efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

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

externalities and asymmetric information a reconsideration of the pigovian theory of regulating externalities via taxation is undertaken for environments with private information the presence of private information may have no effect on the social optimum but when it has an impact it is to cause a group of different agents to share the same production or consumption levels the model developed provides an appealing characterization of when such situations transpire they occur when the individuals who desire most to engage in some activity are the ones who society least wants to participate since such instances could potentially be regulated by the imposition of quantity controls this may explain authorities apparent predilection for quantity limits rather than tax cum subsidy schemes to manage many externalities

pollution claim settlements under private information abstract the classical problem of resolving a nuisance dispute between a pollution generating firm and nearby residents is modelled here as a mechanism design problem we assume that the designer of the mechanism is the firm that it is uncertain about the actual losses suffered by residents and that the initial assignment of property rights is one where each resident is entitled to prevail we derive a profitmaximizing scheme under the individual rationality and incentive compatibility constraints and examine its properties it is shown that the outcomes it yields are sometimes inefficient moreover when many residents are affected by pollution and the degree of uncertainty with respect to the losses they suffer is large these inefficiencies become rampant

conflict and the social contract we consider social contracts for resolving conflicts between two agents who are uncertain about each other s fighting potential applications include international conflict litigation and elections even though only a peaceful agreement avoids a loss of resources if this loss is small enough then any contract must assign a positive probability of conflict we show how the likelihood of conflict outbreak depends on the distribution of power between the agents and their information about each other

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

refinancing and decentralization evidence from china abstract decentralization can complement market liberalization by strengthening incentives of agents to respond to market signals however in china banks centralized lending authority following financial reforms in the mid 1990s we present a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information using data from chinese rural financial institutions we empirically assess the determinants of decentralization and the likelihood of collateral seizure strongly confirming the predictions of the refinancing model we conclude that weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization

the price of advice we develop a model of consulting advising where the role of the consultant is to reveal signals to her client that refine the client s original private estimate of the profitability of a project although the client can perfectly observe and evaluate these signals the consultant may only be able to do the same imperfectly or not at all this captures the idea that the expert may not fully understand the impact of her advice on the client we characterize the optimal contract between the consultant and her client it is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not the main result of the article is that in the optimal mechanism the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client s profit estimate

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

contract renegotiation a simple framework and implications for organization theory this paper provides a unifying framework for studying renegotiation of contracts in the presence of asymmetric information we show that interim renegotiation does not constrain the set of contracts attainable with full commitment regardless of whether renegotiation offers are made by the informed or the uninformed agent ex post renegotiation however does constrain the set of attainable contracts these constraints depend on the identity of the agent making the renegotiation offer we then show how the theory of contract renegotiation can provide insights for organization theory specifically we show how decentralization of decision making can be an optimal response to the threat of ex post renegotiation finally we show that our framework can be used to analyse the trade off between internal and external markets

on countervailing incentives abstract this paper extends and unifies previous work on optimal contracts under countervailing incentives shedding light in particular on the relation between countervailing incentives and pooling inflexible rules our main result is that the nature of the optimal contract depends crucially on whether the agent s utility is quasiconcave or quasiconvex in the private parameter the optimal contract is separated in the former case and it may entail pooling in the latter case journal of economic literature classification number d82

central governance or subsidiarity a property rights approach to federalism abstract we consider a model where one region in a federation can realize a public project after undertaking value increasing investments while negotiations on the federal level ensure that an efficient project size is implemented in equilibrium non contractibility of investments causes the overall outcome to differ across regimes if the region bears the entire implementation costs of its policies underinvestment prevails and subsidiarity centralized governance is superior when spillovers are weak strong conversely if linear cost sharing arrangements are feasible decentralized authority often admits a socially optimal outcome while centralized authority with majority or unanimity rule does not

government versus private ownership of public goods there has been a dramatic change in the division of responsibility between the state and the private sector for the delivery of public goods and services in recent years with an increasing trend toward contracting out to the private sector and public private partnerships this paper analyzes how ownership matters in public good provision we show that if contracts are incomplete then the ownership of a public good should lie with a party that values the beneets generated by it relatively more this is true regardless of whether this party is also the key investor or other aspects of the technology

eliminating price supports a political economy perspective abstract this paper characterizes information and politically constrained government programs for eliminating price supports the issues which we examine in this model include i to what extent is it possible to reduce the size of oversubscribed industries in light of the information and political constraints that exist is a complete decoupling of a worker s compensation from her output possible or desirable ii which type of workers as characterized by their skill levels and outside employment opportunities remain in the industry iii which type of worker is harmed by the relocation program which coalitions of workers will oppose the reorganization

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

decentralization externalities and efficiency in the competitive model externalities lead to inefficiencies and inefficiencies increase with the size of externalities however as argued by coase these problems may be mitigated in a decentralized system through voluntary coordination we show how coordination is limited by the combination of two factors respect for individual autonomy and the existence of private information together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large moreover there are instances in which coordination cannot yield any improvement at all despite common knowledge that social gains from agreement exist this occurs when external effects are relatively small and this may help to explain why coordination is so seldom observed in practice when improvements are possible we describe how simple subsidies can be used to implement second best solutions and explain why standard solutions such as pigovian taxes cannot be used possible extensions to issues arising in the structure of research joint ventures assumptions in the endogenous growth literature and the location of environmental hazards are also described

endogenous mergers in endogenous sunk cost industries abstract this paper uses an endogenous coalition formation game to derive an upper bound to industry concentration the proposed coalitional stability concept assumes that firms are endowed with foresight in that they look ahead and anticipate the ultimate outcome of their actions it is shown that while in exogenous sunk cost industries the upper bound to concentration falls as the market becomes large in endogenous sunk cost industries regardless of the size of the market arbitrarily concentrated outcomes can arise in equilibrium in addition for this second class of industries if products are sufficiently good substitutes then duopoly coalition structures can only be sustained in equilibrium if composed of sufficiently size asymmetric coalitions the results therefore complement those of sutton sutton j 1991 sunk costs and market structure cambridge ma mit press sutton j 1998 technology and market structure theory and history cambridge ma mit press

incomplete contracts vertical integration and supply assurance this paper extends the analysis of transactions cost models of vertical integration to multilateral settings its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply integration reduces supply assurance concerns for an integrating firm but it may increase them for others therefore to explain the scope of any firm one must consider the overall network of production and distribution relations three fundamental questions are addressed 1 what are the effects of different integration structures 2 what are the determinants of the socially efficient integration structures 3 in what way do equilibrium integration structures differ from socially efficient structures

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

asymmetric information bargaining problems with many agents a yes or no decision must be made about some issue all agents must agree the coase theorem asserts that the efficient outcome will always result suppose the value positive or negative that an individual attaches to an affirmative decision is privately known to that individual it is proved under very mild conditions that with independent types as the number of agents increases the probability of an affirmative efficient decision goes to zero an example in which it is common knowledge that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given

coordination and externalities abstract we analyze the gains of coordinating decisions in a regulatory framework in which agents are sovereign and tax inducements are socially costly we consider a general multi agent situation with externalities among agents incomplete information and type dependent reservation utilities when the regulator optimally leaves informational rents to the most efficient agents centralized coordination reduces global activity coordination induces more activity when the principal optimally leaves rents to the most inefficient agents last if we impose budget balance our mechanism can also be interpreted as the optimal auction of a public good with congestion externalities journal of economic literatureclassification numbers d62 d82 l51

dynamic common agency and investment the economics of movie distribution i introduction the management of vertical relationships is one of the fundamental issues addressed by contract and organization theorists how do contract choices interact with other strategic choices what are the consequences of vertical integration answers to these questions inform management strategy and public policy this article analyzes vertical relationships and strategic behavior in the movie distribution market vertical relationships in dynamic environments have been neglected and this article is the first to analyze an infinite horizon common agency model that considers vertical integration and investment the model has two distributors studios or independent distributors and one exhibitor theater distributors can invest each period before contracting with the exhibitor a distributor s investment stochastically improves its movies the probability of having hits rises dynamic strategic interaction is particularly important in the movie business and the infinite horizon model explains several facts that cannot be addressed with a static or two period model 1 in the model distributors avoid simultaneous new hit releases and hits stay in the theater longer than flops in reality release timing and run lengths are critical choices distributors often adjust release dates to avoid competing head to head chisholm 1999 krider and weinberg 1998 reardon 1992 and run lengths depend on early performance de vany and eckert 1991 de vany and walls 1996 furthermore in equilibrium distributors appropriate the lion s share of the marginal value created by their hits this occurs because hits are rare and the exhibitor s next best alternative is to show worse movies this is consistent with real world exhibition contracts which use nonlinear revenue sharing rules that give distributors higher shares of ticket revenue when revenue is high filson et al 2005 vertical integration one distributor owning the exhibitor has implications for strategies and welfare although the article emphasizes the impacts on strategies the welfare analysis is useful because it addresses a historical debate the paramount decrees of the late 1940s and early 1950s barred distributors from owning theaters in the 1980s the u s department of justice gave distributors permission to forward integrate again several did so including some of the largest ones de vany and eckert 1991 argue that the courts erred in the original decrees but to date no formal model supports or refutes their arguments in the infinite horizon model vertical integration is privately profitable but lowers industry value the combined value of the two firms that merge rises because they appropriate value from the remaining distributor but suboptimal investment occurs so the combined value of all three firms falls additional results depend on how integration affects bargaining power if the independent distributor maintains its bargaining power then the integrated distributor increases its investment and further delays releasing its hits the integrated distributor uses its hits as threats to appropriate value from the independent distributor in response the independent distributor reduces its investment however total industry investment never falls and it rises for a wide range of investment costs higher industry investment causes more hits to reach the theater and consumer surplus rises as a result integration may improve welfare in contrast if the independent distributor loses all of its bargaining power after integration then it reduces its investment to zero the integrated distributor still increases its investment but industry investment and welfare falls other strategies also change for example the integrated distributor tends to show its own new hits in preference to the independent distributor s because it does not need to delay releasing its hits to appropriate value

harmonization and side payments in political cooperation for two districts or countries that try to internalize externalities i analyze a bargaining game under private information i derive conditions for when it is efficient with uniform policies across regions with and without side payments and when it is efficient to prohibit side payments in the negotiations while policy differentiation and side payments allow the policy to better reflect local conditions they create conflicts between the regions and thus delay the results also describe when political centralization outperforms decentralized cooperation and they provide a theoretical foundation for the controversial uniformity assumption traditionally used by the fiscal federalism literature

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

local pollution in federal systems it is widely accepted that decentralized control of local pollution is inefficient if the central and the local authorities are imperfectly informed this paper shows how the central authority can introduce a flexible grant in aid system that induces the local authority to use a weighted combination of local and central information when the local authority suffers from confirmatory bias if the central authority is highly uncertain about the environmental effects of a specific pollutant the tax subsidy scheme can be designed to allow local information to play an essential role in the environmental policy if the central authority is certain that a pollutant must not exceed a specific limit the tax subsidy scheme can be designed to allow local information little influence on the environmental policy