cooperative and noncooperative r d in duopoly with spillovers contrary to the usual assumption made in most oligopoly models relations among firms are seldom of a wholly cooperative or noncooperative type in many situations they compete in some fields while they cooperate in others an important example is the case of cooperative research efforts bringing fierce competitors together two types of agreement are observed first r d cooperation can take place at the so called precompetitive stage companies share basic information and efforts in the r d stage but remain rivals in the market place 1 a second type of agreement involves an extended collusion between partners creating common policies at the product level the usual justifications of this extension are the difficulties of protecting intellectual property the idea is then to allow partners who have achieved inventions together to also control together the processes and products which embody the results of their collaboration in order to recuperate jointly their r d investments 2 what could be expected from these types of agreement is a reduction in r d expenditures because of less wasteful duplication and a reduction of total production because of more reprinted from the american economic review 78 5 1133 1137 1988 center for operations research econometrics 1348 louvain la neuve belgium we are grateful to jean

changing threat perceptions and the efficient provisioning of international security this paper proposes a mechanism for structuring international institutions to efficiently provision global security against the threat of a rogue nation the effects of security effort by an alliance member are assumed to be non rival and non excludable for other members specifically this effort has both positive and negative effects as security measures prevent attacks by the rogue nation but also involves loss of commercial and diplomatic benefits further the alliance members are assumed to have heterogeneous tastes regarding the desired security level the allies act strategically vis a vis one another with regard to security provision and the alliance a whole acts strategically with respect to the rogue nation which strategizes in turn importantly this paper investigates how the evolution of public opinion in the respective countries facing the rogue nation s threat impacts the proposed mechanism

flexibility and uncertainty the preserving of flexibility when faced with uncertainty is a neglected aspect of behaviour under risk yet it is an important factor in decisions to hold liquid assets or delay irreversible investment this paper formalizes the notion of flexibility in a sequential decision context and relates its value to the amount of information an agent expects to receive a rudimentary money demand model is developed embodying these ideas and the history of flexibility as an economic concept is traced choices are frequently made between alternatives that imply different degrees of future commitment between a short term investment that leaves future options open for example and a long term one that by its very nature forecloses those options the relative attractiveness of the two depends on their probability distributions of payoffs over time a basic consideration in this choice is the recognition that beliefs about the risks governing these payoffs may change current doubts may be partially resolved in the near future this prospect decreases the attractiveness of the longer term commitment in that one is able to respond less fully to new information and even if it does not directly affect the risks associated with shorter term choices enhances their appeal this paper formalizes the above remarks by establishing connections between the following two partial orderings the first is an ordering based on variability of beliefs one set of beliefs is more variable than another if more final risk is resolved at an intermediate stage the more one expects to learn by an intermediate period relative to what one knows today the more variation one is anticipating in beliefs about the final outcome the second is an ordering of current actions or positions based on flexibility one position is more flexible than another if it leaves available a larger set of future positions at any given level of cost these two orderings are incorporated in a simple sequential decision model to suggest the following behavioural principle the more variable are a decision maker s beliefs the more flexible is the position he will choose this principle potentially applies whenever i there will be opportunities to act after further information is received and ii current actions influence either the attractiveness or availability of different future actions

optimal shared savings contracts in supply chains linear contracts and double moral hazard in many supply chains consumption of indirect materials sold by a supplier to a customer for use in her production process can be reduced by efforts exerted by either party since traditional supply contracts provide no incentive for the supplier to exert such effort shared savings contracts have been proposed as a way to improve incentives in the channel leading to more efficient effort choices by the two parties such shared savings contracts typically combine a fixed service fee with a variable component based on consumption volume we formalize this situation using the double moral hazard framework in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption we also extend the double moral hazard framework to analyze a broader class of cost of effort functions than considered so far including the linear cost of effort functions commonly found in practice we show that the supplier can still always induce the optimal second best equilibrium with a linear shared savings contract under this broader class of functions however the behavior of the optimal contract as a function of the problem parameters becomes more complex we illustrate how small changes in the problem parameters can turn profits from being a well behaved to a poorly behaved function of the contract and provide some theoretical characterization of this phenomenon the practical significance of this is that simple linear contracts are sufficient in many double moral hazard contexts even for the broader class of functions we consider but care must be taken in selecting the optimal contract parameters

risk allocation and the costs and benefits of public private partnerships we study the agency costs of delegated public service provision focusing on the link between organizational forms and uncertainty at project implementation we consider a dynamic multitask moral hazard environment where the mapping between efiort and performance is ex ante uncertain but new information may come along during operations our analysis points out at the e ciency gains that bundling planning and implementation as under public private partnerships can bring in terms of better project design and lower operational costs bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design procedure technology on the cost of operations the compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which for high operational risk can make unbundling optimal in this context the use of private flnance can help re establishing the beneflt of bundling only if lenders have su cient expertise to help assessing project risks

essays on duopoly competition with asymmetric firms is profit maximization always an evolutionary stable strategy abstract we propose both a well mixed and spatially structured evolutionary game to analyze the competitive behavior of retail firms in duopolistic markets firms from two different populations high low efficiency compete and the available strategies are i profit or ii revenue maximization under bounded rationality assumptions firms can update their behavior through dynamic learning mechanisms in addition to a replicator dynamics approach we develop an agent based model to increase realism and to capture possible spatial effects on firms strategic behavior a convergence between the methods is observed and given specific conditions revenue maximization may corresponds to an evolutionary stable strategy ess

laboratory evidence on the effectiveness of corporate leniency programs the number of cartels detected in the united states and in europe has increased considerably since the introduction of corporate leniency programs in antitrust legislation it cannot however be ruled out that this apparent success results in part from increased cartel activity we explore the effects of corporate leniency programs on pricing and cartel activity by use of an experiment we find that in the lab i fewer cartels are established when a leniency program is in place and ii cartels that do exist are less successful in charging prices above the static nash equilibrium price and have lower survival rates

information revelation incentives and the value of a real option the real options approach to capital budgeting focuses on valuing benefits of project flexibility this paper presents an incentive consideration in such valuation operating flexibility not only allows a firm to change course in response to new information but also allows interested observers to make inferences based on the change in course or lack thereof such information conveyance through refined operating choices can alter observers incentives as a result an option to delay may prove valuable because it allows a firm to prolong informational advantages

designing supply contracts contract type and information asymmetry this paper studies the value to a supplier of obtaining better information about a buyer s cost structure and of being able to offer more general contracts we use the bilateral monopoly setting to analyze six scenarios three increasingly general contracts wholesale pricing schemes two part linear schemes and twopart nonlinear schemes each under full and incomplete information about the buyer s cost structure we allow both sides to refuse to trade by explicitly including reservation profit levels for both for the supplier this is implemented through a cutoff policy we derive the supplier s optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts our key findings are as follows first the value of information is higher under two part contracts second the value of offering two part contracts is higher under full information and third the proportion of buyers the supplier will choose to exclude can be substantial

nash equilibria in models of fiscal competition abstract this paper analyzes nash equilibria in a simple model of an economy with jurisdictions engaging in fiscal competition small number nash equilibria in which tax rates are the strategic variables are shown not to coincide with nash equilibria in which public expenditure levels are the strategic variables

intertemporal cost allocation and managerial investment incentives a theory explaining the use of economic value added as a performance measure this paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures the main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level the income measure created by this allocation rule is usually referred to as residual income or economic value added

on the design of leniency programs abstractleniency programs contribute to destabilizing collusion but can also be abused and generate perverse effects this paper develops a simple model capturing this trade off which we use to relate the optimal leniency policy the carrot to the effectiveness of investigations the stick we show that it is always desirable to offer some leniency before an investigation is launched it is also optimal to offer some leniency once an investigation is underway when investigations are unlikely to succeed in uncovering cartels absent self reporting our analysis also confirms the usefulness of restricting leniency to the first informant only in contrast it does not support prohibiting leniency for repeat offenders

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

fines leniency and rewards in antitrust this article reports results from an experiment studying how fines leniency and rewards for whistleblowers affect cartel formation and prices antitrust without leniency reduces cartel formation but increases cartel prices subjects use costly fines as punishments leniency improves antitrust by strengthening deterrence but stabilizes surviving cartels subjects appear to anticipate the lower postconviction prices after reports leniency with rewards prices fall at the competitive level overall our results suggest a strong cartel deterrence potential for well run leniency and reward schemes these findings may also be relevant for similar white collar organized crimes such as corruption and fraud

the elementary economics of social dilemmas a social dilemma is in essence a prisoners dilemma in a continuous strategy space i discuss a number of social dilemmas that have caught my attention offer an elementary diagrammatic synthesis of them and discuss some of the economic insights that the diagrams capture including incentives for pre commitment finally i model pre commitment via delegation and link results to the literature on the evolution of preferences l economie elementaire des dilemmes sociaux un dilemme social est essentiellement un dilemme du prisonnier dans un espace continu de strategie l auteur discute d un certain nombre de dilemmes sociaux qui ont retenu son attention il en propose une synthese graphique elementaire et discute certaines des suggestions economiques qui decoulent de ces diagrammes comme par exemple les incitations a se pre engager finalement l auteur construit un modele de pre engagement par delegation et relie ses resultats a la litterature sur l evolution des references

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

long term and penalty contracts in a two stage supply chain with stochastic demand abstract recent applications of game theoretic analysis to supply chain efficiency have focused on constructs between a buyer the retailer or manufacturer and a seller the supplier in successive stages of a supply chain if demand for the final product is stochastic then the supplier has an incentive to keep its capacity relatively low to avoid creating unneeded capacity the manufacturer on the other hand prefers the supplier s capacity to be high to ensure that the final demand is satisfied the manufacturer therefore constructs a contract to induce the supplier to increase its production capacity most research examines contracting when final demand is realized after the manufacturer places its order to the supplier however if final demand is realized before the manufacturer places its order to the supplier these types of contracts can be ineffective this paper examines two contracts under the latter timing scenario long term contracts in which the business relationship is repeated and penalty contracts in which the supplier is penalized for too little capacity results indicate long term contracts increase the profit potential of the supply chain furthermore the penalty contracts can ensure that the supplier chooses a capacity level such that the full profit potential is achieved

environmental policy in a federation with special interest politics and inter governmental grants the paper explores the potential effect of intergovernmental grants igg on sub national local environmental policy in a federal structure in the model a politically inclined local government receives campaign contributions from the polluters lobby in return for lower pollution taxes a benevolent federal government uses igg as an incentive to reduce the resulting distortion in the local pollution tax igg are formulaic transfers that are conditional on pollution levels lower pollution in a sub national jurisdiction relative to others translates into a higher share of the grant and vice versa in equilibrium the grant effect reduces the distortion created in the pollution tax by the lobby effect and may even lead to a higher than pigouvian tax when the local government assigns a large enough weight on social welfare and or when the grant is large enough further igg result in the tax levels of jurisdictions becoming interdependent in an interesting way environmental policies in two jurisdictions may become strategic complements or substitutes depending on their relative pollution levels the possibility of strategic substitution implies that federal welfare may not increase even when environmental policy becomes stricter in one state

coordination of supply chains by option contracts a cooperative game theory approach manufacturer retailer supply chains commonly adopt a wholesale price mechanism this mechanism however has often led manufacturers and retailers to situations of conflicts of interest for example due to uncertain market demand retailers prefer to order flexibly from manufacturers so as to avoid incurring inventory costs and to be able to respond flexibly to market changes manufacturers on the other hand prefer retailers to place full orders as early as possible so that they can hedge against the risks of over and under production such conflicts between retailers and manufacturers can result in an inefficient supply chain motivated by this problem we take a cooperative game approach in this paper to consider the coordination issue in a manufacturer retailer supply chain using option contracts using the wholesale price mechanism as a benchmark we develop an option contract model our study demonstrates that compared with the benchmark based on the wholesale price mechanism option contracts can coordinate the supply chain and achieve pareto improvement we also discuss scenarios in which option contracts are selected according to individual supply chain members risk preferences and negotiating powers

splitting up value a critical review of residual income theories this paper deals with the notion of residual income which may be defined as the surplus profit that residues after a capital charge opportunity cost has been covered while the origins of the notion trace back to the 19th century in depth theoretical investigations and widespread real life applications are relatively recent and concern an interdisciplinary field connecting management accounting corporate finance and financial mathematics peasnell 1981 1982 peccati 1987 1989 1991 stewart 1991 ohlson 1995 arnold and davies 2000 young and o byrne 2001 martin petty and rich 2003 this paper presents both a historical outline of its birth and development and an overview of the main recent contributions regarding capital budgeting decisions production and sales decisions implementation of optimal portfolios forecasts of asset prices and calculation of intrinsic values a most recent theory the systemic value added approach also named lost capital paradigm provides a dierent denition of residual income consistent with arbitrage theory en folded in keynes s 1936 notion of user cost and forerun by pressacco and stucchi 1997 the theory has been formally introduced in magni 2000a b c 2001a b 2003 where its properties are thoroughly investigated as well as its relations with the standard theory two different lost capital metrics have been considered for value based management purposes by drukarczyk and schueler 2000 and young and o byrne 2001 this work illustrates the main properties of the two theories and their relations and provides a minimal guide to construction of performance metrics in the two approaches

on the incentive effects of job rotation abstract a new employee may work hard to build his reputation this effect is greatest when he starts the longer he is employed at his job the more the firm will already have learned about his ability the incentives for an employee to influence the firm s perceptions of his ability decrease over time if rotating the employee to a different job leads to new uncertainty about his ability this generates a fresh impulse for effort however job rotation also reduces the employee s time horizon thus reducing future rents from reputation this trade off leads to a unique optimum we derive a simple rule of thumb for an optimal rotation time our main results still hold for cases of complete but imperfect information transmission the incentive effects of job rotation also prevail in a setting in which skills are job specific we study several extensions rotations across multiple employees absence of commitment to a rotation time different bargaining positions discounting over time and learning by doing effects

multistage capital budgeting with delayed consumption of slack capital budgeting frequently involves multiple stages at which firms can continue or abandon ongoing projects in this paper we study a project requiring two stages of investment failure to fund stage 1 of the investment precludes investment in stage 2 whereas failure to fund stage 2 results in early termination in contrast to the existing literature we assume that the firm can limit the manager s informational rents with the early termination of the project in this setting we find that the firm optimally commits to a capital allocation scheme whereby it forgoes positive net present value npv projects at stage 1 capital rationing whereas at stage 2 depending on the manager s previous report it sometimes implements projects with a negative continuation npv but in other situations forgoes implementing projects with positive continuation npvs this paper was accepted by mary barth accounting

modeling the birth and death of cartels with an application to evaluating competition policy one of the primary challenges to measuring the impact of antitrust policy on collusion is that the cartel population is unobservable we observe only the population of discovered cartels to address this challenge a model of cartel creation and dissolution is developed to endogenously derive the populations of cartels and discovered cartels it is then shown how one can infer the impact of antitrust policy on the population of cartels by measuring its impact on the population of discovered cartels in particular the change in the distribution on the duration of discovered cartels could be informative in assessing whether a new antitrust policy is reducing the latent rate of cartels

residual income and value creation an investigation into the lost capital paradigm this paper presents a new way of measuring residual income originally introduced by magni 2000a 2000b 2003 contrary to the standard residual income the capital charge is equal to the capital lost by investors the lost capital may be viewed as a the foregone capital b the capital implicitly infused into the business c the outstanding capital of a shadow project d the claimholders credit relations of the lost capital with book values and market values are studied as well as relations of the lost capital residual income with the classical standard paradigm many appealing properties are derived among which a property of earnings aggregation different concepts and results provided by different authors in such different fields as economic theory management accounting and corporate finance are considered o hanlon and peasnell s 2002 unrecovered capital and excess value created ohlson s 2005 abnormal earnings growth o byrne s 1997 eva improvement miller and modigliani s 1961 investment opportunities approach to valuation keynes s 1936 user cost drukarczyk and schueler s 2000 net economic income fernandez s 2002 created shareholder value anthony s 1975 profit they are all conveniently reinterpreted within the theoretical domain of the lost capital paradigm and conjoined in a unified view the results found make this new theoretical approach a good candidate for firm valuation incentive compensation capital budgeting decision making

an evaluation of vendor selection models from a total cost of ownership perspective abstract many different vendor selection models have been published in the purchasing literature however there has been no systematic approach to compare the relative efficiency of the systems in this paper we propose to use the concept of total cost of ownership as a basis for comparing vendor selection models we illustrate the comparison with a real life data set of the purchasing problem of ball bearings at cockerill sambre a belgian multinational company in the steel industry from a total cost of ownership perspective mathematical programming models outperform rating models and multiple item models generate better results than single item models for this specific case study

strategic commitments for an optimal capacity decision under asymmetric forecast information we study the important problem of how to assure credible forecast information sharing between a supplier and a manufacturer the supplier is responsible for acquiring the necessary capacity before receiving an order from the manufacturer who possesses private forecast information for her end product we address how different contracts affect the supplier s capacity decision and hence the profitability of the supplier and the manufacturer we fully develop two contracts and provide explicit formulae to enable credible forecast information sharing the first is a nonlinear capacity reservation contract under which the manufacturer agrees to pay a fee to reserve capacity the second is an advance purchase contract under which the manufacturer is induced to place a firm order before the supplier secures the component capacity used to build the end product these contracts serve a strategic role in information sharing the capacity reservation contract enables the supplier to detect the manufacturer s private forecast information while the advance purchase contract enables the manufacturer to signal her forecast information we show that channel coordination is possible even under asymmetric forecast information by combining the advance purchase contract with an appropriate payback agreement through our structural and numerical results we also show that the degree of forecast information asymmetry and the risk adjusted profit margin are two important drivers that determine supply chain efficiency and which contract to adopt

the impact of voluntary disclosure on a firm s investment policy in this paper we provide a model which describes how voluntary disclosure impacts on the timing of a firm s investment decisions a manager chooses a time to invest in a project and a time to disclose the investment return in order to maximise his monetary payoff we assume that this payoff is linked to the level of the firm s stock price prior to investing the profitability of the project and the market reaction to the disclosure of the investment return are uncertain but the manager receives signals at random points in time which assist in resolving some of this uncertainty we find that a manager whose objective can only be achieved through voluntarily disclosing the return is motivated to invest at a time that would be sub optimal for an identical manager with a profit maximising objective

organizational inertia and dynamic incentives abstract we model the level of inertia as an endogenous rational choice made by the organization principal we show that the efficient organizational response to the presence of private information on the value of change will in general be to bias the decision rule towards the status quo the compensation of the agent differs significantly according to whether the information is private to the principal or the agent and the efficient distribution of real authority in an organization need not always be profitably retained by the principal

to build or not to build normative and positive theories of public private partnerships abstract this paper analyzes whether the two tasks of building infrastructures which are socially useful in providing public services and managing these assets should be bundled or not when performance contracts can be written both tasks should be performed altogether by the same firm if a better design of the infrastructure helps also to save on operating costs otherwise tasks should be kept apart and undertaken by different units in incomplete contracting environments we isolate conditions under which either the traditional form of public provision of services or the more fashionable public private partnership emerges optimally the latter dominates when there is a positive externality and the private benefits from owning assets are small enough finally we take a political economy perspective and study how incentive schemes are modified under the threat of capture of the decision makers much of the gains from bundling may be lost in this case

optimal corporate leniency programs this study characterizes the corporate leniency policy that minimizes the frequency with which collusion occurs though it can be optimal to provide only partial leniency plausible sufficient conditions are provided whereby the antitrust authority should waive all penalties for the first firm to come forward it is also shown that restrictions should be placed on when amnesty is awarded though it can be optimal to award amnesty even when the antitrust authority is very likely to win the case without insider testimony

promised lead time contracts under asymmetric information we study the important problem of how a supplier should optimally share the consequences of demand uncertainty i e the cost of inventory excesses and shortages with a retailer in a two level supply chain facing a finite planning horizon in particular we characterize a multiperiod contract form the promised lead time contract that reduces the supplier s risk from demand uncertainty and the retailer s risk from uncertain inventory availability under the contract terms the supplier guarantees on time delivery of complete orders of any size after the promised lead time we characterize the optimal promised lead time and the corresponding payments that the supplier should offer to minimize her expected inventory cost while ensuring the retailer s participation in such a supply chain the retailer often holds private information about his shortage cost or his service level to end customers hence to understand the impact of the promised lead time contract on the supplier s and the retailer s performance we study the system under local control with full information and local control with asymmetric information by comparing the results under these information scenarios to those under a centrally controlled system we provide insights into stock positioning and inventory risk sharing we quantify for example how much and when the supplier and the retailer overinvest in inventory as compared to the centrally controlled supply chain we show that the supplier faces more inventory risk when the retailer has private service level information we also show that a supplier located closer to the retailer is affected less by information asymmetry next we characterize when the supplier should optimally choose not to sign a promised lead time contract and consider doing business under other settings in particular we establish the optimality of a cutoff level policy finally under both full and asymmetric service level information we characterize conditions when optimal promised lead times take extreme values of the feasible set yielding the supplier to assume all or none of the inventory risk hence the name all or nothing solution we conclude with numerical examples demonstrating our results

supplier switching decisions abstract in order to maximize profit a buying firm should continuously search for and access sources which offer more favorable prices while the literature is replete with works on the formation and development of buyer supplier relationships there is surprisingly only scarce research on the termination of such relationships and supplier switching using the concept of switching costs in a principal agent framework we at first analyze whether a firm switches the entire or a partial quantity to an alternative supplier when there is either symmetric or asymmetric information about the alternative supplier s cost structure information asymmetry results in inert supplier switching decisions subsequently we extend our model and take competitive reactions of the incumbent supplier and economies of scale effects into consideration we find conditions under which no partial and complete switching occurs which depend on the buying firm s beliefs about the alternative supplier s unit costs switching costs the price offered by the incumbent supplier and refinements of the price offered by the incumbent supplier due to competitive reactions and economies of scale broader implications for supplier relationship management and sourcing strategy decisions are also provided

the effects of risk aversion on production decisions in decentralized organizations this paper presents a principal agent model in which subsequent to contracting the risk averse agent becomes informed about the production process communication of the agent s information is always valuable the optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric leading to an efficiency loss comparative statics show that the loss in expected production increases as the agent becomes more risk averse

on the evolutionary stability of altruistic and spiteful preferences abstract this note demonstrates that a result on evolutionary stability presented by bester and guth bester h guth w 1998 journal of economic behavior and organization 34 193 209 applies under more general preference and payoff functions

goal congruence analysis in multi division organizations with shared resources based on data envelopment analysis abstract in multi division organizations goal congruence between different divisions and top management is critical to the success of management in this paper drawing upon a nonparametric framework to model production technology we derive a necessary and sufficient condition for a firm with multiple divisions to be goal congruent and then extend it to a goal congruence testing measure which coincides with a data envelopment analysis dea model the goal congruence measure not only shows empirically whether the firm is goal congruent or not but also provides a measurement for the degree of goal incongruence to be goal congruent resources shared among divisions are suggested to be allocated so that the conditions for an optimizable operation are satisfied in addition goal congruent firms are verified to be cost efficient all findings in this research are examined and illustrated with a dataset of 20 bank branches with shared resources for service and sales divisions

controlling for supplier switching in the presence of real options and asymmetric information abstract applying a real option approach this paper examines how asymmetric information alters key variables of a firm s supplier switching process such as the timing of contracting hurried versus delayed contracting transfer payments set up switching and abandonment decisions in a symmetric information setting delayed contracting is unambiguously beneficial abandoning the once established relation with the entrant supplier is never an issue in contrast under asymmetric information hurried contracting with potentially abandoning the relation can be beneficial consistent with adverse selection models we find that under delayed contracting in equilibrium the firm switches less frequently to the entrant supplier switching inertia surprisingly we also find that under hurried contracting the firm switches more frequently to the entrant supplier switching acceleration and may abandon the relation finally we study how these key variables of the supplier switching process change when also the incumbent supplier has private information two sided asymmetric information case

selection of contract suppliers under price and demand uncertainty in a dynamic market in this paper we consider a supply contracting problem in which the buyer firm faces non stationary stochastic price and demand first we derive analytical results to compare two pure strategies i periodically purchasing from the spot market and ii signing a long term contract with a single supplier the results from the pure strategies show that the selection of suppliers can be complicated by many parameters and is particularly affected by price uncertainty we then develop a stochastic dynamic programming model to incorporate mixed strategies purchasing commitments and contract cancellations computational results show that increases in price demand uncertainty favor long term short term suppliers by examining the two way interactions of contract factors price demand purchasing bounds learning and technology effect salvage values and contract cancellation both intuitive and non intuitive managerial insights in outsourcing strategies are derived

trade wars and trade talks when governments meet in the international arena their actions reflect the political situations at home previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest here we introduce domestic politics into the analysis of international economic relations we study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups our analysis sheds light on the determinants of the structure of protection in non cooperative and cooperative policy equilibria

a supplier s optimal quantity discount policy under asymmetric information in the supply chain literature an increasing body of work studies how suppliers can use incentive schemes such as quantity discounts to influence buyers ordering behaviour thus reducing the supplier s and the total supply chain s costs various functional forms for such incentive schemes have been proposed but a critical assumption always made is that the supplier has full information about the buyer s cost structure we derive the optimal quantity discount policy under asymmetric information and compare it to the situation where the supplier has full information

the evolution of preferences and competition a rationalization of veblen s theory of invidious comparisons we examine how preferences evolve by natural selection in a competitive environment similar to that characterizing much of our evolutionary past we find that the evolutionarily stable preferences in this context exhibit a concern not only for absolute payoffs but also for relative payoffs and that this intensifies the degree of competition relative to what obtains when players consider only absolute payoffs we argue that this has consequences for the equilibrium population size we argue that the premise of this analysis is consistent with the available anthropological evidence and that the prediction is broadly consistent with the findings of experimental game theory

the distribution of wealth and the efficiency of institutions the distribution of wealth and the efficiency of institutions this paper explores the effect on economic efficiency of the distribution of wealth and systems for enforcing property rights we construct a two person two period economy in which each person can consume plant transfer or steal corn we find circumstances in which redistribution of wealth is pareto optimal and in which increasing sanctions against theft to their maximum level is not these results suggest that it is not only important to consider distribution in the design of property institutions but also that redistribution itself may serve to increase the efficiency of systems of property rights i introduction a fundamental insight of economics is that property rights may foster creation of wealth nevertheless property rights which can be freely violated serve no function so that to be meaningful they must be enforceable effective enforcement requires the existence of enforcement systems to monitor violations impose sanctions and provide for restitution of stolen property an effective enforcement system produces obvious desirable effects by deterring theft and providing for restitution it assures that individuals will appropriate the fruits of their labors and hence enforcement serves to increase efficiency it is a standard observation in the literature on crime and punishment that the possibility of crime may lead potential victims to alter their behavior in efficiency reducing ways the possibility of street crime may for example empty the streets neher 1978 conversely the establishment of an effective enforcement system can return people to the streets both by deterring theft or reducing the probability that it will occur and by providing for restitution in the event theft occurs and the thief is apprehended we refer to these efficiency enhancing effects of enforcement as deterrence and restitution effects however the benefits of operating an enforcement system must be weighed against its costs such a system may be resource using and may yield undesirable as well as desirable effects thus maintaining a criminal justice system entails direct costs resources to operate a police force courts and prisons and indirect costs in that potential criminals may modify their behavior to adjust to the prospect of sanctions in efficiency reducing ways see becker 1968 usher 1986 a criminal may for instance dissipate resources in the face of expected sanctions or otherwise deploy them in an inefficient fashion to escape appropriation hence the tendency of criminals to exhibit apparently high discount rates observed by wilson and herrnstein 1985 may reflect the prospect of sanction rather than indicate a strong preference for immediate gratification as they suggest likewise the reduced risk of appropriation may explain the willingness of criminals to pay large transactions costs to maintain secrecy in swiss bank accounts we refer to these efficiency reducing effects of enforcement systems as sanction effects cheung 1970 and others have observed that the costs of enforcing property rights may depend on their distribution 1 ehrlich s 1973 finding that there is a positive relation between the level of crime and the degree of income inequality is supportive of this view beyond this it has frequently been suggested that redistribution may increase respect for property rights along with monitoring and sanctions the notion that giving people more to lose can render them more law abiding is central to liberal theories of rehabilitation it is also embedded in efficiency wage models where high wages are shown to be economical to the extent they increase the efficacy of sanctions and extend an employer s basis for control see for example eaton and white 1983 yellen 1984 any wealth transfers to individuals must of course come from other individuals

option value to waiting created by a control problem we study a principal agent model in which there is an option to defer a capital project approval decision a control incentive problem makes the option to wait valuable when it would not have been valuable otherwise deferring the project approval decision has both a cost and a benefit the cost of waiting is that the agent s uncertainty regarding future project cost realizations cannot be exploited however by delaying the first project s approval decision the principal can condition its approval on the agent s cost report of the second project such conditioning can be valuable in the provision of incentives because of a diversification effect

asymmetric tax competition abstract the paper analyzes nash equilibrium when two jurisdictions set tax rates on a tax base which is mobile between them population differences imply tax differences the smaller jurisdiction levies a lower tax rate in equilibrium and its residents are better off than those in the larger jurisdiction the nash equilibrium is inefficient if the two jurisdictions merged the resulting allocation would be efficient however if differences in population are great enough residents of the small jurisdiction would be made worse off by such a merger

strategic leniency and cartel enforcement the cornerstone of cartel enforcement in the united states and elsewhere is a commitment to the lenient prosecution of early confessors a burgeoning game theoretical literature is ambiguous regarding the impacts of leniency i develop a theoretical model of cartel behavior that provides empirical predictions and moment conditions and apply the model to the complete set of indictments and information reports issued over a 20 year span statistical tests are consistent with the notion that leniency enhances deterrence and detection capabilities the results have implications for market efficiency and enforcement efforts against cartels and other forms of organized crime jel d43 l12 l13 k21 in 1993 the department of justice doj introduced a new leniency program with the intent of destabilizing existing cartels and deterring new cartels the program commits the doj to the lenient prosecution of early confessors in particular it guarantees complete amnesty from federal prosecution to the first confessor from each cartel provided that an investigation into the confes sor s cartel is not already underway it also offers discretionary penalty reductions to conspirators who confess when an investigation is already ongoing the new leniency program has become the cornerstone of cartel enforcement efforts in the united states e g scott d hammond 2004 and recently has inspired antitrust authorities in australia canada the european union japan south korea and elsewhere to introduce similar programs oecd 2002 2003 this paper tests the efficacy of the new leniency program the results have implications for market efficiency and enforcement efforts against cartels and other forms of organized crime a burgeoning game theoretical literature is ambiguous regarding the impacts of leniency a common finding is that leniency may destabilize cartels because conspirators can simultane

the impact of the 2002 reform of the eu leniency program on cartel outcomes abstract the objective of this study is to empirically assess whether the 2002 reform of the eu leniency program which brought the eu leniency policy much closer to the us policy has increased the european commission s capability to destabilize cartels while making prosecution more efficient more specifically relying on a difference in difference approach we estimate the impact of the 2002 reform on cartel duration fines before and after applying leniency reductions and duration of investigation we find that the 2002 reform decreased cartel duration by about 87 percent but did not significantly affect the other outcome variables thus our findings seem to suggest that the 2002 reform has improved the cartel destabilizing effect of the eu leniency program without enhancing however its effectiveness in prosecuting cartels

selling to the newsvendor with a forecast update analysis of a dual purchase contract we consider a supply chain in which a manufacturer sells to a procure to stock retailer facing a newsvendor problem with a forecast update under a wholesale price contract the retailer waits as long as she can and optimally places her order after observing the forecast update we show that the retailer s wait and decide strategy induced by the wholesale price contract hinders the manufacturer s ability to 1 set the wholesale price and maximize his profit 2 hedge against excess inventory risk and 3 reduce his profit uncertainty to mitigate the adverse effect of wholesale price contract we propose the dual purchase contract through which the manufacturer provides a discount for orders placed before the forecast update we characterize how and when a dual purchase contract creates strict pareto improvement over a wholesale price contract to do so we establish the retailer s optimal ordering policy and the manufacturer s optimal pricing and production policies we show how the dual purchase contract reduces profit variability and how it can be used as a risk hedging tool for a risk averse manufacturer through a numerical study we provide additional managerial insights and show for example that market uncertainty is a key factor that defines when the dual purchase contract provides strict pareto improvement over the wholesale price contract

depreciation rules and the relation between marginal and historical cost the reported cost of a product frequently contains historical cost com ponents that reflect past investments in productive capacity we examine a setting wherein a firm makes a sequence of overlapping capacity investments earlier research has identified particular accrual accounting depreciation rules with the property that on a per unit basis the historical cost of a product captures precisely its marginal cost relative to this benchmark we investigate and characterize the direction and magnitude of the bias in reported histori cal cost that results from alternative depreciation rules including in particular straight line depreciation in conjunction with partial direct expensing in ad dition we demonstrate that for a reasonable range of parameter specifications the resulting bias is rather small finally we apply our framework to two spe cific settings first in a regulatory context we establish the extent to which the accounting profit margin is indicative of a firm s pricing power in the product market second we model an internal control scenario in which a manager s performance is evaluated using residual income and identify the distortions in investment levels that result from the use of alternative depreciation rules

commodity tax competition between member states of a federation equilibrium and efficiency we first describe regional market equilibria whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices taxes and transportation costs next regional optimal tax levels and public good quantities are derived the tax of the other region being held constant fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other

project assignments when budget padding taints resource allocation this paper shows that rotation programs can be an effective response to concerns of employee budget padding rotation programs naturally create a portfolio of assignments for each manager and the resulting diversification can reduce the downside of resource rationing in particular the production versus rents trade off linked with adverse selection problems can be more efficiently carried out when the firm faces two managers with average information advantages rather than one with a large advantage and one with a small advantage roughly stated rotation of project assignments is a way of smoothing information across managers on the other hand if a firm places a premium on treating different types of projects in distinct ways specialized assignments can be preferred due to the ability to confine project types to individual managers

competition in crime deterrence this paper studies competition between jurisdictions in the eradication of crime in one story criminals choose the jurisdiction in which they will commit their crimes while jurisdictions choose the amount of resources devoted to deterrence to protect local production in another story the criminals cannot change jurisdictions but they can not rob the owners of mobile capital jurisdictions choose the amount of resources devoted to the deterrence of local crime so as to secure property rights and to attract capital in both stories competition between jurisdictions leads to overdeterrence relative to the pareto optimal level

uncertainty real options and cost behavior evidence from washington state hospitals this study tests an implication of the real options theory of investment that uncertainty leads firms to prefer technologies with low fixed and high variable costs in 1983 a change in medicare reimbursement increased the uncertainty of revenues for hospitals using a sample of 831 departments in 59 washington state hospitals over the 1977 1994 period we find that the ratio of variable to total costs increased after 1983 this increase is not attributable to a gradual increase in the ratio over time we estimate a significant increase after 1983 even after controlling for a time trend further we find a greater increase in the variable to total cost ratio for hospitals that had higher percentages of medicare patients increasing our confidence in the conclusion that the change in cost behavior is attributable to medicare s change in reimbursement copyright university of chicago on behalf of the institute of professional accounting 2005

anniversary article a perspective on asymmetric information incentives and intrafirm resource allocation the paper asymmetric information incentives and intrafirm resource allocation by harris kriebel and raviv was published in the june 1982 issue ofmanagement science in this article written as part of this journal s 50 year anniversary celebration we highlight the significance of the harris et al paper for research in managerial accounting we first formulate and solve a continuous version of the harris et al model to illustrate the key assumptions and findings of their paper we then review several strands of the resource allocation literature in managerial accounting that have taken their inspiration either directly or indirectly from the work of harris et al

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

optimal protection of property rights in a general equilibrium model of growth we incorporate weak property rights into an otherwise standard general equilibrium model of growth and second best optimal policy in this setup the state plays two of its key roles it protects property rights and provides public services the government chooses policy the income tax rate as well as the allocation of collected tax revenues between law enforcement and public services to maximize the growth rate of the economy the focus of our analysis is on how weak property rights generate multiple decentralized competitive equilibria the different properties of these equilibria and the implications of second best optimal policies

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

the impact of leniency and whistle blowing programs on cartels antitrust authorities have set up leniency programs for cartel members that denounce their collusive agreements these programs help prosecute participants and can thereby deter collusion we compare the impact of reduced fines and positive rewards and argue that rewarding individuals including firm employees can deter collusion in a more effective way we discuss possible adverse effects of whistle blowing programs on firms behavior and particularly on turnover incentives to innovate and cooperation we also explore explanations for the puzzling fact that managers keep incriminating evidence and argue reward programs actually provide additional incentives for keeping such evidence

dynamics of rate of return regulation under rate of return regulation a firm s product prices are constrained by the requirement that investors not earn more than an allowable return on the firm s assets this paper examines the dynamic properties of the rate of return regulation process when the regulated firm periodically undertakes new capacity investments our analysis identifies prices that correspond to stationary values of the regulation process it is shown that the underlying depreciation rules for property plant and equipment determine whether these stationary prices will be above equal to or below the long run marginal cost of providing the regulated service we provide conditions under which the rate of return regulation process is dynamically stable so that prices indeed converge to their stationary values the overall efficiency of this regulation method is shown to depend on how well the applicable depreciation schedule matches the productivity pattern of the assets in use this paper was accepted by gerard p cachon accounting

a dynamic model of supplier switching abstract while a broad branch of literature deals with the development of buyer supplier relationships limited research exists under which circumstances a buyer should terminate such a relationship and switch to a new supplier recently wagner and friedl 2007 have developed a framework to analyze a static one shot supplier switching decision when the buyer has asymmetric information about the supplier s production costs we extend their basic framework to a dynamic one assuming that the supplier learns the production costs over time when he sets up the production process since the supplier s cost information at the individual stages crucially determines the setup and the switching decision it becomes essential for supply chain management to provide proper incentives so that the supplier reveals his cost information truthfully over time we characterize the optimal setup and switching strategy as well as the optimal supply chain contract we also compare our findings with those of the static setting to provide further insights

supply chain coordination with insurance contract abstract we propose an insurance contract under which the supplier shares the risk of overstock and understock with the retailer improving the efficiency of the supply chain with a newsvendor type product we first show that the insurance contract could coordinate the supply chain and obtain bargaining solution in the supply chain model then we investigate the effects of agents risk aversion on the supply chain model and acquire the pareto optimal solution through the mean variance approach after that we compare the insurance contract with the revenue sharing contract focusing particularly on their differences finally extensive numerical studies are conducted and managerial implications are proposed

a model of imperfect competition with keynesian features the recent literature on the reappraisal of keynes has viewed keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities one problem with this approach is that it lacks a theory of price determination in particular of why prices are fixed in the present paper we show that a number of keynesian features arise in a model in which prices are fully flexible but where agents have some monopoly power one advantage of this approach is that it provides a theory of the determination of both prices and quantities

is altruism evolutionarily stable and envy and malevolence remarks on bester and guth abstract in a convincing analysis of the conditions and strength of altruism bester and guth journal of economic behavior organization vol 34 1998 193 209 unfortunately restrict the interpretation of their results their paper provides us with an analysis of the conditions and strength of malevolence or envy as well

endogenous timing in the presence of non monotonicities the aim of this paper is to generalize the endogenous timing game proposed by hamilton and slutsky games and economic behavior 1990 2 pp 29 46 by allowing the payoff or the marginal payoff of a player to become non monotonic with respect to the strategy of the opponent we propose a taxonomy of the subgame perfect nash equilibria based on the characteristics of the payoff functions proposed by eaton canadian journal of economics 2004 37 pp 805 29 we determine under which conditions of the initial payoff functions commitment has a social value and when the simultaneous move nash equilibrium is commitment robust and discuss its pareto efficiency

technological competition uncertainty and oligopoly abstract in an oligopoly context the present technological choice of a firm which expects to receive private revelant information just prior to the uncertain market stage has both a flexibility value and a strategic commitment value in contrast to some common wisdom ideas we provide a natural two stage competition framework in which an increase in uncertainty always raises the commitment value of the technological choice of the firm and may decrease its flexibility value when the increased uncertainty takes the form of more variable beliefs the first result tends to reinforce therefore the findings of the strategic commitment literature under certainty

dominant strategy implementation of bayesian incentive compatible allocation rules abstract a large literature on incentive mechanisms represents incentive constraints by the requirement that truthful reporting be a bayesian equilibrium this paper identifies mechanism design problems for which there is no loss in replacing bayesian incentive compatibility by the stronger requirement of dominant strategies we identify contexts where it is possible to change the transfer payments of an optimal bayesian mechanism so as to create dominant strategies and yet leave every participant s expected utility unchanged we also address the issue of multiple equilibria and unique implementation contexts where these results apply include auctions bilateral bargaining procurement contracting and intrafirm resource allocation

multistage capital budgeting for shared investments this paper studies the performance of delegated decision making schemes in a two stage multidivision capital budgeting problem for a shared investment with an inherent abandonment option applying both robust goal congruence and sequential adverse selection frameworks we show that the optimal capital budgeting mechanism entails a capital charge rate above the firm s cost of capital in the first stage but below the cost of capital in the second stage further the first stage asset cost sharing rule depends only on the relative divisional growth profiles and equal cost sharing can be optimal even when the divisions receive significantly different benefits from the shared investment project in the presence of an adverse selection problem all agency costs are incorporated into the second stage budgeting mechanism leaving the first stage capital charge rate and asset sharing rule unaffected even though the agency problem induces capital rationing at both stages this paper was accepted by mary barth ac

using return policies to elicit retailer information we show that a manufacturer may prefer to offer a return policy when dealing with a retailer who holds advance knowledge about market conditions roughly stated the manufacturer offers a liberal return allowance in lieu of a lower price to satisfy a retailer facing unfavorable market conditions a retailer facing favorable conditions finds this tradeoff unattractive because he is likely to sell the merchandise anyway and thus not make as much use of the generous return terms as a consequence a retailer is less inclined to misstate market conditions by serving as an additional control instrument a returns policy reduces the manufacturer s need to ration cut production

swords or plowshares a theory of the security of claims to property this paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities the model emphasizes the distinction between offensive weapons which are the instruments of predation and fortifications which provide defense against predation the analysis of this model shows how the equilibrium security of claims to property is determined the analysis focuses on the possibility of a nonaggressive equilibrium in which no resources are allocated to offensive weapons and claims to property are fully secure we also analyze the complex relation between economic welfare and the security of claims to property we find for example that a relatively poor agent could be better off in an equilibrium with less secure claims to property

global terrorism deterrence versus pre emption this paper analyses two anti terrorism policies when a targeted nation s people and property are in jeopardy at home and abroad a country s deterrence decision involves both external benefits and costs as the terrorist threat is deflected while its preemption decision typically gives external benefits when the threat is reduced for all potential targets with damages limited to home interests a country will overdeter while for globalized terror a country will underdeter pre emption is usually undersupplied leader follower behaviour is apt to lessen inefficiency for deterrence but worsen inefficiency for pre emption compared with simultaneous choice equilibrium allocations targeted nations can never achieve the proper counterterrorism policy through leadership ce memoire analyse deux politiques anti terrorisme quand la population et la propriete des nations visees sont en danger tant au pays qu a l etranger la decision de dissuasion d un pays entraine des avantages et des couts externes a proportion que la menace terroriste est evitee alors que la decision de preemption produit typiquement des avantages externes quand la menace est reduite pour toutes les cibles potentielles dans le cas de dommages limites aux cibles dans le pays un pays va etre portea sur dissuader alors que dans le cas de terreur globalisee un pays va etre portea sous dissuader la preemption est generalement sous offerte le comportement leader suiveur est susceptible de reduire l inefficacite de la dissuasion mais d empirer l inefficacite de la preemption par rapport a ce qui se passe quand les choix sont simultanes les nations visees ne peuvent jamais en arriver a la politique d anti terrorisme appropriee par la voie du leadership

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

how to design infrastructure contracts in a warming world a critical appraisal of public private partnerships we analyze how long term uncertainty for example regarding future climate conditions affects the design of concession contracts and organizational forms in a principal agent context with dynamic moral hazard limited liability and irreversibility constraints the prospect of future uncertain productivity shocks on the returns on the firm s effort creates an option value of delaying efforts a course that exacerbates agency costs contracts and organizational forms are drafted to control this cost of delegated flexibility the possibility for the agent to delay investment in response to uncertainty and irreversibility also elicits preference for unbundling different stages of the project through short term contracts our analysis is relevant to infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of public private partnerships in this context

residual income based compensation plans for controlling investment decisions under sequential private information earlier literature has pointed to the effectiveness of residual income type measures based on particular accrual accounting rules such as the relative benefit allocation rule these performance metrics have been shown to generate desirable managerial incentives when investment decisions are delegated this paper further attests to the robustness of these measures by extending the result to a sequential adverse selection model with an inherent real option an option to abandon in other words as long as the residual income measures are judiciously constructed neither private information nor the requirement to selectively exercise an option derails their use in this setting

inventory holding as a strategic weapon to deter entry recent papers by dixit 1980 and eaton and lipsey 1981 have explored the strategic use of committed product specific capital by an incumbent firm in order to influence a post entry equilibrium and in some cases make entry unattractive by committing or sinking part of the production costs prior to entry the incumbent creates a credible shift in its own reaction function if entry should occur in this way the payoffs in the post entry equilibrium can be influenced to the incumbent s advantage the entry game thus consists of two stages the first in which the incumbent is able to strategically commit itself prior to entry and the second or post entry period in which a duopoly equilibrium is realized the more costs that are put up front by the incumbent the greater is the post entry output it will wish to sell for a given output of the entrant and the lower will be the resulting equilibrium price if the set up or fixed costs of entry are sufficiently high entry may be rendered unprofitable this paper extends the idea in a natural way all the production costs of a quantity of output can be sunk or committed by stockpiling inventory of the product the stock of inventory held by the incumbent firm represents a credible shift in its reaction function in response to entry in the following way the inventory is a stock that can be sold off over time in a way consistent with intertemporal profit maximization constrained by the presence of the entrant moreover the threat to sell off the inventory in response to entry is credible since given that entry has occurred the opportunity cost of the inventory is zero it seems reasonable to require that any strategic asymmetry between incumbent and entrant should be restricted to commitments made by the former prior to entry conditional on such commitments the post entry game should give neither firm a strategic advantage this requirement is the same as the game theoretic concept of perfectness 1 entry can be credibly deterred because the entrant knows that were entry to take place it would be in the incumbent s own interest to follow the anticipated sales programme of inventory in order to demonstrate that entry may be deterred by holding a stock of inventory that is sufficiently large that deterrence can be made the perfect equilibrium of the complete entry game the properties of the equilibrium with entry must be derived the post entry equilibrium is modelled here as a pair of nash strategies in sales programmes if the sales programme anticipated by the entrant in the post entry equilibrium implies a negative present value entry will be deterred thus successful entry deterrence implies that the equilibrium with entry is never realized the incumbent can then continue to receive monopoly profits less the holding cost of the inventory which serves as a credible deterrent to entry but is never sold

endogenous timing in general rent seeking and conflict models we examine simultaneous versus sequential choice of effort in a two player contest the timing of moves determined in a preplay stage prior to the contest subgame as well as the value of the prize is allowed to be endogenous contrary to endogenous timing models with an exogenously fixed prize the present paper finds the following 1 players may decide to choose their effort simultaneously in the subgame perfect equilibrium spe of the extended game 2 the spe does not need to be unique in particular there is no unique spe with sequential moves if the direct costs of effort are zero 3 symmetry among players does not rule out incentives for precommitment to effort locally away from the cournot nash level 4 finally there may be no correlation between win probability and strategic incentives in our framework a finding most central in the analysis of fixed prize contests

comparative statics of contests and rent seeking games this paper develops the comparative statics properties of a contest encountered in patent races and rent seeking games the author shows that symmetric equilibrium expenditure and profit per player decrease with the number of competitors and the discount rate but increase with the value of the prize a fundamental lemma established in the paper shows that a stability condition usually imposed on the model is automatically satisfied the author identifies a class of likelihood or hazard rate functions for which aggregate expenditure increases with the number of competitors and total profits converge to zero copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies