Market power,uncertainty, and the level of trade

We consider a set of home firms, each of which has a stochastic requirement for a particular input. High-cost home firms can produce the input themselves. Low-cost foreign firms produce the input to sell it to home firms through an international market. Efficiency requires the input to be produced by foreign firms and traded in the market. Yet, home firms will always engage in inefficient home production. By producing some of its own input needs, a home firm cuts down on aggregate input demand, thus depressing prices in the market.     

THE THEORY OF WARRANTY CONTRACTS

Abstract. This paper surveys theories of the existence and design of warranty contracts. Insurance, signalling, and incentive motives are used to explain the existence of warranties. The incorporation of imperfections that prevent warranties from serving their basic purposes in a first-best way describes actual warranty practices.     

Imperfect Tests and Natural Insurance Monopolies

In a housing insurance market buildings have different damage probabilities. High-risk houses need investment, low-risk houses don't. Insurers use imperfect tests to assess risks. The market is a natural monopoly: with more than one active insurer, high-risk house owners continue to apply to insurers until they are eventually assigned to the low-risk class. The natural monopoly need not be sustainable. In equilibrium the incumbent accommodates entry even when the natural monopoly is sustainable. We explain recent observations from Germany and Switzerland where damage rates and prices went up drastically after the transition from state monopolies to competitive environments.     

US‐style contingent fees and UK‐style conditional fees: agency problems and the supply of legal services

Under contingent fees, the attorney gets a share of the judgment; under conditional fees, the lawyer gets an upscale premium if the case is won which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a principal–agent framework where the lawyer chooses unobservable effort after she has observed the amount at stake. Contingent fees provide better incentives than conditional fees independently of whether upfront payments are restricted to be non‐negative or not. Under contingent fees, the attorney uses her information about what is at stake more efficiently. Copyright © 2006 John Wiley & Sons, Ltd.     

Accuracy Versus Falsification Costs: The Optimal Amount of Evidence under Different Procedures

An arbiter can decide a case on the basis of his priors or hecan ask for further evidence from the two parties to the conflict.The parties may misrepresent evidence in their favor at a cost.The arbiter is concerned about accuracy and low procedural costs.When both parties testify, each of them distorts the evidenceless than when they testify alone. When the fixed cost of testifyingis low, the arbiter hears both, for intermediate values one,and for high values no party at all. The arbiter's ability toremain uninformed as well as sequential testifying makes itmore likely that the arbiter requires evidence. (JEL D82, K41,K42)