downstream integration by a bottleneck input supplier whose regulated wholesale prices are above costs we examine the consequences of allowing a bottleneck input supplier to vertically integrate downstream and compete with users of the input when the input has a regulated price above cost if the supplier maximizes the sum of short run profits from the downstream market and input market then allowing the vertical integration will increase social surplus even if it causes sellers of competing differentiated products to exit the market if the bottleneck supplier wishes to engage in predatory pricing increasing the regulated price of the input above cost reduces the incentive to engage in predation these questions are motivated primarily by assertions made in the public record that allowing bell operating companies into long distance can be harmful if access rates are above cost copyright 2001 by the rand corporation

defence procurement theory and uk policy since the early 1980s competition as a means of obtaining best value for money has dominated uk defence procurement policy this paper describes the uk defense equipment market and the procurement problem there are sections on the economic theory of procurement contracting regulation and competition the conclusion evaluates uk defence procurement policy and assesses some of the policy issues for the 1990s copyright 1996 by oxford university press

entry auctions and strategic behavior under cross market price constraints abstract we examine how universal service provisions and price restrictions across markets impact strategic entry and pricing we develop a simple multi market model with an oligopolistic profitable urban market and entry auctions for unprofitable rural service cross market price restrictions induce a firm operating in both markets to become a softer competitor thus placing the firm at a strategic disadvantage when we account for entry incentives and strategic bidding the downstream strategic disadvantage becomes advantageous leading to higher prices and profits price restrictions may also put outside firms even relatively inefficient ones at a strategic advantage

parallel imports price controls and innovation the impact of parallel trade on innovation in r d intensive industries such as pharmaceuticals is a hotly debated question in antitrust and ip policy the well known argument that parallel trade dampens innovation by undermining firms ability to price discriminate has been challenged by recent literature the argument is that with endogenous price controls parallel trade increases innovation by reducing governments incentives to set particularly low price caps in this paper we show that this result crucially depends on the degree of homogeneity of the trading countries the result only holds if consumers in poorer countries have a relatively similar demand for medication as consumers in richer countries instead when countries are relatively heterogeneous parallel trade dampens innovation and lowers welfare by exporting price cap regulation from poorer to richer countries these findings are in line with recent case evidence we also show that when patent length is endogenous richer countries will tend to choose longer patent protection with parallel trade whereas equilibrium price caps tend to be tighter in that case

second sourcing and the experience curve price competition in defense procurement we examine a dynamic model ofprice competition in defense procurement that incorporates the experience curve asymmetric cost information and the availability of a higher cost alternative system we model acquisition as a two stage process in which initial production is governed by a contract between the government and the developer competition is then introduced by an auction in which a second source bids against the developer for remaining production we characterize the class of production contracts that are cost minimizing for the government and that induce the developer to reveal private cost information when high costs are revealed these contracts result in a credible cutoff of new system production in favor of the still higher cost alternative system

south east europe regional energy market challenges and opportunities for romania abstract the paper takes as its starting point the athens memorandum signed by countries of south east europe whereby a regional energy market in power and gas will be developed the aim under the athens memorandum is that the south east europe regional energy market seerem will be liberalized in a phased manner from 2005 and ultimately that this will form part of the eu s internal energy market the subject of the paper is the extent to which romania one of the biggest countries in south east europe and traditionally a net energy exporter to the region complies with requirements under the athens memorandum and outstanding challenges related to successful serem accession the paper argues that much progress has been made in energy sector reform in romania power prices have increased payments discipline in the power sector has improved independent regulators have been established for power and gas sectors and power and gas utilities have been restructured nevertheless a number of challenges remain if romania is to fully benefit from participation in the seerem further power price increases will be required in the medium term whilst payments discipline remains poor by industry best practice standards in the gas sector retail prices do not reflect border prices and payments discipline remains a problem the paper argues that gas price reform would likely have adverse affordability impacts and proposes means to mitigate these through rationalization of existing social safety nets for gas and heat on investment requirements the paper notes that these are significant in power generation and proposes a contract framework that would support mobilization of finance

how important is precautionary saving we estimate how much of the wealth of a sample of psid respondents is held because some households face more income uncertainty than others we begin by solving a theoretical model of saving which we use to develop appropriate measures of uncertainty we then regress measures of wealth on our measures of uncertainty and find evidence that households engage in precautionary saving finally we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest uncertainty group we find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest uncertainty group

inflexible rules in incentive problems in practice contracts involve standard terms or rules allowing for variations only under exceptional circumstances we develop a simple model in which optimal contracts display this feature even in the absence of transactions costs rules arise when an agent has countervailing incentives to misrepresent private information these incentives are created by endowing the agent with a critical factor of production ex ante applications in regulatory labor and legal settings

nationalization vs regulation of monopolies abstract this paper compares the effects of government ownership and regulation under private ownership on the production decisions of a monopoly firm it analyzes an optimal mechanism design problem in which the owners of the firm either the government or shareholders contract with a manager who has private information about the firm s cost function and takes an unobservable action that affects the firm s costs the model predicts that the privately owned regulated firm will use relatively more capital and the publicly owned firm will use relatively more labor than the second best efficient solution to the private information problem

socially optimal pricing with rivalry and economies of scale this article examines the nature of economically efficient tariffs when there exists rivalry among firms that produce imperfectly substitutable outputs with economies of scale and that operate under a viability constraint pricing principles are derived and related to the rules developed in the literature for the regulated monopolist for some firms excess profits may prevail at efficient prices and the form of the inverse elasticity rule is altered in markets with rivalry however the standard efficient pricing rules and increased welfare results if regulators are empowered to implement lump sum interfirm payments a numerical example is provided

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

precautionary savings a panel study theoretical literature shows that income uncertainty boosts saving yet empirical work is incomplete i test for the precautionary motive for saving using panel data knowing this motive s size is important for gauging the responsiveness of saving to government programs that reduce uncertainty and for comparison to other motives such as bequests most empirical studies of precautionary saving use either aggregate time series or cross sectional data which cannot capture the effects of individual income uncertainty i derive measures of total permanent and transitory income uncertainty from panel data the national longitudinal survey and find a strong precautionary motive a doubling of uncertainty increases the ratio of wealth to permanent income by 29

reform of the electricity supply industry in britain an assessment of the development of public policy abstract several countries have been trying gradually to increase competition in electricity supply but britain has just taken a radical step with this aim a vertically integrated administered structure has been replaced by one that is more market based in particular electricity generation and transmission have been separated policy proceeded in four steps the commitment to privatise structural reform establishment of the regulatory framework and decisions on contractual arrangements this paper discusses difficulties that arose as policy developed and argues that the complexities of market failure problems in electricity supply were underestimated initially some lessons for policymakers elsewhere are suggested

income uncertainty and the demand for annuities abstract two well known results concerning the demand for annuities in an overlapping generations model are i egoistic agents should annuitize all their wealth and ii altruistic agents should segment their savings between riskless bonds for bequests and annuities for own consumption this paper extends the analysis by considering income uncertainty it is shown that while the segmentation result holds under future generation s income uncertainty fgiu altruistic agents do not segment their savings in the presence of second period income uncertainty spiu the intuition for this result is that income uncertainty in the second period of life is contingent on being alive and therefore at the optimum the covariance between one s offspring s consumption and life uncertainty is not zero as in the case of certainty and fgiu the effects of precautionary savings on the demand for annuities are also analyzed

screening in a matching market contract design under incomplete information is often analysed in a bilaterally monopolistic setting if the informed party s reservation value does not depend on its private information its type it is a standard result that the uninformed side offers low types distorted contracts to reduce the information rent left to high types we challenge this result by embedding contract design in a matching market environment we consider a market where players meet pairwise and where in each match either side may be chosen to make a take it or leave it offer as frictions become sufficiently low we find that the set of equilibria is independent of whether there is complete or incomplete information in particular all contracts are free of distortions

precautionary savings and the self employed this work focuses on the impact of uncertainty on savings under bequest form specifically we estimate whether and to what extent income variability does have an effect on post mortem savings we approximate the post mortem savings with the closest dedicated savings which is savings in term insurance a lump sum inherited at the death of the subscriber furthermore we test whether the intensity of the income variance or the riskiness of the job type such as self employment matters more in the choice our results show that self employment status is one of the most relevant variables affecting term insurance ownership

tax incentives and the demand for life insurance evidence from italy the theoretical literature suggests that taxation can have a large impact on household portfolio selection and allocation in this paper we analyze the tax treatment of life insurance considering the cancellation of tax incentives in italian life insurance contracts for investors with high marginal tax rates and the introduction of incentives for those with low rates using repeated cross sectional data from 1989 to 1998 we find that the tax reforms had no effect on the decision to invest in life insurance or the amount invested the likely explanations are the lack of information and lack of commitment to long term investment

precautionary saving and subjective earnings variance abstract in this paper i examine a model of precautionary saving and i show that the fact that people may insure against income risk makes it difficult to evaluate the extent of precautionary accumulation by simply looking at the relationship between wealth and earnings variance i also argue that occupations may represent a bad proxy for income risk

pricing and entry in regulated industries the role of regulatory design abstract this paper studies the optimal regulatory policy in a market where entry may occur in the event of entry the regulator regulates the incumbent but not the entrant we show that the effect of entry on prices depends on the length of the interval between regulatory reviews if the gap is long then the market outcome following entry has a higher price than it would have with a shorter gap 1997 elsevier science s a

regulating an oligopoly with unknown costs abstract we examine the problem of a planner who is regulating an oligopoly with unknown costs we provide a complete characterization of the optimal mechanism which takes the following simple form firm s which report low costs produce together the first best output corresponding to this low cost and firm s which report high costs produce nothing when all firms report high costs only the ex ante least efficient firm produces the entire output and all the other firms produce nothing we show that under mild conditions as the number of firms increases the planner attains the same welfare level as if he had complete information of low cost

life insurance and household consumption abstract using life insurance holdings by age sex and marital status we infer how individuals value consumption in different demographic stages we estimate equivalence scales and bequest motives simultaneously within a fully specified model where agents face us demographics and save and purchase life insurance our findings indicate that individuals are very caring for dependents that economies of scale are large that children are very costly or yield very high marginal utility that wives with children produce lots of home goods and that females display habits from marriage while men do not these findings contrast sharply with standard equivalence scales

how strong are bequest motives evidence based on estimates of the demand for life insurance and annuities this paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated by the desire to leave bequests specifically i find that social security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals these patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms even if insurance markets were perfect evidence on the relationship between insurance purchases and total resources reinforces this conclusion

designing a private industry government auctions with endogenous market structure abstract this paper considers government mechanisms for auctioning production rights in which both the winners and the market structure doupoly dual sourcing monopoly sole sourcing or government owned production are a function of the bids in designing the optimal mechanism the government considers the tradeoffs among consumer surplus producer surplus and revenue under incomplete information doupoly is implemented less frequently and government production more frequently than under complete information when bidders are symmetric the optimal mechanism can be implemented as a modified second price auction applications to privatization deregulation and defense procurement are discussed

regulating a dominant firm unknown demand and industry structure in this article we study the optimal regulation of a dominant firm when an unregulated firm actively competes generally the existence of an active rival imposes new and binding constraints on regulatory problems we characterize optimal policies both when demands are known complete information and unknown incomplete information to the regulator optimal policies under complete information may set the price at the dominant firm above or below its marginal cost optimal policies under incomplete information may be either pooling or separating constant over a range of the prior distribution of the firm s private information and leave no information rent to the firm

competition in nhs quasi markets recent reforms of the national health service have focused attention on contracts for health services and competition amongst the providers of those services as means of ensuring that quality is maintained at an acceptable standard whilst costs are contained this paper considers the particular roles that competition may be expected to play in both health authority and gp fundholder quasi markets copyright 1996 by oxford university press

the importance of business owners in assessing the size of precautionary savings abstract not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives using data from the panel study of income dynamics from the 1980s and 1990s we show that within samples of both business owners and non business owners the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10 of total household wealth previous large estimates of the size of precautionary balances resulted from pooling these two groups together such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non business owners for reasons unrelated to precautionary motives

contractual distortions in a market with frictions abstract this paper analyses contract design in a decentralized market environment with frictions while principals e g firms have all contractual power their market power is constrained as agents e g workers can choose to wait and search for better offers we find that results depend crucially on how market frictions affect agents utilities with type independent costs of search and waiting equilibrium contracts are always first best if agents are impatient and discount future payoffs however distortions vanish only gradually in the latter case we also characterize equilibrium offers and show that the market exhibits two types of externalities both of which are absent in the case of type independent costs of search

public rationing and private cost incentives this paper considers a public provider s strategic use of rationing in a market served by both public and private providers such a mixed market structure is common in many industries such as health care telecommunication postal service and public utilities the technology in the private sector exhibits increasing returns each firm can expend effort in the form of fixed cost to reduce the marginal cost firms in the contestable private sector compete and the market equilibrium is characterized by average cost pricing the equilibrium private sector market size is too low resulting in deficient cost effort efficient rationing forces more consumers to use the private sector restoring cost incentives and implementing the first best random rationing may reduce cost inefficiency but does not implement the first best

privatization in theory and practice privatization george yarrow this paper examines the theoretical and empirical case for private versus public ownership privatization usually leads managers to place greater emphasis on the pursuit of profits however whether this is beneficial to society depends on the trade off between possible market failures due to a lack of competition and deficiencies in government control of public firms the competitive and regulatory environment is more important than the question of ownership per se in competitive markets there is a presumption in favour of private ownership where there is a natural monopoly vigorous regulatory action is required the evidence suggests that privatization has led to improved performance by firms such as the national freight corporation and cable and wireless which operate in a relatively competitive environment the benefits are less clear in the case of firms like bp britoil and british aerospace however the most worrying case is that of british telecom and the projected privatization of british gas where little thought has been given to limiting the abuse of monopoly power rather the regulatory environment has been tailored to the needs of the existing management and to ensuring a successful share flotation privatization is also advanced as a weapon for reducing trade union power encouraging wider share ownership redistributing wealth and improving the public finances however there are other policy instruments better suited to achieving these objectives the existing privatization programme has not led to a marked widening of share ownership and has resulted in windfall gains to a small group of investors at the expense of taxpayers in general

public pricing under imperfect competition abstract existing literature on second best pricing assumes that regulatory control encompasses all industries subject to distortion this paper extends the theory in a game theoretic framework to incorporate market power outside the regulated sector we find that in this situation price always exceeds marginal cost in the public firm and that the profit constraint for the public firm need not be binding in addition the existence of pricing distortions outside the regulated sector can actually increase welfare

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

regulating district heating in romania legislative challenges and energy efficiency barriers abstract many states in eastern and central europe ece possess extensive district heating dh networks that were constructed during the days of communist rule in order to provide a universally accessible energy service that supported soviet development policies but the post communist transition was marked by the exacerbation of the sector s numerous technical economic regulatory and environmental problems accompanied by its abandonment in favour of alternative methods of domestic heating recent efforts to increase the use of dh in ece as a result of environmental and energy security concerns have taken place in an absence of critical context sensitive research the purpose of this paper is to explore the legal aspects of post communist dh reforms in romania with the aim of identifying some of the governance challenges faced by state authorities in managing the sector in broader terms we seek to explore the extent to which the romanian legislative framework is in a position to promote energy efficiency in dh this has been achieved via an analysis of formal policy documents government decrees strategic documents and laws pertaining to this sector as published and subsequently amended in the official gazette the conclusions of the paper identify the key regulatory issues in the sector especially with respect to the tariff setting process and the division of competences among different organisations in it while suggesting a set of policy steps and general restructuring approaches that could help overcome the current situation

coordination in split award auctions we analyze split award procurement auctions in which a buyer divides full production between two suppliers or awards all production to a single supplier and suppliers have private cost information an intriguing feature of split awards is that the equilibrium bids are implicitly coordinated because a split award price is the sum of offered split prices each supplier can unilaterally veto a split award by bidding very high for the split the need to coordinate is reflected in a split price that does not vary with private information we also explore conditions under which split award auctions may be preferred to winner take all auctions

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

regulation competition and asymmetric information abstract this article studies a model of regulation under asymmetric information when there exists a competitive fringe of unregulated alternative producers the correlation between the unknown cost parameters of the fringe and of the regulated firm allows the regulator to use the threat of entry by the fringe to reduce the informational cost of regulation the presence of the fringe is welfare enhancing the allocative distortions can be larger or smaller than those in the no fringe case and the optimal contract sometimes allows inefficient entry the optimal contract can exhibit non standard bunching phenomena and discontinuities

estimation of limited dependent variable models with dummy endogenous regressors applied economists have long struggled with the question of how to accommodate binary endogenous regressors in models with binary and nonnegative outcomes i argue here that much of the difculty with limited dependent variables comes from a focus on structural parameters such as index coefcients instead of causal effects once the object of estimation is taken to be the causal effect of treatment several simple strategies are available these include conventional two stage least squares multiplicative models for conditional means linear approximation of nonlinear causal models models for distribution effects and quantile regression with an endogenous binary regressor the estimation strategies discussed in the article are illustrated by using multiple births to estimate the effect of childbearing on employment status and hours of work

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

auctioning the digital dividend a model for spectrum auctions abstract we model a spectrum auction where firms purchase units to participate in a constrained multi product downstream market we use dynamic programming techniques to numerically solve for the optimal bidding strategy in a clock auction firms value constraining competitor market power so incumbents often bid aggressively to shut out entrants we find that high cost firms may hold up the market so the auction may be inefficient and generate zero revenue an auction may be optimal for a regulator maximising total surplus a regulator maximising auction revenue sets reserve prices high enough to restrict spectra sold effectively behaving as a monopolist

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

the importance of bequests and life cycle saving in capital accumulation a new answer as the workhorse of consumption and saving research for the past four decades the life cycle model has proved flexible and useful for examining a variety of questions in a classic paper albert ando and franco modigliani 1963 p 56 stated a key assumption of the basic model t he individual neither expects to receive nor desires to leave any inheritance although the authors contended that the absence of a bequest motive was not critical to the heart of their results the assumption set off a long standing battle over the relative importance of different motives for saving in an influential study laurence kotlikoff and laurence summers 1981 estimated that a large fraction of the u s capital stock was attributable to intergenerational transfers modigliani and his collaborators vigorously disagreed and based on their own empirical work claimed that life cycle saving was the primary source of capital accumulation modigliani 1988 subsequent work has failed to reach a consensus since this debate began an important advance in the consumption literature has been the incorporation of uncertainty in life cycle models see e g r glenn hubbard et al 1995 we argue that allowing for uncertainty resolves the controversy over the importance of life cycle and bequest saving by showing that these motives for saving are overlapping and cannot generally be distinguished a dollar saved today simultaneously serves both a precautionary life cycle function guarding against future contingencies such as health shocks or other emergencies and a bequest function because in the likely event that the dollar is not absorbed by these contingencies it will be available to bequeath to children or other worthy causes under this view households have a bequest motive but bequests are given i e the motive is operative in only some states of the world wealth is something like traveler s checks you take them along on vacation just in case but odds are they will remain uncashed and available for sundry goods after the journey is complete we first demonstrate the result using a simple model and then argue that this approach reconciles the apparent importance of bequests with households declared focus on life cycle saving finally we consider implications of our analysis

liberalisation of the russian power sector abstract the paper discusses the russian power sector reform plan approved by the government in july 2001 which outlines the framework for competition and changes in ownership structure the paper focuses on the following issues related to the plan price reform restructuring of regional energos and large generating companies restructuring of transmission and system operation the mechanism for introducing competition competition for residential consumers and reform sequencing one key message of the paper is that price and regulatory reform is central to success of market liberalisation a second key message is that the restructuring of energos should not create companies with market power ideally local generation and distribution companies would be owned separately with multiple generators in each region at a minimum commonly owned companies should keep separate accounts with regulation of generation a possibility where there is market power regarding transmission and dispatch common ownership would not be a problem given that transmission and generation are separately owned on competition a fully fledged pool may not be appropriate in the case of russia with the alternative of a market based on bilateral contracts with a balancing pool functioning better in a context of non payment and constrained institutional capacity and providing security for investments regarding competition for residential consumers this is not a priority in the short to medium term lastly on sequencing it is better that structural and institutional change takes place before competition begins

on allocative distortions in problems of self selection this article considers the general structure of self selection models by imposing conditions which permit the ordering of agents by their preferences we provide a characterization of the distortions inherent in the sorting process

repeated auctions of incentive contracts investment and bidding parity with an application to takeovers this article considers a two period model of natural monopoly and second sourcing the incumbent supplier invests in the first period after observing the incumbent s first period performance the buyer may break out in the second period the investment may or may not be transferable to the second source and it may be monetary or take the form of human capital we determine whether the incumbent should be favored at the reprocurement stage and how the slope of his incentive scheme should evolve over time we find that the gains from second sourcing are not so large as one might hope finally we reinterpret the second source as a raider and the breakout as a takeover we discuss the desirability of defensive tactics and obtain a rich set of testable implications concerning the size of managerial stock options the extent of defensive tactics the firm s performance and the probability of a takeover

a direct test of the buffer stock model of saving recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations when wealth is below an optimal target consumers try to increase their buffer stock of wealth by saving more when it is above target they increase consumption this important implication of the buffer stock model of saving has not been subject to direct empirical testing we derive from the model an appropriate theoretical restriction and test it using data on working age individuals drawn from the 2002 and 2004 italian surveys of household income and wealth one of the most appealing features of the survey is that it has data on the amount of wealth held for precautionary purposes which we interpret as target wealth in a buffer stock model the test results do not support buffer stock behavior even among population groups that are more likely a priori to display such behavior the saving behavior of young households is instead consistent with models in which impatience relative to prudence is not as high as in buffer stock models jel d91

powering up developing countries through integration power market integration is analyzed in a two country model with nationally regulated firms and costly public funds if the generation costs between the two countries are too similar negative business stealing outweighs efficiency gains so that the subsequent integration welfare decreases in both regions integration is welfare enhancing when the cost difference between two regions is large enough the benefits from export profits increase the total welfare in the exporting country whereas the importing country benefits from lower prices in this case market integration also improves incentives to invest compared to autarky the investment levels remain inefficient however especially for transportation facilities free riding reduces incentives to invest in these public good components of the network whereas business stealing tends to decrease the capacity to finance new investment

the surprisingly low importance of income uncertainty for precaution abstract while it is common to use income uncertainty to explain household saving decisions there is much disagreement about the importance of precautionary saving this paper suggests that income uncertainty is not an important motive for saving although households do have other precautionary reasons to save using a question from the survey of consumer finances that asks how much households want for precautionary purposes this paper shows that expressed household preferences and liquid savings are much lower than predicted by standard modeling assumptions households rarely list unemployment as a reason to save perceived income uncertainty does not affect liquid savings or precautionary preferences neither does being in an occupation with higher income volatility instead households seem very concerned with expenditure shocks

regulating a monopolist with unknown demand the authors analyze the optimal regulatory policy when the firm has better information about demand than the regulator from the outset of their relationship the firm s cost structure is common knowledge but monitoring of output is prohibitively costly the authors find that when marginal production costs increase with output the firm command s no rents from its private information and the efficient price is established for each realization of demand in contrast with declining marginal costs the same price is established by the regulator for all demand realizations and the firm s rents can be substantial overall major qualitative differences in the optimal regulatory policy arise when the firm s private information concerns demand rather than costs copyright 1988 by american economic association

information expropriation and moral hazard in optimal second source auctions abstract government mandated technology transfers from the developer of a product to a second source offer a potential gain of reduced information rents and procurement costs to provide appropriate incentives technology must sometimes be transferred even when the second source is less efficient than the first additionally when developer moral hazard exists with respect to investments in cost reducing technology the optimal auction will make the developer s success in the auction more sensitive to the developing firm s announced costs

split awards procurement and innovation in many procurement settings it is possible for a buyer to split a production award between suppliers in this article we develop a model of split award procurement auctions in which the split choice is endogenous we characterize the set of equilibrium bids and allocations for optimizing agents in an environment in which suppliers are fully informed about each other s costs split award equilibria simultaneously exhibit strong collusive features and cost efficiency properties despite the former property of the equilibria upstream investment considerations may lead a buyer to prefer a split award auction format to a winner take all auction format

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

incomplete information and optimal market structure public purchases from private providers abstract market structure is endogenized in a normative model of public procurement featuring a social cost of profit product variety economies of scale and incomplete information about cost depending on parameters either sole sourcing or dual sourcing might be optimal however if the social cost of profit is positive but not too large incomplete information biases optimal market structure in favor of sole sourcing on the other hand this bias in favor of sole sourcing may be reversed if the social cost of profit is large an application to the publicly financed treatment for drug abuse motivates the analysis