the acquisition of fisher body by general motors abstract it is commonly said that in 1926 general motors was led to acquire its supplier of automobile bodies fisher body because fisher body held up general motors it is claimed that fisher body did this by locating its body plants far away from the general motors assembly plants and by adapting inefficient methods of production thus increasing both the cost of producing bidies and the profits of fisher body under its cost plus contract this tale is factually incorrect what general motors acquired in 1926 was the 40 percent of the shares of fisher body that it did not already own furthermore fisher body did not locate its plants far away from the general motors assembly plants it is also most implausible for many reasons that the fisher brothers would have used inefficient methods of production there is no evidence that a holdup occurred

incentives and the efficiency of public sector outsourcing contracts abstract outsourcing the provision of traditionally publicly provided services has become commonplace in most industrialized nations despite its prevalence there still is no consensus in the academic literature on the magnitude and determinants of expected cost savings to the government nor the sources of those savings this article considers the arguments for and against outsourcing and then examines the empirical evidence pertaining to whether any observed savings occur and whether they persist over time in addition we examine the existing evidence for the redistribution hypothesis and the quality shading hypothesis which critics have used to argue that outsourcing lowers government expenditure by lowering wages and conditions and or lower quality services finally we consider the impact of contract design on outsourcing outcomes while the power of incentives is a strong theme in economics recent work has suggested that high powered incentives may be suboptimal for many public sector services because they may crowd out intrinsic motivation particularly in instances where agents are highly motivated we discuss the implications of this insight for the efficiency of public sector outsourcing

the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

social norms and the law an economic approach by social norm norm for short i shall mean a rule that is neither promulgated by an official source such as a court or a legislature nor enforced by the threat of legal sanctions yet is regularly complied with otherwise it wouldn t be a rule the rules of etiquette including norms of proper dress and table manners the rules of grammar and customary law in prepolitical societies and private associations are all examples of norms in my sense a full understanding of law requires consideration of norms law is older than political society which means that it originates as a set of norms as it remains in the case of public international law because there is no world government even in societies that have strong governments norms are both a source of law and often a cheap and effective substitute for law and sometimes they are an antagonist to law the incentives for obeying law are clear enough but what about the incentives for obeying norms the answer to this question will help toward an understanding of the relation between law and norms there are four incentives for obeying norms i some norms are self enforcing the incentive to obey comes from the fact that obedience confers private benefits because they are constitutive of advantageous transactions if you don t speak the language you can t make yourself understood if you don t play chess by the rules you re not playing it at all so if you enjoy playing chess you will not cheat unless the net expected gain is great 2 this point bears on the norms governing judicial behavior of judges not those norms backed by law such as the rule against taking bribes but those subtler norms that adjure the judge to lay aside personal or partisan sympathies disregard public blame or praise follow precedent rather than his own values in short adhere to the traditional rule of law virtues compliance with these norms is far from uniform because there are incentives to deviate and the costs of deviation are small but why is there any compliance the answer is that the private costs of compliance are low because the law backed rules of judicial behavior make it difficult for the judge to profit from partiality while the private benefits are substantial because the rule of law norms are the constitutive rules of the practice of judging if you don t obey them you re not playing the judicial game law school and the judiciary teach the game to new lawyers while judicial selection procedures select for persons who want to play the judicial game rather than some other game such as partisan politics even when judicial appointments are elective rather than appointive or when appointments are based on patronage or ideology rather than merit self selection is present in the decision to seek or accept appointment ii some norms are enforced by the emotions a point vital to understanding the emergence of law the honor code of the old south see jack k williams 1980 will illustrate the code which required a man to challenge to a duel any man who infringed his dignity was a survival of a revenge based system of law more precisely pre law before there were governments what is now called law was u s court of appeals for the seventh circuit and university of chicago law school 1111 e 60th st chicago il 60637 i thank gary becker dan kahan lawrence lessig martha nussbaum eric posner eric rasmusen cass sunstein and yuval tal for many helpful comments on a previous draft i do not require however that it be internalized as a preference as in the definition of norm in gary becker 1996 p 225 2 these are examples of compensated norm imposed constraints becker 1996 p 228 not only must the judge not take bribes but he must not sit in cases in which he or his relatives might derive a pecuniary benefit from his decision

dissipation of contestable rents by small numbers of contenders the theory of rent seeking with its origins in the observations of gordon tullock 1967 or to use jagdish bhagwati s 1982 proposed term the theory of directly unproductive profit seeking activities is concerned with the potentially adverse effects on resource allocation of incentives to cap ture and defend artificially contrived rents and transfers the scope for so cial loss proposed by the theory derives from the relation between the value of a contestable prize and the value of the resources attracted into the con test to determine the beneficiary of the prize underlying this social loss is a specification of how rational behavior by optimizing agents links the value of the prize sought to the resources expended it has been traditional to assume competitive behavior in describing the activities of lobbying and influence seeking then if some further condi tions are satisfied l the total value of the resources expended precisely equals the value of the prize sought so dissipation is complete 2 conse quently the social cost associated with contestability of a rent can be in ferred from the value of the rent itself and the detailed and hard to come by information on individual outlays made in the course of the contest be comes unnecessary by basing their analyses on competitive dissipation contributors to the rent seeking literature see the review by robert tollison 1982 have been able to presume that the observed value of a contested rent is an exact measure of the associated social cost of monopoly power or regu lation similarly in the trade theoretic literature where the rights contested are to quota premia or revenues from trade taxes krueger 1974 bhagwati

free entry and efficient rent seeking this paper concerns rent seeking and the extent to which rents are dissipated under various circumstances gordon tullock s 1967 insight that expenditures made to capture an artificially created transfer represent a social waste suggested that the cost to the economy of monopoly and regulation is greater than the simple harberger 1954 deadweight loss indeed under tullock s original formulation and in the extensions of his work by krueger 1974 and posner 1975 rents are exactly dissipated at the social level 1 is spent to capture 1 so that the total welfare loss from such activities is equal to the harberger triangle plus the rectangle of monopoly profits

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

development of marginal abatement cost curves for the building sector in armenia and georgia abstract armenia and georgia are taking climate change agenda seriously and contributing to efforts for mitigating global climate change through various ways including preparation of low carbon development strategies for their future economic growth the improvement of energy efficiency is one of the key elements of the low carbon development strategies this study develops a methodology to estimate marginal abatement cost mac curve for energy efficiency measures and apply in the building sector in both countries the study finds that among the various energy efficiency measures considered the replacement of energy inefficient light bulbs i e incandescent lamps with efficient light bulbs is the most cost effective measure in saving energy and reducing greenhouse gas ghg emissions from the building sector most energy efficiency improvement options considered in the study would produce net economic benefits even if the value of reduced carbon is not taken into account while the mac analysis conducted demonstrates the cost competitiveness of various energy efficiency measures in armenia and georgia the study also offers a caution to policy makers to have supplemental analysis before prioritizing the implementation of these measures or introducing policies to support them

rent seeking and entry abstract it is the purpose of this paper to develop a market equilibrium model of rent seeking with entry the model determines the optimal amount of rent seeking activities by individuals the equilibrium number of rent seekers and hence also the total amount of rent seeking in the industry

contractual form and market thickness in trucking a central proposition of the transaction costs literature is that firms will substitute more complicated contractual arrangements for simple spot arrangements when transactions involve relationship specific investments i investigate this proposition by testing whether simple spot arrangements are less common when local trucking markets are thin i find that doubling the thickness of the market increases the likelihood that simple spot arrangements govern transactions by about 30 for long hauls i find weaker evidence of relationships between local market thickness and contractual form for short hauls hauls for which quasi rents are particularly small contracts protect quasi rents over a surprisingly large range but they play a less important role as quasi rents decrease

public service motivation as an argument for government provision a public service motivation psm inclines employees to provide effort out of concern for the impact of that effort on a valued social service though deemed to be important in the literature on public administration this motivation has not been formally considered by economists when a psm exists this paper establishes conditions under which government bureaucracy can better obtain psm motivated effort from employees than a standard profit maximizing firm the model also provides an efficiency rationale for low powered incentives in both bureaucracies and other organizations producing social services 2000 elsevier science s a all rights reserved

british bus deregulation it is always of interest to observe the sharp divisions which arise in professional economic opinion on major policy issues bus deregulation is just such a case when the british government published its proposals to deregulate the bus industry in a white paper in i984 dot i984 considerable debate ensued with members of the profession on both sides beesley and glaister i985 gwilliam nash and mackie i985 even now six years after implementation the debate continues whilst both parties would admit that some of their forecasts were wrong the fact that the measure has proved neither as good as its proponents expected nor as bad as its opponents feared simply makes reaching a conclusion on the merits of bus deregulation more difficult the layout of this paper is as follows in the next section we describe the background to the decision to deregulate the british bus industry and the changes that were involved the next two sections look at the theoretical arguments for and against bus dereg ulation we then turn to a brief review of what actually happened before reaching our conclusion

integration of the sales force an empirical examination this article develops and tests a model of integration of a marketing function personal selling the model derived from transaction cost analysis as developed principally by williamson is formulated as a logistic function which is estimated with data from the electronic components industry as expected integration is associated with increasing levels of asset specificity difficulty of performance evaluation and the combination of these two factors contrary to the transaction cost model neither frequency of transactions nor interaction of specificity and environmental uncertainty is significantly related to integration the transaction cost model improves significantly upon the fit of a simple model relating integration to company size alone these results suggest that for studying transactions of this kind it is fruitful to view the firm as a governance structure

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

leadership and expenditures in rent seeking models the theory of rent seeking begun by tullock 1967 krueger 1974 and posner 1975 is now well established the analysis of these models typically involves studying properties of the symmetric noncooperative nash equilibrium defined in terms of pure strategies rent seeking expenditures in a 1980 article tullock first noted and in 1984 later elaborated upon several situations where the traditional nash equilibrium of equal rent seeking payments by identical players failed to exist this failure could arise for two reasons first even though the second order conditions were satisfied at the candidate symmetric equilibrium point 2 once at that point all agents had a conditional incentive to choose zero rent seeking to avoid negative payoffs thus the traditional point while locally optimal as indicated by the second order conditions was not globally optimal the second possible reason for failure was that at the traditional point the second order conditions were violated the problems arise because r a parameter affecting the conditional probability of successful rent seeking may be too large the principal consequence is that the traditional model with myopic agents does not capture some of the potential behaviour of the players a particularly worrisome feature is that agents may find it privately optimal to spend in total more on rentseeking than the value of the prize as well benefits sometimes accrue to agents if they can block entry by preemptive play tullock 1984 97 has conjectured that there is another game in the precommitment stage in which the parties attempt to make the first commitment so that no one else will enter in this paper we consider a two player noncooperative rent seeking game where agents are allowed to adopt and potentially benefit from other than a passive stance towards their rivals firms must choose to be either leaders or followers and consistent with that decision and their beliefs about their rivals strategies then choose their rent seeking expenditures firms thus have the option of becoming stakelberg leaders or stakelberg followers 3 the analysis begins insection 2 we provide three principal results that serve to characterize the range of possible equilibria the results critically depend

contract choice in modern agriculture cash rent versus cropshare e conomists have expended enormous effort examining the rationale for various contractual arrangements in agriculture particularly sharecropping while economists have made considerable theoretical efforts to understand agricultural contracts few empirical studies have been undertaken the dearth of empirical analyses of agricultural contracts is particularly striking for modern western agriculture this is an important omission not only because the existing empirical work tends to focus on the question of efficiency but also because the theoretical models tend to examine contracts that bear little resemblance to those found in the united states today

efficient rents 1 rent seeking behavior in the long run we have analyzed long run behavior in rent seeking under several conditions and behavioral hypotheses the question of interest is whether or not the long run expenditures will exactly equal the value of the rents our results depend on the type of competitive response which is assumed to exist in the long run and on the r value governing the probability of winning

privatisation and x inefficiency a bargaining approach the usual analysis of privatization and x inefficiency uses agency theory to model managerial effort the authors model worker effort as determined by a bargain between firms and workers workers dislike effort because it lowers utility firms prefer high effort because it raises productivity public sector firms are assumed to be social welfare maximizers and therefore compared to private sector firms they bargain lower effort levels since they have the interests of consumers and workers at heart the authors model predicts that under certain conditions privatization should raise effort and so lower x inefficiency and that wages may increase or decrease copyright 1995 by blackwell publishing ltd

competition and incentives with motivated agents a unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission as opposed to profit as an organizational goal such mission oriented organizations are frequently staffed by motivated agents who subscribe to the mission this paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency matching economizes on the need for high powered incentives it can also however entrench bureaucratic conservatism and resistance to innovations the framework developed in this paper is applied to school competition incentives in the public sector and in private nonprofits and the interdependence of incentives and productivity between the private for profit sector and the mission oriented sector through occupational choice jel d23 d73 h41 l31 the late twentieth century witnessed a historic high in the march of market capitalism with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods moreover this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms when it comes to the provision of collective goods no such consensus has emerged debates about the relative merits of public and private provision still dominate this paper suggests a contracting approach to the provision of collective goods it focuses on two key issues how to structure incentives and the role of competition between providers at its heart is the idea that organizations that provide collective goods cohere around a mission 2 thus production of collective goods can be viewed as mission oriented

auctions and bidding a primer maybe the contractor was right to think bid jobs are different but it is more likely that he suffered from too simple a view of what is involved in preparing a competitive bid our analysis will show that even an experienced estimator working in familiar terrain can lose money if he doesn t understand the subtleties of competitive bidding the phenomenon experienced by the painting contractor known as the winner s curse is just one of the surprising and puzzling conclusions that have been turned up by modern research into auctions another is the theoretical proposition supported also by some experimental evidence that for example a sealed bid treasury bill auction in which each buyer pays a price equal to the highest rejected bid would yield more revenue to the treasury than the current procedure in which the winning bidder pays the seemingly higher amount equal to his own bid there are also subtle results that demonstrate the equivalence of such apparently different institutions as the standard sealed bid auction in which the auctioneer seller sells the goods to the highest bidder for a price equal to his bid and the dutch auction in which the auctioneer seller begins by asking a high price and gradually lowers the price until

long run equilibrium and total expenditures in rent seeking the lure of excess profits or rents associated with monopoly power gives rise to expenditures to obtain these rents competitive rent seeking behavior is recognized as a factor which must be included among the wastes associated with monopoly power tullock 1967 posner 1975 1 the expenditures are aimed at transferring wealth rather than its creation and the use of resources to obtain this transfer is a loss to society how important rent seeking is as a part of the total monopolistic waste hinges on the size of the total expenditures induced by a given level of excess profits

the determinants of price and quality in competitively tendered contracts traditional analysis of the impact of competitive tendering on service provision has focused on costs and prices critics have argued that price reductions lead to lower quality we tested this hypothesis using a two equation econometric model with data from a panel of 61 cleaning service contracts the results indicated that while competition reduced price significantly quality of service was maintained or even enhanced the effect of competition turned out to be greater on prices than on quality and the influence of ownership appeared to be negligible on both the evidence does not support the hypothesis that efficiency gains are traded off for lower quality copyright 1995 by royal economic society

incentives choice and accountability in the provision of public services this paper discusses a theoretical framework to study the issues of competition and incentives without relying on the standard profitoriented market model in the context of the debates about public service reform in the u k it uses the idea that the production of public services coheres around a mission and discusses how decentralized service provision can raise productivity by matching motivated workers to their preferred missions our focus on competition and incentives cuts across traditional debates about public versus private ownership and allows for the possibility of involving private non profits we also address concerns about the consequences of allowing more flexibility in mission design and competition on inequality

contracting out by the public sector theory evidence prospects unlike privatization contracting out or simply contracting does not generally involve the sale of publicly owned assets yet it has been widely used as a mechanism for reform of public sector service provision contracting introduces ex ante competition competition for the market through competitive tendering this article examines both the theory and evidence of contracting by the public sector it considers the theoretical conditions such as contractual incompleteness and the ownership of physical assets which may impede efficient contracting it also reviews the international evidence which suggests that savings in the order of 20 percent are achievable without sacrificing the quality of service provided in the uk savings of between 240m pounds and 280m pounds have been estimated for contracts let at the central government level substantial savings have also been generated by contracting at the local government level copyright 1997 by oxford university press