the cyclicality of international public sector borrowing in developing countries does the lender matter abstract the paper shows that international government borrowing from multilateral development banks is countercyclical while international government borrowing from private sector lenders is procyclical the countercyclicality of multilateral development bank mdb lending is mostly driven by the behavior of the world bank borrowing from regional development banks tends to be acyclical the paper also shows that mdb lending to latin america and east asia is more countercyclical than mdb lending to other regions private sector lending is instead procyclical in all developing regions while the cyclicality of mdb lending does not depend on domestic or international conditions private lending becomes particularly procyclical in periods of limited global capital flows by focusing on both borrower and lender heterogeneity the paper shows that the cyclical properties of international government debt are mostly driven by credit supply shocks demand factors appear to be less important drivers of procyclical international government borrowing the focus on supply and demand factors is different from the traditional push and pull classification as push and pull factors could affect both the demand and the supply of international government debt

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

contracting for software development software contracting is a multi faceted issue that involves legal economic managerial and technological considerations to better understand the economic aspect of software contracting this paper provides a summary review of software development contracts followed by a gametheoretic model developed to incorporate incentive and information issues associated with software contracting in the model an outside contractor is hired to develop a software system over multiple periods due to the uncertainties about costs or technology the developer faces the risk of having to abandon the project at an intermediate phase the user is better informed of the benefit of the system while the developer privately discovers the development costs as the project advances given the limited information the contracting parties make decisions in their own interest leaving each party vulnerable to the other s opportunistic behavior in this setting we construct a viable contract that aligns the incentives of the contracting parties and produces the same equilibrium outcome as in in house development we also relate the implications of the model to the actual contract cases

does a procurement service provider generate value for the buyer through information about supply risks we consider a supply chain with one buyer and two suppliers who are subject to disruptions and whose likelihoods of disruption are their private information in such a setting does the buyer benefit from engaging the services of a better informed procurement service provider psp compared to procuring directly from the suppliers intuition might suggest that hiring a psp is always the right choice because the psp s knowledge of the supply base improves supplier selection and management on the other hand earlier studies prove that using a psp purely for its superior knowledge about supply costs is always worse for a buyer than contracting with the suppliers directly our answer to this research question is more nuanced contrary to the findings of earlier studies we find that the buyer may benefit from using a psp we identify quantify and explain all of the benefits and the costs of using a psp and describe conditions under which the benefits exceed the costs the benefits of using a psp are deriv

simple contracts renegotiation under asymmetric information and the hold up problem abstract in this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non trivial it is argued that the default decision may be interpreted as a simple contract that the parties have written ex ante this result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold up problem to be solved even if the parties valuations are private information

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

second sourcing and the experience curve price competition in defense procurement we examine a dynamic model ofprice competition in defense procurement that incorporates the experience curve asymmetric cost information and the availability of a higher cost alternative system we model acquisition as a two stage process in which initial production is governed by a contract between the government and the developer competition is then introduced by an auction in which a second source bids against the developer for remaining production we characterize the class of production contracts that are cost minimizing for the government and that induce the developer to reveal private cost information when high costs are revealed these contracts result in a credible cutoff of new system production in favor of the still higher cost alternative system

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

the common pool dilemma of global public goods lessons from the world bank s net income and reserves the function of international organizations ios as suppliers of international or global public goods gpgs has received increasing attention in recent years but in a world with many claimants and limited resources gpgs are more likely to have common pool properties than be pure public goods the paper develops a joint products model of public goods supply by international organizations examining how specific institutional features of international organizations affect the supply of gpgs the sources and distribution of the world bank s net income the single largest source of discretionary funds available annually to an io are used as the lens to analyze the issue the paper examines the tension between control rights on net income which reside primarily with nonborrowing shareholders and the sources of net income which largely lie with minority borrowing shareholders the analysis suggests that while the joint product model of member country support for international organizations has much merit institutional features that were incorporated when these institutions were established sharply affect both the absolute magnitude and the distribution ratio of the benefit streams

two sided uncertainty and up or out contracts a bilateral moral hazard problem provides a rationale for up or out employment contracts the employer sets a wage higher than opportunity cost to induce the worker to invest in firm specific capital if the individual does not make the grade it is in the firm s interest ex post to fire him had the initial arrangement not included provisions for firing individuals the firm would underreport the value of the employee wrecking the incentive scheme the basic model permits both firm and worker to be risk neutral therefore it admits a straightforward multiperiod extension which we also investigate

price and quality competition under adverse selection market organization and efficiency firms compete with prices and qualities in markets where consumers have heterogeneous preferences and cost characteristics consumers demand two goods which can be supplied jointly or separately by firms we consider two strategy regimes for firms uniform price quality pairs and screening price quality menus for each regime we compare the equilibria under integration each firm supplying both goods and separation each firm supplying one good integrating and separating markets change quality efficiency and welfare the theory illustrates phenomena such as the carveout of mental health and substance abuse coverage from general health insurance and creaming for low cost students in locales with school choices copyright 2003 by the rand corporation

balanced bayesian mechanisms in the transferable utility case a number of authors have identified conditions on beliefs that guarantee the existence of bayesian incentive compatible mechanisms with balanced transfers we present a new easy to interpret condition and we show that it is strictly more general than all the other conditions found in the literature we also study conditions guaranteeing the bayesian implementability of all social decision rules with balanced budget mechanisms

auctioning incentive contracts this paper draws a remarkably simple bridge between auction theory and incentive theory it considers the auctioning of an indivisible project among several fi rms the firms have private information about their future cost at th e bidding stage and the selected firm ex post invests in cost reduct ion the authors show that 1 the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid 2 the winner faces a linear incenti ve contract 3 the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost and 4 the share of cost overruns borne by the winn er decreases with the winner s announced expected cost copyright 1987 by university of chicago press

optimal contracts with public ex post information abstract we are concerned with the value of public ex post information about a seller s costs to an initially uninformed buyer we derive necessary and sufficient conditions for a public ex post signal s s that is correlated with the risk neutral seller s costs to render the initial information asymmetry inconsequential to the buyer the first best outcome for the buyer is shown to be feasible if 1 the dimension of s is at least that of or 2 the conditional likelihood function of s given is for one of its realizations sj a strictly increasing function of and more concave in than is the seller s cost function

money and the dispersion of relative prices a price dispersion equation is tested with data from the german hyperinflation the equation is derived from a version of lucas s and barro s partial information localized market models in this extension different excess demand elasticities across commodities imply a testable dispersion equation in which the explanatory variable is the magnitude of the unperceived money growth in order to test this hypothesis a price dispersion series is constructed and a measure of the unperceived part of money growth is estimated the model receives support from the empirical analysis although it is evident that unincluded variables have important effects on price dispersion

borrowing costs and the role of multilateral development banks evidence from cross border syndicated bank lending abstract cross border bank lending is a growing source of external finance in emerging and developing countries and could play a key role in infrastructure and development financing this paper looks at the role of multilateral development banks mdbs on the terms of syndicated loans focusing on loan pricing the results show that mdbs participation is associated with higher borrowing costs and longer maturities signaling a greater willingness by mdbs to finance risky projects which may not be financed by the private sector we also show that mdbs are more likely to lend to borrowers located in countries with high credit and financial risk overall our findings suggest that mdbs could play a role in easing access to credit for high risk borrowers

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

multidimensional incentive compatibility and mechanism design abstract incentive compatibility conditions are characterized in general for problems in which several goods are to be allocated and agents types are multidimensional two questions of monopoly pricing under multidimensional uncertainty are then analyzed first we find the optimal nonlinear pricing scheme when the monopolist knows only the distribution of an arbitrarily parameterized family of demand curves and second we solve for the optimal bundling policy for a multiproduct monopolist

the scope of imf conditionality international organizations are governed by two parallel sets of rules formal rules which embody consensual procedures and informal rules which allow exceptional access for powerful countries a new data set drawn from the imf s records of conditionality provides an opportunity to study the bargaining process within an important international organization and answer questions about the institution s autonomy i find evidence of u s influence which operates to constrain condition ality but only in important countries that are vulnerable enough to be willing to draw on their influence with the united states in ordinary countries under ordinary circumstances broad authority is delegated to the imf which adjusts conditionality to accommodate local circumstances and domestic political opposition the imf has refrained from exploiting the vulnerability of particular countries to maximize the scope of conditionality international organizations have become increasingly important actors in inter national politics they have proliferated have expanded in membership have acquired new legal enforcement powers and have extended their reach into the details of domestic political economy in their member states af ew including the international monetary fund imf or simply the fund command significant resources and wield considerable authority some critics have argued that these international organizations are sufficiently autonomous to create a democratic def icit at the international level as they pursue a vision of undemocratic liberal ism 1 other critics have argued that international organizations are nothing more than instruments in the hands of powerful states 2 these critiques of course cannot simultaneously be true and both run into difficulties the puzzle that the rogue agency view cannot explain is why the principals have chosen to delegate so much authority in principal agent terms this view posits that both screening and monitoring have failed the principals are unable to select agents with preferences similar to their own and are unable

bilateral monopoly with imperfect information abstract the problem at stake in this paper is the determination of the price and the quantity transacted in a bilateral monopoly with imperfect information a simple characterization of incentive compatible contracts is given that significantly generalizes a previous one due to green and honkapohja this allows an easy study of two interesting families of such contracts and their institutional counterpart namely cost plus contracts and contracts with quantity rationing

relative price changes and exchange rate determination with slow price adjustment an empirical analysis the general purpose of this paper is to analyze empirically sectoral price adjustment in the exchange rate adjustment process relative price changes may occur within a sector between countries and within a country between sectors our main objective is to test the hypothesis that both kinds of relative price changes occur in the adjustment process to disturbances in money demand and supply in particular we expect that the relative prices among goods of different tradedness ranging from perfectly traded to non traded goods are affected by such disturbances our second objective is to test empirically whether the nature of exchange rate adjustment is affected by the average speed of sectoral price adjustment towards the law of one price and whether the exchange rate overshoots purchasing power parity after monetary disturbances we build on a model developed by dornbusch 6 and extended by mussa 17 they argue that the exchange rate may overshoot its purchasing power parity level after monetary disturbances as a result of slow price adjustment in the market for domestically produced goods the price of imported goods follows the law of one price we modify the dornbusch mussa model to distinguish between domestically produced goods for which the law of one price may hold to different degrees relative price changes in the adjustment process to monetary disturbances have gained

decentralization hierarchies and incentives a mechanism design perspective separation of ownership from management multidivisional firm organizations delegation of production decisions to worker teams delegation of pricing and advertising decisions to retail franchisers reliance on intermediaries in trade or finance and distribution of regulatory authority across different agencies represent examples of organizations that delegate and distribute decision making authority instead of centralizing it this paper reviews literature on costs and benefits of delegated decision making in hierarchical organizations or contracting networks with regard to problems of incentives and coordination it starts by describing incentive and coordination costs of delegation in simple canonical examples of hierarchies where both information and incentives of different decisionmakers differ one class of models pertain to contexts where the classical revelation principle applies i e where costs of contractual complexity information processing or communication are absent agents do not collude and the mechanism designer can commit to the mechanism delegation may conceivably entail a loss of control and coordination arising from the divergence of information and incentives sufficient and necessary conditions for this loss to be mitigated entirely include risk neutrality top down contracting and monitoring of transfers or production assignments between subordinates the next class of models introduces communication costs that restrict the performance of centralized arrangements relative to delegation owing to a resulting loss of flexibility which has to be traded off against possible control losses of delegation finally consequences of collusion among agents is discussed which typically enlarge the range of circumstances under which delegation can attain optimal second best outcomes the paper concludes with a discussion of the relevance of this theoretical literature to recently emerging empirical studies of industrial organizations where delegated decision making plays an important role adoption of innovative human resource management practices new information technologies and retail franchising

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

the changing architecture of advertising agencies in contrast to other marketing activities advertising is usually outsourced historically to an integrated full service advertising agency that provides both creative and media services recently major changes have occurred specialized media shops have appeared and large holding companies with several agencies and a separate media shop have emerged this paper describes how firms in the current industry structure choose their agents a theoretical section specifies the firm s decision process in obtaining the creative and media components conditions under which one or both could be effectively produced internally are identified in the prevalent case when these components are outsourced we evaluate whether they can be more efficiently produced by a bundled full service agency or by unbundling to separate agents an empirical section tests the theory implications with cross sectional data on u s firm choices of advertising agents the bundled full service agency is still widely used firms with large advertising budgets unbundle to take advantage of media discounts obtained by market making media shops internal agencies are used when firms have internal creative abilities or have low level requirements in both creative and media the creative and media agencies within holding companies are found to act independently

marketing information a competitive analysis selling information that is later used in decision making constitutes an increasingly important business in modern economies jensen jensen fred o 1991 information services congram friedman eds the ama handbook of marketing for the service industries chapter 22 ama com new york 423 443 information is sold under a large variety of forms industry reports consulting services database access and or professional opinions given by medical engineering accounting financial and legal professionals among others this paper is the first attempt in marketing to study competition in the rapidly emerging information sector specifically we are interested in answering the following questions 1 is competition fundamentally different when competing firms sell information rather than traditional goods and services and if yes why 2 what are the implications of such differences for decision makers marketers and regulators 3 can we explain some of the observed marketing strategies in the information industry as such the audience of the paper includes academics as well as professionals who are interested in understanding what is specific about competition in information markets familiarity with the practical implications of such differences and understanding of the mechanisms that drive them is essential for those who are faced with the problem of marketing information to answer the above research questions we build a simple game theoretic model that consists of two firms selling information to a population of consumers who are heterogeneous in their willingness to pay for the quality of information the most important features of the model are the following information products sold by the two firms are modeled as random draws from two normal distributions having equal mean the variances of these distributions and their correlatedness constitute the product attribute space which is assumed to be common knowledge consumers are interested in assessing the mean of the distributions and to do so they can buy the sample from any of the firms or they can buy both samples and combine them to obtain a more accurate estimate quality of information is linked to the accuracy of consumers estimate of the mean which in turn is influenced by the accuracy of each sample as well as by their correlatedness consumers utility depends on the quality of information they purchased on their inherent utility for quality taste and on the total price they paid to acquire information knowing consumer preferences firms simultaneously price their information products the main finding of the paper is that information markets face unique competitive structures in particular the qualitative nature of competition changes depending on basic product characteristics while traditional products and services compete either as substitutes or as complements in the relevant product attribute space information may be one or the other depending on its position within the same product attribute space said differently the nature of competition changes qualitatively with a continuous change in basic product attribute levels the intuition behind this finding is the following when purchasing information consumers facing important decisions may find it beneficial to purchase from several information sellers this is more likely to happen when the reliability of information is low and the sources of information are independent under such conditions information products tend to be complements and as a result competition between sellers is relatively mild in the opposite case when information is reliable and or sellers sources are highly correlated consumers are satisfied after consulting a single source in this case information products are substitutes and sellers tend to undercut one another s prices to induce consumers to choose their brand understanding this discontinuity in competitive structures has important implications for decision makers as very different strategies are optimal under different product characteristics under substitution traditional strategies to avoid competition e g differentiation are recommended when the competing products reliability is generally low they are complements firms are better off accommodating competition in fact we find that a firm may benefit from inviting a competitor finally our findings are also important for regulators of information markets as the literature on complementarity suggests price fixing agreements between firms offering complementary products may benefit firms as well as consumers

regulating a monopolist with unknown demand and cost functions we consider the design of regulatory policy when the regulator is imperfectly informed about both the firm s cost function and the demand function it faces to some extent the optimal policy here is the natural combination of the optimal policies when there is uncertainty only about either demand or cost important qualitative differences also exist however for example it may be optimal to set prices below marginal cost and the pricing authority delegated to the firm may be more limited when there is uncertainty about both cost and demand

bargaining and regulation with asymmetric information about demand and supply abstract rate regulation is studied as a bargaining process in which consumers and the firm negotiate output and payments under asymmetric information the feasible set of transactions given incentive compatibility and individual rationality constraints is characterized the set of interim incentive efficient mechanisms for the direct revelation game is also characterized sufficient conditions are given for efficient mechanisms to be full information efficient efficient mechanisms are identified which correspond to nonlinear monopoly pricing monosony compensation schedules and the baron myerson regulation model

awarding monopoly franchises the authors analyze how to award a monopoly franchise when the objective is to maximize expected consumers surplus net of transfer payments to the producer potential producers initially possess independent private information about uncertain production costs only the chosen producer subsequently observes realized production costs after awarding the franchise to the producer with the lowest expected costs prices are optimally set above realized marginal cost these ex post distortions foster more competitive bidding ex ante the distortions for any bid cost pair are invariant to the number of bidders n though expected distortions and profits decline with n copyright 1987 by american economic association

competition for procurement contracts and underinvestment a two period model is considered in which ex ante identical firms invest in period one and in period two after they learn their costs the lowest cost firm is chosen as the winner of the contract it is found that even though firms are racing against one another they end up underinvesting relative to the ex ante socially optimal levels when the buyer is unable to credibly precommit to the second period contract

information sharing in union firm relationships large firms often negotiate wage rates with labor unions when they do an ex ante agreement to share information should make it more likely that they will reach an agreement and capture the gains from trade however if the firm refuses to share information the union may shade down its wage demand to increase the probability of acceptance this reduction in the wage can increase the joint surplus of the agents and increase social welfare as a result there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information many firms and their input suppliers form long term relationships in which they periodically negotiate their terms of trade as has long been recognized the presence of private information can cause negotiations to break down on occasion resulting in an inefficient disruption of production for example the united auto workers with superior knowledge of its strike fund and or its member s outside options may call for a strike against general motors if the firm is unwilling to meet its wage demands and the firm s unwillingness to concede may be due to its superior knowledge of demand productivity and or its stock of inventories theoretically such disruptions could be avoided if the agents would simply agree to reveal their private information before the negotiations begin 2 whether or not this will occur is unclear however since some agents may be unwilling to enter into such an agreement if it sufficiently weakened their bargaining position the literatures on noncooperative bargaining and mechanism design have already dealt with many of the issues that arise in this environment in the bargaining literature it is generally assumed that the agents already possess the private information and then the implications of different bargaining processes are examined see ausubel et al 2002 for a survey in the mechanism design literature one of the questions addressed is whether the agents can find a way to commit to ex

credible commitments contract enforcement problems and banks intermediation as credibility assurance abstract we consider contract enforceability problems in credit transactions and justify a bank as an organizational solution to market breakdown due to unenforceable contracts specifically we explain i why loan commitments exist and ii why banks exist to sell such commitments a loan commitment resolves moral hazard more efficiently than any combination of inside equity and spot credit however the market breaks down if commitment sellers are individuals because their promises to honor contracts are not credible with a large bank a perfect sequential equilibrium is obtained in which credibility is restored

the economic and political determinants of imf and world bank lending in the middle east and north africa mena assumes both political and economic significance politically it is arguably the epicentre of world crisis chronically war prone and the site of the world s most protracted conflicts hinnebusch 2003 p 1 economically it owns the bulk of the world s oil reserves driving in particular the usa economic engine in light of the region s geopolitically and economically strategic position in the world economy it is clear that economic and political factors are inextricably linked when it comes to the manner in which the west particularly the usa responds to the region s needs

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

exchange rate dynamics an empirical investigation this paper estimates a reduced form exchange rate equation whose estimates are used to address questions on exchange rate overshooting intermediate run exchange rate dynamics and long run proportionality relationships between relative money supplies and exchange rates based on swiss u s data from the period 1973 79 the major findings are that following a monetary shock there is short run exchange rate overshooting by a factor of about two and that subsequent exchange rate adjustments to a new long run equilibrium take longer than 2 years and exhibit nonmonotonic patterns

us politics and world bank ida lending this paper studies the role of us political factors in the allocation of world bank concessional lending where us political interests are proxied by voting similarity in the united nations general assembly on issues identified as important by the us department of state in contrast to previous studies we find that the us exerted a significant influence on ida lending during the period 1993 2000 we demonstrate that the influence was both statistically as well as economically significant finally we demonstrate that our result is robust with respect to the omission of the ida country performance rating index

technology transfer under asymmetric information licensing contracts for newly patented innovations are observed to vary along several dimensions including the form and size of the payment to the inventor fixedfee versus some output based royalty the degree of exclusivity and the division of rents in this article we show that theform of the contract can be explained by two problems in technology exchange the superiority of a licensor s precontractual information about the economic value of the innovation and thefact that sharing this information with the licensee mayfacilitate imitation we show that a licensor signals her technology type with an output based payment or royalty and may leave some of the rents with the licensee conditions under which exclusive license contracts linear and nonlinear and nonexclusive linear contracts are used to transfer technology are identified

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

exchange rate dynamics sticky prices and the current account rational expectations exchange rate models have been of two principal types flexible price models and sticky price models the flexible price models may be further divided into those where current account based wealth effects are an important driving force in exchange rate dynamics and those where such effects are ignored 1 notably the literature includes few sticky price models incorporating current account based wealth effects 2 two reasons for the scarcity of such models are a the belief that current accountbased wealth effects are empirically unimportant for exchange rates and b that a model endogenizing exchange rate movements sticky price movements and current account based wealth effects is relatively difficult to analyze we note though that recent empirical work e g meese and rogoff 1983 has called into question the empirical importance of the standard determinants of exchange rates consequently the criterion of empirical relevance has not yet distinguished among models of exchange rates in connection with reason b note that a rational expectations sticky price exchange rate model where current account based wealth

real exchange rate effects of monetary shocks under fixed and flexible exchange rates abstract we analyze how the real exchange rate effects of monetary and real shocks depend on the exchange rate regime within a two country rational expectations model with confusion about money and real shocks the model demonstrates that the real exchange rate effect of unanticipated monetary shocks is negatively related to the variance of the domestically created money supply growth and that the effects of increasing domestic money variance on the real exchange rate are less under a fixed rate regime than under a flexible rate regime

barriers to political analysis in aid bureaucracies from principle to practice in dfid and the world bank summary politics has become a central concern in development discourse and yet the use of political analysis as a means for greater aid effectiveness remains limited and contested within development agencies this article uses qualitative data from two governance leaders the united kingdom department for international development and the world bank to analyze the administrative hurdles facing the institutionalization of political analysis in aid bureaucracies we find that programing management and training practices across headquarters and country offices remain largely untouched by a political analysis agenda which suffers from its identification with a small cross national network of governance professionals

inventories and sticky prices note in a recent contribution to this review alan blinder provides an interesting analysis of the relationship between optimal inventory decisions and the process of price adjustment arguing that inventory permits separation of production and sale decisions and allows the firm greater flexibility in responding to anticipated demand disturbances blinder shows that the responsiveness of relative prices depends critically upon the cost of storage and the temporal structure of the demand shocks few economists would fault the intuitive substance of blinder s basic proposition and the proposition is justified with characteristic precision the analysis however is considerably less general than blinder maintains the formal argument of his paper relies upon a simple model of a monopolist capable of backlogging orders and storing unsold goods as the model is constructed order backlogs assume a role of fundamental importance in any stationary equilibrium this feature of the model vitiates blinder s extension of his result to situations in which order backlogs are prohibited the basic monopoly model developed in sections i and ii of blinder s paper places no restriction upon the sign of inventory negative inventory is interpreted as net unfilled orders while no distinction is drawn between reductions in gross inventory and additions to the order backlog as a result the cost of holding inventory is symmetric around an arbitrary minimum point the only role of inventory is to permit the time paths of production and sales to differ gross inventory allows production to antedate sales while order backlogs generate revenue before production costs are borne under these circumstances if future costs and revenues are discounted it is natural to expect any stationary equilibrium level of net inventory to be negative this can be shown to be true of blinder s model it is useful to distinguish in general between the nonstochastic stationary level of inventory n and the stochastic stationary level n the former is realized when the current expected demand disturbance eo is zero and production equals sales the latter which differs from customary usage represents the level of inventory expected to prevail when adjustment to the current nonzero expected demand disturbance is complete if the demand disturbance is not a random walk so that p 1 in blinder s 5 the two equilibria coincide relatively little attention is devoted to either stationary solution because blinder s main interest is in the optimal current solution level n1 the stochastic stationary level is crucially important however since it represents the goal toward which the current choice must provide an optimal first step to verify that both nand n are negative whenever production is strictly positive note that blinder s necessary condition 7 with the coefficient cl set equal to zero together with the definition of xa as the deviation of the shadow value of inventory q from its nonstochastic stationary value q implies

the design of contracts and remedies for breach in the first part of this article hypothetical contracts providing for all possible uncertain contingencies are considered in the next part contracts providing for only some contingencies are examined and are shown to be advantageous due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them in the following major part of the article two of these substitutes for contingent terms are analyzed remedies for breach and the opportunity for renegotiation the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts

correlated information and mechanism design in models of asymmetric information possession of private information leads to rents for the possessors this induces mechanism designers to distort away from efficiency the authors show that this is an artifact of the presumption that information is independently distributed rent extraction in a large class of mechanism design games is analyzed and a necessary and sufficient condition for arbitrarily small rents to private information is provided additionally the two person bargaining game is shown to have an efficient solution under first order stochastic dominance and a hazard rate condition similar conditions allow full rent extraction in milgrom weber auctions

the value of information and optimal organization the paper addresses the issue of optimal organization of production i compare three organizational forms centralization one agent produces difierent inputs decentralization each of the two agents produces a difierent input and contracts directly with the principal and delegation two agents produce difierent inputs the principal contracts with one of them only the optimal organizational form depends on the degree of complementarity substitutability between the inputs in the flnal use the degree of complementarity substitutability also determines whether delegation is payofi equivalent to the two agent mechanism from the point of view of the principal in the context of delegation i consider which of the two agents should serve as the primary contractor i also address the issue of collusion between the agents in a decentralized organization and characterize the conditions under which a stake of collusion exists jel fields d2 d82 l23

always vote for principle though you may vote alone explaining united states political support for multilateral development loans summary what motivates the u s when casting votes and to what degree does its formal influence matter in final outcomes in multilateral development banks we first assess the formal influence of the u s on final decisions and find that 64 of projects lacking u s support were nevertheless approved suggesting u s influence is not as strong as previously thought we then test several hypotheses explaining how the u s votes on projects in mdbs we find recipient need is strongly related to u s support and some evidence for both economic and political factors such as trade relations and human rights

the high politics of imf lending analysts have long suspected that politics affects the lending patterns of the international monetary fund imf but none have adequately specified or systematically tested competing explanations this paper develops a political explanation of imf lending and tests it statistically on the developing countries between 1985 and 1994 it finds that political realignment toward the united states the largest power in the imf increases a country s probability of receiving an imf loan a country s static political alignment position has no significant impact during this period suggesting that these processes are best modeled dynamically an analysis of two subsamples rejects the hypothesis that the imf has become less politicized since the end of the cold war and suggests that the influence of politics has actually increased since 1990 the behavior of multilateral organizations is still driven by the political interests of their more powerful member states

the organization of regulated production complementarities correlation and collusion we analyze the choice between vertical separation vs and vertical integration vi when two regulated firms produce complementary inputs with correlated costs and are protected by ex post break even constraints first in the absence of collusion the regulator prefers vi vs for negative and weak positive respectively strong positive correlation second if the firms can collude under vs and know all costs then vs is equivalent to vi however if firms collude under asymmetric information then collusion does not affect the choice between vs and vi since the regulator takes advantage of the transaction costs created by asymmetric information

risk information and incentives in telecom supply chains supply chain management involves the selection coordination and motivation of independently operated suppliers the central planner s perspective in operations management translates poorly to vertically separated chains where suppliers recurrently seem to object to benevolent information sharing and centralized decision rights seen from the supplier s perspective such resistance may very well be rational a downstream assembly line disclosing reliable information on actual and forecasted sales puts itself at a disadvantage when bargaining on share of chain profits in this paper we use a minimal agency model to contrast known optimal mechanisms with the actual practice in the telecommunications industry a three stage supply chain under stochastic demand and varying coordination and information asymmetry is modeled a two period investment production game addresses the information sharing and specific investment problem in the telecom industry the observed price quantity contracts under limited commitment are shown to be inadequate under realistic asymmetric information assumptions more a result of gradually evolving changes in bargaining power than coordination efforts the upstream urge to coordinate may further deteriorate performance in terms of our model c 2003 elsevier science b v all rights reserved

efficient reliance and damage measures for breach of contract this article considers a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to prepare to sell it it is assumed that postbreach bargaining is possible and carried out in a cooperative fashion and that buyers and sellers form expectations about the outcome of such bargaining in a specific way without enforceable contracts the potential appropriability of specific rents results in inefficiently low levels of investment three damage measures commonly used to enforce contracts are shown to produce inefficiently high levels of investment and to be pareto ranked from best to worst as follows specific performance expectation damages and reliance damages

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

the political economy of conditionality an empirical analysis of world bank loan disbursements abstract traditional aid conditionality has been attacked as ineffective in part because aid agencies notably the world bank often fail to enforce conditions this pattern undermines the credibility of conditionality weakening incentives to implement policy reforms the standard critique attributes this time inconsistency to bureaucratic factors within the aid agency such as pressure to lend defensive lending or short sighted altruism pressure from powerful donors provides another potential explanation for lax enforcement this paper presents an empirical analysis of the political economy of conditionality in international organizations using the case of the world bank and the united states the analysis examines panel data on world bank disbursements to 97 countries receiving structural adjustment loans between 1984 and 2005 using un voting as an indicator of alignment with the u s the paper presents evidence that world bank structural adjustment loan disbursements are less dependent on macroeconomic performance in countries aligned with the united states

information incentives and organizational mode we examine the choice of organizational mode for a two stage production process wherein cost realizations at each stage are observed only by the producing party when these costs are positively correlated the principal prefers to undertake second stage production herself when the correlation is negative and sufficiently small she will prefer that the agent who performs the first stage also perform the second for large negative correlation either mode might be preferred when costs are uncorrelated the principal is indifferent between modes

side payment contracts in two person nonzero sum supply chain games review discussion and applications this paper investigates supply chain coordination with side payment contracts we first summarize specific side payment contracts and present our review on the literature that developed general side payment schemes to coordinate supply chains following our review we discuss two criteria that a proper side payment contract must satisfy and accordingly introduce a decision dependent transfer payment function and a constant transfer term we present the condition that the transfer function must satisfy and use nash arbitration scheme and shapley value to compute the constant transfer term and derive its closed form solution next we provide a five step procedure for the development of side payment contract and apply it to four supply chain games cournot and bertrand games a two retailer supply chain game with substitutable products and a one supplier one retailer supply chain more specifically for the cournot game we construct a linear transfer function and a constant side payment to coordinate two producers for the bertrand game we build a nonlinear transfer function which is equivalent to a revenue sharing contract and show that the constant term is zero and two firms in the game equally share the system wide profit for a supply chain with substitutable products we present a side payment contract to coordinate two retailers for a two echelon supply chain we develop a proper side payment scheme that can coordinate the supply chain and also help reduce the impact of forward buying on supply chain performance

the invisible hand financial pressures and organisational convergence in multilateral development banks abstractthis paper investigates how the unique financial model of multilateral development banks dependent largely on issuing bonds in private capital markets to raise lending resources came about in the early history of three different mdbs and how this in turn shaped their operational characteristics historical research demonstrates that the world bank inter american development bank iadb and andean development corporation caf converged on organisational and operational arrangements very different to what their founders had intended and much closer to one another as a direct result of the need to secure sufficient resources to function as viable development lenders the findings indicate that in the absence of governments willing or able to provide significant financing out of their budgets mdbs tend to converge towards a single organisational model in order to maintain access to international capital markets all three mdbs examined here modified their lending and financial policies in un

delegated monitoring versus arm s length contracting abstract this paper analyzes the optimal organization of input suppliers in a procurement context we discuss when a top firm chooses to induce information sharing and active coordination between its suppliers consolidation rather than having them contract at arm s length delegation in designing the organization the firm anticipates that different supplier networks have different costs of inducing information revelation from suppliers when the cost of information sharing varies the optimal organization exhibits various discrete degrees of consolidation there is excessive arm s length contracting compared to the case where the top firm controls this organizational choice itself the paper offers also a methodology to study in a unified framework various organizational forms separately analyzed in the literature

regulating complementary products a comparative institutional analysis optimal regulation subject to informational constraints is analyzed for industries for which production requires complementary inputs an issue for regulatory policy is whether supply in these industries should be bundled or unbundled bundled supply calls for regulation of an integrated industry unbundled supply has each component regulated separately a main result is that unbundling introduces into regulation an additional component of information cost that is similar to double marginalization in the monopoly pricing of complementary products unbundling may be advantageous if it allows sufficient competition in nonmonopoly services but the information cost can exceed the benefits of competition

dominant strategy implementation of bayesian incentive compatible allocation rules abstract a large literature on incentive mechanisms represents incentive constraints by the requirement that truthful reporting be a bayesian equilibrium this paper identifies mechanism design problems for which there is no loss in replacing bayesian incentive compatibility by the stronger requirement of dominant strategies we identify contexts where it is possible to change the transfer payments of an optimal bayesian mechanism so as to create dominant strategies and yet leave every participant s expected utility unchanged we also address the issue of multiple equilibria and unique implementation contexts where these results apply include auctions bilateral bargaining procurement contracting and intrafirm resource allocation

global horse trading imf loans for votes in the united nations security council we investigate whether temporary members of the united nations security council receive favorable treatment from the international monetary fund imf using panel data for 197 countries over the period from 1951 to 2004 our results indicate a robust positive relationship between temporary security council membership and participation in imf programs even after accounting for economic political and country specific factors there is also evidence that security council membership reduces the number of conditions included in imf programs imf loans seem to be a mechanism by which the major shareholders of the fund can win favor with voting members of the security council

a model of exchange rate dynamics this model treats the exchange rate as an asset price that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information the model explains the random component in exchange rate behavior the source of divergences from purchasing power parity the anticipatory response of exchange rates to future expected disturbances and the causes of exchange rate overshooting

shopping for development multilateral lending shareholder composition and borrower preferences this paper proposes two theoretical considerations regarding multilateral development banks mdbs the first is that mdb activities are increasingly driven by the growing economic strength of many developing countries the second is that categorizing mdbs according to the balance of power among shareholders helps explain why countries might prefer one or another mdb we compare three different mdbs operating in latin america one dominated by nonborrowers world bank another controlled by borrowing countries andean development corporation caf and a third more evenly split between borrowers and nonborrowers inter american development bank iadb qualitative and statistical analysis suggests that demand factors play an important role in mdb lending

minimum bill contracts theory and policy this paper examines the efficiency implications of minimum bill cont racts and concludes that minimum bill provisions promote rather than impede efficient adaptation to changing circumstances in particular minimum bills provide a simple mechanism by which parties faced wit h uncertain demand and rising marginal cost can approximate joint pro fit maximizing payment schedules in transaction specific relationship s governed by long term contracts the paper also questions the merit of proposals for legislative or regulatory intervention to reduce mi nimum bill obligations in natural gas contracts and considers the ap propriate legal status of these provisions in the event of contractua l failure copyright 1988 by blackwell publishing ltd

job design with conflicting tasks reconsidered a principal wants two sequential tasks to be performed by wealth constrained agents suppose that there is an outcome externality i e a first stage success can make second stage effort more or less effective if the tasks are conflicting the principal s profit maximizing way to induce high efforts is to hire one agent to perform both tasks so that the prospect to get a larger second stage rent after a first stage success motivates the agent to work hard in the first stage in contrast when there is an effort externality i e first stage effort reduces or increases the probability of a second stage success then the principal prefers to hire two agents whenever the tasks are conflicting

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

uncertainty asymmetric information and bilateral contracts on considere un monopole bilateral avec incertitude et information asymetrique on donne les conditions necessaires et suffisantes a l existence de contrats qui soient efficaces et a la fois stimulants