collective action and group heterogeneity voluntary provision versus selective incentives several studies have concluded that heterogeneity within a group facilitates the initiation of collective action however a recent analysis found that heterogeneity can either facilitate or impede collective action depending on factors like the strength of the temptation to free ride reconciling these conclusions is difficult because the earlier studies assumed that public goods are provided voluntarily whereas the later analysis assumed that selective incentives like norms or laws can mandate cooperation i examine the link between group heterogeneity and collective action in three regimes voluntary systems in which actors make unrestricted decisions to participate in collective action compliance systems in which actors create and enforce norms that compel others to participate in public goods production and balanced systems in which actors can create and enforce compliance norms or oppose such norms the analysis reveals a complex link among group heterogeneity collective action and the type of regime by fostering the organization of previously atomized groups and weakening the cohesion of highsolidarity groups heterogeneity in contribution costs and valuation of the public good can reduce social power differentials

the ambiguous impact of inequality on local resource management abstract the impact of inequality on the ability of human groups to undertake successful collective action is investigated with special reference to overexploitation of common property resources in voluntary provision problems on the one hand inequality has an ambiguous impact on the feasibility of the efficient outcome even though better endowed agents contribute more to collective action in regulated settings on the other hand inequality tends to reduce the acceptability of available regulatory schemes and therefore to make collective action more difficult

an equilibrium model of incentive contracts in the presence of information manipulation abstract this paper develops an agency model in which stock based compensation is a double edged sword inducing managers to exert productive effort but also to divert valuable firm resources to misrepresent performance we examine how the potential for manipulation affects the equilibrium level of pay for performance sensitivity and derive several new cross sectional implications that are consistent with recent empirical studies in addition we analyze the impact of recent regulatory changes contained in the sarbanes oxley act of 2002 and show how policies intended to increase firm value by reducing misrepresentation can actually reduce firm value or increase the upward bias in manipulated disclosures

grower risk aversion and the cost of moral hazard in livestock production contracts the use of contracts to vertically coordinate the production and marketing of agricultural commodities has become common practice in many agricultural sectors to solve the apparent asymmetric information problems between processors and independent farmers that universally plague these relationships the majority of contracts use high powered incentives schemes to compensate farmers in light of the renewed interest and increased pressure on the states and federal government to regulate production contracts a legitimate question to ask is how much are the producers going to loose if forced to replace the high powered incentives schemes that include performance bonuses with some low powered ones such as simple piece rates the answer to this question depends on the size of the cost of moral hazard the welfare cost of moral hazard emanates from the fact that contract growers are risk averse and face uncertain income streams the degree of risk aversion generates more or less disutility from uncertainty and plays an important role in the design of the optimal contract form the literature on the provision of incentives in firms is based on the premise that relating pay to performance increases output but at the cost of imposing risk on the agents which is reflected in higher compensations grower welfare depends on the type of contract he has signed the distribution of random factors affecting production and the shape of his utility function the objective of this article is to develop an analytical framework for the econometric estimation of the degree of risk aversion of farmers involved in the contract production of hogs and to carry out the empirical estimation of

signal jamming models of fraudulent misreporting and economic prospects an experimental investigation abstract this study uses experimental methodology to examine how the frequency and magnitude with which managers commit fraud varies with economic prospects boom middle and bust the experimental design is based on signal jamming equilibrium sje models of fraud in which managers make potentially inaccurate public reports and investors bid on shares under sje managers always exaggerate reports by a fixed amount up to the maximum possible report independent of the truth shareholders can perfectly correct managers reports except for the maximum possible report in contrast the results of the experiment show four robust deviations from sje predictions 1 managers exaggerate and shareholders correct reports according to dominated mixed strategies with probabilities significantly less than one 2 managers exaggerate more frequently and by more when outcomes are poor 3 shareholders adjust low reports by less than high reports and 4 shareholders correct relatively high reports by more in booms than busts even though managers reporting strategies are invariant to economic prospects

collective choice in the commons experimental results on proposed allocation rules and votes we analyse and empirically examine a multi level common pool resource cpr game consisting of a collective choice level game and an operational level game in the collective choice game participants anonymously propose allocation rules to be used in the operational game and vote anonymously on the proposed rules majority and unanimity rules are investigated our major finding is that both types of voting rules substantially increase efficiency relative to a baseline with no opportunity for collective choice but the distributional consequences of the rules differ to understand the process by which efficiency is improved better we examine four predictive theories related to proposals votes and outcomes

moral hazard severity and contract design in an agency setting where the agent must be compensated both to exert effort to produce a new project and to announce honestly when the new project has been produced we show that holmstrom s 1979 well known informativeness criterion does not by itself determine whether a variable is optimally incorporated into the agent s contract what also matters is how severe the control problem is between the principal and the agent we further show that the severity of the moral hazard problem also determines whether it is desirable for the principal to have the agent implement the project more often that warranted by first best implementation considerations

asymmetric information may protect the commons the welfare benefits of uninformed regulators we examine an entry deterrence model in the commons we investigate in which contexts asymmetric information among firms becomes welfare improving and in which settings an uninformed regulator may prefer to assess and disseminate information about the available stock among firms

risk aversion and incentive effects new data without order effects holt and laury 2002 used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions the main results of that paper were a subjects are risk averse even for relatively small payments of less than 5 b risk aversion increases sharply with large increases in the scale of cash payoffs and c there is no significant effect from increasing the scale of hypothetical payment with a few exceptions noted in the paper all treatments began with a low payment choice followed by a choice with hypothetical payments that had been scaled up by 20 50 or 90 followed by a real cash decision with the same high payment scale 20 50 or 90 followed by a single final low 1 real payment choice those in the 90 treatment could earn amounts ranging from 9 00 to 346 50 in this task as glenn w harrison et al 2004 correctly note this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks in a new experiment reported below we first seek to replicate harrison et al s finding that the order effect participating in a low payment choice before making a high payment choice magnifies the scale effect in a second treatment each subject completes the menu of lottery choices under just one payment condition 1 or 20 real or hypothetical thereby eliminating any order effects i new data

managing local commons theoretical issues in incentive design local commons encompass a wide range of resources whose shared feature is the need for some form of collective management in what follows we shall be concerned mainly with the problems of implementing a collective management plan whatever the mechanisms invoked many recent contributions to the literature have stressed that relatively informal collective management of common property resources can in the right circumstances avoid the severe resource degradation predicted by the tragedy of the commons nevertheless both empirical and theoretical arguments suggest that cooperative behavior may be only partial and the incentives of short term self interest only partially held in check under what circumstances then can more formal implementation mechanisms make good the deficiency and given that formal incentives are typically stronger than informal ones are there any reasons why informal incentives might nevertheless sometimes be preferred

can incomplete information lead to under exploitation in the commons abstract this paper analyzes the protection of a common pool resource cpr through the management of information specifically we examine an entry deterrence model between an incumbent perfectly informed about the initial stock of a cpr and an uninformed potential entrant in our model the appropriation of the cpr by the incumbent reduces both players future profits from exploiting the resource in the case of complete information we show that the incumbent operating in a high stock common pool overexploits the cpr during the first period since it does not internalize the negative external effect that its first period exploitation imposes on the entrant s future profits this inefficiency however is absent when the commons totally regenerate across periods under incomplete information we identify an additional form of inefficiency in particular the incumbent operating in a low stock cpr underexploits the resource in order to signal the low available stock to potential entrants deterring entry

the power of incentives variable pay is usually defined as pay that is tied to some measure of worker output the most typical form of variable pay historically was the piece rate which was more prevalent during the early part of the 20th century than it is at the beginning of the 21st there is a resurgence in variable pay particularly as it relates to executives whose pay is tied to output through some mechanism like stock options or bonuses that depend on individual or firm performance why use variable pay the typical reaction is that variable pay provides incentives to put forth effort although true discrete pay schemes also generate incentives much of the confusion in the literature results from the use of the terms high powered and low powered incentives which connote difference in ability to elicit worker effort it is more informative to make distinctions between discrete and continuous pay and between inputbased and output based pay 2 pay structures can be summarized by the following equation

uncertainty risk and incentives theory and evidence uncertainty has qualitatively different implications than risk in studying executive incentives we study the interplay between profitability uncertainty and moral hazard where profitability is multiplicative with managerial effort investors who face greater uncertainty desire faster learning and consequently offer higher managerial incentives to induce higher effort from the manager in contrast to the standard negative risk incentive trade off this learning by doing effect generates a positive relation between profitability uncertainty and incentives we document empirical support for this prediction this paper was accepted by wei jiang finance

determinacy of equilibria in dynamic models with finitely many consumers abstract we consider a production economy with a finite number of heterogeneous infinitely lived consumers we show that if the economy is smooth enough equilibria are locally unique for almost all endowments we do so by converting the infinite dimensional fixed point problem stated in terms of prices and commodities into a finite dimensional negishi problem involving individual weights in a social value function by adding artificial fixed factors to utility and production functions we can write the equilibrium conditions equating spending and income for each consumer entirely in terms of time zero factor endowments and derivatives of the social value function

piece rates fixed wages and incentives evidence from a field experiment data from a field experiment are used to estimate the gain in productivity that is realized when workers are paid piece rates rather than fixed wages the experiment was conducted within a tree planting firm and provides daily observations on individual worker productivity under both compensation systems unrestricted statistical methods estimate the productivity gain to be 20 since planting conditions potentially affect incentives structural econometric methods are used to generalize the experimental results to out of sample conditions the structural results suggest that the average productivity gain outside of the experimental conditions would be at least 21 7

endogenous provision and appropriation in the commons munity creating the potential of avoiding the tragedy of the commons that characterizes resource use under open access bromley serious difficulties remain however in managing the resource in a way that is socially optimal because of the rival nature of appropriation by individual members achieving the social optimum requires either inducing a noncooperative behavior by individual members that mimics what co

employee choice of health insurance a new specification of health insurance plan choice is developed that uses a nonparametric functional form for the loss function used to evaluate insurance premiums and uncertain out of pocket expenditure the approach is implemented on data resulting from one firm s implementation of a new health plan with three distinct health insurance options health expenditure differences greater than 500 percent are observed indicating extremely strong biased selection plan choices are consistent with a convex loss function for small losses which suggests that consumers underweight high loss low probability outcomes relative to low loss high probability ones copyright 1989 by mit press

has moral hazard become a more important factor in managerial compensation we estimate a principal agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compen sation we find exogenous growth in firm size largely explains these secular trends in compensation in our framework exogenous firm size works through two channels first conflicts of interest between shareholders and managers are magnified in large firms so optimal compensation plans are now more

theory research design assumptions and causal inferences abstract ferri zheng and zou test fischer and verrecchia s 2000 prediction that a reduction in investors uncertainty about managers financial reporting objectives leads to an increase in the valuation relevance of earnings reports they use mandatory cd a disclosures as an arguably exogenous shock that provided investors with more precise information about managers contractual incentives and find that these enhanced disclosures increased the relation between firms unexpected earnings and stock returns using ferri et al as a backdrop we discuss the implicit assumptions invoked in natural experimental research designs and the fundamental role of theory in drawing causal inferences from empirical evidence

the tragedy of the commons revisited identifying behavioral principles abstract the theme of hardin s renowned the tragedy of the commons is that the common pool resource is dissipated to the level where the average value of extraction equals the wage rate in the long run when the number of appropriators is unlimited yet experimental results and rapid deforestation in tropical countries follow a contrasting pattern even though the number of appropriators is limited the common pool resource is dissipated more than the nash equilibrium predicts first given these market or experimental observations we identify two behavioral principles share maximization and difference maximization second we characterize these principles at nash equilibrium

common pool resource appropriation under costly cooperation abstract in addition to the usual fixed costs we introduce variable costs in a community s effort to cooperate in extracting from a common pool resource using a standard supervision mechanism these variable costs are shown to be an increasing function of individual members incentives to default the model explains why we frequently observe communities that all cooperate and have relatively similar resource endowments and yet achieve very different levels of extraction

economic heterogeneity and the commons effects on collective action and collective goods provisioning summary the question of how economic and socio cultural heterogeneity impacts commons management has been receiving increasing attention but without resolution however the issue is increasingly important in a globalizing world this paper builds upon recent theoretical works to provide a clearer understanding of the conditions under which we might expect economic inequality to have positive or negative effects of critical importance to the argument is the distinction between the problem of collective action and the problem of providing collective goods a synthetic set of predictions is subsequently developed and tested with a comparative analysis of case studies of fisheries and irrigation systems

costly distortion of information in agency problems anecdotal evidence suggests that agents often spend resources distorting information transmitted to principals we present a model where costly information distortion emerges as equilibrium behavior the information structure we focus on is intermediate between and encompasses the cases of private information and public information the agent can falsify the privately observed state at some cost although the principal can design contracts that induce no falsification these may involve excessive iinformation rents falsification can be beneficial in spite of the waste of resources involved because it helps reduce information rents we examine how optimal contract and equilibrium payoffs change as the information structure ranges from private to public information

coping with the tragedy of the commons game structure and design of rules the paper provides an assessment of some recent results of the large amount of new institutional economics analyses investigating a common pool resource setting with a specific focus on game theory models most of the studies have used a non cooperative approach in order to explain how under provision for the resource or its over use the so called tragedy of the commons can be avoided within given management rules they show how the characteristics of the game payoff matrix repetition or of the users group size wealth heterogeneity and moral norms may give incentives for the latter to play in a way that benefits all users by contrast much fewer articles have used a formalized approach to assess the possibility for players to design new rules to overcome the initial tragedy of the commons the article ends with some proposals of directions for future research

the economics of earnings manipulation and managerial compensation this article examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm when realized these earnings constitute hidden information that is privately observed by the manager who may expend resources to generate an inflated earnings report we characterize the optimal managerial compensation contract in this setting and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits and to report those profits honestly as a result some degree of earnings management must be tolerated as a necessary part of an efficient agreement

managed care s price bargaining with hospitals research has shown that managed care mc slowed the rate of growth in health care spending in the 1990s primarily via lower unit prices paid however the mechanism of mc s price bargaining has not been well studied this article uses a unique panel dataset with actual hospital prices in massachusetts between 1994 and 2000 to examine the sources of mc s bargaining power i find two significant determinants of price discounts first plans with large memberships are able to extract volume discounts across hospitals second health plans that are more successful at channeling patients can extract greater discounts patient channeling can add to the volume discount that plans negotiate

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

are medical prices declining evidence from heart attack treatments we address long standing problems in measuring medical inflation by estimating two types of price indices the first a service price index prices specific medical services as does the current cpi the second a cost of living index measures a quality adjusted cost of treating a health problem we apply these indices to heart attack treatment between 1983 and 1994 more frequent reweighting and accounting for price discounts lowers the measured price change for heart attacks by three percentage points annually accounting for quality change lowers it further we estimate that the real cost of living index fell about 1 percent annually

addressing global environmental externalities transaction costs considerations is there a way to understand why some global environmental externalities are addressed effectively whereas others are not the transaction costs of defining the property rights to mitigation benefits and costs is a useful framework for such analysis this approach views international cooperation as a contractual process among country leaders to assign those property rights leaders cooperate when it serves domestic interests to do so the demand for property rights comes from those who value and stand to gain from multilateral action property rights are supplied by international agreements that specify resource access and use assign costs and benefits including outlining the size and duration of compensating transfer payments and determining who will pay and who will receive them four factors raise the transaction costs of assigning property rights i scientific uncertainty regarding mitigation benefits and costs ii varying preferences and perceptions across heterogeneous populations iii asymmetric information and iv the extent of compliance and new entry these factors are used to examine the role of transaction costs in the establishment and allocation of property rights to provide globally valued national parks implement the convention on the international trade in endangered species of wild fauna and flora execute the montreal protocol to manage emissions that damage the stratospheric ozone layer set limits on harvest of highly migratory ocean fish stocks and control greenhouse gas emissions jel d23 p14 q22 q51 q54 q58

piece rates principal agent models and productivity profiles parametric and semi parametric evidence from payroll records this paper uses data on the wages received by piece rate workers to estimate worker productivity profiles the data were collected from the payroll records of a british columbia copper mine the advantage of these data is the close link between observed wages and worker productivity an explicit model is used to control for worker effort as a function of observable worker characteristics and the parameters of the compensation system the model implies a censored wage distribution the parameters of which can be estimated using well known econometric techniques semi parametric estimation allows for the relaxation of the distributional assumptions of the model results suggest that while productivity profiles were increasing concave functions of tenure they were also very flat i relate these results to historical arguments on the skill saving nature of technological change in the mining industry at the end of the nineteenth century

the internal economics of the firm evidence from personnel data we analyze twenty years of personnel data from one firm the hierarchical structure is quite simple and stable career movements suggest that the employee s rate of learning and the firm s learning about ability are important there are promotion fast tracks exit rates vary little with tenure or salary the firm has personnel policies like those described in the internal labor markets literature although several theoretical preconditions for ilms such as ports of entry and exit are lacking job levels are important to compensation but there is also substantial individual variation in pay within levels our companion paper in this issue explores the wage policy of this firm

inequality and conservation on the local commons a theoretical exercise to analyse the effect of asset inequality on co operation within a group we consider a twoplayer nonco operative model of conservation of a common pool resource overexploitation by one user affects another s payoff by reducing the next period catch we give necessary and sufficient conditions such that conservation is a nash equilibrium and show that increasing inequality does not in general favour full conservation however once inequality is sufficiently great further inequality can raise efficiency thus the relationship between inequality and economic efficiency is u shaped finally we analyse the implications for conservation if players have earning opportunities outside the commons the daily livelihood of vast masses of the rural poor in many countries depends on the success with which common pool resources cprs such as forest resources grazing lands in shore fisheries and irrigation water are managed and on the environmental consequences of their management understanding the factors that lead to success or failure of community management of these resources is thus critical to rural development cpr management is a collective action dilemma a situation in which mutual cooperation is collectively rational for the group as a whole but individual cooperation is not necessarily individually rational for each member one factor that has not always been recognised as critical to the outcome of collective action dilemmas is heterogeneity among the resource users in this paper our attention will be largely restricted to a single but potent kind of heterogeneity inequality in asset ownership olson 1965 hypothesised that inequality might favour the provision of a public good

identifying and testing models of managerial compensation this article analyses the identification and empirical content of the pure moral hazard pmh and the hybrid moral hazard hmh principal agent models the pmh model has hidden actions while the hmh model has hidden information in addition to hidden actions in both models agents are risk averse and principals are risk neutral the article derives the equilibrium restrictions from the optimal contract and uses the restrictions to show that the models have empirical content for any given risk aversion parameter the models other parameters are non parametrically point identified the risk aversion parameter and hence the model are however only partially identified management s ability to manipulate accounting reports arises endogenously within hmh models but not in all versions of pmh models we use our framework to investigate whether shareholders contract with management recognizing that accounting reports are susceptible to manipulation and therefore endogenous to the incentives offered to management the data reject all models in which accounting reports are verifiable furthermore the version of the pmh in which accounting reports can be manipulated is rejected if expected compensation is restricted to be positive

misdeeds matter long term stock performance of firms after the filling of class action lawsuits consistent with theory this study of shareholder litigation found a broad transformation in company characteristics and risk exposures and generally negative short and long term performance effects that differed substantially between two types of allegations the findings have important implications for both regulator and institutional investor monitoring and decision making strategies

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

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

manipulation and equity based compensation economists have long argued that a strong linkage between compensation and performance is essential for resolving the agency problem created by the separation of ownership and control in particular michael c jensen and kevin j murphy 1990 were very influential in giving impetus to the view that such incentives were in need of strengthening compared to accounting benchmarks the stock price is more forward looking and it is responsive to all value relevant information including informal and unverifiable items of news this makes stock and or option awards an important part of optimal incentives and constitutes a primary reason for seeking a public listing as argued by bengt holmstrom and jean tirole 1993 until recently however theories of optimal executive compensation have generally ignored the possibility that the stock price can be manipulated or falsified it is becoming increasingly clear that this is an important issue in a spate of recent scandals companies have misled the investing public by vastly overstating their profitability and prospects and substantive restatements of company accounts have become increasingly commonplace a growing body of empirical evidence suggests that executive pay in its current form may be at least in part responsible recent studies finding a link between unusual movements in performance measures such as accounting yardsticks and publicly disclosed price sensitive information and compensation include daniel bergstresser and thomas philippon 2006 natasha burns and simi kedia 2006 and peng and roell forthcoming thus the benefits of stock based incentives should be weighed against their side effects this paper models optimal executive compensation in a setting where managers are in a position to influence the public perception of manipulation and equity based compensation

promotion turnover and compensation in the executive labor market this paper develops a generalized roy model with human capital accumulation moral hazard and career concerns we identify and estimate the model with a large panel that matches data on publicly listed firms to information on their executives the structural estimates obtained are used to decompose the firm size pay gap we find that although total compensation and incentive pay increase with firm size certainty equivalent pay decreases with firm size in larger firms and for more highly ranked executives weaker signal quality about effort results in higher risk premiums this risk premium accounts for roughly 80 percent of the firm size gap in total compensation larger firms are also willing to pay more than smaller ones to attract executives finally the estimated coefficients on human capital accumulation from formal education and experience gained from different firms are individually significant but their collective effect on firm size pay differentials nets out

choosing rules to govern the commons a model with evidence from mexico abstract i develop a model to assess distributive rules observed in field data on 48 mexican farmer managed irrigation systems households decide whether to contribute maintenance effort the aggregate amount of which affects the level of output distributive rules with congruence between the sharing of collective costs and benefits elicit the highest level of effort empirically however incongruent rules dominate the surveyed systems i argue that transaction costs offset some efficiency benefits of congruent rules i estimate a model of rule choice inequality and the age of the water users association strongly increase the likelihood that a system chooses proportional water allocation

risk aversion and incentive effects comment charles a holt and susan k laury 2002 develop an experimental design to determine the risk attitude of an individual they use their observations to argue that increased incentives appear to change risk attitudes leading to greater risk aversion popular utility functions that do not allow for such effects are therefore misspecified building on this finding they estimate a flexible utility function that characterizes their aggregate data well but that does not assume constant absolute or relative risk aversion the basic holt and laury 2002 hl design should become an important tool for the interpretation and design of experiments in which risk attitudes could play a role however their most important result showing the effect of scaling up the stakes of the lottery choice task is confounded by a possible order effect an order effect occurs when prior experience with one task affects behavior in a subsequent task the primary methodological contribution of experiments in economics is to enhance control ideally such control makes the explanatory variables of interest in this case scale orthogonal to other explanatory variables such as order allowing clearer inferences about behavior than one could get from field econometric data we argue that not controlling for order effects results in a misspecification of utility functions that is as important as that of scale the subjects in the hl design were given sequences of three or four tasks as shown in table 1 task 1 involved choices over lotteries with a baseline level of prizes which we will refer to as the 1 scale task 2 involved hypothetical choices over prizes with a scaled up level of prizes either 20 50 or 90 task 3 repeated task 2 but with choices that involved real payoffs task 4 was a return to the baseline task with real 1 prizes in some sessions subjects were not given task 2 or task 3 what could one infer from the comparison of measured risk attitudes in the 1 and 20 tasks in hl unfortunately any observed difference could be due either to the scale of the prizes involved or the task order or some combination of both thus the effect of scale is intrinsically confounded with the possible effect of task order this is a logical flaw in their design which

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

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

why do hmos spend less patient selection physician price sensitivity and prices abstract cost control incentives have become an important part of the health insurance landscape in the united states these incentives are the strongest in capitated managed care organizations especially hmos because such organizations are paid a fixed amount regardless of the spending they generate using a sample of insurance claims from about 500 plans i find that in hmos spending on anti cholesterol drugs is 19 lower than in other insurance plans this spending difference could reflect the strong cost control incentives generated by capitation but it could also reflect the selection of healthy price sensitive patients into hmos or it could simply reflect lower prices to understand the difference i estimate a model of physician prescribing and patient refill decisions patients in hmos are nearly twice as sensitive to copays as are other patients consistent with selection of healthy patients into hmos even after adjusting for this selection however hmo physicians remain highly sensitive to drug procurement costs this high sensitivity explains about a 20 of the spending difference combined with lower prices it explains about 25 55 of the difference i find no evidence that these spending reductions result in fewer patient refills or the prescribing of less effective statins

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

risk aversion performance pay and the principal agent problem this paper calculates numerical solutions to the principal agent problem and compares the results to the stylized facts of ceo compensation the numerical predictions come from parameterizing the models of grossman and hart and of holmstrom and milgrom while the correct incentives for a ceo can greatly enhance a firm s performance providing such incentives need not be expensive for many parameter values ceo compensation need increase only by about 10 for every 1 000 of additional shareholder value for some values the amount is 0 003 cents

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

determinants of collective action on the local commons a model with evidence from mexico i develop a model of cooperation in small irrigation systems i give conditions under which an equalizing redistribution of wealth increases the level of equilibrium cooperation but also show that some redistributions that increase inequality can also increase cooperation the distributive rule a combination of arrangements for maintenance cost sharing and water allocation also affects the cooperation level i estimate statistical models of cooperation for three maintenance indicators using field data from a study of mexican irrigation societies social heterogeneity and landholding inequality are significantly associated with lower maintenance distributive rules that allocate water proportionally to landholding size likewise reduce maintenance

enrollee mix treatment intensity and cost in competing indemnity and hmo plans abstract why do indemnity insurance plans cost substantially more per capita 77 more in our study than hmos we answer this question using data from a large organization s insurance pool covering 215 000 lives we decompose cost differences for eight major medical conditions into four sources demographics incidence within demographic groups treatment intensity and prices per service greater incidence of disease in the indemnity plan both from demographics themselves and within demographic groups and higher prices each explain nearly 50 of the difference contrary to conventional wisdom indemnity plans do not have greater treatment intensity

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

modeling effort and lobbying in a heterogeneous common pool resource setting extraction from a common pool resource cpr such as a fishery can lead to socially inefficient and undesirable outcomes as a result of appropriation problems through regulation of the cpr users may achieve a more profitable and socially efficient outcome feeny et al land econ 72 2 187 205 1996 delve into some of the assumptions made by traditional cpr models and how use of those assumptions provides an incomplete framework to guide fishery policy in the theoretical models we develop we relax two of those assumptions cpr users are homogeneous and are unable to create or influence management of the resource we note a case where regulation of the individual user can induce others to harvest more and relate this to the slippage effect concept regarding resource sustainability we document situations where incentives exist for cpr users to lobby for tighter regulations and thus increase profits by limiting the tragedy of the commons influence

structural estimation of a principal agent model moral hazard in medical insurance despite the importance of principal agent models in the development of modern economic theory there are few estimations of these models i recover the estimates of a principal agent model and obtain an approximation to the optimal contract the results show that out of pocket payments follow a concave profile with respect to costs of treatment i estimate the welfare loss due to moral hazard taking into account income effects i also propose a new measure of moral hazard based on the conditional correlation between contractible and noncontractible variables

explicit versus implicit contracts evidence from ceo employment agreements we report evidence on the determinants of whether the relationship between a firm and its chief executive officer ceo is governed by an explicit written or an im plicit agreement we find that fewer than half of the ceos of s p 500 firms have comprehensive explicit employment agreements consistent with contracting theory explicit agreements are more likely to be observed and are likely to have a longer du ration in situations in which the sustamabihty of the relationship is less certain and where the expected loss to the ceo is greater if the firm fails to honor the agreement when a firm hires a chief executive officer ceo it enters into a complex relationship that has significant long term implications for its stockholders establishing the terms of this relationship requires determining the ceo s responsibilities compensation perquisites and term of employment the con ditions under which either party can sever the relationship and restrictions on the ceo s outside activities among other considerations despite the com plexity of these arrangements many public companies including some of the largest choose not to put such terms in writing in 2000 less than half of the firms in the s p 500 had a comprehensive written or explicit employment agreement ea with their ceos the other firms had either no written agree ment at all or agreements that covered only limited aspects of their relationship with the ceo such as change of control nondisclosure noncompete or nonso licitation agreements these latter firms and their ceos relied on implicit eas through which the ceo was employed at will we report evidence on the determinants of whether the relationship between a firm and its ceo is contractually defined in an explicit agreement this

strategic communication with lying costs i study a model of strategic communication between an uninformed receiver and an informed but upwardly biased sender the sender bears a cost of lying or more broadly of misrepresenting his private information the main results show that inflated language naturally arises in this environment where the sender almost always claims to be of a higher type than he would with complete information regardless of the intensity of lying cost there is incomplete separation with some pooling on the highest messages the degree of language inflation and how much information is revealed depend upon the intensity of lying cost the analysis delivers a framework to span a class of cheap talk and verifiable disclosure games unifying the polar predictions they make under large conflicts of interest i use the model to discuss how the degree of manipulability of information can affect the trade off between delegation and communication copyright 2009 wiley blackwell

is honesty the best policy curtailing insurance fraud through optimal incentive contracts an incentive contracting approach is used to characterize optimal contracts when insured individuals possess private information about their losses and are able to misrepresent permanently their loss magnitudes by engaging in the falsification of claims we demonstrate that efficient agreements necessarily induce some falsification but that the extent of such claims inflation is mitigated partially by an indemnification schedule that overcompensates small losses while overpaying larger ones the differential costs of generating insurance claims through falsification provide an avenue by which the heterogencous insureds can credibly signal their underlying losses and are exploited in an optimal contract to implement loss contingent insurance payments

the power and limitations of proportional cutbacks in common pool resources abstract this paper examines the success and limitations of proportional cutbacks as an allocation rule for improving the performance of common pool resources cprs two field cases one success and one failure motivate the analysis for symmetric cprs we establish the existence of efficiency enhancing proportional cutbacks we then introduce complications that arise in the presence of asymmetries which induce a continuum of proportional cutbacks that raise efficiency above nash equilibrium calibrating a linear quadratic cpr model to global carbon dioxide emissions the efficiency and distributional consequences of proportional cutbacks like those embodied in the kyoto protocol are derived

executive compensation a modern primer this article studies traditional and modern theories of executive compensation bringing them together under a simple unifying framework accessible to the general interest reader we analyze assignment models of the level of pay and static and dynamic moral hazard models of incentives and compare their predictions to empirical findings we make two broad points first traditional theories find it difficult to explain the data suggesting that compensation results from rent extraction by ceos however more modern shareholder value theories that arguably better capture the ceo setting do deliver predictions consistent with observed practices suggesting that these practices need not be inefficient second seemingly innocuous features of the modeling setup often made for tractability or convenience can lead to significant differences in the model s implications and conclusions on the efficiency of observed practices we close by highlighting apparent inefficiencies in executive compensation and additional directions for future research