electricity fuel contracting relationships with coal and gas suppliers the growth of competition in the electricity generation industry along with changes in natural gas and coal regulation have led to renewed interest in the nature of efficient transactional arrangements for procuring coal and gas this study examines the evolution of major influences on the incentives for choosing among different transactional forms we find that the asset specificity hypothesis continues to be an important explanation for transactional arrangements in fuel acquisition the degree of asset specificity in a fuel supply arrangement is a function of technological factors of inherent market characteristics and of regulatory rules the expanding role of more flexible fuel supply arrangements in gas and to a lesser extent coal markets is a natural response to current regulatory and technological trends

the acquisition of fisher body by general motors abstract it is commonly said that in 1926 general motors was led to acquire its supplier of automobile bodies fisher body because fisher body held up general motors it is claimed that fisher body did this by locating its body plants far away from the general motors assembly plants and by adapting inefficient methods of production thus increasing both the cost of producing bidies and the profits of fisher body under its cost plus contract this tale is factually incorrect what general motors acquired in 1926 was the 40 percent of the shares of fisher body that it did not already own furthermore fisher body did not locate its plants far away from the general motors assembly plants it is also most implausible for many reasons that the fisher brothers would have used inefficient methods of production there is no evidence that a holdup occurred

efficient strategy proof exchange and minimum consumption guarantees abstract for exchange economies with classical economic preferences it is shown that any strategy proof social choice function that selects pareto optimal outcomes cannot guarantee everyone a consumption bundle bounded away from the origin this result demonstrates that there is a fundamental conflict between efficiency and distributional goals in exchange economies if the social choice rule is required to be strategy proof

on the duration of agreements a model of optimal contracts between two infinitely lived parties a borrower and lender is presented and analyzed the objective is to explain the phenomenon of finite length multi period contracts it is shown how costly information acquisition can account for multi period contracts which are of bounded length comparative statics results on how contract length responds to exogenous parameters such as the cost of information acquisition are also derived copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

knowledge accumulation within an organization in this article we consider a knowledge accumulation problem within an organization that cannot prevent the worker from quitting and using the knowledge outside the organization we show that knowledge accumulation is delayed the fraction of working time allocated to knowledge creation is highest at the early career stage falls gradually then rises again before falling finally toward zero we determine the effect of a change in the severity of the enforcement problem or the specificity of knowledge we also discuss the form of the optimal life cycle wage profiles the role of the initial knowledge level and the role of discounting

shareholder information and partial tender offers abstract the raider faces a winners curse problem when the target shareholders have private information about the post takeover value using marquez and yilmaz 2008 framework we show that this problem can be partly mitigated by using partial tender offers

efficient adaptation in long term contracts take or pay provisions for natural gas to mitigate the inflexibility of long term contracting for natural gas parties will look for terms that minimize the need for costly adjudication while maintaining incentives for appropriate adaptation the authors examine the incident of take or pay provisions in contracts between natural gas producers and pipelines from this perspective they argue that take obligations can be viewed as a mechanism for effecting appropriate incentives for contractual performance and show that efficient breach considerations define an optimal take percentage as a function of characteristics of the transaction these incentives are distorted by regulated price ceilings which cause the adoption of take obligations in excess of optimal levels the findings refute the common perception that take or pay provisions are just an artifact of wellhead price regulation and serve no useful purpose in the absence of regulation 20 references 1 figure 1 table

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

contractual responses to the common pool prorationing of crude oil production this paper examines bargaining among firms to mitigate rent dissipation following the major oil discoveries of 1926 35 because of high bargaining costs firms chose prorationing instead of consolidation and unitization and success varied the analysis also shows that prorationing took the form it did because concession such as per well quotas were required to draw in small operations and the quotas led to predictable responses regarding rent dissipation prorationing despite its costs controlled total field production and costs conserved natural reservoir energies and lengthened field life when private agreements failed the parties successfully appealed for state enforcement since similar heterogeneities influnce regulations elsewhere in the economy detailed analysis of bargaining among firms is essential for insight into the emergence of various institutional forms 33 references 3 tables

institutions and the supply of oil a case study of russia in new institutional economics the variance in institutions explains differences in cross country output per capita institutions may also explain how the supply of oil is affected within oil producing countries for example in the early 1970s as nominal oil prices increased from 3 per barrel to 11 per barrel a number of opec oil producers changed the institutional environment by nationalizing their oil production and putting under government control all petroleum related capital and infrastructure this affected oil supplies similar institutional changes may be happening again now that oil prices are rising in particular the newly democratic russia may be following the same path the russian government has already effectively taken over control of much of the oil production capacity in the country and is still heavily involved in natural gas production in this paper we will look at the russian upstream oil industry as it changed from central planning to a market oriented sector and is now swaying toward re nationalization some of the laws and institutional transitions will be detailed in order to elucidate what has taken place

on the optimality of partial tender offers abstract this paper analyzes the optimality of partial tender offers in acquisition of firms we show that partial offers have no impact on the acquirer s expected profit under complete information

raiders or saviors the evidence on six controversial investors abstract carl icahn irwin jacobs carl lindner david murdock victor posner and the late charles bluhdorn are usually portrayed as corporate raiders the evidence here however shows that between 1977 and 1982 when it was first announced that they had purchased stock in a given firm stock prices on average increased significantly the investors activities in target firms for the two years following the initial stock purchase are likewise inconsistent with raiding we discuss two hypotheses that are consistent with the evidence first these investors improve the management of target firms second they are systematically able to identify under priced stocks

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

representing the valuation of take or pay provisions in gas markets with limited liquidity long term contracting is the traditional governance mechanism to deal with the transaction costs associated with the specificity of gas industry assets long term contracts have been often used to allocate risks among players and to that end they often include take or pay provisions these clauses specify that buyers take the volume risk as they are obliged to pay for a minimum amount of gas consumption in exchange buyers pay a predefined price supposedly lower than the risk neutral expectation of short term gas prices in that view if the buyer is able to resell that gas in the short term the contract is an effective hedge against short term volatility otherwise the contract does not act as a hedge but it becomes a sunk cost the corresponding power producers behavior involves not only output decisions but also financial decisions to analyze that situation this paper develops a new quantitative methodology that allows comparing risk neutral valuations of gas and power markets decisions we test the model in a real size system and show the additional cost of the power system associated with a possible illiquidity of the short term gas market

co specific investments hold up and self enforcing contracts abstract this paper offers a general model of the hold up problem when investments are co specific agents are risk neutral and there are no information asymmetries nash bargaining with outside options determines the division of the surplus arising from exchange the model formally demonstrates that reciprocal exposure to specific assets achieved via the partial redistribution of specific investment costs to the potentially opportunistic party serves as a credible commitment to mutually advantageous exchange

contract duration and relationship specific investments empirical evidence from coal markets this paper examines the importance of specific relationship investments in determining the duration of coal contracts negotiated between coal suppliers and electric utilities data for 277 coal contracts are used to perform the analysis the results provide strong support for the view that buyers and sellers make longer commitments to the terms of future trade at the contract execution stage and rely less on repeated bargaining when relationship specific investments are more important

transaction cost economics past present and future oliver williamson is the founder and chief developer of transaction cost economics tce in this brief essay on the occasion of his nobel memorial prize i offer a partial discussion of williamson s contributions by first summarizing some of the accomplishments of tce past and then sketching some of the opportunities for tce future most of the topics in both sections tce past and tce future start with a quotation from williamson s early work that i think still speaks volumes today that is while fellow travelers and successors have acted on one set of williamson s insights helping to produce the accomplishments of tce past another collection of williamson s insights has gone relatively unremarked creating some of the opportunities for tce future

supplier performance in vertical alliances the effects of self enforcing agreements and enforceable contracts the paper examines the significance of enforceability and adaptability in governing vertical alliances and their performance ramifications for suppliers literature on supplier relations suggests that suppliers are skeptical of close ties with their buyers helper 1991 helper and sako 1995 such skepticism persists in spite of the fact that buyers are writing longer enforceable contracts with fewer suppliers in this context the paper develops a transaction cost economics tce based model that distinguishes between the verifiable and nonverifiable aspects of governance attributes of safeguards incentive intensity and adaptability in explaining supplier performance variations the paper argues that the following factors prove valuable for suppliers 1 the adaptive and collaborative orientation fostered by the original equipment manufacturer s oem s credible commitment to the exchange and by information sharing on the part of the supplier 2 the presence of certain nonverifiable safeguards and 3 the incentives inherent in target pricing these assertions have been tested using data from the home appliance industry results indicate that information sharing together with 1 oem dependence and 2 target pricing does indeed enhance supplier performance also results suggest that while nonverifiable safeguards can help verifiable safeguards do not have a positive association with supplier interests under certain conditions then suppliers can venture into closer relationships with buyers and benefit

central bank secrecy in the foreign exchange market abstract this paper argues that with sticky goods prices and a forward looking exchange rate the central bank will only want a partial dissemination of its information about shocks to the economy it is shown that in such a model the central bank may prefer to intervene secretly in the foreign exchange markets when responding in anticipation of future shocks but openly when reacting to current shocks the model thus provides a rationale for secrecy in central bank foreign exchange operations the model also elucidates the relationship between the signaling and portfolio balance channels of sterilized intervention

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

ownership structure speculation and shareholder intervention an institution holding shares in a firm can use information about the firm both for trading speculation and for deciding whether to intervene to improve firm performance intervention increases the value of the institution s existing shareholdings but intervention only increases the institution s trading profits if it enhances the precision of the institution s information relative to that of uninformed traders thus the ability to speculate can increase or decrease institutional intervention we examine key factors that affect the intervention decision the usefulness of short swing provisions and restricted shares in encouraging institutional intervention and implications for ownership structure across different firms institutional investors hold an ever greater fraction of corporate america s equity traditionally these institutions were stock pickers who tried to beat the market through trading if a firm whose stock they held seemed headed for trouble these investors headed for the door the wall street rule more recently some of these institutions have been using the ownership rights attached to their shares to pressure firms to act in the shareholders interest some have even argued that there is a synergy between gathering information for use in trading shares speculation and intelligently pressuring firms to improve performance intervention we argue that these motives can also conflict analyzing these motives allows us to predict which firms are most likely to attract institutional intervention which in turn has crosssectional implications for firm ownership structure recent examples suggest that institutional investors with large stakes sometimes intervene and sometimes follow the wall street rule so that there is indeed a choice to be studied in the early 1990s there was a wave of activism by a variety of large institutional investors among them calpers the california public employees pension fund putnam management a mutual fund manager and j p morgan a bank holding company these institu

contractual form and market thickness in trucking a central proposition of the transaction costs literature is that firms will substitute more complicated contractual arrangements for simple spot arrangements when transactions involve relationship specific investments i investigate this proposition by testing whether simple spot arrangements are less common when local trucking markets are thin i find that doubling the thickness of the market increases the likelihood that simple spot arrangements govern transactions by about 30 for long hauls i find weaker evidence of relationships between local market thickness and contractual form for short hauls hauls for which quasi rents are particularly small contracts protect quasi rents over a surprisingly large range but they play a less important role as quasi rents decrease

risk arbitrage in takeovers this article studies the role of risk arbitrageurs in takeovers and the source of their advantage we show how the presence of arbitrageurs affects the value of the target shares since arbitrageurs are more likely to tender therefore an arbitrageur has the informational advantage of knowing he bought shares in equilibrium the number of arbitrageurs buying shares and the price they pay are determined endogenously we also present several empirical implications including the relationship among trading volume takeover premium liquidity of the shares and the number of risk arbitrageurs investing in one particular deal copyright 2002 oxford university press

gas market distorting effects of imbalanced gas balancing rules inefficient regulation of pipeline flexibility this paper analyzes the value and cost of line pack flexibility in liberalized gas markets through examination of the techno economic characteristics of gas transport pipelines and the trade offs between different ways to use the infrastructure transport and flexibility line pack flexibility is becoming increasingly important as a tool to balance gas supply and demand over different periods in the european liberalized market context a monopolist unbundled network operator offers regulated transport services and flexibility balancing services according to the network code and balancing rules therefore gas policy makers should understand the role and consequences of line pack regulation the analysis shows that the line pack flexibility service has an important economic value for the shippers and the tso furthermore the analysis identifies distorting effects in the gas market due to inadequate regulation of line pack flexibility by disregarding the sunk costs of flexibility in the balancing rules the overall efficiency of the gas system is decreased finally the analysis demonstrates that the actual costs of line pack flexibility are related to the peak cumulative imbalance throughout the balancing period any price for pipeline flexibility should therefore be based on the related trade off between the right to use the line pack flexibility and the provision of transport services

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

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

the information content of short interest a natural experiment an increase in the cost of selling short should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market we extend the diamond and verrecchia 1987 model to include short selling against the box and test the extended model using a natural experiment based around the taxpayer relief act of 1997 tra97 tra97 made short selling more costly for those shorting against the box consistent with the implications of our extended model this increase in short selling costs strengthens the negative relationship between short interest and subsequent stock price performance post tra97

long term relationships governed by short term contracts this paper studies the effects of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information and contracts are complete ex cept that short term contracts specify only current period actions t hen short term contracting distorts investment decisions only when t he efficient plan involves mainly sunk cost investment and the relati onship plays a consumption smoothing role there is a general but no t universal tendency to underinvest copyright 1988 by american economic association

contract bargaining with symmetric information this paper reviews a recent literature that extends the rubinstein stahl bargaining model to the case of contract bargaining theoretical issues such as the appropriate game form existence and uniqueness of equilibria are discussed the paper finishes with a brief overview of some applications of the framework

time related characteristics of tenancy contracts and investment in soil conservation practices we present a dynamic model that shows how different types of land tenancy contracts and their time related characteristics influence farmers decisions to invest in soil improvement and productive inputs using recent household and plot level data from the brong ahafo region in ghana we analyze the impact of land tenancy arrangements contract duration as well as the number of times the contract has been renewed in the past on the intensity of investment in soil conservation measures such as ditches and farmyard manure and productive inputs like chemical fertilizer the empirical findings generally confirm the predictions of the theoretical model and reveal that the intensity of investments on different plots cultivated by a given farmer varies significantly with the type of tenancy arrangement on the plot as well as the time related characteristics of the contract

note on social choice allocation in exchange economies with many agents abstract we show that in pure exchange economies there exists no pareto efficient and strategy proof allocation mechanism that ensures positive consumption for all agents we also show that a pareto efficient strategy proof and non bossy allocation mechanism is dictatorial we further show that in three agent economies the allocation given by a pareto efficient strategy proof and non dictatorial mechanism depends only on one agent s preference who is always allocated zero consumption that is in three agent economies zhou s 1991 14 conjecture is true and any pareto efficient and strategy proof mechanism is of satterthwaite and sonnenschein s 1981 10 type

real options with ex post division of the surplus abstract this paper examines a real option model where two vertically related firms are involved in a specific investment project that is subject to an uncertain payoff while ex post bargaining between a seller and a buyer leads to underinvestment by the seller in a standard model where timing of the seller s investment is exogenous we show that this need not be the case when the seller s timing of investment is endogenous however bargaining with a buyer leads to excessive waiting more severe holdup and higher uncertainty will lead to vertical integration of activities to avoid timing inefficiencies

revisiting legal realism the law economics and organization perspective the contrast between american legal realism which ran itself into the sand schlegel 1979 p 459 and the law and economics movement which is perhaps the most important development in legal thought in the last quarter century posner 1986 p xix is dramatic that the one foundered while the other flourished is explained in large measure by the absence of an intellectual framework for legal realism and the use by law and economics of the powerful framework of neoclassical economics

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

an options based approach to forecast competing bids evidence for canadian takeover battles during takeover battles a tender offer provides a call option right to the target s shareholders it guarantees the offered price but maintains the chance of a higher offer we present an options based approach to estimate the probability and expected value of higher competing takeover bids using target stock price data analysing canadian takeover battles in the period 1997 to 2007 we find that during the 5 trading days prior to the occurrence of an increased takeover bid the estimated probability of a higher bid exceeds 80 on average and the expected value of a potential competing bid almost matches the realized value

information and efficiency in tender offers we analyze tender offers where privately informed shareholders are uncertain about the raider s ability to improve firm value the raider suffers a lemons problem in that for any price offered only shareholders who are relatively pessimistic about the value of the firm tender their shares consequently the raider finds it too costly to induce shareholders to tender when their information is positive in the limit as the number of shareholders gets arbitrarily large when private benefits are relatively low the tender offer is unsuccessful if the takeover has the potential to create value the takeover market is therefore inefficient in contrast when private benefits of control are high the tender offer allocates the firm to any value increasing raider but may also allow inefficient takeovers to occur unlike the case where all information is symmetric shareholders cannot always extract the entire surplus from the acquisition

climate contracts a game of emissions investments negotiations and renegotiations the paper presents a dynamic game where players can contribute to a public bad invest in technologies and write incomplete contracts despite the n 1 stocks in the model the analysis is tractable and the symmetric markov perfect equilibrium unique the framework helps to analyze emissions investments and international environmental agreements if only the emission levels are contractible then investments are suboptimally small if the contract is short term or close to its expiration date to encourage investments the optimal contract is more ambitious if it is short term and it is tougher to satisfy close to its expiration date and for countries with small investment costs if renegotiation is possible such an incomplete contract implements the rst best the results have important lessons for how to design a climate treaty

cost of capital discounting and relational contracting endogenous optimal return and duration for joint investment projects concession project financing and public private partnership schemes are investment projects that are generally submitted to valuation criteria based on discounted cash flow analysis the theoretical basis of these valuation criteria are now at issue pursuant to recent advances in relational contracting economics and behavioural finance joint investment projects can be considered as special relational environments where the project s returns improve on alternative replacement opportunities this article seeks to bridge the gap between new theories and widely used valuation techniques by providing a generalized approach to investment valuation this article suggests reasonable valuation criteria that fit these new theoretical developments including an endogenous optimal duration function that may be integrated into the project s contractual agreement

what do facilitating practices facilitate an empirical investigation of most favored nation clauses in natural gas contracts long term contracts often include most favored nation clauses mfns which are nondiscrimination guarantees that obligate a buyer or seller to treat all trading partners symmetrically in pricing decisions recent theoretical work has shown that such clauses can facilitate tacit collusion by increasing the cost of selective price changes aimed at attracting new business an alternative view is that mfns serve to facilitate efficient price adjustment in extended exchange relationships we test these competing hypotheses using data from long term natural gas contracts many of which employ mfns our conclusion is that the pattern of mfn adoption in conjunction with the structure of the nondiscrimination regions and the parallels with other nonstrategic price escalation provisions lends strong support to the efficiency rationale

contracting on time the paper shows how the time considerations especially those concerning contract duration affect incomplete contract theory time is not only a dimension along which the relationship unfolds but also a continuous verifiable variable that can be included in contracts we consider a bilateral trade setting where contracting investment trade and renegotiation take place in continuous time we show that efficient investment can be induced either through a sequence of constantly renegotiated fixed term contracts or through a renegotiation proof evergreen contract a perpetual contract that allows unilateral termination with advance notice we provide a detailed analysis of properties of optimal contracts

contractual flexibility rent seeking and renegotiation design an empirical analysis of information technology outsourcing contracts this paper examines renegotiation design in contracts for outsourced information technology it services whereas prior literature in information systems has highlighted the likelihood of ex post rent seeking engendered by renegotiation we build upon literature on incomplete contracts to posit that renegotiation can be pareto improving by incorporating contingencies revealed ex post research on contract renegotiation has been hampered by two sets of challenges the lack of appropriate data and empirical challenges in identification we circumvent this problem both by appropriate data collection and by employing an identification strategy to address alternate causal explanations we propose a measure pareto improving amendments to assess renegotiation outcomes that enhance the value from outsourcing by hazard equilibration and by incorporating learning using a unique sample of 141 it outsourcing contracts we examine the role of decision rights delineated ex ante in enabling pareto improving amendments and in resolving the trade off between adaptation and rent seeking we find that flexibility provisions termination for convenience rights and contractual rights whereby vendors are granted rights to reuse know how are associated with pareto improving amendments the results are robust to potential endogeneity of contractual provisions when parties have feasible foresight and to the possibility of adverse selection in the sample we also examine alternate explanations from the literature on contractual breach implications for practitioners and researchers are discussed this paper was accepted by sandra slaughter information systems

complementarity and evolution of contractual provisions an empirical study of it services contracts an increasing volume of business activity appears to be occurring via alliances or other interfirm arrangements in which complex contracts are featured yet there has been relatively little study of contract design in the strategy or management literatures the economics literature on contracting has been extensive but it has been less concerned with learning and evolution phenomena in which strategy and organization scholars are deeply interested in this paper we investigate the relationship between two types of contractual provisions that are important in high technology contracts or contracts for which environmental uncertainty or technological complexity are significant namely contingency planning and task description previous research suggests that contracts can vary significantly in the degree of detail with which such key provisions are written and that they are each subject to learning in this paper we find evidence from a sample of 386 contracts that contingency planning and task description behave as complements in contractual design we argue that this complementarity reflects patterns of learning to contract we also find that repeated exchange between two firms leads to greater effort at contingency planning in subsequent contracts a finding that is also consistent with learning effects but not with frequently made claims that contracts and trust are substitutes

long term short term and renegotiation on the value of commitment in contracting spot contracting generally involves efficiency losses relative to long term contracting it is proved here that short term contracting and renegotiation allow to achieve long run efficiency when transfers are not limited objectives are conflicting and no relevant asymmetric information appears at recontracting dates this last assumption excludes adverse selection but not moral hazard when technologies and preferences are time separable copyright 1990 by the econometric society

hedging in coal contracts under the acid rain program tradable permit schemes introduce uncertainty into the cost of regulatory compliance due to the permits uncertain price regulated firms can hedge this uncertainty through their contracts for fuel procurement data on coal contracts are used to estimate how the option not to be delivered higher sulfur coal is priced results show that under a tradable permit scheme coal prices are reduced for an increase in the sulfur bound controlling for reductions in price due to higher delivered sulfur content jel q48 q53

the mirrlees approach to mechanism design with renegotiation with applications to hold up and risk sharing the paper studies the implementation problem first analyzed by maskin and moore 1999 in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism we develop a first order approach to characterizing the set of implementable utility mappings in this problem paralleling mirrlees s 1971 first order analysis of standard mechanism design problems we use this characterization to study optimal contracting in hold up and risk sharing models in particular we examine when the contracting parties can optimally restrict attention to simple contracts such as noncontingent contracts and option contracts where only one agent sends a message

freeze out mergers do freeze out mergers mitigate the free rider problem of corporate takeovers we study this question in a tender offer model with finitely many shareholders under a freeze out merger minority shareholders expect to receive the original offer price whether or not they tender their shares we show that the ability to freeze out shareholders increases the raider s expected profit however as the number of shareholders gets arbitrarily large the raider s expected profit in equilibrium converges to zero for any freeze out clause with an ownership threshold that is strictly above simple majority in this sense freeze out mergers do not solve the free rider problem received september 17 2016 editorial decision june 3 2018 by editor francesca cornelli

information in tender offers with a large shareholder we study takeovers of firms whose ownership structure is a mixture of minority block holders and small shareholders we show that the combination of dispersed private information on the side of small shareholders and the presence of a large shareholder can facilitate profitable takeovers furthermore our analysis implies that even if some model of takeovers predicts a profit for the raider for example due to private benefits the profit will be underestimated unless the large shareholder and the dispersion of information among the small shareholders are modeled

regulation and long term contracting in us natural gas markets this paper addresses the recent experience of the us natural gas industry with contracting and regulation the so called contracts problem between producers and pipelines we develop a simple model of contracting between a single buyer and seller emphasizing the determination of price and minimum purchase take or pay provisions we find that take or pay provisions are likely to emerge in regulated and unregulated markets characterized by uncertainty but that phased deregulation may well exacerbate the problem of contract adjustment our model is supported by empirical evidence drawn from recent samples of contracts between wellhead producers and pipelines

the quantity flexibility contract and supplier customer incentives consider a supply chain consisting of two independent agents a supplier e g a manufacturer and its customer e g a retailer the latter in turn serving an uncertain market demand to reconcile manufacturing procurement time lags with a need for timely response to the market such supply chains often must commit resources to production quantities based on forecasted rather than realized demand the customer typically provides a planning forecast of its intended purchase which does not entail commitment benefiting from overproduction while not bearing the immediate costs the customer has incentive to initially overforecast before eventually purchasing a lesser quantity the supplier must in turn anticipate such behavior in its production quantity decision this individually rational behavior results in an inefficient supply chain this paper models the incentives of the two parties identifying causes of inefficiency and suggesting remedies particular attention is given to the quantity flexibility qf contract which couples the customer s commitment to purchase no less than a certain percentage below the forecast with the supplier s guarantee to deliver up to a certain percentage above under certain conditions this method can allocate the costs of market demand uncertainty so as to lead the individually motivated supplier and customer to the systemwide optimal outcome we characterize the implications of qf contracts for the behavior and performance of both parties and the supply chain as a whole

participation and duration of environmental agreements we analyze participation in international environmental agreements in a dynamic game in which countries pollute and invest in green technologies if complete contracts are feasible participants eliminate the holdup problem associated with their investments however most countries prefer to free ride rather than participate if investments are noncontractible countries face a holdup problem every time they negotiate but the free rider problem can be mitigated and significant participation is feasible participation becomes attractive because only large coalitions commit to long term agreements that circumvent the holdup problem under well specified conditions even the first best outcome is possible when the contract is incomplete

expectation damages divisible contracts and bilateral investment this paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship specific investment by the buyer and the seller as demonstrated by edlin and reichelstein 1996 no contract that specifies only a fixed quantity and a fixed per unit price can induce efficient investment if marginal cost is constant and deterministic we show that this result does not extend to more general payoff functions if both parties face the risk of breaching the first best becomes attainable with a simple price quantity contract

open access and the evolution of the u s spot market for natural gas federal regulations promoting open access transportation dramatically altered the organizational structure of the u s market for natural gas in the 1980s generally unbundling the merchant and transport functions of interstate pipelines an empirical analysis of wellhead spot prices is undertaken to examine the effect of open access on the geographic scope of the spot market using monthly spot price data from 1984 91 three statistical tests are applied and compared price correlations granger causality and cointegration we find that open access integrated the regional wellhead markets into a national competitive market for natural gas the effects of unbundling on contracts for natural gas are then investigated incentives for long term contracts between pipelines and producers are shown to be effectively removed by the introduction of competitive buying and selling of gas at the wellhead through open access

noise trading and takeovers a model of takeovers is investigated in which noise trading provides camouflage that makes it possible for a large corporate outsider to purchase enough shares at favorable prices so that takeovers become profitable although the model accommodates the possibility of dilution grossman and hart 1980 and a large incumbent shareholder shleifer and vishny 1986 neither dilution nor a large incumbent shareholder is necessary for costly takeovers to be profitable noise trading tends to encourage costly takeovers that otherwise would not occur and to discourage beneficial takeovers that otherwise would occur

the economics of governance the economics of governance is an effort to implement the study of good order and workable arrangements where good order includes both spontaneous order in the market which is a venerated tradition in economics adam smith 1776 friedrich hayek 1945 kenneth a arrow and gerard debreu 1954 and intentional order of a conscious deliberate purposeful kind chester irving barnard 1938 p 9 also i interpret workable arrangements to mean feasible modes of organization all of which are flawed in comparison with a hypothetical ideal avinash dixit 1996 pp 4 9 the object is to work out the efficiency logic for managing transactions by alternative modes of governance principally spot markets various long term contracts hybrids and hierarchies interest among social scientists economists included in the study and practice of good order and workable arrangements has been steadily growing in contrast with the orthodox lens of choice prices and output supply and demand the economics of governance is a lens of contract construction broadly in the spirit of james buchanan s 2001 p 29 observation that mutuality of advantage from voluntary exchange is the most fundamental of all understandings in economics the economics of governance as herein described is principally an exercise in bilateral private ordering by which i mean that the immediate parties to an exchange are actively involved in the provision of good order and workable arrangements to be sure the need for private ordering varies with the rules of the game as provided by the state distinctions between lawlessness where the state provides limited or unreliable protection for property and contract dixit 2004 and lawfulness where the state undertakes to protect property and enforce contracts in a principled way are pertinent the first of these applies mainly to primitive and transition economies the second is commonly associated with western democracies recourse to private ordering under conditions of lawlessness is altogether understandable given the absence of state support the walter a haas school of business university of california berkeley ca 94720 1900 the paper has benefited from workshop presentations at the university of california berkeley the university of valencia insead fountainebleau and the 2004 annual conference of the international society for new institutional economics an abbreviated version was also given as the horst claus recktenwald lecture at nuremburg on 4 november 2004 comments and suggestions from fred balderston ernesto dalbo avinash dixit robert gibbons witold henisz ian larkin steven tadelis and dean williamson are especially acknowledged 1 lon fuller s 1954 p 477 definition of eunomics as the science theory or study of good order and workable arrangements is very much in the spirit of what i refer to as governance 2 one of the immediate ramifications of insistently comparing feasible alternatives all of which are flawed is that the purported inefficiencies that are ascribed to failures to achieve first best optimality are not dispositive but invite the query as compared with what i return to this issue in section iv 3 excluding corporate governance the numbers of articles that used the word governance during the period 1998 2000 as compared with the period 1977 1979 in selected economics business management sociology organization and political science journals were 60 vs 1 76 vs 4 79 vs 18 and 60 vs 25 where the journals surveyed were the american economic review journal of political economy quarterly journal of economics rand journal of economics and journal of economic perspectives in economics strategic management journal management science academy of management journal and academy of management review in business management administrative science quarterly organization science american journal of sociology american sociological review and annual review of sociology in sociology organization and american political science review political science quarterly journal of politics and political research quarterly in political science combining these four categories articles using the word governance increased from 48 to 275 over this 20 year interval dixit 2004 pp 149 50 reports that the number of web pages that turn up under the search for governance is huge

inefficiency of strategy proof rules for pure exchange economies abstract in his pioneering article in decision and organization c b mcguire and r radner eds pp 297 336 north holland amsterdam 1972 hurwicz establishes that there is no strategy proof pareto efficient and individually rational rule for pure exchange economies with two agents and two goods provided that the domain includes a sufficiently wide class of classical preferences in this article we extend his result to pure exchange economies with any finite number of agents and goods we establish that i there is no strategy proof pareto efficient and individually rational rule on the class of classical homothetic and smooth preferences and ii there is no strategy proof pareto efficient and symmetric rule on the same class of preferences journal of economic literature classification numbers d78 d71 c72