The Effects of Macroeconomic Policy with a Disparity in Price Elasticity Between Private‐ and Public‐ Sector Demands

We introduce a disparity in price elasticity between government demand and consumption demand into a simple money‐in‐the‐utility‐function model. This extension demonstrates that the effect of fiscal policies on production may be positive, negative, or neutral depending on the disparity in price elasticity between sectors. Because the effect of an increase in nominal money supply with constant nominal government expenditure is the opposite to that of a fiscal policy, a fiscal policy financed by seigniorage can have positive, negative, or no effects depending on parameter values. Moreover, the effect of simultaneous implementation of expansionary–contractionary policies depends on how they are combined.     

Endogenous Verifiability and Optimality in Agency

This paper investigates the optimal contract design in a principal-agent model where verification of an agent's action is endogenously determined through strategic interactions between contracting parties. We derive a necessary and sufficient condition for the first best outcome to be implemented as an equilibrium. The equilibrium has the following features: (i) The action level that the agent chooses is not verified even if it is possible. (ii) Nevertheless, the first best can be attained by making a contract contingent on the unverified action. Journal of Economic Literature Classification Numbers: D20, K40.     

Signal-extracting education in an overlapping generations model

Summary. In order to get good positions in companies, people try to enter highly-ranked universities. However, abilities vary greatly between individuals. High-ability individuals have an incentive to send signals to firms by obtaining a higher level of education in order to distinguish themselves from low-ability individuals. This paper constructs an overlapping generations model in order to examine the macroeconomic consequences of such sorting behavior of individuals. There are two kinds of possible equilibria in our model. In one equilibrium, only the high-ability agent can obtain higher education and thus an elite society emerges. In the other equilibrium, all ability types have the chance to obtain higher education and thus a society with mass higher education emerges. We also discuss the possibility of multiple equilibria of these different steady states and the dynamic change in wage differentials.Received: 9 October 2002, Revised: 15 July 2003, JEL Classification Numbers: D82, J31, O10.The authors acknowledge Osamu Hayashida, Noriyoshi Hemmi, Hideshi Itoh, Michihiro Kandori, Toshihiro Matsumura, Takuya Nakaizumi, Osamu Nishimura, Ryoji Ohdoi, Tadashi Yagi, Noriyuki Yanagawa, and seminar participants at Doshisha University, the University of Tokyo, and Contract Theory Workshop at Kyoto University for helpful comments and suggestions. We would also like to thank an anonymous referee for valuable comments. This paper is part of the academic Project on Intergenerational Equity (PIE), funded by a scientific grant from Japans Ministry of Education, Culture, Sports, Science and Technology (grant number 603).     

Entry Deterrence in a Unionized Oligopoly

We investigate wage determination between an incumbent firm and its labour union under threat from another firm entering its product market. In equilibrium, it may be optimal for a labour union of the incumbent firm to lower its wage demand. This may make it possible for the incumbent firm to maintain a higher employment level, in that the lower wages can help the firm deter the entry of a rival firm. This will yield a higher profit for the incumbent firm and a lower utility level for the labour union compared with those in an equilibrium with no threat of entry.
JEL Classification Numbers: J51, L10     

Moral Hazard and Renegotiation with Multiple Agents

We investigate the effects of contract renegotiation in multi-agentsituations where risk-averse agents negotiate a contract offer to theprincipal after the agents observe a common, unverifiable perfect signalabout their actions. We show that renegotiation with multiple agentsreduces the cost of implementing any implementable action profile downto the first-best level, even though the principal cannot observe theagents' actions. Moreover, it is sufficient for the principal to use a"simple" initial contract, in the sense that it consists of nomore than a single sharing scheme for each agent and the total payments tothe agents are the same regardless of the realised state. An importantimplication is that decentralization, in the sense of delegated negotiationand proposals from the agents, can be as effective as centralized schemesthat utilize revelation mechanisms in unrestricted ways.     

Holdup, search, and inefficiency

This paper investigates the holdup problem in the search market environment where players search for their trading partners and specific investments are made after matching but before trade decisions are taken. We show that markets with small frictions make the holdup problem more serious than those with large frictions because in any equilibrium, whether stationary or nonstationary, investment must reach the minimum level and trade must be delayed with positive probability for infinitely many time periods. We then show that the gap between equilibrium welfare and the first best welfare becomes larger as search frictions become smaller.