Procurement favouritism and technology adoption

It is well known that the design of cost minimizing procurement rules for the selection of a contractor among distinct technological groups requires the favouritism of inefficient firms. In this paper, I show that, if technology adoption is non-contractible, these policies will also provide optimal incentives for the inefficient firms to adopt more efficient technologies.     

Should we write prenuptial contracts?

A successful marriage requires for both parties to make investments in their relationship and marital assets. How such assets would be divided if and when the parties divorce is an important factor determining each party's ex ante investment incentives. Using the incomplete contracting approach, we characterize the optimal asset division rule, one that provides the parties with the best investment incentives. We then discuss the circumstances under which the spouses would agree, in equilibrium, to contract out state-imposed rules governing the allocation of marital assets upon divorce. We conclude by exploring the implications of our results in the context of various asset division rules currently discussed by policy-makers.     

The Red–Green Channel Dilemma: Customs Declaration and Optimal Inspection Policy

Despite the evolvement of an extensive literature on the economics of smuggling, the evasion of customs duties under the common red–green channel system has failed to attract any theoretical attention. The present paper develops a simple three‐passenger‐type model to examine the passenger's decision of whether to pass through the green or red channel, as well as to derive the optimal inspection policy for a revenue‐maximizing customs authority. The analysis reveals that if net revenue collection when inducing truthful declaration is positive, it is never optimal for the customs authority to provide incentives for passing through the green channel, although it may be optimal to provide incentives for cheating at the red channel. However, if the penalty for evasion is large enough to wipe out passengers' income, providing incentives for passing through the green channel may be the optimal policy.     

R&D incentives in compatible networks

Network externalities describe the phenomenon that a good becomes more valuable to each user the more other consumers use the same or a compatible troduct. Whereas most of the recent literature on network effects has focused on the adoption of products, this paper shows that network externalities can have important feedback effects on the incentives to carry out R&D and develop new products. Even if the products are compatible, network effects can lead to strategic overinvestment or underinvestment. The firms' R&D decisions are compared with the socially optimal ones.     

Dividends, safety and liquidation when liabilities are long-term and stochastic

This paper investigates the optimal management of a firm faced with a long-term liability that occurs at a random date. Three issues are analysed: The optimal dividend policy; optimal expenditure on safety to delay the occurrence of the liability; and the optimal liquidation date of the firm. An owner faced with dynamic unlimited liability never liquidates and therefore accumulates capital to the golden rule level. For long-term liabilities, dividend payments and safety expenditure are non-decreasing over time. The owner protected by limited liability may liquidate the firm in finite time in order to avoid paying the liability. If this is the case, then it accumulates less capital than the dynamic unlimited liability owner; and may decrease dividend payments and safety expenditure over time. The paper shows that a finite liquidation date is more likely to be optimal when the arrival rate of the liability occurrence increases over time.     

Regulation of common property resources under private information about resource externalities

Optimal marginal investment incentives and optimal entry regulations are developed for a case where heterogeneous firms exploit a common property natural resource. The government’s objectives are to correct for resource externalities and to tax away the resource rent. Both individual output and efficiency levels are subject to private information, i.e. it is a model with multi-agency, externalities, and countervailing incentives. There are asymmetric information about the net revenue of the firm and the size of the resource externalities that the firm inflicts on the other firms in the industry. The latter implies that external effects are present both in the firms’ net incomes and in the information rents.     

The timing of contracting with externalities

This paper endogenizes the timing of bilateral contracting between one principal and multiple agents in the presence of externalities. Contracting simultaneously with all agents is optimal for the principal if externalities become weaker the more an agent trades. If instead externalities become stronger, sequential negotiations might benefit the principal as they lower the agents’ outside options. Under some linearity conditions, the principal's preferences with respect to different timings of contracting are opposed to their efficiency ranking.     

Message-contingent delegation

The paper studies the role of delegation and authority in a principal-agent relation in which a non-contractible action has to be taken. The agent has private information relevant for the principal, but has policy preferences different from the principal. Consequently, an information revelation problem arises. I consider a partially incomplete contracting environment with contractibility of messages and decision rights and with transferable utility. I contribute to the literature by allowing for message-contingent delegation and by deriving the optimal partially incomplete contract. It is shown that message-contingent delegation creates incentives for information revelation and may outperform unconditional authority and unconditional delegation.     

Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences

The effects of consumption and production externalities on economic performance under time non-separable preferences are examined both theoretically and numerically. We show that a consumption externality alone has long-run distortionary effects if and only if labor is supplied elastically. With fixed labor supply, it has only transitional distortionary effects. Production externalities always generate long-run distortions, irrespective of labor supply. The optimal tax structure to correct for the distortions is characterized. We compare the implications of this model with those obtained when the consumption externality is contemporaneous. While some of the long-run effects are robust, there are also important qualitative and quantitative differences, particularly along transitional paths.     

Socially excessive dissemination of patent licences

Abstract .  Compared with the social optimum, a monopolist usually sells too little. This result seemingly includes the case of a lab that licences its patented cost innovation: Katz and Shapiro (1986) find 'conditions under which [the lab] will issue fewer than the socially optimal number of licences.' However, I find instead that its incentives can be socially too high; the monopoly seller may sell too much. For example, it can be profit maximizing to sell several licences, while it is socially optimal that none is sold.     

RANDOM AUTHORITY

This article rationalizes matrix management in a multiproject organization in which decisions must be adapted to local conditions but also coordinated with each other. Project managers are privately informed about local conditions and communicate strategically via cheap talk. Matrix management is modeled as a randomization over deterministic authority allocations. We show that random authority is strictly optimal when the conflict between adaptation and coordination is very severe or the coordination need is very small. Moreover, the optimal degree of delegation changes nonmonotonically in the coordination need when the incentives of the project managers are sufficiently aligned.     

Private information,Coasian bargaining,and the second welfare theorem

Most of the debate about Coasian bargaining in the presence of externalities relates to the First Welfare Theorem: is the outcome under bargaining efficient? This debate has involved the definition and importance of transaction costs, the significance of private information, and the effect of entry. There has been little analysis of how Coasian bargaining relates to the Second Welfare Theorem: even if the bargaining outcome is efficient, does the process limit the set of Pareto optimal allocations which can be achieved?We consider a model in which individuals utilize a common resource and may affect each other's output. The individuals differ in their productivities or tastes and this information is private to each of them. The government can manage the common resource and use nonlinear taxes to correct for the externality or it can turn the common resource over to a private owner who can charge individuals to utilize it with a nonlinear fee schedule. The government and the owner have the same information about tastes and productivities of the individuals. Except for the private information, there are no bargaining or administrative costs for collecting the taxes or fees. Whether there is public or private ownership, the government desires to redistribute, but it faces self-selection constraints.We show that the outcome of Coasian bargaining is constrained Pareto efficient. That is, given the information constraints, no Pareto improvement is possible. However, private ownership may limit what Pareto optimal allocations the government can achieve. The private owner in seeking to maximize profits always proposes contracts which counteract the government's attempts to redistribute across individuals with different characteristics. Under public management, any Pareto optimum can be sustained. In this context, private ownership, while not inefficient, does limit the government's ability to redistribute.     

Multiplier effects in economies with missing risk markets

The paper analyses the impact of pecuniary externalities in a two-sector economy with an incomplete market structure. Agents in each sector choose their proportion of risky investment. Sector specific risks are assumed to be perfectly negatively correlated. It is shown that the economy is more volatile if risk markets do not exist. With a complete set of risk markets, shocks in one sector will be dampened on the aggregate level. In contrast, when risk markets are absent, pecuniary externalities arising from higher risky investment in one sector can create feedback effects in the other sector. When agents are sufficiently risk averse (their coefficient of relative risk aversion being greater than one), an individually optimal response to the increased riskiness of the price distribution will result in an even riskier price distribution: an increase in risky activity in one sector will lead to an increase in risky activity in the other sector, and this gives multiplier effects.Part of this work has been done while I was visiting assistant professor at the University of Western Ontario, London, Canada.I am grateful to Hans-Werner Sinn for helpful comments. The suggestions of the two referees have contributed to improve the paper considerably.     

A note on dynamic monopoly pricing under consumption externalities

We analyze dynamic monopoly pricing under consumption externalities, focusing on pricing under negative externalities. We also attempt to generalize models in the previous literature, which encompass both negative and positive externalities, by incorporating a consumer’s discount factor for past sales as a parameter. Analyzing our model reveals oscillation as the optimal price path in the presence of negative externalities.     

Efficient Bayesian Mechanisms for Collective Goods: Is a Deficit Inevitable?

This paper considers efficient Bayesian mechanisms for the provision of collective goods. We study the impact of excludability and the nature of externalities exhibited by collective goods upon incentives. We demonstrate that if a good is rivalrous only excludability of benefits allows a designer to restrict each agent's payoff enough to achieve efficiency in the limit. The more exclusive a rivalrous good, the smaller is the financial deficit in the mechanism relative to the size of the surplus of the economic activity. In contrast, if a good exhibits positive externalities, excludability is no longer necessary to achieve efficiency in provision.     

Budget Cuts, Social Assistance and Voluntary Unemployment

The theory of optimal taxation has shown that bunching can be optimal under certain circumstances so that low–skilled agents are not offered any work incentives. Optimal bunching balances the marginal costs of voluntary unemployment and the marginal reduction in information rents for high–skilled workers. This paper demonstrates how the optimal scheme will change if the budget is cut. It shows that a tighter budget constraint will lead to more voluntary unemployment and less work incentives.     

战略性经营者激励选择与国际市场份额竞争

本文首先用具有线性需求和规模收益不变生产技术的Cournot双头模型来刻画国际市场份额竞争。指出 ,如果参与国际竞争的本国企业是所有权与经营权分离的企业 ,那么 ,无论竞争对手是否是所有权与经营权分离的企业 ,本国企业所有者总是有积极性操纵经营者的激励 ,特别的 ,在只有本国企业作出单边激励选择的情况下 ,这种操纵可以使本国企业生产Stackelberg领先者产量成为可以置信的承诺。它在这里所起到的作用是与出口补贴在战略性贸易政策分析中所起到的作用相一致的。如果考虑到从过去的GATT到现在的WTO都规定政府不得以任何形式参与国际竞争 ,这个结论就更有趣了。因为无须政府帮助 ,本国企业所有者凭借自身的力量就能实现有利于本国企业的竞争结果。这种民间对政府的替代是有意义的。在双边激励选择的情况下 ,两国企业陷入了“囚徒困境”。本国企业只有诉诸于本国政府对国际市场的干预 ,才能重新获得Stackelberg领先者的地位 ;但与对它的传统理解相比 ,这种地位已然弱化。最后 ,我们还证明 ,根据相当一般的条件 ,所有者决定的最优经营者激励只与竞争类型 (数量竞争还是价格竞争 )有关 ,而与企业的产品类型 (替代品还是互补品 )无关。     

Optimal collective contract without peer information or peer monitoring

If entrepreneurs have private information about factors influencing the outcome of an investment, individual lending is inefficient. The literature typically offers solutions based on the assumption of full peer information to solve adverse selection problems and peer monitoring to solve moral hazard problems. In contrast, I show that it is possible to construct a simple budget-balanced mechanism that implements the efficient outcome even if each borrower knows only own type and effort, and has neither privileged knowledge about others nor monitoring ability. The mechanism satisfies participation incentives for all types, and is immune to the Rothschild–Stiglitz cream skimming problem despite using transfers from better types to worse types. The presence of some local information implies that the mechanism cannot be successfully used by formal lenders. Thus a local credit institution can emerge as an optimal response to the informational environment even without peer information or monitoring. Finally, I investigate the role of monitoring in this setting and show how costly monitoring can increase the scope of the mechanism.     

Breaking the law when others do: A model of law enforcement with neighborhood externalities

A standard assumption in the economics of law enforcement is that the probability of a violator being punished depends only on the resources devoted to enforcement. However, it is often true that the productivity of enforcement resources decreases with the number of violators. In this paper, an individual who violates the law provides a positive externality for other offenders because the probability of being punished decreases with the number of individuals violating the law. This externality explains the existence of correlation between individuals’ decisions to break a law. The model evaluates the implications when determining the socially optimal enforcement expenditure, focusing specifically on the case of neighborhood crime. In particular, using a parametrized functional form, I show that neighborhood externalities will enhance or impede enforcement, depending on the crime rate.     

Resale Markets and the Assignment of Property Rights

The consumption of an indivisible good causes identity-dependent externalities to non-consumers. We analyse resale markets where the current owner designs the trading procedure, but cannot commit to future actions. We ask the following questions: (1) Does the identity of the initial owner matter for the determination of the final consumer? (2) Is the outcome always efficient? The major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency. This result complements the Coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency.