planning under incomplete information and the ratchet effect abstract central planning of production is usually performed under asymmetric information the firm in general has more information about its productive possibilities than the central planner from now on for short cp this justifies the use of incentives schemes in which the cp does not directly fix activity levels casual observation of such existing schemes suggests that the time dimensions is crucial for their working typically the cp revises the incentive scheme over time to take into account the information provided by the firm s performance managers of centrally planned economies as well as economists have long recognized that this revision induces firms to underproduce in order to avoid demanding schemes in the future this is the ratchet effect it is purpose of the present paper to study the ratchet effect under the non commitment assumption which we believe to be more realistic the inadequacy of conceptual tools made if difficult in the past to consider such an assumption now basic research on dynamic games with incomplete information recently resulted in new ideas which look particularly relevant for a theoretical analysis of the problem

thermal plant bids and market clearing in an electricity pool minimization of costs vs minimization of consumer payments the spanish wholesale electricity market started on january 1st 1998 though it is based on simple price quantity bids it incorporates some provisions to take thermal plant running requirements into account this paper presents these rules and its mathematical treatment focusing on a possible implementation of the minimum income condition which allows thermal generators to declare minimum stable loads it also shows another key point in the debate whether the algorithm should minimize costs or consumer payments

what do entrepreneurs pay for venture capital affiliation this study empirically evaluates the certification and value added roles of reputable venture capitalists vcs using a novel sample of entrepreneurial start ups with multiple financing offers i analyze financing offers made by competing vcs at the first professional round of start up funding holding characteristics of the start up fixed offers made by vcs with a high reputation are three times more likely to be accepted and high reputation vcs acquire start up equity at a 10 14 discount the evidence suggests that vcs extra financial value may be more distinctive than their functionally equivalent financial capital these extra financial services can have financial consequences a central issue for early stage high tech entrepreneurs is obtaining external resources when the assets of their start up are intangible and knowledge based particularly for entrepreneurs without an established reputation convincing external resource providers such as venture capitalists vcs to provide financial capital may be challenging the literature contains two main lines of research for overcoming this problem one research stream has concentrated on designing institutional structures to permit financing early stage ventures this contractual and monitoring based approach is aimed at solving potential agency problems between investors and entrepreneurs e g admati and pfleiderer 1994 lerner 1995 hellmann 1998 and kaplan and str omberg 2001 2002 2003 a second research stream has suggested that when the quality of a start up cannot be directly observed external actors rely on the quality of the start up s affiliates as a signal of the start up s own quality

bargaining and strikes strikes are generally regarded as an important economic phenomenon and yet good theoretical explanations of them are hard to come by the difficulty is to understand why rational parties should resort to a wasteful mechanism as a way of distributing the gains from trade why could not both parties be made better off by moving to the final distribution of surplus immediately or if it is uncertain to its certainty equivalent and sharing the benefits from increased production

foundations of dynamic monopoly and the coase conjecture subgame perfect equilibria are characterized for a market in which the seller quotes a price each period assume zero costs positive interest rate continuum of buyers and some technical conditions if buyers valuations are positive then equilibrium is unique buyers strategies are stationary and the price sequence is determinant along the equilibrium path but possibly randomized elsewhere otherwise a continuum of stationary equilibria can exist but at most one with analytic strategies coase s conjecture is verified for stationary strategies reducing the period length drives all prices to zero or the least valuation connections to bargaining models are described journal qf economic literature classification

bargaining and the right to remain silent this paper analyzes a class of alternating offer bargaining games with one sided incomplete information for the case of no gap if sequential equilibria are required to satisfy the additional restrictions of stationarity monotonicity pure strategies and no free screening we establish the silence theorem when the time interval between successive periods is made sufficiently short the informed party never makes any serious offers in the play of alternating offer bargaining games a class of parametric examples suggests that the time interval required to assure silence is not especially brief as a byproduct of the analysis we also prove under the same set of assumptions a uniform version of the coase conjecture when the time interval between successive periods is made sufficiently short the initial serious offer by either party in an alternating offer bargaining game must be less than e times the highest possible buyer valuation for an entire family of distribution functions

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

double sided auction mechanism design in electricity based on maximizing social welfare an efficient electricity double sided auction mechanism should control market power and enhance the social welfare of the electricity market based on this goal the paper designs a new double sided auction mechanism in the new mechanism the social welfare contribution of each participant plays a pivotal role because this contribution is the critical factor in market clearing payment settling and transaction matching rules in particular each winner of the auction can gain transfer payments according to his contribution to social welfare in the electricity market and this gives the mechanism the ability to control the market power of some participants at the same time this mechanism ensures that the market organizer balances his budget we then conduct a theoretical and empirical analysis based on the spanish electricity market both of the results show that compared to the uniform pricing mechanism the new mechanism can reduce market power of participants and enhance the social welfare of the electricity market

the real consequences of market segmentation we study the real effects of market segmentation due to credit ratings using a matched sample of firms just above and just below the investment grade cutoff these firms have similar observables including average investment rates however flows into high yield mutual funds have an economically significant effect on the issuance and investment of the speculative grade firms relative to their matches especially for firms likely to be financially constrained the effect is associated with the discrete change

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

torture in counterterrorism agency incentives and slippery slopes abstract we develop a counterterrorism model to analyze the effects of allowing a government agency to torture suspects when evidence of terrorist involvement is strong we find that legalizing torture in strong evidence cases has offsetting effects on agency incentives to counter terrorism by means other than torture it lowers these incentives because the agency may come to rely on torture to avert attacks however it also increases these incentives because other efforts may increase the probability of having strong enough evidence to warrant the use of torture legalizing torture in strong evidence cases is more likely to reduce non torture efforts if these efforts are more effective at stopping attacks and less effective at turning up strong evidence when the suspect is guilty if it reduces non torture efforts it can reduce security and is more likely to do so if the attack threat is higher moreover if torture is used in strong evidence cases even if torture is banned legalizing torture in strong evidence cases necessarily reduces security if it reduces non torture efforts lastly it can increase incentives to torture even in weak evidence cases a slippery slope

stage financing and the role of convertible securities venture capital financing is characterized by extensive use of convertible securities and stage financing in a model where a venture capitalist provides staged financing for a project we illustrate an advantage of convertible debt or warrants over a mixture of debt and equity essentially when the venture capitalist retains the option to abandon the project the entrepreneur has an incentive to engage in window dressing and bias positively the short term performance of the project reducing the probability that it will be liquidated an appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project s equity

generation flexibility in ramp rates strategic behavior and lessons for electricity market design abstract a ramp rate usually defines the speed at which an electric power producer can decrease or increase its production in limited time the availability of fast ramping generators significantly affects the economic dispatch especially in the systems with high penetration of intermittent energy sources e g wind power since the fluctuations in supply are common and sometimes unpredictable one of the regulatory practices of how to impel generators to provide their true ramp rates is to separate the stages of submitting the bids on ramp rate and production in this paper we distinguish two types of market structures one stage when electric power producers are deciding their production and ramp rate at the same time or two stage when generators decide their ramp rate first and choose their production levels at the second stage we employ one stage and two stage equilibrium models respectively to represent these market setups and use a conjectured price response parameter ranging from perfect competition to the cournot oligopoly to investigate the effect of the market competition structure on the strategic decisions of the generators we compare these two market setups in a symmetric duopoly case with two time periods and prove that in the two stage market setup the level of ramp rate is independent of the strategic behavior in the spot market and generally lower than the one offered in the one stage setup we also show that the ramp rate levels in one and two stage models coincide at the cournot oligopoly we extend the model to asymmetry several load periods portfolio bidding and uncertainty and show that withholding the ramp rate still occurs in both models our findings prove that market regulators cannot rely on only separating the decision stages as an effective measure to mitigate market power and in certain cases it may lead to an adverse effect

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

the consequences of entrepreneurial finance evidence from angel financings this article documents the fact that ventures funded by two successful angel groups experience superior outcomes to rejected ventures they have improved survival exits employment patenting web traffic and financing we use strong discontinuities in angel funding behavior over small changes in their collective interest levels to implement a regression discontinuity approach we confirm the positive effects for venture operations with qualitative support for a higher likelihood of successful exits on the other hand there is no difference in access to additional financing around the discontinuity this might suggest that financing is not a central input of angel groups

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

torture and the commitment problem we study torture as a mechanism for extracting information from a suspect who may or may not be informed we show that a standard rationale for torture generates two commitment problems first the principal would benefit from a commitment to torture a suspect he knows to be innocent secondly the principal would benefit from a commitment to limit the amount of torture faced by the guilty we analyse a dynamic model of torture in which the credibility of these threats and promises is endogenous we show that these commitment problems dramatically reduce the value of torture and can even render it completely ineffective we use our model to address questions such as the effect of enhanced interrogation techniques rights against indefinite detention and delegation of torture to specialists

auction design in day ahead electricity markets competition in day ahead electricity markets has been established through auctions where generators and loads bid prices and quantities different approaches have been discussed regarding the market auction design multi round auctions despite its implementation complexity allow market participants to adapt their successive bids to market prices considering their operational and economic constraints however most of the day ahead electricity market implementations use noniterative single round auctions this paper presents a market simulator to compare both auction models different auction alternatives such as the spanish single round auction that takes into account special conditions included in the generator bids and multi round auctions with different stopping rules are analyzed the results and acquired experience in the simulation of the spanish market started in january 1998 are presented hourly market prices average daily price price demand correlation and several economic efficiency indicators such as generator surplus consumer surplus and social welfare are compared to derive conclusions regarding the performance of the auction alternatives

simulating oligopolistic pool based electricity markets a multiperiod approach this paper simulates a pool based electricity market and identifies equilibrium patterns a multiperiod framework that requires the use of continuous and binary variables is considered producers can be either price takers or price makers although price makers and their behavior characterize the market the elasticity of the loads is modeled through piecewise constant price demand curves the market operator uses a detailed network constrained market clearing auction that results in hourly market clearing prices the behavior of the market participants and the market itself are characterized through a repetitive simulation procedure the tool presented in this paper is particularly useful for the market regulator that may use it to monitor the market and to identify the exercise of market power by producers results from a realistic case study are presented and discussed

auction implementation problems using lagrangian relaxation lagrangian relaxation lr is used as an auction method for bidding in a deregulated environment this paper focuses on the problems that occur while using lr as an auction method identical or similar units can prevent lr from finding the optimal solution if the units are similar lr may have trouble selecting some of them for the optimal solution a feasible solution may thus not be found since a heuristic selection of which unit data to alter has to be applied this is inequitable to the unit s not selected and may result in lawsuit s because the dispatcher has to use heuristic selection there is no fair solution to these problems the authors suggest previously published methods to implement auctions sensitivity analysis has also been applied in this paper to show that the percentage difference of similarity between units may affect the solution found

price taker bidding strategy under price uncertainty this paper provides a framework to obtain the optimal bidding strategy of a price taker producer an appropriate forecasting tool is used to estimate the probability density functions of next day hourly market clearing prices this probabilistic information is used to formulate a self scheduling profit maximization problem that is solved taking advantage of its particular structure the solution of this problem allows deriving a simple yet informed bidding rule results from a realistic case study are discussed in detail

reputation and equilibrium selection in games with a patient player a single long run player plays a simultaneous move stage game against a sequence of opponents who play only once but observe all previous play let the stackelberg strategy be the pure strategy to which the long run player would most like to commit himself if there is positive prior probability that the long run player will always play the stackelberg strategy then his payoff in any nash equilibrium exceeds a bound that converges to the stackelberg payoff as his discount factor approaches one when the stage game is not simultaneous move this result must be modified to account for the possibility that distinct strategies of the long run player are observationally equivalent

venture capital entrepreneurship and economic growth abstract using a panel of u s metropolitan areas we find that increases in the supply of venture capital positively affect firm starts employment and aggregate income our results remain robust to a variety of specifications including ones that address endogeneity the estimated magnitudes imply that venture capital stimulates the creation of more firms than it funds which appears consistent with two mechanisms first would be entrepreneurs anticipating financing needs more likely start firms when the supply of capital expands second funded companies may transfer know how to their employees thereby enabling spin offs and may encourage others to become entrepreneurs through demonstration effects

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

a multistage model of bargaining this paper presents a simple multistage model of bargaining wherein a seller makes an offer that can be either accepted or refused if rejected the process continues how the seller s ability to make commitments affects bargaining outcomes is analysed by comparing the commitment equilibria to those arising when commitment is impossible the effects of increasing uncertainty about preferences and varying the length of the bargaining horizon are analysed the ways in which the bargaining environment can be changed to improve outcomes are discussed

sequential bargaining with incomplete information this paper describes a simple two person two period bargaining game and solves it using the concept of perfect bayesian equilibrium in which the actions of each player convey information which is used by his opponent the paper examines the effects of changes in bargaining costs the size of the contract zone and the length of the bargaining process on such aspects of the solution as the probability of impasse and the likelihood of concessions the combination of information transfer and the lack of pre commitment embodied in perfectness yields many surprising results common perceptions about the effects of parameter changes on bargaining processes are suspect and should be checked in the particular game being discussed

maintaining a reputation when strategies are imperfectly observed this paper studies reputation effects in games with a single long run player whose choice of stage game strategy is imperfectly observed by his opponents we obtain lower and upper bounds on the long run player s payoff in any nash equilibrium of the game if the long run player s stage game strategy is statistically identified by the observed outcomes then for generic payoffs the upper and lower bounds both converge as the discount factor tends to 1 to the long run player s stackelberg payoff which is the most he could obtain by publicly committing himself to any strategy

the political economy of indirect control this paper characterizes the efficient sequential equilibrium when a government uses indirect control to exert its authority we develop a dynamic principal agent model in which a principal a government delegates the prevention of a disturbance such as riots protests terrorism crime or tax evasion to an agent who has an advantage in accomplishing this task our setting is a standard dynamic principal agent model with two additional features first the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players second the principal suffers from limited commitment using recursive methods we derive a fully analytical characterization of the likelihood intensity and duration of intervention the first main insight from our model is that repeated and costly interventions are a feature of the efficient equilibrium this is because they serve as a punishment to induce the agent into desired behavior the second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal s inability to commit finally we derive sharp predictions regarding the impact of various factors on likelihood intensity and duration of intervention we discuss these results in the context of some historical episodes

a simulation model for a competitive generation market the simulation of a wholesale electricity market should go beyond a simple optimization based on the operating costs of the generating units a model of a competitive electricity market must consider the market structure the strategy of the market participants and any other factor that lead to prices different from costs this paper presents cosmee a model of a wholesale electricity market based on simple bids that estimates expected bid prices and quantities system hourly prices and generation schedules taking into account the bidding strategies of generators and the structure of the market the model reflects the profit maximizing behavior of the market agents subject to different types of constraints cosmee has been used to simulate a real wholesale market