regulatory reform in britain regulatory reform in britain john kay and john vickers major sectors of the british economy are currently undergoing far reaching regulatory reform deregulation removal of barriers to competition and the introduction of new methods of regulation are occurring notably in financial services some of the professions and in utility industries such as telecommunications gas and electricity this paper gives an economic assessment of these developments the authors examine the root causes of market failure that call for regulation externalities monopoly and information problems and the pros and cons of various regulatory responses a broad distinction is drawn between structural regulation the determination of which firms or types of firms can engage in which activities and conduct regulation the control of how firms behave in their chosen activities recent examples of deregulation plus re regulation in britain are seen in part as a shift from structural to conduct regulation the relative merits of the two modes of regulation are complex to assess but it is argued that some recent regulatory reforms are placing undue reliance on conduct regulation as well as assessing individual industries the authors draw general conclusions about the desirability of regulatory solutions that make full use of market forces

trademark protection quality improvement and exports in developing countries trademarks indicate the inherent quality or other distinguishing features of products strong trademark protection can lower consumers costs of searching for preferred quality characteristics with weak trademark protection firms in developing countries may not be willing to provide high quality products with strong trademark protection firms have an incentive to maintain or improve quality over time in order not to erode the value of their trademarks by solving the theoretical model we show that strengthened trademark protection in developing countries may induce domestic firms to become exporters and raise the quality of products on the export market the welfare analyses show that strengthened trademark protection in developing countries benefits southern customers and firms producing high quality products but harms firms producing counterfeits and uninformed customers if firm h charges low prices given firm h charges a high price the strengthened trademark protection only helps firm h and informed customers in the south while leaves the others unaffected

public procurement with unverifiable quality the case for discriminatory competitive procedures unverifiable quality may affect the enforcement of procurement contracts even when the award procedure is able to select the most efficient firm in the market in this paper we show that a discriminatory competitive mechanism which awards the contract on the basis of price and firms past performance yields an efficient allocation of the contract and allows the buyer to implement her desired quality quality enforcement arises out of relational contracting whereby the buyer handicaps a contractor in future competitive tendering processes if it fails to provide the required quality we study an infinitely repeated procurement model with two firms and one buyer imperfectly informed on the firms cost in which in each period the buyer runs a discriminatory auction we restrict our analysis to the case of a buyer committed to her handicapping strategy a case which captures some of the features of a public buyer when players use either grim trigger or stick and carrot strategies we find that the buyer can induce the delivery of optimal unverifiable quality with a variety of handicap levels and when applicable durations of the punishment period for some values of the handicap and the length of the punishment period both firms remain active in the market even when punished

material interests moral reputation and crowding out species protection on private land we consider how the reputation of being socially responsible works as an effective source of motivation in protecting a public good such as endangered species this paper investigates the mechanism design for endangered species protection on private land under asymmetric information about reputation and land quality we examine optimal monetary transfer by designing an efficient mechanism which takes into account the crowding out effect of monetary rewards on socially responsible behavior we find landowners who have good reputation contribute more than the optimum level landowners with poor reputation sacrifices information rent rather they buy reputation

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

satisfaction guaranteed or money partially refunded efficient refunds under asymmetric information refunds are modelled as a competitive market response to asymmetric information firms have private information on their choice of product quality and compete by offering price and refund contracts consumers who care about quality draw inferences about the quality offered by the various firms from observed contracts conditions under which a revealing market equilibrium emerges are specified and the equilibrium quality and contract s characterized the model predicts that when product risk is not insurable consumers with higher incomes will pay higher prices for higher quality goods with higher refunds if the product fails

gratitude conscience and reciprocity models of supplier motivation when quality is non contractible abstract standard game theoretic models that apply principal agent problems to analyse buyer supplier relations have postulated that in a single period game the agent will not choose non contractible quality however evidence exists that suppliers or service providers choose costly quality in non contractible dimensions even in absence of reputation concern if they are offered a premium such actions violate the axiom of individual rationality and are not subgame perfect in standard game theory wherein only material payoffs are considered this paper builds three models of supplier behaviour in a single period stackelberg like buyer supplier game by using the framework of psychological game theory and explains supplier motivations to choose quality on non contractible dimensions in absence of any reputation effect if the buyer offers a price higher than the market price the supplier may be motivated to choose non contractible quality due to a sense of gratitude or because of his conscience or in order to reciprocate kindness the results show that maximum possible quality is chosen by the supplier only in the presence of a sufficiently strong sense of gratitude or a sufficiently strong conscience however the buyer is better off with a fair supplier who is motivated to reciprocate than a supplier having a very poor sense of gratitude or one having a weak conscience because the buyer can choose an optimal premium above market price to ensure that a fair and reciprocal supplier chooses an optimal quality

gift giving and the evolution of cooperation gift giving is a practice common to many societies in an evolutionary model the social custom of giving gifts at the beginning of a relationship can lead to trust and cooperation the evolutionary approach makes predictions about the character of the goods that can be used as gifts for example gift goods may have little use value even at low levels of consumption although the gifts themselves are useless the institution is not

what does tax aggressiveness signal evidence from stock price reactions to news about tax shelter involvement abstract we study the stock price reaction to news about corporate tax aggressiveness we find that on average a company s stock price declines when there is news about its involvement in tax shelters we find some limited evidence for cross sectional variation in the reaction for example the reaction is more negative for firms in the retail sector suggesting that part of the reaction may be a consumer taxpayer backlash in addition the reaction is less negative for firms that are viewed to be generally less tax aggressive as proxied by the firm s cash effective tax rate we interpret this as being consistent with the market reacting positively to evidence that a firm is trying to reduce taxes when their financial reports would lead one to believe the firm is not tax aggressive

visits to the client when competing for new consulting contracts sourcing information or influencing the client consulting firms cfs sell services on a project basis to many clients and must therefore continuously tender for new contracts one frequently used strategy by cfs is to visit the clients in connection to the tenders the reasons to the visits are 1 to influence the client in his decision making e g marketing bribing and or 2 to source information about the project so that a better proposal can be submitted using a unique database on individual export proposals submitted to emerging markets which of these two reasons is the most important is examined empirically the estimations show that influencing the client dominates as explanation to the visits although it is not possible to determine whether this influence takes the form of bribing or marketing all conditions necessary for bribes to occur are fulfilled

spillovers and governance an analysis of knowledge and reputational spillovers in information technology investigating spillovers potential costs and benefits to a firm that extend beyond an individual transaction i integrate transaction cost theory and the knowledge based view of the firm in an effort to better understand the efficient governance of knowledge contracts with detailed task descriptions were associated with transactions with the potential to generate new and reusable knowledge the risk of a firm s technology spilling over to others and the risk of reputation impairing spillovers were associated with suppliers using their own employees rather than subcontractors thus results suggest that the creation and protection of knowledge are key factors in understanding governance decisions

exchange rate behavior with currency inconvertibility abstract the paper analyzes exchange rate dynamics in a world where the domestic currency is inconvertible into foreign currency and there is a black market for foreign exchange the official exchnage rate is thus set by policy but the black market rate is determined by portfolio balance the stock of domestic money changes with the reported current account and the stock of foreign assets of the private sector changes with smuggling and other unreported current account transactions the effects of capital and current account disturbances as well as the effects of changes in the level and the rate of crawl of the official rate on the black market premium and on the currency substitution ratio are analyzed in variants of the basic model

price advertising and the deterioration of product quality arguments in favour of self enforced bans on advertising by professionals often rely on the stylized fact that advertising can communicate information about price but not about quality this being the case it is argued that allowing professionals to advertise runs the risk that firms will compete vigorously over price at the expense of the quality of their product this paper shows that even if price can communicate no information directly about quality it can do so indirectly because price will be a signal of quality because of this allowing advertising is shown to improve consumer welfare

seasonality and the effect of advertising on price does advertising make markets more or less competitive this paper lays out an econometric strategy for estimating the effect of advertising on prices that exploits seasonal demand and imperfect targeting of consumers we find mostly negligible effects of advertising on prices at monthly frequency among the 35 of 131 product categories with sufficient advertising seasonality to justify second stage estimation only nine have a significant effect and those are typically small this finding is essentially the result of the much greater seasonality in advertising than price

why corporations insure corporations insure to reduce the shirking information problem of joint production insurance encourages specialization in ownership increasing the returns to monitoring and lowering shareholders demand for a more diversified portfolio it enhances the credibility of specific capital as a performance bond and it lowers the cost to shareholders of compensating other members of the team for investing in firm specific assets tax and other factors may further encourage individual corporations to insure

is antitrust enforcement effective in a paper in this journal block nold and sidak 1981 tried to determine the impact of antitrust enforcement on horizontal price fixing after examining data on white bread markups in 20 u s cities they concluded that the enforcement activity of the department of justice against wholesale bakers had both remedial and deterrent effects in this paper i question the authors empirical results for three reasons they used bureau of labor statistics bls retail prices in computing bread markups however the white bread priced by the bureau changed quality over the sample period when a proxy for this quality change is included in the authors specification one deterrent effect disappears second the bread markups are sensitive to the pricing decisions made by grocery retailers when a proxy for retail pricing decisions is included in the model the deterrent effects are weaker finally the significance of the remedial effect depends on a single observation and this observation was affected by the two problems just stated

two part pricing for experience goods in the presence of adverse selection abstract because customers learn something when they purchase an experience good for the first time a firm selling experience goods may face different demand curves from new and repeat customers the firm can exploit these differences by using a two part pricing strategy to price discriminate between new and repeat customers the firm may also use a two part pricing strategy to mitigate the information problems of adverse selection when its quality is uncertain the analysis is particularly applicable to service markets where customers and firms seek long term relationships and firms maintain customer records which facilitate price discrimination

ripoffs lemons and reputation formation in agency relationships a laboratory market study this paper examines the effect of the moral hazard problem in an agency relationship where the principal cannot observe the level of service provided by the agent using data from laboratory markets we demonstrate that the presence of moral hazard leads to shirking by agents however this lemons phenomenon occurs only about one half of the time while there is evidence of reputation effects in these markets seemingly reputable agents are often able to use opportunities for false advertising to their advantage and ripoff principals there has been considerable discussion about the price and quality of services provided within certain principal agent relationships for example the securities and exchange commission and congress have focused a great deal of attention on the price and quality of outside audit services to investors the securities and exchange commission and the department of justice have considered the regulation of investment banking contracts because of their concern over the price and level of services provided finally a large and growing literature has focused attention on the conflict between owners and managers and the problem of shirking by managers the above examples share a feature common to most agency relationships in that the services provided by the agent have a hidden characteristic specifically the principal cannot costlessly observe the level of service provided by the agent and thus cannot determine whether an unfavorable outcome is due to the agent s shirking or due to an unfortunate occurrence of a state of nature a large theoretical literature has developed e g shavell 9 which proposes remedies for dealing with the moral hazard problem that arises in these situations yet to our knowledge there has been no direct empirical test demonstrating that the moral hazard problem does in fact lead to shirking by agents furthermore the theoretical literature provides a number of competing models about the market s ability to provide pareto optimal levels of service in the presence of moral hazard

can high prices ensure product quality when buyers do not know the sellers cost timothy j perri i introduction when consumers are unaware of product quality before they buy producers can nonetheless be punished for providing low quality by losing repeat business klein and leffler 1981 demonstrate that under fairly general conditions a price with a positive profit margin is needed to induce producers to deliver the promised quality level if the profit margin were zero the profit would be greater from low quality than from high even if the customers were disappointed and none of them returned consequently if a firm s price equaled its cost repeat business would be a matter of indifference a higher price however increases long run profit more for firms that provide the promised quality because such firms benefit from the repeat business of satisfied customers at a sufficiently high price the profit from repeat business exceeds the profit from cheating on quality at that price firms will provide the promised quality level 1 two points are of interest in the klein leffler model first absent firm specific capital expenditures positive profit exists in a competitive market second because consumers know the price is an incentive for high quality only if it generates sufficiently high profit they must know the firm s production costs if a given price premium is to ensure high quality we address both points in this article first although it is sometimes thought that non price competition will dissipate profits in the klein leffler model the model does not by itself have that implication positive profit will indeed persist in equilibrium even with free entry unless some new feature is added second while the klein leffier model assumes producers have identical costs though they can choose different quality levels we will add the possibility firms differ in their marginal costs of high quality in ways buyers cannot observe thus we combine moral hazard and adverse selection in a product quality model we hope to accomplish two things to explain how positive profits can persist in the original klein leffler model and to show that adding adverse selection can result in profit dissipation let us explain further before setting out the model first profit dissipation by non price competition lies outside the klein leffler model in that model information is complete buyers know only one type of firm exists but do not know product quality when they purchase a good 2 thus moral hazard is possible firms may deliver quality that is less than what they promised a price p sup above average cost p sub c is necessary to induce firms to deliver the high level of quality they promise to consumers entry cannot eliminate the resulting profit since additional output will drive price below the quality assuring level of p sup this is a surprising result an industry known to earn positive profit without collusion or conventional barriers to entry and yet without expanded output or entry 3 klein and leffler suggest that non price competition will dissipate this profit they realize that non price competition cannot reduce the operating margin by driving average cost per period up closer to price but they suggest that some kind of fixed cost might absorb the profit competition to dissipate the economic profits earned by existing firms must therefore occur in nonprice dimensions the competition involves firm specific capital expenditures klein and leffler 1981 626 such thinking comes naturally to economists we hold the maxim that markets abhor a profit as dearly as physics does nature abhors a vacuum non price competition would occur if each firm could increase profit via such behavior even though the net effect of many firms doing it would dissipate profit such is the case with a cartel where each cartel member can do better if it cheats on the collusive agreement using secret price cuts or non price competition that tends to drive profit to zero

physician price fixing under the sherman act an indirect test of the maricopa issues the expression price fixing usually indicates an attempt by competitors to put a floor under the minimum price they will charge but a recent decision of the supreme court arizona v maricopa county suggests that attempts to fix maximum prices are equally economically objectionable in this paper i propose an explanation of simultaneous minimum and maximum price fixing i also investigate empirically the distribution of physicians fees in a closely related instance of alleged physician price fixing the data reject any inference of successful price fixing and instead conform to the usual predictions of the economics of costly market information

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

urban agglomeration effects and employment and wage gradients abstract when employment occurs at both central and non central points but firms have a preference to be near the center the rent gradient will decline and a wage gradient is necessary to compensate workers for more centrally located employment wage gradients and rent gradients are jointly determined the relationship between wage offer functions and the equilibrium wage gradient is derived the latter dependent on utility functions and commuting costs this is illustrated with a two sector model incorporating agglomeration economies in the export sector numerical solution reveals how agglomeration economies affect wages employment and city size

gifts as economic signals and social symbols gift giving has often puzzled economists especially because efficient gifts like cash or giving exactly what a person asks for seem crass or inappropriate it is shown in a formal game theoretic model that gifts serve as signals of a person s intentions about future investment in a relationship and inefficient gifts can be better signals other explanations for the inefficiency of gift giving are advanced and some stylized facts about gift giving practices are described many of which are consistent with the signaling view of gifts

productivity change technical progress and relative efficiency change in the public accounting industry we present evidence on components of productivity change in the public accounting industry toward the end of the 20th century using revenue and human resource data from 64 of the 100 largest public accounting firms in the united states for the 1995 1999 period we analyze productivity change technical progress and relative efficiency change over time the average public accounting firm experienced a productivity growth of 9 5 between 1995 and 1999 we find support for the hypothesis that technical progress rather than an improvement in relative efficiency was the reason for this productivity growth firms that were early movers into management advisory services mas and those that emphasized growth in mas over growth in the traditional audit and tax services enjoyed significantly higher productivity growth than their peers these firms also contributed significantly more to the industry s technical progress

moral hazard asset specificity implicit bonding and compensation the case of franchising i introduction there is a large and growing interest in the structuring of compensation to deal with the moral hazard problem much of this literature treats various forms of income sharing such as piece rates and sharecropping as a means for a principal to provide incentives to an agent this literature has been extended to the case of two sided moral hazard where both parties to an exchange may shirk another mechanism to induce effort discussed in the literature is bonding where workers post a bond that is forgone if effort is inadequate klein 1980 and klein and leffler 1981 treat the possibility of specific assets as constituting an implicit bond where poor performance by a firm is penalized by bankruptcy and sale of assets at a loss this paper studies a situation where these issues coalesce the case of compensation arrangements in franchising the typical franchise contract calls for the sharing of franchise income between franchisee and franchisor additionally franchisees may be terminated for poor performance if franchise assets have a degree of specificity the ensuing sale of assets at a loss provides a penalty for poor performance we examine the determinants of franchise royalty rates and fees in this setting while there is a literature on two sided moral hazard and some empirical work on franchising based on this idea none incorporates the potential influence of asset specificity we explicitly consider the role of implicit bonding and asset specificity in conjunction with moral hazard on the part of both trading parties we go beyond previous work in franchising by estimating the effects of asset specificity and other influences on the royalty rate further part of our empirical work utilizes improved micro data on actual franchise contracts our approach and its implications are discussed in section ii consistent with previous work we expect the royalty rate to decrease increase as the importance of the franchisee s franchisor s input increases however more specific capital with the threat of termination acts as an implicit bond and substitutes for a reduced royalty rate in inducing franchisee effort thus we expect royalty rates to increase with asset specificity also unlike other approaches we do not necessarily expect an inverse relationship between the royalty rate and the franchise fee for example the greater the importance of franchisor effort the higher the royalty rate but the franchise fee may also increase if franchise revenue rises by enough our hypotheses are tested using two different data sets an original firm level data set is taken from federal trade commission ftc required uniform franchise offering circulars ufoc 1 in addition data are obtained from bond s 1989 the source book of franchise opportunities the data are discussed and the results presented in section iii we find substantial support for our approach for example factors that increase the importance of the franchisee s effort such as the number of employees supervised lower the royalty rate and increase the franchise fee also a reduction in the specificity of the franchisee s investment due to leasing lowers the royalty rate and raises the franchise fee 2 section iv summarizes our findings and concludes the paper ii the approach and the hypotheses the typical franchising contract consists of a two part payment by the franchisee to the franchisor the franchisee pays an up front nonrefundable franchisee fee and a continuing royalty payment usually a percentage of sales in return the franchisee receives the right to use the franchisor s brand name capital and a method of operation in addition the franchisor provides on going support to the franchisee however the franchisor maintains the right to unilaterally terminate the contract if the franchisor determines that the franchisee is not delivering a product consistent with the quality guaranteed by the brand name

counterfeit product trade the authors analyze trade in both legitimate and counterfeit products domestic firms ow n trademarks and establish reputations for delivering high quality pr oducts in a steady state equilibrium foreign suppliers export legiti mate low quality merchandise and counterfeits of domestic brand name merchandise heterogeneous home consumers either purchase low quality imports or brand name products rationally expecting some degree of counterfeiting of the latter the authors describe the positive and normative effects of counterfeiting in comparison with a no counterfe iting benchmark they also provide a welfare analysis of border inspe ction policy and of policy regarding the disposition of counterfeit g oods that are confiscated at the border copyright 1988 by american economic association

pleasures of cockaigne quality gaps market structure and the amount of grading the article explores under what circumstances high quality producers would not voluntarily submit to grading when low quality firms would readily do so and under what conditions high quality firms would have a lesser proportion of their output graded than would their low quality counterparts it also investigates how market structure affects the decison to grade establishing that a competitive industry carries out the optimal amount of grading when some firms have finite market shares the industry engages in excessive grading

price quality and reputation evidence from an online field experiment we examine the link between price quality seller claims and seller reputation in internet auctions after purchasing actual baseball cards and having them professionally graded we find that some buyers in the online graded market are misled by incredible claims of quality they pay higher prices but do not receive better quality and in fact are defrauded more often online seller reputation is effective for identifying good faith sellers but conditional on completed auctions reputable sellers do not provide better quality evidence also suggests that high claim sellers target less experienced buyers we attribute these patterns to two loopholes in the ebay rating system we benefited from the comments of austan goolsbee raphael thomadsen john shea dan vincent david reiley larry ausubel peter cramton v joseph hotz jeff smith jimmy chan vincent crawford mark duggan and attendees at numerous seminars and conferences we are particularly grateful to seth sanders and john list for their constructive advice at the early stage of the research to timothy bresnahan rachel kranton and thomas hubbard for their detailed suggestions in reshaping earlier versions and to editor ariel pakes and two anonymous referees for their careful readings special thanks to eight friends who acted as our agents in purchasing baseball cards in retail markets and to numerous sports card store owners who shared their insights on the sportscard industry excellent research assistance from randy alexander moore and krzysztof fizyta is gratefully acknowledged any remaining errors are ours

the optimal weighting of indicators for a crawling peg abstract this paper derives optimal weights for current account and reserve indicators for adjusting the exchange rate a crawling peg kenen 1975 showed that use of a current account indicator alone would not stabilize reserves while a reserve indicator results in unstable fluctuations in the exchange rate this paper builds on the framework of phillips 1954 to analyze the problem in terms of optimal control we show that in all cases the optimal combination is a weighted average with a fairly low variance of the current account and a large effect of an exchange rate change on the current account the weight of the current account is quite close to its welfare weight an increase in either the variance or the elasticities reduces the weight of the current account in the optimal formula

experience dependent information diffusion and product quality in a monopoly market for an experience good the diffusion of product quality information may depend on whether or not the information is favorable to capture this asymmetry our model uses as its information source a quality survey which suffers from response bias consumers may attempt to adjust for bias but are not required to do so correctly as a result quality under perfect information need not be and usually will not be higher than quality under imperfect information in addition the externality exerted by informed consumers on uninformed consumers may not be the traditional beneficial externality jel l15

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

prices as signals of product quality this paper is concerned with the provision of quality in markets in which consumers have only imperfect information the analysis focuses on a market for a product that can be produced at different quality levels all consumers prefer higher to lower quality but they may differ in their willingness to pay for quality producers can produce any quality they like but higher qualities are more costly to produce the information in this market is imperfect in the sense that the exact quality chosen by a firm is known only to the firm itself some information about the quality of a firm s product will however reach its potential customers even if they do not make any special effort to acquire it within the framework suggested here two conclusions are drawn first prices may serve as signals which exactly differentiate the available quality levels that is there exists a fulfilledexpectations equilibrium at which each price signals a unique quality level second the pricesignals are not arbitrary each price signal exceeds the marginal cost of producing the quality it signals such a mark up depends on the nature of the product specific information received by consumers the poorer the information the higher the mark up

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

competition and the incentive to produce high quality previous literature indicates that when quality is a choice variable firms have an incentive to produce high quality to maintain their reputations with consumers the strategic interaction among firms and competition for market share is not considered this paper finds that when firms compete for market share perfect equilibria in which firms produce high quality goods need not exist competition for customers can eliminate the price premium needed to induce firms to maintain a reputation for high quality production in this case economists and policy analysts should pay greater attention to the interaction among firms and the institutions such as professional associations that structure interfirm relations when considering whether firms have an incentive to produce high quality goods

information and the provision of quality differentiated products governments often enact information provision policies to overcome asymmetric information of product qualities we show that increasing awareness among consumers of the quality of a good can but will not always encourage firms to produce goods with higher levels of quality even if product qualities increase social welfare may fall as information provision results in too much product differentiation we show that the effectiveness of emission taxes and output subsidies are affected by the level of consumer knowledge of product quality and we identify conditions under which information provision is welfare enhancing relative to these price instruments jel l15 q58 i introduction in the past 20 years consumers have become increasinglyconscious ofthe undesirable health and safety attributes of the products they consume and surveys suggest that a growing percentage of consumers are willing to pay more for higher quality products such as organic foods and household cleaners and detergents that contain less toxic ingredients guber 2003 other high quality products facing higher demand include energy efficient products like extended life lightbulbs and improved home insulation often these highquality products provide private benefits that are excludable to buyers as well as public benefits that are nonrival and nonexcludable for example reduced pesticide and chemical residue on food may lower the risk of cancer while also reducing contaminated run off that degrades ground and surface water quality extended life lightbulbs and improved home insulation may reduce an individual s utility bill while also reducing greenhouse gas emissions from lower energy consumption although interest in these types of high quality productsisgrowing demand isoften relatively small market shares of organic produce for

the market value of rarity abstract most theories of demand assume that consumers value the characteristics of products but are unconcerned with how many other consumers also consume the product however several theories of demand argue that consumers can value the exclusivity of possessing a rare object we test this implication on a particular collectible rare coins our paper examines the case of coins of a given type and identical quality that have mintages in different quantities this allows us to exclude the common case in which rarity or price itself is an indicator of quality for our sample rarer coins command higher prices rarity in the form of original mintage more strongly influences the market price than does collectibility as represented by the rarest coins of each mint mark or year we also point out that here may be other goods such as automobiles for which rarity may influence market demand

community enforcement of trust with bounded memory we examine how trust is sustained in large societies with random matching when records of past transgressions are retained for a finite length of time to incentivize trustworthiness defaulters should be punished by temporary exclusion however it is profitable to trust defaulters who are on the verge of rehabilitation with perfect bounded information defaulter exclusion unravels and trust cannot be sustained in any purifiable equilibrium a coarse information structure that pools recent defaulters with those nearing rehabilitation endogenously generates adverse selection sustaining punishments equilibria where defaulters are trusted with positive probability improve efficiency by raising the proportion of likely re offenders in the pool of defaulters

efficiencies without economists the early years of resale price maintenance resale price maintenance rpm continues to be a contentious topic both in economics and in antitrust during the 1980s economists derived new efficiency motivations for rpm while the supreme court reaffirmed the decades old per se ban on its use and congress threatened to extend that ban in the 1990s after several years of federal inactivity during the reagan administration the federal trade commission ftc has once again begun bringing rpm cases while economists have proposed a number of different efficiency explanations for rpm such theorizing has been performed largely without the help of businesses that actually use rpm with little practical evidence such hypotheses have been subject to substantial criticism of course since rpm has been per se illegal businesses may be reluctant to admit that they are engaged in the practice which would appear to be a necessary condition for generating an efficiency defense this article seeks to find out why businesses may believe that they benefit from rpm it does so by examining which efficiency rationales were advanced by firms during a critical time for rpm in the united states 1915 to 1917 these rationales drawn largely from previously unexplored materials are then examined in the light of current economic theory there are two basic sources for these rationales the first is three hearings on rpm held in 1915 1916 and 1917 in the u s house of representatives on a bill to legalize certain forms of rpm the second is the transcript of seven days of hearings the ftc held in 1917 to discuss efficiency motivations for rpm section ii explains several economic theories that have been posited for rpm and briefly discusses the critiques of these theories that have arisen in the legal and economic communities section iii examines federal rpm case law prior to 1918 and posits efficiency rationales from section ii to match the products involved in the case law section iii also discusses the uncertainty in the case law during the period 1908 to 1917 and the concepts behind the various judicial decisions section iv presents the efficiency arguments made during this period of legal uncertainty

imperfect competition and reputational commitment abstract competition can both aid and hinder reputational commitments for quality these are self sustaining depending on future profits after maintaining or deviating from the commitment and on current costs of sustaining it competition can affect these three elements at different rates

marital division of labor with risk of divorce the role of voice enforcement of contracts it is assumed that emotional ties can be relied on to enforce implicit marital contracts by voice therefore in the present model divorce has economic consequences not only because the economies of scale from living together are destroyed but also because the scope for such voice enforcement is weakened moreover perhaps surprisingly i find that it is ambiguous how an increase in the probability of divorce influences predivorce allocation of time even when preferences are assumed to be homothetic

the profitability of price fixing evidence from stock market reaction to federal indictments the authors estimate the profitability of price fixing by examining the stock price reaction to federal indictments for 127 firms during 1962 1980 they hypothesize that the reaction is composed of expected legal costs lost monopoly profits and or various negative market signal effects the mean abnormal return over the wsj indictment announcement date and the day before is a statistically significant 1 08 this corresponds to a total value loss of 2 18 billion 1982 of which only about 13 can be attributed to various legal costs e g fines and damages the 1 89 billion residual might be in all or part the present value of monopoly profits lost because of conspiracy dissolution they test this and other possible explanations and on balance find support for the lost monopoly profit interpretation copyright 1991 by mit press

interest group competition and the organization of congress theory and evidence from financial services political action committees we develop a positive theory of how interest group competition shapes the organization of congress and use it to explain campaign contribution patterns in financial services since interest groups cannot enforce fee for service contracts with legislators legislators have an incentive to create specialized standing committees which foster repeated dealing between interests and committee members the resulting reputational equilibrium supports high contributions and high legislative effort for the interests contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory which also has implications for term limits and campaign reform

political shocks international reserves and the real exchange rate the argentine case abstract exogenous shocks to international reserves are introduced as an indicator for exchange rate adjustments these reserves shocks are identified for argentina in the 1970s and they appear to have been induced by political upheavals as well as by changes in the external terms of trade granger and modified sims causality tests indicate that the shocks to reserves did lead the real exchange rate from the seemingly erratic series of mini and maxi devaluations a rule of crawling galloping peg is estimated with the reserves shocks as significant independent variables that affected the pace of devaluations the crawling peg used as an instrument to pursue an international reserves target was the channel through which changes in the political and economic environment of the country were transmitted to fluctuations of its real exchange rate

fly by night firms and the market for product reviews this paper presents a model that permits third party information provision in a market characterized by information asymmetries and reputation formation the model is used to examine how the market for information provision affects prices and supply in the primary market they find that decreasing the cost of providing and using information 1 increases rather than decreases the margins received by reputable service firms 2 decreases the price of new untested service firms so reputation is more costly to build and 3 leads to more high quality firms and less fly by night firms copyright 1989 by blackwell publishing ltd

revenue sharing in movie exhibition and the arrival of sound i introduction at least since adam smith economists have been intrigued by share contracts there has been a proliferation of models most of which tend to explain the share contract as resulting from some mix of optimal risk bearing and optimal effort motivation 1 a large number of researchers have attempted to test these models empirically sharecropping contracts not surprisingly are the most intensively examined the bibliography in knoeber 2000 but similar studies have been conducted in many other areas for example martin 1988 and lafontaine 1992 examine franchise arrangements hallagan 1978 investigates contracts used to lease gold claims leffler and rucker 1991 analyze a sample of private timber sale contracts goldberg and erickson 1987 study long term contracts for the sale of petroleum coke aggarwal and samwick 1999 investigate incentive contracts between firms and their executives and chisholm 1997 goldberg 1997 and weinstein 1998 all examine profit sharing contracts between fi lm companies and the talent this article differs in an important respect from most previous studies which analyze a cross section of contracts in an attempt to determine how or whether they vary according to the attributes of the contracting parties or the products being contracted for instead it investigates an area where a sudden technology shock led to the rapid and widespread replacement of one form of contracting by another the industry is the motion picture business and the shock was the arrival of sound during the silent film era the vast majority of first run feature films were rented to cinemas for flat daily or weekly payments within two years of the release of the first sound picture revenue sharing contracts were the norm and they remain the norm to this day 2 my goal is to investigate the degree to which the standard economic concerns moral hazard risk sharing and measurement problems can explain this change because the contracting parties remained the same the question becomes what was altered in the nature of the product or in its provision so as to have altered correspondingly the incentives faced i conclude the following first the advent of sound fundamentally changed the inputs live music and other acts supplied by the exhibitor and central to the show were replaced by a soundtrack and short sound films supplied by the film company the benefit of deterring exhibitor shirking through the use of flat rental fees which made the exhibitor full residual claimant declined accordingly the party whose effort makes the largest contribution to marginal product generally receives the largest proportion of the residual claims and in the decades following the arrival of sound the proportion of residual claims collected by film companies rose steadily in addition average revenue per film increased with sound whereas the cost of ensuring that exhibitors reported attendance revenue honestly done by locating a film company s representative in the theater remained the same the ex post division of revenue necessary for revenue sharing thus became cheaper on a per film basis finally uncertainty ab out the value in terms of expected attendance revenue of the early sound films appears to have raised the cost of negotiating lump sum rental fees and thus promoted experiments with revenue sharing however although this may have contributed initially it cannot explain the practice s persistence uncertainty about film values declined as talking films became better known ii the nature of the problem a film company contracts with an exhibitor so that they may jointly produce the final good a movie presentation 3 to that end each supplies essential inputs the film company provides the movie itself assembled from a variety of inputs and some sort of national advertising support the exhibitor provides the theater which consists of seating projection equipment a refreshment stand and other support activities and some form of local advertising

legislator voting and shirking a critical review of the literature we set out to critically review the progress in answering two related questions what determines how legislators vote and how can shirking by legislators be measured in the first category the hypothesis that legislators shirk in order to indulge their personal ideological preferences has led researchers astray the theoretical underpinning is shaky on two counts first legislators who indulge their preferences at the expense of their constituents preferences put themselves at a competitive electoral disadvantage second the original two stage procedure used to measure ideological shirking is severely flawed among many other problems the residual measure of shirking implicitly assumes that the median voter is the relevant constituent principal for the legislator agent

asymmetric information and overinvestment in quality in a standard adverse selection world asymmetric information about product quality leads to quality deterioration in the market suppose that a higher investment level makes the realization of high quality more likely then if consumers observe the investment but not the realization of product quality before purchase they can infer the probability distribution of high and low quality that may be put on the market we uncover two effects that may lead the firm to overinvest in quality compared to a market with full information first an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and second an efficiency effect according to which a larger investment reduces the probability of having in the market low quality products that are not socially valuable

the antecedents and performance implications of cooperative exchange norms our study investigates the antecedents and performance implications of cooperative exchange norms we argue that in early relationships the level of expected cooperative norms in an exchange is the result of a calculative process facilitated by transaction attributes joint transaction specific investments and observability the greater the level of these two exchange attributes the greater the level of cooperative exchange norms all else being equal we further argue that the realized level of cooperative exchange norms can deviate from the expected level because the development of such norms is the result of social processes that management cannot directly and fully control this gap between realized and expected norms affects exchange performance performance suffers when the realized level of cooperative exchange norms falls below the expected level but overshooting expectations lays a critical groundwork for repeat transactions the analysis of a survey of 182 collaborative r d alliances provides initial support for our theory

environmental ethics and information asymmetry among organizational stakeholders this paper addresses the conflicting environmental interests of a firm and the community an important stakeholder the short term profit maximization objective of a firm may stand in contrast with what the community wants a safe and clean environment this paper argues that the information regarding the environmental impact of a firm s products processes and waste may be asymmetrically distributed between the firm and the community the resultant information asymmetry may influence the probability of a firm acting opportunistically and ultimately a firm s ethical behavior the paper identifies information asymmetry between a firm and community as well as that within the community the perceived information asymmetry across various community segments may perhaps be a determinant of environmental discrimination the paper further contends that information asymmetry may diminish in the long run finally it examines the implications of information asymmetry for firms and government policy

development and the interaction of enforcement institutions we examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase firm level incentives for producing high quality can be achieved with an informal enforcement mechanism reputation the efficacy of which is enhanced by consumers investing in connectedness or with a formal mechanism legal enforcement the effectiveness of which can be reduced by means of bribes we show that formal and informal enforcement mechanisms do not necessarily substitute each other while high levels of judicial efficiency decrease consumers incentives to connect higher consumers connectedness leads to higher levels of judicial efficiency we then look at how the equilibrium institutional mix evolves with the level of development in doing so we show the presence of a new physical channel that can affect institutions i e the frequency of bad productivity shocks that in less developed settings can impact on firms incentives to cheat c 2010 elsevier b v all rights reserved

credit rating industry a helicopter tour of stylized facts and recent theories the recent subprime crisis and the ongoing euro zone crisis have generated an enormous interest in the credit rating industry not only among economists but also among average citizens as a consequence we have seen an explosion of the economic literature on the industry the objective of this survey is to introduce readers to the key stylized facts of the credit rating industry and to the recent theoretical economic literature on this industry

the economic effects of franchise termination laws we would like to thank blake rhodes and pam schommer for excellent research assistance participants in workshops at arizona state university university of california berkeley the university of chicago dartmouth college iowa state university the justice department the university of rochester and the university of utah as well as jeff coles arnold cowan jim dana franklin m fisher stuart gilson ben hermalin cliff holderness gregg jarrell alan krueger wayne mikkelson walter oi jim poterba ajai singh cliff smith kathy spier david weisbach jamie zender jerry zimmerman and especially kevin j murphy and an anonymous referee for comments on an earlier draft brickley and weisbach thank the managerial economics research center of the university of rochester and the john m olin foundation and dark thanks the college of business at iowa state university for financial support brickley also thanks the garn institute of finance at the university of utah for financial assistance 1 see mark robichaut franchise rules are back off drawing board wall st j july 6 1990 at bl note that in this article we focus on laws that apply to business format franchises for an analysis of state laws in automobile franchising see richard l smith ii franchise regulation an economic analysis of state restrictions on automobile distribution 25 j law econ 125 1982 richard a epstein unconscionability a critical appraisal 18 j law econ 293 314 15 1975 and paul h rubin the theory of the firm and the structure of the franchise contract 21 j law econ 223 1978 other work on the economics of franchising includes james a brickley frederick h dark the choice of organizational form the case of franchising 18 j fin econ 401 1987 james a brickley frederick h dark michael s weisbach an agency perspective on franchising 20 fin mgmt 1991 in

advertising restrictions and concentration the case of malt beverages the relationship between state imposed advertising restrictions and state level market concentration in the malt beverage industry is examined the authors find that the presence of proscriptions on price advertising significantly increases market concentration at the state level both absolutely and relative to a measure of national concentration the evidence also indicates that banning local nonprice advertising in addition to price advertising yields no marginal significant change in either measure of state level concentration analysis of individual brewers market shares suggests that large national brewers gain at the expense of smaller brewers when price advertising is restricted copyright 1995 by mit press

does it pay to change your company s name a stock market perspective a company s name is commonly considered to be an integral part of its image just like the quality of its products or the quality of its technical services changing a company s name is a major policy decision contemplated by many firms and actually implemented by some each year this paper attempts to examine albeit indirectly whether a name change can improve the profit performance of a firm and what type of firm is more likely to succeed in doing so we use the event study methodology developed in finance to examine the above questions with respect to 58 corporations that changed their names in 1981 1985 our findings are that for most of the firms name changes are associated with improved performance and that the greatest improvement tends to occur in firms that produce industrial goods and whose performance prior to the change was relatively poor evidence that industrial good producers are also heavy users of corporate advertising lends further credence to this finding our findings do not support however the contention that the new name per se will enhance demand for the firm s products rather it seems that the act of a name change serves as a signal that other measures to improve performance such as changes in product offerings and organizational changes will be seriously and successfully undertaken the rationale behind why such a signal is sent and why it is believed is discussed

the reputational penalties for environmental violations empirical evidence abstract this paper examines the sizes of the fines damage awards remediation costs and market value losses imposed on companies that violate environmental regulations firms that violate environmental laws suffer statistically significant losses in the market value of firm equity the losses however are of similar magnitudes to the legal penalties imposed and in the cross section the market value loss is related to the size of the legal penalty thus environmental violations are disciplined largely through legal and regulatory penalties not through reputational penalties

product complementarities capabilities and governance a dynamic transaction cost perspective the organization and governance of the transactions that comprise a bundling arrangement depend on the distribution of capabilities among firms and the amount of time during which the window of opportunity for earning rents is expected to remain open firms engaged in inter firm collaboration must undertake support transactions related to billing marketing customer support and product repair these support transactions differ from the core transactions that have traditionally been perceived as sufficient to provide a product bundle since support transactions create costs of their own the market may turn out to be an expensive means of governing collaborative arrangements undertaken for bundling purposes the telecommunications service sector provides an illustration copyright 1997 by oxford university press

assigning property rights to radio spectrum users why did fcc license auctions take 67 years abstract while leo herzel 1951 and ronald coase 1959 persuasively argued for auctioning licenses issued by the federal communications commission fcc not until 1993 did the u s congress grant the fcc authority to assign wireless operating permits via competitive bidding why were auctions with obvious efficiency and equity advantages so long in coming why were comparative hearings in the public interest first abandoned as assignment tools in 1981 not for auctions but for lotteries and why were radio and tv licenses pointedly excluded from auctions four factors the special interest of regulators in influencing broadcasting content the limits placed on explicit program regulation by the u s constitution the recent increase in the relative economic importance of nonbroadcast wireless services and the agency problem embedded in central planning are used to explain both the political stability of economically inefficient licensing methods and recent reforms

how the client effect moderates price competition why is unregulated competition supposed to drive price down to ruinous levels in some high fixed cost low marginal cost industries e g railroads but not in others e g hotels we argue that price competition is moderated in high fixed cost low marginal cost industries when the value one consumer realizes from the service is affected by the characterics of other consumers we develop a simple model of this client effect using the example of the demand for hotels and then generalize the implications of our model to other industries

foreign counterfeiting of status goods we study the positive and normative effects of counterfeiting i e trademark infringement in markets where consumers are not deceived by forgeries consumers are willing to pay more for counterfeits than for generic merchandise of similar quality because they value the prestige associated with brand name trademarks counterfeiters of status goods impose a negative externality on consumers of genuine items as fakes degrade the status associated with a given label but counterfeits allow consumers to unbundle the status and quality attributes of the brand name products and alter the competition among oligopolistic trademark owners we analyze two policies designed to combat counterfeiting enforcement policy which increases the likelihood of confiscation of illegal items and the imposition of a tariff on low quality imports

earning through learning in legislatures this inquiry applies gary becker s theoretical notions of general and specific training to the experiential learning that occurs within political institutions in particular the u s congress in the process we isolate economic facets of these legislative experiences that influence the rental value of human capital derived from congressional training we identify four factors that structure legislators post elective wages pre congressional salary year of entry tenure and variables closely related to general training in congress specifically assignment to powerful legislative committees acquisition of broad skill packages investment in expanding skill set proficiencies and to a lesser extent life cycle driven declines in such investments