contracting with wealth constrained agents we examine how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input e g effort when potential operators are privately informed about their limited wealth truthful revelation of wealth is induced by promising a higher probability of operation and if necessary a greater share of realized profit the larger the nonrefundable bond that a potential operator posts the project owner benefits when total wealth is widely dispersed among potential operators under plausible conditions limited knowledge of wealth is not constraining for the project owner

consumption of durable goods and tests of the permanent income hypothesis evidence from korean macro data quarterly aggregate data from korean urban households is used to test the restrictions on the vector autoregressive var representation of the permanent income hypothesis pih in testing these restrictions an alternative consumption measure is proposed which takes account of the flow of services from durable goods for comparison two commonly used measures total consumption expenditures and expenditures on non durables and services are also employed in the empirical analysis and the results show that the choice of consumption measures could have a significant effect on the results of the tests leading to a false conclusion with the improper consumption variables

optimal selling strategies when buyers may have hard information abstract consider a revenue maximizing seller who can sell an object to one of n potential buyers each buyer either has hard information about his valuation i e evidence that cannot be forged or is ignorant the optimal mechanism is characterized it turns out that more ignorance can increase the expected total surplus even when the buyers are ex ante symmetric the object may be sold to a buyer who does not have the largest willingness to pay nevertheless an additional buyer increases the expected total surplus in the symmetric case whereas more competition can be harmful if there are ex ante asymmetries

monitoring versus incentives abstract this paper analyzes the trade off between monitoring and incentives in a principal agent relationship with moral hazard we derive general results on the optimal monitoring incentives mix for the case where both parties are risk neutral and the agent faces a limited liability constraint we show that the principal uses less monitoring and stronger incentives if the agent s liability limit is relaxed or if monitoring costs increase to induce more effort on the part of the agent the principal resorts to more monitoring or to stronger incentives or both in particular there are cases where the cheapest way to induce more effort is to use lower powered money incentives but with much more precise monitoring

catching the agent on the wrong foot ex post choice of monitoring abstract in a principal agent model with multiple performance measures we show that the principal benefits by choosing ex post which variables will be monitored if it is too costly for one type of agent to mimic all performance measures expected from another type the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type for cases of small asymmetry of information the principal can implement the first best contract for more serious asymmetries of information the first best is not implementable then the low type may be required to overproduce which is in contrast to the traditional result of second best contracting we also obtain a ranking of monitoring instruments according to the frequency of their use

pollution claim settlements reconsidered hidden information and bounded payments abstract a principal s production decision imposes a negative externality on an agent the principal may be a pollution generating firm the agent may be a nearby town the principal offers a contract to the agent who has the right to be free of pollution then the agent privately learns the disutility of pollution finally a production level and a transfer payment are implemented suppose there is an upper bound possibly zero on payments that the agent can make to the principal in the second best solution there is underproduction for low cost types while there is overproduction for high cost types in contrast to standard adverse selection models of pollution claim settlements there may thus be too much pollution compared to the first best solution

aggregate employment real business cycles and superior information abstract we test whether dynamic stochastic general equilibrium artificial economies associated with several labor market structures provide an adequate characterization of aggregate employment volatility and dynamics our test is robust to possible misspecifications about the information set used by economic agents to forecast future events accounting for agents superior information we find that the divisible labor indivisible labor labor adjustment costs and labor hoarding structures replicate employment volatility in contrast to the nominal wage contracts structure also the labor hoarding structure provides a substantially better account of employment dynamics

labor hoarding superior information and business cycle dynamics abstract in this paper we test whether a labor hoarding environment with basic and augmented laws of motion provide an adequate explanation for observed business cycle dynamics the basic law of motion assumes that the information set used by economic agents to forecast future forcing variables includes only the history of forcing variables augmented laws of motion assume that the information set is superior and include both forcing and hidden exogenous variables we show that the labor hoarding environment with the basic law of motion fails to replicate observed business cycle facts while the environment with augmented laws of motion successfully matches these facts

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

permanent and transitory movements in labor income an explanation for excess smoothness in consumption many have argued that if labor income is difference stationary the permanent income hypothesis predicts that consumption should be relatively volatile in u s aggregate data labor income is well characterized as having a unit root however consumption turns out to be relatively smooth this anomaly is known as deaton s paradox i resolve deaton s paradox by providing decompositions of labor income into permanent and transitory components these preserve the univariate dynamic properties of labor income however when agents distinguish permanent and transitory movements in their labor income as the rational expectations hypothesis asserts they should the permanent income hypothesis correctly predicts the observed smoothness in consumption

the theoretical developments initiated by haberler but named for pigou do not provide sufficient grounds for rejecting keynes s key theoretical proposition this paper examines a claim made in the introduction to milton friedman s presidential address to the american economic association and that is now taken for granted in orthodox economics according to friedman the theoretical developments initiated by haberler but named for pigou provide sufficient grounds for rejecting keynes s key theoretical proposition and the economics of keynes in its entirety the problem with this claim is that it turns out given the scrutiny that it clearly deserves to be false the theoretical developments initiated by haberler but named for pigou do not provide sufficient grounds for rejecting keynes s key theoretical proposition and thus the economics of keynes as a whole there is no legitimate rationale for believing in other words even in a world of flexible prices that the system will tend naturally toward a position of equilibrium at full employment

the firm as a nexus of treaties part 1 knowledge its acquisition sharing and or asymmetry the participatory generation of information rents and the theory of the firm masahiko aoki common knowledge and the co ordination of economic activities jacques cremer profit sharing information and employment matti pohjola part 2 vertical integration and the strategic management of the enterprise what is vertical integration michael h riordan vertical integration transaction costs and learning by using kurt lundgren the firm as a nexus of internal and external contracts torger reve part 3 issues of labour organization the viability of worker ownership an economic perspective on the political structure of the firm henry hansmann intellectual skill and the role of employees as constituent members of large firms in contemporary japan kazuo koike the implicit contract for corporate law firm associates ex post opportunism and ex ante bonding robert h mooking part 4 finance and the political structure of the firm capital structure as a mechanism of control a comparison of financial systems erik berglof long term contracts in financial markets hakan lindgren the principle of external accountability in competitive markets herbert gintis union militancy and plant designs kar ove moene can transaction cost economics explain trade associations marc schneiberg and j rogers hollingsworth

contractual contingencies and renegotiation in a dynamic model of asymmetric information between the owner of a firm and a manager we investigate the optimal set of contingencies on which an incentive contract should depend when renegotiation is possible in particular we characterize the circumstances in which the contracting parties find it desirable to deliberately restrict what the owner can monitor thereby limiting the contractible contingencies our findings thus provide an endogenous explanation for contract simplicity in contrast to those based on transactions costs or bounded rationality

the response of consumption to income innovations evidence from uk regions d ejuan j 2003 the response of consumption to income innovations evidence from uk regions reg studies 37 445 451 the permanent income hypothesis pih predicts an income innovation has the same size effect on consumption as on permanent income this paper tests this prediction using time series data from 11 regions of the uk over the 1971 94 period the empirical results support the pih d ejuan j 2003 la reponse de la consommation a des innovations de revenu des preuves provenant des regions du r u reg studies 37 445 451 l hypothese de la permanence du revenu permanent income hypothesis pih predit que l importance de l effet d une innovation de revenu sur la consommation est la meme que celui sur le revenu permanent a partir des donnees presentees en serie temporelle et provenant de 11 regions du r u sur la pe riode de 1971 a 1994 cet article cherche a evaluer cette prediction il s avere que les resultats empiriques viennent a l appui du pih d ejuan j 2003 die reaktion des ve

multicointegration in us consumption data the present study tests for the existence of multicointegration between real per capita private consumption expenditure and real per capita disposable personal income in the usa in doing so the study exploits the fact that the flows of disposable income and consumption expenditure on the one hand and the stock of consumers wealth which can be considered as cumulative past discrepancies between the flows of income and expenditure on the other hand can be thought of as a stock flow model in which multicointegration is likely to occur recently developed i 2 techniques are applied for testing for multicointegrating relations and find supporting evidence for the existence of multicointegration in us consumption data

saving and income smoothing evidence from panel data abstract in this paper we use data from a panel of dutch households to investigate the behavior of savings as in campbell 1987 we examine whether the pattern of savings is consistent with the predictions of the rational expectations permanent income model we consider one important prediction of the model whether savings anticipate future income changes we test the predictions of the permanent income model in several ways first we propose some informal tests that exploit directly the information on expected future income changes available in the data we then perform a test of the model by setting up a vector autoregression var in terms of savings and income changes and by using euler equations expressed in terms of savings the empirical evidence shows that in all the specifications used in this paper the permanent income model is rejected contrary to the evidence from u s macro data we do not find that the excess sensitivity of consumption to income is responsible for the rejection of the model

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

the theory of warranty contracts abstract this paper surveys theories of the existence and design of warranty contracts insurance signalling and incentive motives are used to explain the existence of warranties the incorporation of imperfections that prevent warranties from serving their basic purposes in a first best way describes actual warranty practices

participation constraints in adverse selection models abstract this paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latter s reservation utility depends on his type the informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade the paper identifies conditions for the optimal contract to be separating to be nonstochastic and to induce full participation it also discusses the nature of the solution when bunching occurs the results are applied to nonlinear pricing under price cap regulation and bypass competition and to competition in nonlinear pricing journal of economic literature classification numbers d82 d42 d23 d78 l51 l15

ex post information in auctions assumptions maskin and riley 1984 show that when the amount a buyer is willing to pay for the auctioned object is not independent of his wealth expected revenue tends to be lower under open bidding in contrast milgrom and weber 1982 relax the assumption that valuations are independent and assume instead that buyers private estimates of the item s value are affiliated a buyer with a high estimate then tends to believe that other buyers will have higher estimates as well maintaining the other assumptions milgrom and weber show that expected revenue is higher in the open ascending bid auction the intuition behind this result is that in sealed high bid auctions a buyer s bid is determined not only by his own beliefs but via their bids by the beliefs of those with lower estimates a buyer with a low estimate believes that others are more likely to have low estimates as well he therefore bids less aggressively it follows that a buyer can beat all opponents who have lower estimates with a bid which is lower than it would be if beliefs were independent 2 milgrom and weber also show that if the seller purchases and then publicly reveals information which is positively linked to buyers valuations this also raises expected gross revenue from an auction the intuition here is that this helps to reduce the difference in bidders willingness to pay 3 that such a reduction should raise expected revenue is easily understood for the limiting case in which the seller s information includes all the buyers private information for then all buyer asymmetry is eliminated and so expected buyer profit is bid away to zero the seller therefore reaps the entire surplus in the following pages the implications of correlated signals are further explored while milgrom and weber emphasized the potential gains to a seller who reveals information ex ante the focus here is on ex post information in section 2 it is shown that under weak assumptions the sealed high bid auction is dominated by any auction

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

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

common cycles in seasonal non stationary time series this paper extends the notion of common cycles to quarterly time series having unit roots both at the zero and seasonal frequencies it is shown that common cycles are present in the hylleberg engle granger yoo decomposition of these series when there exists a linear combination of their seasonal differences which follows an ma process of order at most three the pitfalls of seasonal adjustment for common cycles analysis are also documented inference on common cycles in seasonally cointegrated series is derived from existing statistical methods for codependence concepts and methods are illustrated with an empirical analysis of the comovements between consumption and output using italian data copyright 1999 john wiley sons ltd

the value of information in a principal agent model with moral hazard the ex post contracting case abstract in a principal agent model with moral hazard a signal about the principal s technology the stochastic mapping from the agent s action to the outcome is observed before the contract is offered the signal is either uninformative null information informative and observed only by the principal private information or also observed by the agent public information we show that from an ex ante standpoint before the signal is observed i the agent prefers private to both null and public information ii the principal sometimes prefers null to both private and public information and iii when the principal prefers public to null information she prefers public to private information whereas the agent prefers private to public information in this last situation we also show that iv for any separating equilibrium with private information there exists a contract with public information that both strictly prefer

a direct test of the permanent income hypothesis with an application to the u s states this paper tests the prediction of the permanent income hypothesis pih that news about future income induce a revision in consumption equal to the revision in permanent income we use time series data from 48 contiguous u s states to perform the test the empirical results provide some support for the pih across states

samurai accountant a theory of auditing and plunder a risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know but may verify through a costly auditing procedure we characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent the main results are that efficient schemes involve preaudit payments which are increasing in the agent s wealth audit probabilities are decreasing in the agent s wealth and also satisfy certain constraints as equalities in general such schemes involve stochastic auditing and rebates after an audit in this paper we analyse the problem of a principal extracting wealth from an agent who is reluctant to part with it and is also better informed than the principal as to the amount he owns we assume that the principal has a costly means of discovering the agent s

moral hazard and limited liability implications for the theory of the firm this paper presents a theory of the firm based on moral hazard in the provision of effort by an owner manager who borrows money in financial markets under conditions of limited liability the authors examine the relationship between the financial structure of the firm and the effort and output decisions of the owner manager results are reported concerning the determination of the firm s optimal financial structure and concerning the positive and normative implications of financial structure for pure competition and monopoly they also identify a strategic advantage from equity finance under cournot oligopoly copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

contracting to compete for flows abstract we present a model in which asset managers design their contracts to attract flows of investor capital we find that they make their contracts depend on public information e g credit ratings or benchmark indices as a way to attract flows rather than as a way to mitigate incentive problems as has been emphasized in the literature unfortunately asset managers competition for flows triggers a race to the bottom asset managers use public information in their contracts even though it is socially inefficient this inefficiency arises because contracting on public information prevents risk sharing

optimal contracts with contingent allocation abstract we study the contractual design problem of a seller that observes an ex post signal correlated with the buyer s valuation and can make the allocation but not payments contingent on it we show that to maximize her profit the seller should offer a menu of contracts whereby the good is transferred to the buyer only if the signal is sufficiently low the welfare implications of these contracts are also discussed

testing in models of asymmetric information this paper explores the role of testing in models of asymmetric information we demonstrate conditions under which testing for underlying characteristics can overcome adverse selection problems and lead to a full information competitive equilibrium this paper provides a more general statement of mirrlees result on the optimal use of infinite fines where testing cannot fully resolve the problems associated with asymmetric information we outline the source of the difficulties our results developed in the context of a labour market can be directly extended to other environments in problems with asymmetric information testing to discover an agent s chosen action or underlying characteristics may significantly reduce the cost of moral hazard and adverse selection

endogenous punishments in agency with verifiable ex post information the article studies an adverse selection model in which a contractible imperfect signal on the agent s type is revealed ex post the agent is wealth constrained which implies that the maximum penalty depends on the contracted transaction e g the volume of trade first we show that the qualitative effects of the signal can be unambiguously tied to the nature of the problem e g whether the agent is in a buyer or a seller position second the distortions caused by informational asymmetries may become more severe although more information is now available finally the signal can actually serve to increase the agent s informational rents

the excess smoothness of consumption identification and interpretation deaton s observation that consumption appears to be too smooth is easily reconciled with the notion that consumption exhibits excess sensitivity to current income the reconciliation invokes the plausible assumption that households forecast on the basis of a larger information set than the econometrician the empirical case for excess smoothness is strengthened by showing that the innovations in permanent income can be inferred from an autoregression of income and saving not only under the permanent income hypothesis but also under the excess sensitivity model empirically parameter restrictions imposed on the bivariate autoregression by the excess sensitivity model are not rejected

countervailing incentives in agency problems abstract we analyze countervailing incentives in agency problem countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations and to overstate it for others when countervailing incentives arise pooling generally characterizes the equilibrium contract furthermore performance is distorted both above and below efficient levels in addition the agent s rents generally increase with the realization of his private information over some ranges and decrease over other ranges we demonstate that the creation of countervailing incentives can enhance aggregate welfare

superior information income shocks and the permanent income hypothesis according to the permanent income hypothesis with quadratic preferences households save for a rainy day the transitory component of income innovations and consume entirely the permanent one the m

modelling relative price variability and aggregate inflation in the united kingdom the relationship between relative price variability and aggregate inflation in the uk is used to illustrate a number of issues in econometric modelling methodology the rigorous evaluation of models especially testing for congruence and encompassing is emphasized the valuable role of recursive estimation methods in assessing model adequacy is demonstrated attention is drawn to the potential limitations of single equation and univariate analysis of time series data and a recently proposed modelling strategy for analyzing nonstationary variables with cointegrating relationships based on sequential reductions of a congruent var is applied to a small system involving inflation and relative price variability

modelling economic series readings in econometric methodology part i introduction to part i edward e leamer let s take con out of econometrics michael mcaleer adrian r pagan paul a volker what will take the con out of econometrics trevor s breusch simplified extreme bounds adrian r pagan paul a volker thomas f cooley stephen f leroy what will take the con out of econometrics a reply to mcaleer edward e leamer sensitivity analysis would help adrian pagan three econometric methodologies a critical appraisal david f hendry grayham e mizon procrustean econometrics or stretching and squeezing data christopher a sims macroeconomics and reality part ii alternative methodologies introduction to part ii ray fair macroeconomic methodology richard m todd improving economic forecasting with bayesian vector autoregression edward e leamer a bayesian analysis of the determinants of inflation arnold zellner bayesian analysis in econometrics part iii lse methodology introduction to part iii christopher gilbert professor hendry s econometric methodology david f hendry jean francois richard on the formulation for empirical models in dynamic econometrics aris spanos towards a methodology of econometric modelling part iv model evaluation and selection introduction to part iv halbert white model selection y chong d f hendry econometric evaluation of linear macro economic models

contractual design with correlated information under limited liability we examine contractual design in a principal agent model under two forms of limited liability nonnegative constraints on the transfer payments to and the profits of the agent we show that when limited liability is a binding constraint the principal cannot implement the first best solution and the agent earns rents from private information limited liability is a binding constraint in the nonnegative transfers model only when a signal is insufficiently responsible to type inelastic further as the production rule and profits are continuous in the type elasticity of the signal density function the level of the inefficiency is less than that which obtains with no signal if a signal is sufficiently responsive to type elastic in this environment then the principal can implement the first best allocation and the value of the agent s private information is zero we show that limited liability will always be a binding constraint in the nonnegative ex post profits model regardless of the information content of the signal the production rule and welfare are increasing in the informativeness of the signal

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

arm s length relationships we show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats hence it will weaken incentives and can therefore be counterproductive this phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible applications to the theory of the firm are briefly explored

present value tests of an intertemporal model of the current account abstract this paper first demonstrates that in a simple intertemporal open economy model the current account is equal to the expected decline of the present discounted value of net output of a country net output is defined as gross domestic product less the sum of investment plus government spending it then uses econometric methods for present value models to analyze the current account for four countries in two of these countries the model does a satisfactory job of explaining the current account

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

a procedure to evaluate cyclical fluctuations under superior information this article presents and assesses a procedure to evaluate conventional moments characterizing fluctuations at the business cycle frequency when the economic agents information set is superior to the econometrician s one first we derive the theoretical conditions under which the econometrician obtains valid statistics for the moments from laws of motion for forcing variables that fully recover the agents superior information second we use a new keynesian monetary model to document the numerical properties of the statistics when the laws of motion are possibly misspecified and to assess the ability of certain information criteria to detect the presence of superior information

retail contracting and costly monitoring theory and evidence abstract we reconcile seemingly conflicting hypotheses and evidence that surface in the principal agent literature specifically we examine the literature that deals with the effect of costly monitoring on retail organizational form our principal agent model of the optimal relationship between up and downstream firms allows the principal to garner two types of imperfect signals of agent effort sales data and behavior data the model yields predictions that we confront with the econometric evidence which comes from both franchising and sales force compensation literatures we find that when variation in the informativeness and in the cost of increasing the informativeness of both signals is considered the evidence is consistent with the theory

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts