Measurement distortion and missing contingencies in optimal contracts

Summary Theory suggests that optimal contracts should include many contingencies to achieve optimal risk sharing. However, in practice, few contracts are as complex as theory suggests. This paper develops a model which is consistent with this observation. The lack of risk sharing results from the interplay of two factors. First, contingencies must be based on information produced by measurement systems, which may be manipulable. Second, when two parties to a contract meet, they often have incomplete information. The type of contract offered may reveal information about the party who proposes it. Different types of agents have different preferences over contingent contracts, because they have different abilities to manipulate the measurement system. These differences in preferences allow the parties to signal their types through the contracts they offer. Noncontingent contracts may be chosen in equilibrium because they are the only contracts which do not give any type an incentive to distort the measurement system and, hence, do not reveal information about the party proposing the contract.We have benefited from conversations with Oliver Hart, Rick Lambert, Michael Riordan and Jean Tirole and the comments of Michel Habib, Nick Yannelis and two anonymous referees. Financial support from the National Science Foundation under grants SES-8920048 and SES-8720589 is gratefully acknowledged.     

WORLD OUTLOOK

Events in the Gulf have finally brought an end to the world economic boom of the last eight years. The oil price shock itself is only partly responsible for the downturn. The previous tightening of monetary policy in the face of inflationary pressures and the end of a rapid period of credit and asset price expansion had severely weakened the ability of some economies to respond to the shock. This is reflected in the diversity of response, most obviously in the United States where Fed fine tuning and the credit crunch have already weakened the economy. The rise in oil prices has led to a sudden collapse in consumer confidence and a swift cutback in output. Although we do not expect the recession to be deep, the financial problems will delay recovery. The Japanese economy was already in financial difficulties before the shock, although the real economy was stronger and here we expect a sharp deceleration from almost 6 per cent growth last year to around 3.5 per cent. In contrast the German economy, partly shielded by the substantial appreciation of the DM over the last year, has been affected less by the oil price shock and we expect the consumer and investment boom to continue this year as the economies merge. This provides a welcome boost to other European economies.     

Risk Management Using Quasi–static Hedging

In this paper, we try to develop a comprehensive theory of risk management for illiquid trading instruments and exotics by examining the consequences of a quasi–static hedging strategy. In contrast to a static hedging strategy, in which an initial hedge once executed is kept in place for the life of the trade, and a dynamic hedging strategy, in which hedges are frequently adjusted over the life of the trade, a quasi–static hedging strategy utilizes hedge adjustments but tries to minimize the frequency. Almost all the examples studied in the framework introduced here take this minimization to the extreme by limiting hedge adjustments to at most one during the life of a trade. We examine the application of this approach to long–dated forwards, long–dated options and exotic options such as cliquet and barriers. The model we present for barriers is a new generation of the Derman–Ergener–Kani approach which combines the flexibility of the approach with a sizable increase in model independence.     

Strategy-proofness and Arrow's conditions: Existence and correspondence theorems for voting procedures and social welfare functions

Consider a committee which must select one alternative from a set of three or more alternatives. Committee members each cast a ballot which the voting procedure counts. The voting procedure is strategy-proof if it always induces every committee member to cast a ballot revealing his preference. I prove three theorems. First, every strategy-proof voting procedure is dictatorial. Second, this paper's strategy-proofness condition for voting procedures corresponds to Arrow's rationality, independence of irrelevant alternatives, non-negative response, and citizens' sovereignty conditions for social welfare functions. Third, Arrow's general possibility theorem is proven in a new manner.     

The National Collegiate Athletic Association Cartel: Why it Exists,How it Works,and What it Does

In this essay we consider why American colleges and universities participate in big-time commercialized intercollegiate sports, and how sports came to play such a prominent role on American college and university campuses. We also review how the National Collegiate Athletic Association (NCAA) developed as a body to regulate player safety and transformed itself into an economic regulator, the means by which the NCAA attempts to maintain its control, increase revenues, and reduce costs for college sports programs. We also examine how the organization succeeds in the face of institutional characteristics that imply that its cartel activities would be doomed. Finally, we speculate on what changes might be on the horizon for the NCAA and college athletics.     

The Urban Unbound: London's Politics and the 2012 Olympic Games

Global events such as London's 2012 Olympic Games raise questions about the ways in which embedded political arrangements take their shape from relationships that stretch across and beyond urban boundaries. In this article, the urban politics that we wish to capture is not one that is merely located in the city, but rather one that has to constantly take into account the mediated demands folded (as it were) into the urban arena. In the first part of the article, the corporate politics of an Olympic‐related urban regeneration are outlined and then considered, first as a staged setting for interaction, a kind of placeless political engagement, and then as a more embedded spatial politics that takes into account the leverage of networked groups acting within and beyond the city. Following that, we explore the politics of regeneration when campaign groups and alternative coalitions of interest raise their own political demands by drawing on references outside of their immediate urban area and attempt to steer political dialogue in ways that extend the reach of urban politics. The urban politics at stake in this context, we argue, appears to work more through topology than a series of mapped connections; through actors registering their presence in ways that often dissolve the tension between inside and outside rather than define it in terms of separate political spaces.     

Behavioural Orientations of Non‐Profit Boards as a Factor in Entrepreneurial Performance: Does Governance Matter?

Relatively little is understood about factors triggering entrepreneurial behaviour within organizations not driven by profit motives. Governance plays an important role in non‐profits, particularly boards of directors. Integrating resource‐based theory and entrepreneurial orientation research, we examine the influence of non‐profit boards as strategic resources shaping the organization's entrepreneurial orientation and performance. In particular, we focus on the non‐profit board's underlying behavioural orientations, or the extent to which the board is strategic, activist, conservative, and cohesive. Findings from a cross‐sectional survey on arts and culture organizations demonstrate that three of these behavioural orientations impact levels of entrepreneurship occurring within non‐profits. Higher levels of entrepreneurship affect social performance, but not financial performance.