Contests with spying: A comment

The subject of the following comment is a paper by Baik and Shogren which has been published in this journal (Vol. 11, No. 3 (1995) pp. 441–451). In their game-theoretic model, Baik and Shogren connect the informational states of the agents in a way which leads to inconsistencies.     

Habit formation and long-term contracts

It is often assumed that the consumption of certain goods causes changes in preferences: The more we consume these goods, the more we like them. Extreme examples of such habit-forming goods are drugs (from heroin to cigarettes); mild examples are sweets, books, and sports. The process of habit formation is usually described as the accumulation of a certain form of human capital which is introduced as a variable in the utility function. As such, habit formation is regarded as similar to the technologically necessary joint consumption of capital goods and variable inputs: heating system and fuel, video-recorder and video-tape, etc. By developing a certain capital stock, an individual — or an economy — becomes dependent on or addicted to a certain complementary input. This paper contains a discussion of reasons why long-term contracts for habit-forming goods are concluded. Furthermore, it is investigated which form such contracts should have. This helps us to understand the frequent appearance of Take or Pay contracts in the energy markets as well as in book clubs, fitness centres, language courses, etc.

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Gewohnheitsbildung und langfristige Verträge

Zusammenfassung Es gibt eine Reihe von Gütern, deren Konsum Präferenzänderungen hervorruft: Je mehr und je länger wir diese Güter konsumieren, desto mehr mögen wir sie. Extreme Beispiele für solche Güter sind Drogen (von Heroin bis zu Zigaretten), weniger folgenreich ist gewöhnlich der Konsum von Süßigkeiten, Büchern oder sportlichen Aktivitäten. Der Prozeß der Gewohnheitsbildung wird in der ökonomischen Theorie gewöhnlich als die Akkumulation von Humankapital beschrieben. Die damit einhergehende Nachfrage wird ähnlich wie der Konsum von komplementären Inputs von langlebigen Konsumgütern wie elektrischen Geräten, Videorecordern, Gasheizungen o.ä. gesehen. Durch den Aufbau eines bestimmten Kapitalstocks entwickelt sich im Individuum eine Abhängigkeit von einem komplementären Input, sei es Elektrizität oder Heroin.Der Beitrag diskutiert Gründe für den Abschluß von langfristigen Verträgen für gewohnheitsbildende Güter. Ferner wird untersucht, welche Form solche Verträge aus der Sicht der Produzenten und der Konsumenten haben sollten. Daraus ergibt sich ein Verständnis dafür, weshalb es so viele Beispiele für Take-or-Pay-Verträge gibt, und zwar im Handel mit Energieressourcen ebenso wie bei Buchklubs, Fitnesscentern, Sprachklubs u.s.w.

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Friedel Bolle is affiliated with the Institute of Energy Economics, University of Cologne, Albertus-Magnus-Platz, D-5000 Cologne 41, Germany.     

Sustainability and dietary change: the implications of Swedish food consumption patterns 1960–2006

This article focuses on the changing food consumption pattern in Sweden between 1960 and 2006, and the implications of those changes for sustainability. National statistical data on the consumption of different food groups such as meat, milk, dairy products, eggs, fruit, vegetables, cereal, potatoes and sugar were compared. Overall, an increase in the consumption of meat, cheese, cream, fruit and vegetables was observed, while the consumption of milk, butter and potatoes decreased. For the sustainability assessment, three parameters were chosen: land requirement, greenhouse gas (GHG) emissions and energy use. It was shown that the Swedish diet in 2006 required more resources and produced more GHG emissions than in 1960, mainly due to the increase in the consumption of animal products.     

Organizational power: Should remuneration heterogeneity mirror hierarchy?

We model and experimentally investigate effort levels in team production as a public good game with heterogeneous remuneration. In a hierarchically organized firm, team leaders (allocators) determine the effort levels of all team members. When the allocator receives equal payment or twice as much as the other workers, this results in the same team production, but when the allocator receives only half of what the other workers receive, team production is diminished.     

Over- and under-investment according to different benchmarks

In a two-stage oligopoly, with investment in the first stage and quantity or price competition in the second stage, there is a “Common Wisdom” Theorem which states that we find over-investment if the goods are substitutes and competition is in strategic substitutes, or if goods are complements and competition is in strategic complements, and that we find under-investment if we have complements and strategic substitutes or substitutes and strategic complements. The existing literature, however, lacks a proof of this theorem and, in particular, it lacks a systematic comparison of the different benchmarks for over- and under-investment. A “naive” benchmark is the cost efficient investment with respect to the subgame perfect (closed loop) equilibrium quantities. Alternative benchmarks (which are more often proposed) are the open loop equilibrium investment or the welfare maximizing investment. The chosen benchmark is critical because the Common Wisdom Theorem applies (under certain conventional conditions) only for the naive benchmark. The other two benchmarks give rise to subcases.