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

fiscal policy outcomes and electoral accountability in american states clear fiscal policy effects appear in american state gubernatorial and legislative elections between 1968 and 1992 independent of the effects of incumbency coattails term limits and macroeconomic conditions the results show that accountability is generally stronger following a period of unified party control than under divided government voter reactions to taxes and spending relative to the state economy are conditional on expectations which differ for each party net of these expectations republican gubernatorial candidates lose votes if their party is responsible for unanticipated increases in the size of the state budget democrats do not and indeed may be rewarded for small increases independent of this the incumbent governor s party is punished in legislative elections for failing to maintain fiscal balance taken together these results show how electoral accountability for fiscal policy outcomes is strong but highly contingent on a complex configuration of party labels partisan control expectations and institutions

voters as fiscal conservatives voters penalize federal and state spending growth this is the central result of my analysis of voting behavior in presidential senatorial and gubernatorial elections from 1950 1988 the composition of federal spending growth seems irrelevant the vote loss to the president s party from an extra dollar of defense or nondefense spending is the same however in gubernatorial elections expansion of state welfare spending exacts a disproportionate political price deficit financing of federal or state spending does not appear to matter politically i conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility

regulation and evolution of compliance in common pool resources the evolution of compliance with regulation and the evolution of a cpr stock are modeled jointly in a setup where replicator dynamics describing compliance with harvesting rules are combined with resource stock dynamics this evolutionary approach suggests that in long run equilibrium coexistence of both cooperative and non cooperative rules is possible under regulation stock effects on profits and a certain structure of auditing probabilities could imply the emergence of a limit cycle in areas of low stock levels as an equilibrium outcome it might be easier for the regulator to obtain full compliance under precommitment to fixed auditing probabilities

the economics of crime and punishment an analysis of optimal penalty this paper demonstrates the optimality of a non maximal penalty in a hierarchical enforcement structure the penalty is chosen by the social planner to maximize the probability of monitoring and to minimize the probability of transgression we compare the optimal penalty levels with and without ex post flexibility wherein the players are allowed to alter their decision after they observe the social planner s choice 2000 elsevier science s a all rights reserved

discussion of the influence of elections on the accounting choices of governmental entities kido petacchi and weber 2012 investigate whether the occurrence of a state gubernatorial election is important to understanding the accrual choices of preparers of the state s comprehensive annual financial report central to the authors argument is the idea that voters do not like budget deficits politicians in response have incentives to use accounting choices to mask deficits in the period before elections focusing on a specific accrual the changes in compensated absences liability the authors find evidence that the discretionary part of this accrual is smaller in the period before an election which is consistent with politicians attempting to improve the picture of the state s financial health in addition the authors show that accrual manipulation is positively associated with the vote share of incumbent governors in elections in my discussion i ask two questions 1 how strong are governors political incentives to manipulate accruals in the run up to elections 2 can the association between discretionary compensated absence accruals and elections be explained by forces other than politically motivated accounting manipulation i argue that the incentives to manipulate accruals might well be weak given strong disciplinary mechanisms that induce politicians to transparency what s more i document that elections might produce patterns in state employment as the compensated absences liability is linked to the payroll election induced changes in state employment might be reflected in this accrual evidence of an association between the compensated absences accrual and elections then does not necessarily imply that politicians manage accounting numbers to further illustrate this point i show empirically that gubernatorial elections have little explanatory power for state financial reporting choices that are unaffected by state employment jel classification h70 h72 m41

implications for gaap from an analysis of positive research in accounting based on extant literature we review the positive theory of gaap the theory predicts that gaap s principal focus is on control performance measurement and stewardship and that verifiability and conservatism are critical features of a gaap shaped by market forces we recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally we conclude that rather than converging u s gaap with ifrs competition between the fasb and the iasb would allow gaap to better respond to market forces

the effect of newspaper entry and exit on electoral politics we use new data on entries and exits of us daily newspapers from 1869 to 2004 to estimate effects on political participation party vote shares and electoral competitiveness our identification strategy exploits the precise timing of these events and allows for the possibility of confounding trends we find that newspapers have a robust positive effect on political participation with one additional newspaper increasing both presidential and congressional turnout by approximately 0 3 percentage points newspaper competition is not a key driver of turnout our effect is driven mainly by the first newspaper in a market and the effect of a second or third paper is significantly smaller the effect on presidential turnout diminishes after the introduction of radio and television while the estimated effect on congressional turnout remains similar up to recent years we find no evidence that partisan newspapers affect party vote shares with confidence intervals that rule out even moderate sized effects we find no clear evidence that newspapers systematically help or hurt incumbents

optimal fiscal policy for a state or local government abstract state and local government services are enjoyed by and taxes borne by two groups residents and non residents this paper addresses the question if state and local governments maximize their residents welfare and cannot distinguish between individual residents and non residents but know the aggregate characteristics of the two groups what set of taxes subsidies and public goods should they choose some of the results obtained are i even when all commodities are taxable and equity is ignored the existence of non resident consumption makes uniform taxation non optimal ii in some cases whether a commodity should be taxed or subsidized is independent of its own price elasticity iii central cities may be subsidized by suburban residents and iv the ability of state and local governments to redistribute is inversely proportional to the openness of the economy

state economies and state taxes do voters hold governors accountable theory states have sufficient autonomy in the policies they adopt that voters hold state officials partly responsible for the condition of the state economy as the best known state official elected by a statewide constituency governors in particular are held accountable for the economic performance of their states with respect to taxes the clear locus of responsibility in state actions and the high visibility of certain taxes suggest that governors will also be held responsible for increased rates hypotheses the performance of the state economy tax increases and voters personal financial situations all influence voting behavior in gubernatorial elections methods logit equations using 1986 abc washington post exit polls in 34 of 36 gubernatorial races combined with economic and tax data from the states results a poor state economy increases in taxes and lowered personal finances all contribute to votes against incumbent governors and their parties

regulatory errors optimal fines and the level of compliance abstract this paper shows that with a hierarchical structure of enforcement regulatory errors cause the optimal penalty to be non maximal even if offenders are risk neutral and fines are pure transfers and the private benefit from violation is strictly less than the social cost for all individuals in contrast with error free monitoring no finite fine is optimal within the same hierarchical structure also full compliance is an equilibrium outcome in the presence of errors whereas in the absence of errors the regulator can achieve only partial compliance

fiscal restraints and voter welfare this paper explores the logic of fiscal restraints in a political agency model with both moral hazard and adverse selection the role of the political process is both to discipline incumbents who may act against the public interest and to sort in those politicians who are most likely act in voters interests we use the model to examine the optimality of inefficient taxation limits on the size of government increasing transparency and yardstick competition some conclusions are surprising for example we show that some forms of fiscal restraint can only be desirable when incumbents are sufficiently likely to be benevolent

credence goods efficient labelling policies and regulatory enforcement we analyse the optimality of information revelation of hidden attributes of credence goods via alternative labelling procedures when consumers are heterogeneous in their willingness to pay for the hidden attribute producers can either self label their products or have them certified by a third party the government can impose self or third party labelling requirements on either the green or the brown producers our benchmark model develops a condition that links the optimal imposition of third party labelling to the relative market share of each type of the good under complete information we extend our analysis to incorporate asymmetric information and cheating by the producers when corrupt producers can affix spurious labels the government needs to supplement the labelling policy with costly monitoring activities we find that mandatory self labelling schemes generally dominate mandatory third party labelling unless the market share effect greatly exceeds the incentive to cheat effect

the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting abstract i study the evolution of sfas 142 which uses unverifiable fair value estimates to account for acquired goodwill i find evidence consistent with the fasb issuing sfas 142 in response to political pressure over its proposal to abolish pooling accounting the result is interesting given this proposal was due in part to sec concerns over pooling misuse i also find evidence consistent with lobbying support for sfas 142 increasing in firms discretion under the standard agency theory predicts such unverifiable discretion can be used opportunistically

energy efficiency in world bank power sector policy and lending new opportunities abstract this paper examines the role of and opportunities for energy efficiency in the world bank s electric power sector policy and lending it finds that the dynamic environment in which the bank operates provides substantial opportunity for the bank to more effectively fulfill its mandate through an aggressive effort to develop the energy efficiency market opportunities in its client countries the paper finds a variety of market conditions that indicate both an opportunity for the bank in efficiency markets and a need for bank influence in the development of these markets in assessing the bank s current policy and lending practices the paper finds that the bank continues to be fundamentally oriented towards the traditional supply side measures that have long defined the bank s focus between 1992 and 1996 less than one half of one percent of the bank s power sector loans financed demand side efficiency improvements by neglecting the significant potential for demand side efficiency improvements the bank is missing major opportunities to fulfill its mandate in developing countries and capitalize on the investment opportunities in this business in new markets as the flow of private sector financing to developing country power sectors grows the bank s continued focus on traditional supply side investments is increasingly inconsistent with its mandate to be a lender of last resort yet more importantly in neglecting the emerging energy efficiency market the bank is missing a strategic opportunity to foster environmentally sound development in developing countries and establish a vital new role for itself in the dynamic power sector the paper recommends that the bank take advantage of this opportunity by adopting a new approach to the power sector one that combines continued pricing reforms with institutional reforms and capital investments in both demand side efficiency and supply side expansion towards this end it identifies ways in which the bank could finance large scale investments in demand side efficiency in developing countries finally the paper suggests that only by considering such energy efficiency investments early in the project identification process rather than as an add on to projects fundamentally conceived as supply side projects will the full potential for such investments be realized

transparency political polarization and political budget cycles in oecd countries we investigate the effects of fiscal transparency and political polarization on the prevalence of electoral cycles in fiscal balance while some recent political economy literature on electoral cycles identifies such cycles mainly in weak and recent democracies in contrast we show conditioning on a new index of institutional fiscal transparency that electoral cycles in fiscal balance are a feature of many advanced industrialized economies using a sample of 19 oecd countries in the 1990s we identify a persistent pattern of electoral cycles in low er transparency countries while no such cycles can be observed in high er transparency countries furthermore we find in accordance with recent theory that electoral cycles are larger in politically more polarized countries

regulating externalities through testing abstract testing for compliance with regulation of a negative externality is analyzed in a strategic framework the outcome is described where the number tested and the penalties for observed noncompliance are each controlled by different agencies or by different levels within the regulatory agency and where the number tested cannot be precommitted comparative statics results are provided and the equilibrium is compared with the welfare optimum for different objectives of those doing the testing it is shown that the actual enforcement decision can sometimes be optimally delegated even if those doing the enforcement have objectives different from minimizing expected social cost

bargaining in environmental regulation revisited abstract we explore the possibility that firms and regulators achieve cooperative agreements in environmental regulation we show that it is possible that firms choose cleaner technologies in exchange for reductions of the fines for non compliance with environmental standards interestingly the likelihood of achieving these agreements depends negatively on the monitoring costs positively on the external damages and non monotonically on the differences among the eligible technologies and the maximum sanctions for violating the standards

the optimal use of fines and imprisonment abstract this paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities these sanctions are analyzed separately as well as together first for identical risk neutral individuals and then for two groups of risk neutral individuals who differ by wealth when fines are used alone and individuals are identical the optimal fine and probability of apprehension are such that there is some underdeterrence if individuals differ by wealth then the optimal fine for the high wealth group exceeds the fine for the low wealth group when imprisonment is used alone and individuals are identical the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence if individuals differ by wealth the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group when fines and imprisonment are used together it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term the effects of risk aversion of these results are also discussed