money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

banking in computable general equilibrium economies abstract in this paper we develop a computable general equilibrium economy that models the banking sector explicitly banks intermediate between households and between the household sector and the government sector households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement banks pool households savings and they purchase interest bearing government debt and non interest bearing reserves we use this structure to answer two sets of questions one normative in nature that evaluates the welfare costs of alternative monetary and tax policies and one positive in nature that studies the real effects of following a procyclical interest rate policy rule

behavioral contract theory abstract this review provides a critical survey of psychology and economics behavioral economics research in contract theory first i introduce the theories of individual decision making most

testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

entrepreneurs perceived chances for success abstract entrepreneurs involved in planning or starting firms must engage in a continuing process of appraising prospects for success these assessments presumably bear upon the preparations they make as well as at some later point whether they decide to make major changes or even to discontinue the business in this study data from 2994 entrepreneurs who had recently become business owners were analyzed to determine their perceived changes of success although previous evidence on business survival led to the hypothesis that the entrepreneurs would only be cautiously optimistic this was not the case they perceived their prospects as very favorable with 81 seeing odds of 7 out of 10 or better and a remarkable 33 seeing odds of success of 10 out of 10 in considering the prospects for other businesses like their own they perceived odds which were significantly lower but still moderately favorable based upon previous research on factors associated with new business success it was hypothesized that those who were more likely to succeed based upon their personal backgrounds and the nature of their new firms would be more optimistic however this was not the case those who were poorly prepared were just as optimistic as those who were well prepared at this point shortly after having become business owners the assessment by entrepreneurs of their own likelihood of success was dramatically detached from past macro statistics from perceived prospects for peer businesses and from characteristics typically associated with higher performing new firms the psychological literature on post decisional bolstering suggests that decision makers in many settings tend to bolster or exaggerate the attractiveness of an option after it has been chosen this coupled with the tendency of entrepreneurs to believe that they can control their own destinies implies that the extreme optimism observed here is probably a typical occurrence for entrepreneurs the findings suggest that it is probably natural to experience feelings of entrepreneurial euphoria when first becoming a business owner with the available evidence it is difficult to judge whether this leads to inadequate preparations or an inability to diagnose problems and make adjustments after the business is started this extreme optimism probably does contribute to the heavy personal commitments observed here in which the median entrepreneur devoted more than 60 hours per week to the business the entrepreneur would seem well advised to form relationships with outsiders such as board members and professional advisors who can be objective and detached in diagnosing problems and assessing objectively the prospects for the business in its current form

general equilibrium with nonconvexities and money in a general equilibrium economy with nonconvexities there are sunspot equilibria with good welfare properties sunspots can ameliorate the effects of the nonconvexities for these economies we show that agents act as if they have quasi linear utility functions we use this result to construct a new model of monetary exchange along the lines of lagos and wright where trade occurs in both centralized and decentralized markets but instead of quasi linear preferences we assume general preferences but with indivisible labor this suggests that modern monetary theory is more robust than one might have thought it also constitutes progress on the classic problem of integrating monetary economics and general equilibrium theory

aggregate employment real business cycles and superior information abstract we test whether dynamic stochastic general equilibrium artificial economies associated with several labor market structures provide an adequate characterization of aggregate employment volatility and dynamics our test is robust to possible misspecifications about the information set used by economic agents to forecast future events accounting for agents superior information we find that the divisible labor indivisible labor labor adjustment costs and labor hoarding structures replicate employment volatility in contrast to the nominal wage contracts structure also the labor hoarding structure provides a substantially better account of employment dynamics

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

asymmetric awareness and moral hazard abstract this paper introduces asymmetric awareness into the classical principal agent model and discusses the optimal contract between a fully aware principal and an unaware agent the principal enlarges the agent s awareness strategically when proposing a contract and faces a tradeoff between participation and incentives leaving the agent unaware allows the principal to exploit the agent s incomplete understanding of the world relaxing the participation constraint while making the agent aware enables the principal to use the revealed contingencies as signals about the agent s action choice relaxing the incentive constraint the optimal contract reveals contingencies that have low probability but are highly informative about the agent s effort

overconfidence and moral hazard abstract in this paper i study the effects of overconfidence on incentive contracts in a moral hazard framework agent overconfidence can have conflicting effects on the equilibrium contract on the one hand an optimistic or overconfident agent disproportionately values success contingent payments and thus prefers higher powered incentives on the other hand if the agent overestimates the extent to which his actions affect outcomes lower powered incentives are sufficient to induce any given effort level if the agent is moderately overconfident the latter effect dominates because the agent bears less risk in this case there are efficiency gains stemming from his overconfidence if the agent is significantly overconfident the former effect dominates the agent is then exposed to an excessive amount of risk and any gains arise only from risk sharing under disagreement an increase in optimism or overconfidence increases the effort level implemented in equilibrium

concentration in ownership of plant variety rights some implications for developing countries this paper explores concentration levels in the ownership of intellectual property rights over plant varieties worldwide an analysis of data for 30 upov member countries shows a high degree of concentration in the ownership of plant variety rights for six major crops at the national level in the developed world much of this concentration has arisen owing to the rapid consolidation of the seed industry through mergers and acquisitions especially in the 1990s a high degree of concentration in the ownership of plant variety rights in combination with recent efforts to strengthen plant variety protection regimes is likely to have significant effects on the prospects for future innovation in plant breeding and the distribution of market power between companies for developing countries concentration in intellectual property right ownership may have important implications for the structure of domestic seed industries and access to protected varieties and associated plant breeding technologies these implications for developing countries are likely to become apparent in the context of the rapid spread of plant variety protection and access legislation emerging changes in the international exchange regime for plant material and liberalised investment policies permitting foreign investment in the seeds sector

the tradeoff between oligopsony power and cost efficiency in horizontal consolidation an example from beef packing in this paper we model the tradeoff between regional oligopsony power and cost efficiency resulting from consolidation in a food processing industry the model can be used to calculate the cost reductions necessary to offset the anticompetitive effects of market power and to compare them to actual cost savings achieved through plant scale or multiplant operating economies for an application we choose the beef packing industry for this case we find that the estimated cost savings necessary to neutralize the anticompetitive effects of consolidation in beef packing are about half the actual cost savings from scale economies

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

overtime labor employment frictions and the new keynesian phillips curve abstract this paper presents a new keynesian nk model that is extended to differentiate between straight time and overtime work the model proposes that the new keynesian phillips curve nkpc should be estimated with marginal cost measured in terms of overtime labor the resulting coefficient estimates are in accordance with theory and statistically significant for the hybrid nkpc which allows for backward looking price setters but not for the purely forward looking nkpc in the hybrid model backward looking behavior is found to be predominant the paper also shows that the incorporation of employment frictions predetermined employment and convex adjustment costs in nk models helps reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level

money and the business cycle with one period nominal contracts a modified version of the nominal contract developed by j a gray 1976 and s fischer 1977 is introduced in a general equilibrium model with money which has been used in the real business cycle literature money is introduced in the model through cash in advance constraint two kinds of contracts are examined namely a nominal wage contract and a nominal price contract the nominal wage contract improves the fit of the model in many respects the nominal price contract increases the output volatility enormously but it has some unrealistic features

measuring market power in multi product oligopolies the us meat industry this paper develops and estimates an economic model for measuring market power in a quantity setting oligopoly engaged in the joint production of demand related goods the model which allows for firms conjectures about both same and cross market responses to own output variation is applied to the us meat beef and pork industry he hypothesis that the industry s equilibrium reflects price taking behaviour is rejected the hypothesis of no cross effects cannot be rejected roughly half of the farm to retail price spreads for beef and pork appear to be attributable to market power

bounds on elasticities with optimization frictions a synthesis of micro and macro evidence on labor supply how can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention i derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand the size of the price change and the degree of frictions the degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum the bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities i apply these bounds to the literature on labor supply the utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1 of earnings as a result small frictions can explain the differences between micro and macro elasticities extensive and intensive margin elasticities and other disparate findings pooling estimates from existing studies i estimate a hicksian labor supply elasticity of 0 33 on the intensive margin and 0 25 on the extensive margin after accounting for frictions

the rise of the chicago packers and the origins of meat inspection and antitrust the meat inspection act of 1891 and the sherman act of 1890 are closely tied this link makes clearer congress intent in enacting the legislation both laws were products of economic conditions after 1880 and reflected in part widespread concern about the market power of chicago meat packers the concerns of local slaughterhouses which were being displaced by new low cost refrigerated beef and of farmers who sold livestock to the large chicago packers were echoed elsewhere by other small businesses and farmers who feared for their livelihood during a time of structural change in the economy i introduction in the few years between 1887 and 1891 the legislative basis was established for major intervention by the federal government into the american economy the interstate commerce act of 1887 the sherman act of 1890 and the meat inspection act of 1891 1 with these laws the federal government became directly involved in the regulation of railroad rates antitrust enforcement and the inspection and certification of food quality for consumers representing a significant break from what had previously been considered an appropriate role for the federal government this legislation provided a new and permanent mandate for government regulation in the market economy despite the importance of these laws the link between the economic and political environment in the united states in the late nineteenth century on the one hand and the legislative histories of the laws on the other has not been thoroughly explored as a result the motives of congress for enacting these laws remain both unclear and controversial consider meat inspection and antitrust although most attention in the literature is focused on the 1906 meat inspection act made popular by the publication of upton sinclair s the jungle the initial legislation the meat inspection act of 1891 came fifteen years earlier and it addressed the production and consumption of fresh beef but as reported in this paper there is no evidence of a major health crisis regarding the consumption of beef at the time something else appears to have been on the mind of congress when it passed the legislation in 1891 the objectives of congress in enacting the sherman act are even more controversial because of the prominence of the law debate revolves around whether the sherman act was designed to promote competition and consumer welfare or to limit competition and protect special interests 2 this paper argues that to gain a better understanding of the origins of this important legislation and its early economic effects the laws must be placed into the context of the extraordinary changes taking place in the american economy in the late nineteenth century the linkages among the laws help to identify the underlying political and economic forces behind the legislation three broad characteristics of the economy must be kept in mind in analyzing this period first the post civil war period was a time of general deflation between 1864 and 1900 the consumer price index fell by 47 percent u s department of commerce 1975 211 in general prices for farm products followed the overall pattern but prices for cattle fell in real terms after the mid 1880s fluctuations in farm prices also appear to have coincided with periods of agrarian unrest 3 second as described by higgs 1971 and chandler 1977 the period after 1880 was a time of major structural change in the economy the economy was becoming more industrial and biased technological change economies of scale in production distribution and marketing as well as the lowering of transportation costs were fundamentally altering production methods and products this affected the competitive positions of many firms creating winners and losers james 1983 burns 1983 atack 1985 emerging large firms expanded from local to national and international markets and existing small firms found their local markets threatened by new competitors

markdown pricing and cattle supply in the beef packing industry we determine the effect of anticipated and unanticipated cattle supply on the departure of fed cattle price from cattle s marginal value product results indicate fed cattle were priced significantly below their marginal value during 31 of the 59 quarters between 1972ii and 1986iv when unanticipated supply shocks are small markdown behavior is consistent with the hypothesis that packers follow an average processing cost apc pricing rule one implication of our results is that reducing industry concentration is not likely to lead to changes in cattle prices predicted by scp based studies of the industry

productivity growth consumer confidence and the business cycle abstract the objective of this paper is to provide in the context of a dynamic general equilibrium model an answer to the following five questions 1 to what extent does an economy subject to regular variations in labor productivity growth differ from one where labor productivity is constant 2 what is the impact on major macro indicators of a one time change in labor productivity growth 3 what are the business cycle implications of autonomous non falsifiable changes in growth expectations 4 what is the potential of such expectation changes for explaining the volatility of consumption to output ratio 5 can autonomous changes in growth expectations help us understand recent business cycle episodes

rational overoptimism and other biases rational agents with differing priors tend to be overoptimistic about their chances of success in particular an agent who tries to choose the action that is most likely to succeed is more likely to choose an action of which he overestimated rather than underestimated the likelihood of success after studying the comparative statics of this mechanism i show that it also causes agents to attribute failure to exogenous factors but success to their own choice of action to disproportionately believe that they will outperform others to overestimate the precision of their estimates and to overestimate their control over the outcome

household production and the excess sensitivity of consumption to current income empirical research on the permanent income hypothesis pih has found that consumption growth is excessively sensitive to predictable changes in income this finding is interpreted as strong evidence against the pih we propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors although the pih is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth

unemployed but optimistic optimal insurance design with biased beliefs biased perceptions of risks change the perceived value of insurance and the per ceived returns to avoiding these risks i show empirically that unemployed workers overestimate how quickly they will nd work but underestimate the return to their search eorts i analyze the consequences for the optimal design of unemployment insurance with biased beliefs contracts equalizing the marginal smoothing ben e t and the moral hazard cost of insurance are suboptimal social and private insurance diverge a paternalistic social planner corrects the moral hazard cost for the distortion in the insured s eort choice while private insurers focus on the perceived rather than the true smoothing bene ts when unemployed workers are optimistic privatizing unemployment insurance may result in ine ciently low or rapidly decreasing unemployment bene ts

managerial beliefs and incentive policies abstract this article examines incentive contracts under moral hazard when a principal and agents disagree about the likelihood that a task will succeed the direction of disagreement alters the effectiveness of monetary incentives the principal s optimal contract is a relative performance evaluation when she is more optimistic than the agents and a joint performance evaluation when she is less optimistic we further show why disagreement may prevail in organizations by considering a simple job assignment problem

meatpacker conduct in fed cattle pricing an investigation of oligopsony power market power in regional fed cattle markets is measured with an econometric model which links behavior of the margin between boxed beef and fed cattle prices to an economic model of conduct a noncooperative game theoretic model suggests that for tacitly collusive pricing behavior to persist in equilibrium oligopsonists must follow a discontinuous pricing strategy meatpackers pay low prices for cattle during cooperative phases and purchase cattle aggressively during noncooperative phases tests for cooperative noncooperative conduct and measures of market power are presented fed cattle prices in four direct trade regions in the central united states are examined evidence of cooperative noncooperative conduct is present in all markets but has declined over time varying conduct across markets and over time suggests it is important to continue monitoring fed cattle markets to assure a competitive environment

antitrust and competition historically considered although antitrust laws enjoy wide support among economists there was almost no such support during the early years of the sherman act one reason for this transformation is a change in the theory of competition until the 1920s most economists viewed competition as a dynamic rivalrous process that would be stifled by antitrust laws once the perfect competition model which largely ignores rivalry was accepted economists opinions of antitrust grew more favorable to the extent that antitrust interferes with rivalry and enterprise the competitive model has very likely misdirected the profession at least as far as antitrust policy is concerned

note on cyclical employment in the consumption goods sector abstract the basic neoclassical growth model makes the counterfactual prediction that the consumption share of employment is countercyclical when endogenous growth from a formal training sector is added to this model the consumption share of employment becomes procyclical owing to the additional margin of adjustment in the allocation of time

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

the farm retail price spread in an imperfectly competitive food industry in a previous article in this journal gardner investigated the effects of three distinct forces affecting food system equilibria shifts in retail demand shifts in farm commodity supply and shifts in marketing input supply he derived comparative static predictions about how the quotient of retail and farm prices the retailfarm price ratio would adjust to changes in each of these exogenous effects the investigation was conducted within a framework that

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

the effects of optimism bias in teams this article imports a behavioural perspective into a team context to study the effort coordination problem among agents specifically we investigate how the presence of optimism bias impacts the severity of the free rider problem the organizational structure of the team and the compensation contracts offered to agents in equilibrium the results indicate that all agents become more reluctant to exert effort and the team welfare decreases when some of its agents are optimistic suggesting that optimism aggravates the free rider problem in teams appointing a team leader makes all agents work harder and the team benefits more by having the optimistic agent as its leader these findings are in sharp contrast to the effects of overconfidence as identified in the literature it is advisable to pay the optimistic agents less than the rational agents encouragingly optimistic agents can learn about their own bias in the long run leaving their team without too much detriment of optimism

overconfidence in the markets for lemons we extend akerlof s 1970 market for lemons by assuming that some buyers are overconfident buyers in our model receive a noisy signal about the quality of the good that is at display for sale overconfident buyers do not update according to bayes rule but take the noisy signal at face value the main finding is that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection this stabilization however comes at a cost rational buyers are crowded out of the market

individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we develop a heterogeneous agent general equilibrium model that incorporates both intensive and extensive margins of labor supply a nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins we consider calibrated versions of this model that dier in the value of a key preference parameter for labor supply and the extent of heterogeneity the model is able to capture the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we then study how the various specications inuence labor supply responses to aggregate technology shocks we nd that abstracting from intensive margin adjustment has large eects on the volatility of aggregate hours even if intensive margin uctuates relatively little

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

disagreement and learning in a dynamic contracting model we present a dynamic contracting model in which the principal and agent disagree about the resolution of uncertainty and we illustrate the contract design in an application with bayesian learning the disagreement creates gains from trade that the principal realizes by transferring payment to states that the agent considers relatively more likely changing incentives the interaction between incentive provision and learning creates an intertemporal source of disagreement risk that alters optimal risk sharing there is an endogenous regime shift between economies with small and large belief differences and an early shock to beliefs can lead to large persistent differences in variable pay even after beliefs have converged under risk neutrality selling the firm to the agent does not implement the first best because it precludes state contingent trades the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

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

overconfidence ceo selection and corporate governance we develop a model that shows that an overconfident manager who sometimes makes value destroying investments has a higher likelihood than a rational manager of being deliberately promoted to ceo under value maximizing corporate governance moreover a risk averse ceo s overconfidence enhances firm value up to a point but the effect is nonmonotonic and differs from that of lower risk aversion overconfident ceos also underinvest in information production the board fires both excessively diffident and excessively overconfident ceos finally sarbanes oxley is predicted to improve the precision of information provided to investors but to reduce project investment

government spending and the international business cycle in this paper the author develops a stochastic general equilibrium model of the world economy it differs from previous multicountry models in the introduction of the government sector the author assumes that countries produce a nonspecialized traded good and that households derive utility from the consumption of private and public goods and services this simple modification has a potential explanation for the low cross country correlations in private consumption and output and the countercyclical trade balances that are observed empirically

market structure and price cost margins in a paper that has become a standard reference in the structure conductperformance approach to industrial economics cowling and waterson 1976 developed a theoretical rationale for expecting industry profitability to be positively correlated with the level of concentration their model based on a simple algebraic description of oligopoly behaviour has been interpreted as providing a justification for the common empirical practice of cross industry regression analysis of price cost margins in terms of concentration levels in the present paper we show that on further examination this model implies a joint determination of margins and concentration this provides some interesting comparative static results of relevance to inter industry differences in concentration levels equally however it leads to various cautionary insights concerning the meaning of price cost margin versus concentration regressions

life insurance and life settlement markets with overconfident policyholders abstract we analyze how the life settlement market the secondary market for life insurance may affect consumer welfare in a dynamic equilibrium model of life insurance with one sided commitment and overconfident policyholders in our model policyholders may lapse their life insurance policies when they lose their bequest motives however they are overconfident in the sense that they may underestimate the probability of losing their bequest motives we show that in the competitive equilibrium without life settlement overconfident consumers will buy life insurance contracts with too much reclassification risk insurance for later periods the life settlement market can impose a limit on the extent to which primary insurers can exploit overconfident consumers we show that the life settlement market may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently vulnerable in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption our result is robust to alternative specifications where i insurers cannot observe the subjective or objective probability that policyholders will lose their bequest motives ii insurers can include health contingent cash surrender values csvs in the life insurance contract and iii policyholders underestimate their future mortality risk

inter firm differences in fed cattle prices in the southern plains pooled cross section time series data were used to assess inter firm differences in fed cattle prices paid by southern plains meatpackers during june 1989 significant price differences were found among packers even after accounting for numerous factors affecting fed cattle value some buyers paid higher prices and some lower prices than did one of the three largest packers as a group the big three firms paid lower prices than did smaller firms both in the southern plains as a whole and in three of its subregions

measuring market power and cost efficiency effects of industrial concentration in this paper i show how appelbaum s framework for testing price taking behavior in a single industry can be formally extended to consider concentration explicitly in so doing i separate the market power effect of concentration from its cost efficiency effect data from the us beef packing industry are used to illustrate an empirical application of the model the findings support oligopsonistic market power and slaughter cost efficiency in the industry however the cost efficiency effect outweighs the market power effect

positive self image and incentives in organizations this paper investigates the implications of individuals mistaken beliefs of their abilities on incentives in organizations using the principal agent model of moral hazard the paper shows that if effort is observable then an agent s mistaken beliefs about own ability are always favorable to the principal however if effort is unobservable then an agent s mistaken beliefs about own ability can be either favorable or unfavorable to the principal the paper provides conditions under which an agent s over estimation about own ability is favorable to the principal when effort is unobservable finally the paper shows that workers mistaken beliefs about their coworkers abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

uncertainty inflation and welfare this paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk in a microfounded search theoretical monetary model we calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness we show that in the presence of imperfect insurance the estimated long run welfare costs of inflation are on average 40 to 55 smaller compared to a complete markets representative agent economy and that inflation induces important redistributive effects across households

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

looking at the bright side the motivational value of confidence abstract the motivational value of confidence postulates that individual effort provision is increasing in beliefs on one s own ability this relation is supposed to also hold for overconfident individuals who have exaggerated ability beliefs we present the first empirical evidence on the existence of a motivational value of absolute confidence that many microeconomic models with overconfident agents build on moreover we document that negative debiasing information on individual ability diminishes effort provision a result that is of obvious relevance for many contexts such as labor relations or learning at school we also offer a strategy for identifying significant absolute overconfidence at the individual level

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

testing the monopsony inefficiency incentive for backward integration in theory monopsony at one stage in a vertically related market provides an incentive for backward integration into the adjacent competitive stages by integrating backward a monopsonist internalizes the monopsony inefficiency due to underemployment of the factor produced upstream however little is known about the importance of such incentive in practice in this paper i provide an empirically implementable model to test the monopsony inefficiency incentive for vertical integration for illustration the model is applied to the u s beef slaughter industry findings seem to support the monopsony inefficiency incentive for backward integration by the industry into the live cattle market

estimating the degree of market power in the beef packing industry a technique for assessing the degree of monopoly power developed by appelbaum 1979 1982 is extended here to permit measurement of monopsony power as well data from the u s beef packing industry are examined the results reveal small but statistically significant monopoly monopsony price distortions in slaughter cattle and wholesale beef markets but in spite of a recent trend toward heightened concentration in the industry give no indication that performance has become appreciably less competitive of late this abstract was borrowed from another version of this item

testing for switching market conduct this paper tests for switching market conduct in an oligopsonistic industry the model adopts bresnahan s procedure for identifying the oligopoly solution and integrates the procedure with a switching regression model applied to the us beef slaughter industry two distinct regimes of conduct in the industry were identified the two regimes are consistent with the time periods during which the industry has undergone major structural change

captive supplies market conduct and the open market price in this paper i examine the anatomy of the price captive supplies relationship to ascertain if some of the interpretations offered in the empirical literature are defensible gardner s one product two input model is extended to consider a partially integrated oligopsonistic industry the main result is that although the empirical relationship between captive supplies and the price received by independent producers is negative it may or may not be attributed to noncompetitive conduct hence for an econometric model to detect what type of conduct the relationship reflects more structural detail is needed than what so far has been provided in the literature

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

unrealistic expectations and misguided learning we explore the learning process and behavior of an individual with unrealistically high expectations overconfidence when outcomes also depend on an external fundamental that affects the optimal action moving beyond existing results in the literature we show that the agent s beliefs regarding the fundamental converge under weak conditions furthermore we identify a broad class of situations in which learning about the fundamental is self defeating it leads the individual systematically away from the correct belief and toward lower performance due to his overconfidence the agent even if initially correct becomes too pessimistic about the fundamental as he adjusts his behavior in response he lowers outcomes and hence becomes even more pessimistic about the fundamental perpetuating the misdirected learning the greater is the loss from choosing a suboptimal action the further the agent s action ends up from optimal we partially characterize environments in which self defeating learning occurs and show that the decisionmaker learns to take the optimal action if and in a sense only if a specific non identifiability condition is satisfied in contrast to an overconfident agent an underconfident agent s misdirected learning is self limiting and therefore not very harmful we argue that the decision situations in question are common in economic settings including delegation organizational effort and public policy choices

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists

antitrust innovation and competitiveness the essays in this book explore how the us antitrust laws especially the sherman act have affected the ways in which us corporations can form alliances to compete in world markets the editors start from the premise that current antitrust laws needlessly and unwisely restrain innovation because they inhibit communication and co operation between firms although not all the contributors agree with them about the extent of this effect

marketing margins market power and price uncertainty this paper provides a conceptual and empirical framework for analyzing marketing margins in a noncompetitive food processing industry facing output price uncertainty the framework allows the decomposition of observed margins into components reflecting the marginal cost of the processing industry oligopoly oligopsony price distortions and an output price risk component the empirical procedure is applied to a time series of spreads between wholesale pork prices and farm prices of market hogs the principal finding is that while farm wholesale margins are more consistent with competitive performance now than they were fifteen years ago the output price risk component persisted throughout the sample period

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

pessimistic information gathering an agent gathers information on productivity shocks and accordingly produces on behalf of a principal information gathering is imperfect and whether it succeeds or not depends on the agent s effort contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering and there are both moral hazard in information gathering private information on productivity shocks and moral hazard on operating effort an optimal menu of linear contracts mixes high powered productivity dependent screening options following good news with a fixed low powered option otherwise

competition in the us meatpacking industry is it history the us meatpacking industry has become concentrated to a degree not experienced since the days of the beef trust a century ago a number of mainstream studies have investigated if such concentration has been detrimental to competition just as earlier studies may have helped shape competition policy towards meatpacking a century ago contemporary studies have made their way into current discussions and may shape competition policy at the turn of this century this paper asks whether or not contemporary studies are useful in informing competition policy after comparing how competition looks from the econometric vantage point with how it looks from the vantage point of the industry s 300 yr history this article concludes that mainstream studies are more useful for a competition policy targeting conduct rather than structure

home production with endogenous growth abstract benhabib et al 1991 and greenwood and hercowitz 1991 demonstrate that general equilibrium beckerian home production models that incorporate separate technology shocks to the home and market production functions are able to explain either the comovements in employment across consumption and investment sectors of the economy or the comovement in output across market and home investment sectors but not both simultaneously this paper demonstrates that these comovements can be resolved by introducing endogenous growth into the model while retaining only a single technology shock to market production the additional margin for allocating time between formal training and market activities is sufficient to bring about the observed positive comovements in employment and output across sectors

technical progress and aggregate fluctuations abstract we compare the cyclical fluctuations exhibited by a stochastic growth model under various stochastic processes governing technical change all of which are highly autocorrelated the results obtained are quite sensitive to the precise form of this stochastic process in particular the results depend on whether growth is deterministic or stochastic and in each case are quite sensitive to the persistence of an innovation the model does a relatively poor job of accounting for features of observed business cycles when technical change is difference stationary and does a better job when technical change is trend stationary but highly autocorrelated

correlation neglect incentives and welfare abstract we modify the holmstrom milgrom model by letting the agent neglect the correlation between performance measures whenever true and perceived correlation are sufficiently low correlation neglect enhances material welfare and expected profit otherwise material welfare diminishes and the agent may benefit