group reputations stereotypes and cooperation in a repeated labor market reputation effects and other regarding preferences have both been used to predict cooperative outcomes in markets with inefficient equilibria existing reputation building models require either infinite time horizons or publicly observed identities but cooperative outcomes have been observed in several moral hazard experiments with finite horizons and anonymous interactions this paper introduces a full reputation equilibrium fre with stereotyping perceived type correlation in which cooperation is predicted in early periods of a finitely repeated market with anonymous interactions new experiments generate results in line with the fre prediction including final period reversions to stage game equilibrium and non cooperative play under unfavorable payoff parameters

time varying convergence in european electricity spot markets and their association with carbon and fuel prices abstract long run dynamics of electricity prices are expected to reflect fuel price developments since fuels generally account for a large share in the cost of generation as an integrated european market for electricity develops wholesale electricity prices should be converging as a result of market coupling and increased interconnectivity electricity mixes are also changing spurred by a drive to significantly increase the share of renewables consequently the electricity wholesale price dynamics are evolving and the fuel electricity price nexus that has been described in the literature is likely to reflect this evolution this study investigates associations between spot prices from the british french and nordpool markets with those in connected electricity markets and fuel input prices from december 2005 to october 2013 in order to assess the time varying dynamics of electricity spot price series localized autocorrelation functions are used electricity spot prices in the three markets are found to have stationary and non stationary periods when a trend in spot prices is observed it is likely to reflect the trend in fuel prices cointegration analysis is then used to assess co movement between electricity spot prices and fuel inputs to generation the results show that british electricity spot prices are associated with fuel prices and not with price developments in connected markets while the opposite is observed in the french and nordpool day ahead markets

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

communicating subjective evaluations consider managers evaluating their employees performances should managers justify their subjective evaluations suppose a manager s evaluation is private information justifying her evaluation is costly but limits the principal s scope for distorting her evaluation of the employee i show that the manager justifies her evaluation if and only if the employee s performance was poor the justification assures the employee that the manager has not distorted the evaluation downwards for good performance however the manager pays a constant high wage without justification the empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels this pattern was attributed to biased managers i show that these effects occur in optimal contracts without any biased behavior

rewarding performance by promotion to a different job abstract use of promotions rather than performance related pay to provide incentives can be justified if performance is non verifiable information this does not explain why promotion is to a different job rather than simply a better paid job the effectiveness of tournaments is undermined however if unsuccessful workers are equally suited to higher paid jobs and can engage in bribery or other influence activity a promotion based reward structure with pay tied to jobs can be made immune to such activity if misallocations of employees to jobs are costly to the firm

european market integration for gas volume flexibility and political risk this is a copy of an article originally published by elsevier in energy economics see http www sciencedirect com science journal 03014215 2002 elsevier science b v

discretionary rewards as a feedback mechanism abstract this paper studies the use of discretionary rewards in a finitely repeated principal agent relationship with moral hazard the key aspect is that rewards have informational content when the principal obtains a private subjective signal about the agent s performance she may pay discretionary bonuses to provide credible feedback to the agent in accordance with the often observed compression of ratings we show that in equilibrium the principal communicates the agent s interim performance imperfectly i e she does not fully differentiate good and bad performance furthermore we show that small rewards can have a large impact on the agent s effort provided that the principal s stake in the project is small

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

a note on cheap talk and burned money abstract austen smith and banks cheap talk and burned money j econ theory 91 1 2000 1 16 study how money burning can expand the set of pure cheap talk equilibria of crawford and sobel strategic information transmission econometrica 50 6 1982 1431 1451 i identify an error in the main theorem of austen smith and banks and provide a variant that preserves some of the important implications i also prove that cheap talk can be influential with money burning if and only if it can be influential without money burning this strengthens a result of austen smith and banks but uncovers other errors in their analysis finally an open conjecture of theirs is proved correct

intertemporal surplus management abstract this paper presents an intertemporal portfolio selection model for pension funds or life insurance funds that maximizes the intertemporal expected utility of the surplus of assets net of liabilities following merton econometrica 41 1973 867 it is assumed that both the asset and the liability return follow ito processes as functions of a state variable the optimum occurs for investors holding four funds the market portfolio the hedge portfolio for the state variable the hedge portfolio for the liabilities and the riskless asset in contrast to merton s result in the assets only case the liability hedge is independent of preferences and only depends on the funding ratio with hara utility the investments in the state variable hedge portfolio are also preference independent finally with log utility the market portfolio investment depends only on the current funding ratio

european natural gas seasonal effects on futures hedging abstract this paper is the first to discuss the design of futures hedging strategies in european natural gas markets nbp ttf and zeebrugge a common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather demand and storage level seasonalities this paper follows and extends the ederington and salas 2008 framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis futures price minus spot price this fact remains true for short a week and long one three and six months hedging periods furthermore volatility of weekly price changes also has a seasonal pattern and is higher in winter than in summer a simple volatility seasonal model that is based on sinusoidal functions on the basis improves the risk reduction obtained by strategies in which hedging ratios are estimated with linear regressions seasonal hedging strategies linear regression based strategies or even a naive position perform better than more sophisticated statistical methods

formal measures in informal management can a balanced scorecard change a culture abstract we extend traditional agency theory by exploring the roles for formal measures when managerial behavior is not governed by rules formulas or contracts part i describes relational incentive contracts with informal weights on formal performance measures more importantly it also explores how formal measures could be used in models of informal management such as adaptation and coordination politics and influence leadership and informal authority part ii considers the benefits from allowing key stakeholders to develop their own potentially inferior performance measures the collaboration to create a balanced scorecard of performance measures can help change an organization s culture

involuntary layoffs in a model with asymmetric information concerning worker ability this paper examines the contract between a risk neutral firm and its risk averse employees assuming that worker ability is privately learned by the firm after a period of employment employers in an external spot labour market attempt to infer worker quality from the observable actions taken by the firm such as the number of workers it lays off the threat of spot market raids distorts the optimal contract layoffs may be involuntary and can exceed efficient levels a seniority layoff rule may be included in the contract to avoid the adverse selection problems that arise if layoffs are conducted on the basis of ability

subjective evaluations with performance feedback this paper models two key roles of subjective performance evaluations their incentive role and their feedback role the paper shows that the feedback role makes subjective pay feasible even without repeated interaction as long as there exists some veri able measure of performance it also shows that while subjective pay is helpful it cannot achieve full e ciency however fully e cient incentives are achievable if the rm can commit to a forced distribution of evaluations and employs a continuum of workers with a small number of workers a forced distribution is valuable only if the veri able measure is poor

incentive compatible long term contracts and job rationing this article presents a model in which markets for long term contractual employment coexist with spot markets for labor assuming the absence of third party enforcement wage contracts are required to be incentive compatible as a consequence contract wages yield higher expected utility to the worker than spot market wages so that in equilibrium contractual long term jobs are rationed

strategic ignorance as a self disciplining device we analyse the decision of an agent with time inconsistent preferences to consume a good that exerts an externality on future welfare the extent of the externality is initially unknown but may be learned via a costless sampling procedure we show that when the agent cannot commit to future consumption and learning decisions incomplete learning may occur on a markov perfect equilibrium path of the resulting intra personal game in such a case each agent s incarnation stops learning for some values of the posterior distribution of beliefs and acts under self restricted information this conduct is interpreted as strategic ignorance all equilibria featuring this property strictly pareto dominate the complete learning equilibrium for any posterior distribution of beliefs

gas versus oil prices the impact of shale gas abstract what significance will developments in shale gas production have for european gas prices some commentators paint a gloomy picture of the future gas markets but most forecasts for the oil market are positive consequently a view appears to prevail that price trends will differ sharply between oil and gas markets this article looks at developments in us shale gas production and discusses their impact on the movement of european gas prices the relationship between oil and gas prices over time is also analysed

a theory of disagreement in repeated games with bargaining this paper proposes a new approach to equilibrium selection in repeated games with transfers supposing that in each period the players bargain over how to play although the bargaining phase is cheap talk following a generalized alternating offer protocol sharp predictions arise from three axioms two axioms allow the players to meaningfully discuss whether to deviate from their plan the third embodies a theory of disagreement that play under disagreement should not vary with the manner in which bargaining broke down equilibria that satisfy these axioms exist for all discount factors and are simple to construct all equilibria generate the same welfare optimal play under agreement generally requires suboptimal play under disagreement whether patient players attain efficiency depends on both the stage game and the bargaining protocol the theory extends naturally to games with imperfect public monitoring and heterogeneous discount factors and yields new insights into classic relational contracting questions

agent compensation and the limits of bonding agents in positions of trust may engage in malfeasance which is difficult to detect this paper develops a model in which employers seek to control malfeasance by paying wages contingent on imperfect monitoring and agents may be required to pay entry fees or post bonds we conclude that entry fees which exceed agents assets are ineffective in controlling malfeasance as a result conditions exist in which it is optimal to pay agents more than their opportunity cost such conditions lead to an excess supply of applicants and allow employers to engage in discrimination at zero cost to themselves

efficiency wage models of unemployment one view h lorne carmichael persistent wage rigidity and involuntary unemployment appear to be recurrent problems in most economies what could be preventing the wage adjustment necessary to clear the labor market many recent papers claim to have found the answer in efficiency wage models this paper surveys this literature and attempts to evaluate its accomplishments it concludes that the efficiency wage models fail to explain wage rigidity or persistent involuntary unemployment persistent involuntary unemployment of workers is a recurrent problem in labor markets all over the world unemployed workers seem unable to find work even though they are willing to accept lower wages than those being paid employed workers with similar skills what could be preventing wages from adjusting to clear these markets many recent papers known collectively as the efficiency wage literature now claim to have the answer this paper will survey the efficiency wage literature and critically evaluate some of its accomplishments efficiency wage models have already been examined by yellen 1984 katz 1986 and stiglitz 1987 and have received generally favorable reviews this paper is more critical its overall conclusion is that efficiency wage models provide some useful insights into the workings of the labor market but they do not provide a satisfactory account of wage rigidity or involuntary unemployment there are at least five separate versions of the efficiency wage model they share a common structure however and this is outlined in the first section of the paper this section also attempts to relate efficiency wage models to other recent models of unemployment section ii examines and criticizes the different approaches in detail section iii evaluates the achievements of this approach and suggests some directions for future work i a general efficiency wage model efficiency wage models as the name suggests are first of all models of wages they generate unemployment by showing that firms will sometimes want to set wages at non market clearing levels it is useful to begin therefore by reviewing how wages and employment are determined in some related models in a perfectly competitive labor market the wage for each type of labor is adjusted constantly to maintain equality of supply and demand overall employment fluctuates in response to demand changes as workers move up and down their labor supply curves unemployment is voluntary in that anyone who is not working prefers that state to employment at the going wage for people of his skills as well the value of a worker s marginal product is equal to the marginal value of his leisure so there are no unexploited wage bargains between unemployed workers and firms this model is successful in predicting the long term response of wages to shifts in demand and supply but it is clear that in the short run its depiction of voluntary unemployment and flexible wages is unrealistic a natural way to generate more realism is to assume that wages are inflexible in the short run in this case a reduction in demand away from a long run equilibrium will lead to rationing of jobs by employers as they attempt to stay on their labor demand curves the unemployment here is involuntary in that the unemployed would prefer to be working at the going wage and is inefficient in that there are lost gains from trade between these workers and firms the weakness of this model is that it is silent about the mechanism that keeps wages rigid unemployed workers who offer to work for less than the fixed wage ought to find work the early implicit contract models of azariadis 1975 baily 1974 and gordon 1974 provide one explanation for wage rigidity these models introduced the idea that wages can do more than just clear the market for labor wages in an implicit contract model are used to shift the risk generated by uncertain output market conditions from risk averse workers to the risk neutral firm

return targets and percentile fans this article presents a highly intuitive approach for visualizing return distributions for a basic form of cash equity allocations this percentile fan framework can help clarify some of the key risk return trade offs in intuitive ways for a wide set of asset owners in particular percentile fans can help investors express their portfolio objectives in terms of return targets or shortfall limits over one or more horizons for some investors these intuitive goals especially when depicted in a visual context can feel like a more natural approach than the standard mean variance utility framework

the interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

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

contract theory and implications for perennial energy crop contracting abstract this article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops we discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges we focus primarily on the mechanism design or complete contracts approach to contracting which involves optimizing some objective function e g profits costs etc with respect to contract terms subject to important incentive constraints the solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and or minimize costs

cheap talk and burned money we augment the standard crawford sobel 1982 econometrica 50 1431 1451 model of cheap talk communication by allowing the informed party to use both costless and costly messages the issues on which we focus are the consequences for cheap talk signaling of the option to burn money and the circumstances under which both cheap talk and burned money are used to signal information

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

unemployment and the efficiency wage hypothesis there has been much recent discussion of the reasons why prices in certain markets and in particular in labour markets may not adjust to eliminate excess supply the absence of speedy adjustment of prices is an essential feature of the recent models of disequilibrium macroeconomics but for the most part no explanation for this absence is provided from within those models one explanation that has been around in the literature for some time and has been receiving increasing attention recently is the efficiency wage hypothesis initially applied to developing economies see leibenstein i957 it has more recently been adapted to developed economies by weiss i 980 and used in the context of a keynesian macroeconomic model by hart i 980 similar concepts have been applied to the credit market by stiglitz and weiss i98i the purpose of the present paper is to explore further the conditions under which the notion of an efficiency wage is applicable and can provide an explanation of involuntary unemployment the essential feature of the efficiency wage hypothesis is that the productivity of a firm s employees increases as their wage is increased at least over an economically relevant part of its range if the wage paid by the firm is denoted by w the number of employees by l and the productivity of each employee by p w where p w o then the effective labour force of the firm e can be represented by

multilateral contracting and the employment relationship this paper studies the structure of the employment relationship in organizations it investigates the trade off firms face between making commitments to their workforce as a whole multilateral relational contracts and making more limited commitments to individuals or smaller groups of employees bilateral relational contracts multilateral contracts bind the firm more strongly to implicit commitments improving motivation but are difficult to adjust in response to changes in the environment bilateral contracts make workforce changes easier to implement the framework helps to explain the use of relative performance evaluation why firms rely on temporary employees and the adoption of two tier workforces

contracting productivity growth in this paper we analyze the interactions between growth and the contracting environment in the production sector allowing incompleteness in contracting implies that viable production relationships for firms and workers and therefore the profitability of industries depend on the rates of innovation and growth the speed at which new innovations arrive in turn depends on the profitability of production for the usual reasons examined in the endogenous growth literature we show that these interactions can have important implications which are consistent with observed phenomena in both the micro and macro environment in particular we demonstrate that a technological shock increasing productivity of research can through this interaction lead to a productivity slowdown and a shift in labor market contracts away from firms providing implicit guarantees of lifetime employment and towards shorter term contractor type arrangements we show the consistency of an increase in the proportion of the labor force under short term employment increased relative returns of workers in high productivity sectors and increased income inequality with a productivity slowdown of finite duration

did american welfare capitalists breach their implicit contracts during the great depression preliminary findings from company level data it has been claimed that american employers experiments in private welfare capitalism collapsed during the great depression giving place to the welfare state and industrial unionism recent studies however reveal considerable differences in experience across firms the author of this study who characterizes private welfare capitalism as a set of human resource management practices constituting an implicit contract equilibrium tests the implications of implicit contract theory using data from fourteen leading manufacturing firms the repudiation of implicit contracts she finds was positively correlated with the severity of the depression s impact experienced by firms and negatively correlated with the effectiveness of internal enforcement mechanisms instituted by firms furthermore she finds that greater breaches of implicit contracts were associated with greater employee support for industrial unions and more explicit employment contracts concluded under the new deal a comparative case study c

asset allocation by surplus optimization a defined benefit pension plan is effectively an operating division of the sponsor thus when evaluating risk and making asset allocation decisions it is more appropriate to focus on the plan s net worth the difference between its assets and liabilities than on its assets only this requires the development of probability distributions for both assets and liabilities liability modeling is still in its infancy and different models lead to radically different notions of the riskiness of liabilities in particular the way in which a plan s actuarial assumption for inflationlsalary growth is modeled can have an enormous impact on the relative attractiveness of stocks and long bonds some simplified approaches to liability modeling focus on fixed dollar liabilities the accumulated benefit obligation or on the responsiveness of inflation sensitive liabilities such as the projected benefit obligation to changes in discount rate assumptions under these approaches liabilities behave like bonds and long bonds constitute a large proportion of efficient pension portfolios a model that assumes volatility in real rates however shows liabilities to be extremely volatile and results in efficient portfolios with a significant proportion of stocks

price discovery in european natural gas markets we provide the first high frequency investigation of price discovery within the physical and financial layers of europe s natural gas markets testing not only looks at short term return dynamics but also considers each security s contribution to price equilibrium in the longer term results show that uk natural gas futures traded on the intercontinental exchange display greater price discovery than physical trading at various hubs throughout europe

on the relevance and composition of gifts within the firm evidence from field experiments we investigate the economic relevance and the composition of gifts within a firm where output is contractible we develop a structural behavioral model that identifies workers optimal reaction to monetary gifts received from their employer we estimate the model using data from two separate field experiments conducted within a tree planting firm we use the estimated structural parameters to generalize beyond the experiment simulating how workers would react to different gifts on the part of the firm within different labor market settings we find that gifts have a role to play within this firm increasing in importance when the workers outside alternatives deteriorate profit maximizing gifts would increase profits within slack labor markets by up to 10 on average and by up to 17 for certain types of workers

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval

do wage cuts damage work morale evidence from a natural field experiment employment contracts are often incomplete leaving many responsibilities subject to workers discretion high work morale is therefore essential for sustaining voluntary cooperation and high productivity in firms we conducted a field experiment to test whether workers reciprocate wage cuts and raises with low or high work productivity wage cuts had a detrimental and persistent impact on productivity reducing average output by more than 20 percent an equivalent wage increase however did not result in any productivity gains the results from an additional control experiment with high monetary performance incentives demonstrate that workers could still produce substantially more output leaving enough room for positive reactions altogether these results provide evidence consistent with a model of reciprocity as opposed to inequality aversion

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

threat of dismissal incentive or sorting many people are fired from their jobs for poor performance however it is difficult to distinguish whether they are fired because they are not well suited for their job sorting explanation or because the firms are trying to provide incentives for effort incentive explanation this article develops a dynamic incentive model of dismissal and proposes a methodology to distinguish between these two explanations the methodology is based on learning by doing and changes in the slope of dismissal probability with respect to tenure using personnel data from a large u s company this study finds significant evidence for the incentive explanation

public procurement with unverifiable quality the case for discriminatory competitive procedures unverifiable quality may affect the enforcement of procurement contracts even when the award procedure is able to select the most efficient firm in the market in this paper we show that a discriminatory competitive mechanism which awards the contract on the basis of price and firms past performance yields an efficient allocation of the contract and allows the buyer to implement her desired quality quality enforcement arises out of relational contracting whereby the buyer handicaps a contractor in future competitive tendering processes if it fails to provide the required quality we study an infinitely repeated procurement model with two firms and one buyer imperfectly informed on the firms cost in which in each period the buyer runs a discriminatory auction we restrict our analysis to the case of a buyer committed to her handicapping strategy a case which captures some of the features of a public buyer when players use either grim trigger or stick and carrot strategies we find that the buyer can induce the delivery of optimal unverifiable quality with a variety of handicap levels and when applicable durations of the punishment period for some values of the handicap and the length of the punishment period both firms remain active in the market even when punished

incentives and transactions costs within the firm estimating an agency model using payroll records we estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers we estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself at the estimated parameters the cost of worker risk aversion insurance is of similar magnitude to moral hazard incentives overall incomplete information accounted for one half of the bonus system s inefficiency relative to potential full information profits the other half is attributed to the bonus system s inefficient generation of incentives and insurance relative to the optimal incentive contract

reputation and hierarchy in dynamic models of employment the employment relationship with employees ability and their actions both private information thus combining adverse selection with moral hazard is modeled as a repeated game with self enforcing contracts being perfect bayesian nash equilibria under termination contracts the equilibrium contract structure consists of a hierarchy of ranks finite in number even though ability is continuous reputation acts as an effective device for worker discipline without the need for involuntary unemployment selection by bonding is not in general incentive compatible but selection by promotion of employees through the ranks is many other features correspond to observed employment structures

a theory of contracts with limited enforcement we present a theory of contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset public enforcement relies on remedies for breach private enforcement comes from severing relationships we first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly whether a long term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller while under complete information the optimal contract would remain stationary non stationarity might arise under asymmetric information enforcement constraints are time dependent and easier to satisfy as time passes indeed a high cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on yet such take the money and run strategy becomes less attractive as time passes and can be prevented with backloaded payments the optimal contract thus goes through two different phases first quantities and prices increase at the inception of the relationship later on the contract looks more stationary the public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting long run screening distortions encapsulate the quality of enforcement offering de facto a link between the quality of the legal system and contractual performances

the role of cooperation and reciprocity in structuring carbon sequestration contracts in developing countries the reduction of emissions from deforestation and forest degradation redd presents a key opportunity for developing countries to mitigate global warming and to help meet long term global climate objectives however the success of a redd strategy in a post kyoto protocol regime depends primarily on the design and implementation of a financial mechanism that is feasible and effective in providing the right incentives to land holders to manage forests in a sustainable manner that contributes to climate goals optimal redd contracts must not only properly reward agents who reduce emissions from deforestation and degradation dd but also account for technical issues such as permanence and additionality of carbon offsets in many countries national authorities may not have the institutional capacity and the proper technology for measuring the delivery of carbon offsets furthermore contract enforcement becomes complex because the effort and outcomes described in such contracts are difficult for a third party to monitor and verify therefore contracts need to provide sufficient incentives to all parties to participate and perform in the long term i e to be self enforcing however the structure of the contracts may vary depending on the presence of selfish and altruistic agents this paper studies the role of cooperation and reciprocity on the structure of carbon sequestration contracts in the context of developing countries where legal enforcement may be impractical we examine if the optimal structure of self enforcing contracts differs if the paula cordero salas is a ph d candidate and brian roe is the mccormick professor of agricultural marketing and policy aede department the ohio state university this project was supported by the world bank s development research group energy and environment team under the contract a mechanism for reducing emissions from deforestation and degradation redd a framework to design cost effective contracts

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

public service motivation as an argument for government provision a public service motivation psm inclines employees to provide effort out of concern for the impact of that effort on a valued social service though deemed to be important in the literature on public administration this motivation has not been formally considered by economists when a psm exists this paper establishes conditions under which government bureaucracy can better obtain psm motivated effort from employees than a standard profit maximizing firm the model also provides an efficiency rationale for low powered incentives in both bureaucracies and other organizations producing social services 2000 elsevier science s a all rights reserved

on reputation a microfoundation of contract enforcement and price rigidity we study the impact of reputational incentives in markets characterised by moral hazard problems social preferences have been shown to enhance contract enforcement in these markets while at the same time generating considerable wage and price rigidity reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially this effect is however associated with a considerable bilateralisation of market interactions suggesting that it may aggravate price rigidities surprisingly reputation in fact weakens the wage and price rigidities arising from social preferences thus in markets characterised by moral hazard reputational incentives unambiguously increase mutually beneficial exchanges reduce rents and render markets more responsive to supply and demand shocks

relational contracts and the value of loyalty this paper examines how relational contracting afiects the pattern of trade across the economy we suppose a flrm principal repeatedly chooses among of a set of potential trading partners agents under the threat of holdup the possibility of ex post opportunism allows agents to collect rents which act like a flxed cost that the principal must pay when initiating a new relationship the principal responds by dividing agents into insiders with whom she has previously traded and outsiders with whom she has never traded if the principal is su ciently patient the proflt maximising contract then uses insiders e ciently while being biased against outsiders this optimal strategy can be implemented by a maintenance contract that is robust to asymmetric information

endogenous verifiability and relational contracting for contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract the strict requirements of verifiability make it costly if not impos sible for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court a way out is then to rely on self enforcing relational con tracts through repeated transactions the parties can make it costly for each other to breach the contract by letting breach ruin future trade but the self enforcing range of contracts is limited so the court s ability to enforce a contract is not without consequence for the contracting parties if possible the parties may thus have incentives to take costly actions that affect the ability of the court both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement in this paper we focus on the former assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications we assume that careful contracting can improve the court s ability to verify whether an action conforms to the one described in the contract then we ask what happens to the self enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification in order to provide some answers we analyze a simple repeated principal agent game where the verifiability of the agent s actions is endogenously determined by the principal s investments in drafting an explicit contract pertaining to the quality of the agent s output the model makes it possible to identify some subtle effects of two key enforcement devices legal courts and repeated interaction note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness and the equilibrium level of incompleteness will depend on the verification technology i e the resource costs that are necessary to achieve various verifiability levels this verification technology will be influenced in an essential way by the quality of courts in fact we can use the model to study relationships between two distinct aspects of courts namely their ability which influences the verification technology and their predictability which manifests itself in the equilibrium level of verifiability i e the probability with which the court in fact will verify the relevant action the repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it the discount factor is then a proxy for the trust level in the relationship by studying the effect of variations in verification technology and the discount factor we can gain insight into the rela tionship between court ability explicit contracting trust and relational contracting below we summarize the results

optimal contracting with subjective evaluation this paper extends the standard principal agent model to allow for subjective evaluation the optimal contract results in more compressed pay relative to the case with verifiable performance measures moreover discrimination against an individual implies lower pay and performance suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination finally the optimal contract entails the use of bonus pay rather than the threat of dismissal hence neither efficiency wages nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract

international market integration for natural gas a cointegration analysis of prices in europe north america and japan this paper investigates the degree of integration of natural gas markets in europe north america and japan in the time period between the early 1990s and 2004 the relationship between international gas market prices and their relation to the oil price are explored through principal components analysis and johansen likelihood based cointegration procedure both of them show a high level of natural gas market integration within europe between the european and japanese markets as well as within the north american market at the same time the obtained results suggest that the european respectively japanese and the north american markets were not integrated

the contingent effect of management practices this article investigates how the success of a management practice depends on the underlying values articulated by the management a large u s transportation company is in the process of fitting its trucks with an electronic on board recorder eobr to provide drivers with information on their driving performance the company also has commenced a multi year initiative to remake its internal operations the first phase of which focuses exclusively on changing values toward a greater emphasis on teamwork and empowerment in this setting a natural question is whether the optimal managerial practice consists of 1 letting each driver know his or her individual performance only or also 2 providing drivers with information about their performance with respect to other drivers using the eobr provided driver performance data we randomize these practices across sites the main result of our experiment is that 2 leads to better performance than 1 in a particular site if and only if the site has not yet received the values intervention and worse performance if it has the result is consistent with the presence of a conflict between competition based managerial practices and a shift to a cooperation based value system more broadly it highlights the role of intangible factors in determining the optimal set of managerial practices

incentives equality and contract renegotiations theory and evidence in the chinese banking industry renegotiation plays an important role in contract theory but the empirical study of renegotiation is almost non existent in the literature using a unique dataset from the chinese banking industry we find that the large majority of managerial incentive contracts are renegotiated after performances are realized we develop a model of contract renegotiation where supervisors and managers sign incentive contracts and then renegotiate them in the unique equilibrium of the model incentive contracts are almost always renegotiated ex post even though renegotiation is fully anticipated incentive contracts affect performance the predictions of the model find strong support from our empirical results

governance and contract choice theory and evidence from groundwater irrigation markets abstract this paper examines the role governance institutions play in the adoption of contracts we develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in bangladesh a distinguishing feature of this market is the variety of village level institutions which impose different degrees of punishment for contract violation consistent with the model we find households adopt contracts that rely on unverifiable outcomes which are not formally contractible when punishment for contract violation is weak conversely households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe this evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible

infinitely repeated games with public monitoring and monetary transfers this paper studies infinitely repeated games with imperfect public monitoring and the possibility of monetary transfers it is shown that all public perfect equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick and carrot punishments a fast algorithm is developed that exactly computes the set of pure strategies equilibrium payoffs for all discount factors

relational incentives and moral hazard in teams this paper studies moral hazard in teams using a model where efforts are promoted via the combination of profit shares and relational contracts the focus is on how these two forms of incentives interact according to the degree of effort observability and the importance of future interaction the optimal allocation of profit shares can range from a wide dispersion across players to a full concentration of shares in the hands of a single player when shares are sufficiently concentrated the corresponding residual claimant can also adopt the role of administering all relational contracts therefore serving as an endogenously chosen principal copyright 2007 wiley blackwell

investing in a relationship a principal can make an investment anticipating a repeated relationship with an agent but the agent may appropriate the returns through ex post bargaining i study how this holdup problem and efficiency depend on the contracting environment when investment returns are observable informal contracts ex post can be more efficient than formal contracts as they induce higher investment ex ante the principal invests not only to generate direct returns but also to improve relational incentives unobservability of returns increases the principal s ability to appropriate the returns but reduces her ability to improve incentives the optimal information structure depends on bargaining power

dynamic relational contracts under complete information abstract this paper considers a long term relationship between two agents who both undertake an action or investment that produces a joint benefit agents have an opportunity to expropriate some of the joint benefit for their own use agents have quasi linear preferences two cases are considered where agents are risk averse but where limited liability constraints do not bind and where agents are risk neutral and subject to limited liability constraints we ask how to structure the investments and division of the surplus over time to avoid expropriation in the risk averse case the dynamics of actions and surplus may or may not be monotonic depending on whether or not a first best allocation can be sustained agents may underinvest but never overinvest if the first best allocation is not sustainable there is a trade off between risk sharing and surplus maximization surplus may not be at its constrained maximum even in the long run and the amnesia property of pure risk sharing models fails to hold in contrast in the risk neutral case there may be an initial phase in which one agent overinvests and the other underinvests both actions and surplus converge monotonically to a stationary state where surplus is maximized subject to the self enforcing constraints

rent seeking versus productive activities in a multi task experiment incentive instruments like asset ownership and performance pay often have to strike a balance between the productive incentives and the rent seeking incentives they provide standard theory predicts that these instruments become less attractive when the effectiveness of rent seeking activities increases in contrast theories that emphasize the importance of reciprocity suggest that this relationship may go the other way around in this paper we test these predictions by means of a laboratory experiment by and large our findings confirm standard theory incentive instruments typically become less attractive when the scope for rent seeking activities increases however reciprocity motivations do seem to mitigate the adverse effects of rent seeking opportunities to a considerable extent

a model of efficiency wages as a signal of firm value we consider performance contracts with firm private information the verifiable components of the contract an up front wage and employment may serve both as a signal and a performance incentive job rent may be necessary for signaling and since efficient signaling is multidimensional there is an inextricable link between job rent and underemployment signaling can explain the lack of explicit bonding in actuality though our basic model is static our underemployment result is not a consequence of firm myopia when the firm is farsighted it will not maximize the joint future surplus if it cannot extract the worker s share at present copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

oil and gas markets in the uk evidence from a cointegrating approach the paper examines the relationship between uk wholesale gas prices and the brent oil price over the period 1996 2003 in order to investigate whether oil and gas prices decoupled during this period as orthodox gas market liberalisation theory suggests tests for unit roots and cointegration are carried out and it is discovered that a long run equilibrium relationship between uk gas and oil prices exists moreover this relationship pre dates the opening of the uk mainland europe interconnector following a recursive methodology hansen h and johansen s 1999 some tests for parameter constancy in cointegrated var models econometrics journal 2 306 333 it was found that the cointegrating relationship is present throughout the sample period however the long run solutions seem to be more volatile evidence is provided that the short run relationship is linear and impulse response functions are used to examine the effects that a shock in oil would have on gas these findings do not support the assumption that gas prices and oil prices decouple

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

relational contracts and the theory of the firm relational contracts informal agreements sustained by the value of future relationships are prevalent within and between firms we develop repeated game models showing why and how relational contracts within firms vertical integration differ from those between nonintegration we show that integration affects the parties temptations to renege on a given relational contract and hence affects the best relational contract the parties can sustain in this sense the integration decision can be an instrument in the service of the parties relationship our approach also has implications for joint ventures alliances and networks and for the role of management within and between firms

gift giving and worker productivity evidence from a firm level experiment abstract we present results from a field experiment designed to measure worker response to a monetary gift from their employer the experiment took place inside a tree planting firm paying its workforce incentive contracts firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity we compare planter productivity the number of trees planted per day on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block and thus under similar planting conditions we find direct evidence that the gift had a significant and positive effect on daily planter productivity controlling for planter fixed effects weather conditions and other random daily shocks

information transmission and market interactions across the atlantic an empirical study on the natural gas market abstract this paper studies the international information transmission and market interactions in the u s and u k natural gas markets three well documented approaches are used to measure the relative importance on the process of price discovery under a quadvariate system after adjusting the effects of nonsynchronous trading prices robust results indicate our system that includes spot and futures prices within the two countries are driven by one common factor information disseminates efficiently among the four markets concerned the u s futures market dominates as the center for price discovery the u k futures market comes as the second the spot markets in the u s and u k are less efficient than their corresponding futures market where the u k spot market contributes the least and almost zero to the price discovery process asymmetric volatility spillovers are found in three of the four markets volatility in the u s futures market increases with positive returns which illustrates the inverse leverage effect in most of the commodity market volatilities in the spot markets are negatively related to returns which is analogous to the traditional leverage effect prevailing in most of the equity stock markets

contracting with repeated moral hazard and private evaluations a repeated moral hazard setting in which the principal privately observes the agent s output is studied the optimal contract for a finite horizon is characterized and shown to require burning of resources these are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor for the infinite horizon it is shown that there is no loss from restricting the analysis to contracts in which the agent receives a constant efficiency wage and no feedback until he is fired furthermore optimal contracts cannot be replicated by short term contracts a family of fixed interval review contracts is characterized longer review intervals are preferable but harder to implement comparative statics on the review length are carried out finally these contracts are shown approximate first best if players are very patient jel d82 d86

restricting the means of exchange within organizations abstract this paper considers why firms often ban monetary exchange between their employees while encouraging these trades through other means such as through the reciprocation of favours or barter despite classical inefficiencies associated with non monetary exchange we illustrate two themes as to why non monetary trade may be preferred to allowing money first the use of non monetary trade may affect the allocation of rents in surplus enhancing ways as agents respond strategically to the existence of these rents second non monetary trade improves the ability of agents to impose sanctions on those who act dishonestly

wage premiums and profit maximization in efficiency wage models abstract the standard shirking model of efficiency wages is essentially a continuous time repeated prisoners dilemma game thus to sustain an equilibrium with employment requires sufficient gains from future co operation each division of these gains corresponds to some equilibrium efficiency wages correspond to employees receiving the gains bonds allow firms to receive them in markets well informed about agents pasts employment is independent of the distribution of gains but in anonymous markets with more workers than jobs employment is highest in efficiency wage equilibria efficiency wages thus arise naturally as the unique efficient equilibrium without recourse to assumptions that limit bonding

productive low morale abstract this paper models employment relationship as a repeated principal agent problem with private evaluation the efficient contracts exhibit correlated movements between lagged wage and current effort that are consistent with the positive feedback between pay and morale in practice low morale therefore is an integral part of a well functioning relationship

bad news an experimental study on the informational effects of rewards both psychologists and economists have argued that rewards often have hidden costs one possible reason is that the principal may have incentives to oer higher rewards when she knows the task to be di cult our experiment tests if high rewards embody such bad news and if this is perceived by their recipients our design allows us to decompose the overall eect of rewards on eort into a direct incentive and an informational eect the results show that most participants correctly interpret high rewards as bad news in accordance with theory the negative informational eect co exists with the direct positive eect

enforcement of implicit employment contracts through unionization in a world in which employment contracts are incomplete it is costly for a firm to establish credibility for honoring implicit terms of employment agreements by monitoring the employment relationships between the firm and its workers the labor union may provide the workforce with valuable information regarding the firm s adherence to these implicit agreements thus the union provides a signaling mechanism that allows workers to coordinate their actions in order to discipline the firm for a breach of the implicit contract this mechanism enhances the firm s credibility when forming employment contracts and facilitates increased employment levels

probationary contracts in agencies with bilateral asymmetric information this paper examines a two period principal and agent model where the agent s ability level is not observable to the principal and revealed to the agent only after the contract is signed the value of the agent s output to the principal is affected by the agent s collegiality which is unknown to the agent but is observed by the principal in these circumstances with risk neutral agents the principal prefers a probationary scheme with second period rehiring based on satisfactory first period performance multiple equilibria results from this problem however the refinements literature provides a resolution to the multiplicity under certain conditions the agent is rehired for sufficiently high first period output the superior agent will work harder in the first period than under recontracting and the inferior type agent will work less hard the probationary scheme is shown to be pareto superior to standard recontracting

intention based reciprocity and the hidden costs of control abstract empirical research suggests that despite strengthening conventional incentives to put in effort exerting control might reduce worker performance the present paper shows that intention based reciprocity can explain such hidden costs of control if individuals differ in their propensity for reciprocity and preferences are private information not being controlled might then be considered to be kind because not everybody reciprocates not being controlled with high effort this argument contrasts existing theoretical wisdom on the hidden costs of control that is almost exclusively based on signaling

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

a unified approach to testing for serial correlation in stock returns this article provides a unified approach for testing serial correlation in stock returns the authors describe a general class of statistics that are linear combinations of consistent estimators of autocorrelations as special cases they show that this class captures many of the statistics studied in the recent finance and macroeconomics literature using this result the authors then provide a common perspective on the asymptotic distribution and power of these statistics copyright 1994 by university of chicago press

worker cooperation and the ratchet effect workers paid by the piece should be happy to introduce new techniques that increase output but firms always seem to reduce the piece rate when workers start earning too much money workers respond by restricting output and keeping good new ideas to themselves we show that this outcome is inevitable in a competitive environment however there are noncompetitive situations where firms can use piece rates to get cooperation from their workers these predictions are consistent with case history evidence from the cotton spinning industry in england in the nineteenth century and the lincoln electric company in the united states even today

testing dynamic models of worker effort this article derives three dynamic models of worker effort determination based on a shirking efficiency wage model a compensating differentials model and a union firm bargaining model it shows that all of these three models have the same long run comparative statics but differ in their short run dynamics we use these different predictions about the dynamics as a basis for testing the models euler equations for each model are estimated using panel data on 486 u k companies the evidence supports the shirking model in firms with low levels of unionization but the bargaining model in highly unionized industries