optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

market transition government policies and interprovincial migration in china 1983 1988 a 10 random sample of china 1988 2 1000 fertility and birth control survey data was analyzed to determine to what extent chinas transition to a market economy affects migration patterns in the country and to what extent the government policy of establishing rural enterprises reduced migration from rural areas the survey was conducted by chinas state family planning commission in july august 1988 and covered a nationally representative sample of individuals aged 15 64 years at the time of the survey data were collected on interprovincial migration trends for all members in the households surveyed the study findings concerning individual level characteristics of interprovincial migration during 1983 88 are consistent with previous research in china and in other developing countries however unique to the findings for china is the effect of province level characteristics individuals are more likely to move out of provinces with a large population and a lower level of economic development this phenomenon is in line with classic arguments about migration and economic development foreign investment slightly reduces migration out of provinces receiving investment with migrants being more likely to choose provinces with high levels of foreign capital investment as destinations foreign investment leads to both direct job opportunities and secondary opportunities created by economic growth

the effect of food stamps on labor supply a bivariate selection model abstract although there is a large literature on the effects of u s transfer programs on labor supply this is the first such study of the food stamp program we model the nonlinearity and nonconvexity of the budget constraint and use maximum likelihood methods to estimate hours of work functions for female heads of household the largest recipient group in the program we also model the joint response to afdc and food stamps and we account for the existence of a significant number of eligible households who do not participate in the programs a three equation bivariate selection model is estimated on a sample of eligible households with maximum likelihood

politics and markets dual transformations the articles published in this issue of the journal help advance the debate on market reform in former socialist states in our comment besides dealing with data analysis issues we suggest several ways to improve the level of debate about substantive issues these suggestions include more attention to politics including path dependence and more attention to middle level generalizations from other developing market societies

resale price maintenance and collusion the article revisits the conventional wisdom according to which vertical restrictions on retail prices help upstream firms to collude we analyze the scope for collusion with and without resale price maintenance rpm when retailers observe local shocks on demand or retail costs in the absence of rpm retail prices react to retailers information and deviations from collusive behavior are thus difficult to detect by eliminating retail price flexibility rpm facilitates the detection of deviations but reduces profits and thus increases the short run gains from a deviation overall rpm can facilitate collusion and reduce total welfare when firms adopt it

incentive effects of the u s welfare system a review the author would like to acknowledge support for prior work on this topic from the u s department of health and human services and helpful comments from three anonymous referees rebecca blank howard chernick john fitzgerald irwin garfinkel peter gottschalk edward gramlich david greenberg judith gueron james heckman v joseph hotz robert hutchens michael keane frank levy larry mead michael murray robert plotnick anuradha rangarajan philip robins howard rolston jeffrey smith and daniel weinberg all opinions and errors are those of the author alone

the determinants of welfare participation of female heads of household in canada this paper assesses the impact on the probability of welfare participation of budget constraint variables such as the expected wage welfare benefit level and implicit welfare tax rate the empirical results are based on a model of welfare participation that is estimated using a sample of female heads of household in canada the coefficients on the budget constraint variables are significant and carry signs that are generally consistent with the predictions of the model and the results of related studies based on data from the united states in addition to the budget constraint variables which include important policy tools a wide range of sociodemographic variables are included in the specification

rural industrialisation and internal migration in china to avoid the problems of overcrowding and urban unemployment that are associated with overurbanisation observed in other developing countries china has since the late 1970s actively pursued a st

livelihoods and poverty the role of migration a critical review of the migration literature this review of the literature concludes that development studies have paid insufficient attention to labour migration and makes a plea to integrate analyses of migration within those of agricultural and rural development it emphasises that population mobility is much more common than is often assumed and that this has been so throughout human history in fact available material suggests that it is as likely that population mobility has decreased as that it has increased a review of empirical studies shows that it may not be possible to generalise about the characteristics of migrants or about the effects of migration on broader development inequality or poverty the review concludes that given the importance of migration for the rural livelihoods of many people policies should be supportive of population mobility and possibilities should be explored to enhance the positive effects of migration

common marketing agency as a device for facilitating collusion in a variety of markets firms voluntarily and independently delegate control over certain aspects of marketing to common agents in this article we present an explicit model of agency delegation where firms noncooperatively select agents name output prices and choose compensation schemes we exhibit an equilibrium in which all strategic variables not merely the marketing choices delegated to agents but prices as well are selected perfectly cooperatively this cooperative equilibrium is very simple and attractive each firm sets the collusive output price and employs a commission scheme to compensate the agent although each

making sense of nonbinding retail price recommendations we model retail price recommendations rprs as a communication device in vertical supply relations with private manufacturer information on production costs and consumer demand with static trade rprs are irrelevant and the equilibrium outcome is inefficient with repeated trade rprs can become part of a relational contract communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus we show that this contract is self enforcing if the retailer s profit is independent of production costs and punishment strategies are chosen appropriately the predictions of our analysis are consistent with the available empirical evidence

do msrps decrease prices abstract the nature of manufacturer s suggested retail prices msrps and whether they increase or decrease prices is poorly understood we exploit a policy experiment in which a ban on msrps was imposed and then lifted a year later and show that msrps decrease prices by 3 6 percent on average there is no indication that msrps lowered prices by acting as binding price ceilings instead we find suggestive evidence that msrps are aimed at consumers possibly providing a benchmark by which consumers can evaluate prices

the political economy of targeting one of the most widely used method of targeting is to reduce welfare benefits as income rises although the need for such targeting is clear enough it also entails two important difficulties firstly the prospect for the recipients of losing part of their benefits if they were to earn more can be a deterrent to work harder secondly by reducing the number of recipients targeting reduces the political support for taxation and redistribution the purpose of this paper is to study the voting equilibrium of the degree of targeting and the level of taxation in an economy where labour supply is variable the analysis reveals that targeting may be fatal for redistribution even though it rejects strictly less than the richest half of the population and that it is not possible for a coalition of the extremes to form and reject the middle income group from the welfare system moreover because targeting affects labour supply we find that pareto improvements are possible when targeting is either too low or too high we also find that voting simultaneously over taxation and targeting is favourable to the poor in the sense that they can converge to their most preferred policy by successively forming a majority coalition with the rich to increase targeting and with the middle to increase taxation

trading between agents for a better match this paper studies externalities that arise when agents can trade outcomes ex post i show that when agents can trade outcomes ex post principals are incentivized to contract with agents ex ante to reduce ex post transfers to outside agents with whom the principals do not directly contract this causes principals to offer agents piece rates that are inefficiently low and lower than the piece rates they would offer if trading was not allowed although trading reduces an agent s effort and could increase the agent s outside option of rejecting a principal s ex ante contract principals ultimately gain from allowing ex post trading because such trading results in outcomes that better match their tastes

on reforming the welfare system abstract using a simulation model for a small open economy quebec 1986 various negative income tax nit and workfare schemes are compared from the point of view of efficiency and equity the main finding is that there exist workfare schemes that are superior both to the quebec regime of 1986 and to a nit characterized by a 100 percent implicit tax rate however these workfare schemes are dominated by some nit programs this suggests that it may be necessary to have work requirements that vary across socio demographic classes for a workfare plan to be superior to any nit combining workfare with an nit could also be the prescription

the emergence of a market society changing mechanisms of stratification in china this article examines the effect of institutional change the shift from redistribution to markets in altering the mechanisms of stratification new institutionalists maintain that interests are emb

an economic model of welfare stigma perhaps the most basic assumption of the economic theory of consumer demand is that more is better than less virtually all of the major propositions of consumer theory can in a certain sense be derived from the assumption that goods are good interestingly however this tenet seems to be violated by the behavior of many individuals in the low income population for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls for example it has been estimated that in 1970 only about 69 percent of the families eligible for afdc aid to families with dependent children participated in the program see richard michel 1980 the corresponding percentage for afdc u the program for which families with an unemployed male are eligible was only 43 percent and the participation rate in the food stamp program was only 38 percent see maurice mcdonald 1977 this phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets consequently most investigators ignore the problem when studying the effects of welfare programs on behavior in this paper this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma that is from disutility arising from participation in a welfare program per se 1 the existence of stigma has been amply documented in the sociological literature patrick horan and patricia austin 1974 lee rainwater 1979 where interviews of recipients have often uncovered feelings of lack of self respect and negative self characterizations from participation in welfare nevertheless this phenomenon has not been modeled and many questions consequently remain when is the disutility of participation strong enough to prevent participation shouldn t we expect individuals to weigh the disutility of participation against the potential benefit in their decisions what is the elasticity of participation with respect to the potential benefit also in a slightly different vein how are the work disincentives of welfare affected by stigma these questions have been given scant attention by economists yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population here these questions are addressed by modeling nonparticipation as a utility maximizing decision the model is developed and estimated for the afdc program 2 the model posits an individual utility function containing not just disposable income but

social inequalities in reforming state socialism between redistribution and markets in china this article extends market transition theory to an analysis of inequality under the conditions of partial reform in china logit regression analysis indicates cadres officials have no greater odds than other households of being among the privileged or avoiding poverty entrepreneurs andformer team cadres however are advantaged despite the rise of a hybrid elite of entrepreneurs who are currently cadres that capitalizes on redistributive power to gain competitive advantage in the marketplace increases in income inequality are modest when market reform stimulates improved economic performance the poor appear to benefit and experience comparable improvements in household income as a result there is only a slight increase in inequality at least in the early stages of market reform the empirical analysis is based on survey data collected in rural china in 1985

a model of recommended retail prices manufacturers frequently post nonbinding public price recommendations but neither the rationale for this practice nor its impact on prices is well understood i develop a model in which recommendations signal a manufacturer s production cost to searching consumers who then form beliefs about retail prices increasing search makes consumers reject offers for the manufacturer s and competitors products more often and i show that both consumers and the manufacturer prefer more search when the production cost is low and less search when it is high with incentives thus aligned manufacturer recommendations inform consumers via cheap talk and their removal harms both parties

why suggest non binding retail prices we provide a simple behavioural explanation of why manufacturers frequently announce non binding suggested retail prices for their products our model is based on the assumption that once the actual price for a product exceeds its suggested retail price the marginal propensity to consume suddenly jumps downward we show that this may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium although the latter price is non binding this in turn leads to a shift of profits from the retailer to the manufacturer

migration and incomes in source communities a new economics of migration perspective from china the objective of this paper is to understand the effects of china s migration on source communities and to discuss their policy implications we draw from new economics of labor migration nelm theory to understand how migration and migrant remittances can relax or tighten market constraints in china s rural economy using simultaneous equation econometric techniques and household survey data from china we estimate net sectorspecific effects of migration on rural household income focusing on farm production and self employment our econometric findings indicate that the loss of labor to migration has a negative effect on household cropping income in source areas however we provide evidence that remittances sent home by migrants positively compensate for this lost labor effect contributing to household incomes directly and indirectly by stimulating crop and possibly self employment production this finding offers evidence in support of the nelm hypothesis that remittances loosen constraints on production in the imperfect market environments characterizing rural areas in less developed countries taking into account both the multiple effects of migration and the change in household size participating in migration increases household per capita income between 14 and 30 percent migration and incomes in source communities a new economics of migration perspective from china china is experiencing the largest peacetime flow of labor out of agriculture ever witnessed in world history solinger 1999 rozelle et al 1999 despite the rapid expansion of labor migration china s work force is still disproportionately employed in agriculture compared to other countries at similar levels of per capita gdp taylor and martin 2001 hence as china s economy continues to expand the flow of labor to urban areas will continue and even accelerate johnson 1999 the massive flow of labor away from farms has intensified research interest in china s migration in recent years however as in the broader literature on migration in less developed countries most recent studies on china s migration have focused on determining the size and composition of the labor flow macroeconomic implications of increased migration and the effects of migration on urban areas zhao 1999 yang 1999 1997 less emphasis has been placed on researching the effects of migration on the rural communities that migrants leave even though evidence shows that the rural household in the village of origin is typically the central concern of all those involved in migration both those who leave and those who stay behind exceptions include wang and zuo 1999 bai 2001 moreover the recent increase in migration has left policy makers particularly concerned regarding the way source communities will be affected moa 1999 they are concerned that as labor flows away from farms food production and crop income will decline potentially threatening china s food security furthermore policy makers are concerned about the increasing gap between urban and rural household incomes if migration exacerbates this gap some fear that as it grows rural residents eventually will flood cities ill equipped to absorb them others fear that discontent over a rising urban rural income gap could even spill over into political unrest yang 1999 because china s markets and other modern economic institutions are still relatively undeveloped migration may play a pivotal role in creating or overcoming constraints caused by the lack of well functioning markets and or institutions knight and song 1999 benjamin and brandt 2000 the new economics of labor migration nelm literature analyzes migration as a household decision rather than as an individual decision stark 1991 the nelm hypothesizes that rural households facing imperfect market environments decide

on the effects of suggested prices in gasoline markets textabstractthis article analyzes the role of suggested prices in the dutch retail market for gasoline suggested prices are announced by large oil companies with the suggestion that retailers follow them there are at least two competing rationales for the existence of suggested prices they may either help retailers translate changes in international gasoline spot market prices into retail prices or they may coordinate retail prices we show that there is next to the international spot market prices additional information in suggested prices that explains retail prices therefore we conclude that suggested prices help to coordinate retail prices

a problem with the negative income tax abstract the goal of a negative income tax is to increase the work incentives of welfare recipients this note points out that it may not do so and empirical simulations show that this is a real world possibility

work incentives in the afdc system an analysis of the 1981 reforms the road to welfare reform increasingly appears to be one of the rockier paths the united states has traversed indeed by all outward appearances it is not even clear whether the current path runs uphill or downhill as far as work incentives in the welfare system are concerned economists of all political persuasions from milton friedman to james tobin have agreed that the uphill direction is that which leads to lower tax rates i e lower benefit reduction rates however as with free trade the near unanimity of opinion among economists has strangely only occasionally persuaded a majority of the nation s representatives to vote to go uphill the legislative history so illustrates from 1935 when the aid to families with dependent children afdc program was enacted to the 1967 social security amendments the tax rate in the program was 100 percent that is benefits were reduced by one dollar for every extra dollar earned with the 1967 amendments congress lowered the tax rate to 67 percent and in the heady atmosphere of the 1960 s it was expected that further progress in this direction would be made and that the tax rate would be lowered further indeed the family assistance plan subsequently proposed by president nixon would have lowered tax rates however the legislation passed the house but not the senate the ford administration considered welfare reform proposals internally but never proposed legislation while the carter administration proposed a massive welfare reform plan that met with no legislative success welfare reform was finally achieved in 1981 when the omnibus budget reconciliation act obra was enacted but obra increased the tax rate back to 100 percent the level prevailing prior to 1967 in retrospect it appears that 1967 marked the end not the beginning of legislative progress on work incentives in the welfare system in this paper i shall report the results of recent research that complicates the issue considerably by questioning whether lower tax rates do in fact provide work incentives the findings themselves seesaw not unlike the path of welfare reform itself first on a theoretical basis it appears that lower tax rates in a welfare program do not necessarily increase labor supply in the low income population as a whole contrary to the conventional wisdom in fact it also appears that members of the reagan administration were aware of this all along well in advance of the economics profession this theoretical ambiguity has fairly fundamental implications for the work incentive issue in welfare reform second nevertheless the empirical resolution of the ambiguity provided by existing econometric estimates in the labor supply literature and by estimates of the effect of afdc on labor supply indicates that a lower tax rate would indeed increase labor supply in the low income population as a whole and that a higher tax rate would decrease it thus the conventional wisdom is correct even though based upon an incorrect tdiscussants henry aaron the brookings institution and university of maryland harold watts columbia university edward gramlich university of michigan