Non-discriminating renegotiation in a competitive insurance market

A variant of the Rothschild-Stiglitz model of a competitive insurance market is considered, where each uninformed firm is allowed to renegotiate the contracts that its customers initially sign, subject to the restriction that renegotiated contracts be offered to all the firm's customers. Such non-discriminating renegotiation is shown to weaken the profitability of cream skimming to the extent that there exists a unique equilibrium outcome. This outcome is that of Miyazaki and Spence i.e., the incentive-compatible pair of zero-profit contracts, if efficient; and the incentive-compatible, zero-profit pair of contracts maximizing low-risk utility, otherwise.     

Questions About the Initiative of the European Commission Concerning the Awarding and Compulsory Competitive Tendering of Public Service Concessions

The ruling of the European Commission is that the award of contracts by regional or local authorities for the provision of services of general economic interest must be done by way of competitive tendering. Such contracts must not be awarded to the authority's own public enterprises or to any other enterprise, including by means of unilateral State act, without a call for tenders, a practice that had previously been common in many Member States. Public service concessions are also subject to the competition rules of the EC Treaty. Should the European Commission enact a directive concerning compulsory competitive tendering, this would result, for several Member States, in a serious change of paradigm as regards the awarding of public service concessions. Against this background, this article will attempt to find answers to the following questions: —How is the present relationship of the regional or local authority with its own public enterprise to be considered? —Are there any limits to applying the rules on competition of the EC Treaty to public service concessions? —What kind of positive and negative effects concerning economic efficiency and supply of specific public services result from the awarding of public service concessions and from compulsory competitive tendering? —What kind of, and what amount of, transaction costs result from compulsory competitive tendering and from the awarding of concessions? —Does competitive tendering work properly, and are public tenderers given equal opportunities? —Are there any alternatives to compulsory competitive tendering that would achieve an efficient market performance and provide sufficient supply?     

Self-Regulation and Government Oversight

Self-regulation is a feature of a number of professions. For example, in the U.S. the government delegates aspects of financial market regulation to self-regulatory organizations (SROs) like the New York Stock Exchange and the National Association of Securities Dealers. We analyse one regulatory task of an SRO, enforcing antifraud rules so agents will not cheat customers. Specifically, we model contracting/enforcement as a two-tier problem. An SRO chooses its enforcement policy: the likelihood that an agent is investigated for fraud and a penalty schedule. Given an enforcement policy, agents compete by offering contracts that maximize customers' expected utility. We assume that the SRO's objective is to maximize the welfare of its members, the agents. We show that the SRO chooses a more lax enforcement policy—meaning less frequent investigations—than what customers would choose. A general conclusion is that control of the enforcement policy governing contracts confers substantial market power to a group of otherwise competitive agents. We also investigate government oversight of the self-regulatory process. The threat of government enforcement leads to more enforcement by the SRO, just enough to pre-empt any government enforcement.     

Forward trading in exhaustible-resource oligopoly

We analyze oligopolistic exhaustible-resource depletion when firms can trade forward contracts on deliveries – a market structure relevant for some resource markets (e.g., storable pollution permits, hydro-based power pools) – and find that trading forwards can have substantial implications for resource depletion. We show that when firms’ initial resource-stocks are the same, the subgame-perfect equilibrium path approaches the perfectly competitive path as firms trade forwards frequently. But when the initial stocks differ, firms can credibly escape part of the competitive pressure of forward contracting. It is a unique feature of the resource model that equilibrium contracting and the degree of competition depends on resource endowments.     

Efficient political contributions with conditional Coasian contracts

The externalities associated with political contributions imply agents choose a socially inefficient level. A typical market solution to these externalities would involve Coase bargaining where agents form contracts with payments conditional on the actions of others. These contracts, however, are hard to enforce because political contributions can be unobservable or unmeasurable. In this study, we modify these Coasian contracts, making the payments conditional on the outcome of the political election. We show the agents that form these contracts contribute the socially efficient amount.     

An evolutionary analysis of insurance markets with adverse selection

The equilibrium nonexistence problem in Rothschild and Stiglitz's insurance market is reexamined in a dynamic setting. Insurance firms are boundedly rational and offer menus of insurance contracts which are periodically revised: profitable competitors' contracts are imitated and loss-making contracts are withdrawn. Occasionally, a firm experiments by withdrawing or innovating a random set of contracts. We show that Rothschild and Stiglitz's candidate competitive equilibrium contracts constitute the unique long-run market outcome if innovation experiments are restricted to contracts which are sufficiently “similar” to those currently on the market.     

A New Approach for Regulating Information Markets

Information markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. They have the potential to improve decision making and policies throughout the economy. At the same time, there are regulatory hurdles to establish such markets, largely arising from state prohibitions on Internet gambling. This paper reviews the current regulatory structure for information markets in the United States and offers recommendations for reform. We argue that the authority for regulating many information markets should be shifted from the states to the federal government. In addition, the Commodity Futures Trading Commission should administer an “economic purpose test”. That test would only allow information market contracts that are likely to provide significant financial hedging opportunities or valuable information for improving economic decisions.     

Renewable resource management, user heterogeneity, and the scope for cooperation

Cooperation can increase the efficiency of commonly-owned renewable resource use. However, received knowledge is that, absent side payments, cooperative solutions are more difficult to achieve the less homogenous the agents involved. We revisit this claim by analyzing how differences in the opportunity costs of resource harvesting affect the scope for Pareto-improving contracts, where contracting is with respect to the type of technology used. We find that the scope for cooperation is largest for intermediate levels of heterogeneity.     

Adaptive contracting: the trial-and-error approach to outsourcing

Summary. Adaptive contracting occurs when a principal experiments with the delegation of authority through leaving contracts incomplete. We highlight two potential benefits of adaptive contracting: First, the delegation of authority can be advantageous even if the agent acts opportunistically, since expected private benefits will be shared between the parties through price negotiation. Second, the principal extracts information from experimenting with delegation of authority and we identify a positive option value embodied in the principals ability to extend or withdraw the delegated authority in future contracting periods.Received: 14 April 2003, Revised: 26 January 2004, JEL Classification Numbers: D72, L33, L97.We thank John Sørensen and Henrik Severin Hansen for introducing us to the contractual and economical issues in local bus outsourcing in Denmark, Oliver Hart and Antonio Rangel for early discussions on adaptive contracting and Christian Aastrup for research assistance. We are grateful to Danish Transportation Research Institute (www.dtf.dk) for comments and financial support for this project.     

The determinants of tendering periods for PPP procurement in the UK: an empirical analysis

The procurement of infrastructure projects via public–private partnerships (PPPs) is rising globally. PPPs are, however, often characterized by lengthy tendering periods, defined as the difference between contract notice and financial close. Tendering periods are important because they account for a significant proportion of overall project delivery time. Slow tendering deters bidders and thus reduces competition for contracts. We source data on 670 PPP projects in the United Kingdom and use a duration analysis model to empirically examine factors that impact tendering period duration. Our results reveal significant sectoral variation with projects in the health and housing sectors taking significantly longer to reach financial close. We also show that, after controlling for other factors, projects with higher capital values and projects that overlap with the timing of general elections are associated with significantly longer tendering periods. We further examine the impact of the competitive dialogue procurement method and find evidence that tendering periods have increased since 2006; the year competitive dialogue was introduced. We do, however, observe a significant reduction in the time between appointment of preferred bidder and financial close post-2006. This suggests that competitive dialogue is effective in reducing the scope for negotiations by preferred bidders holding quasi-monopoly advantages.     

The Reform of Local Public Utilities in Italy

The Italian system of local public utilities has recently undergone an important reform process. The first round of reforms, introduced in the 1990s, represented a remarkable change in the social welfare function with regard to the management of local public utilities. The legislation was specifically designed to cut costs and reduce deficits. A second round of reforms, required by European directives, started around the mid-1990s. Several laws were passed introducing important innovations and regulating specific sectors: public transport; electricity; and gas. Article 35 of the 2002 Financial Law was the final step in a comprehensive reform of the whole local public utility sector. The main innovations of the Financial Law concerns liberalization. Article 35 states that the general rule for awarding service provision contracts is competitive tendering; the rationale is obviously that of competition for the market. The general rule as expressed by Article 35 is nevertheless limited during the transition period. In the long run, competitive tendering will become the normal way of awarding contracts for local public utility provision. Even if there are doubts that full competition will be introduced into the sector, liberalization does appear to be having an effect, forcing many local public utilities to become more efficient. The changes introduced have brought about a better and a more efficient system with a greater number of large size enterprises and on the average a more active management.
In the future, the liberalization process may come to a standstill due to an insufficient number of competitors. Strong public administrations are therefore needed to prevent opportunistic behaviour by private firms.     

Withholding investments in energy only markets: can contracts make a difference?

Although there are mechanisms to control market power in the spot market, withholding investments can still increase profits and hamper adequate capacity expansion. We examine the effect on investment of one suggested approach to reducing market power, contracting longer term. We construct a stylized model of an energy-only market where two firms, each specializing in one technology, invest in a first stage, contract part of their production in the second stage and sell the rest in the spot market in the third stage. We compare this model to one of an energy-only market having two stages, investment and a spot market. We find cases where the contracts change neither capacity nor peak prices, where the foreclosing effect of one player blocking the other from contracts markets increases investments and reduces prices, and where the opportunity to foreclose the market can incentivize one firm to lower its investment and increase its pricing power to the detriment of consumers. The model relies on the simplest possible assumptions of imperfect competition (subgame perfect equilibria with Cournot agents). We illustrate the different outcomes in a numerical example with two load steps (peak and off-peak) where we change one parameter, the height of the off-peak time segment. We find cases with increased and decreased capacity as well as no change in capacity. Since there is no general characterization of the consequences of contracts in this simple example, there can be no characterization in more complicated models that contain the market structures included here, and regulators or competition authorities cannot rely on contracts to induce sufficient capacity expansion by reducing market power. One other market mechanism that has been proposed to induce investment, a capacity auction with predetermined capacity requirements, is a potential alternative to limit market power that deserves further exploration to determine the extent to which it can provide an adequate incentive to invest in the presence of market power.     

Wage-vacancy contracts and coordination frictions

We consider a directed search model with risk-averse workers and risk-neutral entrepreneurs who can set up firms that post wage-vacancy contracts, i.e., contracts where firms can make payments to more than one applicant, and where the payments can be different for each applicant and be contingent on the number of applicants. We establish that the type of contracts the literature focuses on are not offered if firms can post wage-vacancy contracts. We show that there exists an equilibrium satisfying a Monotonic Expected Utility property which is efficient. Furthermore, we investigate the role of wage-vacancy contracts on welfare and competition.     

Does Poaching Distort Training?

We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investment in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.     

部分契约、控制权转移与揭示机制

区别于完全契约和不完全契约理论,基于对名义控制权和实际控制权的区分,Aghion等(2002;2003)提出部分契约概念,强调代理人人力资本的重要性和实际控制权的可转移性.在此基础上,我们放松Aghion等(2003)的研究假设,基于贝叶斯法则对该理论做一般化分析并对不同状态下转移控制机的机制效力进行比较.我们强调在更一般的情况下,除了引人价格机制以外,引入声誉作为保障该信息揭示机制效力的激励约束机制是必要的且比价格机制列为适用.该理论对于解释信誉,授权等理论问题,以及指导中国公司治理实践具有参考价值.     

Default Service Auctions

In February 2002, New Jersey completed a market process whereby the utilities were able to purchase one-year forward contracts to ensure energy needs for their default service customers for a one-year period. The auction was the first application of the simultaneous descending clock auction to power procurement. We chose this auction format to fit the specific needs of the New Jersey Electric Discount and Energy Competition Act and the New Jersey Board of Public Utilities mandate for a competitive bidding process to procure the electricity to meet the electric utilities default service obligations.     

Opening up Public Services to Competition by Putting Them Out to Tender: An Evaluation

This article examines the effects of systematizing tendering procedures when awarding public service concessions. The opening up of the water supply industry to competition is used by way of illustration. Results show that arguments in favour of systematization are not robust when focusing solely on the expected benefits of the liberalization process. The peculiarities of the contract relationship in the delegation of public services, the mobilization of specific assets, and the long duration and incompleteness of the contracts invalidate this type of argument and expose public authorities to the opportunism of operators.
The efficiency of awarding public services concessions relies on cost–benefit analysis, taking into account sectoral aspects as well as specificities of the contracting organizations and structures.
The public service culture of these organizations is in this respect a key factor in the choice of efficient organizations since it conditions their ability to internalize the mission of fulfilling the public interest.     

On the possibility of welfare-enhancing hard core cartels

The conventional wisdom is that cartels which merely lead to lower production levels and higher prices are detrimental to social welfare. This paper explores the extent to which this is generally valid. We derive necessary and sufficient conditions for the existence of a hard core cartel that is beneficial for firms and society at large. Considering both strong (with side payments) and weak (without side payments) hard core cartel contracts, we find that (i) both strong and weak welfare-enhancing cartels exist when at least one firm makes a loss on part of its sales in competition, (ii) a welfare-enhancing strong cartel exists whenever there is a difference in unit cost at competitive production levels, and (iii) a welfare-enhancing weak cartel exists when the profit margin on all sales is positive and the cost difference is sufficiently large.     

Forward contracts and competition

This paper examines the strategic use of forward contracts in an industry where downstream firms must buy an essential input from imperfectly competitive upstream suppliers. When a single large firm and a fringe of firms exist downstream, the large firm buys forward contracts from the fringe, i.e. there is horizontal subcontracting from the large firm to the firms on the fringe, in order to make the spot market less competitive. Hence our paper argues that horizontal subcontracting becomes an anti-competitive device. We also compare the strategies of buying forward contracts and purchasing productive capacity and we find that both are equivalent tools. When the downstream industry has instead several large firms, they have a “horizontal” incentive to sell forward contracts in order to gain market share, but the former “vertical” incentive to buy them persists. In this case, forward contracting may then lead to less competition in the spot market. We are indebted to Ramon Faulí-Oller, José Manuel Ordó?ez and Juan Carlos Reboredo for their helpful comments and suggestions on an earlier draft. We also gratefully acknowledge the valuable observations made by two anonymous referees and a Co-Editor that led to substantial improvements. Of course, the usual disclaimer applies. Antelo acknowledges financial support from the Xunta de Galicia (Grant PGIDIT02PXIA20101PR) and Bru that from the Spanish Ministerio de Ciencia y Tecnología (Grant PB98-1402).     

UNEMPLOYMENT INSURANCE AND EXPERIENCE RATING: INSURANCE VERSUS EFFICIENCY*

Unemployment insurance (UI) distorts firms' layoff decisions by reducing the cost of laying off workers. To dampen this increase, it has been suggested that UI should be financed with an experience‐rated tax. Despite the fact that increasing the level of experience rating can reduce unemployment, it can reduce the insurance coverage workers receive. With high experience rating, firms may reduce their severance payments by more than the UI benefit. We build a model where competitive firms offer contracts with severance payments to risk‐averse workers. Frictions in the labor market lead to incomplete insurance. This article shows that less than full‐experience rating enables the government to increase the insurance coverage workers receive. Welfare implications are also investigated.