involuntary unemployment and implicit contracts this paper provides an explanation of involuntary umemployment arising as a consequence of asymmetric information between firms and workers involuntary unemployment is defined as a situation where ex post gains to trade exist a model of labor contracts is developed where the allocations are not ex post optimal it is shown that inferiority of leisure is a necessary and sufficient condition for the existence of involuntary unemployment

union power cost of job loss and workers effort the authors hypothesize that the effectiveness of external threats in raising workers effort is mediated by among other labor market conditions the presence or absence of a powerful union in particular they argue that because powerful unions reduce the potency of the external threat of job loss by making it more difficult for employers to dismiss workers the pace of work is less responsive to such a threat in strongly unionized plants than in weakly unionized plants the results of an analysis of data from the 1990 workplace industrial relations survey in britain support this hypothesis the analysis also yields evidence that effort is increased where workers are rewarded individually according to results and where there are various communication channels between workers and management

wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

the peter principle a theory of decline some have observed that individuals perform worse after being promoted the peter principle which states that people are promoted to their level of incompetence suggests that something is fundamentally misaligned in the promotion process this view is unnecessary and inconsistent with the data below it is argued that ability appears lower after promotion purely as a statistical matter being promoted is evidence that a standard has been met regression to the mean implies that future ability will be lower on average firms optimally account for the regression bias in making promotion decisions but the effect is never eliminated rather than evidence of a mistake the peter principle is a necessary consequence of any promotion rule furthermore firms that take it into account appropriately adopt an optimal strategy usually firms inflate the promotion criterion to offset the peter principle effect and the more important the transitory component is relative to total variation in ability the larger

behavioral heterogeneity in dynamic search situations theory and experimental evidence abstract this paper presents models for search behavior and provides experimental evidence that behavioral heterogeneity in search is linked to heterogeneity in individual preferences observed search behavior is more consistent with a new model that assumes dynamic updating of utility reference points than with models that are based on expected utility maximization specifically reference point updating and loss aversion play a role for more than a third of the population the findings are of practical relevance as well as of interest for researchers who incorporate behavioral heterogeneity into models of dynamic choice behavior in for example consumer economics labor economics finance and decision theory

career concerns incentives and endogenous learning in labour markets models of career concerns provide a framework for analyzing the actions that may be taken by a manager in an attempt to influence performance signals that the market uses to update its beliefs on her productivity and the incentive problem that arises if such actions do not coincide with those that maximize the financial return to a firm s owner this survey provides a formal introduction to the main types of models of career concerns hidden action and hidden information and discusses some extensions of these models applications of the career concerns framework to explain aspects of managerial behavior and the form of labor market institutions are emphasized copyright 1992 by blackwell publishers ltd

optimal labour contracts when workers have a variety of privately observed reservation wages if a firm does not know the individual ex post outside opportunities of its contracted workforce then it can use hours wages and redundancy payments to screen them will a second best contract have underemployment inefficiency or overemployment and with a stochastic contract are those workers randomly selected for layoff worse off than their retained colleagues involuntary layoff or vice versa involuntary retention the answers depend on the nature of the workers preferences two polar cases are looked at corresponding to permanent and temporary layoff the former is characterized by overemployment and involuntary retention the latter by underemployment and involuntary layoff also examined are simple contracts where all retained workers are paid a common wage and all laid off workers receive a common redundancy payment handling asymmetric information in stochastic contracts has led to two technical innovations first a number of results are proved even though all the truth telling constraints are explicitly included second a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

is trade good or bad for the environment sorting out the causality we seek to contribute to the debate over globalization and the environment by asking what is the effect of trade on a country s environment for a given level of gdp we take specific account of the endogeneity of trade using exogenous geographic determinants of trade as instrumental variables we find that trade tends to reduce three measures of air pollution statistical significance is high for concentrations of so2 moderate for no2 and lacking for particulate matter although results for other environmental measures are not as encouraging there is little evidence that trade has a detrimental effect on the environment

two sided uncertainty and up or out contracts a bilateral moral hazard problem provides a rationale for up or out employment contracts the employer sets a wage higher than opportunity cost to induce the worker to invest in firm specific capital if the individual does not make the grade it is in the firm s interest ex post to fire him had the initial arrangement not included provisions for firing individuals the firm would underreport the value of the employee wrecking the incentive scheme the basic model permits both firm and worker to be risk neutral therefore it admits a straightforward multiperiod extension which we also investigate

equilibrium pollution taxes in open economies with imperfect competition abstract this paper argues that imperfect competition in global markets creates a strategic interaction between governments that can lead to the inefficient distortion of pollution taxes this distortion can be decomposed into a rent capture effect and a pollution shifting effect the rent capture effect lowers equilibrium taxes as each country attempts to gain a competitive advantage over its trading partner and thereby capture foreign rent through net exports the pollution shifting effect raises equilibrium taxes as each country attempts to transfer production and its associated pollution to the other country this effect vanishes if pollution is perfectly transboundary because shifted pollution causes as much damage to the domestic environment as does domestic pollution the net effect on symmetric equilibrium taxes is negative except in the special case of perfect competition with no transboundary pollution in this case the two effects are mutually offsetting and the nash equilibrium is efficient when pollution is at least partially transboundary there also arises the usual transboundary externality and this reinforces the negative net strategic effect giving rise to equilibrium taxes that are lower than what is globally efficient

mfn tariff rates and carbon emission evidence from lower middle income countries the paper empirically investigates whether developing countries may use trade policy as an alternative to environmental policies in order to control carbon emission it measures the effectiveness of the existing most favored nations mfn tariff rates applicable to lower middle income countries and for countries sorted on the basis of manufacturing to trade shares in lowering carbon emission by applying a fixed effects panel regression method over 16 years it is found that the mfn tariff rate helps these economies to reduce carbon emission substantially in addition the role of foreign direct investment as purveyor of clean products is explored at the cross country level the results at least on the ground of better environmental standards indicate the need to re evaluate the choice for protection under the domain of multilateral trade negotiations

is environmental policy a secondary trade barrier an empirical analysis should international trade agreements be extended to include negotiations over environmental policy the answer depends on whether countries distort levels of environmental regulations as a secondary means of providing protection to domestic industries our results suggest that they do previous studies of this relationship have treated the level of environmental regulation as exogenous and found a negligible correlation between environmental regulation and trade flows in contrast we find that when the level of environmental regulation is modelled as an endogenous variable its estimated effect on trade flows is significantly higher than previously reported jel classification fl f14 f18 est ce que la politique environnementale est une barriere commerciale secondaire une analyse empirique est ce que les accords commerciaux internationaux doivent etre etendus pour couvrir la politique environnementale la reponse depend du degre de distorsion que les pays introduisent dans leur politique environnementale pour proteger leurs industries nationales nos resultats suggerent que cet impact est important des etudes anterieures de cette relation ont traite la politique environnementale comme exogene et ont montre qu il existe une co relation negligeable entre politique envir onnementale et flux commerciaux au contraire nous revelons que quand la politique environnementale est consideree comme variable endoge ne son effet sur les flux com merciaux est plus eleve de maniere significative que ce qu on a note anterieurement

carbon trade policy and carbon free trade areas this paper discusses both the potential contribution that trade policy initiatives can make towards the achievement of significant global carbon emissions reduction and the potential impacts of proposals now circulating for carbon reduction motivated geographical trade arrangements including carbon free trade areas we first suggest that trade policy is likely to be a relatively minor consideration in climate change containment the dominant influence on carbon emissions globally for the next several decades will be growth more than trade and its composition and in turn the size of trade seemingly matters more than its composition given differences in emission intensity between tradables and non tradables we then note that differences in emissions intensity across countries are larger than across products or sectors and so issues of country discrimination in trade policy and violations of mfn arise we next discuss both unilateral and regional carbon motivated trade policy arrangements including three potential variants of carbon emission reduction based free trade area arrangements one is regional trade agreements with varying types of trade preferences towards low carbon intensive products low carbon new technologies and inputs to low carbon processes a second is the use of joint border measures against third parties to counteract anti competitive effects from groups of countries taking on deeper emission reduction commitments a third is third country trade barriers along with free trade or other regional trade agreements as penalty mechanisms to pressure other countries to join emission reducing environmental agreements we differentiate among the objectives forms and possible impacts of each variant we also speculate as to how the world trading system may evolve in the next few decades as trade policy potentially becomes increasingly dominated by environmental concerns we suggest that the future evolution of the trading system will likely be with environmentally motivated arrangements acting as an overlay on prevailing trade and financial arrangements in the wto and imf and eventually movement to linked global trade and environmental policy bargaining

a strategy experiment in dynamic asset pricing this study presents a strategy experiment in a simple dynamic asset pricing model where the current market equilibrium asset price is determined by aggregated individual expectations of next period s price after participating in an introductory laboratory experiment on expectation formation participants formulate a complete forecasting strategy these strategies are programmed and markets are simulated participants receive feedback from the results of these simulations and can adapt their strategy four rounds are played and the entire experiment lasts eight weeks a final laboratory experiment compares predictions of participants with the predictions of the submitted strategy we find that most of the participants submit complicated strategies and that strategies become more complicated over the rounds most markets converge to a steady state price only after many periods if at all the number of converging price sequences increases over the rounds these results suggest in general slow convergence and learning of the subjects over the rounds even in a stationary environment learning the correct fundamental price level turns out to be difficult an important part of the non convergence seems to be caused not by individual strategies but by the interaction of several strategies from the final experiment we conclude that the strategies are a good representation of what participants do in a laboratory experiment

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

unemployment long term employment relations and productivity growth using an effort regulation type of efficiency wage model it is demonstrated that a firm may respond to slackening labor markets by acting to increase the intensity with which workers work the magnitude of this work intensity effect depends on the structure of employment relations where long term employment relations are prevalent the effect of labor market slack on work intensity may be diminished these propositions are tested empirically by estimating the effects unemployment and long term employment have on productivity growth in two digit manufacturing industries copyright 1987 by mit press

how do behavioral assumptions affect structural inference evidence from a laboratory experiment we use a laboratory experiment to investigate the effect that assuming rational expectations has on structural inference on a dynamic discrete choice decision problem our experimental design induces preferences up to each subject s subjective rates of time preference leaving unrestricted only this parameter and the decision rule that the subject uses in solving the problem we analyze the data under the assumption that all subjects use the rational expectations decision rule and also under weaker behavioral assumptions that allow for heterogeneity in the way people form decisions we find no evidence that assuming rational expectations distorts inferences about the cross sectional distribution of discount rates

the firm as a dedicated hierarchy a theory of the origins and growth of firms in the formative stages of their businesses entrepreneurs have to provide incentives for employees to protect rather than steal the source of organizational rents we study how the entrepreneur s response to this problem determines the organization s internal structure growth and its eventual size large steep hierarchies will predominate in physical capital intensive industries and will have seniority based promotion policies by contrast e at hierarchies will prevail in human capital intensive industries and will have up or out promotion systems furthermore e at hierarchies will have more distinctive technologies or cultures than steep hierarchies the model points to some essential differences between organized hierarchies and markets at the root of most enterprises generating economic surplus is an entrepreneur with a unique critical resource such as an idea good customer relationships a new tool or superior management technique a fundamental problem of entrepreneurship is how to enlist the cooperation of the many agents necessary for production without ceding to them too much of the surplus generated by the enterprise the risk of being expropriated however is always inherent in production in particular the entrepreneur has to give her employees whom we call managers close proximity or access to the critical resource for them to learn to produce effectively for example a manager has to understand the idea be in contact with the key customers and suppliers or even learn the entrepreneur s unique managerial techniques in order to work effectively but access also gives the manager the opportunity to expropriate this critical resource and compete against the entrepreneur managers may steal the idea walk away with clients or mimic the entrepreneur s management style and start up a rival concern the greater the access a manager has the more he can appropriate and the more effectively he can compete this paper explores the role of organizational design in

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

are optimal search rules reasonable and vice versa and does it matter anyway abstract the economics of search has made rapid progress in recent years and its results have contributed siginificantly to economic knowledge recent work has been particularly marked for the steadily increasing realism of the assumptions describing the environment surrounding the searcher however concomitant with this improvement has been a steady growth in the technical complexity of the problem supposedly solved by the searcher indeed many of the recent models are so complicated that their solutions are beyond the capacity of even modern day computers after elaborating on this impracticability of optimal search rules the paper goes on to consider two more realistic and practical alternatives the adoption of either suboptimal or reasonable rules paradoxically reasonable rules may in some circumstances be better than optimal rules the paper contains a preliminary discussion of what might be meant by reasonable behaviour and shows that a minimal set of criteria for reasonableness leads to the major qualitative conclusions at a market level of optimal search theory

an experimental test of a committee search model the objective of this chapter is to design a laboratory experiment for an infinite horizon sequential committee search model in order to test some of the implications obtained by the model in albrech et al j econ theory 145 1386 1407 2010 aav we find that compared with single agent search the search duration is longer for committee search under the unanimity rule but is shorter for committee search in which at least one vote is required to stop searching in addition according to estimates from round based search decisions subjects are more likely to vote to stop searching in committee search than in single agent search this confirms that agents are less picky in committee search overall the experimental outcomes are consistent with the implications suggested by the aav model however despite the prediction from the aav model we could not obtain a significant outcome in relation to the size order of the probabilities of voting to stop searching in committee search for the various plurality voting rules

ecologically unsustainable trade abstract international trade although balanced in monetary terms may be unequal in terms of the exchange of biomass and sink capacity it may also be unilaterally or mutually unsustainable if it implies the overuse of the biocapacity in either one or both of the trading partners in this article the ecological footprint concept is used to distinguish different types of ecologically unsustainable trade but the issue of the possible effects of trade on the ecological footprints is also raised we distinguish four such effects an allocative effect an income effect a rich country illusion effect and a terms of trade effect since international trade can be a subtle mechanism by which ecological sustainability is preserved locally by means of importing biomass and sink capacity from other countries it can also blur the view of responsibility for the ecological effects of production and consumption at the end of this article some ethical and political dilemmas related to these issues are raised

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

do efficiency wages explain dismissals this study modifies rebitzer s 1987 model of efficiency wages to predict dismissal from employment using a sample selection method and data from australian workplaces the analysis supports the predictions that both very high and very low levels of required effort loose labour markets and high dismissals costs are associated with fewer dismissals among other results we find extensive internal labour markets and active unions reduce dismissals the evidence suggests that large employers rely more heavily on dismissals to motivate employees although such employers screen more effectively and so exhibit lower dismissal rates jel j24 j41 j42

involuntary unemployment and worker moral hazard this paper critically examines the hypothesis that layoffs are involuntary in implicit labour contracts because they are used by employers to punish inferior worker performance in repeated moral hazard situations workers typically bear risk associated with whether they are chosen to be laid off even though the latter is uninformative about previous effort choices and wages are performance contingent however the hypothesis is unsatisfactory as optimal contracts involve involuntary retentions rather than involuntary layoffs in a wide variety of circumstances the theory of implicit labour contracts as developed over the past decade has thrown considerable light on the nature of long term employment relationships by emphasizing that firm owners are usually less risk averse than workers and thus have an incentive to insure workers against fluctuations in the demand for the firm s product the theory manages to explain the emergence of long term contracts characterized by downward real wage rigidity see holmstrom 1983 however the theory also typically implies that workers will be indifferent about whether they are to be retained or laid off this runs contrary to the common observation that there is an element of involuntariness in layoff decisions i e within any job category with given skill and performance history if a proportion of randomly chosen workers are to be laid off in a recession the laid off workers would strictly prefer to be retained not only is this phenomenon of involuntary layoffs interesting to explain per se it also seems relevant to the keynesian notion of involuntary unemployment interpreted as unequal treatment of similar workers where some are employed while others are not and unemployed workers would strictly prefer to be employed it thus seems worthwhile to examine if the theory of implicit contracts can be extended to explain this phenomenon satisfactorily as a test of its plausibility and as a possible source of a consistent microfoundation for keynesian propositions to explain why the firm does not insure workers against the risk associated with selection of those to be laid off it is natural to think of possible informational asymmetries this has been attempted by geanakoplos and ito 1981 and moore 1985 geanakoplos and ito introduce the realistic feature that a firm does not observe spot market opportunities available ex post to a laid off worker this permits only incomplete insurance against the risk of layoff however their model produces the paradoxical conclusion that with decreasing absolute risk aversion workers strictly prefer ex ante being laid off moore allows workers to have better ex ante information about their spot market opportunities but finds a similar tendency toward involuntary retentions rather than involuntary layoffs in this paper we explore the alternative hypothesis that firms cannot perfectly observe effort decisions of employed workers and use the threat of involuntary layoff as a discipline device the analysis of stiglitz and weiss 1983 shapiro and stiglitz 1984 and singh 1982 of principal agent relations in the absence of demand fluctuations suggests that the threat of contract termination may be used as an incentive device in their models

work incentives hierarchy and internal labor markets this paper argues that contracts with payment based on a ranking of employee performance can provide performance incentives even under asymmetric information that prevents payment based on individual performance only being enforceable such contracts also fit with five features of labor markets that have aroused considerable interest 1 hierarchical wage structures 2 internal promotion 3 wage rates that rise with seniority and experience more than productivity 4 the variance of earnings increasing with experience and 5 wage rates attached to jobs rather than individuals with differentials set by administrative procedures rather than by reference to external market wages

input output analysis of co2 emissions embodied in trade the effects of sector aggregation abstract energy related co2 emissions embodied in international trade have been widely studied by researchers using the environmental input output analysis framework it is well known that both sector aggregation and spatial aggregation affect the results obtained in such studies with regard to the latter past studies are often conducted at the national level irrespective of country or economy size for a large economy with the needed data studies may be conducted at different levels of spatial aggregation we examine this problem analytically by extending the work of su et al su b huang h c ang b w zhou p 2010 input output analysis of co2 emissions embodied in trade the effects of sector aggregation energy economics 32 1 166 175 on sector aggregation we present a numerical example using the data of china and by dividing the country into eight regions it is found that the results are highly dependent on spatial aggregation our study shows that for a large country like china it is meaningful to look into the effect of spatial aggregation

efficiency productivity and environmental policy a case study of power generation in the eu this study uses the eu public power generating sector as a case study to investigate the environmental efficiency and productivity enhancing performance of the european union s co2 emissions trading scheme eu ets in its first phase using data envelopment analysis methods we measure the environmental efficiency and the productivity growth registered in public power generation across the eu over the 1996 2007 period in the second stage of our analysis we attempt to explain changes in productivity and efficiency over time using econometric techniques our analysis suggests two conclusions carbon pricing led to an increase in environmental efficiency and to a shift outwards of the technological frontier and the overly generous allocation of emission permits had a negative impact on both measures these results are shown to be robust to changes in controls and specifications

strategic shirking a theoretical analysis of multitasking and specialization we provide a new theory to explain why firms multitask workers instead of specializing them workers overperform in tasks they like and underperform in tasks they dislike to favorably influence future job assignments anticipating this firms may find it optimal to commit to future multitasking to induce workers to appropriately allocate effort early in the employment relationship we show that when the product market is volatile so that future product prices are uncertain the firm s ability to credibly commit to a multitasking strategy diminishes this generates a negative relationship between multitasking and product market volatility consistent with recent empirical evidence

limited contract enforcement and strategic renegotiation this paper presents a strategic theory of contract renegotiation in this theory suboptimal contracts are put in place initially to protect one party against undesirable a ctions by another party and are renegotiated once the danger is past the authors develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes so that only a complicated contract or renegotiation will serve unlike most previous accounts of contract renegotiation this theory does not rely on exogenous uncertainty to motivate renegotiation copyright 1988 by american economic association

trading uncertainty enforcement and labor unions it is shown that when contracts can be perfectly enforced trading uncertainty leads to discrimination among workers with the same skills and experience in this case anti discrimination laws lead to inefficiencies in the absence of perfect enforcement anti discrimination practices may be used as enforcement devices and need not lead to inefficiencies in particular firms may wish to precommit to an anti discrimination policy say by inviting in a labor union in order to offer credible insurance to its workers this leads to an equilibrium in which union workers get a higher wage than non union workers but unions do not have monopoly power

profit sharing and the role of professional partnerships when it is hard to assess service quality firms will suboptimally hire low ability workers we show that organizing as a profit sharing partnership can alleviate these problems our theory explains the relative scarcity of partnerships outside of professional service industries such as law accounting medicine investment banking architecture advertising and consulting it also sheds light on features of partnerships such as up or out promotion systems the use of noncompete clauses and recent trends in professional service industries

the role of mfn under asymmetries in environmental standards abstract we critically examine the implications of the most favored nation mfn clause under asymmetric environmental standards using an oligopolistic intra industry trade model we show that environmentally beneficial trade diversion and higher world welfare obtain under tariff discrimination relative to mfn

do formal salary systems really matter drawing on a single large u s corporation s personnel records for the years 1989 93 the authors analyze an example of the kind of formal salary system used by most large firms they find that this firm s practices were consistent with most of the important conclusions of prior empirical research on internal labor markets the system was highly centralized covering salary levels salary ranges raises and bonuses supervisors had little discretion over pay other than through subjective performance ratings the firm held fairly strictly to the salary rules leading to observable constraints on pay for employees near the top of the salary range these constraints however apparently did not impose important costs on the firm in the form of increased turnover although the system operated without any apparent connection to external factors the authors conclude that it transmitted external labor market forces with little distortion

the shape of utility functions and organizational behavior based on measurements among 332 owner managers we investigate how theglobal shape of the utility function i e s shaped versus concave or convex over the total range of outcomes relates to choice behavior we find that the global shape of the utility function differs across decision makers about one third of the owner managers exhibit an s shaped utility function and that the global shape is linked to organizational behavior i e the production system employed a result that does not change when using different methods to identify the decision maker s global shape of the utility function the decision maker s risk attitude risk averse or risk seeking does not affect the choice of the production system whereas the degree of risk aversion based on thelocal shape of the utility function may be important in explaining owner managers trading behavior pennings and smidts 2000 more structural organizational behavior appears to be linked to theglobal shape of the utility function

risk aversion and incentive effects comment charles a holt and susan k laury 2002 develop an experimental design to determine the risk attitude of an individual they use their observations to argue that increased incentives appear to change risk attitudes leading to greater risk aversion popular utility functions that do not allow for such effects are therefore misspecified building on this finding they estimate a flexible utility function that characterizes their aggregate data well but that does not assume constant absolute or relative risk aversion the basic holt and laury 2002 hl design should become an important tool for the interpretation and design of experiments in which risk attitudes could play a role however their most important result showing the effect of scaling up the stakes of the lottery choice task is confounded by a possible order effect an order effect occurs when prior experience with one task affects behavior in a subsequent task the primary methodological contribution of experiments in economics is to enhance control ideally such control makes the explanatory variables of interest in this case scale orthogonal to other explanatory variables such as order allowing clearer inferences about behavior than one could get from field econometric data we argue that not controlling for order effects results in a misspecification of utility functions that is as important as that of scale the subjects in the hl design were given sequences of three or four tasks as shown in table 1 task 1 involved choices over lotteries with a baseline level of prizes which we will refer to as the 1 scale task 2 involved hypothetical choices over prizes with a scaled up level of prizes either 20 50 or 90 task 3 repeated task 2 but with choices that involved real payoffs task 4 was a return to the baseline task with real 1 prizes in some sessions subjects were not given task 2 or task 3 what could one infer from the comparison of measured risk attitudes in the 1 and 20 tasks in hl unfortunately any observed difference could be due either to the scale of the prizes involved or the task order or some combination of both thus the effect of scale is intrinsically confounded with the possible effect of task order this is a logical flaw in their design which

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

learning to like what you have explaining the endowment effect the endowment effect describes the fact that people demand much more to give up an object than they are willing to spend to acquire it the existence of this effect has been documented in numerous experiments we attempt to explain this effect by showing that evolution favors individuals whose preferences embody an endowment effect the reason is that an endowment effect improves one s bargaining position in bilateral trades we show that for a general class of evolutionary processes strictly positive endowment effects will survive in the long run

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

preferential trade agreements and tax competition for foreign direct investment abstract this paper examines how free trade agreements and customs unions affect the location of foreign direct investment fdi and social welfare taking into account that governments may adjust taxes and external tariffs to compete for fdi conditions are identified under which a free trade agreement leads to fdi and under which this improves welfare the welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition a free trade agreement may fail to induce welfare improving fdi creating a role for a customs union

a model of the demand for investment banking advising and distribution services for new issues this paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer and the issuer cannot observe the distribution effort expended by the banker the optimal contract under which the offer price decision is delegated to the better informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized the model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues an investment banker performs three functions which may be of value to an issuer of new securities underwriting advising and distribution this paper presents a theory of the demand for investment banking advising and distribution services based on an informational asymmetry between an issuer of new securities and an investment banker ultimately a theory of the organization of the financial intermediary industry is required that would predict which firms would use which types of financial intermediaries for which purposes and which firms would raise capital without engaging the services of a financial intermediary only a limited set of such predictions are developed here in the context of a model of a fixedprice offering under a negotiated contract in which the investment banker is

employment wage and accommodation patterns of permanently impaired workers this article offers an explanation of the postinjury employment wage and accommodation patterns of permanently impaired workers in particular it argues that the observed tendency of time ofaccident employers to rehire at the preinjury wage accommodate and then perhaps quickly terminate the impaired worker is a manifestation of the worker s preferred contract that contract is characterized by wage inflexibility by removing the opportunity for the postinjury employer to underreport productivity this contract creates an incentive for the worker to attempt to functionally adapt to the impairment thereby increasing expected lifetime utility

consumer search behavior and sunk costs abstract this paper presents the results of four economic experiments involving 41 undergraduate students who were assigned the task of searching for the lowest price from a known distribution of prices economic theory predicts that individuals should continue to draw until the expected gain of another search is less than the marginal search cost additionally once individuals have made a draw and then continued they should never return to a price drawn earlier exercise recall both of these predictions are tested in the paper and the results show that behavior is not always consistent with them it appears that individuals are making decisions based on the total return from searching rather than simply the marginal return from another draw

firm size earnings and displacement risk rudolf winter ebmer analogous to the well documented firm size wage differential there also exists a differential in layoff risk according to firm size using austrian data i discuss several reasons for this puzzle including on the job training and workers heterogeneity if less stable and also less able workers select themselves into small unstable and low paying firms predicted layoff risk of workers can be used as a proxy for heterogeneity of workers and therefore be included in wage regressions doing this one half of the size earnings premium can be explained jel j31 j63 i introduction large employers pay more numerous empirical studies have documented this relationship 1 but they have not been able to explain it in a very careful study brown and medoff 1989 1056 look at ten possible reasons for this puzzle only to conclude our bottom line is that the size wage differential appears to be both sizable and omnipresent our analysis leaves us uncomfortably unable to explain it or at least the part of it that is not explained by observable indicators of labor quality neither compensating differentials for working conditions nor product market power or the threat of unionization were able to explain the size premium brown and medoff 1989 also found size effects for piece rate workers for unionized workers 2 and in longitudinal samples 3 where they controlled by first differencing for unobserved heterogeneity of the individuals given this wide interest in the effects of employer size on earnings very little research has been done concerning size differentials in turnover are the jobs in big firms not only higher paid but also more stable this would reinforce the puzzle of firm size once more anderson and meyer 1994 look at separation rates without distinguishing between quit and layoff and find highly decreasing turnover rates with firm size for permanent separations but no size effect on temporary separations 4 brown and medoff 1989 as well as others find quit rates to decline with firm size which speaks against compensating wage differentials arguments idson 1996 explicitly looks at the issue of long term employment relationships in large establishments which may be possibly due to the greater capacity of large employers to provide job mobility within the enterprise and the lower probability of business failure facing larger firms rebitzer 1986 argues that the observed higher job tenure in large plants is in a ccordance with labor market segmentation theory the aim of this article is to provide further evidence for a size layoff relationship using austrian data i try to consider several explanations for this regularity especially on the job training and the hypothesis of selective recruitment of workers into large and small firms following one hypothesis small employers attract less stable and capable employees a pattern that would cause only a spurious size layoff relationship on the other hand if workers with a relatively low stock of human capital sort themselves into relatively inefficient firms with unstable employment prospects then the size wage effect itself may be upwardly biased which was noted by mayo and murray 1991 the plan of the article is as follows section ii presents institutional details on wage bargaining and employment protection legislation in austria the data for the empirical study are discussed in section iii results for size wage and size layoff relationships are presented in section iv section v looks at the interaction between firm size layoff risk and wage determination section vi concludes ii wage bargaining institutions and job security legislation in austria wage bargaining in austria is very centralized even though only about 60 of workers are organized in unions bargaining outcomes are extended to all workers unionized or not a works council has to be established under the austrian labor law in all establishments employing at least five adult workers but usually the actual existence of a works council is positively determined by both firm size and firm age

uncertainty asymmetric information and bilateral contracts on considere un monopole bilateral avec incertitude et information asymetrique on donne les conditions necessaires et suffisantes a l existence de contrats qui soient efficaces et a la fois stimulants