technological specialization and the decline of diversified firms we document a strong decline in corporate diversification activity since the late 1970s and we develop a dynamic model that explains this pattern both qualitatively and quantitatively the key feature of the model is that synergies endogenously decline with technological specialization leading to fewer diversified firms in equilibrium the model further predicts that segments inside a conglomerate should become more related over time which is consistent with the data finally the calibrated model also matches other empirical magnitudes well output growth rate market to book ratios diversification discount frequency and returns of diversifying mergers and frequency of refocusing activity

a formal model of firm boundaries and haggling this study provides a formal model of williamson s haggling theory in which transacting parties engage in ex post contract renegotiation we show that integration can economize bargaining costs but suffers from too much third party arbitration i e fails in selective intervention

control rights in complex partnerships this paper develops a theory of the allocation of authority between two players who are in a complex partnership that is a partnership which produces impure public goods we show that the optimal allocation depends on technological factors the parties valuations of the goods produced and the degree of impurity of these goods when the degree of impurity is large control rights should be given to the main investor irrespective of preference considerations there are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party s investment is more important than the other party s if the parties investments are of similar importance and the degree of impurity is large shared authority is optimal with a greater share going to the low valuation party if the importance of the parties investments is similar but the degree of impurity is neither large nor small the low valuation party should receive sole authority we analyze an extension in which side payments are infeasible we check for robustness of our results in several dimensions such as allowing for multiple parties or for joint authority and apply our results to interpret a number of complex partnerships including those involving schools and child custody jel d02 o23 h41 l31

behavioral contract theory abstract this review provides a critical survey of psychology and economics behavioral economics research in contract theory first i introduce the theories of individual decision making most

a generalized utility model of disappointment and regret effects on post choice valuation in this paper we show that performance information about forgone alternatives i e alternative that were considered but not chosen can have a significant impact on post choice valuation our approach introduces a new and parsimonious way of looking at satisfaction that combines the literature on post choice valuation with research regarding generalized expected utility theory while the post valuation literature focuses on the selected brand as the valuation s basis e g anderson and sullivan anderson e w m w sullivan 1993 the antecedents and consequences of customer satisfaction for firms marketing sci 12spring 125 143 bolton and drew bolton r j drew 1991 a multistage model of customers assessments of service quality and value j consumer res 17 375 384 we draw on a stream of research in generalized expected utility theory that considers both chosen and forgone alternatives as the basis for valuation e g bell bell d 1983 risk premiums for decision regret management sci 29 1156 1166 and bell d 1985 disappointment in decision making under uncertainty oper res 33 1 27 loomes and sugden loomes g r sugden 1982 regret theory an alternative theory of rational choice under uncertainty the econom j 92 805 824 and loomes g r sugden 1986 disappointment and dynamic consistency in choice under uncertainty rev econom stud 53 271 282 the result is a combined model of post choice valuation that explicitly incorporates both concepts specifically we extend the existing paradigm of post choice valuation to include buyers regret concerning forgone alternatives proposing a generalized utility theory based treatment of post choice product assessment that uses the intuitively appealing concepts of disappointment and regret as the basis we propose a model for conceptualizing post choice valuation that is consistent with the existing literature discuss how this model extends the construct to consider the influence of forgone alternatives and report results of an empirical test that contrasts our model to important recent work in the area e g boulding et al boulding w a kalra r staelin v a zeithaml 1993 a dynamic process model of service quality from expectations to behavioral intentions j marketing res 30february 7 27 our generalized model of post choice valuation is based on the sum of three components that represent factors that may contribute to consumers assessment of a chosen product or service the first component is expected performance the second component is disappointment which captures the discrepancy between actual and expected performance much as the disconfirmation construct in traditional satisfaction research the third component is regret which captures the difference between the performance of the chosen product service and the performance of a forgone product service this perspective is useful in that risk is captured by the disappointment and regret terms providing an intuitively appealing decomposition of post choice valuation and offering several advances over previous representations of disappointment and regret we test our model via a choice experiment participants in the empirical study were asked to make choices between successive lottery pairs they were then given outcome feedback on the forgone alternative as well as on the chosen alternative in each lottery pair immediately following outcome feedback for each choice subjects were asked to evaluate their decision our results clearly suggest an effect of regret on post choice valuation information about the forgone alternative influenced subjects valuation of the chosen alternative we also find evidence that as predicted the effects of disappointment and regret on post choice valuation are asymmetric specifically the negative effect of disappointment on post choice valuation was greater than the positive effect of elation similarly the negative effect of regret was greater than the positive impact of rejoicing our research offers five contributions to the literature on post choice valuation first our results illustrate the advantage of using generalized utility theory as the basis for conceptualizing and modeling post choice valuation we derive a model of post choice valuation that formally captures the components of disappointment and regret and show that the outcome of both the chosen alternative through disappointment and a forgone alternative through regret can influence the chosen alternative s valuation second we formally integrate the concepts of disappointment and regret which have been examined separately for many years into a single model based on a multiattribute preference structure third we argue that the effects of disappointment and regret on post choice valuation are asymmetric and present empirical evidence in this regard fourth our results suggest that word of mouth regarding forgone alternatives may affect post choice valuation extending research that has not heretofore considered forgone outcomes role in this process finally our development provides a preconsumption measure of potential disappointment and regret in modeling choice at the time of choice consumers may visualize the feelings of disappointment and or regret that will be derived at consumption taking into account both the chosen brand and forgone brands our generalized utility theory based approach to the post choice valuation construct can be useful in examining the role of disappointment and regret as preconsumption constructs

grouping durable goods modelling consumer preferences has a long history of interest in the literature several approaches that have been proposed consider consumer behaviour to be hierarchical products are divided into groups and preferences within a group are modelled independently an important question that arises in these efforts concerns the development of appropriate higher level groups this paper replicates and extends an earlier study by pickering et al 1973 in which product groups were developed based on consumer perceptions of product attributes we collect survey data perceived product attributes and similarity ratings for a set of durable products multiple measures are thus used to test the stability and consistency of product groups a matrix of product similarity values is constructed for each of these two survey based measures cluster analysis is then performed to develop a grouping scheme for these durable goods althought differences are observed the product composition of the resulting product groups a

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

revisiting the bright and dark sides of capital flows in business groups prior studies report that the business group structure and the associated intra group capital flows are prone to conflicts of interest between controlling shareholders and minority investors yet business group is a prevalent and stable structure around the globe particularly where capital markets are underdeveloped using data from china this paper empirically studies the trade off between the negative and positive roles played by intra group capital flows and tests the efficiency implications of such trade off we find that from the perspective of the whole group intra group capital flows are most efficient when the groups are least subject to conflicts of interest between controlling shareholders and minority shareholders and when they face strong external financing constraints

on a tight leash does bank organizational structure matter for macroprudential spillovers abstract this paper examines whether the organizational form of multinational banks foreign affiliates affects cross border spillovers of macroprudential regulation we compare changes in the growth of lending provided by foreign banks branches versus subsidiaries in the united kingdom in response to changes in capital requirements lending standards and reserve requirements in foreign banks home countries our results suggest that a tightening of capital requirements at home reduces uk branches interbank lending growth by 5 7 pp more relative to subsidiaries we link this effect to the higher degree of control which parent banks hold over operations of their foreign branches compared to subsidiaries supporting this hypothesis a set of further tests illustrates that the response of foreign affiliates operating under a branch structure is stronger where parent banks are more likely to delegate more decision making authority to the board of directors of their subsidiaries

foreign influence control and indirect ownership implications for productivity spillovers how does the presence of controlled foreign firms affect the productivity of domestic firms in the same industry we revisit the historical distinction between control and influence by the foreign owner and define controlled foreign firms as those with a foreign ultimate owner holding 50 or more of voting shares connecting insights from new internalization theory with knowledge based views of the mne we posit that controlled foreign firms will generate larger productivity spillovers than non controlled foreign firms we use a firm level panel dataset of 575 844 manufacturing firms 2 343 495 observations across 20 european countries to test our proposition we pay careful attention to how firms are categorized as foreign taking into account both direct and indirect ownership links allowing for indirect ownership turns out to be pivotal there are just as many indirectly controlled foreign firms as foreign firms captured with direct ownership data we find positive horizontal spillovers from controlled foreign firms and zero spillovers from non controlled foreign firms interestingly the strongest positive spillovers come from the indirectly controlled foreign firms the implications of our study extend beyond productivity spillovers to areas such as cross border m as joint ventures mne strategies of legitimation and corporate groups

governing adaptation super 1 to remain competitive an organization must both respond to information about its environment and coordinate its activities we analyse how the allocation of decision rights within an organizational hierarchy influences the organization s ability to solve such problems of coordinated adaptation when information is both soft and distributed inside the organization and the organizational participants behave strategically the results show that contrary to the common intuition the performance differential between centralized and decentralized decision making is non monotone in the importance of coordination further both these common structures are dominated by asymmetric structures in sufficiently asymmetric environments such as a small division developing a new product in the presence of a large division with an established product finally if the incentive conflicts between the participants can be made sufficiently small centralized decision making is always dominated by decentralized decision making copyright 2008 wiley blackwell

incomplete contracting renegotiation and expectation based loss aversion abstract we consider a simple trading relationship between an expectation based loss averse buyer and a profit maximizing seller when writing a long term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post we show that if the buyer expects renegotiation to occur the seller can opportunistically exploit the buyer s attachment to the expected outcome of renegotiation in other words incomplete contracts create a new type of hold up problem if credible the buyer prefers to expect not to renegotiate which gives rise to ex post inefficiencies in a next step we allow the buyer to undertake a non contractible investment we find that loss aversion can mitigate the traditional hold up problem

a theory of firm scope the formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining in reality parties often simply exercise their decision rights we develop a model based on shading in which the use of authority has a central role we consider two firms deciding whether to adopt a common standard nonintegrated firms may fail to coordinate if one firm loses an integrated firm can internalize the externality but puts insufficient weight on employee benefits we use our approach to understand why cisco acquired stratacom a provider of new transmission technology we also analyze delegation

why focusing on the similarity of substitutes leaves a lot to be desired consumers frequently choose substitutes for products that are out of stock unavailable too unhealthy or too expensive a series of studies shows that focusing on differences between the substitute and the unattained alternative reduces the consumer s desire for the unattained alternative more than focusing on similarities between them whether consumers were dieting listening to songs or consuming snacks in the lab focusing on differences reduced their desire for the unattained alternative and subsequent consumption of this item after consuming the substitute more than focusing on similarities this suggests that consumers can reduce overconsumption by focusing on how the substitutes they consume differ from the alternatives they wish to avoid

the value of the high aswan dam to the egyptian economy the high aswan dam converted a variable and uncertain flow of nile river water into a predictable and controllable water supply stored in lake nasser we use a computable general equilibrium model of the egyptian economy to estimate the economic impact of the high aswan dam we compare the actual 1997 economy to the 1997 economy as it would have been if historical pre dam nile flows drawn from a 72 year portrait had applied i e the dam had not been built the steady water supply sustained by the high aswan dam increased transport productivity and year round availability of predictable and adequate water sustained a shift towards more valuable summer crops these static effects are worth egp 4 9 billion investments in transport and agriculture increased as a consequence these investments assuming that egypt is a small open economy added another egp 1 1 billion to the value of the dam the risk premium on the reduced variability is estimated to be egp 1 1 billion for a modest risk aversion and perhaps egp 4 4 billion for a high risk aversion the total gain of egp 7 1 billion to 10 3 egp billion equals 2 7 to 4 0 of annual gdp in 1997

overchoice and assortment type when and why variety backfires almost universally research and practice suggest that a brand that increases its product assortment or variety should benefit through increased market share in this paper we show this is not always the case we introduce the construct assortment type and demonstrate that the effect of assortment size on brand share is systematically moderated by assortment type we define an alignable assortment as a set of brand variants that differ along a single compensatory dimension such that choosing from that assortment only requires within attribute trade offs in contrast we define a nonalignable assortment as a set of brand variants that simultaneously vary along multiple noncompensatory dimensions demanding between attribute trade offs in turn we argue that an alignable assortment can efficiently meet the diverse tastes of consumers thereby increasing brand share but that a nonalignable assortment increases both the cognitive effort and the potential for regret faced by a consumer thereby decreasing brand share we term this effect overchoice across three studies we provide evidence of overchoice and tie the effect to the effort and regret brought about by nonalignability in the process we demonstrate that simplification of information presentation reversibility of choice and a reduction in underlying nonalignability serve to reduce or eliminate this effect

the reference point approach to the theory of the firm an introduction there is a small but growing literature on the reference point approach to incomplete contracts as formulated by hart and moore the reference point approach has begun to be applied to the theory of the firm in 3 recent papers this introduction reviews the main theoretical aspects of each of these papers it then discusses the relationship between the reference point approach to the firm the transaction cost approach and the property rights approach here it is argued that the reference point approach is a step back towards ex post inefficiencies away from reliance on ex ante inefficiencies

an economic approach to influence activities in organizations members of organizations spend considerable time effort and ingenuity attempting to influence decision makers such influence activities may bring benefits to the organization but they also involve real costs this essay offers an economic rationale for such influence activity as representing rational self interested behavior in the presence of informational asymmetries and an analysis of how the design of the organization s structure and policies should respond to the incentives for attempting influence it is posited that information valuable for the organization s decision making is directly available only to members of the organization who have some personal stake in the decisions these individuals may then have an incentive to try to manipulate the information they develop and provide in order to influence the resulting decisions to their benefits this can be costly both in degrading the quality of decision making and in diverting the attention and effort of the organization s members from more productive activities the organization has three different methods it can employ to discourage excessive influence activities and to encourage more directly productive uses of time and effort it can limit access to decision makers and participation in decision making it can alter its decision making criteria to favor those performing well in productive activities and it can provide direct financial incentives to encourage the desired allocation of effort it is shown that an efficiently designed organization will use such financial incentives only as a last resort instead it will always first alter its decision participation policies and decisionmaking criteria

financing a portfolio of projects this article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems competition for scarce informed capital at the refinancing stage strengthens investors bargaining positions and yet entrepreneurs incentives may be improved because projects funded by investors with shallow pockets must have not only a positive net present value at the refinancing stage but one that is higher than that of competing portfolio projects our article may help understand provisions used in venture capital finance that limit a fund s initial capital and make it difficult to add more capital once the initial venture capital fund is raised jel g24 g31 venture capital finance takes place in an environment of severe informational asymmetries and incentive problems venture capitalists not only must assess the quality of investment proposals submitted to them for funding but once the initial funding has taken place they must also give the right incentives to the entrepreneurs and monitor the performance of the portfolio companies on an ongoing basis this article departs from most of the existing literature by explicitly recognizing that venture capitalists manage a portfolio of projects the need for portfolio management arises if the amount of capital both financial and human available to a venture capital fund is limited implying that venture capitalists must carefully choose which projects to allocate their scarce financial and human resources to 1 by staging their investments venture capitalists retain the right to deny capital infusions to particular

interpersonal authority in a theory of the firm this paper develops a theory of the flrm in which a flrm s centralized asset ownership and low powered incentives give a manager interpersonal authority over employees in a world with difiering priors the paper derives such interpersonal authority as an equilibrium phenomenon one key result is that a manager s control over critical assets through its efiect on the level of outside options allows the manager to order employees what to do the paper thus provides microfoundations for the idea that bringing a project inside a flrm gives the manager authority over that project while in the process explaining concentrated asset ownership low powered incentives and centralized authority as typical characteristics of flrms it also leads to a new perspective on the flrm as a legal entity and building on the insights of a parallel paper to a new theory for flrm boundaries based on the idea of break up a key feature of the latter theory is that flrm boundaries matter even though both ex ante investments and ex post actions are perfectly contractible

rational and adaptive performance expectations in a customer satisfaction framework this article develops and tests alternative models of market level expectations perceived product performance and customer satisfaction market performance expectations are argued to be largely rational in nature yet adaptive to changing market conditions customer satisfaction is conceptualized as a cumulative construct that is affected by market expectations and performance perceptions in any given period and is affected by past satisfaction from period to period an empirical study that supports adaptive market expectations and stable market satisfaction using data from the swedish customer satisfaction barometer is reported

reference points social norms and fairness in contract renegotiations how does an ex ante contract affect behavior in an ex post renegotiation game we address this question in a canonical buyer seller relationship with renegotiation our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threat points we compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex ante contract was written the ex ante contract causes sellers to ask for markups that are 45 lower than in strategically equivalent bargaining situations without an initial contract moreover buyers are more likely to reject given markups in renegotiations than in negotiations these effects do not depend on whether the contract was written under competitive or monopolistic conditions our results provide strong evidence supporting the hypothesis that contracts serve as reference points that shape and coordinate the expectations of the contracting parties

south korean chaebols and value based management south korean industrial conglomerates chaebols are discussed in the context of value based management vbm recent economics and finance literature on the diversion of corporate resources from the firm to the controlling shareholders tunneling for which chaebols are notoriously known is discussed chaebols have engaged in empire building and expropriation of minority shareholders distorting the process of efficient resource allocation in south korea and became the root cause of the 1997 financial crisis we argue that the 1997 crisis should be viewed as a consequence of chaebols systematic deviation from the guiding principles of vbm we use tunneling within chaebols as an example of the need to directly address prohibition of the expropriation of minority shareholders as a primary postulate of vbm we argue that vbm should require that the value generated by the firm not be expropriated from minorities or any stakeholders by dominant shareholders we also examine moral and ethical considerations and present explanations as to why the unethical practice of tunneling has been tolerated by the south korean public we show that public opinion on tunneling is changing and that the treatment of minority shareholders by chaebols controlling families is becoming increasingly unacceptable to south koreans

constructive consumer choice processes consumer decision making has been a focal interest in consumer research and consideration of current marketplace trends e g technological change an information explosion indicates that this topic will continue to be critically important we argue that consumer choice is inherently constructive due to limited processing capacity consumers often do not have well defined existing preferences but construct them using a variety of strategies contingent on task demands after describing constructive choice consumer decision tasks and decision strategies we provide an integrative framework for understanding constructive choice review evidence for constructive consumer choice in light of that framework and identify knowledge gaps that suggest opportunities for additional research

a single ideal point model for market structure analysis computing unsegmented product maps from preference data by means of single ideal point models is commonly thought to be impossible because of indeterminacy problems the authors show that this math

does delegation increase worker training we model a principal firm offering training to its agent worker under two alternative organizational structures integration where the principal retains authority to overrule the investment project recommended by the worker and delegation where the principal cannot overrule the worker s preferred investment project we assume that training reduces the worker s effort cost of assembling information about alternative projects payoffs and identify the conditions under which delegation increases the profit maximizing intensity of training empirical estimates from matched employer employee data show that workplaces delegating authority do provide more worker training this result persists in two cross sections in panel fixed effect estimates and critically in an instrumental variable exercise that also controls for establishment fixed effects jel d21 d22 d23 m53 m54

strategic incentives for innovations and market competition abstract we consider a principal agent model to provide a general analysis of how risk affects incentives of firms who invest in cost reducing r d and compete in the product market we specify the conditions under which higher risk reduces incentives of all firms we also examine the conditions under which an increase in risk may trigger opposite responses of rivals in the same industry some firms will strengthen while other firms will weaken the incentives provided to their agents this result holds regardless of the mode of competition in the product market cournot or bertrand as long as the rivals r d decisions are strategic substitutes it can generate new empirical implications and can provide an explanation for the lack of strong empirical support in the literature for a negative relationship between risk and incentives we also discuss policy implications regarding the effect of risk on the incentives to innovate and welfare

mental budgeting and consumer decisions consumers often set budgets for categories of expenses e g entertainment and track expenses against their budget because budgets cannot perfectly anticipate consumption opportunities people may earmark too much or too little money for a particular category this leads them to overconsume or underconsume goods in that category the results of three studies suggest that consumers do indeed set budgets and that budgeting may lead to underconsumption to show that consumers track expenses the studies demonstrate that budgeting effects are larger for purchases that are highly typical of their category such purchases reduce the amount people spend in a category and block the purchase of other typical items the studies control for satiation and income effects thus budgeting adds predictive power to standard economic consumer theory

contracts entrepreneurs market creation and judgement the contemporary mainstream theory of the firm in perspective this survey gives an overview of the theory of the firm as it is formulated within the contemporary mainstream of economics two groupings of theories are briefly discussed principal agent and incomplete contract models next three of the most recent contributions regarding firms are considered the reference point approach is looked at first followed by a discussion of spulber s book the theory of the firm last we consider the entrepreneurial judgement perspective

loss aversion and inefficient renegotiation we propose a theory of inefficient renegotiation that is based on loss aversion when two parties write a long term contract that has to be renegotiated after the realization of the state of the world they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction we show that loss aversion makes the renegotiated outcome sticky and materially inefficient the theory has important implications for the optimal design of long term contracts first it explains why parties often abstain from writing a beneficial long term contract or why some contracts specify transactions that are never ex post efficient secondly it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship specific investments rather than writing a specific performance contract thirdly it shows that employment contracts can be strictly optimal even if parties are free to renegotiate

foreign banks and credit stability in central and eastern europe a panel data analysis abstract we examine whether foreign and domestic banks in central and eastern europe react differently to business cycles and banking crises our panel dataset comprises data of more than 250 banks for the period 1993 2000 with information on bank ownership and mode of entry during crisis periods domestic banks contracted their credit base whereas greenfield foreign banks did not also home country conditions matter for foreign bank growth as there is a significant negative relationship between home country economic growth and host country credit by greenfields finally greenfield foreign banks credit growth is influenced by the health of the parent bank

intertemporal capital budgeting abstract this paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects consistent with field study evidence an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal the model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms

motivational compatibility and choice conflict for most forms of conscious consumer choice product attributes serve as the means that consumers use to accomplish their goals because there is competition between products in the marketplace consumption decisions typically present conflict between means to achieve a goal in this article we examine the consequences of conflict between regulatory means on consumers decisions and show that its resolution depends on whether the means that is the attributes are compatible with the consumer s regulatory orientation we show that compatibility with more than one attribute arouses acute decision conflict and evokes decision processes that result in a pronounced tendency to make counternormative choices we also show that incompatibility with a product s attributes leads to choosing extreme alternatives which suggests the presence of a pick your poison effect we test our hypotheses using the attraction compromise and deferral paradigms we close by discussing our results in the context of the lewinian view of decision conflict

contributions of oliver hart and bengt holmstrom to contract theory oliver hart and bengt holmstrom were awarded the 2016 sveriges riksbank prize in economic sciences in memory of alfred nobel for their fundamental contributions to contract theory this article offers a short summary and discussion of their path breaking work

evaluating the impact of reforming the food subsidy program in egypt a mixed demand approach abstract food subsidy is one of the policies considered to protect consumer welfare against food price increases in particular when the insufficient local production has to be complemented by food imports with volatile prices egypt has experienced several food crises the latest in 2008 which put an halt to attempts to reform in depth the system of food subsidies because of social unrest in this paper we use a mixed demand approach to analyze the consumption structure of egyptian households our model specification takes into consideration the characteristics of the egyptian food subsidy system where some food items have predetermined quotas while others are associated with predetermined subsidized prices price income and quota elasticities are estimated from the egyptian family expenditure survey and welfare change measures are derived by income class simulations of various options to eliminate subsidies on selected food items are conducted we estimate the negative welfare impact of the reforms especially in the context of increasing food prices by comparing welfare effects of policy options by income quartiles and by household category rural urban

tobin s q and the importance of focus in firm performance using tobin s q as a measure of performance we seek to estimate the relative importance of industry focus and share effects in determining firm performance our methods are analogous to those of richard schmalensee and like him we find that industry effects account for the majority of the explained variance however we also find that firm effects exist in the form of focus effects that is narrowly diversified firms do better than widely diversified firms we interpret this finding as consistent with profit maximization by firms with different factor endowments

thinking about the firm a review of daniel spulber s the theory of the firm in this review i describe how economists have moved beyond the firm as a black box to incorporate incentives internal organization and firm boundaries i then turn to the way that the theory of the firm is treated in daniel spulber s book the theory of the firm microeconomics with endogenous entrepreneurs firms markets and organizations spulber s goal is to explain why firms exist how they are established and what they contribute to the economy to accomplish this spulber defines a firm to be a transaction institution whose objectives differ from those of its owners for spulber this separation is the key difference between the firm and direct exchange between consumers i raise questions about whether this is a useful basis for a theory of the firm jel d21

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

competing for ownership we study how the internal organization of firms specifically the allocation of ownership of assets and the distribution of profi ta mong the firm s managers is determined in a competitive market we ask how scarcity of assets skills or liquidity in the market translates into ownership and control allocations within organizations firms will be more integrated when the terms of trade are more favorable to the short side of the market when liquidity is unequally distributed among existing firms and when there is a positive uniform shock to productivity the model identifies a price like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring

overcoming the early entrant advantage the role of alignable and nonalignable differences prior research has focused on early entrant advantage rather than on theories that explain and predict how late entrants can surpass the early entrant s performance in this research the authors p

demand driven integration and divorcement policy abstract traditionally vertical integration has concerned industrial economists only insofar as it affects market outcomes particularly prices this paper considers reverse causality from prices and more generally from demand to integration in a model of a dynamic oligopoly if integration is costly but enhances productive efficiency then a trend of rising prices and increasing integration could be due to growing demand in which case a divorcement policy of forced divestiture may be counterproductive divorcement can only help consumers if it undermines collusion but then there are dominating policies we discuss well known divorcement episodes in retail gasoline and british beer as well as other evidence in light of the model

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

the dilemma of cheap food and self sufficiency the case of wheat in iran self sufficiency in wheat has been one of the major goals of iranian agricultural policies since the revolution of 1979 even so the country failed to achieve this goal by the early 2000s despite a satisfactory growth in wheat production this paper addresses this failure and the political difficulties in introducing reforms that would reduce the need for import first the production and consumption of wheat are examined the conclusion is that the cheap bread policy has mainly been responsible for the imbalances between domestic supply and demand and the continued reliance on wheat imports moreover the paper argues that the subsidy program is an expensive safety net for the needy and shows that the iranian government has intended to reform the program since the early 1990s however subsidy reforms are politically sensitive especially in developing countries where subsidies are considered very important both for supporting the poor and for political stability an analysis of the iranian attempts at subsidy reform suggests that they have not yet succeeded mainly due to such political considerations

when does coordination require centralization this paper compares centralized and decentralized coordination when manag ers are privately informed and communicate strategically we consider a multi divisional organization in which decisions must be adapted to local conditions but also coordinated with each other information about local conditions is dispersed and held by self interested division managers who communicate via cheap talk the only available formal mechanism is the allocation of decision rights we show that a higher need for coordination improves horizontal com

when does competition foster commitment consider a firm that would like to commit to a focused business strategy because focus improves efficiency and thus increases profit we identify two general conditions under which tougher competition strengthens the firm s ability to commit to a focused strategy under these conditions competition fosters commitment for two reasons i competition reduces the value of the option to diversify the contestability effect and ii competition increases the importance of being efficient the efficiency effect we use a number of different models of imperfect competition to illustrate the applicability of our results our examples suggest that the contestability effect is very general in contrast the efficiency effect often requires further conditions which are specific to the nature of competition in each model in both cases our analysis helps us predict when these effects are more likely to be observed this paper was accepted by bruno cassiman business strategy

reallocation of corporate resources and managerial incentives in internal capital markets abstract diversified firms often trade at a discount with respect to their focused counterparts the literature has tried to explain the apparent misallocation of resources with lobbying activities or power struggles we show that diversification can destroy value even when resources are efficiently allocated ex post when managers derive utility from the funds under their purview moving funds across divisions may diminish their incentives the ex ante reduction in managerial incentives can more than offset the increase in firm value due to the ex post efficient reallocation of funds this effect is robust to the introduction of monetary incentives moreover we show that asymmetries in size and growth prospects increase the diversification discount

communication in bargaining over decision rights abstract this paper develops a model of bargaining over decision rights between an uninformed principal and an informed but self interested agent we introduce two different bargaining mechanisms tacit and explicit bargaining in tacit bargaining an uninformed principal makes a take it or leave it price offer to the agent who then decides whether to accept or reject the offer in the equilibrium of the game the principal inefficiently screens out some agent types so that the agent s private information cannot be fully utilized when the decision is made in explicit bargaining in which parties can communicate explicitly via cheap talk before tacit bargaining however an equilibrium with no such inefficient screening exists even when the conflict of interest is arbitrarily large we also follow a mechanism design approach showing that under certain conditions explicit bargaining is an optimal bargaining mechanism that maximizes the joint surplus of the parties

modeling choice strategies for noncomparable alternatives theoretical models are developed for two strategies consumers use to choose among noncomparable alternatives the models view consumers as trading off decision error and processing effort when selecting a decision strategy the models predict the use of choice strategies and implicit abstraction processes for noncomparable alternatives in a number of different circumstances

evaluating the role of subsidy reform in addressing poverty levels in malaysia a cge poverty framework abstractmalaysia as one of the top subsidised countries around the world has launched to reduce subsidies to capture its development goals this study therefore analyses the effects of the subsidy reform on the macroeconomic welfare and poverty levels of malaysia by applying a cge model the findings suggest that subsidy removal leads to significant falls in both income and consumption of rural urban and non citizen households and consequently decreases their welfare however poverty levels among rural households will most likely increase significantly when compared to urban households due to their relatively low level of income compared to other groups

the boundaries of the firm revisited why do firms exist what is their function and what determines their scope these remain the central questions in the economics of organization they are also central questions for business executives and corporate strategists the worldwide volume of corporate mergers and acquisitions exceeded 1 6 trillion in 1997 it is hard to imagine that so much time effort and investment bankers fees would be spent on adjusting firm boundaries unless there was some underlying economic gain indeed the exceptional levels of merger and acquisition activity over the past two decades are a strong indication that economically significant forces do determine organizational boundaries the study of firm boundaries originated with the famous essay by coase 1937 who raised the question of why we observe so much economic activity inside formal organizations if as economists commonly argue markets are such powerful and effective mechanisms for allocating scarce resources coase s answer was in terms of the costs of transacting in a world of imperfect information when the transaction costs of market exchange are high it may be less costly to coordinate production through a formal organization than through a market in large part thanks to the work of williamson 1975 1985 recent decades have seen a resurgence of interest in coase s fundamental insight that firm boundaries can be explained by efficiency considerations our understanding of firm boundaries has been sharpened by identifying more precisely the nature and sources of transaction costs in different circumstances in the process the focus of

ownership and control rights in internet portal alliances 1995 1999 we examine the structure of more than 100 alliances by internet portals and other firms between 1995 to 1999 from a contract theory perspective models of incomplete contracts frequently invoke unforeseen contingencies the cost of writing contracts and the cost of enforcing contracts in justifying the assumption of incompleteness the setting in which internet portals formed alliances was rife with these sorts of transaction costs we argue that these alliances can be viewed as incomplete contracts and find that the division of ownership and the allocation of control rights are consistent with the incomplete contracting literature copyright 2003 by the rand corporation

commercial bank ownership and performance in china this study examines the determinants of bank performance based on proxy variables that assess the quality of assets profitability liquidity and overall performance using a sample of 111 chinese commercial banks over the period of 2000 2012 we find that foreign banks appear to have better asset quality and overall performance although lower profitability compared to domestic banks in contrast the state owned banks tend to be more profitable and have better liquidity position compared with other domestic banks and foreign banks at bank level equity liability ratio exerts significant influence on overall bank performance while at the macroeconomic level per capital gdp gdp growth inflation and unemployment rates appear to have a bearing on bank performance

consumer choice strategies for comparing noncomparable alternatives research on consumer choice has focused on easily comparable alternatives a subset of the choices consumers regularly face this paper outlines the problem and two general strategies for comparing noncomparable alternatives a subset of choices that has been overlooked in the literature experiments are reported that support use of the strategies

product level choice a top down or bottom up process examination of the process by which consumers form decision criteria and subsequently evaluate and choose product level alternatives when purchase goals are well defined indicates that decision criteria are formulated in a goal driven top down fashion rather than a product driven bottom up fashion evaluation of alternatives follows a within product strategy as opposed to a within attribute strategy and is characterized by less reliance on price information than reported in previous research even without a specific goal for product decisions the formation and utilization of decision criteria did not follow the bottom up process alternative explanations are offered for these contrasts along with implications for future research on product level decisions

incommensurate resources not just more of the same abstract the pricing literature is replete with research that focuses on how consumers respond to sales promotions when both the reference level and the change are expressed in dollar terms i e discounts the psychophysics of pricing suggests that changes in monetary magnitude are not based on their absolute level but rather on their deviation from some reference level or how the change is framed often however a promotion is presented in nonmonetary terms e g a premium when two resources are delivered simultaneously but in different currencies e g receive a free razor with the purchase of a can of shaving cream the marginal value of the nonmonetary incremental benefit may be difficult to evaluate in relation to the focal product or its price therefore the value of the premium may be less likely than a comparable discount to be viewed in a relative sense and thus less likely to suffer from diminishing marginal returns this research explores how people often fail to exhibit the sam

different missions and commitment power in r d organizations theory and evidence on industry university alliances this paper proposes a theory for why firms conduct some research activities in house but outsource other projects to independent partners and for why firms retain different degrees of control over collaborative research projects the focus is on the determinants of a company s choice to outsource research projects to academic organizations because of the different institutional missions of academic organizations outsourcing a project to a university allows a firm to commit not to terminate or alter a scientifically valuable project before it is complete this commitment is potentially valuable for the firm in an environment where scientific value and economic value may not coincide and scientific workers are responsive to the incentives defined by their community of peers an economic model that formalizes these arguments is developed empirical hypotheses are then formulated about the kind of research activities firms will outsource to universities and activities on which they will exert stronger control evidence from a sample of industry university research agreements as well as from other large sample and case studies shows patterns consistent with the predictions of the model

household level consumption in urban ethiopia the effects of a large food price shock summary we use survey data to investigate how urban households in ethiopia coped with the food price shock in 2008 qualitative data indicate that the high food price inflation was by far the most adverse economic shock between 2004 and 2008 and that a significant proportion of households had to adjust food consumption in response regression results indicate that households with low asset levels and casual workers were particularly adversely affected by high food prices we interpret the results as pointing to the importance of growth in the formal sector so as to generate more well paid and stable jobs

internal versus external capital markets this paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation we focus pritnarily on comparing an internal capital market with bank lending while both represent centralized forms of financing in the former case the financing is owner provided while in the latter ceise it is not we argue that the ownership aspect of internal capital allocation has three important consequences 1 it leads to more monitoring than bank lending 2 it reduces managers entrepreneurial incentives and 3 it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

bank ratings what determines their quality this paper examines the quality of credit ratings assigned to banks by the three largest rating agencies we interpret credit ratings as relative assessments of creditworthiness and define a new ordinal metric of rating error based on banks expected default frequencies our results suggest that on average large banks receive more positive bank ratings particularly from the agency to which the bank provides substantial securitization business these competitive distortions are economically significant and contribute to perpetuate the existence of too big to fail banks we also show that overall differential risk weights recommended by the basel accords for investment grade banks bear no significant relationship to empirical default probabilities harald hau sam langfield and david marques ibanez

comparability and hierarchical processing in multialternative choice consumer choice research recently moved beyond brand based decisions to study the more noncomparable choices consumers often face noncomparable choice processing in choices involving multiple products is discussed in experiment 1 consumers used attribute based processing at an abstract level and alternative based processing at a concrete level to evaluate more noncomparable alternatives independent of choice set size in experiment 2 the choices from experiment 1 were compared with choices within which products varied in comparability the results suggest that comparability variance within a multialternative choice set facilitates consumers use of product categories and hierarchical processing to eliminate choice alternatives

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

estimating the welfare costs of reforming the iraq public distribution system a mixed demand approach the iraqi public distribution system is the largest universal in kind subsidy system in the world in 2012 the public distribution system transfers accounted for as much as 30 percent of incomes of the poorest 10 percent of the iraqi population and provided 70 percent of the calories of the poorest 40 percent in effect the public distribution system remains the only safety net program that covers all the poor and vulnerable in the country yet it is a very inefficient and expensive means to deliver transfers to the poor and creates distortions in the economy as well as an unsustainable fiscal burden the fiscal crisis since mid 2014 has put reform of the public distribution system back on the agenda this paper employs a mixed demand approach to analyze the consumption patterns of iraqi households and quantify the welfare impact of a potential reform of the public distribution system in urban areas the results show that household consumption of public distribution system items is relatively inelastic to changes in price consumption is more inelastic for the poorest quintiles and for much of the population these goods are not inferior but rather normal goods cross sectional comparisons suggest that with improvements in welfare levels and with well functioning markets some segments of the population are substituting away from the public distribution system and increasing their consumption of market substitutes the removal of all subsidies will require compensating poor households by 74 4 percent of their expenditures compared with nearly 40 percent for the richest households in urban areas

agency conflicts in the presence of random private benefits from project implementation abstract we study a contracting problem where a principal delegates the decision to implement a project to an agent who obtains private information about the value of the project before making the implementation decision moral hazard arises because the agent gets private random non contractible benefits or incurs private random non contractible costs if the project is implemented this contracting problem is pervasive when project and benefits are interpreted broadly even when the agent is risk neutral we show that the principal s optimal contract always insufficiently discourages the agent from implementing negative npv projects and also insufficiently encourages the agent to implement positive npv projects we also show that the principal s residual claim always increases in the project s npv a result that is generally unobtainable for optimal contracts in effort based moral hazard problem settings

food subsidies in egypt reform options distribution and welfare abstract egypt s food subsidies in 1996 97 5 5 percent of government expenditures cover rationed cooking oil and sugar 23 percent of subsidy cost and unrationed bread and flour 77 percent the subsidies enhance food security but are nontargeted and have substantial leakages this paper uses a computable general equilibrium cge model to simulate the short run effects of alternative food subsidy scenarios government savings from reduced spending finance uniform cuts in direct tax rates across all household types the model uses a 1996 97 database with detailed household information the targeting of cooking oil and sugar subsidies to the needy the bottom two quintiles in rural and urban areas has a progressive effect while elimination of this subsidy is regressive disaggregated household consumption changes are small 0 3 percent the targeting of all food subsidies is pro needy partly due to important indirect effects the consumption of the needy increases by 0 5 percent with little change for the nonneedy food subsidy elimination is regressive the needy suffer a consumption loss of 1 1 percent if the government savings instead are transferred to the needy the impact is reversed consumption increases by 4 2 percent for needy households while the nonneedy register a small loss the overall policy implication is that food subsidy reform can benefit the needy with at worst only a modest negative impact on the nonneedy if the subsidy is entirely eliminated targeted government programs would be necessary to protect the needy from the negative impact

optimal food price stabilisation policy this paper proposes a framework for designing optimal food price stabilisation policies in a self sufficient developing country it uses a rational expectations storage model with risk averse consumers and incomplete markets government stabilises food prices by carrying public stock and by applying a state contingent subsidy tax to production the policy rules are designed to maximise intertemporal welfare the optimal policy under commitment crowds out all private stockholding activity by removing the profit opportunity from speculation the countercyclical subsidy tax to production helps price stabilisation by subsidising production in periods of scarcity and by taxing it in periods of glut it contributes little to welfare gains most of which come from stabilisation achieved through public storage

a general choice model for bundles with multiple category products application to market segmentation and optimal pricing for bundles abstract the attribute based approach to study customer choices cannot deal with bundles of heterogeneous components which are usually drawn from different product categories the authors develop the comparability based balance model which is a unified framework for modeling bundle choices the model can be employed for any bundle regardless of the heterogeneity of bundle components under a pure bundling strategy the conjoint model and balance model are special cases of the general model the authors use mixture distributions in a hierarchical bayesian framework to incorporate consumer heterogeneity in a more flexible manner than the extant approaches such as latent class and random coefficient models the empirical tests of the model show that most attribute effects are significant and consistent with the model s predictions the model is superior to those that do not consider the issues of comparability of attributes latent class structure and heterogeneity among respondents the authors show how

restructuring constructive processing of information displays in consumer choice this research examines the construction of information displays by consumers this aspect of constructive processing in which data may be transformed edited or inferred is termed restructuring subjects notes and verbal protocols generated during a study are used to examine restructuring behavior when making choices among brands these methods enable the examination of restructuring and its effect on evaluative processing throughout the course of making a choice results demonstrate that consumers do restructure that restructuring is done in a contingent opportunistic manner and that restructuring may influence the type of choice heuristic used e g alternative based vs attribute based

leadership coordination and corporate culture what is the role of leaders in large organizations we propose a model in which a leader helps to overcome a misalignment of followers incentives that inhibits coordination while adapting the organization to a changing environment good leadership requires vision and special personality traits such as conviction or resoluteness to enhance the credibility of mission statements and to eectively rally agents around them resoluteness allows leaders to overcome

a reexamination of the conglomerate merger wave in the 1960s an internal capital markets view one possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets examining 392 bidder firms during the 1960s we find the highest bidder returns when financially unconstrained buyers acquire constrained targets this result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing we also find that bidders generally retain target management suggesting that management may have provided companyspecific operational information while the bidder provided capital budgeting expertise