spillovers investment incentives and the property rights theory of the firm this paper examines the property rights theory of the firm when a manager s relationship specific investment can be partially appropriated by the owner of an asset even if cooperation breaks down the investments of non owners may then be devalued but are seldom wholly lost to the owner with such spillovers the outside option principle can be incorporated into the grossman hart moore framework without implying that ownership demotivates enriched predictions on the determinants of integration emerge

cost benefit assessment of energy efficiency investments accounting for future resources savings and risks in the australian residential sector this article focuses on the impact of the discount rate on cost benefit assessment of investment options for residential building efficiency an integrated thermal modeling life cycle costing approach is applied to an extensive sample of dominant house designs for australian conditions the relative significance of predicted thermal performance and the applied discount rate on the present value of energy savings from alternative investment scenarios is investigated costs and benefits are also evaluated at the economy wide scale including carbon pricing considerations and for a test case household faced with alternative investment options at the point of construction the influence of the applied discount rate on produced cost benefit calculations is investigated as is the interaction between critical cost benefit input parameters findings support that the discounting framework is the primary driver of difference in estimates about costs and benefits of higher standards of efficiency in the residential sector results demonstrate that agreement on a low discount rate based on sustainability principals would prioritise those projects with significant environmental benefits

collective bargaining in the public sector the effect of legal structure on dispute costs and wages this paper examines the impact of collective bargaining legislation on dispute costs and wages using a panel of canadian public sector contracts the authors results suggest that policymakers designing collective bargaining legislation face a trade off between reducing dispute costs and increasing wages dispute costs are lower under compulsory arbitration than under the right to strike or when no collective bargaining legislation exists hence a switch to compulsory arbitration could potentially make both the union and the employer better off by reducing dispute costs however the authors find that wages are higher under compulsory arbitration than under other legal structures copyright 1991 by american economic association

price setting power vs private information an experimental evaluation of their impact on holdup abstract this paper investigates the extent of the holdup problem in a buyer seller relationship in which the seller has private information about his alternative opportunities theory predicts that compared to a situation in which outside options are publicly observed the seller obtains an informational rent whereas the buyer bears an informational loss as a result the seller is predicted to invest more while the buyer is expected to invest less in contrast to this private information has no impact on the investment levels observed in the experiment but actual investments do increase with the price setting power of the investor these findings are roughly consistent with a model in which agents are inequality averse overall the results question some recent theoretical suggestions that private information rents might substitute for price setting power in mitigating holdup

extending cost benefit analysis for energy investment choices abstract although cost benefit analysis is still widely practised because it addresses real and continuing problems the technique has been frequently called into question the present paper identifies three major limitations in the technique and offers suggestions for improvements while costs and benefits of energy investments have several dimensions cba attempts to give all effects an economic value this often requires arbitrary and subjective judgments which have discredited the technique it is proposed that cba should be extended from the single economic dimension to include three others environmental technical and the analysis of risk it is suggested that important subjective judgments should be made by the ultimate political decision maker and not by the analyst

comparative productivity the ussr eastern europe and the west this paper compiles comparative measures of output per worker in 1975 in four socialist and seven western market economy wme countries and explores sources of observed differences between the two groups of countries in that regard such differences seem explicable only partially by reference to differences in per worker capital stock and farm land a residual disparity of 25 to 34 percent in favor of wme countries appears to testify to superior efficiency in the latter copyright 1987 by american economic association

the economics of the greenhouse effect the recognition that economic activity is contributing to climatic change with attendant costs that may be of large magnitudes has set in motion a substantial research effort this paper seeks to review the contribution of economics to analysis of the greenhouse effect and to the policies and instruments suggested as means of mitigating its damage a brief overview of the causes and consequences of global warming is given and a number of energy economy forecasting models are examined as the costs of global warming depend upon the extent to which preventative and adaptive measures are undertaken the techniques available to evaluate these costs are surveyed we examine extant targets for greenhouse gas emissions reduction and explore the frameworks within which optimal policy targets can be designed the paper also considers the narrower question of minimized abatement costs and surveys the types of models used to estimate them the merits of alternative policy instruments are examined paying particular attention to the role that risk and uncertainty and the costs of monitoring and implementation of policy under conditions of imperfect information may play in the choice of instruments problems of international co operation in the development of abatement policy are examined and we consider the compensations across both nations and generations that are likely to be necessary conditions for effective action

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

markets with heterogeneous beliefs a necessary and sufficient condition for a trader to vanish what does it take to survive in the market previous literature has proposed sufficient conditions for a trader to vanish which depend on pairwise comparisons of traders discounted beliefs we propose a novel condition that focuses on the ratio of traders discounted beliefs and approximate equilibrium prices unlike existing conditions ours is both necessary and sufficient for a trader to vanish and delivers the exact rate at which vanishing traders lose their consumption shares as an application we analyze the performance of two intuitive behavioral strategies the follow the leader strategy that prescribes mimicking the beliefs of the most successful trader and the follow the market strategy that prescribes to use beliefs which coincide with the state price density further we show that the relative performance of vanishing traders cannot be studied in isolation our analysis highlights an intuitive point obscured by the existing conditions trading in financial markets is qualitatively different from bilateral trading

divergent expectations as a cause of disagreement in bargaining evidence from a comparison of arbitration schemes the fact that settlement rates are much higher where final offer arbitration rather than conventional arbitration is the dispute settlement procedure is used as the basis of a test of the role of divergent and relatively optimistic expectations in causing disagreement in negotiations calculations of identical expectations contract zones using existing estimates of models of arbitrator behavior yield larger identical expectations contract zones in conventional arbitration than in final offer arbitration this evidence clearly suggests that divergent expectations alone are not an adequate explanation of disagreement in labor management negotiations a number of alternative explanations for disagreement are suggested and evaluated

bargaining and the joint cost theory of strikes an experimental study this article reports on an experiment that was designed to test predictions about the frequency of disagreement strikes in games with complete information an empirical test of the joint cost theory which relates strike activity to the marginal cost of striking is based on a set of shrinking pie games in which subjects bargained in consecutive periods over how to divide a sum of money strike activity was a frequent occurrence in these games and moreover did not disappear over time the joint cost theory received some support indicating that further tests may be useful

negotiation under possible third party resolution abstractthe effect of a possible third party resolution on negotiation behavior is studied in an economic bargaining experiment the bargaining phase is preceded by a production phase that allows for different fairness principles to guide the division of the total production value the experimental results show that a possible third party resolution lowers the dispute costs by reducing the number of rounds of alternating offers in the presence of a third party negotiators make first offers that are more strongly related to their production which reduces the number of bargaining rounds the production phase has an effect on the distributional property of the agreements in negotiations in which third party resolution is an option the negotiation outcome shifts toward a more unequal outcome more in line with each person s contribution

do high stakes and competition undermine fair behaviour evidence from russia abstract this paper reports the results of a series of competitive labour market experiments in which subjects have the possibility to reciprocate favours in the high stake condition subjects earned between two and three times their monthly income during the experiment in the normal stake condition the stake level was reduced by a factor of ten we observe that both in the high and the normal stake condition fairness concerns are strong enough to outweigh competitive forces and give rise to non competitive wages there is also no evidence that effort behaviour becomes generally more selfish at higher stake levels therefore our results suggest that fairness concerns may play an important role even at relatively high stake levels

equilibrium strategies for final offer arbitration there is no median convergence final offer arbitration is a procedure for settling disputes between two parties in which an arbitrator chooses the final offer of the party closest to what he considers a fair settlement this procedure is modeled as a two person zero sum game of imperfect information in which the parties are assumed to know the probability distribution of the arbitrator s fair settlements and to make bids in an infinite strategy space that maximize their expected payoffs necessary and sufficient conditions for there to be local and global equilibria in pure strategies are derived and necessary conditions for mixed strategies in a particular case are found such equilibria when they exist in pure strategies represent bids which are symmetric about the median and for most common distributions are separated from one another by two or more standard deviations this finding suggests that final offer arbitration may not accomplish its avowed purpose of inducing the two parties to converge on what they perceive to be t

energy planning under uncertainty implications for coal processing and oil stocking policy abstract this study presents a method for quantifying the benefits of various ways of anticipating energy shortages the method is applied to coal liquefaction and oil stocking the study concludes that uncertainty about future energy supplies can improve the prospects for coal processing the results for oil stocking are consistent with actions already taken by government indicating that the assumption and methodology of the study are consistent with revealed preferences

specific investments holdup and the outside option principle according to the outside option principle the holdup problem can be solved when the non investor has a binding outside option the investor then becomes residual claimant creating efficient investment incentives this paper reports about an experiment designed to test this we find that when the outside option is binding investment levels fall short of the efficient level but holdup is less of a problem than predicted when the outside option is non binding

a comparison of conventional final offer and combined arbitration for dispute resolution two widely used forms of arbitration are conventional arbitration in which the arbitrator makes an unconstrained settlement choice and final offer arbitration in which the arbitrator must choose between disputants final offers under an innovative as yet unused approach called combined arbitration if the arbitrator s notion of a fair settlement lies between the disputants final offers final offer arbitration rules are used otherwise conventional arbitration rules are used theoretically by combining the risks that the two standard forms of arbitration pose for disputants who do not voluntarily settle combined arbitration should generate convergent final offers the results of this controlled laboratory study show however that dispute rates are highest in combined arbitration and lowest in conventional arbitration these results challenge the theoretical predictions for combined arbitration as well as claims that final offer arbitration should reduce disputes compared to conventional arbitration the results are however consistent with a simple theory of disputant optimism

on the merit of equal pay performance manipulation and incentive setting abstract work performance is often difficult to assess thus leaving room for manipulation of commonly used metrics we created a laboratory workplace in which we can precisely assess both work performance along with manipulation activities using two independent experiments we show that whenever pay for performance is used manipulation is pervasive leading to both a waste of organizational resources and a weakening of incentives by contrast paying organizational members equally effectively deters manipulation attempts leading to higher organizational production

the relationship between uncertainty the contract zone and efficiency in a bargaining experiment research on bargaining suggests that the efficiency of bargaining is related to the size of the surplus to be divided and to uncertainty about the opponent we conducted a bargaining experiment which manipulated both of these factors we find that the presence of uncertainty decreases bargaining efficiency while the effect of contract zone size depends on whether there is uncertainty or certainty

the pernicious role of asymmetric history in negotiations the role of history in negotiations is a double edged sword although parties can develop trust over time there are also countless examples of protracted feuds that developed as a result of conflicting interpretations and invocations of history we propose that due to biased invocations of the past history is likely to play a pernicious role in negotiations particularly when given an asymmetric history in which one party benefited at the expense of the other we test this prediction in two two stage experiments we find that asymmetric history in a first stage leads to increased impasses in a second stage but that this effect holds only when the second stage pairs the same two parties who shared the asymmetric history in the first

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

on the relation between asset ownership and specific investments experimental results are presented for a simplified version of hart s 1995 theory of the firm theory predicts that investment levels remain constant when investors no trade pay offs increase if these pay offs are threat points while they may decrease when no trade pay offs are outside options our results support these predictions in a relative sense average investment levels exceed the predicted level actual investment behaviour is consistent with the outcomes of the bargaining stage the play of the game is supported by a reciprocity mechanism in which non investors consider higher investment levels as fair behaviour which deserves a reward investors anticipate this

economic natural selection the theoretical structure of modern economics rests on the hypothesis that individual behavior is rational in the sense that choice can be described by utility maximizing behavior most economists view this hypothesis not as an assertion of procedural rationality but instead as a simple description of the outcomes of individual choice behavior furthermore requiring that every individual behave according to the predictions of rationality is typically viewed as too stringent even though many of our models assume it we are most confident about the predictions of rationality for aggregate behavior rather than individual behavior we believe that many but of course not all individuals behave approximately as predicted by models of rational behavior and we hope that our models are robust to small departures from rationality this belief is probably most firmly held for asset markets where many individuals interact repeatedly and the payoffs for good decisions can be large but why should we believe that individual level rationality hypotheses yield good predictions for aggregate asset market behavior there are two answers to this question the first answer entails adaptive response individuals who do not behave as predicted by rationality may modify their behavior over time they could imitate the successful they could experiment or they could learn from their past mistakes the second answer entails natural selection the market selects for those whose behavior is most nearly optimal those who for whatever reason behave as if they are rational take wealth away from those who behave otherwise ultimately the market is dominated by seemingly rational individuals and prices converge to their rational expectations equilibrium values this answer also requires some kind of innovation if the initial set of decision rules contains no rational rule natural selection alone will not drive the economy to rationality but if randomly chosen new rules enter the market from time to time rational or nearly rational rules will sooner or later enter the market and be selected for in the course of our research we have addressed both adaptation and natural selection here we focus on natural selection the appeal to natural selection for the defense of various rationality hypotheses has a long tradition in economics but until recently there was little formal investigation of its validity alchian 1950 and friedman 1953 both used it in defense of the hypothesis of profit maximization their argument was that firms that behave as if they maximize profits would drive out other non maximizing firms winter 1964 1971 1975 formalized and explored these ideas but the link between profitability and fitness in his work was assumed

reinterpreting arbitration s narcotic effect an experimental study of learning in repeated bargaining field evidence suggests that arbitration increases negotiation dispute rates we study repeated bargaining in a laboratory to understand the reasons why our results represent a reinterpretation of an explanation known as the narcotic effect the standard interpretation assumes that the probability of dispute without arbitration is constant across negotiations but field evidence suggests that experienced bargainers have fewer disputes to properly assess arbitration s impact we compare bargainer learning with and without arbitration under otherwise comparable laboratory conditions and develop a model to measure learning we find strong evidence that learning occurs in both cases but is slower with arbitration journal of economic literature classification numbers c78 c92 d77 j52 q 1998 academic press

incomplete contracts vertical integration and supply assurance this paper extends the analysis of transactions cost models of vertical integration to multilateral settings its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply integration reduces supply assurance concerns for an integrating firm but it may increase them for others therefore to explain the scope of any firm one must consider the overall network of production and distribution relations three fundamental questions are addressed 1 what are the effects of different integration structures 2 what are the determinants of the socially efficient integration structures 3 in what way do equilibrium integration structures differ from socially efficient structures

collective risk taking in the commons abstract the management of natural commons is typically subject to threshold effects if individuals are risk averse some of the recent economic literature holds that uncertainty on the threshold may have a positive impact by lowering incentives to over consume the paper shows that this intuitive result may unravel when uncertainty is modeled as a discrete or multimodal distribution using a variant of the nash demand game with two thresholds two types of nash equilibria typically coexist cautious respectively dangerous equilibria in which agents coordinate on the low threshold resp the high threshold when both types of equilibria coexist the symmetric dangerous equilibrium is always pareto dominated by the symmetric cautious equilibrium and the latter is always pareto efficient we use an experimental setting to assess the severity of the coordination and equilibrium selection problem while cautious resp dangerous play is decreasing resp increasing in the probability that the threshold is high coordination failures are salient for intermediate probabilities where the likelihood of coexistence of both type of equilibria is high we find that there is a u shaped relationship between overall coordination and the probability that the threshold is high

the reality game abstract we introduce an evolutionary game with feedback between perception and reality which we call the reality game it is a game of chance in which the probabilities for different objective outcomes e g heads or tails in a coin toss depend on the amount wagered on those outcomes by varying the reality map which relates the amount wagered to the probability of the outcome it is possible to move continuously from a purely objective game in which probabilities have no dependence on wagers to a purely subjective game in which probabilities equal the amount wagered we study self reinforcing games in which betting more on an outcome increases its odds and self defeating games in which the opposite is true this is investigated in and out of equilibrium with and without rational players and both numerically and analytically we introduce a method of measuring the inefficiency of the game similar to measuring the magnitude of the arbitrage opportunities in a financial market we prove that the inefficiency converges to equilibrium as a power law with an extremely slow rate of convergence the more subjective the game the slower the convergence

an experimental comparison of dispute rates in alternative arbitration systems this paper reports the results of a systematic experimental comparison of the effect of alternative arbitration systems on dispute rates the key to our experimental design is the use of a common underlying distribution of arbitrator fair awards in the different arbitration systems this allows us to compare dispute rates across different arbitration procedures where we hold fixed the amount of objective underlying uncertainty about the arbitration awards there are three main findings first dispute rates are inversely related to the monetary costs of disputes dispute rates were much lower in cases where arbitration was not available so that the entire pie was lost in the event of a dispute this confirms the empirical importance of the so called chilling effect on bargaining that has been conjectured is produced by the adoption of arbitration systems second the dispute rate in a final offer arbitration system is at least as high as the dispute rate in a comparable conventional arbitration system contrary to the usual argument we find no evidence that final offer arbitration eliminates the chilling effect third dispute rates are inversely related to the uncertainty costs of disputes dispute rates were lower in conventional arbitration treatments where the variance of the arbitration award was higher and imposed greater costs on risk averse negotiators our results can also be interpreted as providing tentative evidence that the negotiators were risk averse on average finally we find general agreement between the dispute rates in our experiment and dispute rates found in the field in comparable settings

cost effectiveness and cost benefit analysis of air quality regulations a cost benefit analysis of sulfur dioxide regulations concludes that the clean air act should be amended to lower the cost of pollution control net benefits will be higher the study shows if marginal costs and benefits are equated instead of continuing the current method of mandating a level of emissions a better control strategy will be more effective than stringent control even when there is great uncertainty and error 8 references 2 tables dck