optimal long term contracting with learning we introduce uncertainty into holmstrom and milgrom 1987 to study optimal long term contracting with learning in a dynamic relationship the agent s shirking not only reduces current performance but also increases the agent s information rent due to the persistent belief manipulation effect we characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable in the optimal contract the optimal effort is front loaded and stochastically decreases over time furthermore the optimal contract exhibits an option like feature in that incentives increase after good performance implications about managerial incentives and asset management compensations are discussed

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

reciprocal relationships and mechanism design we study an incomplete information game in which players can coordinate their actions by contracting among themselves we model this relationship as a reciprocal contracting procedure where each player has the ability to make commitments contingent on the other players commitments we differ from the rest of the literature on reciprocal contracting by assuming that punishments cannot be enforced in the event that cooperation breaks down we fully characterize the outcomes that can be supported as perfect bayesian equilibrium outcomes in such an environment we use our characterization to show that the set of supportable outcomes with reciprocal contracting is larger than the set of outcomes available in a centralized mechanism design environment in which the mechanism designer is constrained by his inability to enforce punishments against non participants the difference stems from the players ability in our contracting game to convey partial information about their types at the time they offer contracts we discuss the implications of our analysis for modelling collusion between multiple agents interacting with the same principal

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

innovation and imitation in a duopoly in a duopoly where one firm has the idea for a non patentable innovation the expected profits from the innovation will not be a monotonic function of the cost of innovating furthermore a costly innovation may be undertaken where an inexpensive one would not have been all other things being equal

welfare aspects of technological adoption with learning abstract this paper considers the welfare implications of adoption of a new technology when this technology is characterized by costs of adaptation and some localized learning effects a two period model is developed to represent the adoption game between firms in a duopolistic framework optimal social patterns of adoption are compared with private patterns emerging as equilibria of the game it is shown that differences between the two patterns are due first to the shape of the demand function of the product sold on the duopolistic market and secondly to strategic interaction effects between the adopting firms

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

hitting the jackpot product proliferation by multiproduct firms under uncertainty this paper presents a model of product proliferation by multiproduct firms under uncertainty firms introduce new differentiated products because they want to hit as many jackpots as possible products with high profits and long lives there is uncertainty about the success of new products as the probability of hitting a jackpot increases product proliferation increases more products are introduced and expected in equilibrium the expected number of products in equilibrium is always less than at the optimum but in industries with multiple firms as the probability of hitting a jackpot increases rivalry intensifies and that gap shrinks

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

imperfect patent protection and innovation the paper studies the effect of strengthening protection on r d incentives in the context of process innovation it shows that for non drastic innovations that do not render the pre existing technology obsolete the innovator might favor imitation if the expected royalty rate determined by the court is sufficiently high since imitation is discouraged for very high levels of patent protection r d investment is maximized for an intermediate level of patent strength this finding provides a theoretical explanation for emerging empirical evidence questioning the effectiveness of strengthening protection on innovation incentives it also serves as a justification for the imperfections of the existing patent system that allows for some infringement

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

the licensing of patents under asymmetric information abstract this paper seeks to explain the use of royalty payments rather than fixed fees in the licensing of patents by the presence of asymmetric information the licensee is assumed to know the value of the patent and makes a single offer of a contract to the licensor it is shown that there is a unique equillibrium satisfying cho and kreps intuitive criterion qualitative properties of the equilibrium contract are derived by considering a continuum of types

collusion under asymmetric information when applied to groups the revelation principle postulates a bayesian nash behavior between agents their binding agreements are unenforceable or the principal can prevent them at no cost we analyze instead a mechanism design problem in which the agents can communicate between themselves and collude under asymmetric information we characterize the set of implementable collusion proof contracts both when the principal offers anonymous and nonanonymous contracts after having isolated the nexi and the stakes of collusion we proceed to a normative analysis perform some comparative statics discuss our concept of collusion proofness and provide some insights about transaction costs in side contracting

dynamic delegation of experimentation i study a dynamic relationship where a principal delegates experimentation to an agent experimentation is modeled as a one armed bandit that yields successes following a poisson process its unknown intensity is high or low the agent has private information his type being his prior belief that the intensity is high the agent values successes more than the principal does so prefers more experimentation the optimal mechanism is a cutoff rule in the belief space the cutoff gives pessimistic types total freedom but curtails optimistic types behavior pessimistic types over experiment while the most optimistic ones under experiment this delegation rule is time consistent

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

collusion and signaling in auctions with interdependent values abstract the standard approach to collusion in auctions posits an uninformed disinterested third party who prior to the auction designs and implements a collusive mechanism in environments where collusion agreements are likely to be both proposed and executed by the involved parties this approach may neglect information leakages from simply a proposal to collude we consider a model of collusion where one informed bidder proposes to another as in es and schummer 2004 we allow for general interdependent values and affiliated signals in contrast to third party modeling approaches collusion is inefficient from both a social perspective except for the case of pure common values and from the perspective of the ring both bidders are better off than without colluding but the surplus extracted from the seller is distributed asymmetrically between the bidders the potential for information leakage from proposing is bad for low types who reveal that they are weak competitors but is advantageous for high types because they are able to signal their strength we identify a so called briber s curse whereby acceptance of a proposal causes the proposer to downgrade her expected value for the object when there is additional competition in the form of bidders outside of the cartel the briber s curse significantly harms cartel profits and raises seller revenues

matching markets with adverse selection abstract this paper considers a market with adverse selection in the spirit of rothschild and stiglitz quart j econ 90 1976 629 the major departure from existing approaches is that we model a decentralized market that is open ended and constantly refilled by new participants e g by new workers and firms in the case of a labor market the major novelty of this approach is that the distribution of types in the market becomes an endogenous variable which is jointly determined with equilibrium contracts as frictions become small we show that the least cost separating contracts are always supported as an equilibrium outcome regardless of the distribution of types among entrants moreover we derive conditions under which this outcome is also unique

mandated countertrade as a strategic commitment abstract mandated countertrade is a policy to restrict unilateral imports a country s government thereby in effect commits domestic firms not to purchase from a foreign trading partner unless there are reciprocal sales we argue that the policy may be a rational response to fundamental contracting failures our key assumption being that sellers are incompletely informed about buyers valuations in line with observed practices the analysis suggests that an optimal mandated countertrade policy will target high mark up imports and low mark up exports implications for global welfare are ambiguous and depend upon the extent of a double coincidence of wants

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

r d in clean technology a project choice model with learning abstract in this study we investigate the qualitative and quantitative effects of an r d subsidy for a clean technology and a pigouvian tax on a dirty technology on environmental r d when it is uncertain how long the research takes to complete the model is formulated as an optimal stopping problem in which the number of successes required to complete the r d project is finite and learning about the probability of success is incorporated we show that the optimal r d subsidy with the consideration of learning is higher than that without it we also find that an r d subsidy performs better than a pigouvian tax unless suppliers have sufficient incentives to continue cost reduction efforts after the new technology successfully replaces the old one moreover by using a two project model we show that a uniform subsidy is better than a selective subsidy

dynamic pricing in the presence of individual learning abstract this paper studies price dynamics in a setting in which a monopolist sells a new experience good over time to many buyers and the seller can neither price discriminate among the buyers nor commit to a price rule buyers learn from their own experiences about the effectiveness of the product individual learning generates ex post heterogeneity which affects the buyers purchasing decisions the monopolist s pricing strategy and efficiency when learning occurs through good news signals buyers receive a rent because of the possible advantageous belief caused by short lived deviations if a good news signal arrives the price can instantaneously increase or decrease depending on the arrival time of this signal the equilibrium is inefficient because the monopolist s incentive to exploit known buyers leads to inefficient early termination of exploration when learning occurs through bad news signals ex post heterogeneity has no such effect since only homogeneous unknown buyers purchase the experience good

a non cooperative bargaining theory with incomplete information verifiable types abstract we consider a non cooperative sequential bargaining game with incomplete information where two players negotiate for mechanisms with ex post verifiable types at the interim stage we prove the existence of a stationary sequential equilibrium of the bargaining game where the ex post nash bargaining solution with no delay is asymptotically implemented with probability one further the ex post nash bargaining solution is a unique outcome of a stationary equilibrium under the property of independence of irrelevant types iit whereby the response of every type of a player is independent of allocations proposed to his other types and under a self selection property of their belief

making waves to innovate or be a fast second internal finance leads to a stalemate in innovation games each firm wants to free ride on the others costly experimentation when instead innovation is financed externally e g with venture capital or initial public offerings there is an endogenous cost to delay waiting to make risky irreversible investment conveys pessimistic information i characterize the relative sizes of waves of leaders and followers in innovation cycles and the endogenous intertemporal distribution of quality as each wave builds and crashes finally old waves leave an adverse selection hangover such that too much early innovation can cause the market for future innovation to break down

contests for experimentation we study contests for innovation with learning about the innovation s feasibility and opponents outcomes we characterize contests that maximize innovation when the designer chooses a prize sharing scheme and a disclosure policy a public winner takes all contest dominates public contests where any success is immediately disclosed with any other prize sharing scheme as well as winner takes all contests with any other disclosure policy yet jointly modifying prize sharing and disclosure can increase innovation in a broad class of mechanisms it is optimal to share the prize with disclosure following a certain number of successes under simple conditions a hidden equal sharing contest is optimal

mechanism design by an informed principal private values with transferable utility we provide a solution to the informed principal problem in the independent private values setting with monetary transfers the principal s private information creates signaling considerations that may distort the implemented allocation we show that there is no distortion all principal types implement an allocation that is optimal for the principal ex ante before he she learns his her type as an application we consider settings with linear utility for bilateral exchange in which the principal is one of the traders the solution is a combination of a participation fee a buy out option for the principal and a resale stage with posted prices

the relationship of operational innovation and financial performance a critical perspective abstract operations management designs schedules and controls organizational processes to increase productivity by using methods such as just in time jit lean manufacturing total quality management tqm or environmental management systems ems following implementation managers generally want to determine the impact of such operational innovations on firm performance past studies analyzed financial ratios to prove the usefulness of the operational methods however findings are mixed while some reported positive relationships between operational innovations and financial performance others found no or inconsistent relationships motivated to uncover explanations for said inconsistencies this paper takes a critical look at the appropriateness of the profitability ratios return on asset roa return on equity roe and basic earning power bep in determining the impact of a given operations strategy on firm performance focusing on jit lean manufacturing the relationship between these ratios and inventory management ratios is analyzed fixed effect regression shows that no consistent relationship between roa roe bep and inventory management ratios exists this result may be explained as the profitability of a firm is affected by at least two factors results from its operations and how these are financed e g usage of cheap debt which enhances profitability this paper suggests that the impact of an individual operations strategy is difficult to isolate from other firm activities such as its financial management hence profitability ratios such as roa roe and bep that aggregate all of a firm s activities may not be suitable metrics to determine the effect of jit lean manufacturing methods on financial firm performance

strategic intrafirm innovation adoption and diffusion 1 introduction this paper addresses two empirical observations that are common in the extensive literature on innovation diffusion first a firm usually adopts an innovation over time not instantaneously that is there are intrafirm diffusions mansfield 1968 nasbeth and ray 1974 romeo 1975 stoneman 1981 1983 second the time path of an intrafirm diffusion has a predictable shape diffusion curves plot the extent of adoption against time and are generally s shaped that is they are initially convex reach an inflection point and then are concave thereafter often they are also skewed in that they are initially convex for less than half of the length of the diffusion this skewing can be so severe that the diffusion curve is essentially concave davies 1979 stoneman 1983 given the voluminous literature on innovation diffusion it is surprising that intrafirm diffusions have not received more attention with few exceptions noted below the theoretical literature assumes adoption is a discrete choice variable and so occurs instantaneously moreover empirical studies typically assume adoption occurs at the date of first use of the innovation by the firm to the extent intrafirm diffusions occur these studies clearly overestimate the speed at which the innovation is put into use and thus the speed at which its benefits accrue to the firm and society intrafirm diffusions are especially common in the case of capital embodied new process innovations because adoption involves adjustment costs as well as acquisition costs in a seminal study mansfield 1968 found that the time interval between 10 and 90 usage of diesel locomotives ranged from three to more than 14 years for firms in the u s railroad industry more recent examples abound most readers have undoubtedly experienced at least once the adoption of new computer equipment in their workplace from my own experience not all users are upgraded to the new equipment within a day a week or even a month hence in this paper i analyze the intrafirm diffusion of a new process innovation in a differential game model of an oligopoly the model s predictions are consistent with the empirical regularities noted above first an intrafirm diffusion occurs in equilibrium because the marginal cost of adoption is increasing in the rate of adoption it is not optimal to adopt instantaneously just as it is not optimal to adjust to the desired level of a stock instantaneously when adjustment costs are increasing at the margin second the equilibrium intrafirm diffusion curve is either s shaped or concave moreover this diffusion curve is more likely to be sshaped the more competitive the industry the larger the marginal cost of adoption or the preinnovation unit cost of production or the smaller the demand the analysis also shows a firm s diffusion is longer and so the extent of its adoption at any date is lower the more competitive the industry the larger the marginal cost of adoption or the pre innovation unit cost of production or the smaller the demand that is a diffusion is longer the smaller the incentive to adopt whether due to lower flow profit or higher adoption flow cost one surprising result is that an increase in the unit cost reduction from the innovation has an ambiguous effect on the intrafirm diffusion the reason is that there are two conflicting effects first as is obvious a larger cost reduction allows each firm to earn a larger flow profit at every date from the same rate of adoption however a more subtle effect is that it also allows the firm to earn the same flow of profit with a slower rate of adoption and so lower adoption costs that is the firms also have an incentive to spread out the diffusion over a longer period of time to save on adoption costs these results are important for two reasons first they show that diffusion curves are more likely to have an s shape for longer diffusions

innovation imitation and social welfare this paper focuses on the impact of competition by imitation more specifically copying for innovative activity and social welfare in part it is a response to recent empirical work 10 12 that has tried to measure the relationship between innovation and imitation costs these papers include a direct call for theoretical modeling that takes explicit account of such cost relationships and we try to answer this challenge specifically we examine the implications for product quality and social welfare when innovators anticipate that a successful product will be copied by rivals obviously previous empirical research is not the only source of interest in these issues the potential effects of imitation on innovative activity have long been both a theoretical and practical concern in recent years a variety of authors have addressed the appropriability issue raised by imitation and its implications for innovative activity 4 7 2 there has also been work on explicit copying i e photocopying 8 11 in the policy arena the protection of product design and intellectual property rights is the focus of much recent actual and proposed u s legislation and a major issue in the uruguay round of trade talks 1 21 our analysis of this topic differs from that of previous work in a number of important respects first we focus explicitly on product as opposed to process innovations second and perhaps even more important we do not restrict the firm s choice to be to innovate or not to innovate instead we allow the innovator to choose what kind or quality of new good to introduce into the market the higher the quality the higher is the development cost third when the innovating firm decides what kind of new product to market it does so under uncertainty about demand the popularity of the new product is not known until after the innovator has chosen the level of quality and sunk its product development costs fourth at the initial time at which the innovator chooses the quality of product to develop it does so with the knowledge that its innovation if it is popular will be copied by later rival entrants finally in direct response to the empirical work mentioned above we explicitly focus on the ratio of imitation to innovation costs our approach yields a number of insights not the least of which is a more precise identification of the potential gains and losses from imitative competition indeed using a quadratic development cost function we explicitly calculate the impact of copying on social welfare this explicit welfare analysis further distinguishes our analysis from most previous work

two sided learning and the ratchet principle i study a class of continuous time games of learning and imperfect monitoring a long run player and a market share a common prior about the initial value of a gaussian hidden state and learn about its subsequent values by observing a noisy public signal the long run player can nevertheless control the evolution of this signal and thus affect the market s belief the public signal has an additive structure and noise is brownian i derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long run player s actions depend on the history of the game only through the market s correct belief using these conditions i demonstrate the existence of pure strategy equilibria in markov strategies for settings in which the long run player s flow utility is nonlinear the central finding is a learning driven ratchet principle affecting incentives i illustrate the economic implications of this principle in applications to monetary policy earnings management and career concerns

learning while voting determinants of collective experimentation this paper combines dynamic social choice and strategic experimentation to study the following question how does a society a committee or more generally a group of individuals with potentially heterogeneous preferences experiment with new opportunities each voter recognizes that during experimentation other voters also learn about their preferences as a result pivotal voters today are biased against experimentation because it reduces their likelihood of remaining pivotal this phenomenon reduces equilibrium experimentation below the socially efficient level and may even result in a negative option value of experimentation however one can restore efficiency by designing a voting rule that depends deterministically on time another main result is that even when payoffs of a reform are independently distributed across the population good news about any individual s payoff increases other individuals incentives to experiment with that reform due to a positive voting externality

incentive schemes as a signaling device abstract this paper considers a model of moral hazard where the principal has private information for instance in an organizational setting the firm may be better informed about the profitability of a sales area for which it seeks to employ a new sales representative we show how this information asymmetry may lead to a game of signaling which can mute incentives

adoption and diffusion of an innovation of uncertain profitability the argument has frequently been made that the pattern of diffusion associated with most new innovations will typically have certain characteristics a diffusion curve for an innovation is usually defined as the proportion of its potential users who have already adopted as a function of time measured from the first adoption many empirical studies by both economists and other social scientists have shown that diffusion curves nearly always have two distinct characteristics i they are s shaped the proportion adopted is an increasing function of time which is initially convex but eventually becomes concave and ii they tend to be right hand skewed the inflection point occurs at a time corresponding to a proportion adopted which is less than one half so that the function is concave over the greatest amount of time in fact this skewing is occasionally severe enough to make the diffusion curve appear concave everywhere the focus of most empirical studies of innovation diffusion has centered on identification of either the major determinants of the speed of diffusion or the characteristics of firms which determine how long they delay adoption the seminal contributions are griliches 6 study of hybrid corn and mansfield s 121 study of 12 industrial innovations these studies and most of the similar ones following conclude that diffusion is faster for innovations with higher profitability and that large firms tend to be the earliest adopters some studies e g mansfield 121 herregat 71 have attempted to ascertain

private versus verifiable interim performance evaluations under uncertainty i study the trade off between private and verifiable interim performance evaluations under uncertainty more uncertainty leads to higher agency costs if the interim evaluation is public and verifiable but lower agency costs if the interim evaluation is private and unverifiable

signaling and the design of delegated management contracts for public utilities this article analyzes the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf governments are privately informed about the quality of the facility while risk neutral contractors undertake a non verifiable operating eort the design of the contract signals the quality of the facility in such a way that the better this quality the greater the share of operating risk kept by the government this feature reduces the agent s marginal incentives creating a trade o between signaling and moral hazard we provide extensions of our framework in several directions allowing for risk aversion on the agent s side double moral hazard and political delegation the model is supported by some stylized facts from the water industry

the eclectic paradigm of international production a restatement and some possible extensions this article reviews some of the criticisms directed towards the eclectic paradigm of international production over the past decade and restates its main tenets the second part of the article considers a number of possible extensions of the paradigm and concludes by asserting that it remains a robust general framework for explaining and analysing not only the economic rationale of economic production but many organisational and impact issues in relation to mne activity as well

subsidizing research programs with if and when uncertainty in the face of severe informational constraints we study government optimal subsidy policies for research programs in the face of servere information asymmetry when firms have private information about the likelihood of project viability but the government cannot form a unique prior belief about this likelihood the paper makes two contributions first we show that the way in which rd under r d competition the first best outcome can also be achieved through a simple combination of a matching subsidy and an unrestricted subsidy if the shadow cost of public funds is positive an ex post equilibrium in general does not exist either under monopoly or competition we then consider two alternative policy decision criteria that are appropriate for belief free games rationalizability and max min criteria we argue that the max min criteria is preferable in our context and by way of doing so establish that the set of max min subsidy policies under either monopoly or competitive r d consists entirely of simple pure matching subsidies we further establish that allowing firms to form an r d consortium reduces the matching rate for the highest max min subsidy suggesting that cooperative r d has the potential to economize on the shadow costs of public funding of subsidies

interim third party selection in bargaining abstract third party intervention can reduce the risk of conflict in situations where the bargaining failure is due to asymmetric information in this paper i consider the selection of a third party in a two person bargaining problem where each disputant has private information about its relative strength or weakness for a class of problems i find that the disputants choose the third party that is best for the strong type but worst for the weak type due to the incentive of each disputant to avoid seeming weak to their adversary the selected third party s intervention entails a higher ex ante chance of conflict than intervention by any other alternative this paper shows how the process of interim third party selection can have important consequences for the outcome of a third party intervention in bargaining

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

contract negotiation and the coase conjecture a strategic foundation for renegotiation proof contracts what does contract negotiation look like when some parties hold private information and negotiation frictions are negligible this paper analyzes this question and provides a foundation for renegotiation proof contracts in this environment the model extends the framework of the coase conjecture to situations in which the quantity or quality of the good is endogenously determined and to more general environments in which preferences are nonseparable in the traded goods as frictions become negligible all equilibria converge to a unique outcome which is separating efficient and straightforward to characterize

on the genesis of multinational foreign affiliate networks multinational enterprises mnes develop their networks of foreign affiliates gradually over time instead of exploring all profitable opportunities immediately they first establish themselves in their home countries and then enter new markets stepwise we argue that this behavior is driven by uncertainty concerning a firm s success in new markets after entry the firm collects information which is used to update its beliefs about its performance in a market as conditions in different markets are correlated the information gathered in one of them can also be used to update beliefs elsewhere with the degree of correlation depending on issues such as the geographical or cultural distance between markets this correlated learning may render it optimal to enter markets sequentially investment in market a is only followed by entry in market b if the firm was sufficiently successful in a the prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis which features the universe of foreign affiliates held by german multinationals based on a rich set of benchmark estimates and sensitivity checks we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of mnes foreign affiliate networks

contract theory and implications for perennial energy crop contracting abstract this article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops we discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges we focus primarily on the mechanism design or complete contracts approach to contracting which involves optimizing some objective function e g profits costs etc with respect to contract terms subject to important incentive constraints the solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and or minimize costs

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

waiting to imitate on the dynamic pricing of knowledge we study the problem of an inventor who brings to the market an innovation that can be legally imitated imitators may enter the market by imitating the innovation at a cost or by buying from the inventor the knowledge necessary to reproduce and use the invention the possibility of contracting dramatically affects the need for patent protection our results show that i imitators wait to enter the market and the inventor becomes a temporary monopolist ii the inventor sells knowledge through contracts that allow resale by the imitators and iii under certain conditions the inventor s payoff increases with the number of imitators

reputations in the adoption of a new technology abstract this paper studies the effects of uncertainty on the timing of adoption of a new technology in a duopoly firms are uncertain of the innovative capabilities of their rivals and about the profitability of adoption these features lead to a richer and in some respects more plausible theory of adoption in which rents from delayed adoption are always realized and returns are not equalized across adoption times

stage financing and the role of convertible securities venture capital financing is characterized by extensive use of convertible securities and stage financing in a model where a venture capitalist provides staged financing for a project we illustrate an advantage of convertible debt or warrants over a mixture of debt and equity essentially when the venture capitalist retains the option to abandon the project the entrepreneur has an incentive to engage in window dressing and bias positively the short term performance of the project reducing the probability that it will be liquidated an appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project s equity

a theory of delegated search for the best alternative searching for the best worker a reliable supply alternative or the most profitable investment is frequently delegated to an agent this article develops a theory of delegated search we show that the principal s ability to delegate depends on the agent s luck her initial resources and the contract that governs her search with moral hazard the optimal contract is characterized by performance deadlines with bonuses for early completion if performance cannot be specified the optimal search is implemented by an option to buy contract for the principal if performance is partially specified the optimal contract is a standard pay for performance arrangement

innovation and imitation in an asymmetrically regulated industry abstract we model a game of innovation and imitation between a regulated firm and an unregulated firm although regulation may slow the industry wide pace of innovation it does not necessarily do so in fact by weakening the regulated firm s incentive to imitate a rival s successful new technology regulation may make the rival s innovation profitable thereby accelerating innovation by extension giving the regulated firm stronger incentives may backfire by producing either excessive or insufficient innovation these negative outcomes are more likely the greater is the cost reducing potential offered by the new technology

learning about the arrival of sales abstract we analyse optimal stopping when the economic environment changes because of learning a primary application is optimal selling of an asset when demand is uncertain the seller learns about the arrival rate of buyers as time passes without a sale the seller becomes more pessimistic about the arrival rate when the arrival of buyers is not observed the rate at which the seller revises her beliefs is affected by the price she sets learning leads to a higher posted price by the seller when the seller does observe the arrival of buyers she sets an even higher price

appropriability and commercialization evidence from mit inventions the effects of appropriability on invention have been well studied but there has been little analysis of the effect of appropriability on the commercialization of existing inventions exploiting a database of 805 attempts by private firms to commercialize inventions licensed from the massachusetts institute of technology mit between 1980 and 1996 we explore the influence of several appropriability mechanisms on the commercialization and termination of projects to develop products based on university inventions our central hypothesis is that the relationship between a licensee s decision to either terminate or commercialize the invention is driven by the current market value of the invention as well as the option value of delaying its commercialization we use a competing risks framework that allows for nonparametric heterogeneity and correlated risks we find that better appropriability in the sense of more effective patent strength and secrecy has a strong negative effect on the hazard of license termination the effectiveness of learning has a strong positive effect on the hazard of technology commercialization while lead time has a negative effect

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

optimal contracts for experimentation this paper studies a model of long term contracting for experimentation we consider a principal agent relationship with adverse selection on the agent s ability dynamic moral hazard and private learning about project quality we find that each of these elements plays an essential role in structuring dynamic incentives and it is only their interaction that generally precludes efficiency our model permits an explicit characterization of optimal contracts

quality management approaches and their impact on firms financial performance an australian study abstract the study of small manufacturing firms typically focuses on issues of entrepreneurship business or operations strategy alternate issues remain scarce and the implications for organisational performance are modest in the australian context managers have often been criticised for their failure to recognise that quality and innovation are a key driving force to performance this research utilises the work of several authors to develop quality orientations for small australian manufacturing firms samfs to purposefully bridge the gaps in the business literature and enable the evaluation of various performance outcomes specifically this study investigates whether a firm s stated quality orientation is useful in differentiating firm performance the research utilises longitudinal panel data gathered by the australian bureau of statistics growth and performance survey over four years from financial year 1995 to 1998 we demonstrate that firm quality management orientation does provide a statistically significant financial performance advantage and by inference survival advantage over those samfs who do not engage in quality management the research is a significant addition to the quality financial performance literature and provides a pathway forward for the use of two new financial productivity ratios as performance measures

venture capital financing moral hazard and learning we consider the provision of venture capital in a dynamic agency model the value of the venture project is initially uncertain and more information arrives by developing the project the allocation of the funds and the learning process are subject to moral hazard the optimal contract is a time varying share contract which provides intertemporal risk sharing between venture capitalist and entrepreneur the share of the entrepreneur reflects the value of a real option the option itself is based on the control of the funds the dynamic agency costs may be high and lead to an inefficient early stopping of the project a positive liquidation value explains the adoption of strip financing or convertible securities finally relationship financing including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting

investing to cooperate theory and experiment we study theoretically and in a lab experiment investment decisions in environments where property rights are absent in our setting a player chooses an investment level before interacting repeatedly with a given set of agents the investment stochastically affects the payoffs of the game in every subsequent period we show that more volatile returns make investment more difficult in the absence of legal protection and might force the investor to invest more to guarantee cooperation experimental results are broadly consistent with the theoretical findings

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

strategic real options abstract i study hidden investment in quality in a dynamic persuasion game a seller such as a project manager or startup company controls an asset and wants to convince a potential buyer such as an acquiring company or a regulator that it has high quality the buyer observes exogenous news with quality dependent drift and holds a call option on the asset the seller is privately informed about quality and can wait at a flow cost upgrade at a fixed cost or exit the market for low upgrade costs multiple equilibria exist and exhibit novel reputational dynamics resetting barriers and skew brownian motion a generalization of a reflected stochastic process in one type of equilibrium a seller with low quality waits until his reputation hits rock bottom and then upgrades with some probability inducing upward reputational jumps in equilibrium the seller may exit at an intermediate reputation in a second type the low quality seller mixes over exiting at low reputations and upgrading in an intermediate sweet spot region the results suggest a social benefit to setting high expectations for effort when agents start with low reputations and help explain why agents respond to adversity in drastically different ways across environments

moral hazard in corporate investment and the disciplinary role of voluntary capital rationing this paper compares three capital budgeting rules the npv rule a high hurdle rate and capital rationing and explains why some firms may voluntarily impose capital rationing under both capital rationing and a high hurdle a restrictive investment criterion is used to control managerial shirking however implementation of these budgeting rules requires a mechanism to prevent the firm from expanding the investment scale ex post capital rationing in the form of a predetermined fixed budget differs from the high hurdle rate rule in that the former requires the firm to overcome the cost of raising additional capital before making further investment

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

loan commitments and the debt overhang problem the debt overhang problem is shown to arise in the context of an entrepreneurial project that requires a sequence of investments financed by an outside lender the entrepreneur not internalizing losses accruing to the lender which financed the initial investments may inefficiently cancel the project and instead pursue an outside opportunity it is shown that loan commitments contracts that allow the entrepreneur to borrow a variable amount at a set interest rate in return for a fixed fee are the optimal financial contracts in this setting strictly dominating standard debt the existence of the fixed fee allows loan commitments to set a relatively low interest rate improving the entrepreneur s incentives to continue the project the paper specifies the optimal contract fully derives robust comparative statics properties using an extension of milgrom and roberts 1994 and extends the results to more realistic settings e g allowing the market risk free rate to be stochastic

the financing of innovation learning and stopping we consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success we distinguish between two financing modes namely relationship financing where the allocation decision of the entrepreneur is observable and arm s length financing where it is unobservable we find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes the rate at which funding is released becomes tighter over time under relationship financing and looser under arm s length financing the tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm s length financing

quality awards and the market value of the firm an empirical investigation this paper empirically investigates the impact of winning a quality award on the market value of firms by estimating the mean abnormal change in the stock prices of a sample of firms on the date when information about winning a quality award was publicly announced we note that the abnormal returns generated by the quality award winning announcements provide a lower bound for the impact of implementing an effective quality award improvement program our results show that the stock market reacts positively to quality award announcements statistically significant mean abnormal returns on the day of the announcements ranged from a low of 0 59 to a high of 0 67 depending on the model used to generate the abnormal returns the reaction was particularly strong for smaller firms mean abnormal returns ranged from low of 1 16 to a high of 1 26 and for firms that won awards from independent organizations such as malcolm baldrige philip crosby etc mean abnormal returns ranged from a low of 1 31 to a h

when to adopt a service innovation nash equilibria in a competitive diffusion framework abstract we study the optimal timing of adoption of a service innovation that a new entrant firm brings to a market populated by two incumbent firms our analysis is based on a model of competitive diffusion dynamics that extends the monopolistic bass model to include customer churn processes as well as a potential market expansion driven by the innovation we obtain expressions for the time trajectories of the customer bases i e the numbers of customers that use old and new service processes for the competing firms as well as sharper closed form characterizations for the setting with a stable market and homogeneous imitation process in modeling competitive dynamics we consider settings where incumbents anticipate a potential failure of the innovation we use the trajectories for the customer bases to model an optimal adoption response problem faced by one of the incumbent firms when the adoption time for the other incumbent can be anticipated or is pre announced and analyze this problem in the absence of market expansion or intra generational customer churn using the optimal response results we provide the nash equilibrium analysis of the adoption decisions by competing incumbent firms and derive sufficient conditions for the now now now never and never never adoption equilibria we use the trading volume data from the foreign exchange markets to estimate the parameters of the competitive diffusion dynamics for our model and to conduct a numerical investigation of the impact of the uncertainty associated with the success of the innovation on the incumbents nash equilibrium adoption times

optimal regulation of multinationals under collusion this paper analyses the optimal collusion proof mechanism for the regulation of multinational firms mnfs in foreign direct investment fdi projects there is a host country with a profitable investment opportunity either a multinational firm mnf or a local firm lf can undertake this project nonetheless due to its firm specific advantage and the mnf has the potential to create a larger surplus the host government faces an informational constraint such that it cannot observe the extra surplus the mnf can generate using this set up karabay 2010 shows that employing foreign ownership restrictions to force a joint venture jv can help the host government to partially overcome its information disadvantage in this paper we extend karabay 2010 by studying the host government s optimal regulatory policy when the mnf and the lf can collude it turns out collusion imposes no cost on the host government and the expected welfare attained in the absence of collusion can still be secured under collusion

second mover advantages in the strategic adoption of new technology under uncertainty abstract this paper introduces technological uncertainty into a timing game of new technology adoption it is shown that the timing neither necessarily involves first mover advantages in precommitment equilibria reinganum review of economic studies xlviii 1981 395 405 nor rent equalization due to the threat of preemption fudenberg and tirole review of economic studies lii 1985 383 401 rather there may be second mover advantages because of informational spillovers furthermore the model predicts that the equilibrium payoffs will typically be discontinuous and non monotonic in the probability that the new technology is profitable a welfare analysis reveals several market failures and suggests that policy intervention should adequately depend on the nature of uncertainty and the rate of technological progress

resale in second price auctions with costly participation abstract we study sealed bid second price auctions with costly participation and resale each bidder chooses to participate in the auction if her valuation is higher than her optimally chosen participation cutoff if resale is not allowed and the bidder valuations are drawn from a strictly convex distribution function the symmetric equilibrium where all bidders use the same cutoff is less efficient than a class of two cutoff asymmetric equilibria existence of these equilibria without resale is sufficient for existence of similarly constructed two cutoff equilibria with resale moreover the equilibria with resale are more asymmetric and under a sufficient condition more efficient than the corresponding equilibria without resale

on the market for venture capital we propose a theory of the market for venture capital that links the excess return to venture equity to the scarcity of venture capitalists vcs high returns make the vcs more selective and eager to terminate nonperforming ventures because they can move on to new ones the scarcity of vcs enables them to internalize their social value and the competitive equilibrium is socially optimal moreover the bilaterally efficient contract is a simple equity contract we estimate the model for the period 1989 2001 and compute the excess return to venture capital which turns out to be 8 6 percent finally we back out the return of solo entrepreneurs which is increasing in their wealth and ranges between zero and 3 5 percent

experimentation and project selection screening and learning firms must strike a delicate balance between the exploitation of well known business models and the exploration of risky untested approaches in this paper we study financial contracting between an investor and a firm with private information about its returns from exploration and exploitation the investor optimal mechanism offers contracts with different tolerance for failures to screen returns from exploitation and with different exposure to the project s revenues to screen returns from exploration we derive necessary and sufficient conditions for private information about returns from exploration to have zero value to the firm when these conditions fail private information about exploration may even decrease the firm s payoff

interim bayesian persuasion first steps some recent information transmission models kamenica and gentzkow 2011 rayo and segal 2010 view the sender as an information structure designer this view emphasizes a connection between design and information transmission it departs from traditional models of information transmission crawford and sobel 1982 grossman 1981 milgrom 1981 spence 1973 since it assumes that the sender commits to an information system before learning her type so that her choice is by itself uninformative by contrast there is a small but active tradition in mechanism design following myerson 1983 that considers the possibility that a choice of mechanism by an informed principal may be used as a signal by the participants in the mechanism through the study of an example this short paper proposes a modest first step toward building a theory of information structure design by an informed principal i work in a simple framework where a sender whose type is either high or low seeks validation from a receiver who wants to validate high types exclusively the sender chooses an infor mation system i e a conditional distribution of signals for each of her types from a feasible set i allow for potential restrictions on the set of feasible information systems which is important to make bayesian persuasion models more flexible i consider perfect bayesian equilibria of the game in which the sender chooses an information system after learning her type and the receiver chooses whether to validate after observing the signal generated by the information system

entrepreneurs and new ideas we study how early stage new ideas are turned into successful businesses even promising ideas can be unprofitable if they fail on one dimension such as technical feasibility correspondence to market demand legality or patentability to screen good ideas the entrepreneur needs to hire experts who evaluate the idea along their dimensions of expertise sharing the idea however creates the risk that the expert would steal it yet the idea thief cannot contact any other expert lest he should in turn steal the idea thus stealing leads to incomplete screening and is unattractive if the information of the other expert is critical and highly complementary in such cases the entrepreneur can form a partnership with the experts thus granting them the advantage of accessing each other s information yet very valuable ideas cannot be shared because it is too tempting to steal them

to innovate or imitate entry strategy and the role of market research abstract a firm planning market entry can attempt to develop a product that is either similar to the incumbent s existing offering imitation or entirely novel innovation the authors establish that when the incumbent is more aggressive in research and development r d this negatively affects the entrant s marginal return on r d thus if greater profits produce a strong weak desire for the incumbent to increase its r d level the entrant will respond by sharply decreasing increasing its r d level as a result the incumbent s likelihood of retaining the lead position will exhibit an inverse u shaped pattern as a function of monopoly and duopoly profits the authors then examine the impact of uncertainty about the rewards from new products and allow firms to conduct market research to resolve the uncertainty they characterize the conditions for the entrant s innovation versus imitation decision to reveal information about future rewards to the incumbent when duopoly profits are uncertain and ca

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

managerial short termism turnover policy and the dynamics of incentives i study managerial short termism in a dynamic model of project development with hidden effort and imperfect observability of quality the manager can complete the project faster by reducing quality to preempt this behavior the prin cipal makes payments contingent on long term outcomes i analyze the dynamics of the optimal contract and its implications for the level of managerial turnover i show that optimal contracts might be stationary and entail no termination in general i show that the principal reduces the manager s temptation to behave myopically by reducing the likelihood of termination and deferring compensation the model predicts a negative relation between the rate of managerial turnover and the use of deferred compensation that is consistent with evidence of managerial compensation contracts received may 23 2016 editorial decision may 27 2017 by editor francesca cornelli

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

getting it done dynamic incentives to complete a project a principal wants an agent to complete a project the agent undertakes unobservable effort which affects in each period the probability that the project is completed we characterize the contracts that the principal sets with and without commitment with full commitment the contract involves the agent s value and wage declining over time in order to give the agent incentives to exert effort the best sequentially rational equilibrium for the principal also involves the agent s wage declining over time while the worst sequentially rational equilibrium for the principal has a constant wage and is in fact the unique stationary equilibrium the best weakly renegotiation proof equilibrium for the principal is achieved by a constant wage that maximizes the principal s payoff conditional on wages being constant we compare these solutions to the efficient outcome

dynamics of innovation and risk we study the dynamics of an innovative industry in which agents learn about the likelihood of negative shocks managers can exert risk prevention effort to mitigate the consequences of shocks if no shock occurs confidence improves attracting managers to the innovative sector but when confidence becomes high inefficient managers exerting low risk prevention effort also enter this stimulates growth while reducing risk prevention the longer the boom the larger the losses if a shock occurs although these dynamics arise in the first best asymmetric information generates excessive entry of inefficient managers earning informational rents inflating the innovative sector and increasing its vulnerability