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

incentive compatible regulation of foreign owned subsidiaries a tax simulation for the jamaican bauxite industry abstract in 1974 jamaica replaced the corporate income tax on multinationals in the bauxite sector with a production levy on bauxite in order to increase tax revenue the results were mixed tax revenue jumped initially but the multinationsl quickly started shifting production elsewhere we model jamaica s taxation problem assuming that it has incomplete information about the multinationals costs and derive the optimal incentive compatible tax mechanism we simulate and compare the effects on output and tax revenue of the actual and the incentive compatible tax regimes and conclude that there might be substantial benefits to implementing an incentive mechanism

the econometrics of kinked budget constraints in the last several years a branch of applied econometrics has developed which is devoted to the development of techniques for the estimation of demand and other functions when the budget constraint is piecewise linear or kinky that is when the constraint consists of a number of segments joined together at kink points such constraints most frequently arise from government tax and transfer programs for example the federal income tax imposes a piecewise linear schedule by the use of constant marginal tax rates within brackets a problem analyzed by hausman 1981 the payroll tax in the social security system likewise generates a kinked schedule inasmuch as the marginal tax rate on earnings is zero above a certain earnings maximum federal and state transfer programs for the poor result in piecewise linear constraints because transfer benefits are taxed in the sense of a negative income tax as income rises and because that tax rate falls to zero at the kink point where an individual or family loses eligibility for the benefit altogether many government transfer programs impose additional nonlinearities by altering this tax rate by discrete amounts over the range of positive benefits as well but kinked constraints sometimes arise in nongovernment contexts a well known example being the block pricing schedule commonly set by utilities and volume discounting in general kinked budget constraints create two difficulties that have several interesting facets one difficulty is that changes in tax and transfer schedules can have unexpected effects that can be exactly the opposite in sign to those expected from economic theory examples of this phenomenon are given below the second difficulty that with which this paper is mostly concerned relates to the implications of kinked budget

estimating ethnic preferences using ethnic housing quotas in singapore there are many policies around the world aimed at integrating groups gender ethnic national in education employment immigration and housing in the case of housing since prices may not internalize externalities in residential location choices we need to know preferences for welfare analysis this paper estimates people s taste for living with own ethnic groups ethnic preferences using unique policy variation from the ethnic housing quotas in singapore my approach combines policy induced variation commonly used in reduced form settings with a non parametric identi cation strategy in a structural demand estimation framework a la berry levinsohn and pakes 1995 i nd that all groups have strong preferences to live with at least some other

quantitative easing in the 1930s during the 1934 39 recovery from the u s great depression overnight interest rates were usually at a lower bound meanwhile american monetary authorities followed policies related to today s debates on quantitative easing they tried to stabilize yields on treasury bonds with open market operations they created rapid growth in high powered money and they allowed transitory factors to affect high powered money effects of these policies on bond yields reveal a portfolio effect of short duration asset supply on term premiums this portfolio effect helps explain why high powered money growth was associated with recovery of real activity over 1934 39

the effect of transaction size on off the run treasury prices this paper examines intra day trading data from the inter dealer broker market for u s treasury securities and measures the degree of price pressure in the off the run treasury market as is well known securities that would appear to be very close substitutes i e on the run and off the run treasury bonds behave as if there is some degree of market segmentation this is the first systematic study of the off the run treasury note and bond market focused entirely on a price pressure effect using intra day data the paper analyzes price pressure through matched pairs of securities that differ only in liquidity

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

on renegotiation design a central concern of contract theory is to investigate departures from the first best paradigm in which rational agents could in principle achieve unrestrained efficiency through complete long term contingent contracts in order to take into account some of the observed limitations in real life contracts attention has been paid to informational problems one focus has been on asymmetries of information between contractors adverse selection and moral hazard have been used for example to analyze insurance problems labor contracts managerial incentives regulation of monopolies vertical restraints or the financial structure of firms see for example hartholmstrom 1987 for a survey of these issues attention has also been devoted to private information shared by the parties but unavailable to outsiders like courts that is observable but unverifiable information asymmetries of information between contractors introduce constraints which indeed most often prevent to achieve first best efficiency unfortunately this paradigm involves technical difficulties which explains why most contributions focus on unidimensional asymmetries and may leave some undeterminacies as to the form of optimal contracts e g if there are more than one asymmetry or the size of the inetliciencies there may for instance exist several equilibria which are more or less inefficient the last paradigm observable but unverifiable information is technically more convenient what is not clear however is the extent to which the presence of unverifiable information may prevent achieving first best

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

an incentive compatible approach to the transfer pricing problem abstract this paper offers an alternative approach to regulating certain types of transfer pricing if the multinational enterprise s transfer price decision is not regulated it will manipulate the transfer price in order to maximize net global profit traditional approaches argue for ad hoc penalty schedules to mitigate manipulative transfer pricing in contrast this paper offers an incentive compatible approach which explicitly incorporates the informational asymmetries that encourage misreports the model has the desirous feature that the optimal regulatory policy has self enforcing properties that is the firm will find it profit maximizing to report true costs

the principal agent problem when the agent has access to outside markets abstract principal agent models assume that the agent must consume the payments he receives under the incentive contract this paper shows that if the agent can trade his payments on frictionless state contigent markets only a flat wage or a full residual claim for the agent are viable

the rand health insurance experiment three decades later we re present and re examine the analysis from the famous rand health insurance experiment from the 1970s on the impact of consumer cost sharing in health insurance on medical spending we begin by summarizing the experiment and its core findings in a manner that would be standard in the current age we then examine potential threats to the validity of a causal interpretation of the experimental treatment effects stemming from different study participation and differential reporting of outcomes across treatment arms finally we re consider the famous rand estimate that the elasticity of medical spending with respect to its out of pocket price is 0 2 emphasizing the challenges associated with summarizing the experimental treatment effects from non linear health insurance contracts using a single price elasticity

using changes in auction maturity sectors to help identify the impact of qe on gilt yields this article uses a novel way of identifying part of the impact of quantitative easing qe on gilt yields using natural experiments associated with bank of england announcements about changes in the maturity distribution of future gilt purchases we find that changes in expected qe purchases had a significant effect on gilt yields following each announcement in march 2009 august 2009 and february 2012 the local supply effects we identify appear to be important they may account for around half of the total impact on gilt yields in these events and are passed through to yields of related assets

health insurance and the demand for medical care evidence from a randomized experiment we estimate how cost sharing the portion of the bill the patient pays affects the demand for medical services the data come from a randomized experiment a catastrophic insurance plan reduces expenditures 31 percent relative to zero out of pocket price the price elasticity is approximately 0 2 we reject the hypothesis that less favorable coverage of outpatient services increases total expenditure for example by deterring preventive care or inducing hospitalization

multinationals multi plant economies and the gains from trade a general equilibrium model of a multinational enterprise based on economies of multi plant operation is developed these economies are modelled as arising from the existence of a joint input whose productivity in each production facility is independent of the number of facilities maintained by a firm the multinational thus offers the world increased technical efficiency by eliminating the duplication of the joint input that would occur with independent national firms since this technical efficiency may come at the expense of increased market power the full determinants of home country host country and world welfare are considered

commitment through renegotiation proof contracts with third parties the paper analyzes contracts as means of strategic commitment that is commitment against outside parties to the agreement it considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry it assumes away the possibility for the parties to precommit not to make pareto improving renegotiations of the agreement once entry has taken place under symmetric information the contract is thus found to be useless for entry deterrence if the incumbent firm or workers possess some private information excessive post entry production levels can however be sustained ex post since output reductions may not be incentive compatible while information asymmetries are usually welfare decreasing when the goal is optimal risk sharing they can thus be welfare improving for the contracting parties when commitment against outsiders is the goal of the contract the role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper and the general relevance of strategic contractual commitment is discussed

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

flow effects of central bank asset purchases on sovereign bond prices evidence from a natural experiment we estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ecb s public sector purchase programme pspp to avoid simultaneity bias in the estimated relationship between prices and purchases we exploit a pspp feature that renders securities temporarily ineligible for reasons unrelated to their prices using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes we find that pspp causes statistically significant and economically relevant upward price impacts the impacts are short lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity

flow effects of large scale asset purchases how large scale asset purchase lsap programs affect financial markets is an important question for policy makers that face the zero lower bound while so called stock effects that is persistent shifts in asset prices observed as the result of an lsap program are relatively well documented in the literature there has been little study of flow effects that may occur at the time of lsap transactions using security level transaction data related to four distinct programs over a period of roughly four years we test for the presence of flow effects in both price and liquidity of treasury securities we show that flow effects in security prices were present during early lsaps by the federal reserve but they were of little economic significance alternatively we find no evidence for systematic liquidity flow effects in any of the lsap programs

a model of expropriation with asymmetric information abstract incomplete information about a multinational enterprise s mne s technology may induce a host country to expropriate the mne s subsidiary even if other policy instruments are available the threat of expropriation does not always deter foreign direct investment so that expropriation may actually occur with nonzero probability perfect sequential equilibria are derived for vertically and for horizontally integrated mnes the model provides predictions regarding the probability of expropriation based on observable mne and host country characteristics countries would be better off if they could commit never to expropriate mnes

the causal effect of coalition governments on fiscal policies evidence from a regression kink design proportional election systems are widespread across countries and often lead to coalition governments this creates interest in how the form of government single party or coalition governments causally influences fiscal policies it is difficult to estimate this causal effect empirically because the form of government is not randomly assigned to political units i overcome this problem by using a regression kink design which exploits that there is a slope change in the treatment probability at the 50 vote share of the strongest party this method is applied to a large panel data set of german local governments i find that contrary to the theoretical prediction coalition governments significantly decrease expenditures

early contract renegotiation an analysis of us labor contracts 1970 1995 this article examines the ex post flexibility of us labor contracts during the 1970 95 period by investigating whether unanticipated changes in inflation increase the likelihood of a contract being renegotiated prior to its expiration we find empirical support for this hypothesis specifically our results indicate that renegotiations are triggered principally by large and infrequent price shocks of either sign when combined with evidence that ex ante contract durations are shorter during episodes of increased inflation uncertainty our results suggest that these contracts are flexible both ex ante and ex post to changes in the evolution of inflation

cost observability and renegotiation abstract a project requires an initial specific investment the total cost of the project depends on the probability that the supplier will experience a delay in the production schedule this probability is the supplier s private information the buyer would like to hire a supplier with a low probability of delay however it can offer a screening contract only by committing to terminate the project if the supplier is not able to complete it within the original budget limits we show that cost observability may prevent the buyer from terminating a cost overrun project and this in turn prevents screening out bad suppliers thus we provide an example in which superior monitoring ability represents a disadvantage for the buyer this finding contrasts with the common argument that better monitoring represents an advantage of integrated organizations

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

a mechanism design approach to transfer pricing by the multinational firm abstract this paper is about how multinationals choose transfer prices and optimal production levels in the presence of differential corporate income tax rates and local ownership requirements a key featrure of the model is that there is an asymmetric information problem between a parent and its foreign subsidiary we examine the interaction between ownership structure corporate taxes and bargaining power transfer prices induce underproduction compared to the full information case when the parent has the bargaining ability when bargaining is controlled by the subsidiary overproduction obtains the model is used to illustrate how governmental objectives can be accomplished without direct regulation of the transfer price

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

price sensitivity of demand for prescription drugs exploiting a regression kink design this paper investigates price sensitivity of demand for prescription drugs using drug purchase records for at 20 random sample of the danish population we identify price responsiveness by exploiting exogenous variation in prices caused by kinked reimbursement schemes and implement a regression kink design thus within a unifying framework we uncover price sensitivity for different subpopulations and types of drugs the results suggest low average price responsiveness with corresponding price elasticities ranging from 0 08 to 0 25 implying that demand is inelastic individuals with lower education and income are however more responsive to the price also essential drugs that prevent deterioration in health and prolong life have lower associated average price sensitivity

optimal resource royalties with unknown and temporally independent extraction cost structures the authors study optimal nonrenewable resource royalty contracts when the extracting agent has private information on costs this is a dynamic incentive problem in which the repeated relationship between the principal and the agent is constrained by initial reserves commitment is limited to one period and costs are intertemporally independent compared with full information extraction information asymmetry shifts production to the future when the optimal contract requires exhaustion in two periods when exhaustion by all types in two periods is not warranted the effect on the terminal period is ambiguous and the output of even the lowest cost firm is always distorted copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

adjustment costs firm responses and micro vs macro labor supply elasticities evidence from danish tax records we show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms we develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs we present evidence supporting three predictions of this model by analyzing bunching at kinks using danish tax records first larger kinks generate larger taxable income elasticities second kinks that apply to a larger group of workers generate larger elasticities third the distribution of job offers is tailored to match workers aggregate tax preferences in equilibrium our results suggest that macro elasticities may be substantially larger than the estimates obtained using standard microeconometric methods

the financial market impact of uk quantitative easing after outlining some of the monetary developments associated with quantitative easing qe we measure the impact of the uk s initial 2009 10 qe programme on bonds and other assets first we use a macro nance yield curve both to create a counterfactual path for bond yields and to estimate the impact of qe directly second we analyse the impact of individual qe operations on a range of asset prices we nd that qe signi cantly lowered government bond yields through the portfolio balance

price pressure in the government bond market what determines the term structure of interest rates standard economic theory links the interest rate for maturity t to the willingness of a representative agent to substitute consumption between times 0 and t the standard model contrasts sharply with a more informal view based on investors preferred habitat proposed by john culbertson 1957 and franco modigliani and richard sutch 1966 according to the preferred habitat view there are investor clienteles with preferences for specific maturities and the interest rate for a given maturity is influenced by the demand of the corresponding clientele and the supply of bonds with that maturity for example the typical clientele for long term bonds are pension funds an increase in their demand would be expected to raise prices of long term bonds and thus lower long term interest rates in short preferred habitat implies that there is price pressure in the bond market while the preferred habitat view has intuitive appeal it has not entered into the academic mainstream typically being relegated to a paragraph in mba level textbooks one reason for this is the mixed findings in early empirical studies of the term structure specifically between 1962 and 1964 the us treasury and federal reserve raised the supply of short term government debt while simultaneously lowering the supply of long term debt this program known as operation twist aimed to raise shortterm interest rates and so improve the balance of payments while also lowering long term rates to stimulate private investment a number of papers evaluated operation twist and while they reached different conclusions none found strong evidence that the operation was effective in flattening the term structure e g modigliani price pressure in the government bond market

patient cost sharing and hospitalization offsets in the elderly in the medicare program increases in cost sharing by a supplemental insurer can exert financial externalities we study a policy change that raised patient cost sharing for the supplemental insurer for retired public employees in california we find that physician visits and prescription drug usage have elasticities that are similar to those of the rand health insurance experiment hie unlike the hie however we find substantial offset effects in terms of increased hospital utilization the savings from increased cost sharing accrue mostly to the supplemental insurer while the costs of increased hospitalization accrue mostly to medicare

the federal reserve s large scale asset purchase programmes rationale and effects we provide empirical estimates of the effect of large scale asset purchases lsaps on longer term us treasury yields within a framework that allows for several transmission channels including the scarcity channel associated with the preferred habitat literature and the duration channel associated with interest rate risk we also clarify lsaps role in the broader context of historical monetary policy strategy results indicate that lsap style operations mainly impact longer term rates via the nominal term premium within that premium the response is predominantly embodied in the real term premium the scarcity and duration channels both seem to be of considerable importance

a high frequency assessment of the ecb securities markets programme policy impact studies often suffer from endogeneity problems consider the case of the european central bank ecb securities markets programme if eurosystem interventions were triggered by sudden and strong price deteriorations looking at daily price changes may bias downward the correlation between yields and the amounts of bonds purchased simple regressions of daily changes in yields on quantities often give insignificant or even positive coefficients and therefore suggest that securities markets programme smp interventions have been ineffective or worse counterproductive we use high frequency data on purchases of the ecb securities markets programme and sovereign bond quotes to address the simultaneity and endogeneity issues we propose a vector autoregressive var framework estimated at several frequencies to better measure the smp impact and its persistence our results show that smp interventions have been effective in reducing yields of government bonds for the countries under the program

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

shifting incidence and interstate exportation of production taxes on energy resources this paper analyzes the shifting incidence and interstate exportation of state and local government production taxes on four primary energy resources in the united states coal uranium oil and natural gas results of the analysis are then compared with those obtained from a standard partial equilibrium incidence model although a limited literature in this area does exist the discussion focuses more directly on the ways general incidence models must be modified to be appropriately applied to these natural resources from both a short run and a long run perspective 24 references