optimal contracting and the organization of knowledge we study contractual arrangements that support an efficient use of time in a knowledge intensive economy in which agents endogenously specialize in either production or consulting the resulting market for advice is plagued by informational problems since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess we show that spot contracting is not efficient because lemons in this case self employed producers with intermediate knowledge cannot be appropriately excluded from the market however an ex ante firm like contractual arrangement uniquely delivers the first best this arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts this simple characterization of the optimal ex ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge intensive sectors our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs

incorporating cultural values for understanding the influence of perceived product creativity on intention to buy an examination in italy and the us extending our understanding of the effects of perceived product creativity this study contributes to the literature by empirically investigating the influence of cultural values on the relationship between the creativity dimensions of novelty and meaningfulness and intention to buy schwartz s values framework is employed to theorize cultural differences the results based upon 206 italian and 201 us consumers surveyed via a mall intercept approach indicate that novelty is a more important dimension of product creativity in the us i e a low resultant conservative high resultant self enhancement culture than in italy i e a high resultant conservatism low resultant self enhancement culture in influencing intention to buy and that meaningfulness is a more important dimension of creativity in italy than in the us in influencing intention to buy these results provide important standardization adaptation implications for international marketing academics and practitioners

strategic restraint in contests abstract economic policy is modelled as the outcome of a political game between two interest groups the possible ex post realized outcomes in the game correspond to the proposed policies in the literature policy proposals are exogenous we extend such games by allowing the endogenous determination of the proposed policies in a first stage the groups decide which policy to lobby for and then in a second stage engage in a contest over the proposed policies our main result is that competition over endogenously determined policies induces strategic restraint that reduces polarization and in turn wasteful lobbying activities

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

why don t people trust experts abstractcredence goods such as health care legal and financial services and auto repair create a conflict of interest by requiring experts to diagnose and provide services to uninformed consumers mistreatment of consumers appears widespread empirically but a simple explanation for mistreatment under realistic assumptions has proved elusive i generalize uwe dulleck and rudolf kerschbamer s credence good model to incorporate the highly realistic assumption that consumers do not observe experts cost functions the model guarantees equilibrium mistreatment in a wide range of price setting and market environments the model also yields testable implications regarding the nature of mistreating firms and the direction of mistreatment

experts and quacks what happens when type is endogenous in a reputational setting here customers cannot tell experts from imitative quacks but gain information through repeated interaction firm incentives to invest in expertise vary nonmonotonically in how tolerant customers are of bad outcomes more tolerant customers are both more forgiving making expertise less necessary and longer tenured increasing the value of retaining them in equilibrium the proportion of expert firms is bounded away from one some quacks are necessary to keep incentives of experts in line the fraction of experts is decreasing in customers switching costs and the relative cost of expertise over quackery

impact of information technology capital on firm scope and performance the role of asset characteristics this research draws on transaction cost and resource based theory to examine how information technology it capital moderates the relationship between different types of assets and firm scope both vertical integration and diversification the analysis suggests that it capital enables firms with narrowly valuable assets to be less vertically integrated and less diversified and enables firms with broadly valuable assets to be more vertically integrated and more diversified the moderating influence of it capital on the relationship between different types of assets and firms vertical and product market scope is consistent with transaction cost as well as resource based traditions abstract from author

matching problems with expertise in firms and markets when should expertise be shared in markets and when in firms knowledge exchanges in the market involve less information about the quality of the provider s expertise but facilitate good utilization of experts knowledge in a firm management holds soft information about individuals expertise and thus improves on the matching of experts to problems however the usage of experts is not smooth and thus firms experience over or underutilization of experts time thus the trade off between firms and markets is between utilization the market allows for better smoother utilization of knowledge than firms and the quality of matching between problems and problem solvers the market provides less information about experts quality

second opinions and price competition inefficiency in the market for expert advice we consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer s need in our model experts offer competing contracts and the consumer may gather multiple opinions we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort in particular the equilibrium fails to realize the second best welfare optimum an intervention that limits price competition via price control increases welfare

transfer seeking and avoidance on the full social costs of rent seeking we would like to thank gordon tullock and an anonymous referee of this journal for their helpful comments and suggestions this abstract was borrowed from another version of this item

ethical spillovers in firms evidence from vehicle emissions testing in this paper we explore how organizations influence the unethical behavior of their employees using a unique data set of over three million vehicle emissions tests we find strong evidence of ethical spillovers from firms to individuals when inspectors work across different organizations they adjust the rate at which they pass vehicles to the norms of those with whom they work these spillovers are strongest at large facilities and corporate chains and weakest for the large volume inspectors these results are consistent with the economics literature on productivity spillovers from organizations and peers and suggest that managers can influence the ethics of employee behavior through both formal norms and incentives the results also suggest that employees have persistent ethics that limit the magnitude of this influence these results imply that if ethical conformity is important to the financial and legal health of the organization managers must be vigilant in their hiring training and monitoring to ensure that employee behavior is consistent with firm objectives

on doctors mechanics and computer specialists the economics of credence goods most of us need the services of an expert when our apartment s heating or our washing machine breaks down or when our car starts to make strange noises and for most of us commissioning an expert to solve the problem causes concern this concern does not disappear even after repair and payment of the bill on the contrary one worries about paying for a service that was not provided or receiving some unnecessary treatment this article studies the economics underlying these worries under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment what types of fraud exist what are the methods and institutions for dealing with these informational problems under which conditions does the market provide incentives to deter fraudulent behavior and what happens if all or some of those conditions are violated

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

physician ownership of complementary medical services abstract when physicians own complementary medical service facilities such as laboratories and imaging centers they gain financially by referring patients to these entities this creates an incentive for the physician to exploit patients trust by recommending more services than necessary using data from taiwan which introduced a separating policy that restricts physician ownership of pharmacies we estimate that where the policy was binding eliminating this incentive caused physicians to prescribe 7 1 less in drugs taking into account increases in complementary diagnostic services and that drugs are only a part of overall primary care spending the policy reduced total expenditures by 1 8 however a large number of clinics exploited a loophole in the law and either had at baseline or integrated pharmacies into their practices post policy making them exempt from the policy as a result the policy only reduced total drug expenditures by 2 1 and total primary care cost by 0 5

does self regulation work experimental evidence of the reputational incentives of self regulatory organizations self regulation sr is a common way of enforcing quality in markets such as banking financial services and several professions and in a variety of public and private organizations we provide experimental evidence of the reputational incentives of self regulatory organizations sros to publicly disclose versus cover up fraud in an incomplete information environment we find that observed behaviour is generally consistent with bayesian equilibrium when subjects are informed about the relative likelihood of fraud detection by a vigilant versus a lax sro type in particular a fraud disclosure equilibrium is supported when subjects are informed that the vigilant sro is more likely to detect fraud otherwise a cover up equilibrium is supported however when subjects are not informed about the relative likelihood of fraud detection by the sro types as expected in real sr situations no equilibrium is strongly supported our results suggest that in practice the reputation based incentives for ef

honesty in a model of strategic information transmission we consider the following simple model of consumer fraud consumers need one of two possible repairs an expensive repair denoted e or an inexpensive repair denoted i the exogenous probability that a consumer needs the more costly remedy is r each consumer is assumed to know r an expert can observe with certainty which of the two repairs is needed and can offer to sell either to the consumer in a simple extension we allow for uncertainty with respect to the expert s observation we assume that selling the expensive remedy to a consumer who needs only the inexpensive one is more profitable than selling the inexpensive one thus h eii h1 iji where h denotes profit and i denotes conditional on needing the profit functions are increasing in the price of the respective repairs for convenience we suppress the dependence of h on prices in our notation we also assume that a consumer prefers to obtain the appropriate repair to the inappropriate one thus u eie u ije and u iii u eii where u is the consumer s payoff lastly we assume that the functions u eje and u e i are decreasing in the price of the expensive repair and that u iie and u iii are decreasing in the price of the inexpensive repair we also assume that u iie is decreasing in the price of the expensive repair since the consumer ultimately buys the expensive repair in this case see below for further assumptions regarding the repairs we are interested in the equilibrium levels of honesty in this model how honest is the expert at the equilibrium do consumers always follow the expert s advice does the level of honesty increase as the interests of the agents become more similar in a sense to be defined below our assumptions are similar to those in the abstract strategic information transmission models of vincent crawford and joel sobel 1982 and jerry green and nancy stokey 1980 we follow the former paper which asks whether the signals sent become less noisy as the agents preferences become more similar despite the similarity of our model to crawford sobel s we arrive at some different conclusions with respect to the expert s honesty vis a vis the agents closeness of interests we explain this in detail in section iii in addition we allow that the expert may be uncertain about the true state of the world we also explicitly model the level of expert honesty which extends crawford sobel the outline of the paper is as follows in section i we provide the details of the model and show that a unique equilibrium exists comparative static results and a simple extension incorporating the assumption of the incompetent expert are given in section ii we draw comparisons with crawfordsobel in section iii in section iv we conclude with a brief summary

consumer information in a market for expert services abstract we present a model of credence goods in which the consumers are heterogenous in terms of the valuation they place for getting a serious problem fixed we introduce consumer information into this framework by assuming that prior to visiting an expert some consumers receive an information signal about whether they have a serious or a minor problem we show that when the fraction of consumers with low willingness to pay is sufficiently high the expert does not cheat any low valuation consumer regardless of their information status but cheats the high valuation consumers those high valuation consumers with bad signals are the most frequent victims of cheating whereas those with good signals are the least likely victims when the fraction of consumers with low willingness to pay is below a certain threshold however the unique equilibrium involves no cheating

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

risk averse rent seeking with shared rents this paper presents a nash equilibrium model of rent seeking behavior in which risk averse players expend resources to obtain a share of a rent as for example in contests for import quota licences results are obtained relating the equilibrium level of lobbying effort by each player to the value of the rent in particular reduced individual lobbying effort is associated with higher rents contested if players are sufficiently risk averse the question of whether the value of rents is a good measure of the resource cost of rent seeking is also considered a simple approximation involving risk and risk aversion parameters is derived for the proportion of rents dissipated in long run equilibrium risk and risk aversion are seen to reduce the rent dissipation ratio below unity copyright 1987 by royal economic society

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

price competition between an expert and a non expert abstract this paper characterizes price competition between an expert and a non expert in contrast with the expert the non expert s repair technology is not always successful consumers visit the expert after experiencing an unsuccessful match at the non expert this re entry affects the behavior of both sellers for low enough probability of successful repair at the non expert all consumers first visit the non expert and a timid pricing equilibrium results if the non expert s repair technology performs well enough it pays for some consumers to disregard the non expert a visit they directly go to the expert s shop and an aggressive pricing equilibrium pops up for intermediate values of the non expert s successful repair a mixed pricing equilibrium emerges where the expert randomizes over the monopoly price and some lower price

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

towards an intellectual capital based view of the firm origins and nature economic and social activities are undergoing radical changes which can be labelled as knowledge economy and or society in this sense intellectual capital ic or knowledge assets as the fourth factor of production is replacing the other ones job land and capital this article tries to offer the origins and nature of the firm s ic that can be labelled as an intellectual capital based view of the firm competition this framework tries to highlight the strategic role of different intangible assets like talented and committed workers cultural values or long term relationships among the firm and its stakeholders customers allies suppliers and society in general in gaining and sustaining competitive advantages being the management of ic a key issue in the management agenda

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

what makes a manufacturing firm effective for service innovation the role of intangible capital under strategic and environmental conditions abstract while an increasing body of research addresses the importance of service innovation to manufacturing firms little work has examined what makes a manufacturing firm effective for service innovation and under what strategic and environmental conditions this article investigates 1 what types of intangible capital are necessary for a manufacturing firm to develop new services 2 whether a focus on an intangible capital will have the greatest effect on new service success and 3 whether the effectiveness of a specific intangible capital varies from the combined conditions of strategic flexibility and environmental uncertainty building on service dominant logic this study theorizes that the four types of intangible capital market service delivery interaction and learning are necessary for manufacturing firms to create superior new services the authors test their hypotheses with a sample of 293 matched responses collected from leading manufacturing firms the results indicate that all four types of intangible capital have significant positive relationships with new service success however not all intangible capital is equally effective as to which learning capital has the strongest effect across four combined conditions of both high and low levels of strategic flexibility and environmental uncertainty this study contributes to the manufacturing literature by shedding light on a neglected construct intangible capital and offering valuable insights for manufacturing managers seeking to determine when high low environmental uncertainty and how high low strategic flexibility firms intangible capital should be emphasized in order to achieve the greatest effectiveness of service innovation

rent seeking with uncertain opposition abstract it is observed that sometimes dispersed interests are passive to rent seeking by concentrated interests and that sometimes they provide rigorous opposition this paper assumes that opposing political activism is triggered when rents accruing to concentrated interests exceed a threshold level unknown to the latter in these conditions rents will increase asymptotically to a level less than the trigger level the threat of opposition means that social costs of rent seeking may be less than found by static analysis under certainty the model may be applicable to certain types of regulation such as taxi licensing or pollution control

would hotelling kill the electric car in this paper we show that the potential for endogenous technological change in alternative energy sources may alter the behaviour of resource owning firms when technological progress in an alternative energy source can occur through learning by doing resource owners face competing incentives to extract rents from the resource and to prevent expansion of the new technology we show that in such a context it is not necessarily the case that scarcity driven higher traditional energy prices over time will induce alternative energy supply as resources are exhausted rather we show that as we increase the learning potential in the substitute technology lower equilibrium energy prices prevail and there may be increased resource extraction and greenhouse gas emissions we show that the effectiveness and the incidence of emissions reduction policies may be altered by increased potential for technological change our results suggest that treating finite resource rents as endogenous consequences of both technological progress and policy changes will be important for the accurate assessment of climate change policy

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

a model of physician behaviour with demand inducement we present a model of the physician patient relationship extending on the model by farley farley p j 1986 theories of the price and quantity of physician services journal of health economics 5 315 333 of supplier induced demand sid first we make a case for the way this model specifies professional ethics physician competition and sid itself second we derive predictions from this model and confront them with the neoclassical model finally we stress the importance of considering how sid affects patient welfare in providing an example where physicians ability to induce makes patients better off to evaluate patient welfare we derive approximations of the patients welfare loss due to physician market power in both the neoclassical model and the inducement model

price and quality cycles for experience goods we explore a dynamic competitive model for experience goods and study an equilibrium for it in which firms plan initially to produce high quality at low price then high quality at high price then low quality at high price each consumer is aware that all firms eventually intend to run down their reputations at customers expense yet he rationally chooses to wait for direct evidence that the firm to which he is attached has already entered into the exploitative phase

experts vs discounters consumer free riding and experts withholding advice in markets for credence goods this paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable and if they face competition by discounters who are not able to perform a diagnosis the unobservability of diagnosis effort and the credence characteristic of the good induce experts to choose incentive compatible tariff structures this makes them vulnerable to competition by discounters we explore the conditions under which honestly diagnosing experts survive competition by discounters we identify situations in which experts misdiagnose consumers in order to prevent them from free riding on experts advice and we discuss policy options to solve the free riding consumers cheating experts problem

risk averse rent seekers and the social cost of monopoly power there is now quite general recognition that the social cost of monopoly power encompasses the resources expended by individuals seeking to become the beneficiaries of monopoly rents however since the activity of rent seeking is generally not observable direct estimates of resources expended in quests to acquire monopoly power are usually impossible to come by 1 as a consequence the indirect approach of taking the observed value of monopoly rents as indicative of the unobserved value of the resources expended in rent seeking is quite generally adopted in approaches to evaluation of the social cost of such activity

warranties durability and maintenance two sided moral hazard in a continuous time model double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time the more complete the warranty the better the producer s durability incentives and the worse the consumer s maintenance incentives using continuous time highlights the need for some warranty bound to avoid reaching the first best as an unreasonable limit early in the paper an exogenous bound is used while later the bound arises endogenously from the possibility of abuse and repair a quadratic example shows that the warranty s duration depends on the relative severity of the two moral hazard problems

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

credence goods monopolists abstract with a credence good consumers never discover how much of the good they actually need therefore the seller acts as the expert determining the customers requirements this information asymmetry creates strong incentives for the seller to cheat on services we analyze whether the market mechanism may induce non fraudulent seller behavior we consider four scenarios differing in the amount of information consumers have at hand to infer the seller s incentives to be honest in three constellations the profit maximizing credence goods monopolist provides honest services only in one scenario there is no trade

relying on the information of interested parties we investigate the conventional wisdom that competition among interested parties attempting to influence a decisionmaker by providing verifiable information elicits all relevant information we find that if the decisionmaker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties competition may be unnecessary to achieve this result if the decisionmaker is unsophisticated or not well informed competition is not generally sufficient if the interested parties interests are sufficiently opposed however or if the decisionmaker is seeking to advance the parties welfare then competition can reduce or even eliminate the decisionmaker s need for prior knowledge about the relevant variables and for strategic sophistication in other settings only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow effective decisionmaking

how do consumers motivate experts reputational incentives in an auto repair market abstract moral hazard exists in expert service markets because sellers have an incentive to shade their reports of the buyer s condition to increase the short run demand for their services the california vehicle emission inspection market offers a rare opportunity to examine how reputational incentives work in such a market i show that consumers are 30 percent more likely to return to a firm at which they previously passed than to one at which they previously failed and that demand is sensitive to a firm s failure rate across all consumers these and other results suggest that demand incentives are strong in this market because consumers believe that firms differ greatly in their consumer friendliness and are skeptical even about those they choose weak demand incentives in other expert service markets are not a direct consequence of moral hazard but rather of its interaction with switching costs and consumers belief that firms are relatively homogeneous

ambiguous political power and contest efforts when there is incomplete information on the source of power in a contest the contestants may divide their lobbying efforts between the potential centers of power only one of which determines the contests winning probabilities our analysis focuses on the effect of ambiguity regarding the source of power on the contestants aggregate effort in a symmetric simple lottery contest with two potential centers of power specifically we examine the effects of varying the informativeness of the contestants private signals i e the probability that a signal is correct and the degree of correlation between them our benchmark case is the standard tullock s model in which the source of power is known i e the contestants signals are perfectly informative we show that the level of aggregate effort in this case is reached also when the signals are perfectly uninformative however in any intermediate case the contestants aggregate effort is lower provided that the signals are not perfectly correlated in other words there is a u shape relationship between the informativeness of the signals and the aggregate effort in the contest the lowest level of effort is spent when the signals are independent and the probability that a signal is true is about 0 85 in this case efforts are reduced by about one fifth in comparison with the benchmark case from a rent dissipation of 50 to slightly over 40