath 2008 question the idea that labor market efficiency is higher in deregulated markets to determine more systematically whether the usual intuition that wage rigidities undermine efficiency is correct or whether our earlier results are more reliable we analyze more thoroughly the interdependency of wage flexibility and employment duration our second hypothesis claims that long term contracts are substituted by renewable contracts when contracts become more inflexible hypothesis b unlike in our previous study where we varied only the flexibility of fixed wages in this study piece rates may also be adapted periodically in the experiment of brown falk and fehr 2004 where work contracts last for only one period long term relationships between employers and employees can only be established if the employer offers a new contract to the same employee in each period we too allow for voluntary renewal of contracts at the end of each period but also the possibility of offering contracts which extend for more than one period our study is more systematic than previous ones because we do not just compare less with more labor flexibility but distinguish five flexibility treatments which can be at least partially ordered from less to more flexibility for any kind of monotonicity hypothesis this can be viewed as a real stress test note that already the one off interaction of our basic labor market scenario allows for reciprocity 4 since employees choose effort after accepting a more or less favorable employment contract

regulating without cost information the incremental surplus subsidy scheme the authors propose a regulatory mechanism called the incremental surplus subsidy iss scheme that can be implemented even when the regulato r has no knowledge of the monopolist s cost structure the regulator need only share the firm s knowledge of demand which may be imperfec t and be able to observe with a lag the firm s expenditures the i ss scheme induces the firm to set marginal cost prices to minimize p roduction costs and to undertake efficient investment levels it als o severely limits the firm s rents and eliminates them altogether if the firm s discount rate is known copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a theory of yes men this paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation this desire to conform arises endogenously from the firm s need to induce the worker to exert effort the author shows that firms may optimally eschew the use of incentive contracts to retain workers incentives for honesty the author illustrates that the incentive to conform implies inefficiencies even when workers are risk neutral and is likely to lead to more centralized decision making than in the absence of the desire to conform copyright 1993 by american economic association

when does privatization work the impact of private ownership on corporate performance in the transition economies this paper compares the performance of privatized and state firms in the transition economies of central europe while controlling for various forms of selection bias it argues that privatization has different effects depending on the types of owners to whom it gives control in particular privatization to outsider but not insider owners has significant performance effects where privatization is effective the effect on revenue performance is very pronounced but there is no comparable effect on cost reduction overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from postprivatization restructuring

toward an economic theory of leadership leading by example this paper explores leadership within organizations leadership is distinct from authority because following a leader is a voluntary rather than coerced activity of the followers this paper considers how a leader induces rational agents to follow her in situations when the leader has incentives to mislead them copyright 1998 by american economic association

the financial and operating performance of privatized firms during the 1990s this study compares the pre and postprivatization financial and operating performance of 85 companies from 28 industrialized countries that were privatized through public share offerings for the period from 1990 through 1996 we document significant increases in profitability output operating efficiency and dividend payments and significant decreases in leverage ratios for our full sample of firms after privatization and for most subsamples examined capital expenditures increase significantly in absolute terms but not relative to sales employment declines but insignificantly combined with results from two previous directly comparable studies these findings strongly suggest that privatization yields significant performance improvements during the past two decades the privatization of state owned enterprises has moved from being a radical almost desperate policy initiative of the thatcher government in britain to being an accepted economic policy for governments of all ideological stripes according to gibbon 1998 860 billion has been raised by governments worldwide through privatizations with the bulk of this total coming since 1987 and at least one commentator roche 1996 predicts that no less than 6 trillion will be raised through privatizations over the next two decades in 1997 alone sales of public enterprises totaled a record 161 billion worldwide with more than 110 billion of the total coming during the second half of the year and 1998 s total of almost 140 billion indicates that the pace shows no sign of slackening as we approach a new millennium

an introduction to applicable game theory this paper offers an introduction to game theory for applied economists i try to give simple definitions and intuitive examples of the basic kinds of games and their solution concepts there are four kinds of games static or dynamic and complete or incomplete information complete information means there is no private information the corresponding solution concepts are nash equilibrium in static games of complete information backwards induction or subgame perfect nash equilibrium in dynamic games of complete information bayesian nash equilibrium in static games with incomplete information and perfect bayesian or sequential equilibrium in dynamic games with incomplete information the main theme of the paper is that these solution concepts are closely linked as we consider progressively richer games we progressively strengthen the solution concept to rule out implausible equilibria in the richer games that would survive if we applied solution concepts available for simpler games in each case the stronger solution concept differs from the weaker concept only for the richer games not for the simpler games

optimal bypass and cream skimming this paper develops a normative model of regulatory policy toward bypass and cream skimming it analyzes the effects of bypass on second degree price discrimination on the rent of the regulated firm and on the welfare of low demand customers it shows that pricing under marginal cost may be optimal for the regulated firm excessive cream skimming occurs if access to the bypass technology is not regulated and the prohibition of bypass may increase or decrease the regulated firm s rent jel 026 613 the regulation of natural monopolies is often associated with policies toward competition including restrictions on entry this paper is concerned with a common form of competition which threatens the regulated firm on its most lucrative markets examples abound in the telecommunications industry the development of microwave radio and communication satellites in the 1960 s introduced the possibility that big telecommunication customers might bypass the major common carrier att and the 1978 natural gas policy act in the united states has created the possibility for industrial plants to bypass the local distribution utilities by building direct connections to the pipelines gas producers or intermediaries

strategic transmission of costly information it is ofren the case that an individual s decision is at least partly based on information received from another and when the agents payoffs depend on both the former s decision and on the latter s information there is an incentive for the informed individual to attempt to bias the decision maker s decision in his or her favor by strategically manipulating the information transmitted in a seminal paper crawford and sobel 1982 hereafter c s study such strategic information transmission in the context of an abstract sender receiver game variants of the crawford and sobel model have been applied widely and as the application varies so often does the interpretation of type in some cases type refers to a preference parameter given by nature as for example in bargaining theory e g farrell and gibbons 1989 matthews 1989 whereas in other settings for instance legislative decision making or expert testimony type refers to more or less technical information concerning how decisions map into final consequences and as such is acquired information e g gilligan and krehbiel 1987 milgrom and roberts 1986 when the information has to be acquired it is natural to suppose the acquisition is costly for otherwise there is no reason why such information is asymmetrically distributed so long as the receiver can observe surely or at least accurately infer whether the sender is informed and so long as messages are cheap talk there is no issue here for strategic information transmission save whether to become informed at all however there are many circumstances when it is inappropri ate to assume the receiver has such knowledge one possibility is that a receiver may know that a sender has some relevant informa tion but be uncertain of the quality of this information a second perhaps more important possibility is that a receiver is unable to tell whether a potential sender is uninformed inter alia this problem constitutes the rationale for ignorance of the law being inadmissible as a legal defense were it admissible then informed miscreants would mimic uninformed transgressors leads voters to be skeptical of politicians claiming ignorance of illegal arms deals and makes the sec sensitive to problems in distinguishing insider trading from legitimate good judgement so there is an intrinsic asymmetry in that it is generally possible for say senders to verify possession of at least some information but it is typically prohibitively difficult to verify any lack of knowledge

motivating wealth constrained actors we examine how owners of productive resources e g public enterprises or financial capital optimally allocate their resources among wealth constrained operators of unknown ability optimal allocations exhibit 1 shared enterprise profit the resource owner always shares the operator s profit 2 dispersed enterprise ownership resources are widely distributed among operators of varying ability 3 limited benefits of competition the owner may not benefit from increased competition for the resource and sometimes 4 diluted incentives for the most capable more capable operators receive smaller shares of the returns they generate implications for privatizations and venture capital arrangements are explored

optimal incentive contracts with multiple agents abstract a setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered with correlated productivities each agent s private information also provides a signal about the other agent s productivity in contrast to the setting in which there is only one agent it is shown that such private information may be of no value to the agents it is only if the agents are risk averse that their private information may allow them to command rents moreover when the agents are constrained only to reveal their private information truthfully as a nash equilibrium the pareto optimal incentive scheme may induce the agents to adopt strategies other than truth telling this leads to the consideration of truth telling equilibria that are not pareto dominated in the subgame played by the agents among all such equilibria the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a nash response to truth

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

incentives to motivate abstract we present a model in which a motivator can take costly actions or what we call motivational effort in order to reduce the effort costs of a worker and analyze the optimal combination of motivational effort and monetary incentives we distinguish two cases first the firm owner chooses the intensity of motivation and bears the motivational costs second another agent of the firm chooses the motivational actions and incurs the associated costs in the latter case the firm must not only incentivize the worker to work hard but also the motivator to motivate the worker we characterize and discuss the conditions under which monetary incentives and motivational effort are substitutes or complements and show that motivational effort may exceed the efficient level

behind the revolving door a new view of public utility regulation regulatory officials frequently work for firms they regulate after they leave office this revolving door has been the subject of much scrutiny owing to the natural suspicion of corruption in a time dependent supergame i take a strategic look behind the revolving door and find it can lead to improved performance of regulated industries when firm managers and regulators have finite and concurrent terms investment incentives are minimal staggered terms and revolving doors can result in improved performance of regulated firms when each side s actions at each date are contingent on past outcomes

leadership based on asymmetric information rational players unconstrained by contracts or formal authority choose to follow a better informed leader whose action reveals part of her information if the leader satisfies a credibility condition then the unique nondegenerate equilibrium solves distinct shirking and coordination problems and achieves the first best if credibility fails as is more likely for a large organization then followers ignore the leader and equilibria are very inefficient appointing multiple leaders or a high cost leader can restore credibility if players invest privately in information then a leader often appears endogenously the equilibrium concept is an original extension of sequential equilibrium to continuous states

the sale of ideas strategic disclosure property rights and contracting ideas are difficult to sell when buyers cannot assess an idea s value before it is revealed and sellers cannot protect a revealed idea these problems exist in a variety of intellectual property sales ranging from pure ideas to poorly protected inventions and reflect the nonverifiability of key elements of an intellectual property sale an expropriable partial disclosure can be used as a signal allowing the seller to obtain payment based on the value of the remaining undisclosed know how we examine contracting after the disclosure and find that seller wealth is pivotal in supporting a partial disclosure equilibrium and in determining the payoff size

repeated auctions of incentive contracts investment and bidding parity with an application to takeovers this article considers a two period model of natural monopoly and second sourcing the incumbent supplier invests in the first period after observing the incumbent s first period performance the buyer may break out in the second period the investment may or may not be transferable to the second source and it may be monetary or take the form of human capital we determine whether the incumbent should be favored at the reprocurement stage and how the slope of his incentive scheme should evolve over time we find that the gains from second sourcing are not so large as one might hope finally we reinterpret the second source as a raider and the breakout as a takeover we discuss the desirability of defensive tactics and obtain a rich set of testable implications concerning the size of managerial stock options the extent of defensive tactics the firm s performance and the probability of a takeover

good regulatory regimes assuming simple functional forms numerical methods are used to analyze linear regulatory rules that include cost plus and price cap regimes regulators are assumed to observe actual cost but not the disutility of cost reduction and are assumed unable to impose taxes or make transfers best linear regimes depend importantly on the level and form of uncertainty the regulatory objective function and the firm profitability constraint under uncertainty regimes in which price depends in part on actual cost generally substantially outperform pure price caps particularly in terms of consumers surplus

optimal procurement mechanisms we analyze optimal mechanisms in environments where sellers are privately informed about quality a methodology is provided for deriving conditions that are necessary and sufficient to determine when two simple trading environments maximize either social or private surplus the commonly used auction mechanism is frequently inefficient in procurement environments often the optimal mechanism is simply to order potential suppliers and to tender take it or leave it offers to each sequentially we completely characterize the environments in which either mechanism is optimal in doing so we develop a general methodology that determines when and if a given trading institution is optimal

the value allocation of an economy with differential information we analyze the shapley value allocation of an economy with differential information since the intent of the shapley value is to measure the sum of the expected marginal contributions made by an agent to any coalition that he she belongs to the value allocation of an economy with differential information provides an interesting way to measure the information advantage of an agent this feature of the shapley value allocation is not necessarily shared by the rational expectation equilibrium thus we analyze the informational structure of an economy with differential information from a different and new viewpoint

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

an analysis of the impact of climate change on crop yields and yield variability this paper develops an econometric model of stochastic production functions to quantify the impacts of climatic variables on the mean variance and covariance of crop yields the estimates of the production function parameters and their elasticities are utilized to analyse the impacts of the projected climate change on agriculture the results show that the climate change will have modest effects on the mean crop yields but will significantly reduce the variance and covariance for most of the crops considered the results have implications for allocations of agricultural land among crops and for crop production mix

network interconnection in telecommunications this paper discusses industries such as telecommunications where firms each have their own customers and must interconnect with other firms to provide a comprehensive service two scenarios are considered i the case of a symmetric unregulated industry and ii the case of an industry with a dominant regulated incumbent in the first provided there is sufficient product differentiation it is shown that firms agree to set interconnection charges above associated costs in order to obtain the joint profit maximising outcome in the second a formula for the welfare maximizing interconnection charge is derived relations with the efficient component pricing rule are discussed

the impact of global warming on agriculture reply in our paper with daigee shaw mendelsohn et al 1994 henceforth mns we developed a new approach to measuring the impact of global warming on agriculture we call this approach ricardian because it relies upon standard rent theory as a way of identifying the impact of changes on net economic welfare we compared the ricardian approach with the traditional production function approach which uses agricultural production functions but has great difficulty identifying all the other adjustments that farmers make in response to changing external conditions the ricardian approach is particularly well suited to a tremendously heterogeneous sector because it can rely upon reduced form estimation and does not require the impossible task of constructing structural models of hundreds of crops in thousands of locations estimating the model using cross sectional data on climate farm land prices and other economic and geophysical data for almost 3 000 counties in the united states the ricardian approach shows a significantly lower estimated impact of global warming than the traditional productionfunction approach indeed our preferred statistical approach showed modest benefits of climate change in his comment on mns in this issue of the review william r cline 1996 raises three concerns first he notes that the analysis assumes that output prices remain constant second he asserts that the analysis assumes that the supply of water for irrigation is perfectly elastic third he calls for testing the results of the model on alternative climate scenarios from general circulation models gcm s his first and third points are useful additions while the second is incorrect our ricardian approach assumes that the existing pattern of agricultural land rents and land prices reflects the long run equilibrium economic effect of climate and other geophysical and economic variables standard economic reasoning shows that by calculating the estimated effects of perturbing the climatic variables we can project the impact of climate change on economic welfare we do so in a partial equilibrium approach which assumes that output prices are invariant to the climate and cline is correct to point out that this might lead to biased estimates because the partialequilibrium estimates tend to underestimate damages and overestimate benefits in fact the bias is small given standard parameters for agricultural demand and supply functions we illustrate this point using linear supply and demand functions for agricultural crops let demand be given by qd ao a1p while supply is q po pi p where q and p are output and price and ai and i are parameters in equilibrium at the old climate market outcomes are qo and po now suppose that global warming contracts supply so that

trade imbalance in international message telephone services an econometric model is estimated to identify determinants of trade imbalance in international message telephone services markets results indicate that asymmetric market structure is important in explaining bilateral market imbalances for high income country pairs for low and high income country pairs gdp per capita is the dominant cause of traffic imbalances the findings suggest that telecommunications liberalization policies are effective in reducing distortions in international traffic flows and settlement payments however liberalization should be accompanied by developmental programmes that enhance income per capita and telecommunications network investment in developing countries such programmes may be effective in providing a more equitable distribution of the gains from telecommunications reform across countries

price discrimination competition and regulation this paper analyzes some effects of price discrimination policy in a model where a dominant incumbent firm faces an endogenous degree of competition in one of its two markets banning price discrimination tends to encourage more entry which is desirable if the entrant is as efficient as the incumbent but has ambiguous welfare effects more generally prices in both markets might fall price discrimination policy under different forms of price regulation is also examined if the incumbent s average price level is regulated then allowing price discrimination can lead to pricing below marginal cost with possible anticompetitive consequences

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

network competition i overview and nondiscriminatory pricing we develop a model of unregulated competition between interconnected networks and analyze the mature and transition phases of the industry in this deregulated environ ment networks pay negotiated or regulated access charges to each other and com pete in prices for customers we show that a competitive equilibrium may fail to exist for large access charges or for large network substitutability and that freely negotiated access charges may prevent effective competition in the mature phase of the industry and erect barriers to entry in the transition toward competition last we examine the meaning and impact of policies such as the efficient component pricing rule

leading for the long term abstract how do leaders build credibility and what happens if they can t or don t existing economic models of leadership consider static settings only and thus are not well suited for addressing such issues moreover an important phenomenon of leadership is its persistence to allow for credibility and other behaviors that make sense only in repeated games such as the followers paying the leader tribute this paper considers a repeated game version of hermalin b e 1998 toward an economic theory of leadership leading by example american economic review 88 1188 1206 leadership model

the access pricing problem a synthesis the baumol willig efficient component pricing rule states that it is efficient to set the price of access to an essential facility equal to the direct cost of access plus the opportunity cost to the integrated access provider the authors analyze the relevant notion of opportunity cost under various assumptions about demand and supply conditions including product differentiation bypass and substitution possibilities which all reduce opportunity cost compared to the benchmark case they show that the ramsey approach to access pricing developed by j j laffont and j tirole 1994 is closely related to the efficient component pricing rule provided opportunity cost is correctly interpreted

diversification incentives under price based and cost based regulation this article considers two schemes of regulationforfirms that serve both monopoly markets and markets subjected to substantial competition the first form cost based regulation combines elements of rate of return regulation on monopoly markets with filly distributed cost pricing much like the form of regulation currently in place in the domestic telephone industry the secondform price based regulation would establish rate caps on noncompetitive services and allow the firm to enter into competitive markets and charge whatever prices it might like in those markets models of both forms of regulation are developed and analyzed with respect to incentives for cost misreporting choice of technology cost reducing innovation choices of prices and output levels and diversification into competitive markets

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

revolving doors and the optimal tolerance for agency collusion in this article i study how the presence of a revolving door and potential collusion between a regulator and a regulated firm affect the regulator s performance incentives contrary to the conventional wisdom these seemingly undesirable features of the regulatory system may serve the interests of the government because i the regulator s efforts to enhance her industry qualifications may have a complementary effect on her regulatory performance and ii the regulator may become more aggressive in regulation so as to signal her industry qualifications to the firm collusion between a regulator and a firm also can be beneficial because a regulator may increase her monitoring effort in order to increase the chance of achieving a profitable side contract with the firm and side contracting may not always succeed

renegotiation design with multiple regulators abstract one striking feature of the internal organization of governments is the existence of multiple regulators this paper explains this organizational choice as coming from the government s limited ability to commit the separation of powers between two regulators is modeled as a stackelberg common agency game with respect to the case of a single regulator the allocative efficiency and the regulated firm s informational rent are both reduced in the unique equilibrium of this game however when regulators have a limited ability to commit this static cost of regulators separation becomes a dynamic benefit separation makes renegotiation harder and improves commitment journal of economic literature classification numbers d82 l51

leadership and information an organization makes collective decisions through neither markets nor contracts instead rational agents voluntarily choose to follow a leader in many cases incentive problems are solved the unique nondegenerate equilibrium achieves the first best even though every agent has incentives to free ride the leader has no special talents but is distinguished by getting exclusive access to information a crucial feature is that the leader reveals part but not all of her information it is this maintenance of informational asymmetry that permits achieving the first best jel d23 m54

endogenous leadership in incentive contracts abstract we study the effect of leadership on incentive contracts in a moral hazard framework in our model agents are allowed to choose the timing of their actions the agents may choose their effort levels simultaneously or sequentially we show that relative performance evaluation leads to a subgame in which agents make simultaneous effort choices whereas joint performance evaluation yields a subgame in which agents make sequential effort choices since agents exert more effort in the sequential game the principal uses joint performance evaluation to induce the leader follower relationship among agents

public policies pressure groups and dead weight costs abstract this paper presents a model of competition among special interest groups for political influence each active group exerts pressure to affect its taxes and subsidies where activities of different groups are related by the equality between total tax collections and total tax subsidies the dead weight costs and benefits of taxes and subsidies play a major role in our model an increase in the dead weight cost of taxation encourages pressure by taxpayers while an increase in the dead weight costs of subsidies discourages pressure by recipients various applications of the analysis are discussed