money back warranties vs replacement warranties a simple comparaison product warranties are one of the most common time honored and visible contractual relationships entered into by consumers moreover under the uniform commercial code consumers are covered by an implied warranty of merchantability even without a written warranty in this paper we compare the outcomes of two contrasting types of consumer product warranties money back warranties and replacement warranties both these types of warranties are ubiquitous in fact a best and a r andreasen 1977 find that returning an item is the most common action taken by dissatisfied consumers c l kendall and f a russ 1975 in a study of the consumer packaged goods industry find that money back and new merchandise are the two most common responses made by firms to consumer complaints yet as our analysis shows there are significant differences in the incentives they provide firms and in their welfare properties in particular we find that the comparison depends crucially on the observability of quality and on the cost of servicing warranties although there are certainly more complicated explanations for warranties we rely on a simple model of imperfect consumer information in which to embed our comparison of the relative performance of these two forms of warranty consumers are confronted by seller moral hazard that is either they are unable to discern the quality of a product before purchase or alternatively this information is extremely costly for consumers to obtain or for firms to publicly demonstrate we abstract from issues such as differing degrees of risk aversion consumer moral hazard and screening each of which is frequently the rationale behind warranty provision our model is perhaps closest to the model presented in michael spence s 1977 article in which he analyzes the provision of warranties in an environment with biased consumer information

an historical perspective on the forecasting performance of the treasury model forecasting the growth in uk consumers expenditure drawing upon treasury official economic forecasts vols i ii a series of treasury model tm forecasts of the percentage growth in real total consumers expenditure are derived for the period 1967 to 1989 the one two and three step ahead forecasts examined cover an interesting period which includes major shocks to the uk economy business cycle effects and changes in economic policy whilst a battery of forecast evaluation statistics and tests do not detect any evidence of forecast bias or irrationality over the whole sample split sample analysis provides evidence of a switch from overprediction to underprediction around 1977 in addition the application of modified versions of holden peel 1990 tests provides evidence of the longest horizon forecasts failing to capture the full movement of changes in consumption growth using simple regression and a selection of forecast encompassing tests shorter horizon forecasts are found to dominate longer horizon forecasts a feature which might be expe

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

east west joint ventures and buyback contracts abstract contractual joint ventures cjvs and the buyback form of countertrade are popular methods that socialist countries use to attract foreign investment in this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts the existence of sharing rules and minimum standard requirements on inputs the model stresses the incentive problems involved when a socialist host country which does not allow foreign direct investment uses a cjv to obtain the fruits of some knowledge based production process from a multinational enterprise

to give or to forgive aid versus debt relief is generalized debt relief an effective development strategy or should assistance be tailored to countries characteristics to answer this question the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief since offering such a menu is costly it is preferred by donors only when the cost of assistance is low and the probability that an indebted country is creditworthy is high enough for lower probabilities and higher costs of assistance donors prefer a policy of only debt relief very limited aid is the preferred policy only for high costs of assistance and low probabilities that the government is creditworthy

crop insurance in a political economy an alternative perspective on agricultural policy lawmakers often subsidize farmers in times of financial distress this article models this political impulse as a constraint on government farm policy describing how ex ante government farm insurance can deter ex post disaster relief and improve production incentives by countering the moral hazard that otherwise prevails absent ex ante government policy ex post relief takes the form of revenue insurance which prompts excessive entry into farm production and under production by operating farmers ex ante government policy can raise economic and political welfare by buying out low productivity farmers and offering profitable farmers a combination of revenue insurance price supports and a program participation fee copyright 2003 oxford university press

an integrated product returns model with logistics and marketing coordination we develop an integrated approach for analyzing logistics and marketing decisions within the context of designing an optimal returns system for a retailer servicing two distinct market segments at the operational level we show that the optimal refund price is not unique moreover it is such that if both market segments return a purchased product then neither segment will receive a full money back refund and it is such that if one or both segments do not return a purchased product then a refund premium over the purchase price is possible but the refund premium will not be enough to offset a customer s total net cost of purchase and return we also show that any improvement to the returns system that results in increased logistical efficiency or marketing effectiveness will be accompanied by an increase in the selling price of the product at the strategic level we show that if the retailer does not coordinate its logistics and marketing efforts to improve the overall returns system then it will tend to over invest in one of the functions and under invest in the other finally we illustrate how our model can be generalized to the case in which a customer s ex post valuation of the product falls along a continuum

findings biased but efficient an investigation of coordination facilitated by asymmetric dominance in several marketing contexts strategic complementarity between the actions of individual players demands that players coordinate their decisions to reach efficient outcomes yet coordination failure is a common occurrence we show that the well established psychological phenomenon of asymmetric dominance can facilitate coordination in two experiments thus we demonstrate a counterintuitive result a common bias in individual decision making can help players to coordinate their decisions to obtain efficient outcomes further limited steps of thinking alone cannot account for the observed asymmetric dominance effect the effect appears to be due to increased psychological attractiveness of the dominating strategy with our estimates of the incremental attractiveness ranging from 3 6 a learning analysis further clarifies that asymmetric dominance and adaptive learning can guide players to an efficient outcome

the right to return this article studies the allocation of responsibility for unsold inventory provision for which is made in practically every distribution contract the two extreme cases are the consignment contract which allocates all the burden to the manufacturer and the no return contract in which retailers purchase the merchandise outright and assume responsibility for unsold inventory contract choices are shown to vary across countries industries products and types of transactions the article identifies six main factors affecting this choice optimal inventory policy in a stochastic retail demand environment relative advantage in disposing of the unsold inventory optimal risk allocation incentives to invest in promotions and provide services to increase consumer demand information asymmetry and costs associated with the consignment contract per se several testable implications are presented and the choice of contracts in the publishing industry is shown to be consistent with the predictions of the model

causes of u s farm commodity programs this paper i s an attempt to explain variations by commodity in producer protection afforded by farm price support programs since the1930s particularly emphasized are theideas that these programs are essentially income redistributional measures and that given political forces the programs are attempts to redistribute efficiently variables associated with the cost to producers of generating political pressure and the social cost deadweight losses of redistribution are both found to be empirically important copyright 1987 by university of chicago press

moral hazard asset specificity implicit bonding and compensation the case of franchising i introduction there is a large and growing interest in the structuring of compensation to deal with the moral hazard problem much of this literature treats various forms of income sharing such as piece rates and sharecropping as a means for a principal to provide incentives to an agent this literature has been extended to the case of two sided moral hazard where both parties to an exchange may shirk another mechanism to induce effort discussed in the literature is bonding where workers post a bond that is forgone if effort is inadequate klein 1980 and klein and leffler 1981 treat the possibility of specific assets as constituting an implicit bond where poor performance by a firm is penalized by bankruptcy and sale of assets at a loss this paper studies a situation where these issues coalesce the case of compensation arrangements in franchising the typical franchise contract calls for the sharing of franchise income between franchisee and franchisor additionally franchisees may be terminated for poor performance if franchise assets have a degree of specificity the ensuing sale of assets at a loss provides a penalty for poor performance we examine the determinants of franchise royalty rates and fees in this setting while there is a literature on two sided moral hazard and some empirical work on franchising based on this idea none incorporates the potential influence of asset specificity we explicitly consider the role of implicit bonding and asset specificity in conjunction with moral hazard on the part of both trading parties we go beyond previous work in franchising by estimating the effects of asset specificity and other influences on the royalty rate further part of our empirical work utilizes improved micro data on actual franchise contracts our approach and its implications are discussed in section ii consistent with previous work we expect the royalty rate to decrease increase as the importance of the franchisee s franchisor s input increases however more specific capital with the threat of termination acts as an implicit bond and substitutes for a reduced royalty rate in inducing franchisee effort thus we expect royalty rates to increase with asset specificity also unlike other approaches we do not necessarily expect an inverse relationship between the royalty rate and the franchise fee for example the greater the importance of franchisor effort the higher the royalty rate but the franchise fee may also increase if franchise revenue rises by enough our hypotheses are tested using two different data sets an original firm level data set is taken from federal trade commission ftc required uniform franchise offering circulars ufoc 1 in addition data are obtained from bond s 1989 the source book of franchise opportunities the data are discussed and the results presented in section iii we find substantial support for our approach for example factors that increase the importance of the franchisee s effort such as the number of employees supervised lower the royalty rate and increase the franchise fee also a reduction in the specificity of the franchisee s investment due to leasing lowers the royalty rate and raises the franchise fee 2 section iv summarizes our findings and concludes the paper ii the approach and the hypotheses the typical franchising contract consists of a two part payment by the franchisee to the franchisor the franchisee pays an up front nonrefundable franchisee fee and a continuing royalty payment usually a percentage of sales in return the franchisee receives the right to use the franchisor s brand name capital and a method of operation in addition the franchisor provides on going support to the franchisee however the franchisor maintains the right to unilaterally terminate the contract if the franchisor determines that the franchisee is not delivering a product consistent with the quality guaranteed by the brand name

performance verifiability and output sharing in collaborative ventures this paper studies the problem of contracting between two firms when they try to exploit their complementary resources in a collaborative venture cv but their performance in the cv cannot be precisely verified by the other party or by a third party arbiter using a mathematical model that treats performance verifiability as a continuous variable the paper first establishes that a party whose performance cannot be perfectly verified has an incentive to shirk if it is paid only a flat fee and that this shirking problem is more severe as its performance is less verifiable then the paper shows in a general setting that a contract under which each party shares a fraction of the output is superior to a contract under which one of them is paid only a flat fee when performance verifiability is sufficiently low in addition with some specific assumptions about the forms of the revenue and cost functions the paper also shows that a party s share of the venture s residual output in the equilibrium is an increasing function of its productivity and a decreasing function of its opportunity cost finally the numerical examples constructed in the paper suggest that a contract which combines the self enforcing mechanism of output sharing with the third party enforcement mechanism of arbitration generally performs better than a contract that utilizes only one of these mechanisms

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

refusals to deal and orders to supply in competitive markets abstract a number of recent antitrust cases in north america and europe have involved allegations that manufacturers of durable products have refused to supply parts to independent service organizations apparently to monopolize the market for repairs of their products this paper analyzes such refusals in a competitive market and connected aftermarket in this model the refusals help to support higher prices for high intensity high value users however these higher charges permit the recovery of higher costs incurred during an initial warranty period since full prices equal full marginal costs in equilibrium the refusals permit the attainment of a first best outcome and an attempt by antitrust authorities to force supply will be welfare reducing

assessing the temporal variation of macroeconomic forecasts by a panel of changing composition this paper calls attention to the problem of changing panel composition in surveys of forecasters and documents the problem in the survey of professional forecasters to study the temporal variation of forecasts we recommend analysis of the time series of predictions made by individual forecasters this makes transparent the heterogeneity of the panel and avoids improper inferences due to changing panel composition we warn against the traditional practice of aggregate time series analysis which con ates changes in the expectations of individual forecasters with changes in the composition of the panel should analysis of aggregated predictions be thought desirable as a simplifying device we recommend analyses of sub panels of xed composition

warranty quality and price in the us automobile market the observed negative relationship between quality and warranty in the us auto market is analysed using a cost based approach developed by cooper and ross the theory of warranty and quality choice by producers and consumers is extended by endogenizing the joint price quality and warranty decision differences in producer costs and consumer preferences are found to explain the inverse relationship which suggests that american manufacturers should adjust their pricing warranty and quality strategy when entering foreign markets

estimating supply response in the presence of farm programs previous empirical research on crop supply response has given insufficient attention to the fundamentally different nature of supply response under farm programs versus competitive markets a simple theoretical model is presented which highlights the program participation option in the farmer s acreage allocation decision the model also provides the basis for different expected supply elasticities under free market and farm program regimes for corn and soybeans econometric supply estimation for corn belt states for 1948 80 using a temporally disaggregated approach confirms a greater supply elasticity for corn and a lower supply elasticity for soybeans under acreage restricting feed grain programs

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

voluntary product safety certification this paper describes the incentives for firms to seek voluntary product safety certifications we consider a firm that makes the decision of whether or not to seek certification prior to selling the product we show that even when the firm and the consumers have the same beliefs about the product s safety there are incentives for the firm to seek safety certification the main analysis investigates the role of consumer moral hazard and shows that it can lead to greater incentives for voluntary certification when inherent product safety and effort are substitutes but smaller incentives when they are complements the analysis of consumer moral hazard provides a nuanced perspective on the so called risk compensation or the peltzman effect phenomenon which postulates higher levels of accidents for safer products in our paper products that are successfully certified can end up with a higher incidence of accidents we also uncover an interesting nonmonotonic relationship between effectiveness of consumer

the informational content of ex ante forecasts the informational content of different forecasts can be compared by regressing the actual change in a variable to be forecasted on forecasts of the change we use the procedure in fair and shiller 1987 to examine the informational content of three sets of ex ant forecasts the american statistical association and national bureau of economic research survey asa data resources incorporated dri and wharton economic forecasting associates uefa we compare these forecasts to each other and to quasi ex ante forecasts generated from a vector autoregressive model an autoregressive components model and a large scale structural model the fair model

distributive leakages of agricultural support some empirical evidence abstract the paper evaluates the transfer efficiency of the austrian bread grain policy taking into account distributive leakages i e how much of the transfers officially intended to support farm income are finally realised in the upstream and downstream industries gardner s am j agric econ 65 1983 225 well known measure of average transfer efficiency ate is augmented for the case of more than two social groups and computer intensive simulation procedures are utilised to deal with parameter uncertainty

optimal shared savings contracts in supply chains linear contracts and double moral hazard in many supply chains consumption of indirect materials sold by a supplier to a customer for use in her production process can be reduced by efforts exerted by either party since traditional supply contracts provide no incentive for the supplier to exert such effort shared savings contracts have been proposed as a way to improve incentives in the channel leading to more efficient effort choices by the two parties such shared savings contracts typically combine a fixed service fee with a variable component based on consumption volume we formalize this situation using the double moral hazard framework in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption we also extend the double moral hazard framework to analyze a broader class of cost of effort functions than considered so far including the linear cost of effort functions commonly found in practice we show that the supplier can still always induce the optimal second best equilibrium with a linear shared savings contract under this broader class of functions however the behavior of the optimal contract as a function of the problem parameters becomes more complex we illustrate how small changes in the problem parameters can turn profits from being a well behaved to a poorly behaved function of the contract and provide some theoretical characterization of this phenomenon the practical significance of this is that simple linear contracts are sufficient in many double moral hazard contexts even for the broader class of functions we consider but care must be taken in selecting the optimal contract parameters

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

inference in nonlinear econometric models with structural change this paper extends the classical test for structural change in linear regression models see chow 1960 to a wide variety of nonlinear models estimated by a variety of different procedures wald lagrange multiplier like and likelihood ratio like test statistics are introduced the results allow for heterogeneity and temporal dependence of the observations in the process of developing the above tests the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models

an intertemporal model of warranties using a simple two period model this paper attempts to explain certaini interesting intertemporal properties of product warranties specifically why does coverage generally fall over time and why is the typical warranty s life so much shorter than the expected life of the product it covers we view warranties as a partial solution to the double moral hazard problem that arises when buyers cannot readily observe the quality built into a product and sellers cannot observe the care with which buyers use it the optimal warranty strikes the right balance between providing incentives for seller quality and for buyer care under certain conditions a two period warranty will render even the first best i e full information solution achievable un modlde intertemporel dce garanties ce memoire tente d expliquer certaines proprietes intertemporelles interessantes des garanties sur les produits a l aide d un modele simple sur deux periodes specifiquement on se pose les questions suivantes pourquoi est ce que generalement la couverture diminue avec le passage du temps et pourquoi la vie de la garantie est elle tellement plus courte que celle du produit auquel elle est attachee les garanties sont perques comme une solution partielle a un double probleme de risque

the political economy of u s wheat legislation bruce a babcock colin a carter and andrew schmitz both taxpayer subsidies to u s wheat producers and domestic deadweight losses increased as a result of the u s wheat program adopted in 1985 a calculation of the costs and benefits of alternative wheat policies shows that mandatory production controls with no taxpayer expense could have made wheat producers as well off as the adopted policy becker s theory of competition among interest groups and peltzman s theory of the equilibrium amount of regulation are shown to be consistent with the observed policy choice if the list of affected interest groups includes agricultural input suppliers and grain marketing firms i introduction every five years congress drafts new farm legislation dictating the provisions of commodity programs for cotton and the major food and feed grains for the subsequent five years from 1973 through 1985 the primary features of the commodity programs were guaranteed farm prices and government stockholding activities deadweight losses from the programs during this time were minimal market prices were generally higher than the government defended price floors because of a booming export market legislated increases in commodity support prices combined with a severe drop off in the demand for agricultural exports beginning in 1982 increased the economic costs of the commodity programs the u s price floor became the world price for wheat cotton and corn grain stocks accumulated while government payments to u s farmers grew to unprecedented levels most agricultural interest groups in 1984 agreed that an overhaul of agricultural policy was necessary supporters of large levels of production and exports wanted to stimulate the demand for exports by eliminating price floors others felt that the united states should reduce budgetary costs by using direct supply controls to raise farm prices the clear winners in the new 1985 farm bill were the proponents of maintained production levels and expanded exports the new policy froze the relatively high supply prices received by farmers while simultaneously lowering price floors becker 1983 argues that two forces mainly determine the outcome of policy debates the first following stigler 1971 and peltzman 1976 is the relative efficiency with which interest groups exert political pressure interest groups that are efficient in exerting political pressure can increase the subsidization or decrease the tax burden of their constituents the second force is the extent of deadweight losses associated with proposed policies those policies with lower deadweight losses are ceteris paribus more likely to be adopted for the simple reason that less tax needs to be collected from losing interest groups for given transfers to winning groups gardner 1987 finds empirical evidence that both the ability to redistribute efficiently and the effectiveness of political organizations help explain which farm commodities have received the most government support since 1930 his study provides little insight however into which force is more important in determining the type of redistribution policies that are ultimately adopted for a given commodity an examination of the wheat program adopted in the 1985 farm bill and alternative policies that were rejected provides an opportunity to determine whether the efficiency of programs or the political prowess of interest groups is more important in determining policy outcomes this task requires a calculation of the magnitudes and the distribution of costs and benefits of the chosen policy and alternative policies costs and benefits are calculated for 1 a continuation of the 1981 farm bill policies through 1986 1990 2 the adopted 1985 farm bill policies and 3 mandatory production controls all three alternatives are examined relative to a laissez faire policy whereby the u s government has no direct involvement in agriculture

bias in federal reserve inflation forecasts is the federal reserve irrational or just cautious abstract inflation forecasts of the federal reserve seem to have systematically under predicted inflation from the fourth quarter of 1968 until volcker s appointment as chairman and to systematically over predict it afterwards until the second quarter of 1998 furthermore under quadratic loss commercial forecasts seem to have information not contained in those forecasts to investigate the cause of this apparent irrationality this paper recovers the loss function implied by federal reserve s inflation forecasts the results suggest that the cost of having inflation above an implicit time varying target was larger than the cost of having inflation below it for the period since volcker and that the opposite was true for the pre volcker era once these asymmetries are taken into account the federal reserve s inflation forecasts are found to be rational

moral hazard and optimal contract form for r d cooperation abstract this paper aims to explain the use of different governance modes for r d cooperation we argue that ex ante cross licensing agreements are preferred to r d joint ventures if potential synergy effects are negligible and the double moral hazard problem caused by unobservable r d effort can be solved by an appropriate royalty scheme it is shown that the first best effort decisions are implementable by a cross licensing agreement if royalty payments are based on r d success however if the payments have to be based on actual know how transfer because r d success is not verifiable there are cases where joint ventures are necessary to induce optimal r d effort

multilateral and bilateral loans versus grants issues and evidence this paper examines a wide range of issues relating to the mix between loans and grants as well as the degree of concessionality of loans a number of empirical tests are carried out based on annual panel data over 1970 to 1999 for 22 donor countries and 72 recipient countries based on the tests we observe that for bilateral donors past grant loan mix and hence reflows from past transfers do not influence the volume of current resource transfers our tests also show that the rate of official borrowing by the recipients and by deduction the extent of their past debt burden is positively influenced by the extent of the concessionality of such loans irrespective of whether it is in the form of subsidised interest rates or longer grace periods the paper concludes with a review of the circumstances in which grants soft loans and non concessional loans might have their respective comparative advantage as well as a discussion of the need so as to overcome the negative incentive problems of soft loans for a typical concessional loan package to be separated into two constituent parts this would enable the recipient to be given the grant component and the option to take from the non concessional loan component as much as desired

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

the value of technology improvements in games with externalities a fresh look at offsetting behavior abstract we model the effect of safety technology improvements in a symmetric game in which each player s payoff depends on his own precaution and the other players average precaution we derive conditions under which an improved technology increases or decreases players equilibrium utilities for mandatory safety technologies the direction of the welfare effect depends on whether the externality between players is positive or negative and on whether the technology improvement is a complement or substitute for individual precaution for safety technologies that individuals can choose whether or not to purchase individuals expend too much on reducing the loss size but may spend either too much or too little on features that reduce an individual s loss probability

budget support versus project aid a theoretical appraisal should donors interested in the effectiveness of developmental programmes rely on conditional budget support or on project aid to answer this question we present a model in which only a subset of developmental expenditures can be subject to conditionality we show that budget support is preferable to project aid when the preferences of donors and recipients are aligned and when assistance is small relative to the recipients own resources furthermore when donors cannot observe the recipient s type they may impose higher levels of conditionality to separate committed governments from uncommitted ones

forward induction in coordination games abstract this paper provides experimental evidence on the power of forward induction arguments in a 2 2 coordination game allowing one player the option of obtaining a certain payoff instead of playing the game coordinates play in the direction predicted by the forward induction argument however two way pre play communication is a more effective coordination device

contractual structure in agriculture abstract this paper develops a generalized double sided moral hazard model of contract choice in agricultural production with mutual monitoring of each other by the landlord and the tiller who generally have different levels of farming efficiency and are risk averse using this model we formally prove that the optimal contract maximizes the output net of the risk bearing and agency costs of both the parties and carry out a simulation exercise which helps explain many of the tenancy related issues the difference in the farming efficiency of the two sides often ignored in previous analysis turns out to be the principal determinant of the contract offered to a tiller

product warranty management iii a review of mathematical models a variety of mathematical models have been developed to study different aspects of warranty in this paper we carry out a comprehensive review of these models by classifying them into three categories based on consumer manufacturer and public policy decision maker perspectives

incentive contracts in two sided moral hazards with multiple agents abstract the paper studies a contracting problem in which a principal enters in two sided moral hazards withnindependent agents there are no technological or informational linkages among thenagency problems despite this independence optimal incentive schemes essentially eliminate the principal s incentive problem when team size is large enough reputation like effects appear in a static setting through an improved aggregation of information about the actions of the principal one implication of this result is that it is generally suboptimal to require an agent s compensation to depend only on his own outcome another implication is the existence of purely informational economies of scale to increasing team size thus the concentration of otherwise unrelated transactions in a single firm creates wealth through a more efficient use of information about the principal s actions the paper also shows that extremely simple statistical contracts are approximately optimal in large teams the outcome of such contracts is observationally indistinguishable from standard principal agent contracts this provides a theoretical justification for using standard principal agent contracts in environments that involve two sided hazard in a fundamental way journal of economic literatureclassification numbers d21 d23

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

warranties durability and maintenance two sided moral hazard in a continuous time model double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time the more complete the warranty the better the producer s durability incentives and the worse the consumer s maintenance incentives using continuous time highlights the need for some warranty bound to avoid reaching the first best as an unreasonable limit early in the paper an exogenous bound is used while later the bound arises endogenously from the possibility of abuse and repair a quadratic example shows that the warranty s duration depends on the relative severity of the two moral hazard problems

all units discounts and double moral hazard abstract an all units discount is a price reduction applied to all units purchased if the customer s total purchases equal or exceed a given quantity threshold since the discount is paid on all units rather than marginal units the tariff is discontinuous and exhibits a negative marginal price cliff at the threshold that triggers the discount this paper shows that all units discounts arise in optimal agency contracts between upstream and downstream firms that face double moral hazard i present conditions under which all units discounts dominate two part tariffs and other continuous tariffs i also examine these tariffs when the upstream market faces a threat of entry in the case considered all units discounts deter entry by less efficient rivals without distorting price and investment whereas continuous tariffs either accommodate such entry or deter it by distorting price and investment

gradualism in aid and reforms abstract dynamic strategic interaction between an international donor and a recipient government is analyzed to review the efficacy of aid conditionality for governance reforms in ldcs it is shown that irrespective of whether the donor can fully commit to the aid program or not for maximal improvement in governance the aid should be disbursed in increments with each subsequent tranche being conditional on prior reforms demonstrating aid gradualism while the attraction of future aid incentivizes authorities to push through reforms these reforms in turn also make aid diversion less feasible further under full commitment the optimal aid package may involve offering scope for interim aid diversion to the elite for long term improvement in governance with such aid diversion being more likely to happen when the total aid budget is large with only partial commitment so that time consistency requires the donor to reconfigure aid in each round it is shown that a interim aid diversion is no longer viable and b both aid and reforms exhibit strong gradualism or what is known as the starting small and grow later principle in commitment models

corporate prediction markets evidence from google ford and firm x despite the popularity of prediction markets among economists businesses and policymakers have been slow to adopt them in decision making most studies of prediction markets outside the lab are from public markets with large trading populations corporate prediction markets face additional issues such as thinness weak incentives limited entry and the potential for traders with biases or ulterior motives raising questions about how well these markets will perform we examine data from prediction markets run by google ford motor company and an anonymous basic materials conglomerate firm x despite theoretically adverse conditions we find these markets are relatively efficient and improve upon the forecasts of experts at all three firms by as much as a 25 reduction in mean squared error the most notable inefficiency is an optimism bias in the markets at google the inefficiencies that do exist generally become smaller over time more experienced traders and those with higher past performance trade against the identified inefficiencies suggesting that the markets efficiency improves because traders gain experience and less skilled traders exit the market

rents from in kind subsidy charity in the public sector public choice analysis usually focuses attention on the behaviour of self interested individuals but this paper considers rent seeking when some taxpayers are motivated by altruism redistribution policies initiated by self interested rent seekers require taxpayer approval even if taxpayers are fully informed their resistance to inefficient schemes is reduced when public sector schemes are the only means available to pursue altruistic goals altruism serves to broaden the scope within which rent seekers may operate a discussion of international tied aid illustrates the impact which rent seeking can exert on public sector charity

monotone equilibria in signaling games abstract we examine the monotonicity of the sender s equilibrium strategy with respect to her type in signaling games we show that when the sender s return from the receiver s action depends on her type the spence mirrlees condition cannot rule out equilibria in which a higher type sender chooses a strictly lower action than a lower type we provide sufficient conditions under which all equilibria are monotone which require that the sender s payoff is decreasing in her action is increasing in the receiver s action and has strictly increasing differences between her type and the action profile we apply our sufficient conditions to education signaling advertising and warranty provision

a simple model of buybacks abstract buybacks are a type of contractual joint venture used in countertrade where the good produced is allocated in fixed proportions to the parties involved we show that buybacks can act as commitment devices when the quality of inputs cannot be contracted over

return policies market outcomes and consumer welfare the effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time product reliability is identified with defect rates producers first choose reliability levels and then compete in prices for given defect rates allowing returns makes products closer substitutes enhancing competition and reducing prices being closer substitutes makes higher reliability less worthwhile which reduces reliability while the decrease in reliability reduces consumer welfare the decrease in prices raises it the latter dominates so that aggregate consumer welfare increases with return policy l effet des politiques de remboursement sur les resultats du marche est examine dans le cadre d un modele ou les consommateurs ont des evaluations differentes de la valeur de leur temps la fiabilite des produits est mesuree par leur taux de defectuosite les producteurs choisissent d abord des niveaux de fiabilite et ensuite se concurrencent par les prix pour des niveaux de defectuosite donnes permettre de retourner le produit rend les produits davantage des substituts accroit la concurrence et reduit les prix une plus grande substituabilite rend la fiabilite moins importante et donc reduit la fiabilite alors que la chute de la fiabilite reduit le bien etre du consommateur la chute des prix l accroit ce second effet domine ce qui fait que le bien etre agrege du consommateur s accroit quand il y a politique de remboursement

do central bank forecasts influence private agents forecasting performance versus signals focusing on a set of central banks that publish their internal macroeconomic forecasts in real time enables one to shed light on the expectations channel of monetary policy the main contribution of this paper is to assess whether central bank forecasts influence private forecasts the response is positive for inflation forecasts in sweden the uk and japan to disentangle the sources of influence of central banks two concepts are proposed endogenous influence which is due to more accurate central bank forecasts and exogenous influence which is due to central bank signals on either future policy decisions or private information original empirical evidence on the central bank forecasting performance relative to private agents is provided and estimates show that in sweden more accurate inflation forecasts generate specific central bank influence that is different from the influence from signals the publication of forecasts may therefore refer to two central banking strategies that aim to shape private expectations forecasting or policymaking

promotion of the agricultural sector and political power in austria in most industrialized countries farmers as a small and well orgnized group are ableto influence government decisions to get rent creating proposals enacted two different viewsare presented to explain why the chicagoan view efficient redistribution hypothesis and the virginian view inefficient outcome of political bargaining a vertically structuredempirical model of the austrian farm sector is employed to test both hypotheses quantitativeresults of the welfare transfers from consumers taxpayers to farmers and agribusiness firmsare derived and the political weights of these groups are presented

reducing moral hazard associated with implied warranties of animal health comment in a recent journal article centner and wetzstein examine efficiency losses associated with moral hazard and the assignment of cost liability arising from diseased animals traditionally a buyer of livestock had an implied warranty that the seller would compensate all ex post costs arising from diseased animals the fear that implied warranties would provide disincentive for buyer self protection against possible damages moral hazard has led sellers to lobby for abrogation of implied warranties centner and wetzstein argue that abrogation of implied warranties does not remove moral hazard but simply transfers disincentive from buyer to seller by noting that welfare under buyer liability may be lower than under seller liability centner and wetzstein suggest efficiency losses can be reduced by maintaining seller liability and introducing partial insurance contracts where both parties share a burden of the ex post damages to induce a buyer to self protect the partial insurance contract is assumed to be a decreasing function of self protection this is a restrictive assumption however because it is often impossible or prohibitively costly for insurers sellers to monitor and enforce the insured s buyer behavior spence and zeckhauser holmstrom indeed it is this lack of monitoring that motivates moral hazard in the first place arrow 2 the purpose of this comment is to illustrate that a decentralized solution where monitoring is unnecessary can be obtained by considering three points a that the state of the world is dependent on the buyer s self protecting actions b the blurred distinction between self protection that influences severity of loss and self protection that influences probability of loss and c a sufficiently large difference in the dollar benefits of diseased and disease free animals given these three points contrary to centner and wetzstein s claim the buyer will have sufficient incentive to purchase optimal self protection despite the existence of implied warranties of animal health 3 first centner and wetzstein assume that the two mutually exclusive and jointly exhaustive states of nature are independent of buyer action let 13 and 1 p3 represent the buyer s degree of belief of selecting a diseased or a disease free animal using centner and wetzstein s notation as pointed out by marshall however independent states of nature exist only if a complete set of contingent contracts exist while theoretically feasible complete contingent claims contracts rarely if ever exist in reality for example given imperfect contingency markets the buyer can influence the probability of r ceiving a disease free animal by adopting assorted self protection strategies i e pretesting for disease use of experienced sellers and markets l t x represent buyer self protection such that the degrees of belief of selecting diseased and diseasefree animals are p p3 x and 1 p p3 x respectively where 3p is an endowed probability assume that an increase in self protection decreases the probability of selecting a diseased animal 3 0 4 subscripts denote relevant partial derivatives

measuring the social costs of suboptimal combinations of policy instruments a general framework and an example abstract since most agricultural programs employ two or more policy instruments simultaneously it is notable that little research has attempted to find optimal instrument combinations and no research exists which evaluates the social costs unrealized benefits of combining instruments suboptimally in our paper we report a simple and feasible method to find optimal policy instrument combinations and we provide the first general formal approach to measuring the social costs of suboptimal policy instrument combinations our approach is illustrated in an analysis for five major u s crops corn feed grains wheat rice cotton the simple model we employ for the illustration suggests that except for the feed grains program the observed programs combined policy instruments quite suboptimally we conclude that agricultural economics research now can and should begin placing increased emphasis on studying optimal policy instrument combinations

product quality and return policy in a supply chain under risk aversion of a supplier abstract this study aims to identify the relationship between return policy and product quality decisions in a decentralized system we consider a supply chain situation as in a retail or oem supply chain system where a buyer decides a return policy for consumers and delegates the product quality decision to a supplier we consider the supplier s different risk attitudes whether risk averse or risk neutral a penalty contract is introduced to control the supplier s hidden action conveying external failures due to returns to the supplier we show the conditions for supply chain coordination and demonstrate that product quality enhancement needs to precede a generous return policy setting in view of the prevalent business environment and current supply chain management practices moreover we indicate the optimal conditions for a generous return policy setting without quality enhancement

exit option in hierarchical agency abstract we explain why organizations that limit the voice of their agents can benefit from granting them an exit option we study a hierarchy with a principal a productive supervisor and an agent communication is imperfect in that only the supervisor can communicate with the principal while the agent has no direct voice to the principal we show that the principal is better off if she grants the agent the option to walk away from the contract by doing so the principal is implicitly giving a veto power to the agent this in turn restricts the manipulation of report by the supervisor thus the exit option can be interpreted as a remedy for limits on communication our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal s welfare while protecting the agent our result is robust to the case of collusion between the supervisor and the agent we also examine the optimal exit option i e whether exit should entail a payment to or from the agent

consequences of discretion in the formation of commodities policy abstract in a simple model of endogenous primary commodity price support policy i policy is affected by private inventories and ii private inventories are affected by speculative attempts to forecast policy the interaction between these two forces is rich yielding bubbles and extrinsic volatility thus helping to explain some odd episodes observed in commodity markets in addition under some conditions a government that wishes to support the price but is unable to commit to future action may be impotent and a government that does not want to support the price may be trapped into doing so by speculative activity

counterpart funding requirements and the foreign aid procyclicality puzzle official development assistance is a key source of external finance in many developing countries a striking feature of these aid flows is their positive correlation with business cycles in recipient countries this pattern is puzzling in that it reinforces recipients already strong and costly macroeconomic fluctuations we propose a simple model of investment financing and aid provision under asymmetric information that rationalizes such a pattern we assume that donor agencies and recipient governments value projects differently and that donors know less than recipients do about project characteristics we show that donors can make a recipient government identify high return projects by requiring that the latter contribute some of its own funds to projects providing these matching grants or counterpart funds is less affordable for recipients during economic downturns which leads to aid procyclicality our model produces aid contracts consistent with those used by aid agencies rationalizes observed aid patterns and yields a rich set of testable empirical predictions

quality indicators in theory and in fact abstract in recent literature it has been suggested that consumers need have no knowledge of product quality as a number of quality indicators or signals may be used as substitutes very little attention has been paid to the empirical verification of these studies the present paper is devoted to the issue of how well these indicators perform using market data provided by consumer magazines from 3 countries the results strongly indicate that price is a poor quality indicator the paper also presents some evidence which suggests that seller reputation and easily observable characteristics are also poor indicators

the theory of warranty contracts abstract this paper surveys theories of the existence and design of warranty contracts insurance signalling and incentive motives are used to explain the existence of warranties the incorporation of imperfections that prevent warranties from serving their basic purposes in a first best way describes actual warranty practices

a dynamic model of the choice of mode for exploiting complementary capabilities this paper examines the choice of mode for a multinational enterprise and a local firm to exploit their complementary capabilities we develop a combined real options and game theoretic model of modal choice by incorporating a range of factors drawn from the dynamic capabilities theory and transaction cost or organizational economics the factors scrutinized in the model include the parties absorptive capacities frictions in knowledge and asset markets and associated incentive problems cost of switching from one mode to another and cost associated with power jockeying the model uses simulation to examine how these factors interact to influence the choice of mode the results identify a number of conditions for one factor to dominate another and help to reconcile different theories that have made contradicting predictions with regard to the effects of such factors as uncertainty and capability divergence on the optimal choice of mode

the fable of the bees revisited causes and consequences of the u s honey program abstract in his 1973 paper steven cheung discredited the fable of the bees by demonstrating that markets for beekeeping services exist and function well although economists heeded cheung s lessons policy makers did not the honey program has operated for over 50 years supporting the price of honey through a variety of mechanisms its effects were minor before the 1980s but then became important with annual government expenditures near 100 million for several years reforms of the program in the late 1980s reduced its market effects and budget costs returning it to its original role as a minor commodity program although the 1996 farm bill formally eliminated the honey program it was reinstated in the 2002 farm bill we measure the historical welfare effects of the program during its various incarnations examine its frequently stated public interest rationale the encouragement of honeybee pollination and interpret its history in light of economic theories of regulation

promotions and product pricing parsimony versus veblenesque demand the veracity of the parsimonious law of demand has long been challenged by analyses of the veblen effect and prestige pricing backward bending demand curves often attend discussions of conspicuous consumption probing the sociological and psychological intricacies of potential consumer interdependencies scholars in economics and marketing have overlooked mundane product promotions for a monopolistic firm we formalize the relationship between the optimal price quantity combination and the thoroughness of product promotions iterating toward the profit maximizing thoroughness of product promotion gives rise to a backward bending price quantity locus challenges to the law of demand that ignore product promotions are thereby undercut

double moral hazard and resale price maintenance incentives for resale price maintenance rpm are studied in a wholesaler retailer relationship in which both firms make a nonprice choice subject to moral hazard the best attainable contract has vertical externalities in both nonprice choices and the choice of consumers price if delegated to the retailer rpm controls the latter externality but interacts with the other externalities as well as a consequence either minimum or maximum vertical price fixing can be optimal in spite of a successive monopoly specification similar incentives exist for writing other variables into contract such as the capital input of the retailer

efficient redistribution through commodity markets efficiency in redistribution is measured in terms of deadweight loss generated per dollar of economic surplus transferred between consumers and producers of a commodity by means of market intervention the implications of supply and demand elasticities for efficiency in redistribution are examined with special attention to the comparison of production control and deficiency payment programs the results may be used to aid in the evaluation of commodity programs and as a basis for consideration of the hypothesis that observed policies are efficient given the political power of interest groups

product risk sharing by warranties in a monopoly market with risk averse consumers abstract this paper analyzes the implications of three different warranty rules in a monopoly setting with risk averse consumers the necessary condition for the existence of the market is independent of the risk sharing arrangement although the quantity consumed is the highest if the consumer receives no warranty even if the monopolist is constrained to marginal cost pricing the replacement warranty is most efficient from a risk allocation point of view however the situation with no warranty is pareto superior to a money back warranty additionally the producer and the consumers agree on the ranking of the warranty rules

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

forecast encompassing as the necessary condition to reject futures market efficiency fluid milk futures the traditional necessary condition for futures market inefficiency is the existence of alternative forecasting methods that produce mean squared forecast errors smaller than the futures market here a more exacting requirement for futures market efficiency is proposed forecast encompassing using the procedure of harvey and newbold multiple forecast encompassing is tested using chicago mercantile exchange fluid milk futures time series models and usda experts provide competing forecasts results suggest milk futures do not encompass the information contained in the usda forecasts at a two quarter horizon while the competing forecasts generate positive revenues it is unlikely that returns exceed transaction costs in this relatively new market

optimal second stage outsourcing manufacturers have recently begun outsourcing product assembly and completion tasks to their suppliers such outsourcing solves several contracting problems but generates new incentive frictions between manufacturers and their suppliers in this paper we analyze a manufacturer s decision to outsource an assembly second stage task to a preestablished supplier we find that outsourcing second stage tasks becomes more attractive as the cost of either the first or second stage activity rises outsourcing becomes less attractive when the supplier is unable to accept large levels of liability the manufacturer is shown to prefer more testing when she outsources assembly to her supplier as opposed to when she assembles products in house last we find that the contracting frictions identified persist when the supplier s work can be tested individually albeit imperfectly

a theory of credit bureaus when both the buyer and seller have the potential to exercise opportunistic behavior some balancing of these mal incentives must be found seller financing has the potential to work as a quality assurance device because the lien holder is clearly at risk when mortgaged property fails the buyer is at risk in the amount of the down payment and installments if the property is abused credit bureaus act as arbitrators our model accurately predicts the shifting in contract terms to account for relative opportunism and the incidence of this contract based on changes in the relative costs and benefits

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

satisfaction guaranteed or money partially refunded efficient refunds under asymmetric information refunds are modelled as a competitive market response to asymmetric information firms have private information on their choice of product quality and compete by offering price and refund contracts consumers who care about quality draw inferences about the quality offered by the various firms from observed contracts conditions under which a revealing market equilibrium emerges are specified and the equilibrium quality and contract s characterized the model predicts that when product risk is not insurable consumers with higher incomes will pay higher prices for higher quality goods with higher refunds if the product fails

delegation and incentives this article analyzes the relation between authority and incentives it extends the standard principal agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority the agent s subsequent choice of effort depends both on monetary incentives and the selected project we find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent in fact if the agent is protected by limited liability delegation is never optimal

signal facilitation a policy response to asymmetric information in cases of asymmetric information policymakers sometimes want to make informed agents share their private information one policy response to this situation is signal facilitation altering the environment to encourage signaling this article illustrates signal facilitation in the context of a competitive used car market sellers may determine quality and reveal it through warranties signal facilitation compares favorably to a policy of mandatory disclosure because car dealers can refuse to test and signal if the cost is excessive also this policy permits dealers to select less costly less revealing alternatives that may enhance social welfare copyright 1992 by university of chicago press

habitability laws for rental housing the impact of tenant inputs court decisions in the 1970s dramatically changed the distribution of legal rights in the landlord tenant relationship in seeking to improve the welfare of tenants thought to be at a disadvantage in their search for housing both landlords and tenants contribute to the quality of services but the fact that the rights of ownership and use are separated prevents both parties from fully internalising the benefits of their efforts the paper develops a simple model of the housing rental relationship capturing the impact which both landlord and tenant have on housing quality it shows that because of the moral hazard problem the non co operative equilibrium of the model is inefficient in that in the absence of any regulation both parties invest too little in maintaining the quality of the unit the model assessing the relationship between the two parties indicates that i increased landlord maintenance raises tenant utility and lowers landlord profits ii the joint benefits of landlords and tenants f

does consumption take a random walk some evidence from macroeconomic forecasting data abstract professional quarterly forecasts of aggregate u s consumption series are used to test hall s 1978 random walk hypothesis results from band spectrum regressions suggest that forecasts predict about 40 percent of the low frequency variation in growth rates of expenditures on nondurables and services the forecasts have no explanatory power for high frequency variations the rejection of the random walk hypothesis is traced to excess sensitivity of consumption growth to forecasted income growth at the business cycle frequencies

applied general equilibrium welfare analysis harberger has long advocated a particular technique for measuring the sum of all effects of an intervention both in the intervened in and related markets the technique is to calculate consumer and producer surplus changes behind demand and supply curves that are explicitly general equilibrium ge that is along curves that hold constant demand and supply conditions in related markets but not prices by calculating surplus changes with respect to such curves one simulates the equilibrium price paths in other markets resulting from the intervention and captures the sum of the welfare effects several authors have elaborated on harber

debt relief for poor countries conditionality and effectiveness this paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries we develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract in contrast to the recent practice of fully cancelling debt optimal incentive compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants the optimal concessionality level depends on the recipient s access to international financial markets and on the strength of the conflict of interest incentive compatible transfers with optimal concessionality levels generate substantial welfare gains if the donor does not implement the optimal concessionality level and provides subsidized loans only then the effectiveness of transfers decreases in the long run with severe welfare implications in contrast transfers are less effective in the short run if the donor offers outright grants only

on the predictive accuracy of crude oil futures prices abstract this paper evaluates the predictive accuracy of 1 3 6 9 and 12 month ahead crude oil futures prices for 1991 01 2001 12 in addition to testing for unbiasedness a naive forecasting model is constructed to generate comparable forecasts as benchmarks our empirical findings reveal that futures prices and naive forecasts are unbiased at all forecast horizons however the 1 and 12 month ahead futures prices are the only forecasts outperforming the naive suggesting their potential usefulness in policy making continuing political instability of the middle east and the inability of opec to offset market sentiment among other factors may in the future adversely affect the predictive accuracy of the 1 and 12 month ahead futures prices accordingly caution must be exercised when utilizing such prices as a forecasting tool

contract choice in modern agriculture cash rent versus cropshare e conomists have expended enormous effort examining the rationale for various contractual arrangements in agriculture particularly sharecropping while economists have made considerable theoretical efforts to understand agricultural contracts few empirical studies have been undertaken the dearth of empirical analyses of agricultural contracts is particularly striking for modern western agriculture this is an important omission not only because the existing empirical work tends to focus on the question of efficiency but also because the theoretical models tend to examine contracts that bear little resemblance to those found in the united states today

do tournaments solve the two sided moral hazard problem abstract the paper analyzes the optimality of relative performance evaluation via two part piece rate tournaments in incentive contracting with multiple agents and two sided moral hazard if the agents are risk averse it is shown that a tournament is optimal only when the following conditions hold i there is common uncertainty inflicted on the activities of the agents that is not contingent on their actions but can be contingent on the principal s action ii the principal sufficiently saves in transaction costs by employing a tournament iii the number of agents is sufficiently large then the feedback effect of using a tournament to monitor the agents is that the principal s moral hazard problem is relaxed when the principal takes a single action it can also be relaxed when the principal can vary her actions with the agents but there are economies of scale in her activity absent common uncertainty the optimum scheme is shown to be a fixed performance standard rather than a tournament but if the agents are risk neutral a tournament can still be optimal provided that ii and iii hold

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

calculating the reserve for a time and usage indexed warranty many products carry a warranty that offers protection for the consumer against low quality these warranties are often two dimensional such as an automobile warranty that guarantees repair up to a certain time and mileage after sale this paper considers the problem of assessing the size of a reserve needed by the manufacturer to meet future claims for such a two dimensional warranty to do this a class of failure models that describe failure by two scales time and mileage for example must be developed the first half of the paper is devoted to this development then the warranty reserve problem is considered in more detail the problem is described and a decision theoretic solution making use of the newly developed reliability model is proposed

aid conditionality and military expenditure reduction in developing countries models of asymmetric information this paper analyzes problems of implementing noneconomic conditionality such as military expenditure reduction in the granting of foreign aid given the presence of asymmetric information the authors present two conceptually separate principal agent models to capture the stylized facts of multilateral and bilateral aid negotiations respectively the first model is an application of the problem of adverse selection when there is more than one type of principal donor with varying objectives the second model extends moral hazard to double moral hazard where neither principal nor agent recipient can fully observe or verify each other s strategies copyright 1995 by royal economic society