behavioral contract theory abstract this review provides a critical survey of psychology and economics behavioral economics research in contract theory first i introduce the theories of individual decision making most

an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

the role of brand image and product characteristics on firms entry and oem decisions we investigate the optimal market entry and original equipment manufacturer oem decisions of a firm facing a market in which firms brands can be horizontally differentiated and products can be vertically differentiated the entrant might sell under its own brand and compete with an incumbent become a supplier to the incumbent or both findings reveal that when consumers perceive the firms are horizontally and vertically differentiated the entrant profits by simultaneously entering the market and establishing an oem arrangement with the incumbent in such competitive scenarios both buyer and seller increase profits by agreeing on wholesale prices that are not too low which softens both horizontal and vertical conflict between the firms findings also show that the incumbent may prefer to pay high wholesale prices to the entrant even if the incumbent had the option to source the product independently at a lower marginal cost when firms have the capability of producing each other s product lines su

informational asymmetries strategic behavior and industrial organization one of the most active and exciting areas of economic research over the last several years has been the use of noncooperative games of incomplete information to model industrial competition this work has yielded not only a remarkable number of papers but also several new insights on and explanations of fundamentally important issues the purpose of this paper is to attempt an appreciation and evaluation of this work because most of our individual and joint work since about 1979 has been in this mode it will come as no surprise that we are proponents of this line of research however there are several questions and potential problems that we see as arising in connection with this methodology and we will attempt to address these first a disclaimer we are not attempting a survey of the applications of asymmetric information games aig to industrial organization although we will refer in a highly selective fashion to a number of prominent strands in this literature in particular where any references are provided at all they are typically only to the earliest contributions to a subject even more we do not deal with work in which informational asymmetries are important but the analysis is not game theoretic for example search and price dispersion or the early work on the lemons problem and on moral hazard and adverse selection in insurance markets or with game theoretic treatments that assume complete information i aig methods and applications

switching regression models with imperfect sample separation information with an application on cartel stability an exogenous switching regression model with imperfect reginme classificationi information is specified and applied to a study of cartel stability an efficient estimation method is proposed which takes this imperfect information into account the consequences of misclassification are analyzed the direction of the least squares bias is derived an optimal regime classification rule is obtained and compared theoretically and empirically with other classification rules we then examine the joint executive committee a railroad cartel in the 1880 s the econometric evidence indicates that reversions to noncooperative behavior did occur for the firms in our sample and these reversions involve a significant decrease in market price this article is concerned with the possibility of estimating a switching regression model and its application to a study on cartel stability the switching regression model is the exogenous switching model proposed by quandt 24 which generalized a problem of mixture distributions day 4 the sample in this model is generated from distinct regression equations or regimes for each time period if the investigator has a priori information on how the sample is partitioned into the underlying regimes it is a switching regression model with known sample separation otherwise it is a model with unknown sample separation estimation of these latter models has been considered by quandt 24 goldfeld and quandt 8 and kiefer 14 16 among others a switching regression model is appropriate for the study of cartel behavior when there are price wars as firms will revert from cooperative to noncooperative behavior and so the industry supply function shifts occasionally this model will allow us to exploit the fact that there will be periodic stochastic switches or reversions between cooperative and noncooperative conduct in order to identify collusive episodes

the cyclical behavior of the department of justice s antitrust enforcement activity abstract we study the cyclical behavior of antitrust enforcement as measured by the number of cases initiated by the us department of justice the key result is that antitrust case activity is countercyclical this finding is robust across alternate indicators of economic activity which include stock prices corporate profits and business cycles and across different types of cases the finding of countercyclical case activity does not appear to lend support to interest group theories that predict greater regulatory protection towards producers during economic contractions one interpretation of our result would be that antitrust violations tend to increase during economic downturns leading to an increase in the number of cases initiated the broad implication being that the antitrust division primarily acts as an antitrust law enforcement agency our results show that politics as measured by the party of the president and the republican versus democrat composition of the house and senate does not have a clear impact on case activity finally the number of cases initiated are significantly affected by the extent of funding

a factor analytic probit model for representing the market structure in panel data internal market structure analysis infers both brand attributes and consumer preferences for those attributes from preference or choice data the authors exploit a new method for estimating probit models from panel data to infer market structures that can be displayed in few dimensions even though the model can represent every possible vector of purchase probabilities

working over time dynamic inconsistency in real effort tasks experimental tests of dynamically inconsistent time preferences have largely relied on choices over time dated monetary rewards several recent studies have failed to nd the standard patterns of present bias however such monetary studies contain oftendiscussed confounds in this paper we sidestep these confounds and investigate choices over consumption real eort in a longitudinal experiment we pair this eort study with a companion monetary discounting study we conrm very limited time inconsistency in monetary choices however subjects show considerably more present bias in eort furthermore present bias in the allocation of work has predictive power for demand of a meaningfully binding commitment device therefore our ndings validate a key implication of models of dynamic inconsistency with corresponding policy implications

does market experience eliminate market anomalies the case of exogenous market experience a vibrant literature has emerged that suggests willingness to pay and willingness to accept measures of value are quite different for inexperienced consumers but that value differences erode with market experience one potential shortcoming of this literature is that market experience is endogenous this study presents a framed field experiment that exogenously induces market experience empirical findings support the premise that market experience alone can eliminate an important market anomaly

fair wages and effort provision combining evidence from a choice experiment and a field experiment the presence of workers who reciprocate higher wages with greater effort can have important consequences for firms and labor markets knowledge about the extent and determinants of reciprocal effort choices is however incomplete we investigate the role of fairness perceptions and social preferences in a field experiment in which workers were hired for a one time job we show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases whereas those who feel adequately paid or overpaid at the base wage do not change their performance moreover we find that only the workers who display reciprocity in a choice experiment show reciprocal effort responses in the field the workers who lack reciprocity in the choice experiment do not respond to the wage increase even if they feel underpaid at the base wage our findings suggest that fairness perceptions and social preferences are key in workers performance response to wage increases in our study the wage increase affects effort mainly through the removal of perceived unfairness i e the elimination of negative reciprocity toward the firm rather than positive reciprocity these results are the first direct evidence of the fair wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1970 this paper was accepted by uri gneezy behavioral economics

regulation and the theory of legislative choice the interstate commerce act of 1887 this article concerns the economic incidence of the interstate commerce act of 1887 ica our focus is the short haul pricing constraint a provision of the ica that prohibited railroads from charging higher rates to isolated primarily agrarian shippers than it charged to intercity shippers of similar commodities utilizing the event study methodology we find that the impending passage of the ica generated a distribution of abnormal returns to railroads and shipping firms that is consistent with the theoretical implications of our analysis of the short haul pricing constraint shpc however early interpretations of the shpc by the interstate commerce commission reduced some of the abnormal returns to railroads in a manner that is inconsistent with the hypothesis that the short haul pricing constraint was an important mechanism of early railroad regulation the analysis does support a multiple interest interpretation of the interstate commerce act and has implications for the positive theory of regulation

a study of cartel stability the joint executive committee 1880 1886 this article employs weekly time series data on the joint executive committee railroad cartel from 1880 to 1886 to test empirically the proposition that observed prices reflected switches from collusive to noncooperative behavior an equilibrium model of dynamic oligopoly with asymmetric firms together with explicit functional form assumptions about costs and demand determines the estimating equations and stochastic structure of the econometric model the hypothesis that no switch took place so that price and quantity movements were solely attributable to exogenous shifts in the demand and cost functions is then tested against this alternative and rejected

accounting for primary and secondary demand effects with aggregate data discrete choice models of aggregate demand such as the random coefficients logit can handle large differentiated products categories parsimoniously while still providing flexible substitution patterns however the discrete choice assumption may not be appropriate for many categories in which we expect consumers may purchase more than one unit of the selected item we derive the aggregate demand system corresponding to a discrete continuous household level model of demand we also propose a method of simulated moments procedure that provides consistent estimates of the structural parameters when only aggregate data are available the procedure also enables the researcher to control both for the potential endogeneity of marketing variables as well as potential heterogeneity in consumer tastes using our aggregate estimates we can measure the decomposition of price elasticities into incidence brand choice and purchase quantity components we also propose several empirical tests to assess the validity of the discrete continuous demand system versus that of the logit model in several simulation experiments we demonstrate the robustness of this model across datasets in which quantity choices may or may not be important our empirical calibration to store level data in the refrigerated orange juice category indicates a considerable improvement in fit of the observed aggregate sales using the discrete continuous model

paying not to go to the gym how do consumers choose from a menu of contracts we analyze a novel dataset from three u s health clubs with information on both the contractual choice and the day to day attendance decisions of 7 752 members over three years the observed consumer behavior is difficult to reconcile with standard preferences and beliefs first members who choose a contract with a flat monthly fee of over 70 attend on average 4 3 times per month they pay a price per expected visit of more than 17 even though they could pay 10 per visit using a 10 visit pass on average these users forgo savings of 600 during their membership second consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year this is surprising because monthly members pay higher fees for the option to cancel each month we also document cancellation delays and attendance expectations among other findings leading explanations for our findings are overconfidence about future self control or about future efficiency overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences

the behavioralist visits the factory increasing productivity using simple framing manipulations recent discoveries in behavioral economics have led to important new insights concerning what can happen in markets such gains in knowledge have come primarily via laboratory experiments a missing piece of the puzzle in many cases is parallel evidence drawn from naturally occurring field counterparts we provide a small movement in this direction by taking advantage of a unique opportunity to work with a chinese high tech manufacturing facility our study revolves around using insights gained from one of the most influential lines of behavioral research framing manipulations in an attempt to increase worker productivity in the facility using a natural field experiment we report several insights for example conditional incentives framed as both losses and gains increase productivity for both individuals and teams in addition teams more acutely respond to bonuses posed as losses than as comparable bonuses posed as gains the magnitude of this framing effect is roughly 1 that is total team productivity is enhanced by 1 purely due to the framing manipulation importantly we find that neither the framing nor the incentive effect lose their significance over time rather the effects are observed over the entire sample period moreover we learn that repeated interaction with workers and conditionality of the bonus contract are substitutes for sustenance of incentive effects in the long run this paper was accepted by gerard p cachon decision analysis

theories of cartel stability and the joint executive committee this article reexamines the experience of the joint executive committee an 1880s railroad cartel to assess the applicability of the green and porter 1984 and rotemberg and saloner 1986 theories of price wars after discussing necessary modifications to the theories i estimate a number of dynamic models to explore the causes of price wars the cyclical nature of pricing and the possibility that secret price cuts may have been given the estimates provide some support for the predictions of the first theory

aggregate impact of different brand development strategies current branding literature investigates the spillover effects and extension effects due to the introduction of product extensions however no study so far has evaluated the aggregate market impact of these effects across different brand development strategies or accounted for the strategic decision to introduce the extension it is important to examine the above given the significant investments and the high failure rates associated with the introduction of new product extensions in this study we develop an analytical framework that derives revenue outcome due to an extension introduction as a function of spillover and extension effects we empirically estimate the above effects through a bayesian endogenous switching model that jointly models market shares of the extension and its parent brand along with the strategic decision to introduce the extension and the endogeneity in prices by using a data set that covers 155 extensions introduced across 20 u s geographic markets we obtain several new gen

who is behavioral cognitive ability and anomalous preferences in this paper we ask whether variation in preference anomalies is related to variation in cognitive ability evidence from a new laboratory study of chilean high school students with similar schooling backgrounds shows that small stakes risk aversion and short run discounting are less common among those with higher standardized test scores the relationship with test scores survives controls for parental education and wealth we find some evidence that elementary school gpa is predictive of preferences measured at the end of high school two laboratory interventions provide suggestive evidence of a possible causal impact of cognitive resources on expressed preferences jel j24 d14 c91

loss aversion and labor supply in many occupations workers labor supply choices are constrained by institutional rules regulating labor time and effort provision this renders explicit tests of the neoclassical theory of labor supply difficult here we present evidence from studies examining labor supply responses in neoclassical environments in which workers are free to choose when and how much to work despite the favorable environment the results cast doubt on the neoclassical model they are however consistent with a model of reference dependent preferences exhibiting loss aversion and diminishing sensitivity jel j22 b49

fair wages and effort evidence from a field experiment the presence of workers who reciprocate higher wages with greater effort can have important consequences for firms and labor markets knowledge about the extent and determinants of reciprocal effort choices is however incomplete we investigate the role of fairness perceptions and social preferences in a field experiment in which workers were hired for a one time job we show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases whereas those who feel adequately paid or overpaid at the base wage do not change their performance moreover we find that only the workers who display reciprocity in a choice experiment show reciprocal effort responses in the field the workers who lack reciprocity in the choice experiment do not respond to the wage increase even if they feel underpaid at the base wage our findings suggest that fairness perceptions and social preferences are key in workers performance response to wage increases in our study the wage increase affects effort mainly through the removal of perceived unfairness i e the elimination of negative reciprocity toward the firm rather than positive reciprocity these results are the first direct evidence of the fair wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature

commodity market dynamics and the joint executive committee 1880 1886 using weekly spot and future commodity prices in chicago and new york we construct expected transportation rates for grain between these two cities expected inventory levels in new york and realized errors in the expectations of such variables we incorporate these exogenous commodity market dynamics into porter s 1983 structural modeling of the joint executive committee railroad cartel as in porter we model marginal cost as a parametric function of instrumented output among other factors unlike porter we model pricing over marginal cost as a nonparametric function of a set of variables which include expectations of deterministic demand cycles and cartel stability we estimate the pricing and demand equation simultaneously and semiparametrically our estimated weekly markups during periods of cartel stability are shown to reflect optimal collusive pricing over deterministic business cycles as modeled in haltiwanger and harrington 1991 periods of cartel instability are proven to be trigger

a hierarchical bayes model of primary and secondary demand product design pricing policies and promotional activities influence the primary and secondary demand for goods and services brand managers need to develop an understanding of the relationships between marketing mix decisions and consumer decisions of whether to purchase in the product category which brand to buy and how much to consume knowledge about factors most effective in influencing primary and secondary demand of a product allows firms to grow by enhancing their market share as well their market size the purpose of this paper is to develop an individual level model that allows an investigation of both the primary and secondary aspects of consumer demand unlike models of only primary demand or only secondary demand this more comprehensive model offers the opportunity to identify changes in product features that will result in the greatest increase in demand it also offers the opportunity to differentially target consumer segments depending upon whether consumers are most likely to enter the market increase their consumption level or switch brands in the proposed hierarchical bayes model an integrative framework that jointly models the discrete choice and continuous quantity components of consumer decision is employed instead of treating the two as independent the model includes parameters that capture individual specific reservation value attribute preference and expenditure sensitivity the model development is based upon the microeconomic theory of utility maximization heterogeneity in model parameters across the sample is captured by using a random effects specification guided by the underlying microeconomic model this requires that some of the effects are strictly positive this is accommodated through the use of a gamma distribution of heterogeneity for some of the parameters a normal distribution of heterogeneity is used for the remaining parameters gibbs sampling is used to estimate the model the key methodological contribution of this paper is that we show how to specify a hierarchical bayes continuous random effects model that integrates consumer choice and quantity decisions such that individual level parameters can be estimated individual level estimates are desirable because insights into primary demand involve nonlinear functions of model parameters for example consumers not in the market are those whose utilities for the choice alternatives fall below some reservation value the proposed methodology yields individual specific estimates of reservation values and expenditure sensitivity which allow assessment of the origins of demand other than the switch ing behavior of consumers the methodology can also be used to help identify changes in product features most likely to bring new customers into a market our work differs from previous research in this area as we lay the framework needed to obtain individual level parameter estimates in a continuous random effects model that integrates choice and quantity the methodology is demonstrated with survey data collected about consumer preferences and consumption for a food item for the data available a large response heterogeneity was observed across all model parameters in spite of limited data available at the individual level a majority of the individual level estimates were found to be significant predictive tests demonstrated the superiority of the proposed model over existing latent class and aggregate models particularly significant gains in predictive accuracy were observed for the no buy behavior of the respondents these gains demonstrate that by structurally linking the choice and quantity models results in a more accurate characterization of the market than existing finite mixture approaches that model choice and quantity independently we show that our joint model makes more efficient use of the available data and results in better parameter estimates than those that assume independence finally the individual level demand analysis is illustrated through a simple example involving a 1 00 price cut we demonstrate practical usefulness of the model for targeting by developing the demographic attitudinal and behavioral profiles of consumer groups most likely to increase consumption enter the market or switch brands because of a price cut decision

what motivates effort evidence and expert forecasts how much do different monetary and non monetary motivators induce costly effort does the effectiveness line up with the expectations of researchers and with results in the literature we conduct a large scale real effort experiment with eighteen treatment arms we examine the effect of 1 standard incentives 2 behavioural factors like social preferences and reference dependence and 3 non monetary inducements from psychology we find that 1 monetary incentives work largely as expected including a very low piece rate treatment which does not crowd out effort 2 the evidence is partly consistent with standard behavioural models including warm glow though we do not find evidence of probability weighting 3 the psychological motivators are effective but less so than incentives we then compare the results to forecasts by 208 academic experts on average the experts anticipate several key features like the effectiveness of psychological motivators a sizeable share of experts however expects crowd out probability weighting and pure altruism counterfactually as a further comparison we present a meta analysis of similar treatments in the literature overall predictions based on the literature are correlated with but underperform the expert forecasts

testing static oligopoly models conduct and cost in the sugar industry 1890 1914 we explore the widespread methodology of using demand information to infer market conduct and unobserved cost components under the hypothesis of static oligopoly behavior direct measures of marginal cost and conduct indicating small market power serve as benchmarks the more competitive models yield better cost estimates the best cost estimates occur when conduct is estimated as a free parameter which in turn only slightly underestimates our direct measure it also tracks the decline in market power accompanying the industry s structural changes the methodology is largely validated although partial cost information can improve its predictive power conclusions are robust to demand function

make buy or ally a transaction cost theory meta analysis since the publication of williamson s markets and hierarchies many empirical articles have investigated the tenets of transaction cost theory using meta analytic techniques we quantitatively syn

cost raising strategies advantage rivals by raising their costs in this paper we show that strategies designed to raise rivals costs have a number of advantages over predatory pricing they are credible do not necessarily require the victim to exit and do not necessarily require the existence of classical market power the paper sets up a general model proves a number of general results and then applies the model to specific strategies involving overbuying inputs and vertical integration

manufacturer retailer channel interactions and implications for channel power an empirical investigation of pricing in a local market the issue of power in the marketing channels for consumer products has received considerable attention in both academic and practitioner journals as well as in the popular press our objective in this paper is to provide an empirical method to measure the power of channel members and to understand the reasons demand factors cost factors nature of channel interactions for this power we confine our analysis to pricing power in channels we use methods from the game theory literature in marketing on channel interactions to obtain the theoretical framework for our empirical model this literature provides us a definition of power one that is based on the proportion or percentage of channel profits that accrue to each of the channel members there can be a variety of possible channel interactions between manufacturers and retailers in channels the theoretical literature has examined some of these games for example choi 1991 examines how channel profits for manufacturers and retailer vary if channel interactions are either vertical nash or if they are stackelberg leaderfollower with either the manufacturer or the retailer being the price leader each of these three channel interaction games has different implications for profits made by manufacturers and retailers and consequently for the relative power of the channel members in contrast to the previous literature that has focused largely on the above three channel interaction games our model extends the game theoretic literature by allowing for a continuum of possible channel interactions between manufacturers and a retailer furthermore for a given product market we empirically estimate from the data where the channel interactions lie in this continuum more critically we obtain measures of how channel profits are divided between manufacturers and the retailer in the product market where a higher share of channel profit is associated with higher channel power we then examine how channel power is related to demand conditions facing various brands and cost parameters of various manufacturers in going from game theory based theoretical models of channel interactions to empirical estimation we use the new empirical industrial organization framework bresnahan 1988 as part of this structural modeling framework we build retail level demand functions for the various brands manufacturer and private label in a given product category given these demand functions we obtain optimal pricing rules for manufacturers and the retailer in determining their optimal prices manufacturers and the retailer account for how all the players in the channel choose their optimal prices that is we account for dependencies in decision making across channel members these dependencies are characterized by a set of conduct parameters which are estimated from market data the conduct parameters enable us to identify the nature of channel interactions between manufacturers and the retailer along the continuum mentioned previously in addition to the demand and conduct parameters manufacturers marginal costs are also estimated in the model these marginal cost estimates along with the manufacturer prices and retail prices available in our dataset enable us to compute the division of channel profits among the channel members hence we are able to obtain insights into who has pricing power in the channel in the empirical application of the model we analyze a local market for two product categories refrigerated juice and tuna in both categories there are three major brands the difference between them is that the private label has an insignificant market share in the tuna category our main empirical results show that the usual games examined in the marketing literature do not hold for the given data we also nd that the retailer s market power is very significant in both these product categories and that the estimated demand and cost parameters are consistent with the estimated pattern of conduct between the manufacturers and the retailer given the evidence from the trade press of intense manufacturer competition in these categories as well as the commodity nature of these products the result of retailer power appears intuitive

an empirical model of mark ups in a quality differentiated export market abstract this paper develops an empirical model to allow for imperfect competition in the market for traded goods a simultaneous equation model incorporating the demand for and supply of taiwanese footwear exports to the united states is specified and estimated the model allows the identification of two separate sources of mark ups in export prices the first comes from the u s imposed quantitative restriction on these exports the second comes from imperfect competition in the international market for these exports the results suggest competitive behavior by taiwanese footwear exporters the quantitative restriction resulted in a 16 9 percent mark up of prices over marginal cost

the effects of horizontal mergers on competition the case of the northern securities company several recent articles have studied the competitive effects of horizontal mergers by examining rival firms stock price reactions to the merger announcement and subsequent antitrust challenge these articles have consistently failed to find any evidence of anticompetitive effects this article considers two alternative explanations for the previous findings and it sheds some new light on the issue by presenting a case study of the merger that resulted in the formation of the northern securities company in 1901

an empirical investigation of private label supply by national label producers private labels pls are ubiquitous in several categories including groceries apparel and appliances however existing empirical work has not examined the differential impact of various upstream supply arrangements for pl products or the strategic motives for pl supply to do so requires one to model the interaction between private and national label nl products both upstream and downstream while accounting for strategic behavior on the part of manufacturers and retailers and retaining essential differences between nl and pl products we build a model that satisfies these requirements and lets us answer our two research questions first can an nl firm profit from being an outsourced pl supplier second what are the upstream and downstream impacts of different pl supply arrangements we answer these questions by modeling private labels as homogenous products at wholesale but as differentiated products at retail in contrast national label products are differentiated at both wholesale and retail levels using structural model estimates for fluid milk in a major metropolitan area we conduct three counterfactual experiments we find that both nl producers and retailers profit from adding private labels we also find that a vertically integrated supply of pl leads to lower prices for end consumers

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

computerisation and wage dispersion an analytical reinterpretation the rich countries have recently seen a dramatic rise in income inequality all the more surprising because the long term trend had been toward equality this paper examines one of the leading explanations computerisation in the workplace i offer a theory of computers impact on white collar work which goes far toward explaining the timing form and locus of recent labour market changes the theory looks at the bureaucratic and organisational applications of computers that have been first largest and most influential they have two effects on firms demand for labour at different skill levels

a dual self model of impulse control we propose that a simple dual self model gives a unified explanation for several empirical regularities including the apparent time inconsistency that has motivated models of quasi hyperbolic discounting and rabin s paradox of risk aversion in the large and small the model also implies that self control costs imply excess delay as in the o donoghue and rabin models of quasi hyperbolic utility and it explains experimental evidence that increased cognitive load makes temptations harder to resist the base version of our model is consistent with the gul pesendorfer axioms but we argue that these axioms must be relaxed to account for the effect of cognitive load

learning and price volatility in duopoly models of resource depletion the aim of this paper is to provide a theoretical model that can account for price fluctuations in depletable resource markets we do so by introducing learning into a hotelling style duopoly model of optimal resource depletion before the depletable resource becomes scarce the self confirming equilibrium of the model mirrors noncooperative rational expectations equilibrium in that supply is high and price is low although learning does induce occasional upward price spikes that are followed by a long period of falling price once the depletable resource becomes scarce the dynamics of the market change significantly with the self confirming equilibrium mirroring the cooperative rather than noncooperative rational expectations equilibrium supply is low and price is high price spikes still occur but against a background of increasing prices when scarcity is sufficient then the market is permanently in a self confirming equilibrium that is equivalent to cooperative rational expectations equilibrium

retail price fixity as a facilitating mechanism previous theoretical explanations for retail price fixity show that fixed retail prices can be consistent with either competitive or imperfectly competitive behavior we develop a conceptual model of retail pricing wherein fixed price points are facilitating mechanisms for tacit collusion a non cooperative equilibrium in fixed retail prices is supported through credible threats to revert to nash pricing if cheating is suspected we test the implications of this model using a two stage ordered probit approach in weekly supermarket pricing data the results show that price fixity does support collusive equilibria among retailers but other factors may also explain retail price behavior

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

incentive design under loss aversion compensation schemes often reward success b ut do not penalize failure fixed salaries with stock options or bonuses have this feature yet the standard principal agent model implies that pay is normally monotonically increasing in performance this paper shows that under loss aversion there will be intervals over which pay is insensitive to performance with the use of carrots but not sticks is frequently optimal especially when risk aversion is low and reference income is e ndogenous a further benefit of capping losses for example through options is to discourage reckless behavior by executives seeking to resurrect their fortunes jel f3 f4

structural analysis of manufacturer pricing in the presence of a strategic retailer consumer goods manufacturers usually sell their brands to consumers through common independent retailers theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer retailer interaction vertical strategic interaction research in empirical industrial organization has focused on analyzing the competitive interactions between manufacturers horizontal strategic interaction decision support systems have made various assumptions about retailer pricing rules e g constant markup category profit maximization the appropriateness of such assumptions about strategic behavior for any specific market however is an empirical question this paper therefore empirically infers 1 the vertical strategic interaction vsi between manufacturers and retailer 2 the horizontal strategic interaction hsi between manufacturers simultaneously with the vsi and 3 the pricing rule used by a retailer the approach is particularly appealing because it can be used with widely available scanner data where there is no information on wholesale prices researchers usually have no access to wholesale prices even manufacturers who have access to their own wholesale prices usually have limited information on competitors wholesale prices in the absence of wholesale prices we derive formulae for wholesale prices using game theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer pricing rules we then embed the formulae for wholesale prices into the estimation equations while our empirical illustration is using scanner data without wholesale prices the model itself can be applied when wholesale prices are available early research on the inference of hsi among manufacturers in setting wholesale prices using scanner data e g kadiyali et al 1996 1999 made the simplifying assumption that retailers charge a constant margin this assumption enabled them to infer wholesale prices and analyze competitive interactions between manufacturers in this paper we show that this model is econometrically identical to a model that measures retail price coordination across brands hence the inferred cooperation among manufacturers could be exaggerated by the coordinated pricing category management done by the retailer we find empirical support for this argument this highlights the need to properly model and infer vsi simultaneously to accurately estimate the hsi when using data at the retail level functional forms of demand have been evaluated in terms of the fit of the model to sales data but recent theoretical research on channels lee and staelin 1997 tyagi 1999 has shown that the functional form has serious implications for strategic behavior such as retail passthrough while the logit and linear model implies equilibrium passthrough of less than 100 lee and staelin call this vertical strategic substitute vss the multiplicative model implies optimal passthrough of greater than 100 vertical strategic complement vsc because passthrough rates on promotions have been found to be below or above 100 chevalier and curhan 1976 armstrong 1991 we empirically test the appropriateness of the logit vss and the multiplicative vsc functional form for the data we perform our analysis in the yogurt and peanut butter categories for the two biggest stores in a local market we found that the vss implications of the logit fit the data better than the multiplicative model we also find that for both categories the best fitting model is one in which 1 the retailer maximizes category profits 2 the vsi is manufacturer stackelberg and 3 manufacturer pricing hsi is tacitly collusive the fact that the retailer maximizes category profits is consistent with theoretical expectations the inference that the vsi is manufacturer stackelberg reflects the institutional reality of the timing of the game retailers set their retail prices after manufacturers set their wholesale prices note that in the stores and product categories that we analyze the two manufacturers own the dominant brands with combined market shares of about 82 in the yogurt market and 65 in the peanut butter market the result is also consistent with a balance of power argument in the literature the finding that manufacturer pricing is tacitly collusive is consistent with the argument that firms involved in long term competition in concentrated markets can achieve tacit collusion managers use decision support systems for promotion planning that routinely make assumptions about vsi hsi and the functional form the results from our analysis are of substantive import in judging the appropriateness of assumptions made in such decision support systems

new york city cab drivers labor supply revisited reference dependent preferences with rational expectations targets for hours and income this paper reconsiders whether cabdrivers labor supply decisions reflect reference dependent preferences following botond koszegi and matthew rabin 2006 we construct a model with targets for hours as well as income both determined by rational expectations estimating using henry s farber s 2005 2008 data we show that the reference dependent model can reconcile his 2005 finding that drivers stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by colin camerer et al 1997 and farber 2005 2008 the model yields sensible estimates that avoid farber s 2008 criticism that drivers income targets are too unstable to allow a useful reference dependent model of labor supply

neoclassical theory versus prospect theory evidence from the marketplace several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e g prospect theory which invokes psychological effects this paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well functioning marketplace the pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers but consumers with intense market experience behave largely in accordance with neoclassical predictions moreover the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered this transference of behavior across domains has important implications in both a positive and normative sense

willingness to pay and willingness to accept how much can they differ comment i agree with the point made by edoh y amiran and daniel a hagen 2003 that there can be a substantial or even infinite divergence between the wta and wtp for a public good even where there is a nonzero elasticity of substitution between market goods and the public good provided that the indifference curves are asymptotically bounded with respect to market goods in the manner they describe this is an important point they are also correct to point out that the elasticity of substitution is a local concept whereas their asymptotic boundedness condition applies also for discrete changes my 1991 paper used a local analysis because it was following the structure of the analysis in robert d willig 1976 and alan randall and john r stoll 1980 i wanted to show that while randall and stoll appeared to extend willig s local result on wta versus wtp from price changes to changes in the quantity of a public good the relevant elasticity was in fact different and involved the substitution elasticity as well as the income elasticity i view these points by amiran and hagen as not two separate results but essentially the same result their asymptotic boundedness condition generalizes my zero elasticity of substitution condition to discrete changes the asymptotic boundedness condition can be expressed as follows assuming a bivariate utility function u x q and given a reference point x q associated with a reference utility level u u x q there exists some q q such that for all q q there exists no x such that u x q u in other words no amount of x can substitute for the reduction in public good from q to q q in the case of a zero elasticity of substitution q q but as amiran and hagen show in their theorem 1 this is unnecessarily restrictive when dealing with a discrete reduction in q furthermore their theorem 2 can be viewed as a special case of their theorem 1 in which q 0 which makes q an essential commodity it is well known in consumer theory that the wta to avoid the loss of an essential market good is infinite their theorem 2 extends this result to the case of an essential nonmarket good but as their theorem 1 shows essentialness is not necessary for an infinite wta the boundedness condition is the key and this implies a fundamental lack of substitutability between money market goods and the public good

logit demand estimation under competitive pricing behavior an equilibrium framework discrete choice models of demand have typically been estimated assuming that prices are exogenous since unobservable to the researcher product attributes such as coupon availability may impact consumer utility as well as price setting by firms we treat prices as endogenous specifically prices are assumed to be the equilibrium outcomes of nash competition among manufacturers and retailers to empirically validate the assumptions we estimate logit demand systems jointly with equilibrium pricing equations for two product categories using retail scanner data and cost data on factor prices in each category we find statistical evidence of price endogeneity we also find that the estimates of the price response parameter and the brand specific constants are generally biased downward when the endogeneity of prices is ignored our framework provides explicit estimates of the value created by a brand i e the difference between consumers willingness to pay for a brand and its cost of production we develop theoretical propositions about the relationship between value creation and competitive advantage for logit demand systems and use our empirical results to illustrate how firms use alternative value creation strategies to accomplish competitive advantage

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

binary payment schemes moral hazard and loss aversion we modify the principal agent model with moral hazard by assuming that the agent is expectation based loss averse according to k o szegi and rabin 2006 2007 the optimal contract is a binary payment scheme even for a rich performance measure where standard preferences predict a fully contingent contract the logic is that due to the stochastic reference point increasing the number of different wages reduces the agent s expected utility without providing strong additional incentives moreover for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold

tacit collusion with imperfect monitoring in the canadian manufacturing industry an empirical study this article undertakes a cross sectoral analysis of a salient empirical implication of the model of tacit collusion advanced by abreu pearce and stachetti 1986 specifically we assess the prevalence of a first order markovian process for alternating between price wars and collusive periods through nonparametric tests the analysis focuses on 30 different industries in canada the evidence provides weak support for optimal collusion in one industry which is consistent with the idea that such kind of collusive arrangements is unusual or if collusion is all too common that price wars as deviations from collusion are rare

vertical relationships between manufacturers and retailers inference with limited data in this paper different models of vertical relationships between manufacturers and retailers in the supermarket industry are compared demand estimates are used to compute price cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed the purpose is to identify the set of margins compatible with the margins obtained from estimates of cost and to select the model most consistent with the data among non nested competing models the models considered are 1 a simple linear pricing model 2 a vertically integrated model and 3 a variety of alternative strategic supply scenarios that allow for collusion non linear pricing and strategic behaviour with respect to private label products using data on yogurt sold in several stores in a large urban area of the u s the results imply that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain this is consistent with non linear pricing by the manufacturers or high bargaining power of the retailers

self control and the theory of consumption to study the behavior of agents who are susceptible to temptation in infinite horizon consumption problems under uncertainty we define and characterize dynamic self control dsc preferences dsc preferences are recursive and separable in economies with dsc agents equilibria exist but may be inefficient in such equilibria steady state consumption is independent of initial endowments and increases in self control increasing the preference for commitment while keeping self control constant increases the equity premium removing nonbinding constraints changes equilibrium allocations and prices debt contracts can be sustained even if the only feasible punishment for default is the termination of the contract

a simultaneous approach to the whether what and how much to buy questions consumer s purchase decisions of whether to buy what to buy and how much to buy are examined simultaneously based on a consumer utility maximization problem an unobservable threshold price about which a consumer pivots from nonpurchase to purchase can be deduced with any model specification the interrelationships between purchase decisions can be explicitly derived the model is applied to coffee purchasing data in addition by suppressing the nonpurchase options the model is compared with an alternative approach appearing in the marketing literature

down from the mountain skill upgrading and wages in appalachia the appalachian region has experienced persistently higher poverty and lower earnings than the rest of the united states we examine whether skill differentials or differences in the returns to those skills lie at the root of the appalachian wage gap using census data we decompose the appalachian wage gap using both mean and full distribution methods our findings suggest that significant upgrading of skills within the region has prevented the gap from widening over the last 20 years additionally we find that urban areas within appalachia have not experienced the rise in returns to skills as in non appalachian urban areas

investigating purchase incidence brand choice and purchase quantity decisions of households we develop a comprehensive utility maximizing framework to study the impact of marketing variables on the category purchase brand choice and purchase quantity decisions of households for frequently purchased packaged goods the model allows for dependence among the three decisions while ensuring that these decisions provide in combination the greatest possible utility to the household by accounting for variations in reservation prices and intrinsic brand preferences across households the modeling framework explicitly captures the effects of unobserved heterogeneity on all three purchase decisions the principal empirical finding from analyzing the a c nielsen data for the yogurt product category is that the substantive implications for the effects of marketing variables are sensitive to whether these effects are determined conditional or unconditional on a product category purchase our results show that reservation prices and intrinsic brand preferences vary across households and not accounting for these variations in the estimation could lead to biased estimates for the coefficients of the marketing variables a comparison of our results to those obtained from a nested logit model of purchase incidence and brand choice reveals that our proposed model performs better using both a formal statistical test as well as the criterion of predictive validity in a holdout sample of panelists further the purchase quantity model compares favorably with two alternative models of quantity choice in the validation sample

market power vertical integration and the wholesale price of gasoline this paper examines empirically the relationship between vertical integration and wholesale gasoline prices we use discrete and differential changes in the extent of vertical integration generated by mergers in west coast gasoline refining and retailing markets to test for incentives to raise rivals costs the research design allows us to test for a relationship between vertical integration and wholesale prices controlling for horizontal market structure cost shocks and trends we find evidence consistent with the strategic incentive to raise competitors input costs this suggests that vertical integration can have a significant impact on wholesale prices

price cost margins exports and productivity growth with an application to canadian industries a model is estimated for oligopolistic industries producing multiple outputs in short run equilibrium outputs are sold domestically and exported while capital is treated as a quasi fixed factor the model is applied to the canadian non electrical machinery electrical products and chemical products industries the results show that there is significant oligopoly power in each of the industries and that the degree of this power differs between the domestic and export markets total factor productivity is decomposed price cost margins exert little influence but the rate of technological change returns to scale and the rate of capital adjustment determine productivity growth

assessing the competitive interaction between private labels and national brands in this article we employ the linear approximate almost ideal demand system la aids and specify price reaction equations derived under the la aids specification we perform intracategory analyses using data on six individual categories as well as a pooled analysis on a sample of 125 categories and 59 geographic markets we find that consumer response to price and promotion decisions demand and firm pricing behavior supply jointly determine observed market prices and market shares further estimates of residual demand elasticities suggest that examination of partial demand elasticities alone may provide an incomplete picture of the ability of brands to raise price copyright 2000 by university of chicago press

margins concentration unions and the business cycle theory and evidence for britain abstract a number of recent studies have examined the cyclical relationship between price cost margins concentration and unions u s data has concluded that unions reduce margins margins vary over the cycle and concentration unionisation and the cycle interact in their effect on margins however there is almost no theory to account for these results we propose a simple theory that assumes only that there is overhead labour present at the firm this produces theoretical predictions that can explain these results and discriminate between existing theories we present results of our own using u k panel data and show similar findings to the u s

toward an understanding of the welfare effects of nudges evidence from a field experiment in the workplace social scientists have recently explored how framing of gains and losses affects productivity we conducted a field experiment in peri urban uganda and compare output levels across 1000 workers over isomorphic tasks and incentives framed as either losses or gains we find that loss aversion can be leveraged to increase the productivity of labor the estimated welfare costs of using the loss contract are quite modest perhaps because the loss contract is viewed as a soft commitment device

is the growing skill premium a purely metropolitan issue abstract this paper documents that virtually all of the growth in the skilled wage premium over the 1980s in the united states was confined to metropolitan areas explanations for the growing skilled premium will therefore need to take location into account

labor supply of new york city cabdrivers one day at a time life cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life cycle wealth previous attempts to test this hypothesis empirically with time series data have not been supportive estimated elasticities are typically negative or nonsignificant such analyses however are vulnerable to measurement error and other estimation problems we use data on daily observations of wages and hours for new york city cab drivers to estimate the supply response to transitory fluctuations in wages cab drivers decide daily how many hours to supply and face wages that are positively correlated within days but largely uncorrelated between days using these data our central finding is that wage elasticities are persistently negative from 5 to 1 in three different samples even after correcting for measurement error using instrumental variables these negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life cycle formulations of labor supply

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low

optimal defaults and active decisions defaults often have a large influence on consumer decisions we identify an overlooked but practical alternative to defaults requiring individuals to make an explicit choice for themselves we study such active decisions in the context of 401 k saving we find that compelling new hires to make active decisions about 401 k enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt in enrollment procedure producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment we also present a model of 401 k enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment i e default enrollment standard enrollment i e default non enrollment or active decisions i e no default and compulsory choice active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous financial illiteracy however favors default enrollment over active decision enrollment

do people anticipate loss aversion there is growing interest in the use of loss contracts that offer performance incentives as up front payments that employees can lose standard behavioral models predict a trade off in the use of loss contracts employees will work harder under loss contracts than under gain contracts but anticipating loss aversion they will prefer gain contracts to loss contracts in a series of experiments we test these predictions by measuring performance and preferences for payoff equivalent gain and loss contracts we find that people indeed work harder under loss than gain contracts as the theory predicts surprisingly rather than a preference for the gain contract we find that people actually prefer loss contracts in exploring mechanisms for our results we find suggestive evidence that people do anticipate loss aversion but select into loss contracts as a commitment device to improve performance using one bias loss aversion to address another dynamic inconsistency data as supplemental material are a