first price auction implements efficient investments abstract this note shows that the first price auction fully implements efficient investments when agents make not only ex ante but also ex post investments the essential assumptions of our model are that i each agent can invest before and after participating in the auction under the same cost function and ii the cost functions are common knowledge among agents in any equilibrium of our model the most efficient agent always wins and makes the efficient level of investment

efficient non contractible investments in large economies abstract do investors making complementary investments face the correct incentives especially when they cannot contract with each other prior to their decisions we present a two sided matching model in which buyers and sellers make investments prior to matching once matched buyer and seller bargain over the price taking into account outside options efficient decisions can always be sustained in equilibrium we characterize the inefficiencies that can arise in equilibrium and show that equilibria will be constrained efficient we also show that the degree of diversity in a large market has implications for the extent of any inefficiency journal of economic literature classification numbers c78 d41 d51

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

investment incentives in procurement auctions this paper investigates firms incentives to invest in cost reduction in the first price sealed bid auction a format largely used for procurement two central features of the model are that we allow firms to be heterogeneous and that investment is observable we find that firms will tend to underinvest in cost reduction because they anticipate fiercer head on competition using the second price auction as a benchmark we also find that the first price auction will elicit less investment from market participants and that this is socially inefficient these results have implications for market design when investment is important different market institutions provide different incentives for firms to reduce costs acquire information expand and so on in short to undertake any activity that affects their competitive positions accordingly the performance of these market institutions should be judged not only from a static perspective taking firms competitive positions as given but also from a dynamic perspective auction markets are a natural competitive environment to study because there is a clear sense in which we can design such markets by choosing appropriate rules for competition in this paper we study how the first price auction fpa a format commonly used for procurement affects firms incentives to invest in cost reduction many procurement markets are characterized by a small number of participants heterogeneity among firms and low rates of turnover therefore it is interesting to investigate to what extent the format used for the auction contributes to these characteristics the basic ingredients of our model are as follows there are n firms and one of them has the opportunity prior to the auction to make an investment we model this investment as an improvement in the ex ante distribution of costs for this firm the main question we ask is what are the firm s incentives to invest given that this investment is observed by its competitors clearly the benefits of such investment depend on how the firm s competitors react in other words to determine the firm s incentive to invest we need to compare the equilibrium at the procurement stage if it makes this investment and if it does not in section 3 we derive new comparative statics results for the fpa we find that after the investment the investor s opponents will bid collectively more aggressively this result holds generally when there are only two bidders or when the investor s opponents are symmetric proposition 1 otherwise a sufficient condition is that investment changes market leadership proposition 2 in the language of industrial organization investment has a negative strategic effect in the fpa this erodes 1

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

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

optimal auction design and r d abstract an indivisible object is to be procured through bidding from one of two prospective suppliers firms decide whether to invest in cost reduction before the bidding the procurer commits to a mechanism ahead of investment decisions by firms if the procurer can charge entry fees that may be discriminatory a sealed bid second price auction uniquely implements the first best outcome and is optimal for the buyer revenue equivalence holds when first best investments are symmetric however it breaks down when first best investments are asymmetric without entry fees the procurer may want to bid discriminate between ex ante identical firms to induce the favored firm to invest and become strong while the unfavored firm not to invest and stay weak this result runs counter to the earlier findings on discrimination in procurement auctions without pre contract r d the principal favors the weaker agent to induce stronger bid competition

the determinants of earnings a behavioral approach we survey the determinants of earnings and propose a framework for understanding labor market success we suggest that the advantages of the children of successful parents go considerably beyond the benefits of superior education the inheritance of wealth or the genetic inheritance of cognitive ability we suggest that noncognitive personality variables such as attitudes towards risk ability to adapt to new economic conditions hard work and the rate of time preference affect both earning and the transmission of economic status across generations

the importance of noncognitive skills lessons from the ged testing program it is common knowledge outside of academic journals that motivation tenacity trustworthiness and perseverance are important traits for success in life thomas edison wrote that genius is 1 percent inspiration and 99 percent perspiration most parents read the aesop fable of the tortoise and the hare to their young children at about the same time they read them the story of the little train that could numerous instances can be cited of high iq people who failed to achieve success in life because they lacked self discipline and low iq people who succeeded by virtue of persistence reliability and self discipline the value of trustworthiness has recently been demonstrated when market systems were extended to eastern european societies with traditions of corruption and deceit it is thus surprising that academic discussions of skill and skill formation almost exclusively focus on measures of cognitive ability and ignore noncognitive skills the early literature on human capital e g gary becker 1964 contrasted cognitive ability models of earnings with human capital models ignoring noncognitive traits entirely the signaling literature e g michael spence 1974 emphasized that education was a signal of a one dimensional ability usually interpreted as a cognitive skill most discussions of ability bias in the estimated return to education treat omitted ability as cognitive ability and attempt to proxy the missing ability by cognitive tests most assessments of school reforms stress the gain from reforms as measured by the ability of students to perform on a standardized achievement test widespread use of standardized achievement and ability tests for admissions and educational evaluation are premised on the belief that the skills that can be tested are essential for success in schooling a central premise of the educational testing movement since its inception much of the neglect of noncognitive skills in analyses of earnings schooling and other lifetime outcomes is due to the lack of any reliable measure of them many different personality and motivational traits are lumped into the category of noncognitive skills psychologists have developed batteries of tests to measure noncognitive skills e g robert sternberg 1985 these tests are used by companies to screen workers but are not yet used to ascertain college readiness or to evaluate the effectiveness of schools or reforms of schools the literature on cognitive tests ascertains that one dominant factor g summarizes cognitive tests and their effects on outcomes no single factor has yet emerged to date in the literature on noncognitive skills and it is unlikely that one will ever be found given the diversity of traits subsumed under the category of noncognitive skills studies by samuel bowles and herbert gintis 1976 rick edwards 1976 and roger klein et al 1991 demonstrate that job stability and dependability are traits most valued by employers as ascertained by supervisor ratings and questions of employers although they present no direct evidence on wages and educational t discussants susan mayer university of chicago cecilia rouse princeton university nan maxwell california state university hayward janet currie university of california los angeles

implementation in economic environments with incomplete information the use of multi stage games abstract this paper shows that in economic environments with incomplete information incentive compatibility and a preference reversal condition are sufficient for implementation in sequential equilibrium journal of economic literature classification numbers c72 d71 d82

a formulation of the earnings function using the concept of occupational investment standard models of income determination specify income to be a function of two variables that measure postschool investment the years of labor market experience and the years of employer tenure this investigation develops a better proxy for general human capital investments by hypothesizing that the intensity of investment varies by occupation and that a proportion of the occupational skills are transferable with occupational change after developing exogenous measures of these features the occupational investment variable is calculated for the young men of the national longitudinal survey empirical work demonstrates that occupational investment is a strong determinant of income far superior to the experience variable

fortunate sons new estimates of intergenerational mobility in the united states using social security earnings data previous studies relying on short term averages of fathers earnings have estimated the intergenerational elasticity ige in earnings to be approximately 0 4 due to persistent transitory fluctuations these estimates have been biased down by approximately 30 or more using administrative data containing the earnings histories of parents and children the ige is estimated to be around 0 6 this suggests that the united states is substantially less mobile than previous research indicated estimates of intergenerational mobility are significantly lower for families with little or no wealth offering empirical support for theoretical models that predict differences due to borrowing constraints

efficient investments in the implementation problem abstract this paper identifies a condition for an efficient social choice rule to be fully implementable when we take into account investment efficiency to do so we extend the standard implementation problem to include endogenous ex ante and ex post investments in our problem the social planner aims to achieve efficiency in every equilibrium of a dynamic game in which agents strategically make investments before and after playing the mechanism our main theorem shows that a novel condition commitment proofness is sufficient and necessary for an efficient social choice rule to be implementable in subgame perfect equilibria the availability of ex post investments is crucial in our model there is no social choice rule that is efficient and implementable in subgame perfect equilibria without ex post investments we also show that our positive result continues to hold in the incomplete information setting

rational expectations information acquisition and competitive bidding most rational expectations market equilibrium models are not models of price formation and naive mechanisms leading to such equilibria can be severely manipulable in this paper a bidding model is developed which has the market like features that bidders act as price takers and that prices convey information higher equilibrium prices convey more favorable information about the quality of the objects being sold than do lower prices bidders can benefit from trading only if they have a transactions motive or if they have access to inside information apart from exceptional cases prices are not fully revealing a two stage model is developed in which bidders may acquire information at a cost before bidding and for which the equilibrium price is fully revealing resolving a well known paradox

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

subgame perfect implementation under information perturbations we consider the robustness of extensive form mechanisms to deviations from common knowledge about the state of nature which we refer to as information perturbations first we show that even under arbitrarily small information perturbations the moore repullo mechanism does not yield even approximately truthful revelation and that in addition the mechanism has sequential equilibria with undesirable outcomes more generally we prove that any extensive form mechanism is fragile in the sense that if a non maskin monotonic social objective can be implemented with this mechanism then there are arbitrarily small information perturbations under which an undesirable sequential equilibrium also exists finally we argue that outside options can help improve efficiency in asymmetric information environments and that these options can be thought of as reflecting ownership of an asset

an examination of personality in occupational outcomes antagonistic managers careless workers and extraverted salespeople abstractthis article investigates the role of personality in the sorting of individuals between a number of occupations allowing for an extensive array of conditioning variables the focus is an examination of the relationship between occupational outcomes and personality using the five factor model we estimate a multinomial logit model using a panel data set from the household income and labour dynamics in australia hilda survey human capital variables are found to exhibit strong credentialism effects and there is evidence for some small dynasty hysteresis personality effects are found to be significant relatively large and persistent across all occupations the personality effects are strong enough to rival that of various education credentials these personality effects include but are not limited to managers being less agreeable and more antagonistic labourers being less conscientiousness and salespeople being more extraverted

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

cost reducing investment optimal procurement and implementation by auctions the authors analyze a model in which potential suppliers invest in research and development r d and then compete for a procurement contract from a buyer if the buyer is able to commit to a procurement mechanism before the investment stage the full information solution can be uniquely implemented by first price and second price sealed bid auction mechanisms when the r d technology exhibits decreasing returns to scale if the procurement mechanisms and the levels of investment are chosen simultaneously the full information solution cannot be implemented the authors discuss how the second best equilibrium contract varies with the number of suppliers copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

pensions and household wealth accumulation abstract economists have long suggested that higher private pension benefits crowd out other sources of household wealth accumulation we exploit detailed information on pensions and lifetime earnings for older workers in the 1992 wave of the health and retirement study and employ an instrumental variable iv identification strategy to estimate crowd out the iv estimates suggest statistically significant crowd out each dollar of pension wealth is associated with a 53 67 cent decline in nonpension wealth with less precision we use an instrumental variable quantile regression estimator and find that most of the effect is concentrated in the upper quantiles of the wealth distribution

unobservable investment and the hold up problem we study a two person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining we show that if all offers are made by the seller and the time between offers is small then the buyer invests efficiently and the seller extracts all of the surplus hence bargaining with frequently repeated offers remedies the hold up problem even when the agent who makes the relation specific investment has no bargaining power and contracting is not possible we consider alternative formulations with uncertain gains from trade or two sided investment

too much investment a problem of endogenous outside options this paper shows that when agents on both sides of the market are heterogeneous varying in their costs of investment ex ante investments by firms and workers or buyers and sellers more generally may be too high when followed by stochastic matching and bargaining over quasi rents the overinvestment is caused by the fact that low cost agents by investing more can increase the value of their outside option and thus shift rent away from high cost investors numerical simulations show that overinvestment can occur given parameter values calibrated to oecd labour markets

investment and competitive matching we study markets in which agents first make investments and are then matched into potentially productive partnerships equilibrium investments and the equilibrium matching will be efficient if agents can simultaneously negotiate investments and matches but we focus on markets in which agents must first sink their investments before matching additional equilibria may arise in this sunk investment setting even though our matching market is competitive these equilibria exhibit inefficiencies that we can interpret as coordination failures all allocations satisfying a constrained efficiency property are equilibria and the converse holds if preferences satisfy a separability condition we identify sufficient conditions most notably quasiconcave utilities for the investments of matched agents to satisfy an exchange efficiency property as well as sufficient conditions most notably a single crossing property for agents to be matched positive assortatively with these conditions then forming the core of sufficient conditions for the efficiency of equilibrium allocations

entry and r d in procurement contracting abstract a model of competitive procurement and contracting is presented in this paper the key features of the model include precontract r d an endogenous number of homogeneous firms and sealed bid auction rules both diminishing and constant returns to scale drs and crs in r d expenditure technologies are considered i find that the sealed bid first price auction fpa is equivalent to the second price auction spa under drs technology the revenue equivalence theorems breaks down under crs because multiple equilibria arise in the r d stage when spa is used howerer spa yields a unique perfect equilibrium given sufficient heterogeneity among potential firms the free entry perfect equilibrium is also characterized the buyer prefers free entry through an appropriate selection of the reservation price

participation costs and efficient auctions abstract suppose that risk neutral agents have independently and perhaps asymmetrically distributed private valuations for an indivisible object a mechanism assigns the object but it is costly to send messages to the coordinator in these circumstances the second price auction has an equilibrium that is classicallyex anteefficient given general opportunities to invest in information about or enhancements of own valuations in contrast the first price sealed bid auction may have no efficient equilibrium even if buyers are symmetric other properties of the first price auction are proved a semirevelation principle is established for mechanisms with participation costs journal of economic literatureclassification numbers d44 d82

incentive enhancing preferences personality behavior and earnings suppose there is a principal agent relationship between employer and employee in which effort is not contractible but is elicited through employer incentive mechanisms we term preferences that allow the employer to elicit effort at lower cost incentive enhancing we analyze how such preferences affect earnings nd then provide evidence that one of the relevant behavioral traits efficacy as well as other psychological aspects of individuals are significant influences on earnings we conclude that measures of cognitive performance are not sufficient indicators of the effectiveness of schools in promoting student labor market success incentive enhancing preferences are irreducibly heterogeneous incentive enhancing preferences help explain the persistence of poverty over generations within families and unlike cognitive skills incentive enhancing traits need not be welfare increasing for their bearers

the inheritance of inequality how level is the intergenerational playing field what are the causal mechanisms that underlie the intergenerational transmission of economic status are these mechanisms amenable to public policies in a way that would make the attainment of economic success more fair these are the questions we will try to answer