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

the state popular participation and the voluntary sector abstract a key determinant in the development contribution of nongovernment organizations ngos is the relationship between ngos and the state ngos may run parallel activities they may play oppositional roles or they may represent weaker members of society organizing them to become more influential in decision making and resource allocation this civil society function entails moving from a supply side approach concentrating on project delivery to a demand side emphasis helping communities articulate their concerns and participate in development processes donors can use the policy dialogue to encourage governments to foster a more enabling environment for ngo activities

stability and the chain store paradox abstract for the kreps and wilson version of selten s chain store game every equilibrium of every stable set induces the same outcome this unique outcome is that induced by the kreps and wilson solution journal of economic literature classification numbers c72

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

multidimensional incentive compatibility and mechanism design abstract incentive compatibility conditions are characterized in general for problems in which several goods are to be allocated and agents types are multidimensional two questions of monopoly pricing under multidimensional uncertainty are then analyzed first we find the optimal nonlinear pricing scheme when the monopolist knows only the distribution of an arbitrarily parameterized family of demand curves and second we solve for the optimal bundling policy for a multiproduct monopolist

optimal ownership of public goods reconsidered consider a non governmental organization ngo that can invest in a public good should the government or the ngo own the public project in an incomplete contracting framework with split the difference bargaining besley and ghatak 2001 argue that the party who values the public good most should be the owner we demonstrate the robustness of their insight when the split the difference rule is replaced by the deal me out solution our finding is in contrast to the private good results of chiu 1998 and de meza and lockwood 1998 who show that the optimal ownership structure crucially depends on whether the split the difference rule or the deal me out solution is used

government s credit rating concerns and the evaluation of public projects we study how considerations regarding the credit rating of the government s debt affect privatization policy credit market discipline presses the government to put more weight on the monetary aspect of public projects relative to their social benefits as the anticipated income increases its creditors confidence in its ability to repay debt yet several informational problems undermine this discipline leading to a costly downgrading of the credit rating dynamic inconsistency occurs when the monetary to social benefi tt radeoff is made only after the credit market has priced government s debt such as in the decision of the toll on a road projects are operated with an excessive emphasis on social benefits adverse selection occurs when the government has private information regarding a prospective project s characteristics such as anticipated traffic project selection is tilted towards those with high social benefits and low monetary benefi ts we study the possible roles for privatization to alleviate these informational problems and evaluate the regimes with and without the option for privatization

the organization and scope of agents regulating multiproduct industries abstract a mechanism design problem with two dimensional uncertainty is solved to derive the optimal policy for regulating a monopolist with private information about the marginal cost of producing two different goods the paper establishes that informational economies of scope or incentive complementarities arise when one firm produces both goods the regulator should weigh these economies against the benefits of relative performance incentives when choosing between integrated and decentralized organizations unless the marginal costs of the two products are sufficiently positively correlated the optimal ex ante policy gives control of both markets to a single firm journal of economic literature classification number s d82 l22 l51

weak cartels and collusion proof auctions abstract we study private value auctions in which bidders may collude without using side payments in our model bidders coordinate their actions to achieve an outcome that interim pareto dominates the noncooperative outcome we characterize auctions that are collusion proof in the sense that no such coordination opportunities exist and show that the efficient and revenue maximizing auctions are not collusion proof unless all bidders exhibit a concave distribution of valuations we then solve for revenue maximizing collusion proof auctions if distributions of valuations are symmetric and single peaked the optimal selling mechanism is a standard auction with a minimum bid followed by sequential negotiation in case no bidder bids above the minimum bid

infrastructure provision and macroeconomic performance this paper studies the differences between private and government provision of infrastructure capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy a subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed the case for private provision is much stronger in economies characterized by high levels of congestion the choice between private and government provision also has a crucial effect on the design of optimal fiscal policy 2011 elsevier b v all rights reserved

does asset ownership always motivate managers outside options and the property rights theory of the firm this paper studies the grossman hart moore ghm property rights approach to the theory of the firm under alternating offers bargaining when managers can pursue other occupations while negotiating over the division of the gains from cooperation the ghm results obtain if taking the best alternative job terminates bargaining outcomes are very different sometimes an agent with an important investment decision should not own the assets he works with sometimes independent assets should be owned together sometimes strictly complementary assets should be owned separately

decentralization externalities and efficiency in the competitive model externalities lead to inefficiencies and inefficiencies increase with the size of externalities however as argued by coase these problems may be mitigated in a decentralized system through voluntary coordination we show how coordination is limited by the combination of two factors respect for individual autonomy and the existence of private information together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large moreover there are instances in which coordination cannot yield any improvement at all despite common knowledge that social gains from agreement exist this occurs when external effects are relatively small and this may help to explain why coordination is so seldom observed in practice when improvements are possible we describe how simple subsidies can be used to implement second best solutions and explain why standard solutions such as pigovian taxes cannot be used possible extensions to issues arising in the structure of research joint ventures assumptions in the endogenous growth literature and the location of environmental hazards are also described

the economics of child custody i develop a model of marriage in which spouses decide on investments in child quality during marriage and on the allocation of child custody should they divorce the custodial allocation determines the share of the marital surplus each spouse appropriates which in turn influences spouses investment incentives the custodial allocation therefore has both distributional and efficiency consequences i derive the equilibrium investments and optimal custodial allocation and identify three channels through which making divorce easier affects child welfare investments in child quality during marriage the likelihood of divorce and the allocation of custody if divorce occurs

recent advances in lending to the poor with asymmetric information abstract microfinance institutions have successfully extended unsecured small loans to poor and opaque borrowers at the bottom of the economic pyramid this success is largely due to innovative financial contracts that impose joint liability and create dynamic incentives to mitigate the effects of asymmetric information given recent advances in microfinance contracts there is a need to map the theoretical developments this article aims to accomplish that by performing a critical literature survey of microlending contracts focussing on joint liability and dynamic incentives bringing out some of the deficiencies of contract theoretic propositions that cannot effectively account for the social mission of microfinance

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

empowerment and efficiency tenancy reform in west bengal the paper analyzes the effect of agricultural tenancy laws offering security of tenure to tenants and regulating the share of output that is paid as rent on farm productivity theoretically the net impact of tenancy reform is shown to be a combination of two effects a bargaining power effect and a security of tenure effect analysis of evidence on how contracts and productivity changed after a tenancy reform program was implemented in the indian state of west bengal in the late 1970s suggests that tenancy reform had a positive effect on agricultural productivity there

cost versus control understanding ownership through outsourcing in hospitals for profit hospitals in california contract out services much more intensely than either private nonprofit or public hospitals to explain why we build a model in which the outsourcing decision is a trade off between cost and control since nonprofit firms are more restricted in how they consume net revenues they experience more rapidly diminishing value of a dollar saved and they are less attracted to a low cost but low control outsourcing opportunity than a for profit firm is this difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when a fixed cost shock raises the marginal value of a dollar of cost savings we test these predictions in a panel of california hospitals finding evidence for each and that the set of services that private non profits are particularly interested in controlling physician intensive services is very different from those than public hospitals are particularly interested in labor intensive services these results suggest that a model of public or nonprofit make or buy decisions should be more than a simple relabeling of a model derived in the for profit context

the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

optimal regulation of network expansion we model the optimal regulation of continuous irreversible capacity expansion where a regulated firm has private information about capacity costs investments are financed from the firm s cash flows and demand is stochastic the optimal mechanism can be implemented as a revenue tax that increases with the level of the price cap if the asymmetric information has large support then the optimal mechanism consists of a laissez faire regime for low cost firms that is the firm s price cap corresponds to that of an unregulated monopolist and it is not taxed this maximal distortion at the top is necessary to provide information rents as direct subsidies are not feasible

noncooperative bargaining hostages and optimal asset ownership this paper re examines the effect of asset ownership on investment decisions for a joint relationship in the absence of contracts on investment levels it obtains some results which contradict findings by sanford j grossman oliver d hart and john moore in particular it finds that the loss of ownership of an asset may increase the asset loser s investment incentive the difference between this paper and those authors papers stems from the different interpretations of the roles of the threat point and outside options in bargaining this paper also clarifies the role of relationship specific investments as a cause of integration copyright 1998 by american economic association

moral hazard incentive contracts and risk evidence from procurement deadlines and late penalties are widely used to incentivize effort tighter deadlines and higher penalties induce higher effort but increase the agent s risk we model how these contract terms affect the work rate and time to completion in a procurement setting characterizing the efficient contract design using new micro level data on minnesota highway construction contracts that includes day by day information on work plans hours worked and delays we find evidence of ex post moral hazard contractors adjust their effort level during the course of the contract in response to unanticipated productivity shocks in a way that is consistent with our theoretical predictions we next build an econometric model that endogenizes the completion time as a function of the contract terms and the productivity shocks and simulate how commuter welfare and contractor costs vary across different terms and shocks accounting for the traffic delays caused by construction switching to a more efficient contract design would increase welfare by 22 5 of the contract value while increasing the standard deviation of contractor costs a measure of risk by less than 1 of the contract value

managerial incentive contracts with a production externality abstract a multi agent model is extended to examine the optimal incentive contract when a production externality is significant in team production a situation is described where relative performance evaluation is ineffective

public private partnerships and government spending limits abstract we consider public private partnerships in which a public official selects a project that is then developed and operated by a private contractor we derive optimal public accounting rules when the official s choice among projects is biased by ideology or social ties or because of pandering to special interests we give particular emphasis to how the rules should constrain the official s incentive to understate the costs of her pet projects in the basic model we show that the optimal accounting rule takes the form of a budget cap with a project s expected cost modified to reflect the official s distortionary incentives if the project can be partially financed privately then fixed price contracts can serve to curb political misbehavior by securitizing public sector liabilities we also consider the possibility that development and operations are each handled by different contractors such unbundling deprives public accountants of forward information about future costs but can prevent the official from funneling hidden future rents to contractors

voting suffrage and the political budget cycle evidence from the london metropolitan boroughs 1902 1937 we study the opportunistic political budget cycle in the london metropolitan boroughs between 1902 and 1937 under two different suffrage regimes taxpayer suffrage 1902 1914 and universal suffrage 1921 1937 we argue and find supporting evidence that the political budget cycle operates differently under the two types of suffrage taxpayer suffrage where the right to vote and the obligation to pay local taxes are linked encourages demands for retrenchment and the political budget cycle manifests itself in election year tax cuts and savings on administration costs universal suffrage where all adult residents can vote irrespective of their taxpayer status creates demands for productive public services and the political budget cycle manifests itself in election year hikes in capital spending and a reduction in current spending

financing infrastructure in developing countries this article develops a theoretical framework to analyse options for financing infrastructure in developing countries we build a basic model that gives motivations for using a combination of public finance private debt and private equity the model is then extended in a number of ways to examine factors that are important for developing countries we focus in particular on key institutional weaknesses that are often important for infrastructure investment overall we show that such weaknesses can be key in determining financing choices but that they do not all push in the same direction financing schemes must therefore be adapted to consider the institutional limitations that are most pertinent in any given context

from global savings glut to financing infrastructure summary samama and joseph stiglitz this paper proposes an institutional solution that can help unlock the flow of low yielding long term savings towards high return infrastructure investments the solution is to transform public private partnerships ppps in infrastructure as well as the classic model of multilateral development banks instead of thinking of ppps as bilateral contracts between a private concession operator and a government agency we argue that they should be conceived as partnerships that also involve a development bank and long term institutional investors as partners we propose a new model for development banks which is to transform them into originate and distribute banks for ppp infrastructure projects the new model allows them to conserve their valuable capital and leverage their expertise and capabilities by making them available to long term institutional investors

competition and incentives with motivated agents a unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission as opposed to profit as an organizational goal such mission oriented organizations are frequently staffed by motivated agents who subscribe to the mission this paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency matching economizes on the need for high powered incentives it can also however entrench bureaucratic conservatism and resistance to innovations the framework developed in this paper is applied to school competition incentives in the public sector and in private nonprofits and the interdependence of incentives and productivity between the private for profit sector and the mission oriented sector through occupational choice jel d23 d73 h41 l31 the late twentieth century witnessed a historic high in the march of market capitalism with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods moreover this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms when it comes to the provision of collective goods no such consensus has emerged debates about the relative merits of public and private provision still dominate this paper suggests a contracting approach to the provision of collective goods it focuses on two key issues how to structure incentives and the role of competition between providers at its heart is the idea that organizations that provide collective goods cohere around a mission 2 thus production of collective goods can be viewed as mission oriented

on some agency costs of intermediated contracting abstract this paper identifies a new agency cost of intermediated contracting a non productive intermediary can extract some rents when a the productive agent has some private information and b the intermediary s sub contract with the productive agent is not directly controlled by the top principal we show that the intermediary s informational rent is an increasing and concave function of the productive agent s own informational rent

the organization of supplier networks effects of delegation and intermediation in a one principal two agent model with adverse selection and collusion among agents we show that delegating to one agent the right to subcontract with the other agent always earns lower profit for the principal compared with centralized contracting delegation to an intermediary is also not in the principal s interest if the agents supply substitutes it can be beneficial if the agents produce complements and the intermediary is well informed

non grant microfinance incentives and efficiency abstracti show that charging interest on funds provided by donors or investors to microfinance institutions mfis can increase efficiency the total number of loans and borrower welfare compared to grant or concessionary funding in a setting in which mfis supply costly non contractible effort putting a price or raising the price of loanable funds strengthens the mfis incentives to put effort in credit administration or monitoring to extend more loans and or reduce overhead costs this theoretical result is robust to several variations of the benchmark model allowing for an endogenous lending rate motivated mfis and endogenous overhead costs

countervailing incentives in agency problems abstract we analyze countervailing incentives in agency problem countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations and to overstate it for others when countervailing incentives arise pooling generally characterizes the equilibrium contract furthermore performance is distorted both above and below efficient levels in addition the agent s rents generally increase with the realization of his private information over some ranges and decrease over other ranges we demonstate that the creation of countervailing incentives can enhance aggregate welfare

the politics of government ngo relations in africa abstract non governmental organizations ngos deservedly or not have gained a reputation as the leading practitioners of rural development in africa african governments have responded ambiguously to the presence of these new agencies on the one hand valuing the economic resources ngos can raise but resisting the political pluralization implied by popular development action this article describes the growth of ngos in africa and proposes a framework for analyzing the dynamics of government ngo relations by means of examples drawn from kenya and zimbabwe among other african countries the article illustrates the strategies used by governments to exercise control and by ngos to assert autonomy an argument is made that politics rather than economics best explain the contribution of ngos to development as well as the attitude of governments toward the burgeoning voluntary sector

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives

distributed energy infrastructure paradigm community microgrids in a new institutional economics context abstract this paper provides a theoretical framework based on new institutional economics nie concepts to guide the development of community microgrids given limited application thus far of such energy systems this paper also draws on empirical studies and experiences from the planning and development of other public community infrastructure and utility services in the development of this framework it links an efficient ownership and governance structure with transactional characteristics such as asset idiosyncrasy frequency and uncertainty defined in section 3 1 the key role of the customers and the microgrid service provider and more specifically their bilateral monopoly relationship and its effects on the choice of institutional structure is highlighted the paper examines the optimum conditions for public private or hybrid financial ownership and for unified or network governance through long term contracting this allows ex ante investment uncertainty and ex post appropriation risks to be efficiently managed the analysis suggests that long term contract completeness future demand for electricity and level of uncertainty are the determining factors in the selection of institutional structure this has significant real world implications for the communities seeking to achieve electricity self sufficiency and environmental benefits through community microgrids service providers and other private or public actors

does a procurement service provider generate value for the buyer through information about supply risks we consider a supply chain with one buyer and two suppliers who are subject to disruptions and whose likelihoods of disruption are their private information in such a setting does the buyer benefit from engaging the services of a better informed procurement service provider psp compared to procuring directly from the suppliers intuition might suggest that hiring a psp is always the right choice because the psp s knowledge of the supply base improves supplier selection and management on the other hand earlier studies prove that using a psp purely for its superior knowledge about supply costs is always worse for a buyer than contracting with the suppliers directly our answer to this research question is more nuanced contrary to the findings of earlier studies we find that the buyer may benefit from using a psp we identify quantify and explain all of the benefits and the costs of using a psp and describe conditions under which the benefits exceed the costs the benefits of using a psp are deriv

moral hazard with several agents abstract we consider a situation in which a principal hires two agents whose cooperation is technically profitable and study three models that incorporate different assumptions about the agents cooperative behavior we find a close relationship between the agents commitment capacity and the characteristics of the optimal contract a greater capacity to cooperate leads to more efficient outcomes we also show that unless agents form a team the efficient level of mutual help is not achieved in equilibrium

decentralization hierarchies and incentives a mechanism design perspective separation of ownership from management multidivisional firm organizations delegation of production decisions to worker teams delegation of pricing and advertising decisions to retail franchisers reliance on intermediaries in trade or finance and distribution of regulatory authority across different agencies represent examples of organizations that delegate and distribute decision making authority instead of centralizing it this paper reviews literature on costs and benefits of delegated decision making in hierarchical organizations or contracting networks with regard to problems of incentives and coordination it starts by describing incentive and coordination costs of delegation in simple canonical examples of hierarchies where both information and incentives of different decisionmakers differ one class of models pertain to contexts where the classical revelation principle applies i e where costs of contractual complexity information processing or communication are absent agents do not collude and the mechanism designer can commit to the mechanism delegation may conceivably entail a loss of control and coordination arising from the divergence of information and incentives sufficient and necessary conditions for this loss to be mitigated entirely include risk neutrality top down contracting and monitoring of transfers or production assignments between subordinates the next class of models introduces communication costs that restrict the performance of centralized arrangements relative to delegation owing to a resulting loss of flexibility which has to be traded off against possible control losses of delegation finally consequences of collusion among agents is discussed which typically enlarge the range of circumstances under which delegation can attain optimal second best outcomes the paper concludes with a discussion of the relevance of this theoretical literature to recently emerging empirical studies of industrial organizations where delegated decision making plays an important role adoption of innovative human resource management practices new information technologies and retail franchising

not for profit entrepreneurs abstract entrepreneurs who start new firms may choose not for profit status as a means of committing to soft incentives such incentives protect donors volunteers consumers and employees from ex post expropriation of profits by the entrepreneur we derive conditions under which completely self interested entrepreneurs opt for not for profit status despite the fact that this status limits their ability to enjoy the profits of their enterprises we also show that even in the absence of tax advantages unrestricted donations would flow to non profits rather than for profit firms because donations have more significant influence on the decisions of the non profits

government versus private ownership of public goods there has been a dramatic change in the division of responsibility between the state and the private sector for the delivery of public goods and services in recent years with an increasing trend toward contracting out to the private sector and public private partnerships this paper analyzes how ownership matters in public good provision we show that if contracts are incomplete then the ownership of a public good should lie with a party that values the beneets generated by it relatively more this is true regardless of whether this party is also the key investor or other aspects of the technology

to build or not to build normative and positive theories of public private partnerships abstract this paper analyzes whether the two tasks of building infrastructures which are socially useful in providing public services and managing these assets should be bundled or not when performance contracts can be written both tasks should be performed altogether by the same firm if a better design of the infrastructure helps also to save on operating costs otherwise tasks should be kept apart and undertaken by different units in incomplete contracting environments we isolate conditions under which either the traditional form of public provision of services or the more fashionable public private partnership emerges optimally the latter dominates when there is a positive externality and the private benefits from owning assets are small enough finally we take a political economy perspective and study how incentive schemes are modified under the threat of capture of the decision makers much of the gains from bundling may be lost in this case

hospital ownership and public medical spending the hospital market is served by firms that are private for profit private not for profit and government owned and operated i use a plausibly exogenous change in hospital financing that was intended to improve medical care for the poor to test three theories of organizational behavior i find that the critical difference between the three types of hospitals is caused by the soft budget constraint of government owned institutions the decision makers in private not for profit hospitals are just as responsive to financial incentives and are no more altruistic than their counterparts in profit maximizing facilities my final set of results suggests that the significant increase in public medical spending examined in this paper has not improved health outcomes for the indigent i introduction the hospital market is served by firms that are private for profit private not for profit and publicly owned and operated in this paper i examine how a hospital s type of ownership influences its response to profitable opportunities that are created by changes in government policy the policy change that i exploit was designed to improve the quality of medical care for lowincome individuals by significantly increasing hospitals financial incentives to treat them this program also substantially increased the revenues of those hospitals that had been serving a disproportionate share of the indigent i use this plausibly exogenous change in government policy to test three different theories of organizational behavior and then to assess the impact of hospital behavioral responses on health outcomes the response of organizations to changes in government policy will have an important impact on the consequences of these policies this is likely to be especially true in the medical sector in which the federal state and local governments contract directly

the informational effects of competition and collusion in legislative politics we use a mechanism design approach to study the organization of interest groups in an informational model of lobbying interest groups influence the legislature only by communicating private information on their preferences and not by means of monetary transfers interest groups have private information on their ideal points in a one dimensional policy space and may either compete or adopt more collusive behaviors optimal policies result from a trade off between imposing rules which are non responsive to the groups preferences and flexibility that pleases groups better within a strong coalition interest groups credibly share information which facilitates communication of their joint interests helps screening by the legislature and induces flexible policies responsive to the groups joint interests an informativeness effect competing interest groups better transmit information on their individual preferences a screening effect the socially and privately optimal organization of lobbying favors competition between groups only when their preferences are not too congruent with those of the legislature with more congruence a strong coalition is preferred finally within a weak coalition interest groups must design incentive compatible collusive mechanisms to share information such weak coalitions are always inefficient

participation constraints in adverse selection models abstract this paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latter s reservation utility depends on his type the informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade the paper identifies conditions for the optimal contract to be separating to be nonstochastic and to induce full participation it also discusses the nature of the solution when bunching occurs the results are applied to nonlinear pricing under price cap regulation and bypass competition and to competition in nonlinear pricing journal of economic literature classification numbers d82 d42 d23 d78 l51 l15

political business cycles and endogenous elections empirical research of political business cycles pbcs may suffer from endogeneity bias when incumbent governments have discretion to call for an early election using an instrumental variable iv routine on data from japan and the u k we find strong evidence to support the notion that election timing is a function of the economy rather than the macroeconomy being driven by elections as assumed in pbc in single equation regressions no evidence of political cycles are found but hausman tests suggest elections are endogenous in our regressions a monetary cycle in japan and an inflation cycle in the u k are uncovered through iv estimation

can the theory of incentives explain decentralization this survey presents within a single model three theories of decentralization of decision making within organizations based on private information and incentives renegotiation collusion and limits on communication are three sufficient conditions for decentralization to be optimal cet article presente dans un cadre unifie un survol de trois theories de la decentralisation de la prise de decision dans les organisations ces theories reposent sur la presence d information privee et des incitations qui en decoulent la renegociation la collusion et les limites a la communication representent trois conditions suffisantes pouvant expliquer l optimalite de la decentralisation this abstract was borrowed from another version of this item

the organization of regulated production complementarities correlation and collusion we analyze the choice between vertical separation vs and vertical integration vi when two regulated firms produce complementary inputs with correlated costs and are protected by ex post break even constraints first in the absence of collusion the regulator prefers vi vs for negative and weak positive respectively strong positive correlation second if the firms can collude under vs and know all costs then vs is equivalent to vi however if firms collude under asymmetric information then collusion does not affect the choice between vs and vi since the regulator takes advantage of the transaction costs created by asymmetric information

pricing in a supply chain for auction bidding under information asymmetry abstract we examine a supply chain in which a manufacturer participates in a sealed bid lowest price procurement auction through a distributor this form of supply chain is common when a manufacturer is active in an overseas market without establishing a local subsidiary to gain a strategic advantage in the division of profit the manufacturer and distributor may intentionally conceal information about the underlying cost distribution of the competition in this environment of information asymmetry we determine the equilibrium mark up the ex ante expected mark up and expected profit of the manufacturer and the equilibrium bid of the distributor in unilateral communication we demonstrate the informed agent s advantage resulting to higher mark up under information sharing we show that profit is equally shared among the supply chain partners and we explicitly derive the mark up when the underlying cost distribution is uniform in 0 1 the model and findings are illustrated by a numerical example

anniversary article a perspective on asymmetric information incentives and intrafirm resource allocation the paper asymmetric information incentives and intrafirm resource allocation by harris kriebel and raviv was published in the june 1982 issue ofmanagement science in this article written as part of this journal s 50 year anniversary celebration we highlight the significance of the harris et al paper for research in managerial accounting we first formulate and solve a continuous version of the harris et al model to illustrate the key assumptions and findings of their paper we then review several strands of the resource allocation literature in managerial accounting that have taken their inspiration either directly or indirectly from the work of harris et al

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

delegated monitoring versus arm s length contracting abstract this paper analyzes the optimal organization of input suppliers in a procurement context we discuss when a top firm chooses to induce information sharing and active coordination between its suppliers consolidation rather than having them contract at arm s length delegation in designing the organization the firm anticipates that different supplier networks have different costs of inducing information revelation from suppliers when the cost of information sharing varies the optimal organization exhibits various discrete degrees of consolidation there is excessive arm s length contracting compared to the case where the top firm controls this organizational choice itself the paper offers also a methodology to study in a unified framework various organizational forms separately analyzed in the literature

regulating complementary products a comparative institutional analysis optimal regulation subject to informational constraints is analyzed for industries for which production requires complementary inputs an issue for regulatory policy is whether supply in these industries should be bundled or unbundled bundled supply calls for regulation of an integrated industry unbundled supply has each component regulated separately a main result is that unbundling introduces into regulation an additional component of information cost that is similar to double marginalization in the monopoly pricing of complementary products unbundling may be advantageous if it allows sufficient competition in nonmonopoly services but the information cost can exceed the benefits of competition

on the existence of pure and mixed strategy nash equilibria in discontinuous games a game is better reply secure if for every nonequilibrium strategy x and every payoff vector limit u resulting from strategies approaching x some player i has a strategy yielding a payoff strictly above u i even if the others deviate slightly from x if strategy spaces are compact and convex payoffs are quasiconcave in the owner s strategy and the game is better reply secure then a pure strategy nash equilibrium exists better reply security holds in many economic games it also permits new results on the existence of symmetric and mixed strategy nash equilibria

how to design infrastructure contracts in a warming world a critical appraisal of public private partnerships we analyze how long term uncertainty for example regarding future climate conditions affects the design of concession contracts and organizational forms in a principal agent context with dynamic moral hazard limited liability and irreversibility constraints the prospect of future uncertain productivity shocks on the returns on the firm s effort creates an option value of delaying efforts a course that exacerbates agency costs contracts and organizational forms are drafted to control this cost of delegated flexibility the possibility for the agent to delay investment in response to uncertainty and irreversibility also elicits preference for unbundling different stages of the project through short term contracts our analysis is relevant to infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of public private partnerships in this context

coalitions incentives and risk sharing abstract this paper analyzes the effects of coalitional behavior in principal multiagent relationships with moral hazard and identifies cases where the principal prefers agents to form a coalition via side contracting it is shown that the principal can implement given efforts via non individualistic incentive contracts at a lower cost when the agents can monitor each other s efforts perfectly and hence coordinate their effort choice than when the agents behave independently permitting the principal to utilize more complex communication mechanisms does not alter the result for there is no coalition proof revelation mechanism improving the principal s welfare journal of economic literature classification number d82

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

the estimation of prewar gross national product methodology and new evidence the paper develops new methodology for the estimation of prewar gnp taps previously unused data sources and develops new estimates for the periods 1869 1908 and 1869 1928 primary among the new data sources are direct measures of output in the transportation communications and construction sectors and estimates of the consumer price index new measures of real gnp nominal gnp and the gnp deflator are developed the new estimates of real gnp are as volatile on average over the business cycle as the traditional kuznets kendrick series but dampen the amplitude of some cycles while raising the amplitude of others the new estimates of the gnp deflator are distinctly less volatile than the traditional series and in fact no more volatile than those in the postwar period

robustly collusion proof implementation a contract with multiple agents may be susceptible to collusion we show that agents collusion imposes no cost in a large class of circumstances with risk neutral agents including both uncorrelated and correlated types in those circumstances any payoff the principal can attain in the absence of collusion including the second best level can be attained in the presence of collusion in a way robust to many aspects of collusion behavior the collusion proof implementation generalizes to a setting in which only a subset of agents may collude provided that noncollusive agents incentives can be protected via an ex post incentive compatible and ex post individually rational mechanism our collusion proof implementation also sheds light on the extent to which hierarchical delegation of contracts can optimally respond to collusion

risk allocation and the costs and benefits of public private partnerships we study the agency costs of delegated public service provision focusing on the link between organizational forms and uncertainty at project implementation we consider a dynamic multitask moral hazard environment where the mapping between efiort and performance is ex ante uncertain but new information may come along during operations our analysis points out at the e ciency gains that bundling planning and implementation as under public private partnerships can bring in terms of better project design and lower operational costs bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design procedure technology on the cost of operations the compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which for high operational risk can make unbundling optimal in this context the use of private flnance can help re establishing the beneflt of bundling only if lenders have su cient expertise to help assessing project risks

dynamic procurement under uncertainty optimal design and implications for incomplete contracts we characterize the optimal dynamic contract for a long term basic service when an uncertain add on is required later on introducing firm risk aversion has two impacts profits for the basic service can be backloaded to induce cheaper information revelation for this service an income effect which reduces output distortions the firm must also bear some risk to induce information revelation for the add on this risk effect reduces the level of the add on but hardens information revelation for the basic service the interaction between these effects has important implications for the dynamics of distortions contract renegotiation and the value of incomplete contracts

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

building and managing facilities for public services abstract we model alternative institutional arrangements for building and managing facilities for provision of public services including the use of the private finance initiative pfi by exploring the effects on innovative investment activity by providers the desirability of bundling the building and management operations is analyzed and it is considered whether it is optimal to allocate ownership to the public or the private sector we also examine how the case for pfi is affected by the voluntary or automatic transfer of ownership from the private to the public sector when the contract expires asset specificity and service demand risk play critical roles

public private partnerships in micro finance should ngo involvement be restricted this paper examines public private partnerships in micro finance whereby ngos can help in channelizing credit to the poor both in borrower selection as well as in project implementation we argue that a distortion may arise out of the fact that the private partner i e the ngo is a motivated agent we find that whenever the project is neither too productive nor too unproductive reducing such distortion requires unbundling borrower selection and project implementation with the ngo being involved in borrower selection only further we compare and contrast two alternative credit delivery mechanisms the linkage mechanism which is the focus of this paper with the grameen one

political business cycles before the great depression abstract we test for the existence of political business cycles using annual data for the period from 1869 to 1929 finding only weak supportive evidence

bundling decisions in procurement auctions with sequential tasks abstract this paper investigates the principal s bundling decision during a procurement auction for a project consisting of two sequential tasks in which task externality exists and information arrives sequentially we show that although increasing the number of bidders in the market for the second task always tilts the principal s choice toward unbundling increasing the number of consortiums that can perform both tasks tilts the principal s preference toward bundling if the externality is negative

collusion delegation and supervision with soft information this paper derives an equivalence principle between organizational forms of supervisory and productive activities we consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent s type in a centralized organization the principal can communicate and contract with both the supervisor and the agent however these two agents can collude against the principal in a decentralized organization the principal only communicates and contracts with the supervisor who in turn sub contracts with the agent we show that the two organizations achieve the same outcome we discuss this equivalence and provide various comparative statics results to assess the e ciency of supervisory structures

power in a theory of the firm transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this within the contractibility assumptions of this literature we identify a potentially superior mechanism the regulation of access to critical resources access can be better than ownership because i the power agents get from access is more contingent on their making the right investment and ii ownership has adverse effects on the incentive to specialize the theory explains the importance of internal organization and third party ownership

micro finance competition motivated micro lenders double dipping and default abstract we develop a tractable model of competition among socially motivated mfis so that the objective functions of the mfis put some weight on their own clients utility we find that the equilibrium involves double dipping i e borrowers taking multiple loans from different mfis whenever the mfis are relatively profit oriented further double dipping necessarily leads to default and inefficiency and moreover borrowers who face relatively higher transactions costs optimally decide to double dip interestingly an increase in mfi competition can increase the extent of double dipping and default further the interest rates may go either way with the interest rate likely to increase with more competition if the mfis are very socially motivated

a theory of bot concession contracts in this paper we discuss the choice for build operate and transfer bot concessions when governments and firm managers do not share the same information regarding the operation characteristics of a facility we show that larger shadow costs of public funds and larger information asymmetries entice governments to choose bot concessions this result stems from a trade off between the government s shadow costs of financing the construction and the operation of the facility and the excessive usage price that the consumer may face during the concession period the incentives to choose bot concessions increase as a function of informational asymmetries between governments and potential bot concession holders and with the possibility of transferring the concession project characteristics to the public authority at the termination of the concession

the value of information and optimal organization the paper addresses the issue of optimal organization of production i compare three organizational forms centralization one agent produces difierent inputs decentralization each of the two agents produces a difierent input and contracts directly with the principal and delegation two agents produce difierent inputs the principal contracts with one of them only the optimal organizational form depends on the degree of complementarity substitutability between the inputs in the flnal use the degree of complementarity substitutability also determines whether delegation is payofi equivalent to the two agent mechanism from the point of view of the principal in the context of delegation i consider which of the two agents should serve as the primary contractor i also address the issue of collusion between the agents in a decentralized organization and characterize the conditions under which a stake of collusion exists jel fields d2 d82 l23

the charitable activities of terrorist organizations violent groups sometimes invest significant resources in social work notably in the form of charities and ngos the present paper models a terrorist group s charities as a means to advertise its cause in order to raise popular support the analysis explains how different types of organizations arise in equilibrium depending on government policies then the interaction between a purely terrorist group and an independent local ngo is examined it is shown that a purely terrorist group always invests in more attacks than an integrated terrorist charity organization furthermore the latter may have more ngo activity than a separate local ngo

public versus private ownership quantity contracts and the allocation of investment tasks abstract the government wants a certain good or service to be provided should the required assets be publicly or privately owned or should a partnership be formed building on the incomplete contracting approach we argue that the initially specified quantity of an ex ante describable basic good can have important effects on investment incentives which has been neglected in the literature so far we also study how the tasks of investing in quality improvements and cost reductions should be assigned we show how the optimal contracts and governance structures depend on the exogenous parameters of the model such as the nature of the investments and the parties bargaining powers

nature of human capital technology and ownership of public goods abstract besley and ghatak 2001 show that a public good should be owned by the agent who values the public good the most irrespective of technological factors in this paper we relax their assumptions in a natural way by allowing the agents to be indispensable and we show that the relative valuations are not the sole determinant of an optimal ownership structure but also the nature of human capital and technology matter

optimal auctions when a seller is bound to sell to collusive bidders i consider optimal auctions for a seller who is bound to sell a single item to one of two potential buyers organized in a well coordinated cartel i show that even though the seller cannot deter collusion he can optimally accommodate it by employing a simple mechanism which imposes an inefficient allocation on the bidders unless they pay a sufficiently high amount to avoid it

behavioral perfect equilibrium in bayesian games abstract we develop the notion of perfect bayesian nash equilibrium perfect bne in general bayesian games we test perfect bne against the criteria laid out by kohlberg and mertens 1986 we show that for a focal class of bayesian games perfect bne exists moreover when payoffs are continuous perfect bne is limit undominated for almost every type we illustrate the use of perfect bne in the context of a second price auction with interdependent values perfect bne selects the unique pure strategy equilibrium in continuous strategies that separates types moreover when valuations become independent the equilibrium converges to the classical truthful dominant strategy equilibrium we also show that less intuitive equilibria in which types are pooled are ruled out by our selection criterion we further argue that standard selection criteria for second price auctions have no bite here bidders have no dominant strategies and the separating equilibrium is not sincere

making corruption harder asymmetric information collusion and crime we model criminal investigation as a principal agent monitor problem in which the agent can bribe the monitor to destroy evidence building on insights from laffont and martimort s 1997 paper we s

incentives choice and accountability in the provision of public services this paper discusses a theoretical framework to study the issues of competition and incentives without relying on the standard profitoriented market model in the context of the debates about public service reform in the u k it uses the idea that the production of public services coheres around a mission and discusses how decentralized service provision can raise productivity by matching motivated workers to their preferred missions our focus on competition and incentives cuts across traditional debates about public versus private ownership and allows for the possibility of involving private non profits we also address concerns about the consequences of allowing more flexibility in mission design and competition on inequality

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

job design with conflicting tasks reconsidered a principal wants two sequential tasks to be performed by wealth constrained agents suppose that there is an outcome externality i e a first stage success can make second stage effort more or less effective if the tasks are conflicting the principal s profit maximizing way to induce high efforts is to hire one agent to perform both tasks so that the prospect to get a larger second stage rent after a first stage success motivates the agent to work hard in the first stage in contrast when there is an effort externality i e first stage effort reduces or increases the probability of a second stage success then the principal prefers to hire two agents whenever the tasks are conflicting