Modelling the choice between regulation and liability in terms of social welfare

Abstract.  Using a formal political economy model with asymmetric information, we illustrate the conditions under which an environmental protection system based on extending liability to private financiers is welfare superior, inferior, or equivalent to a system based on an incentive regulatory scheme subject to capture by the regulatees. We explicitly consider the following factors: the cost of care and its efficiency in reducing the probability of an environmental accident, the social cost of public funds, the net profitability of the risky activities, the level of damages, and the regulatory capture bias. We characterize in such a parameter space the regions where one system dominates the other. JEL classification: D82, K32     

Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of Ex Post Moral Hazard

In a Costly State Verification world, an agent who has private information regarding the state of the world must report what state occurred to a principal, who can verify the state at a cost. An agent then has what is called ex post moral hazard: he has an incentive to misreport the true state to extract rents from the principal. Assuming the principal cannot commit to an auditing strategy, the optimal contract is such that: (1) the agent's expected marginal utility when there is an accident (high‐ and low‐loss states) is equal to his marginal utility when there is no accident; (2) the lower loss is undercompensated, while the higher loss is overcompensated; and (3) the welfare of the agent is greater under commitment than under no‐commitment. Result 2 is contrary to the results obtained if the principal can commit to an auditing strategy (higher losses underpaid and lower losses overpaid). The reason is that by increasing the difference between the high and the low indemnity payments, the probability of fraud is reduced.     

Capacity Commitment versus Flexibility

We show how technological flexibility choices and equilibrium configurations (both simultaneous and sequential duopoly) depend on six industry characteristics. Low market volatility combined with intermediate market size favors inflexible technologies; large values of either volatility or size favor flexible technologies; low or intermediate values of both favor the coexistence of flexible and inflexible technologies. The possibility of a flexibility trap exists in industries of low volatility and intermediate size. Entry prevention can sometimes be achieved by inflexible technologies or flexible technologies, depending on the industry characteristics.     

Rethinking the role of NCBs in the EMU

Five years after the introduction of unified monetary policy in the EMU, some member countries are wondering whether they have ceded too much of their policy-making powers. The fact that National Central Banks no longer carry out sizable expansionary open market or foreign exchange market operations suggests that they face substantially reduced abilities to set economic policy.This paper demonstrates that, in fact, very little power has been yielded: on the fiscal front, the force of such policy initiatives is enhanced by the fixity of the exchange rate. On the monetary front, we show that there is an observational equivalence between all Central Bank actions under fixed exchange rates. This implies that the authorities retain the same amount of policy flexibility as before. So long as they use an alternative form of policy initiative, carrying out what previously would have been characterized as sterilized foreign exchange market operations, their ability to influence the macro performance of their economy is undiminished.     

Unlocking the potential of advanced manufacturing technologies

This research examines whether investments in advanced manufacturing technologies (AMTs) such as flexible manufacturing systems (FMS), computer aided design (CAD), computer aided manufacturing (CAM), robotics, etc., are more likely to lead to improved performance if they are supported by improvements in the manufacturing infrastructure of the company. This question is evaluated using data gathered from 202 manufacturing plants chosen from industries generally considered to have relatively high investments in technology.Multiple item scales are developed and adapted from sources in the literature to measure investments in technology, infrastructure, and the performance of the plant. Evidence supporting the reliability and validity of these scales is provided. Hierarchical regression is used to analyze the relationship between technology, infrastructure, and performance. The results suggest that there is an important interaction between the adoption of advanced manufacturing technologies and investments in infrastructure. Firms that invest in both AMTs and infrastructure perform better than firms which only invest in one or the other. Separate analyses on sub-samples of firms with the highest and lowest investments in AMTs show that infrastructural investments have a stronger relationship with performance in the high investment group. Thus, the data indicate that infrastructural investments provide a key to unlocking the potential of advanced manufacturing technologies.     

Sequential location equilibria under incomplete information

Summary We consider a simple model of incomplete information in location theory. Two firms compete in a two stage framework: a sequential location stage and a price competition stage. Firm 1 knows both its own constant marginal cost technology and that of Firm 2, whereas the latter has incomplete information about firm 1's technology. The location stage turns out to be a monotonic signaling game and theunique D1 equilibrium is a pure strategy separating equilibrium if firm 1's cost advantage is below some bound, and otherwise a pooling equilibrium if the prior probability that Firm 1 is of the low cost type is high, or a semi-pooling equilibrium if it is low. This surprising result is due to the fact that the location gap between the two types of Firm 1 is bounded because of natural economic reasons, which may prevent the separation of the two types. Hence, incomplete information matters: the equilibrium locations differ quite significantly from the full information equilibrium locations.We would like to thank an anonymous referee for very helpful comments and also the participants in seminars at GREQE (Marseille), Université de Montréal, UBC, HEC (Paris), in the Location Theory session of the World Congress of the Econometric Society (Barcelona) and in the Game Theory Conference at the University of Western Ontario for their comments. We remain, of course, solely responsible for the content of the paper. Financial support from FCAR (Québec), SSHRCC (Canada) and CNRS (France) is gratefully acknowledged.     

Aggregation of Directional Distance Functions and Industrial Efficiency

Three main objectives are pursued in this paper. First, we intend to analyze the aggregation problem of directional distance functions from a constructive viewpoint. We provide necessary and sufficient conditions concerning the structural properties of the production technology and of the nature of groups of firms. Indeed, exact additive aggregation holds for a linear technology and for a direction solely defined in the output space. Second, since these conditions are somewhat restrictive, we are interested in providing a measure for the aggregation bias through the relationship between industrial and structural technical efficiency. Finally, we show that this aggregation bias is a lower bound for industrial allocative efficiency.     

Complementarities between firm-sponsored training and information technology use

In this article, we investigate the presence of possible complementarities between investments in information technology (IT) and firm-sponsored training using economy-wide longitudinal representative workplace-level data. Since information on the firm’s capital stock is often missing in such representative data, we match our workplace records to tax data to construct measures of the firm’s capital stock. We find some evidence of positive complementarities between investments in human capital and IT, suggesting that on-the-job training can also have a positive impact on productivity when complemented with investments in CAD or other technologies.