environmental regulation and u s economic growth in this article we quantify the costs of pollution controls by reporting the results of simulations of the growth of the u s economy with and without regulation for this purpose we have constructed a detailed model of the economy that includes the determinants of long term growth we have also analyzed the interaction between industries in order to capture the full repercussions of environmental regulations however we have not attempted to assess the benefits resulting from a cleaner environment we find that pollution abatement has emerged as a major claimant on the resources of the u s economy the cost of emission controls is more than 10 of the total cost of government purchases of goods and services

human fallibility and economic organization doctrines concerning what is a good way to organize a society have influenced human societies more deeply than any other set of doctrines specifically beliefs that one way of organizing production and exchange is better than others have inspired a number of socioeconomic experiments leading to modern capitalist and socialist societies with far reaching implications yet surprisingly the central doctrines though a source of continuing ideological debate have been the subject of only limited scientific enquiry the major proposition the so called langelerner taylor theorem asserting the equivalence between competitive capitalist economies and decentralized socialist economies which make use of the price system made a point in stressing that the issue of the ownership of the means of production might not be central in the comparison of economic systems the theorem however was based on models both of capitalism and of market socialism in which the most important differences between the two systems were suppressed this paper describes a research program attempting to delineate some of the critical differences among alternative forms of economic organization we contend that central to an understanding of these differences is an understanding of differences in the organization of decision making of who gathers what information how it gets communicated and to whom and how decisions get made both concerning what actions to take and who should fill decision making positions this view should be contrasted with the traditional economic paradigm in which decision making plays no role the manager for instance simply looks up in a book of blueprints what the appropriate technique of production is for the given set of factor prices in the conventional paradigm moreover mistakes are never made either in gathering or transmitting information or in making decisions and indeed there are no costs associated with these activities by contrast the view we take here is that to err is human and that different organizational systems differ not only in what kinds of errors individuals make in them but also in how the systems aggregate errors as a result organizations differ systematically in the kinds of errors they make and thus in their overall economic performance organizations also differ in the costs associated with information collection with information communication and processing and with decision making indeed as we discuss below perfect decision making can be achieved by arranging enough decision makers in an appropriate manner no matter how fallible the decision makers are provided their decisions are not purely random or worse what prevents perfect decision making is the cost we refer to the specification of the structure of information gathering communication and decision making as an organization s architecture the objective of our research program has been to construct stylized models of an economic organization within which the consequences of alternative organizational architectures can be examined using these models not only can we compare the performance of particular organizational forms but we can also ask given a particular set of objectives and circumstances what is the optimal structure within tdiscussants david kreps stanford university paul milgrom yale university

the demand for energy cross country evidence using the florida model abstract income and own price elasticities of demand for energy for 51 countries in 1980 are presented based on pooled estimates from an 11 good demand system estimated with the florida model results indicate income elasticities of demand for energy are significantly larger than unitary for all countries and own price elasticities of demand for energy range between 0 8 and 1 0

pareto improving campaign finance policy this paper argues that campaign finance policy in the form of contribution limits and matching public financing can be pareto improving even under very optimistic assumptions concerning the role of campaign advertising and the rationality of voters the optimistic assumptions are that candidates use campaign contributions to convey truthful information to voters about their qualifications for office and that voters update their beliefs rationally on the basis of the information they have seen the argument also assumes that campaign contributions are provided by interest groups and that candidates can offer to provide policy favors to attract higher contributions

the short run impact of environmental protection costs on u s product prices using an input output framework this paper investigates the magnitude of the impact that environmental protection costs had on prices in the united states in 1977 with the imposition of environmental protection costs the projected total price increases for individual industries range from 0 12 to 6 58 due to data limitations the constraints of input output analysis and the structural changes that occurred in the economy from 1972 to 1977 the results should not be taken as definitive however the results do indicate the typical sort of variation in impact likely to occur across industries and that the average impact on prices was modest

uniform compliance costs for mineral commodities who gains and who loses changes in energy and nonfuelmineral production consumption and net export revenue that result from environmental protection are estimated by income class and geographic region unlike previous assessments of unilateral adoption of standards i assume that all producers incur equal cleanup costs adjustment is therefore accomplished through changes in prices and quantities rather than altered trade patterns the estimated magnitude of worldwide changes is not large moreover many poor countries are forecast to benefit since their terms of trade improve however the problem of obtaining foreign exchange for investment remains a financing scheme that divorces efficiency from equity is suggested

information competition and markets one of the dominant characteristics of modern capitalist economies is the important role played by competition not the peculiar static form of pure price competition embodied in the arrow debreu model but rather a dynamic competition more akin to the kind of competition represented by sports contests and other races including patent races in recent years there have been several attempts to explain why firms often base the pay of their workers and managers on relative performance see for example edward lazear and sherwin rosen 1981 such compensation schemes become desirable when three conditions are satisfied a the input effort of workers managers must not be directly observable at least without cost thus firms must either expend resources to monitor inputs or devise reward structures in which compensation is a function of variables such as output or profits which are themselves functions of inputs but are less costly to observe b the relationship between input and output must be stochastic so that by observing output one cannot perfectly infer what the input was c finally the stochastic disturbances which affect the relationship between input and output of different firms must be correlated by looking at the performance of one worker relative to that of others one can make better inferences about his effort than one can make without using this information not only can competition provide a basis of comparison which enables the design of reward structures that can simultaneously provide a high level of incentives with relatively low level risk but compensation schemes based on relative performance have the further advantage of automatically adjusting incentives to changes in the economic environment we refer to this as built in flexibility in a first best world with perfect information concerning the nature of the technology but where it is still costly to monitor individuals activities the compensation scheme would vary from time to time as the environment changed such changes in the compensation scheme are costly to implement and the information required to do so is seldom available when a task is easier the individual s rewards for performing the task should be reduced if pay is based on relative performance although all individuals perform better when they exert the same level of effort their compensation is automatically adjusted thus teachers frequently grade on the curve and a significant fraction of the pay of successful salesmen often consists of bonuses based on relative performance

the optimal decision rule for fixed size committees in dichotomous choice situations the general result this paper presents a general pairwise choice framework and derives the optimal decision rule for fixed size committees the main result generalizes a number of earlier results in the subject copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

an exploration of competitive signalling equilibria with third party information production the case of debt insurance in markets in which sellers know more about product quality than buyers but cannot convey their superior information either by directly issuing costly signals of the spence type or by successfully funding the production of information i suggest another way in which the informational asymmetry problem can be resolved a third party can produce the necessary information at a cost and use it to price a service consumed by the sellers buyers can then observe a seller s choice of service consumption level and be well informed in equilibrium in this framework i construct a model in which a borrower s choice of insurance coverage signals its default probability to lenders and explore the properties of the resulting signalling equilibrium in a variety of cases subsequent to akerlof s provocative paper 1 the analysis of equilibria in markets with asymmetrically informed agents has been the subject of considerable enquiry akerlof s novel insight was the observation that such markets can fail in the sense that the demand at any price is zero this market failure can be prevented however if a priori imperfectly informed buyers of a given product can somehow revise their initial conditional estimates of product quality so that prices are consistent with quality in an equilibrium bhattacharya 2 3 ross 9 and spence 12 13 14 have suggested that one way of achieving this is to allow sellers of the product or service to issue costly signals of the quality offered for sale in a rational equilibrium prospective buyers could use these signals to discriminate accurately between products of differing quality campbell and kracaw 4 have recently suggested another possibility that sellers can make side payments to information producers to acquire the necessary information at a cost and convey it to the market this paper explores yet another distinct way of resolving the information asymmetry problem the market structure considered here involves three parties a group of sellers each aware of the quality of its own product a set of buyers who perhaps satisfy the rational expectations assumption that they are aware of the average quality of the products in the market but are unable to distinguish one seller from the other on the basis of product quality and third party information producers who expend resources to produce information about the quality of each product offered for sale these information producers recover the cost of information acquisition by using their knowledge to structure and price some fixed quality service that they provide to

the architecture of economic systems hierarchies and polyarchies the authors present new ways of looking at economic organizations andsystems individuals judgments entail errors they sometimes reject good projects and accept bad projects the architecture of an economicsystem specifying how the decision making units are organized togetherwithin a system who gathers what information and who communicates what with whom affects its performance both because it influences thenature of errors that individuals make within the system and becauseit has a critical effect on the aggregation of individuals errors theperformance of two polar architectures decentralized polyarchical versus centralized hierarchical decision making authorities are analyzed and compared copyright 1986 by american economic association

market structure marketing method and price instability data for metals sold on commodity exchanges and at prices set by producers are used to test the relationship between the organization of markets and the behavior of prices on the production side the question is whether prices are more stable in concentrated industries and on the sales side the question is whether markets where buyers are consumers have more stable prices than those with consumers and speculators the recent increase in metal price instability is explained by changes in the market structure and organization variables foremost is increased reliance on commodity exchanges declines in concentration are of less importance

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

estimating energy and oil demand functions a study of thirteen developing countries abstract in this paper we attempt to identify some of the factors that have determined the level and pattern of energy demand in developing countries during the 1970s and early 1980s aggregate oil and energy demanding functions are constructed for a selection of oil importing countries and oil exporting countries the results show a strong link between income and aggregate energy demand conversely the price elasticity of energy demand is low both in the short run and the long run oil demand behaviour is more complex oil products can be rationed or domestic energy production can affect oil demand nonetheless the income elasticity remains close to one in most countries and is well above one for some

who pays for industrial pollution abatement the distributional impact of industrial pollution abatement is measured for the years 1973 and 1977 the findings indicate that in 1977 1 09 of income or 0 510 of personal consumption expenditures of the lowest income class paid indirectly for abatement costs implicit in purchased goods for the highest income class the corresponding figures were 0 218 and 0 423 respectively in addition abatement costs per dollar of output are presented for representative industries

campaign contributions and access an important and pervasive view of campaign contributions is that they are given to promote access to successful candidates under circumstances when such access would not ordinarily be given in this story access is valuable as it offers groups the opportunity to influence legislative decisions through the provision of policy relevant information under complete information regarding donors policy preferences i argue that this model predicts a negative relationship between contributions and the extent to which the groups and the recipient legislators preferences are similar however one of the more robust empirical findings in the literature is that this relationship is positive relaxing the informational assumption on donors preferences i reexamine the access story with a model in which campaign contributions can act as signals of policy preference and the informational value of access to any agent is endogenous

dealer intermediation and price behavior in the aftermarket for new bond issues municipal bonds trade in decentralized broker dealer markets and are underpriced when issued but unlike equities the average price rises slowly over several days newly issued municipal bonds have high levels of price dispersion and the average price rises because the mix of trade sizes changes over time while large trades occur close to the reoffering price small trades occur between the reoffering price to as much as 5 above the reoffering price using a mixed distribution model we quantify the losses uninformed traders or issuers give up to broker dealers

secondary trading costs in the municipal bond market using new econometric methods we separately estimate average transaction costs for over 167 000 bonds from a 1 year sample of all u s municipal bond trades municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency also municipal bond trades are substantially more expensive than similar sized equity trades we attribute these results to the lack of bond market price transparency additional cross sectional analyses show that bond trading costs increase with credit risk instrument complexity time to maturity and time since issuance investors and perhaps ultimately issuers might benefit if issuers issued simpler bonds

forward trading and storage in a cournot duopoly a dynamic game is presented that models the effects of forward trading and storage in an imperfectly competitive market it is shown that the pro competitive effects of forward trading found in previous work are weakened by the addition of storage but not eliminated the price level lies between that of a cournot game and that of a game with forward trading but without storage

valuing dealers informational advantage a study of canadian treasury auctions in many financial markets dealers have the advantage of observing the orders of their customers to quantify the economic benefit that dealers derive from this advantage we study detailed data from canadian treasury auctions where dealers observe customer bids while preparing their own bids in this setting dealers can use information on customer bids to learn about i competition that is the distribution of competing bids in the auction and ii fundamentals that is the ex post value of the security being auctioned we devise formal hypothesis tests for both sources of informational advantage in our data we do not find evidence that dealers are learning about fundamentals we find that the information about competition contained in customer bids accounts for 13 27 of dealers expected profits

investment criteria in single and multi member economic organizations this paper compares the determination of investment criteriain single and multi member organizations individualdecisional skills are assumed to be endogenous variables thatdepend on the investment criteria our main result specifiesthe condition that determines the relationship between theinvestment criteria in single and multi member organizations given the size of the multi member organization the decisionrule it applies and the function relating the individual sdecisional skills to the investment criterion theimplications of our main result are developed for specialorganizations such as hierarchies and polyarchies ouranalysis implies that the criteria in a multi memberorganization may be stricter than the criteria set in asingle member organization even though in the former case theorganization may worsen the average decision making ability ofits members the analysis can be applied not only in singleand multi member decision making settings but also in somecontexts of centralized and decentralized decisions this isillustrated in the case of decisions by editors ofprofessional journals regarding the acceptance or rejection ofsubmitted papers

the politics of government financial management evidence from state bonds abstract in the 3 7 trillion u s state and local government bond market greater issuance costs lower issue prices and greater underwriting fees benefit financial institutions while costing taxpayers campaign contributions by politically supportive underwriters can be associated with lower issuance costs alternatively contributions can influence a politician to accept greater costs this paper s evidence suggests that contributions influence politicians in the absence of an underwriter auction underpricing increases with the chosen underwriter s contributions relative to others moreover the difference in the fees charged by contributing underwriters and those charged by non contributing underwriters is 2 9 in the presence of an underwriter auction these results are statistically insignificant

collective decision making and the limits on the organization s size this essay clarifies the relationship between the technology of organizational decision making and the limits on the size of the group of decision makers within the organization viewing the number and quality of decision makers and the time required for decision making as inputs in the production of collective decisions we show that there exist generic organizational forces that offset the incentive to unlimited expansion of the organization even in a long run competitive environment with perfect markets for managers unlimited duplication of the firm may not be economically feasible we first analyze in a general setting and then illustrate in two stylized examples the interplay between individual decisional quality time required for an individual decision direct and indirect costs of decision making and the optimal number of decision makers for example management size

service induced campaign contributions and the electoral equilibrium candidates for office are modeled as promising services such as support for legislation and intervention in the bureaucracy to interest groups in exchange for campaign contributions an electoral equilibrium is characterized in which candidates choose service contribution offers and interest groups choose whether to contribute the model provides several explanations of congressional incumbents success in over 90 percent of their reelection contests a recognition advantage a high personal valuation of the office a lower cost of providing services and policy alignment with high demand interest groups the model yields predictions that are consistent with empirical findings on the relation between campaign contributions and election outcomes