tournaments with midterm reviews in many tournaments investments are made over time the question whether to conduct a review once at the end or additionally at points midway through the tournament is a strategic decision if the latter course is chosen then the designer must establish both a rule for aggregating the results of the different reviews and a rule for determining compensations we first study the case of a fixed exogenously given prize and then extend the analysis to the case where the prize is not fixed but may vary with the tournament s outcome it is shown that 1 it is always optimal to assign a higher weight to the final review 2 this weight increases with the dominance of the first stage effort in determining the final review s outcome when the prize is not fixed the optimal design generates an asymmetric tournament in the second stage that favors the winner of the midterm review

relational contracts limited liability and employment dynamics this paper studies a relational contracting model in which the agent is protected by a limited liability constraint the agent s effort is his private information and affects output stochastically we characterize the optimal relational contract and compare the dynamics of the relationship with that under the optimal long term contract under the optimal relational contract the relationship is less likely to survive and the surviving relationship is less efficient in addition relationships always converge to a steady state under the optimal long term contract but they can cycle among different phases under the optimal relational contract

the information content of current cost income relative to dividends and historical cost income in september 1979 the financial accounting standards board fasb issued statement no 33 financial reporting and changing prices one of the items required by this statement is current cost income from continuing operations ccifco this item is considered by the fasb to be useful in assessing distributable income that is the amount of cash that may be distributed without reducing the operating capability of an enterprise sfas no 33 para 124 in essence a current cost income measure is claimed to remove the illusory inflation profit component and as such is potentially a better indicator of dividend paying ability evidence also exists that current dividends have information content which is consistent with the notion that they provide information on future income and dividends see for example pettit 1972 1976 griffin 1976 and aharony and swary 1980 however dividends are somewhat discretionary in which case ccifco may provide a basis for determining which dividend signals have implications for firm value and which do not since the accounting profession is currently in the process of assessing the desirability of continued disclosure of current cost information it

the incumbency effects of signalling much literature on political behaviour treats politicians as motivated by re election choosing actions to signal their types to voters we identify a novel implication of incumbent signalling because incumbents only care about clearing a re election hurdle signals will tend to cluster just above the threshold needed for re election this generates a skew distribution of signals leading to an incumbency advantage in the probability of election we also solve for the optimal threshold when voters have the ability to commit

learning from coarse information biased contests and career profiles an organization s promotion decision between two workers is modelled as a problem of boundedly rational learning about ability the decision maker can bias noisy rank order contests sequentially thereby changing the information they convey the optimal final period bias favours the leader reinforcing his likely ability advantage when optimally biased rank order information is a sufficient statistic for cardinal information the leader is favoured in every period in other environments bias in early periods may i favour the early loser ii be optimal even when the workers are equally rated and iii reduce the favoured worker s promotion chances this paper presents a model of boundedly rational learning by an organization the aims are to represent in a simple form the costs of gathering processing or transmitting information and to analyse their implications for the procedures selected to handle information as well as for the decisions actually made like other recent work on the internal organization of firms this work explores to what extent organizational structure and behaviour as well as organizational performance can be explained by adaptation to the costs associated with information in the learning model we formulate the decision maker not only selects a rule specifying what action to take as a function of his observations but also chooses sequentially the information partitions generating those observations this general problem is interpreted in the context of an organization which needs to make an important promotion decision and which attempts to maximize the value of the information generated during the observation periods that precede the decision one of the motivations for this analysis was the finding by organizational sociologists that earnings and promotions in the later stages of a worker s career are strongly correlated with earnings and promotions in the early stages kanter 1977 rosenbaum 1984 later success is positively associated with early success even when one controls for the effect of observable characteristics likely to affect performance such as education one obvious source of this correlation is differences in ability that persist over time and that are not captured by the observable covariates in this paper we focus on differences in ability which are initially unobservable by organizations and their workers as well as by researchers we present a simple model of an organization trying to learn about differences in ability and show

belief precision and effort incentives in promotion contests the career concerns literature predicts that incentives for effort decline as beliefs about ability become more precise holmstr om 1982 1999 in contrast we show that effort can increase with belief precision when agents compete for promotions to better paid jobs that are assigned on the basis of perceived abilities in this case an intermediate level of precision provides the strongest incentive for effort with effort increasing decreasing when beliefs are less more precise

actively learning about demand and the dynamics of price adjustment by observing the quantity demanded at particular prices a firm may learn about the parameters of its demand curve in such an environment price changes obstruct the learning process by inducing additional noise the authors paper constructs a dynamic model where a price setting firm endogenously controls the speed of learning the model provides a possible explanation for price inertia as a stable pricing policy allows the firm to learn more rapidly which improves future expected profits furthermore even in the long run learning continues to affect the firm s optimal price copyright 1990 by royal economic society

job allocation rules and sorting efficiency experimental outcomes in a peter principle environment an important issue in personnel economics is the design of efficient job allocation rules firms often use promotions both to sort workers across jobs and to provide them with incentives however the peter principle states that employees output tends to fall after a promotion lazear 2004 suggests that self selection may improve job allocation efficiency while preserving incentive effects we reproduce this peter principle in the laboratory and compare the efficiency of a promotion standard with subjects self selecting their task we find no evidence of effort distortion as predicted by theory furthermore we find that when the peter principle is not severe promotion rules often dominate self selection efficiency of task assignment results are consistent with imperfect appraisal of transitory ability and a lack of strategic behavior

the impact of replacement cost disclosure on security prices new evidence abstract a number of studies have tested for information content in the asr 190 disclosure by comparing the conditional and unconditional distribution of abnormal security returns around the time of disclosure since no differences were observed it was concluded that asr 190 had no information content the study reported below performs a similar test by estimating the regression function of the conditional distribution of abnormal returns this test procedure controls for the information content in contemporaneous historical cost disclosure and uses a conditioning variable not considered in earlier tests it finds statistically significant stock price effects however because most of the effects appear to precede the official announcement date by several months it is unclear whether stock prices were responding to the leakage of the information content of asr 190 prior to disclosure to private production of information contained in asr 190 or to a variable omitted from the study which happens to be correlated with replacement costs

the architecture of economic systems hierarchies and polyarchies the authors present new ways of looking at economic organizations andsystems individuals judgments entail errors they sometimes reject good projects and accept bad projects the architecture of an economicsystem specifying how the decision making units are organized togetherwithin a system who gathers what information and who communicates what with whom affects its performance both because it influences thenature of errors that individuals make within the system and becauseit has a critical effect on the aggregation of individuals errors theperformance of two polar architectures decentralized polyarchical versus centralized hierarchical decision making authorities are analyzed and compared copyright 1986 by american economic association

learning by helping a bounded rationality model of mentoring abstract within an organization a bounded rational principal organizes a promotion contest based on a sequence of tests regarding candidates relative performances we assume the principal to suffer from limited ability to rank the performances only identifying the best in each test furthermore he satisfies the expected profit from promotion designing the contest such that expected gains do not decrease with the information generated by additional tests then mentoring is shown to improve the information about candidates ability when the principal offers help to the current best candidate provided by a manager promoted after a similar contest

interim performance feedback in multistage tournaments the optimality of partial disclosure workers competing in a tournament for a prize e g a promotion often perform sequentially in multiple stages when the firm is privately informed about the workers performance it can sharpen incentives by strategically disclosing the intermediate results but the policies that enhance final stage effort may dampen incentives at the intermediate stage in our model the optimal disclosure policy has a simple form disclose only if all workers perform poorly this result offers a novel justification for partial disclosure in performance feedback also it contrasts with the existing literature that focuses on the extreme policies of full disclosure and no disclosure

the signaling role of promotions further theory and empirical evidence an extensive theoretical literature investigates the role of promotions as a signal of worker ability we extend the theory by focusing on how the signaling role of promotion varies with education and then investigate the resulting predictions using a longitudinal data set that contains detailed information concerning the internal labor market history of a medium sized firm in the financial services industry our results support signaling being important for understanding the differences between promotion practices concerning bachelor s and master s degree holders while the evidence concerning the importance of signaling for high school graduates and phds is mixed

glass ceilings or sticky floors statistical discrimination in a dynamic model of hiring and promotion i show that when two groups differ in i their average skill level ii the precision with which they can signal their skill prior to entering the labour market and or hi the frequency with which they have the opportunity to signal their skill prior to entering the labour market then even if firms become increasingly informed regarding each worker s skill over time equally skilled workers from different groups will have different likelihoods of making it to top jobs in the economy even though there is no discrimination when it comes to promotion to these top jobs in 1995 95 of senior level managers in the top fortune 1000 industrial and 500 service companies in the us were male 97 of whom were also white federal glass ceiling commission 1995 in the uk females make up just 8 3 of the senior judi ciary 9 7 of top business leaders and 9 1 of newspaper editors eoc 2005 at the end of the 2004 american football season only 5 of the 32 nfl head coaches were black and only 2 of the 117 division i college football teams had black head coaches rosenburg 2004 in 1999 there were only 68 female full professors at the 120 phd granting economics departments in the us cswep 1999 this severe underrepre sentation of females and minorities at the highest levels of occupational achievement throughout a wide range of occupations has often been referred to as the glass ceiling 1

optimizing information in the herd guinea pigs profits and welfare abstract herding arises when an agent s private information is swamped by public information in what m o jackson and e kalai 1997 games econ behavior 21 102 134 call a recurring game the agent will fail to reveal his own information and will follow the actions of his predecessor and as a result useful information is lost which might have highlighted a better choice for later decision makers this paper evaluates the strategy of forcing a subset of agents to make their decision early from the perspective of a social planner and a firm with a valuable or valueless product promotional activity by firms can be explained as an attempt to overcome the herd externality and maximize sales journal of economic literature classification numbers d82 d83 l15 m30

money demand and the effects of fiscal policies this paper reexamines the choice of the scale variable in the money demand function a variety of evidence suggests that consumer spending is a better scale variable than gnp changing the money demand specification along these lines can profoundly affect the standard keynesian analysis of a tax cut copyright 1986 by ohio state university press

the effects of government expenditure on the term structure of interest rates most formal macroeconomic models treat all assets as being of common maturity typically this is assumed to be either extremely infinitesimally short a short term bill or infinitely long a perpetuity in reality of course there is a whole spectrum of assets in existence having varying times to maturity moreover different agents in the markets are concerned with rates of return extending over different time horizons participants in asset markets can typically adjust their portfolios virtually instantaneously so that some short run rate of return is appropriate as an argument of the relevant asset demand functions on the other hand investors in physical equipment are typically locked into some longterm financial arrangement in which case it is some long term rate that is the appropriate argument of the investment function provided that the financial markets operate efficiently arbitrage by participants in the asset markets will bring the instantaneous rates of return on assets of varying maturities into equality l in this paper we introduce both a short rate and a long rate into a simple dynamic macroeconomic model the framework we employ is the familiar blinder solow 1973 model it is shown how through arbitrage the current long rate at any point

internal labor markets and worker rents abstract we show that establishing an internal labor market by offering combined contracts across hierarchy levels strictly dominates external recruitment when workers are homogeneous the reason is that only an internal labor market can exploit higher tier rents for incentive provision on lower tiers given unobservable heterogeneity of workers relying on an internal labor market has the further advantage of improving the selection of high ability workers for higher ranks which is complemented by rent based incentive schemes however observable worker heterogeneity gives rise to a trade off between incentive and selection issues and may lead to ports of entry on higher tiers of the hierarchy

foundations for optimal inattention abstract this paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information an optimally inattentive agent chooses both her coarsening and her actions by maximization of an underlying subjective expected utility preference relation net of a cognitive cost of attention the main result axiomatically characterizes the conditional choices of actions by an agent that are necessary and sufficient for her behavior to be seen as if it is the result of optimal inattention observing these choices permits unique identification of the agent s utility index the information to which she pays attention her attention cost and her prior whenever information is costly

evidence on income measurement properties of asr no 190 and sfas no 33 data a number of studies have tested the association between security returns or levels of market value and current cost accounting data as reported under sec accounting series release no 190 asr 190 and statement of financial accounting standards no 33 sfas 33 for example beaver griffin and landsman 1982 henceforth bgl beaver and landsman 1983 henceforth bl and olsen 1985 found no association while bublitz frecka and mckeown 1985 henceforth bfm and murdoch 1986 found a weak association 1 in this paper we estimate cross section regressions of security returns on historical cost net income and holding gains as was done previously but with several extensions first we define our variables in terms of realizations of returns income and holding gains rather than in terms of unexpected changes thus we

information policy in tournaments with sabotage sabotage is one of the main problems of tournament like reward schemes workers who are leading in a tournament are more dangerous rivals and are therefore sabotaged more heavily this implies that there is an extra cost to becoming a leader and hence to choosing high productive effort in the early stages of a tournament the incentives to exert productive effort are thereby reduced we show that this problem can be solved by concealing intermediate information on the performances of workers i e by clever information management moreover we offer experimental evidence indicating that such information management does increase productive efforts

classic promotion tournaments versus market based tournaments as initially formulated in the seminal analysis of lazear and rosen 1981 an important perspective for understanding the role of promotions in firms is the tournament perspective that is a promotion and in particular the wage increase associated with a promotion is a prize that serves as an incentive for workers to exert effort and take other actions beneficial to the firm such as the accumulation of human capital in this paper i consider whether the best way to model promotion tournaments is by having firms commit to prizes ex ante as in lazear and rosen s initial formulation or whether promotion prizes should be modeled as arising from the signaling role of promotions and the competition between firms for promoted workers

ex post unbalanced tournaments tournaments create strong incentives under the assumption that the competition between the agents is balanced if at the outset one agent is stronger than the other the tournament is ex ante unbalanced and incentives break down handicaps can in this case restore incentives in practice competing agents are often overall equally strong but have different sorts of strengths then competition will typically be unbalanced ex post and incentives break down but handicaps cannot be used we show how a simple means introducing the possibility of a tie can often resolve the problem we examine under what conditions incentives are maximized by ties

biased contests for symmetric players in a biased contest one of the players has an advantage in the winner determination process we characterize a novel class of biased contest success functions pertaining to such contests and provide necessary and sufficient conditions for zero bias to be a critical point of arbitrary objectives satisfying certain symmetry restrictions we however challenge the common wisdom that unbiased contests are always optimal when contestants are symmetric ex ante or even ex post we show that contests with arbitrary favorites i e biased contests of symmetric players can be optimal in terms of various objectives such as expected aggregate effort the probability to reveal the stronger player as the winner or expected effort of the winner

the relevance of the value relevance literature for financial accounting standard setting another view this paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors and provides insights into questions of interest to standard setters a primary focus of financial statements is equity investment other uses of financial statement information such as contracting do not diminish the importance of value relevance research value relevance questions can be addressed using extant valuation models value relevance studies address econometric issues that otherwise could limit inferences and can accommodate and be used to study the implications of accounting conservatism r 2001 elsevier science b v all rights reserved jel classification m41 m44 g12

an opposing responses test of classic versus market based promotion tournaments we use a systems based econometric method to show that classic and market based tournament models are empirically distinguishable since the role of risk differs across these models implementing the method using a large finnish worker firm matched panel we find support for classic tournaments given that promotions depend on relative performance the firm s wage structure is convex promotion probabilities are decreasing in the number of competitors performance is increasing in the wage spread and workers and firms adjust their choice variables in opposite directions when the variance of the stochastic component of worker performance changes

variable evaluation costs and the design of fallible hierarchies and polyarchies abstract we show that when there are variable evaluation costs the optimal screening standards in a hierarchy polyarchy should become less more stringent at higher levels also simple reorganization of the optimal hierarchy or polyarchy may not improve net profits although results from information theory show that gross profits can be increased

the assessment emu four years on this paper reviews the functioning of the economic and monetary union over the first 4 years of its existence monetary policy is viewed as having been of the inflation targeting type but with a tendency towards delay and conservatism in adjustment which may also reflect over optimistic output growth forecasts the resulting pressure on the stability and growth pact sgp illustrates the weakness in the consensus view of the harmonious interaction of monetary fiscal and supply side policies which requires policy in all three areas to be correct in discussing reform of the sgp a looser but still constraining form of fiscal agreement is advocated the supply side and balance of payments issues involved in inter country adjustment also interact importantly with the sgp and are identified as key areas of difficulty in a still immature monetary union with separate labour market structures here the mechanisms for coordination are more or less absent copyright 2003 oxford university press

the optimal amount of discretion to allow in disclosure in this paper a party with private information can verifiably disclose some but not all of his information the optimal amount of discretion to allow the informed party is studied that is should the informed party be allowed unlimited discretion in choosing which elements of his information set to disclose or should restrictions be imposed that limit this discretion the model is formulated in the spirit of a persuasion game it is demonstrated that under certain circumstances rules that limit discretion increase the informativeness of disclosures and thus improve economic decisions

penalizing success in dynamic incentive contracts no good deed goes unpunished we examine optimal dynamic incentive contracts when adverse selection and moral hazard problems are present we find that early success is optimally penalized in the sense that the agent who succeeds early subsequently faces a lower powered incentive contract penalizing success in this manner serves to limit the agent s initial incentive to understate his ability

output the stock market and interest rates this paper develops a simple model of the determination of output the stock market and the term structure of interest rates the model is an extension of the is lm model and borrows from it the assumption that output is determined by aggregate demand and that the price level can only adjust over time to its equilibrium value however whereas the is lm emphasizes the interaction between the interest rate and output this model emphasizes the interaction between asset values and output asset values rather than the interest rate are the main determinants of aggregate demand and output current and anticipated output and income are in turn the main determinants of asset values it is this interaction that the model intends to capture its goal is to characterize the joint response of asset values and output to changes in the environment such as changes or announcement of changes in monetary and fiscal policy as the above brief description makes clear anticipations are central to the story the assumption made in this paper will be one of rational expectations the paper is organized as follows section i describes the model and sections ii iv characterize the behavior of the economy under the extreme but convenient assumption that prices are fixed forever sections v and vi extend the analysis to the case where prices adjust over time to their equilibrium value

the internal economics of a university evidence from personnel data using a rich personnel data set of a large european university we find strong evidence for the existence of an internal labor market first there is a strong port of entry at the lowest academic rank and in fact even prior to entering professorship resulting in very long internal careers second wages do not follow external wage developments we subsequently consider various incentive theories regarding the dynamics of promotions as organized through annual tournaments as expected a rigid set of research and teaching criteria determine the speed of promotions at the same time administrative rigidities play an important role

demand for slant how abstention shapes voters choice of news media political commentators warn that the fragmentation of the modern media landscape induces voters to withdraw into information cocoons and segregate along ideological lines we show that the option to abstain breaks ideological segregation and generates cross over in news consumption voters with considerable leanings towards a candidate demand information that is less biased towards that candidate than voters who are more centrist this non monotonicity in the demand for slant makes voters ideologies non recoverable from their choice of news media and generates disproportionate demand for media outlets that are centrist or only moderately biased it also implies that polarisation of the electorate may lead to an ideological moderation in news consumption

options for uk fiscal policy this article is written as the uk s chancellor of the exchequer kenneth clarke prepares his novem ber budget it will be the first unified budget with taxation and expenditure dealt with at the same time in framing this budget the chancellor must make a fine judgement between the need to restore stability to uk public finances and the need to maintain economic recovery the choice is in essence the familiar one between sound finance and the use of fiscal policy to manage demand

equilibrium learning in simple contests abstract the paper studies a repeated contest when contestants are uncertain about their true relative abilities when ability and effort are complements a favorable belief about one s own ability stimulates effort and increases the likelihood of success success in turn reinforces favorable beliefs we show that this implies that with positive probability players fail to learn their true relative abilities in equilibrium and one player wins the contest with high probability forever in this case the prevailing player may be the actually worse player and persistent inequality arises we discuss some features of the model when the complementarity assumption is dropped

alternative measures of profit margin an empirical study of the potential information content of current cost accounting the primary purpose of this study is to investigate the link between price changes in product markets and price changes in financial markets the nature of the association is central to evaluating the information content of current cost accounting measurements such as those promulgated in the sec s accounting series release no 190 asr 190 and the fasb s statement of financial accounting standards no 33 sfas 33 although both asr 190 and sfas 33 state that financial statements based only on historical costs do not provide investors with sufficient information to assess the underlying economics of firms in periods of rapidly changing prices empirical evidence suggests there was no apparent reaction to the initial replacement cost releases mandated by asr 190 e g see beaver christie and griffin 1980 1 this study offers one explanation for the lack of an observed market

collusion and biased tournaments abstract tournaments are vulnerable to collusion this paper finds that biased tournaments can be more effective at preventing collusion than unbiased ones when agents can collude to exert low effort introducing some bias into tournaments generates opposite effects on favored and disfavored agents respective incentives to exert high effort and provides strong incentives for the favored agent to deviate from collusion introducing an adequate degree of bias reduces the principal s incentive cost for preventing collusion however granting excessive bias instead increases the incentive cost we show that the optimal level of bias can be endogenously determined

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality

external recruitment and intrafirm mobility i introduction competition for promotion has a very strong effect on employees work incentive in the stereotypic internal labor market described in doeringer and piore 1985 there are only a limited number of ports of entry into a hierarchical firm or organization so that existing employees are insulated to a large extent from external competition in their climb up the corporate ladder however lazear 1992 and baker et al 1994a 1994b find extensive external recruitments at almost all grade levels in their studies of different u s corporations if the boundary between internal and external labor markets is not impervious then the choice between external recruitment and internal promotion in filling openings becomes an important personnel decision with interesting implications on incentives opening up the competition to external applicants discourages collusion among candidates as well as offers a quick channel for absorbing external talents however it also reduces the probability of promotion for existing workers and thus their incentive to exert with adverse effect on the firm s profit in chan 1996 i suggest that work incentive for the internal promotion candidates can be maintained if external competitors are handicapped in the contest such favoritism for existing employees implies that senior positions tend to be filled internally more often than not and that a worker is recruited from the outside only if he or she demonstrates a significant margin of superiority over the internal candidates this is consistent with the observations that external recruits account for only about 15 to 20 of all appointments to top management positions see denis and denis 1995 warner et al 1988 and that roughly the same percentage of chief executive officers ceos of large u s firms are outsiders see agrawal et al 2002 chan 1996 parrino 1997 the handicapping hypothesis of promotion suggests a dilemma in personnel decisions although handicapping external applicants provides incentive for existing employees it also increases the chance of inferior internal contestants being promoted to senior positions where sorting of workers by ability into different particularly senior positions is important efficiency within the organization is compromised this tension between sorting and maintaining work incentive is explored in tsoulouhas et al 2001 unfortunately the gain in realism with the incorporation of sorting is offset by ambiguity in most of the results the ability of the firm to precommit to future compensation the relative abilities of the internal and external contestants the cost of work effort and commonality within the firm and within the industry all have a role in determining the direction and magnitude of the handicap with different combinations of these factors resulting in very different outcomes whether one starts with the chan model or the tsoulouhas model empirical evidence is important to establish the significance of the competitive handicap against external candidates there has been no shortage of empirical investigations of the incentive effects of tournaments most follow one of two different analytic approaches one approach uses cross sectional or nonpanel data such as data on executive salary across firms gibbons and murphy 1990 leonard 1990 main et al 1993 or data from professional sports tournaments see for example ehrenberg 1990 few of these studies address the distinction between internal or external contestants agrawal et al 2002 is an exception it tests implications of the handicapping hypothesis derived in tsoulouhas et al 2001 by analyzing more than 1 000 ceo successions in large u s firms from 1974 to 1995 even though some of the results are also consistent with a traditional human capital interpretation and the key hypothesis can be derived from the tsoulouhas model only under certain conditions they offer some support for the existence and relevance of the competitive handicap against external contestants

performance promotion and the peter principle this paper considers why organizations use promotions rather than just monetary bonuses to motivate employees even though this may conflict with efficient assignment of employees to jobs when performance is unverifiable use of promotion reduces the incentive for managers to be affected by influence activities that would blunt the effectiveness of monetary bonuses when employees are risk neutral use of promotion for incentives need not distort assignments when they are risk averse it may sufficient conditions for this are given the distortion may be either to promote more employees than is efficient the peter principle effect or fewer

favoring the winner or loser in repeated contests should a firm favor a weaker or stronger employee in a contest despite a widespread emphasis on rewarding the best employees managers continue to tolerate and even favor poor performers contest theory reveals that evenly matched contests are the most intense which implies that a contest designer can maximize each player s effort by artificially boosting the underdog s chances we apply this type of handicapping to a two period repeated contest between employees in which the only information available about their abilities is their performance in the first period in this setting employees are strategic and forward looking such that they fully anticipate the potential impact of the first period contest result on the second period contest and thus adjust their behaviors accordingly the manager also incorporates these strategic behaviors of employees when determining an optimal handicapping policy if employees abilities are sufficiently different favoring the first period loser in the second period increases the total effort over both periods however if abilities are sufficiently similar we find the opposite result occurs total effort increases the most in response to a handicapping strategy of favoring the first period winner

the incremental information content of replacement cost earnings abstract the study explores the incremental explanatory power of replacement cost earnings variables derived from asr 190 data with respect to explaining cross sectional differences in security returns as such the study is a natural extension of previous research including analyses of the effect of security returns of asr 190 data at the time of disclosure investigations of cross sectional relationships between security returns and historical cost earnings and studies of multiple signals the basic finding is that pre holding gain net income provides no incremental explanatory powerm given knowledge of historical cost earnings however the converse does not hold taken together the findings are consistent with the contention that pre holding gain net income is a garbled version of historical cost earnings the basic finding is robust under several extensions of the initial research design the research design incorporates a two stage approach which permits a determination of the incremental explanatory power of collinear variables the findings are in contrast to those of a previous study by easman et al 1979 the nature of the difference in research design inducing the difference is identified potential reasons for the difference in findings are provided

strategic promotion and compensation within a hierarchical firm structure this paper details how the composition of a worker s skills and the non observability of a worker s ability affect wage and promotion paths promotionbased compensation schemes derive naturally from the worker s asymmetrically observed ability promotion takes place over time and is inefficient since employers strategically exploit their knowledge of an able worker s ability conversely employers may be unable to efficiently demote and retain bad managers without paying bonuses employers are led to promote educated employees before their equally or more able but uneducated counterparts explanations for fast track promotions plans and other empirical regularities are provided

valuation and accounting for inflation and foreign exchange inflation and foreign exchange raise new issues with respect to accounting representations of equity value for example inflation creates an earnings illusion as an artifact of the mismatching of expenses based on allocations of historical costs with current revenues in determining earnings this mismatching distorts mappings of aggregate earnings and book values into equity value such that value relevant information is lost in this article we consider the consequences of inflation and foreign exchange accounting policies including those contained in accounting standards on the value relevance of bottom line accounting numbers policies are identified that achieve efficient accounting in the sense that aggregate comprehensive earnings and book values are sufficient for an accounting representation of equity value the linear relations that emerge provide predictions on capitalization coefficients that help explain results of empirical inquiries as well our analysis provides a theoretical foundation for policies contained in accounting standards that contributes to the resolution of controversies such as that concerning foreign exchange accounting

limited observability as a constraint in contract design limited observability is the assumption that economic agents can only observe a finite amount of information given this constraint contracts among agents are necessarily finite and incomplete in comparison to the ideal complete contract that we model as infinite in detail we consider the extent to which finite contracts can approximate the idealized complete contracts the objectives of the paper are i to identify properties of agents preferences that determine whether or not finiteness of contracts causes significant inefficiency ii to evaluate the performance of finite contracts against the ideal optimal contracts in principal agent and bilateral bargaining models

the self perpetuation of biased beliefs to overcome strong prior beliefs strong evidence to the contrary is needed if a person is predisposed to choosing a certain action the advice from an advisor who sets a low threshold for recommending the alternative action is not of much use the preference for like minded advisors who supply coarse information implies that the advice a person receives is likely to reinforce his existing priors this effect can lead to polarisation of opinion and the emergence of self serving beliefs the learning process is prolonged and the induced short run bias can become perpetual if information is costly

liquidity constraints and the formation of unbalanced contests abstract we analyze the effects of future liquidity constraints on contestants investment in a dynamic contest model contestants invest in two consecutive contests to win a prize in each period the loser of the first period contest can be liquidity constrained in the second period due to too little remaining wealth the winner of the first contest can reinvest the prize in the second contest we show that future liquidity constraints mainly affect the imbalance of the contest in the future but not today surprisingly larger contest prizes decrease contestants future investments and amplify the imbalance of future contests however the contest organizer can reduce this imbalance by increasing the share of the prize money in the second contest

backward and forward solutions for economies with rational expectations in models where anticipations of future endogenous variables influence current behavior there exists an infinity of solutions under the assumption of rational expectations this problem has been dealt with in the study of macro economic models by the implicit or explicit use of one of three additional requirements optimality consistency with alleged economic behavior or conformity of the endogenous variables to an imposed stationarity condition these requirements have coincided in existing models leading to the choice of a unique solution a forward solution the purpose of this paper is to review the problem characterize the solutions and examine whether these requirements are acceptable section i presents a simple model and derives the set of solutions the model makes no claim to generality but has the major advantage that the issues are easily understood in this simple case section ii discusses the requirement of consistency with economic behavior section iii discusses the requirement of stationarity and section iv provides some conclusions