what you don t see can t hurt you an economic analysis of morality laws this paper provides an efficiency explanation for regulation of sex drugs and gambling we propose that these morality laws can be explained by considering some activities to impose a negative externality when the activity is observed efficiency requires discretion by the individual who engages in such activities when discretion is difficult to regulate directly the activities can instead be proscribed thereby giving individuals incentive to hide their actions from others we find conditions for the first best levels of consumption and hiding to be implementable since some level of activity is efficient the optimal sanctions are not maximal ce memoire propose une explication en termes d efficacite des regulations sur les industries du sexe de la drogue et du jeu organise on suggere que ces lois de moralite peuvent etre expliquees quand on considere que certaines activites imposent une externalite negative quand l activite est observee l efficacite reclame donc une certaine discretion de la part de l individu qui s engage dans de telles activites quand cette discretion est difficile a reglementer directement les activites peuvent etre prohibees et de ce fait on donne aux individus une incitation a cacher leurs activites aux autres on etablit que des conditions de premier ordre sur les niveaux de consommation et de camouflage peuvent etre mises en application puisque qu un certain niveau d activite est efficace les peines optimales ne sont pas maximales

assessing horizontal mergers under uncertain efficiency gains the analysis of horizontal mergers hinges on a tradeoff between unilateral effects and efficiency gains we examine the role of uncertainty in this tradeoff in theory the attitude towards uncertainty depends on the curvature of the social objective function on the one hand adjustment effects both on the consumers and firms sides tend to make consumers surplus and firms profits convex on the other hand pass through effects may act in the opposite direction we show that convexity prevails in a number of situations including the most general linear demand model implications for empirical merger analysis are exposed

setting standards for credible compliance and law enforcement in this paper we examine the setting of optimal legal standards to simultaneously induce parties to invest in care and to motivate law enforcers to detect violators of the law the strategic interaction between care providers and law enforcers determines the degree of efficiency achieved by the standards our principal finding is that some divergence between the marginal benefits and marginal costs of providing care is required to control enforcement costs further the setting of standards may effectively substitute for the setting of fines when penalties for violation are fixed in particular maximal fines may be welfare reducing when standards are set optimally nous considerons dans cet article la determination en information incomplete de normes legales optimales pour a la fois inciter les citoyens a faire preuve de diligence prevention et motiver les agents de la paix a veiller au respect des lois l interaction strategique entre citoyens et agents de la paix determine l efficacite des normes choisies notre resultat principal est a l effet qu un ecart entre benefices marginaux et couts marginaux de la diligence est necessaire afin de reduire les couts d application des lois de plus les normes peuvent etre un substitut aux amendes lorsque les penalites pour infraction sont fixes des amendes maximales peuvent en particulier etre contre indiquees lorsque les normes sont optimalement determinees

dynamic procurement under uncertainty optimal design and implications for incomplete contracts we characterize the optimal dynamic contract for a long term basic service when an uncertain add on is required later on introducing firm risk aversion has two impacts profits for the basic service can be backloaded to induce cheaper information revelation for this service an income effect which reduces output distortions the firm must also bear some risk to induce information revelation for the add on this risk effect reduces the level of the add on but hardens information revelation for the basic service the interaction between these effects has important implications for the dynamics of distortions contract renegotiation and the value of incomplete contracts

on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

abuse of market power how should competition law deal with anti competitive behaviour by firms with market power in the light of recent ec and us cases this is perhaps the most controversial current issue for competition policy lax policy would jeopardise the competitiveness of markets but rigid policy would chill pro competitive pro consumer conduct this paper gives an economic assessment of evolving legal standards in the area the importance of developing a stronger economic basis for ec law on abuse of market dominance is stressed

on optimal legal standards for competition policy a general welfare based analysis we present a new welfare based framework for optimally choosing legal standards decision rules we formalise the decision theoretic considerations widely discussed in the existing literature by capturing the quality of the underlying analysis and information available to a regulatory authority and we obtain a precise necessary and sufficient set of conditions for determining when an economics or effects based approach would be able to discriminate effectively between benign and harmful actions and consequently dominate per se as a decision making procedure we then show that in a full welfare based approach the choice between legal standards must additionally take into account i indirect deterrence effects of the choice of standard on the behaviour of all firms when deciding whether or not to adopt a particular practice and ii procedural effects of certain features of the administrative process in particular delays in reaching decisions and the investigation of only a fraction of the actions taking place we therefore derive necessary and sufficient conditions for adopting discriminating rules as advocated by the effects based approach we also examine what type of discriminating rule will be optimal under different conditions that characterise different business practices we apply our framework to two recent landmark decisions microsoft vs eu commission 2007 and leegin vs psks 2007 in which a change in legal standards has been proposed and show that it can powerfully clarify and enhance the arguments deployed in these cases

legal standards enforcement and corruption stricter laws require more incisive and costlier enforcement because enforcement activity depends both on available tax revenue and the honesty of officials the optimal legal standard of a benevolent government is increasing in per capita income and decreasing in officials corruption in contrast to the tollbooth view of regulation the standard chosen by a self interested government is a non monotonic function of officials corruption and can be either lower or higher than that chosen by a benevolent regulator international evidence on environmental regulation shows that standards correlate positively with per capita income and negatively with corruption consistent with the model s predictions for benevolent governments jel d73 k42 l51

on the informational superiority of quantities over prices in the presence of an externality in this study we investigate the convexity of the profit function of a regulated firm with respect to the random shocks in the marginal costs and the demand intercept and its implications regarding information disclosure when these shocks are revealed to the firm at a future stage we illustrate that information disclosure is attained when the firm is regulated through the use of a quantity rather than a price instrument to do so we argue that increased convexity obtained under complete information is a sufficient condition as a policy implication we suggest a new argument which favors the use of quantities over prices these implications are more pronounced once we allow for multiple firms

legal uncertainty as a welfare enhancing screen consider legal uncertainty as uncertainty about the legality of a specific action in particular suppose that the threshold of legality is uncertain i show that this legal uncertainty raises welfare legal uncertainty changes deterrence in opposite directions the probability of conviction increases for firms below the threshold while the probability of conviction decreases for firms above the threshold hence legal uncertainty acts as a welfare enhancing screen and increases welfare legal uncertainty discourages some actions with low private benefits while it encourages other actions with high private benefits

optimal proof burdens deterrence and the chilling of desirable behavior determination of the stringency of the burden of proof is a central design question in any system of adjudication including in many private settings employee promotion and firing product launches prior work oriented towards ex ante behavior focuses on deterrence using models in which individuals decide whether or not to commit a harmful act versus abstention or perhaps instead commission of a less harmful act such as when greater precaution is taken 1 in this setting the optimal proof burden maximizes deterrence which involves maximizing the difference between the ex ante likelihoods of correct and incorrect imposition of sanctions section i briefly derives this result and shows how contrary to some suggestions it differs from the familiar preponderance of the evidence rule under which sanctions are applied if and only if it is more likely than not that the individual before the tribunal committed the harmful act such analysis however omits a central concern with the mistaken imposition of sanctions that the prospect of such error will chill desir able behavior in competition law efficient procompetitive behavior e g promotional pricing may be discouraged with securities regulation the cost of capital may be raised if honest ipos often lead to successful class action suits under tort law health care providers might avoid treatment of high risk patients for fear of erroneous malpractice liability this dimension of the problem seems widespread and is likely to be

integrating marketing and production planning in make to order companies abstract make to order companies are in the business of supplying products only in response to a customer s order they may supply unique products made to a customer s specification and or a limited range of products they range from the traditional job shop e g cutting pieces of metal to a specific shape to producers of machine tools e g a vulcanising line a major problem is the divide between sales marketing and production the production function is often faced with unrealistic delivery dates for incoming orders this arises when the sales force quote delivery dates and prices which will maximise the chance of the company winning the order the lack of coordination with production often leads to confirmed orders being delivered later than promised by sales and or being produced at a loss or alternatively production has to delay other orders with consequent extra costs the need to integrate sales and production planning considerations at the customer enquiry stage in deciding how to respond has been pointed out by several authors yet little research has been carried out the paper will discuss some possible approaches to the problem these essentially depend on estimating routinely the probability of winning an enquiry order dependent on many factors including price and lead time etc companies do not traditionally keep records of this data particularly records of unsuccessful bids and on competitors in addition the paper describes the experience of setting up a system to collect such data in a major uk company and the potential uses of such a database

regulatory risk vertical integration and upstream investment abstract we investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors regulatory risk reflects uncertainty about the regulator s commitment to a regulatory policy that promotes the regulated firm s noncontractible investment we show that when the regulator sets the regulatory policy after the vertical industry structure has been established some degree of regulatory risk is ex ante socially beneficial regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost this occurs for moderate costs of high investment and firms small risk aversion our analysis sheds new light on some relevant empirical patterns in vertically related markets

optimal production purchasing and pricing a differential game approach abstract this paper deals with a problem of determining optimal production and pricing policies of a manufacturing firm which is supplying a retailer the latter faces a price dependent demand function towards the final consumers and wishes to determine optimal purchasing and pricing policies both firms carry inventories and backlogging is permitted the problem is modelled as a two player nonzero sum differential game with the inventory levels as the state variables the controls are the rates of production and purchasing as well as the prices assuming linear production costs but convex ordering and holding costs open loop nash controls are characterized by using switching point analysis as well as phase diagrams

the other transformation in econometric practice robust tools for inference angrist and pischke highlight one aspect of the research that has positively transformed econometric practice and teaching they emphasize the rise of experiments and quasi experiments as credible sources of identification in microeconometric studies which they usefully term design based research but in so doing they miss an important part of the story a second research strand aimed at developing tools for inference that are robust to subsidiary modeling assumptions my first aim in these remarks therefore is to highlight some key developments in this area i then turn to angrist and pischke s call for adopting experiments and quasi experiments in macroeconometrics while sympathetic i suspect the scope for such studies is limited i conclude with some observations on the current debate about whether experimental methods have gone too far in abandoning economic theory

breaking the law when others do a model of law enforcement with neighborhood externalities abstract a standard assumption in the economics of law enforcement is that the probability of a violator being punished depends only on the resources devoted to enforcement however it is often true that the productivity of enforcement resources decreases with the number of violators in this paper an individual who violates the law provides a positive externality for other offenders because the probability of being punished decreases with the number of individuals violating the law this externality explains the existence of correlation between individuals decisions to break a law the model evaluates the implications when determining the socially optimal enforcement expenditure focusing specifically on the case of neighborhood crime in particular using a parametrized functional form i show that neighborhood externalities will enhance or impede enforcement depending on the crime rate

organized crime corruption and punishment we analyze an oligopoly model in which differentiated criminal organizations globally compete on criminal activities and engage in local corruption to avoid punishment when bribing costs are low that is badly paid and dishonest law enforcers work in a weak governance environment and the rents from criminal activity are sufficiently high we find that increasing policing and sanctions can generate higher crime rates indeed beyond a threshold further increases in intended expected punishment create incentives for organized crime to extend corruption rings and ensuing impunity results in a fall of actual expected punishment that yields more rather than less crime

optimal deterrence with legal defense expenditure i introduction in this article we consider a justice system which makes both type i errors sometimes convicting the innocent and type ii errors sometimes acquitting the guilty and in which legal defense expenditure on behalf of the accused can reduce their probability of conviction such expenditure has a private value but its social value is less clear we address two sets of issues first do individuals accused of crimes take socially optimal decisions about their expenditure on legal defense and if not what are the implications for public policy in terms of the regulation of defense expenditure or its provision by the state second what are the implications of legal defense expenditure for optimal deterrence policy in much of the literature on optimal deterrence welfare is the unweighted sum of the expected utilities of honest and dishonest individuals becker 1968 polinsky and shavell 1979 with such an efficiency oriented welfare function the only socially relevant aspects of legal defense are its effect on deterrence and its cost because defense expenditures reduce the probability of punishment of dishonest individuals they reduce the expected sanction on dishonest individuals and thus reduce deterrence however when there are type i errors honest individuals face the risk of wrongful arrest and conviction 1 defense expenditure by them increases the rewards for honesty what matters for deterrence are the effects of defense expenditure on the difference between the expected utility of honest and dishonest individuals we show that permitting defense expenditures may increase deterrence as compared with a system in which no such expenditure is permitted we also show that the level of defense expenditure chosen by accuseds is not efficient the private value of legal defense expenditure is the reduction in the probability of conviction both honest and dishonest individuals choose their expenditure when accused to maximize their expected utility the marginal effect of defense expenditure on the expected utility of honest and dishonest individuals at the privately optimal levels is zero consequently marginal changes in defense expenditure at the private optimum have no effect on deterrence because they do not change the difference between the expected utilities of honest and dishonest individuals but defense expenditures do have a positive marginal social cost so that the marginal private and social values of defense expenditure are different and there is scope for regulation to improve on the market equilibrium there is a commonly held view that type i and type ii errors have a direct effect on social welfare rather than an indirect one through their effect on deterrence the view is reflected in blackstone s remark that it is better that ten guilty persons escape than that one innocent suffer volokh 1997 174 2 with a justice oriented welfare function reflecting concern with type i and ii error as well as with individuals expected utilities increases in defense expenditure by the honest reduce type i errors and thereby ceteris paribus increase welfare increases in defense expenditure by the dishonest increase type ii errors and thereby directly reduce welfare with a justice oriented welfare function honest individuals spend too little on defense if the social cost of a type i error is greater than the fine imposed if the individual is convicted the marginal social value of defense expenditure by the dishonest is always negative at their privately optimal level the canonical result in efficient deterrence policy is the becker 1968 demonstration that because fines have a positive deterrent effect but a zero marginal social cost the optimal policy is to increase them to a level that leaves convicted accused with zero wealth there are few examples of deterrence regimes that use maximal fines and the becker result has generated a large literature that suggest reasons why the efficient fine should not bankrupt convicted accused garoupa 1997 polinsky and shavell 2000

fiscal policy over the real business cycle a positive theory this paper presents a political economy theory of the behavior of fiscal policy over the business cycle the theory predicts that in both booms and recessions fiscal policies are set so that the marginal cost of public funds obeys a submartingale in the short run fiscal policy can be pro cyclical with government debt spiking up upon entering a boom however in the long run fiscal policy is counter cyclical with debt increasing in recessions and decreasing in booms government spending increases in booms and decreases during recessions while tax rates decrease during booms and increase in recessions data on tax rates from the g7 countries supports the submartingale prediction and the correlations between fiscal policy variables and national income implied by the theory are consistent with much of the existing evidence from the u s and other countries

regulatory risk under optimal monopoly regulation i develop a tractable framework to study regulatory risk under optimal monopoly regulation it captures increasing regulatory risk as mean preserving spreads of two regulatory variables weights attached to profits and costs of public funds the regulator s reaction to regulatory risk depends on the curvature of demand for convex concave demand it yields a positive negative information rent effect that benefits hurts the firm consumers dislike a positive information rent effect but their risk preferences also depend on their tendency to dislike fluctuations in consumption risk preference of benevolent regulators may contradict both those of the firm and consumers

production strategies for a stochastic lot sizing problem with constant capacity abstract this paper presents a single item capacitated stochastic lot sizing problem motibated by a dutch company operating in a make to order environment due to a highly fluctuating and unpredictable demand it is not possible to keep any finished goods inventory in response to a customer s order a fixed delivery date is quoted by the company the objective is to determine in each period of the planning horizon the optimal size of production lots so that delivery dates are met as closely as possible at the expense of minimal average costs these include set up costs holding costs for orders that are finished before their promised delivery date and penalty costs for orders that are not satisfied on time and are therefore backordered given that the optimal production policy is likely to be too complex in this situation attention is focused on the development of heuristic procedures in this paper two heuristics are proposed the first one is an extension of a simple production strategy derived by dellaert 5 for the uncapacitated version of the problem the second heuristic is based on the well known silver meal algorithm for the case of deterministic time varying demand experimental results suggest that the first heuristic gives low average costs especially when the demand variability is low and there are large differences in the cost parameters the silver meal approach is usually outperformed by the first heuristic in situations where the available production capacity is tight and the demand variability is low

regulatory errors optimal fines and the level of compliance abstract this paper shows that with a hierarchical structure of enforcement regulatory errors cause the optimal penalty to be non maximal even if offenders are risk neutral and fines are pure transfers and the private benefit from violation is strictly less than the social cost for all individuals in contrast with error free monitoring no finite fine is optimal within the same hierarchical structure also full compliance is an equilibrium outcome in the presence of errors whereas in the absence of errors the regulator can achieve only partial compliance

marketing production decisions in an industrial channel of distribution this paper presents a model that considers the interface between marketing and production decisions in a channel of distribution of industrial goods comprised of a manufacturer and a distributor the key issue investigated is the nature of the coordination within the channel in light of an unstable pattern of seasonal demand the investigation which focuses on dynamic issues considers production activities such as product delivery and inventory policy and their link to marketing strategies such as pricing policies the focus here is on the dynamic nature of the coordinational aspects of the various policies for example the following questions are addressed what is the distributor s pricing strategy throughout the season what is the nature of the contractual price in the channel under what conditions should the distributor carry no inventory throughout the seasonal period under what conditions should the manufacturer carry no inventory what is the impact of the seasonal parameters and differing h

due date dd quotation and capacity planning in make to order companies results from an empirical analysis the current competitive context puts manufacturers under increasing pressure to provide products and services that meet the particular requirements of individual customers calling for high flexibility in business processes the complexity and the uncertainty of demand are particularly high in customized contexts such as the make to order mto and engineer to order eto sectors where the ability to deal with more and more differentiated requirements in terms of product features delivery lead time and cost is crucial in order to be competitive in such a context due date dd quotation and capacity evaluation at the customer enquiry stage are of strategic importance having a large impact on the company performance despite the large impact on company performance the importance of dd setting and order acceptance processes and related decisions is often underestimated in practice and the issue is underexposed in the literature as the applicability of most of the proposed models is limited and there are too few empirical studies describing the practices adopted for capacity and delivery lead time management in industrial contexts this study is aimed at developing an understanding of these practices based on a sample of 15 italian capital goods manufacturers an interpretative framework is proposed in order to identify the main contextual factors impacting company choices a model that formalizes the decision process for setting dds in the analyzed cases is then proposed suggesting different procedures depending on the type of enquiry submission dd set by companies or customers and customer order fast or slow

antitrust enforcement under asymmetric information optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting the antitrust authority does not know cartel costs and so cannot distinguish between a high cost competitive industry and a low cost cartel the problem differs from principal agent models since firms can choose competitive or collusive behavior with costly enforcement the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price collusive firms moderate markups to reduce the risk of being prosecuted copyright 1989 by royal economic society

pricing and lead time decisions for make to order firms with contingent orders abstract make to order mto firms have few standard products and volatile difficult to predict demand a production order usually stems from a successful bid which presents the mto firm s terms including price and lead time to satisfy a prospective customer s stated requirements the customer may decide to accept reject or modify these terms until the customer decides the tendered bid is a contingent demand on the mto firm s future production capacity in the short run this capacity may be relatively fixed and if the customer awards the contract to another bidder it may simply go to waste to hedge against this possibility the mto firm can bid on other projects that require the same capacity however this strategy introduces a new source of lead time uncertainty if two or more booked orders must contend for the same resources some work will inevitably be bumped to later time periods thus a hedging strategy carries the risk of penalties for late deliveries in this paper we model this little discussed source of lead time uncertainty and introduce a technique that simultaneously optimizes pricing and lead time decisions for mto firms with contingent orders we illustrate the procedure with a simple numerical example

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

mimicking errors and the optimal standard of proof abstract criminals often engage in costly avoidance to lower their likelihood of being detected and sanctioned such avoidance in turn affects the optimal enforcement policy this paper studies how the optimal standard of proof is affected by a specific type of avoidance namely investments by guilty defendants to mimic innocent individuals we show that when mimicking is possible the optimal standard of proof is weaker than preponderance of the evidence this stands in contrast to much of the literature which shows that non deterrence costs usually cause the standard of proof to be stronger than preponderance thus it is important not to ignore criminals secondary behavior when determining the optimal standard of proof

why higher punishment may reduce deterrence abstract assuming that the willingness to find a potentially innocent defendant guilty is decreasing in punishments we derive two results deterrence is decreasing when punishments are too high and deterrence maximizing punishments tend to increase in the quality of legal systems

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

extremism in revolutionary movements abstract a revolutionary entrepreneur strategically chooses the revolutionary agenda to maximize the likelihood of revolution citizens have different preferences and can contribute varying degrees of support we show 1 extremists exert a disproportionate influence over the revolutionary agenda 2 depending on the structure of repression more severe repression can moderate or radicalize the revolutionary agenda specifically increases in the minimum punishment marginal cost of revolutionary effort at its minimum radicalize the revolutionary agenda this presents the elite with a tradeoff between extreme but unlikely revolutions and moderate but likely ones 3 competition between revolutionary entrepreneurs can radicalize the revolutionary agenda

regulatory decision errors legal uncertainty and welfare a general treatment abstract we provide a general treatment of the implications for welfare of various sources of legal uncertainty facing agents about the decisions made by a regulatory authority we distinguish the legal uncertainty from the decision errors made by the authority while an increase in decision errors will always reduce welfare for any given level of decision errors information structures involving more legal uncertainty can improve welfare this holds always when sanctions are set at their optimal level this transforms radically one s perception about the costs of legal uncertainty we also provide general proofs for two results previously established under restrictive assumptions

the limits of antitrust the author argues that the inhospitality tradition in antitrust has serious costs and causes judges to reject economically beneficial business practices he also contends that the main alternative to the inhospitality tradition the rule of reason enunciated by the supreme court does not provide useful guidance to judges in antitrust because it is completely open ended and provides no assistance in determining how to weigh the relevant factors he then proposes his own alternative approach error cost framework to deciding anti trust cases specifically he suggests that judges should mimic the approach taken by economists and deploy a series of presumptions or filters to guide their inquiry the author believes this would make it easier for businesses to plan their affairs and also reduce litigation costs

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

criminal deterrence in the reduced form a new perspective on ehrlich s seminal study i introduction perhaps the best known and most influential econometric analysis of the deterrent effect of criminal penalties is isaac ehrlich s 1973 participation in illegitimate activities a theoretical and empirical analysis he reported large and significant marginal deterrent effects of penalties for a wide range of crimes ehrlich s work was heavily criticized on methodological grounds and many subsequent studies have contradicted his results while still others have not 1 nonetheless ehrlich s work remains an important hallmark in the study of criminal deterrence this note is motivated by recent research that indicates that penalties may have indirect consequences that could reduce their deterrent effect higher penalties could for instance encourage a criminal to spend more effort avoiding detection and prosecution malik 1990 and snyder 1990 for instance as lott 1987 1992 shows higher penalties may increase the amount of money criminals spend on legal defense 2 this means that higher penalties could reduce the probability of apprehension and conviction in addition a feature of the legal system may generate another way for higher penalties to reduce the probability of punishment this feature is that judges and juries must apply the reasonable doubt test to their decision to convict a defendant assume that jurors establish the level of doubt which is reasonable by finding the threshold that will minimize expected social losses if juries like criminals have a forecast of likely penalties then as the expected penalty rises the cost of an incorrect conviction also rises this means the juror s threshold level of reasonable doubt will rise as well the effect is to reduce the probability that a given defendant will be convicted andreoni 1991 if either the avoidance or the reasonable doubt effect is significant then this will mitigate the direct deterrent effect of penalties on crime rates reexamining ehrlich s work we see that his prime objective was to identify a single equation in a three equation simultaneous equations system that being the equation predicting crime rates he found significant negative coefficients on penalties which he took as evidence for his theoretical model of criminal behavior in which criminals could be deterred by higher penalties if more recent theories are correct in claiming that higher penalties may also decrease the chance of conviction then ehrlich s estimation of the single equation will not tell a complete story in particular we must estimate a reduced form model which will capture both the direct and indirect effects of penalties on crime rates this paper will address these questions using ehrlich s original data replicating ehrlich s regressions we find strong direct deterrent effects of penalties however we also find that increased penalties have a significant negative affect on the probability of conviction as predicted by the theoretical studies we combine these effects by examining the reduced form equations for both crime rates and probabilities of conviction we find that the total effect of penalties on crime rates is approximately zero for all twelve crime categories considered but that the effects of penalties on probabilities of conviction remain negative and significant in the reduced form equations this note allows for two general conclusions first we provide some evidence for theoretical models that predict that penalties may reduce the probability that criminals will be convicted second and more importantly despite one s views on the many widely discussed methodological issues surrounding ehrlich s seminal work when generalized to account for possibilities that higher penalties may reduce the probability of conviction his data generate much different policy implications than those widely adopted at the time of his paper s publication ii specification this section discusses the specification of the structural equations for ehrlich s original study

enforcement costs and the choice of policy instruments for controlling pollution i introduction when evaluating policy instruments for controlling pollution analysts generally agree that economic incentives are superior to direct controls in terms of minimizing abatement costs however when it comes to minimizing enforcement costs there is no such agreement some analysts such as freeman et al 1973 and anderson et al 1977 argue that economic incentives would be much easier to enforce than direct controls while others such as drayton 1978 argue that they would be virtually unenforceable the debate typically centers on technical difficulties in continuously monitoring emissions and to a lesser extent on political and legal issues related to the assessment of penalties 1 an issue that has not been examined is whether there are economic reasons for enforcement costs to vary across policy instruments although there is now a sizable economic literature on the problem of noncompliance with pollution control policies there have been no attempts to formally compare enforcement costs across policy instruments 2 accordingly the purpose of this note is to examine whether there are economic grounds for arguing that enforcement costs would be lower for economic incentives than direct controls 3 the policy instruments compared are marketable permits or emissions taxes and uniform standards the instruments are compared in a setting where the penalty schedule is previously specified by some judicial or legislative body and the regulator s enforcement policy is limited to the choice of audit frequency the analysis is based on the premise that for any policy instrument that targets emissions the regulator will have to periodically monitor emissions and assess penalties for noncompliance the relevant question then is whether less frequent monitoring would be required to ensure compliance with economic incentives casual analysis suggests this should be the case economic incentives minimize aggregate abatement costs and lower abatement costs imply lower costs to firms of complying this should imply in turn that less stringent enforcement is needed to achieve compliance this argument although intuitively appealing is flawed using a simple model of pollution control with costly enforcement i show that enforcement costs narrowly defined may be higher for economic incentives for purposes of exposition the result is established in a setting where the regulator ensures each firm is fully compliant however as shown in the appendix the result generalizes to the more realistic setting where firms are partially compliant ii the model consider a group of n risk neutral firms emitting a single pollutant for simplicity the damages from the pollutant are assumed to depend only on total emissions each firm s abatement costs are given by a strictly convex function c sub i x sub i that is decreasing in emissions x sub i the firm s maximum emissions level is denoted mathematical expression omitted and is defined by mathematical expression omitted with probability p sub i a regulator audits each firm and measures its emissions if the regulator finds the firm s actual emissions x sub i exceed its allowed emissions s sub i the firm is assessed a fine of f x sub i s sub i as is common in the literature on enforcement i assume the fine schedule is previously specified e g by a legislative body 4 thus the regulator can choose the probability with which it audits firms but not the fine it assesses for noncompliance i assume the fine schedule is such that both the total fine and marginal fine are increasing in the violation size x sub i s sub i f prime is greater than 0 and f prime prime is grater than 0 because the regulator is assumed to ensure full compliance no violations occur and no fines are collected therefore enforcement costs consist solely of auditing or monitoring costs to simplify the analysis the cost of conducting an audit a is assumed to be the same across firms

investment and screening under asymmetric endogenous information this article provides an analysis of screening contracts in a complete but imperfect information environment as opposed to the usual incomplete information bayesian environment an agent faces a hold up situation while making a cost reducing specific investment that is not observed by the principal to prevent the hold up the agent randomizes his investment strategy and the principal offers a screening contract the informational rents provided by the equilibrium contract finance the investment for a large class of cost functions the randomization is such that the marginal surplus follows a power distribution

time series analysis cointegration and applications author s granger clive w j abstract this is the speech that professor granger gave at nobel prize awards 2004

imperfect competition law enforcement competition policy is a subject of often heated debate competition authorities seeking to prevent or battle anticompetitive acts in complex cases to the best of their abilities regularly find themselves advised by rival economic theories and disputed empirical analyses as a consequence there is a real possibility that they may occasionally err missing true violations of competition law or finding firms liable that actually had no other intentions than good competition in this paper possible consequences of such imperfect competition law enforcement on firm strategies are considered in a simple model of collusion it is found that the incidence of anti competitive behavior increases in both types of enforcement errors type ii errors decrease expected fines while type i errors encourage industries to collude precautionary when they face the risk of a false conviction hence fallible antitrust enforcement may stifle genuine competition thus stimulating the very behavior competition policy is meant to deter when enforcement errors are non negligible competition authorities run the risk of being over zealous in the sense that welfare is best served by an authority that is selective and conscientious in its targeting of alleged anticompetitive acts

on the role of empirical industrial organization in competition policy abstract in this paper i consider the role of empirical industrial organization io in competition policy in particular i consider the effect of the institutional setting in which competition policy is developed on the diffusion of ideas and techniques emerging from the empirical io literature in doing so my aims are two fold first i aim to understand the areas of competition policy most likely to provide fertile ground for future work and those which are less likely to have an impact and second i hope to make a small step towards ensuring that the important potential synergies between competition policy and empirical io are more fully developed to the benefit of both communities and more importantly the public this paper necessarily draws heavily on my experience in the uk but many remarks may resonate more generally

optimal law enforcement with sophisticated and naive offenders abstract research in criminology has shown that the perceived risk of apprehension often differs substantially from the true level to incorporate this insight we extend the standard economic model of law enforcement becker 1968 by considering two types of offenders sophisticates and naives sophisticates always fully take the actual enforcement effort into account while naives do so only when the effort is revealed by the authority otherwise naives rely on their fixed perceptions when the share of naives is high a welfare maximizing authority chooses a low enforcement effort which is over estimated by the naives otherwise it chooses a high effort which is then revealed to all potential offenders in three empirically relevant extensions we allow for lower efficacy of the effort due to avoidance activities endogenous fines and heterogeneity with respect to naives perceptions

to comply or not to comply pollution standard setting under costly monitoring and sanctioning in this paper we characterize optimal regulatory policies composed of a pollution standard a probability of inspection and a fine for non compliance in a context where both monitoring and sanctioning are socially costly and the penalty may include gravity and non gravity components at the regulator s discretion under given penalties the optimal policy entails compliance with the standard as long as a quite intuitive condition is met non compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages interestingly the appropriate structure of the penalty under non compliance is highly progressive while the best possible shape of the fine under compliance is linear if the regulator is entitled to choose the structure of the fine linear penalties are socially preferred and the optimal policy induces compliance

the optimal use of fines and imprisonment abstract this paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities these sanctions are analyzed separately as well as together first for identical risk neutral individuals and then for two groups of risk neutral individuals who differ by wealth when fines are used alone and individuals are identical the optimal fine and probability of apprehension are such that there is some underdeterrence if individuals differ by wealth then the optimal fine for the high wealth group exceeds the fine for the low wealth group when imprisonment is used alone and individuals are identical the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence if individuals differ by wealth the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group when fines and imprisonment are used together it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term the effects of risk aversion of these results are also discussed

environmental enforcement when inspectability is endogenous a model with overshooting properties if a firm can influence its monitorability vis a vis an environmental regulator it is shown that increasing the thoroughness of inspections induces the firm to substitute towards more transparent technologies whilst increasing their frequency may cause substitution the other way perversely when the effect of such substitution is taken into account an increase in the frequency of inspections or equally the stringency of penalties may worsen the firm s environmental performance the agency should favour more thorough inspections than existing theory suggests particularly in sectors where the scope for such substitution is great moreover when monitorability adjusts only sluggishly to policy shocks because it is an embodied characteristic of capital for example the environmental impacts of increased frequency and increased thoroughness well over and under shoot their respective long run impacts in assessing regulatory reform therefore it is important to leave sufficient time for the class of adjustments identified to occur the possibility of overshooting can be used as an alternative to existing regulatory capture theories to explain why the efficacy of some classes of regulatory reform may fade through time

price dynamics of crude oil and the regional ethylene markets abstract this paper is the first attempt to investigate i is the crude oil wti price significantly related to the regional ethylene prices in the naphtha intensive ethylene markets of the far east north west europe and the mediterranean ii what drives the regional ethylene prices the paper is motivated by the recent and growing debate on the lead lag relationship between crude oil and ethylene prices our findings based on the long run structural modelling approach of pesaran and shin and subject to the limitations of the study tend to suggest i crude oil wti price is cointegrated with the regional ethylene prices ii our within sample error correction model results tend to indicate that although the ethylene prices in north west europe and the mediterranean were weakly endogenous the far east ethylene price was weakly exogenous both in the short and long term these results are consistent during most of the period under review 2000 1 2006 4 with the surge in demand for ethylene throughout the far east particularly in china and south korea however during the post sample forecast period as evidenced in our variance decompositions analysis the emergence of wti as a leading player as well is consistent with the recent surge in wti price fuelled mainly among others by the strong hedging activities in the wti futures options and refining tightness reflecting the growing importance of input cost in determining the dynamic interactions of input and product prices

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

financial fragility in the great moderation abstract a nascent literature explores the measurement of financial fragility this paper considers evidence for rising financial fragility during the 1984 2007 great moderation in the u s the literature suggests that macroeconomic stability combined with strong growth of credit to asset markets in asset prices and in credit relative to output are all indicators of rising financial fragility we show each of these trends in the great moderation we derive the testable implication that in the great moderation credit growth is driven more by past credit growth and less by output growth allen and gale 2000 relative to pre great moderation years results from a var model estimated on quarterly data for 1955 2007 are consistent with the hypothesis this invites a reinterpretation of the great moderation our methodology may help understand when a credit boom turns into a credit bubble and contributes to the development of methods of measuring financial fragility