the cost of contract renegotiation evidence from the local public sector the renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts however assessing the cost of such renegotiation remains an open issue from an empirical viewpoint to address this question we fit a structural principal agent model with renegotiation on a set of urban transport service contracts the model captures two important features of the industry first only two types of contracts are used in practice fixed price and cost plus second subsidies increase over time we compare a scenario with renegotiation and a hypothetical situation with full commitment we conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators

planning under incomplete information and the ratchet effect abstract central planning of production is usually performed under asymmetric information the firm in general has more information about its productive possibilities than the central planner from now on for short cp this justifies the use of incentives schemes in which the cp does not directly fix activity levels casual observation of such existing schemes suggests that the time dimensions is crucial for their working typically the cp revises the incentive scheme over time to take into account the information provided by the firm s performance managers of centrally planned economies as well as economists have long recognized that this revision induces firms to underproduce in order to avoid demanding schemes in the future this is the ratchet effect it is purpose of the present paper to study the ratchet effect under the non commitment assumption which we believe to be more realistic the inadequacy of conceptual tools made if difficult in the past to consider such an assumption now basic research on dynamic games with incomplete information recently resulted in new ideas which look particularly relevant for a theoretical analysis of the problem

capture and ideology in the economic theory of politics the economic theory of regulation long ago put public interest theories of politics to rest these theories have correctly been viewed as normative wishings rather than explanations of real world phenomena they have been replaced by models of political behavior that are consistent with the rest of microeconomics anthony downs 1957 james buchanan and gordon tullock 1965 george stigler 1971 sam peltzman 1976 recently however debate has arisen over whether some version of a public interest theory of regulation will have to be readmitted to our thinking about actions and results in the political arena what is at issue is the empirical importance of the altruistic publicly interested goals of rational actors in determining legislative and regulatory outcomes james kau and paul rubin 1979 kalt 1981 peltzman 1982 this study assesses the nature and significance of publicly interested objectives in a particular instance of economic policymaking u s senate voting on coal strip mining regulations the existence of such objectives is of course no contradiction of the economic view of human behavior kenneth arrow 1972 gary becker 1974 and may well be rooted in genetic biological history becker 1976 jack hirshleifer 1978 generally however individuals altruistic publicly interested goals have been given little attention this reflects the judgment that such goals are so empirically unimportant as to allow the use of occam s razor in positive models or well founded apprehensions that these goals are unusually difficult to identify measure and analyze notwithstanding the latter problem we find that approaches which confine themselves to a view of political actors as narrowly egocentric maximizers explain and predict legislative outcomes poorly the tracking and dissecting of the determinants of voting on coal strip mining policy suggest that the economic theory of politics has been prematurely closed to a broader conception of political behavior

industrial policy and politics abstract recognizing the uncontrollable nature of the political system in a fine tuning way we derive simple constitutional rules for industrial policies which take into account simultaneously the inefficiencies of the political system and informational asymmetries of regulators we apply this methodology to the regulation of natural monopolies we consider a two type political system with the majority rule we study how the chosen cost reimbursement rules and pricing rules which characterize regulation are affected by constitutional choices such as public ownership or privatization creation of incentives for regulators or not price discrimination or not

the effect of welfare and wage levels on the location decisions of female headed households abstract this paper develops and estimates a model designed to calculate the impact of welfare benefit levels wages and tax rates on the location choices of female headed households the empirical model assumes that women simultaneously choose both where they will live and whether or not they will participate in the welfare system based on their expected income and expected hours of work for each location participation possibility these income and hours expectations depend in turn on the welfare benefits wage and tax rates facing each household in each location it is found that both regional welfare levels and wage rates have a significant effect on the location decisions of this population the probability of a typical female headed household with little outside income leaving an area with low welfare payments and low wages can be as much as 12 points higher over a 4 year period than the probability of leaving a high welfare high wage area

contracting with imperfect commitment and noisy communication abstract this paper provides new analytical tools for studying principal agent problems with adverse selection and limited commitment by allowing the principal to use general communication devices we overcome the literature s common but overly restrictive focus on one shot direct communication in addition general communication devices solve two fundamental problems of contracting with imperfect commitment first they allow us to identify the local downward incentive constraints as the relevant ones if the agent s preferences satisfy a single crossing property second we show how one may restrict the cardinality of the message spaces of the communication device an example illustrates our arguments and the suboptimality of one shot direct communication

intergenerational aspects of public transfers borrowing and debt the paper analyzes intergeneration distributional effects of taxes transfer payments public borrowing and debt a two period life cucle model with overlapping generations is constructed the model has two specific features private wealth in both periods enter as arguments in the preference function and the individuals inelastically supply labor in both periods it turns out that some fiscal policy actions favor both of the currently lliving generations possibly at the expense of future generations while other actions generate conflicts between the currently living generations the analysis also shows that it makes considerable difference whether the burden of public spending debt and borrowing is defined in terms of wealth consumption and utility the different implications of foreign vs domestic debt are examined

simple menus of contracts in cost based procurement and regulation in an influential paper jean jacques laffont and jean tirole 1986 formulated a principal agent model of cost based procurement and regulation and showed that the principal can implement the optimal mechanism by offering the agent a menu consisting of a continuum of linear contracts two related problems with applying this theory in practice have been that the economic logic and the underlying mathematics involved in calculating the optimal menu are quite complex and the principal must be able to specify the agent s entire disutility of effort function in order to calculate the optimal menu as a result the model has not been widely used in practice to either calculate actual incentive contracts or even to develop useful qualitative guidance about the nature of the optimal solution and how it is affected by various economic factors the purpose of this paper is to show that dramatically simpler menus which are easy to understand and calculate and which have lower informational requirements can at least in some cases capture a substantial share of the gains achievable by the fully optimal complex menu in particular this paper considers two item menus where one item is a cost reimbursement contract and the other item is a fixed price contract such menus are called fixed price cost reimbursement fpcr menus for the case where the agent s utility is quadratic and the agent s type is distributed uniformly it is shown that the optimal fpcr menu always captures at least three quarters of the gain that the optimal complex menu achieves where the gain is measured relative to the result of using a cost reimbursement contract this paper s research was originally motivated by a policy issue in defense procurement in the united states the department of defense dod purchases almost all major weapons systems from sole source contractors using contracting methods that essentially amount to using cost reimbursement contracts the best way to understand why dod uses costreimbursement contracting methods is that they perform precisely the function identified in laffont and tirole s principal agent model they guarantee in a situation that amounts to a bilateral monopoly that dod and the firm can reach an agreement i e they guarantee that the agent will always produce the good of course the use of cost reimbursement contracting methods

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

noisy observation in adverse selection models we consider a principal agent contracting problem under incomplete information where some of the agent s actions are imperfectly observable contracts take the form of reward schedules based on the noisy observation of the agent s action we first review situations where the principal can reach the same utility as in the absence of noise then we focus on the use of linear reward schedules which allow universal implementation i e implementation of a given mechanism for any unbiased noise of observation and on quadratic reward schedules which only require the knowledge of the variance of the noise we exhibit sufficient conditions under which linear reward schedules implement a given mechanism finally we characterize necessary conditions for a mechanism to be implementable under noisy observation by a linear schedule and by quadratic schedules we give the geometric intuition behind all results

regulation and legislative choice regulation has economic and political dimensions both of which i endogenize in this hierarchical model in which a legislature chooses by majority rule the mandate of an agency that faithfully regulates a firm with private information about its costs sufficient conditions are given for an equilibrium to exist if there is a strong electoral connection between the benefits delivered to constituents and their electoral support the legislature will choose a regulatory mandate that favors consumer over producer interests and results in regulation that does not maximize expected total surplus political interest in delivering benefits to constituents through factor employment results in a regulatory mandate that yields greater expected total surplus

procurement policy and contracting efficiency the contracting literature has emphasized the optimality of using certain contracting instruments such as multiple cost observations full commitment self selection and competition a two period procurement model is constructed incorporating all of the instruments and optimal contracts are characterized numerical examples suggest that the marginal benefits of full commitment self selection and multiple cost observations are small while the benefits of competition are larger to obtain some evidence on contracting costs defense contracting is reviewed it indicates that using these instruments is very costly thus calling into question the optimality of using all of the procurement instruments copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

regulation under asymmetric information in water utilities water utilities are reminiscent of network industries and are characterized by important fixed costs these factors contribute to a single firm serving an area justifying public intervention on pricing about one fourth of u s water utilities are private and subject to regulation regulators are unlikely to be perfectly informed and regulation is unlikely to be costlessly implemented these inherent imperfections have led economists to consider the incentive properties of regulatory procedures using the economics of information see david baron 1989 the empirical literature on regulation has focused on evaluating the effects of regulation on prices firms costs efficiency and innovation in such sectors as airlines electricity and energy as surveyed by paul l joskow and nancy l rose 1989 few of these empirical studies rely on the so called theory of regulation regarding the water industry there is an abundant literature on residential water demand firms cost and their efficiency given their public versusprivate nature relying on a model with asymmetric information and a sample of california water utilities frank a wolak 1994 assesses the consumer welfare loss due to asymmetric information and shows that the model with asymmetric information provides a superior description of the cost and demand data to the model under perfect information analyzing pricing for residential water is an important policy issue as the sector recently experienced price increases the problem is even more acute in california because of a high residential demand for water along with population growth water scarcity and the probability of severe droughts relying on a new dataset of 32 districts in california over the 1995 2000 period we analyze regulation of private water utilities for every district the california public utilities commission cpuc chooses a price for water an access fee per meter and a rate of return on capital to satisfy firms revenue requirements we assume that the cpuc is imperfectly informed about firms labor efficiency following david besanko 1984 and wolak 1994 we develop a model in which the firm s capital is used as a screening variable in particular the model has the features of a rate of return regulation we show how the rate of return and the access fee can be determined optimally to control firms rents we then adopt a structural approach to analyze the data a multistep estimator allows us to estimate the key parameters of the model the empirical results show price inelasticity an income effect slightly decreasing returns to scale and a concentration of efficient firms the computation of the optimal rate of return and access fee shows that the cpuc would tend to be cautious by allowing a lower than optimal rate and access fee relying on the estimated parameters a first experiment evaluates the cost of asymmetric information the price would be significantly lower resulting in a gain of consumer surplus a second experiment consists of simulating the outcome of an optimal price cap following the farid gasmi et al 2002 model the price cap became a popular regulatory tool in the 1980s such as for electricity though the incentives resulting in price cap regulation have been questioned by economists the counterfactual simulations show a price increase which results in a significant loss in consumer surplus the increase in firms profit does not however counterbalance this loss supporting the relevance of the actual rate of return mechanism

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

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

simple cost sharing contracts we extend rogerson s 2003 intriguing analysis of the performance of simple procurement contracts to consider settings where the supplier s innate production cost is not necessarily distributed uniformly although the simple contract that rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely it can perform poorly when the larger cost realizations are relatively likely we show that in all settings under consideration though a fairly simple pair of contracts one that involves linear cost sharing and one that involves full cost reimbursement can always secure more than 73 of the gain achieved with a fully optimal contract

incentive regulatory policies the case of public transit systems in france we assess the empirical relevance of the new theory of regulation using a principal agent framework to study the regulatory schemes used in the french urban transport industry taking the current regulatory schemes as given the model of supply and demand provides estimates for the firms inefficiency the effort of managers and the cost of public funds it allows us to derive the first best and second best regulatory policies for each network and compare them with the actual situation in terms of welfare loss or gain fixed price policies lie between fully informed and uninformed second best schemes cost plus contracts are dominated by any type of second best contract from these results we may conjecture that fixed price contracts call for better informed regulators

contracting with imperfect commitment and the revelation principle the single agent case this paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism we show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent in contrast with the conventional revelation principle however the agent may not use this strategy with probability one our results apply to contracting problems between a principal and a single agent by reducing such problems to well defined programming problems they provide a basic tool for studying imperfect commitment

on the value of commitment with asymmetric information several recent papers have emphasized that long term relationships can be efficiently governed by short term contracts provided that there is no asymmetric information at the contracting dates this excludes not only adverse selection problems but also moral hazards problems in which hidden actions generate private information over the future in this paper we show in the context of a multiperiod principal agent relationship with adverse selection that renegotiable short term contracts can be as efficient as long term renegotiation proof contracts on the other hand spot contracting may fail to achieve long run efficiency not only because of intertemporal smoothing as with symmetric information but also because of ratchet effects and time inconsistency in the optimal structure of informational rents thus some limited commitment seems to be a necessary and sufficient condition to achieve long run efficiency

good regulatory regimes assuming simple functional forms numerical methods are used to analyze linear regulatory rules that include cost plus and price cap regimes regulators are assumed to observe actual cost but not the disutility of cost reduction and are assumed unable to impose taxes or make transfers best linear regimes depend importantly on the level and form of uncertainty the regulatory objective function and the firm profitability constraint under uncertainty regimes in which price depends in part on actual cost generally substantially outperform pure price caps particularly in terms of consumers surplus