# Asset ownership and contractibility of interaction

Save this PDF as:

Size: px
Start display at page:

## Transcription

5 ROIDER / 791 (iv) The possibility of external trade raises the marginal value of the asset for the owner (i.e., b a (B, q, a) > b a (X, q, a) and ŝ a (S, q, a) > ŝ a (X, q, a) for all q and a). First-best solution. I assume that it is ex post efficient for B and S to cooperate. By working together they create an ex post surplus φ(a), possibly through internal and external trade, and I assume that φ a (a) > 0 and φ aa (a) < 0 for all a. Hence, the efficient best-response investment functions are given by and β (σ ) = arg max{φ(a(β,σ)) β} (1) β β σ (β) = arg max{φ(a(β,σ)) σ }. (2) σ σ The ex ante efficient investment pair (β FB,σ FB ) satisfies β (σ FB )=β FB and σ (β FB )=σ FB. Hence, the efficient asset value is given by a FB a(β FB,σ FB ), where a FB is assumed to be unique and interior. 3. Assumptions and preliminary analysis The surplus generated through renegotiating the initial contract is given by (O, q, a) φ(a) b(o, q, a) ŝ(o, q, a) 0 for all O, q, and a. (3) I assume that B and S divide (O, q, a) in Nash bargaining in equal parts. 8 Hence, the postrenegotiation payoffs of B and S (net of investment costs) are given by B(O, q, a) b(o, q, a)+ 1 2 (O, q, a) =1 [ φ(a)+ b(o, q, a) ŝ(o, q, a) ] (4) 2 and Ŝ(O, q, a) ŝ(o, q, a)+ 1 2 (O, q, a) =1 [ φ(a)+ŝ(o, q, a) b(o, q, a) ], (5) 2 respectively. It follows from (4) and (5) that the best-response investment functions are given by and β BR (σ ; C) arg max β { B(O, q, a(β,σ)) β} (6) σ BR (β; C) arg max{ŝ(o, q, a(β,σ)) σ }, (7) σ respectively. An investment equilibrium ( β(c), σ (C)) is implicitly defined by β(c)=β BR ( σ (C);C) and σ (C) =σ BR ( β(c); C). Define ã(c) a( β(c), σ (C)). Hence, for a given contract, the net equilibrium surplus of the relationship between B and S is given by W (C) φ(ã(c)) β(c) σ (C). (8) To characterize optimal contracts, I now derive some properties of the post-renegotiation payoffs and introduce some assumptions. It directly follows from (4), (5), and the properties of the threatpoint payoffs that B aq (O, q, a) = Ŝ aq (O, q, a) for all O, q, and a, (9) 8 The optimal ownership structure might depend on the nature of the bargaining game (see, e.g., DeMeza and Lockwood, 1998; and Chiu, 1998).

6 792 / THE RAND JOURNAL OF ECONOMICS and Ŝ a (S, q, a) > Ŝ a (X, q, a) > Ŝ a (B, q, a) for all q and a, (10) B a (B, q, a) > B a (X, q, a) > B a (S, q, a) for all q and a. (11) If an increase in q has a positive impact on the marginal investment return of party S, it automatically has a negative impact on the marginal investment return of party B, and vice versa. This arises from the fact that the payoffs of the parties depend on investments only through the asset value a. Moreover, because only the owner can use the asset for external trade, the marginal investment returns can be unambiguously ordered across O. Define n(q, a) ŝ(x, q, a) b(x, q, a). (12) For the remainder of the article, I maintain the following assumptions. Assumption 1. ã(c) > 0, β(c) < β, and σ (C) < σ for all C. Assumption 2. ( 2 / β 2 ) B(O, q, a(β,σ)), ( 2 / σ 2 )Ŝ(O, q, a(β,σ)) < 0 for all O, q,β, and σ. Assumption 3. Either n aq (q, a) > 0 for all q and a, orn aq (q, a) < 0 for all q and a. The first two assumptions are of a technical nature. Assumption 1 implies that the equilibrium investment of at least one of the parties is strictly positive. Assumption 2 guarantees that the investment equilibrium can be characterized by the appropriate first-order conditions. Unfortunately, even if φ( ), b( ), and ŝ( ) are well-behaved in a, and a( ) is well-behaved in β and σ, this is not guaranteed automatically. Finally, Assumption 3 ensures that the nature of the incentive problem does not vary across q and a. The term n a (q, a) represents the net selfish effect on the seller that arises through internal trade. Analogously, n a (q, a) represents the net selfish effect on the buyer. If Assumption 3 holds, it is not dependent on q and a whether the net selfish effect of an investment is positive or negative. In accordance with the property-rights theory I assume that investments are relationshipspecific: that is, investments yield higher returns within the relationship than in the outside market. Define and Formally, this assumption amounts to: Assumption 4. ŝ e a(a), b e a(a) <φ a (a) for all a. ŝ e (a) ŝ(s, q, a) ŝ(x, q, a) (13) b e (a) b(b, q, a) b(x, q, a). (14) An optimal contract C =(Õ, q) solves the following problem: C arg max C W (C). (15) In general, the optimal contract is not unique. Denote the set of optimal organizational forms by {O {B, S, X} / O = Õ for some C}. Assumption 3 ensures that for given O, the optimal trade quantity is unique. Define (β EQ,σ EQ ) ( β( C), σ ( C)) and a EQ a(β EQ,σ EQ ). As discussed above, if X, it does not matter whether the asset is given to party B or party S. In this case, the optimal exclusive quantity contract can be signed regardless of the underlying ownership structure. Hence, if = {B}, orif = {S}, it is said to be relevant who owns A, otherwise it is irrelevant who owns A. Similarly, if q > 0, quantity contracts are relevant, while they are irrelevant otherwise. 9 9 Suppose that exclusive contracts are not feasible. This would imply O {B, J, S}, where O = J denotes joint ownership of the asset. In this case, it would only be irrelevant who owns A if = {B, J, S}.

10 796 / THE RAND JOURNAL OF ECONOMICS TABLE 2 Equilibrium Outcome in the Transferable Investment Case with Contractible Trade Set of Optimal Optimal Equilibrium Organizational Trade Asset Value Case Parameter Region Forms Quantity q a EQ = β EQ + σ EQ (a) n a η 1 {B, X, S} q O a FB +0 (b) η 1 < n a η 2 {B, X} q O a FB +0 (c) η 2 < n a η 3 {B} q O a FB +0 (d) η 3 < n a < η 4 {B} q a B,q +0< a FB (e) η 4 < n a < η 5 and η>0 {B} 0 a B,0 +0< a FB (f) η 4 < n a < η 5 and η<0 {S} q 0+a S,q < a FB (g) η 5 n a < η 6 {S} q O 0+a FB (h) η 6 n a < η 7 {S, X} q O 0+a FB (j) η 7 n a {S, X, B} q O 0+a FB Proposition 2. Suppose Assumptions 1 5 hold. (i) Suppose trade is not contractible. Then if b e a(a B,0 ) > ŝ e a(a B,0 ), we have = {B},(β EQ,σ EQ )=(a B,0, 0), and a B,0 < a FB, and if b e a(a B,0 ) < ŝ e a(a B,0 ), we have = {S},(β EQ,σ EQ )=(0, a S,0 ), and a S,0 < a FB. (ii) Suppose trade is contractible and b e a(a B,0 ) > ŝ e a(a B,0 ) holds. Then the equilibrium outcome (, q,β EQ,σ EQ ) is given by Table 2. Note that in the knife-edge case η = 0, both (S, q) and (B, 0) are optimal. Under the former (latter) contract, only party S (B) invests a S,q (a B,0 ), where a S,q = a B,0 < a FB. In the following, I highlight which differences and additional insights arise relative to the one-sided investment case. Foundations of the property-rights theory. (i) If both parties invest, the property-rights approach may predict the wrong ownership structure: in cases (f) and (g) of Table 2, integration is strictly optimal when trade is noncontractible, while separate firms are strictly optimal when quantity contracts are feasible. This result is in stark contrast to the one-sided investment case. 12 This problem cannot, however, arise if the buyer profits more from a better asset than the seller (cases (a) (d)). Note that in case (h), integration is still optimal as long as it is accompanied by an exclusive contract. (ii) Besides providing the exact conditions under which the propertyrights approach is well founded (i.e., when = {B}), Proposition 2 shows that the choice of ownership structure is relevant over a larger parameter range: if 1 < n a < 1, the choice of ownership structure is relevant, but = {B} is possible only in the smaller parameter range 1 < n a < 1 ŝa(a e FB ). Efficiency and investing party. Proposition 2 predicts that for all O it is the same party that invests in equilibrium. Whenever n a is sufficiently large, the first-best outcome can be induced. Moreover, whenever the nonowner invests, the ownership structure is generically irrelevant, and the first-best outcome is achieved. Interaction between organizational forms and quantity contracts. In contrast to the one-sided case, it depends on the model parameters whether contracted quantities are larger in integrated or in separate firms. However, Proposition 2 predicts that if only the seller (buyer) invests in equilibrium, contracted quantities should be lower (higher) between separate firms than within an integrated firm. Comparative statics: Fisher Body revisited. The model allows interesting comparative 12 This problem exists in general, and does not depend on Assumption 5.

12 798 / THE RAND JOURNAL OF ECONOMICS focusing on the set of optimal contracts, the result is extended to nonrandomizing contracts. Second, if investments are transferable, investment equilibria are in general not interior. Segal and Whinston s (2002) result is extended to accommodate this case. 17 Proposition 3. Take Assumptions 2 4 as given, and suppose that Assumption 1 holds for any message-dependent contract C as defined above. If only one party can invest, or if investments are transferable across parties, the set of optimal contracts always contains a noncontingent contract of the form (O, q, t) for some O {B, X, S}, q [0, q] and t R. Segal and Whinston (2002) have shown that if one allows for arbitrary message-dependent mechanisms, the equilibrium prerenegotiation decisions Õ and q are in general indeterminate. Starting from any incentive-compatible mechanism, one can always change the equilibrium decisions and modify the equilibrium transfers in a way such that the equilibrium payoffs remain unchanged. In this case, the incentive-compatibility conditions still hold. Hence, predictions regarding equilibrium decisions are possible only if one imposes restrictions on the set of feasible contracts. In the setting of Proposition 3, the restriction of attention to noncontingent contracts seems to be justified if one assumes that there is an (arbitrarily) small cost of writing more complex agreements Implications for empirical testing The model has implications for the growing empirical literature on the PRT (for a review, see, e.g., Whinston, 2003). First, the model may shed some light on the puzzle of why some empirical studies, like Elfenbein and Lerner s (2003) recent work on Internet portal alliances, support the PRT even though such alliance agreements contain on average two quantity provisions relating to project output. Elfenbein and Lerner find that in promotional agreements, in general one of the parties provides most of the effort. They report a significant relationship between the identity of this party and the allocation of ownership right, and they interpret this as support for the PRT. At the same time, they report a varying degree of completeness of the contracts with respect to quantity provisions. My model suggests that, given transferability of investments, the optimal organizational form, quantity provisions, and the identity of the investing party are all determined endogenously. Moreover, the choice of ownership structure is relevant only under certain circumstances. Second, in contrast to the PRT, my model suggests that frequently more than one organizational form will be optimal. This poses the problem that the theoretical prediction might not be unique. Hence, it seems to be promising to look at industries that experience a shift in underlying parameter values (e.g., in the demand or costs structure) such that certain organizational forms are optimal only before the shift. Third, Whinston (2003) emphasizes that the informational requirements of empirical tests of the PRT are high. In principle, marginal contributions have to be observed. My model might ease such problems somewhat, as it imposes joint restrictions on potentially observable variables, such as the organizational form, the contracted level of interaction, and the identity of the investing party. 8. Conclusion In a property-rights framework, I study how two incentive instruments (organizational form and quantity contracts) are used to generate investment incentives. In a preliminary step, I provide applicable because O represents a discrete choice. Whether in this case a restriction to noncontingent contracts is possible awaits future research. 17 With two-sided investments in human capital, the results of Segal and Whinston (2002) are not applicable. In this case, internal payoffs might depend on the investments of both parties. However, when trading externally, a party only has access to its own human capital. Hence, in general the investments cannot be aggregated into one dimension in the decision-dependent parts of the post-renegotiation payoffs as required by Segal and Whinston s Condition A. 18 Noncontingent contracts are a special case of continuous contracts in which decisions are continuous in messages. Segal and Whinston (2002) have shown that under some assumptions the expected decision in any optimal continuous contract is equal to the decision in the optimal noncontingent contract. Unfortunately, the assumptions underlying their result, e.g., a one-dimensional decision space, are not satisfied in my model (see Segal and Whinston s Condition S).

13 ROIDER / 799 conditions under which the parties can optimally restrict themselves to noncontingent contracts. This simplification allows me to fully characterize optimal contracts. First, the article contributes to the foundation of the property-rights theory of the firm: I characterize when the PRT does and does not make correct predictions when trade is contractible. I delineate the circumstances under which only the correct choice of a quantity contract, only the correct choice of organizational form, or both, are important to reduce the hold-up problem. Second, while maintaining the symmetricinformation assumption of the PRT, my model shows how the two incentive instruments interact. This is in the spirit of the multitasking literature, which, however, focuses on moral hazard problems. Finally, I illustrate how the model may shed light on the classic Fisher Body case. Appendix Proofs of Propositions 1 3 follow. Proof of Proposition 1. (i) Inequality (10), Assumptions 1, 2, and 4, and the fact that a FB is assumed to be interior imply that σ (B, 0) < σ (X, 0) < σ (S, 0) <σ FB = a FB. (ii) I now prove that cases (a) (e) of Table 1 hold true. Case (a). Assumption 3 and n a(q, a FB ) < 0 imply that Ŝ aq(s, q, a) < 0 q, a. Hence, inequality (10) implies that contract (S, 0) is optimal. Case (b). n a(q, a FB ) > 0 and the reasoning in part (a) above imply that the contract (S, q) maximizes investment incentives. Moreover, n a(q, a FB ) < 1 ŝa(a e FB ) Ŝ a(s, q, a FB ) < 1. That is, (S, q) is optimal because the first best cannot be achieved. Finally, Assumptions 1 and 2 imply that the equilibrium investment is given by a S,q = σ BR (0; S, q). Case (c). n a(q, a FB ) 1 ŝa(a e FB ) and the reasoning above imply that, generically, the contract (S, q) leads to overinvestment. However, the fact that (S, 0) leads to underinvestment and the intermediate-value theorem imply that there exists a q S (0, q) such that Ŝ a(s, q S, a FB ) = 1. Assumptions 1 and 2 imply that σ (S, q S ) = a FB. Finally, 0 < n a(q, a FB ) < 1 Ŝ a(x, 0, a FB ) < Ŝ a(x, q, a FB ) < 1 together with inequality (10) implies = {S}. Case (d). 1 n a(q, a FB ) < 1+ b a(a e FB ) and the reasoning in part (c) above imply = {S, X} and q = q O for O, where q O is implicitly defined by Ŝ a(o, q O, a FB ) = 1. Hence, both under (S, q S ) and (X, q X ), the first best is achieved. Case (e). Completely analogous to part (d) and therefore omitted. Q.E.D. Proof of Proposition 2. First, Assumptions 1, 2, and 4 imply a j (S, q) ( )a j (X, q) ( )a j (B, q) q and j = S (B) (A1) and a j ( j, 0) > a i ( j, 0) for i, j {B, S} and i j. (A2) The inequalities in (A1) are strict whenever the respective left-hand side (right-hand side) is strictly positive. Second, Assumption 4 and the intermediate-value theorem imply that for a given O, the first best can be achieved if and only if ã(o, q) a FB. Otherwise, the contract that maximizes investment incentives is optimal because in general only one of the parties invests in equilibrium. (i) It follows from (A1) and Assumptions 1 and 4 that it depends on a B (B, 0) and a S (S, 0) whether = {B} or = {S}. Note that Ŝ a(s, 0, a B (B, 0)) 1=ŝ e a (a B (B, 0)) b e a (a B (B, 0)). (ii) Define ã O max q ã(o, q). The discussion above and b e a(a B (B, 0)) > ŝ e a(a B (B, 0)) a B (B, 0) > a S (S, 0) imply that and { } ã B = max a B (B, q), a B (B, 0), a S (B, q), (A3) { } ã S = max a S (S, q), a S (S, 0), a B (S, q), (A4) { } ã X = max a S (X, q), a B (X, q). (A5) Consider ã B : Assumption 3 implies that if a B (B, q) is increasing in q, then ã B = a B (B, q). If a B (B, q) is decreasing in q, then ã B = max{a B (B, 0), a S (B, q)}. Hence, ã B is given by the expression above. The proof for ã S is completely analogous. Assumption 3 and a S (X, 0) = a B (X, 0) imply the solution for ã X.

14 800 / THE RAND JOURNAL OF ECONOMICS Case (a). Assumption 2 implies that a B (S, q) a FB. Moreover, B a(s, q, a FB ) 1 together with Assumption 3 implies that B aq(0, q, a) > 0 O, q, a. This observation and the reasoning in part (i) imply that a FB > a S (S, 0) a S (S, q), from which the result follows immediately. Cases (b), (c), (g), (h), (j). The proofs for these cases are completely analogous to the proof of part (a) and are therefore omitted. Case (d). Assumptions 1, 2, and 3, 1 + b a(a e FB ) < n a(q, a FB ) < 0, and b a(a e B (B, 0)) > ŝa(a e B (B, 0)) imply that a FB > a B (B, q) > a B (B, 0) > a S (S, 0) a S (S, q). Given this observation, the result immediately follows from inequality (A1) and Assumption 3. Cases (e) and (f). Analogous to the reasoning in case (d), 0 < n a(q, a FB ) < 1 ŝa e(afb ) and b a e(a B (B, 0)) > ŝa e(a B (B, 0)) imply that a FB > a B (B, 0) > a B (B, q) and a FB > a S (S, q) a S (S, 0). Hence, it is optimal to maximize investment incentives. If η>0, then a B (B, 0) > a S (S, q). In this case, (A1) and Assumption 3 imply that = {B} and q =0. Hence, (β EQ,σ EQ )=(a B (B, 0), 0), where a B (B, 0) < a FB. The proof for the case η<0 is completely analogous and is therefore omitted. Q.E.D. Proof of Proposition 3. Step 1. For the purposes of the proof, consider the more general class of contracts C = [ p B, p S, p X, q, t] : 2 [0, 1] 3 [0, q] R. The functions p O (θ B,θ S ) 1 O denote the respective probabilities with which an ownership structure O is selected ex post. Hence, p O (θ B,θ S )=1 θ B,θ S holds. Renegotiations are assumed to occur after the realization of the randomly determined organizational form. Without loss of generality one can restrict attention to direct mechanisms that induce truth-telling on and off the equilibrium path. Hence, given this more general class of contracts, the best-response investment function of B is defined by β BR (σ ; C ) arg max p O (θ,θ) B(O, q(θ,θ), a(β, σ)) β t(θ,θ), β (A6) where θ =(β, σ). The best-response function of S is defined analogously. Step 2. Suppose that in the two-sided case the equilibrium investments of both parties are interior, i.e., 0 < β(c ) < β and 0 < σ (C ) < σ C. In the one-sided case, 0 < σ (C ) < σ C holds by assumption. For the moment, consider message-independent contract terms p O p O (θ B,θ S ), q q(θ B,θ S ), and t(θ B,θ S ) 0 for all θ B,θ S, and O.Define q max arg max q{ŝ a(s, q, a)} and q min arg min q{ŝ a(b, q, a)}. Assumption 3 implies that q max, q min {0, q}, and that both q max and q min are independent of a. These observations and (10) imply that Ŝ a(b, q min, a) O p O Ŝ a(o, q, a) Ŝ a(s, q max, a) p O, q, a. (A7) Hence, Segal and Whinston s (2002) Condition H ± is satisfied in the present framework. Moreover, the decision space [0, 1] 3 [0, q] is compact and connected, and the functions φ a, Ŝ a, and B a are continuously differentiable in all arguments except O. Note that O is not a decision variable given the larger class of contracts presently considered. Hence, Condition A of Segal and Whinston is also satisfied. Finally, Assumption 2 corresponds to their Condition C. This implies that Segal and Whinston s Proposition 4 applies in the present framework. That is, if there is a message-dependent contract C that sustains certain interior investments, then there exists a noncontingent contract [p B, p S, p X, q] that sustains the same investments. With slight abuse of notation, define a S (p B, p S, p X, q) arg max a{ p O Ŝ(O, q, a) 1}, and define a B (p B, p S, p X, q) analogously. Note that the a j ( ) and ã( ) are continuous in q, p B, p S, and p X. Step 3. Now I extend the result of step 2 to situations in the transferable case where one of the parties does not invest in equilibrium. Suppose that an arbitrary contract C sustains an investment vector (0,σ ), where 0 <σ < σ. The case (β, 0), where 0 <β < β, is completely analogous and therefore omitted. Since C sustains (0,σ ), the investment σ > 0 is a best response to β = 0. Now consider the exactly same situation but assume that only the seller has the possibility to invest. That is, suppose that β 0 is exogenously given. In this corresponding one-sided investment problem it is still a best response to choose σ given the original contract C. Because σ is interior, step 2 implies that for this corresponding one-sided investment problem there exists a noncontingent contract C NC = [ p B, p S, p X, q ], for some p B, p S, p X, and q, that also sustains σ. Hence, σ = a S (C NC ). Now consider the original two-sided problem. There, it is still a best response to choose σ given β = 0 and C NC.GivenC NC, either (0,σ )or(β, σ), where β + σ σ, emerges as an investment equilibrium. If β + σ a FB, contract C NC leads to weakly higher welfare than the initial contract C.Ifβ + σ>a FB, Assumption 4, the intermediate-value theorem, and the observation that ã( ) is continuous in p B, p S, and q imply that there exists a noncontingent contract C FB that induces the first-best. Step 4. Building on the observations in steps 2 and 3, I can finally show that the set of optimal contracts always contains a contract that assigns probability one to some O. Consider an arbitrary noncontingent (but possibly randomizing) contract C NC. For all O {B, S, X} and an arbitrary q,define C O [p B, p S, p X, q], where p O = 1. Without loss of generality, suppose that ã(c S ) ã(c O ) O. This implies that ã(c S ) ã(c NC ). If ã(c S ) a FB, then C S leads to weakly higher welfare than C NC.Ifã(C S ) > a FB, then the fact that ã( ) is continuous in q, the intermediate-value theorem, and

15 ROIDER / 801 ã(s, 0) < a FB imply that there exists a q such that the contract [p B =0, p S =1, p X Q.E.D. =0, q] induces the first-best. References Aghion, P., Dewatripont, M., and Rey, P. Renegotiation Design with Unverifiable Information. Econometrica, Vol. 62 (1994), pp Baker, G., Gibbons, R., and Murphy, K.J. Bringing the Market Inside the Firm? American Economic Review, Vol. 91 (2001), pp ,, and. Relational Contracts and the Theory of the Firm. Quarterly Journal of Economics, Vol. 117 (2002), pp Bernheim, B.D. and Whinston, M.D. Incomplete Contracts and Strategic Ambiguity. American Economic Review, Vol. 88 (1998), pp Cai, H. A Theory of Joint Asset Ownership. RAND Journal of Economics, Vol. 34 (2003), pp Che, Y.-K. and Hausch, D.B. Cooperative Investments and the Value of Contracting. American Economic Review, Vol. 89 (1999), pp Chiu, Y.S. Noncooperative Bargaining, Hostages, and Optimal Asset Ownership. American Economic Review, Vol. 88 (1998), pp Chung, T.-Y. Incomplete Contracts, Specific Investments, and Risk Sharing. Review of Economic Studies, Vol. 58 (1991), pp Coase, R.H. The Nature of the Firm. Economica, Vol. 4 (1937), pp DeMeza, D. and Lockwood, B. Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm. Quarterly Journal of Economics, Vol. 113 (1998), pp Edlin, A.S. and Hermalin, B.E. Contract Renegotiation and Options in Agency Problems. Journal of Law, Economics and Organization, Vol. 16 (2000), pp and Reichelstein, S. Holdups, Standard Breach Remedies, and Optimal Investment. American Economic Review, Vol. 86 (1996), pp Elfenbein, D.W. and Lerner, J. Ownership and Control Rights in Internet Portal Alliances, RAND Journal of Economics, Vol. 34 (2003), pp Grossman, S.J. and Hart, O.D. The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Journal of Political Economy, Vol. 94 (1986), pp Guriev, S. Incomplete Contracts with Cross-Investments. Contributions to Theoretical Economics, Vol. 3 (2003), Article 5. Available at Hart, O.D. Firms, Contracts, and Financial Structure. New York: Oxford University Press, and Moore, J. Property Rights and the Nature of the Firm. Journal of Political Economy, Vol. 98 (1990), pp and. Foundations of Incomplete Contracts. Review of Economic Studies, Vol. 66 (1999), pp Hermalin, B.E. and Katz, M.L. Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach. Journal of Law, Economics and Organization, Vol. 9 (1993), pp Holmström, B. The Firm as a Subeconomy. Journal of Law, Economics and Organization, Vol. 15 (1999), pp and Milgrom, P. Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership and Job Design. Journal of Law, Economics and Organization, Vol. 7 (1991), pp and. The Firm as an Incentive System. American Economic Review, Vol. 84 (1994), pp and Roberts, J. The Boundaries of the Firm Revisited. Journal of Economic Perspectives, Vol. 12 (1998), pp and Tirole, J. Transfer Pricing and Organizational Form. Journal of Law, Economics and Organization, Vol. 7 (1991), pp Klein, B. Fisher-General Motors and the Nature of the Firm. Journal of Law and Economics, Vol. 43 (2000), pp MacLeod, W.B. and Malcomson, J.M. Investments, Holdup, and the Form of Market Contracts. American Economic Review, Vol. 83 (1993), pp Maskin, E. and Moore, J. Implementation and Renegotiation. Review of Economic Studies, Vol. 66 (1999), pp and Tirole, J. Two Remarks on the Property-Rights Literature. Review of Economic Studies, Vol. 66 (1999), pp Nöldeke, G. and Schmidt, K.M. Option Contracts and Renegotiation: A Solution to the Hold-Up Problem. RAND Journal of Economics, Vol. 26 (1995), pp and. Sequential Investments and Options to Own. RAND Journal of Economics, Vol. 29 (1998), pp Rosenkranz, S. and Schmitz, P. Know-How Disclosure and Incomplete Contracts. Economics Letters, Vol. 63 (1999), pp and. Joint Ownership and Incomplete Contracts: The Case of Perfectly Substitutable Investments. CEPR Discussion Paper no. 2679, 2001.

16 802 / THE RAND JOURNAL OF ECONOMICS Segal, I. Complexity and Renegotiation: A Foundation for Incomplete Contracts. Review of Economic Studies, Vol. 66 (1999), pp and Whinston, MD. Exclusive Contracts and Protection of Investments. RAND Journal of Economics, Vol. 31 (2000), pp and. The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-Up and Risk Sharing). Econometrica, Vol. 70 (2002), pp Whinston, M.D. On the Transaction Cost Determinants of Vertical Integration, Journal of Law, Economics and Organization, Vol. 19 (2003), pp

### Moral Hazard. Itay Goldstein. Wharton School, University of Pennsylvania

Moral Hazard Itay Goldstein Wharton School, University of Pennsylvania 1 Principal-Agent Problem Basic problem in corporate finance: separation of ownership and control: o The owners of the firm are typically

### Theory of the Firm. Itay Goldstein. Wharton School, University of Pennsylvania

Theory of the Firm Itay Goldstein Wharton School, University of Pennsylvania 1 Boundaries of the Firm Firms are economic units that make decisions, produce, sell, etc. What determines the optimal size

### Contracting in Inter-Organizational Relationships: Incentives and Accounting Literature

Contracting in Inter-Organizational Relationships: Incentives and Accounting Literature Qualifying Examination for 4+4 PhD project Grete Oll Cpr-number: June 9, 2013 Supervisor: John A. Christensen Department

### Renegotiation-Blocking Through Financial Claims

Renegotiation-Blocking Through Financial Claims February 14, 2015 Abstract Renegotiation of contractual agreements may lead to distortion of ex-ante incentives and inefficiencies. We examine the conditions

### Impressum ( 5 TMG) Herausgeber: Fakultät für Wirtschaftswissenschaft Die Dekanin. Verantwortlich für diese Ausgabe:

WORKING PAPER SERIES Impressum ( 5 TMG) Herausgeber: Otto-von-Guericke-Universität Magdeburg Fakultät für Wirtschaftswissenschaft Die Dekanin Verantwortlich für diese Ausgabe: Otto-von-Guericke-Universität

### Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets

Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Nathaniel Hendren January, 2014 Abstract Both Akerlof (1970) and Rothschild and Stiglitz (1976) show that

### Prices versus Exams as Strategic Instruments for Competing Universities

Prices versus Exams as Strategic Instruments for Competing Universities Elena Del Rey and Laura Romero October 004 Abstract In this paper we investigate the optimal choice of prices and/or exams by universities

### Work incentives and household insurance: Sequential contracting with altruistic individuals and moral hazard

Work incentives and household insurance: Sequential contracting with altruistic individuals and moral hazard Cécile Aubert Abstract Two agents sequentially contracts with different principals under moral

### Market Power and Efficiency in Card Payment Systems: A Comment on Rochet and Tirole

Market Power and Efficiency in Card Payment Systems: A Comment on Rochet and Tirole Luís M. B. Cabral New York University and CEPR November 2005 1 Introduction Beginning with their seminal 2002 paper,

### Promote Cooperation. Job Market Paper

Divide and Conquer? Decentralized Firm Structure May Promote Cooperation Job Market Paper Michal Goldberg December 12, 2013 Abstract I consider a model in which an entrepreneur s objective is to maximize

### 21. Unverifiable Investment, Hold Up, Options and Ownership

21. Unverifiable Investment, Hold Up, Options and Ownership This chapter applies the tools of games with joint decisions and negotiation equilibrium to study the hold up problem in economics. We first

### INCOMPLETE CONTRACTS AND COMPLEXITY COSTS

LUCA ANDERLINI and LEONARDO FELLI INCOMPLETE CONTRACTS AND COMPLEXITY COSTS ABSTRACT. This paper investigates, in a simple risk-sharing framework, the extent to which the incompleteness of contracts could

### CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS

CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS LUÍS VASCONCELOS y Abstract. I analyze a simple model of hold-up with asymmetric information at the contracting stage.

### Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance

JLEO, V15 N2 441 Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance Yeon-Koo Che University of Wisconsin-Madison and Universitat Autònoma de Barcelona Alan Schwartz Yale University Section

### Working Paper Series

RGEA Universidade de Vigo http://webs.uvigo.es/rgea Working Paper Series A Market Game Approach to Differential Information Economies Guadalupe Fugarolas, Carlos Hervés-Beloso, Emma Moreno- García and

### Institute for Empirical Research in Economics University of Zurich. Working Paper Series ISSN 1424-0459. Working Paper No. 229

Institute for Empirical Research in Economics University of Zurich Working Paper Series ISSN 1424-0459 Working Paper No. 229 On the Notion of the First Best in Standard Hidden Action Problems Christian

### Empirical Strategies in Contract Economics: Information and the Boundary of the Firm. George P. Baker and Thomas N. Hubbard*

Empirical Strategies in Contract Economics: Information and the Boundary of the Firm George P. Baker and Thomas N. Hubbard* What determines the boundaries of the firm? Over the past twenty-five years,

### Credible Discovery, Settlement, and Negative Expected Value Suits

Credible iscovery, Settlement, and Negative Expected Value Suits Warren F. Schwartz Abraham L. Wickelgren Abstract: This paper introduces the option to conduct discovery into a model of settlement bargaining

### On Platforms, Incomplete Contracts, and Open Source Software

On Platforms, Incomplete Contracts, and Open Source Software Andras Niedermayer December 20, 2006 revised April 4, 2007 PRELIMINARY AND INCOMPLETE. Abstract We consider a firm A initially owning a software

### Organizational Design, Technology and the Boundaries of the Firm. Discussion Paper No 02/540

Organizational Design, Technology and the Boundaries of the Firm Maija Halonen Augus t 20 02 -Revised July 2004 Discussion Paper No 02/540 Department of Economics University of Bristol 8 Woodland Road

### A Simple Model of Price Dispersion *

Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper No. 112 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0112.pdf A Simple Model of Price Dispersion

### Why do merchants accept payment cards?

Why do merchants accept payment cards? Julian Wright National University of Singapore Abstract This note explains why merchants accept expensive payment cards when merchants are Cournot competitors. The

### Buyer Search Costs and Endogenous Product Design

Buyer Search Costs and Endogenous Product Design Dmitri Kuksov kuksov@haas.berkeley.edu University of California, Berkeley August, 2002 Abstract In many cases, buyers must incur search costs to find the

### Persuasion by Cheap Talk - Online Appendix

Persuasion by Cheap Talk - Online Appendix By ARCHISHMAN CHAKRABORTY AND RICK HARBAUGH Online appendix to Persuasion by Cheap Talk, American Economic Review Our results in the main text concern the case

### Oligopoly: Cournot/Bertrand/Stackelberg

Outline Alternative Market Models Wirtschaftswissenschaften Humboldt Universität zu Berlin March 5, 2006 Outline 1 Introduction Introduction Alternative Market Models 2 Game, Reaction Functions, Solution

### ECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition

ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself

### THE FUNDAMENTAL THEOREM OF ARBITRAGE PRICING

THE FUNDAMENTAL THEOREM OF ARBITRAGE PRICING 1. Introduction The Black-Scholes theory, which is the main subject of this course and its sequel, is based on the Efficient Market Hypothesis, that arbitrages

### Switching Cost, Competition, and Pricing in the Property/Casualty Insurance Market for Large Commercial Accounts

Switching Cost, Competition, and Pricing in the Property/Casualty Insurance Market for Large Commercial Accounts Lisa L. Posey * Abstract: With large commercial accounts, a small number of insurers negotiate

### Chapter 7 Externalities

Chapter 7 Externalities Reading Essential reading Hindriks, J and G.D. Myles Intermediate Public Economics. (Cambridge: MIT Press, 2006) Chapter 7. Further reading Bator, F.M. (1958) The anatomy of market

### A dynamic auction for multi-object procurement under a hard budget constraint

A dynamic auction for multi-object procurement under a hard budget constraint Ludwig Ensthaler Humboldt University at Berlin DIW Berlin Thomas Giebe Humboldt University at Berlin March 3, 2010 Abstract

### Chapter 7. Sealed-bid Auctions

Chapter 7 Sealed-bid Auctions An auction is a procedure used for selling and buying items by offering them up for bid. Auctions are often used to sell objects that have a variable price (for example oil)

### Online Appendix Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage

Online Appendix Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage Alex Edmans LBS, NBER, CEPR, and ECGI Itay Goldstein Wharton Wei Jiang Columbia May 8, 05 A Proofs of Propositions and

### Regret and Rejoicing Effects on Mixed Insurance *

Regret and Rejoicing Effects on Mixed Insurance * Yoichiro Fujii, Osaka Sangyo University Mahito Okura, Doshisha Women s College of Liberal Arts Yusuke Osaki, Osaka Sangyo University + Abstract This papers

### On Compulsory Per-Claim Deductibles in Automobile Insurance

The Geneva Papers on Risk and Insurance Theory, 28: 25 32, 2003 c 2003 The Geneva Association On Compulsory Per-Claim Deductibles in Automobile Insurance CHU-SHIU LI Department of Economics, Feng Chia

### Working Paper Does retailer power lead to exclusion?

econstor www.econstor.eu Der Open-Access-Publikationsserver der ZBW Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW Leibniz Information Centre for Economics Rey, Patrick;

### Gains from Trade. Christopher P. Chambers and Takashi Hayashi. March 25, 2013. Abstract

Gains from Trade Christopher P. Chambers Takashi Hayashi March 25, 2013 Abstract In a market design context, we ask whether there exists a system of transfers regulations whereby gains from trade can always

### Two Papers on Internet Connectivity and Quality. Abstract

Two Papers on Internet Connectivity and Quality ROBERTO ROSON Dipartimento di Scienze Economiche, Università Ca Foscari di Venezia, Venice, Italy. Abstract I review two papers, addressing the issue of

### TOPIC 6: CAPITAL STRUCTURE AND THE MARKET FOR CORPORATE CONTROL

TOPIC 6: CAPITAL STRUCTURE AND THE MARKET FOR CORPORATE CONTROL 1. Introduction 2. The free rider problem In a classical paper, Grossman and Hart (Bell J., 1980), show that there is a fundamental problem

### How to Sell a (Bankrupt) Company

How to Sell a (Bankrupt) Company Francesca Cornelli (London Business School and CEPR) Leonardo Felli (London School of Economics) March 2000 Abstract. The restructuring of a bankrupt company often entails

### Hyun-soo JI and Ichiroh DAITOH Tohoku University. May 25, 2003. Abstract

Interconnection Agreement between Internet Service Providers and the Optimal Policy Intervention: The Case of Cournot-type Competition under Network Externalities Hyun-soo JI and Ichiroh DAITOH Tohoku

### 2. Information Economics

2. Information Economics In General Equilibrium Theory all agents had full information regarding any variable of interest (prices, commodities, state of nature, cost function, preferences, etc.) In many

### 9.1 Cournot and Bertrand Models with Homogeneous Products

1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,

### The Impact of Electronic Markets on B2B-Relationships

The Impact of Electronic Markets on BB-Relationships Jochen Haller Department of Microeconomics and Spatial Economics, University of Stuttgart, Germany January 00 Revised: February 004 Abstract. Although

### Second degree price discrimination

Bergals School of Economics Fall 1997/8 Tel Aviv University Second degree price discrimination Yossi Spiegel 1. Introduction Second degree price discrimination refers to cases where a firm does not have

### Non-Exclusive Competition in the Market for Lemons

Non-Exclusive Competition in the Market for Lemons Andrea Attar Thomas Mariotti François Salanié October 2007 Abstract In order to check the impact of the exclusivity regime on equilibrium allocations,

### On the irrelevance of government debt when taxes are distortionary

On the irrelevance of government debt when taxes are distortionary Marco Bassetto a,b,, Narayana Kocherlakota c,b a Department of Economics, University of Minnesota, 271 19th Ave. S., Minneapolis, MN 55455,

### Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Maitreesh Ghatak presented by Chi Wan

Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Maitreesh Ghatak presented by Chi Wan 1. Introduction The paper looks at an economic environment where borrowers have some

### Capital Structure. Itay Goldstein. Wharton School, University of Pennsylvania

Capital Structure Itay Goldstein Wharton School, University of Pennsylvania 1 Debt and Equity There are two main types of financing: debt and equity. Consider a two-period world with dates 0 and 1. At

### Biform Games: Additional Online Material

Biform Games: Additional Online Material Adam Brandenburger Harborne Stuart July 2006 These appendices supplement Brandenburger and Stuart [1, 2006], [2, 2006] ( Biform Games ). Appendix C uses the efficiency

### Bonn Econ Discussion Papers

Bonn Econ Discussion Papers Discussion Paper 29/2001 On the Use of Nonfinancial Performance Measures in Management Compensation by Dirk Sliwka August 2001 Bonn Graduate School of Economics Department of

### Resource Allocation and Firm Scope

Resource Allocation and Firm Scope Guido Friebel (Toulouse) Michael Raith (Rochester) Barcelona, June 2007 1 1. Introduction Firms frequently rely on resources that may not be available on the market Most

### Credible Termination Threats, Reputation and Private Monitoring.

Credible Termination Threats, Reputation and Private Monitoring. Olivier Compte First Version: June 2001 This Version: April 2005 Abstract In repeated principal-agent relationships, termination threats

### Why the government should do cost-effectiveness analysis in a health insurance market

Government Why the government should do cost-effectiveness analysis in a health insurance market TILEC, Tilburg University April 17, 2012 Government Outline 1 Motivation 2 3 4 Government 5 6 Government

### Game Theory: Supermodular Games 1

Game Theory: Supermodular Games 1 Christoph Schottmüller 1 License: CC Attribution ShareAlike 4.0 1 / 22 Outline 1 Introduction 2 Model 3 Revision questions and exercises 2 / 22 Motivation I several solution

### Bundling in Cable Television: A Pedagogical Note With a Policy Option. Keith Brown and Peter J. Alexander Federal Communications Commission, USA

K. Bundling Brown and in Cable P. J. Alexander Television Bundling in Cable Television: A Pedagogical Note With a Policy Option Keith Brown and Peter J. Alexander Federal Communications Commission, USA

### Economics of Insurance

Economics of Insurance In this last lecture, we cover most topics of Economics of Information within a single application. Through this, you will see how the differential informational assumptions allow

### Technology platforms, such as Microsoft Windows, are the hubs of technology industries. We develop a

MANAGEMENT SCIENCE Vol. 52, No. 7, July 2006, pp. 1057 1071 issn 0025-1909 eissn 1526-5501 06 5207 1057 informs doi 10.1287/mnsc.1060.0549 2006 INFORMS Two-Sided Competition of Proprietary vs. Open Source

### 17.6.1 Introduction to Auction Design

CS787: Advanced Algorithms Topic: Sponsored Search Auction Design Presenter(s): Nilay, Srikrishna, Taedong 17.6.1 Introduction to Auction Design The Internet, which started of as a research project in

### Why Plaintiffs Attorneys Use Contingent and Defense Attorneys Fixed Fee Contracts

Why Plaintiffs Attorneys Use Contingent and Defense Attorneys Fixed Fee Contracts Winand Emons 1 Claude Fluet 2 1 Department of Economics University of Bern, CEPR, CIRPEE 2 Université du Québec à Montréal,

### ECONOMIC RESEARCH CENTER DISCUSSION PAPER. Partial Privatization and Market-Opening Policies: A Mixed Oligopoly Approach. Lihua Han Hikaru Ogawa

ECONOMIC RESEARCH CENTER DISCUSSION PAPER E-Series No.E07-3 Partial Privatization and Market-Opening Policies: A Mixed Oligopoly Approach by Lihua Han Hikaru Ogawa June 2007 ECONOMIC RESEARCH CENTER GRADUATE

### Pricing and Persuasive Advertising in a Differentiated Market

Pricing and Persuasive Advertising in a Differentiated Market Baojun Jiang Olin Business School, Washington University in St. Louis, St. Louis, MO 63130, baojunjiang@wustl.edu Kannan Srinivasan Tepper

### Industry profit in an oligopoly (sum of all firms profits) < monopoly profit.

Collusion. Industry profit in an oligopoly (sum of all firms profits) < monopoly profit. Price lower and industry output higher than in a monopoly. Firms lose because of non-cooperative behavior : Each

### Optimal demand management policies with probability weighting

Optimal demand management policies with probability weighting Ana B. Ania February 2006 Preliminary draft. Please, do not circulate. Abstract We review the optimality of partial insurance contracts in

### ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE YUAN TIAN This synopsis is designed merely for keep a record of the materials covered in lectures. Please refer to your own lecture notes for all proofs.

### The Role of Dispute Settlement Procedures in International Trade Agreements: Online Appendix

The Role of Dispute Settlement Procedures in International Trade Agreements: Online Appendix Giovanni Maggi Yale University, NBER and CEPR Robert W. Staiger Stanford University and NBER November 2010 1.

### A Comparison of the Wholesale Structure and the Agency Structure in Differentiated Markets

A Comparison of the Wholesale Structure and the Agency Structure in Differentiated Markets Liang Lu * School of Economics and the Centre for Competition Policy, University of East Anglia, Norwich NR4 7TJ,

### Competitive Screening in Credit Markets with Adverse Selection: A Cover Version of Bester s Model

Competitive Screening in Credit Markets with Adverse Selection: A Cover Version of Bester s Model Ran Spiegler April 18, 2013 Abstract This note presents a simple model of competitive screening in a credit

### Warranty Designs and Brand Reputation Analysis in a Duopoly

Warranty Designs and Brand Reputation Analysis in a Duopoly Kunpeng Li * Sam Houston State University, Huntsville, TX, U.S.A. Qin Geng Kutztown University of Pennsylvania, Kutztown, PA, U.S.A. Bin Shao

### DANISH RESEARCH UNIT FOR INDUSTRIAL DYNAMICS

DANISH RESEARCH UNIT FOR INDUSTRIAL DYNAMICS DRUID Working Paper No. 99-4 Understanding Ownership: Residual Rights of Control and Appropriable Control Rights by Kirsten Foss & Nicolai J. Foss March 1999

### When is Reputation Bad? 1

When is Reputation Bad? 1 Jeffrey Ely Drew Fudenberg David K Levine 2 First Version: April 22, 2002 This Version: November 20, 2005 Abstract: In traditional reputation theory, the ability to build a reputation

### Schooling, Political Participation, and the Economy. (Online Supplementary Appendix: Not for Publication)

Schooling, Political Participation, and the Economy Online Supplementary Appendix: Not for Publication) Filipe R. Campante Davin Chor July 200 Abstract In this online appendix, we present the proofs for

### MULTIPLE LOSSES, EX ANTE MORAL HAZARD, AND THE IMPLICATIONS FOR UMBRELLA POLICIES

C The Journal of Risk and Insurance, 2005, Vol. 72, No. 4, 525-538 MULTIPLE LOSSES, EX ANTE MORAL HAZARD, AND THE IMPLICATIONS FOR UMBRELLA POLICIES Michael Breuer ABSTRACT Under certain cost conditions

### Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

### Conference Paper Expectation Damages and Bilateral Cooperative Investments

econstor www.econstor.eu Der Open-Access-Publikationsserver der ZBW Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW Leibniz Information Centre for Economics Göller,

### A Theory of Intraday Patterns: Volume and Price Variability

A Theory of Intraday Patterns: Volume and Price Variability Anat R. Admati Paul Pfleiderer Stanford University This article develops a theory in which concentrated-trading patterns arise endogenously as

### Other explanations of the merger paradox. Industrial Economics (EC5020), Spring 2010, Sotiris Georganas, February 22, 2010

Lecture 6 Agenda Introduction Mergers in Cournot Oligopoly Extension 1: number of firms Extension 2: fixed cost Extension 3: asymmetric costs Extension 4: Stackelberg mergers Extension 5: Bertrand competition

### Richard Schmidtke: Private Provision of a Complementary Public Good

Richard Schmidtke: Private Provision of a Complementary Public Good Munich Discussion Paper No. 2006-20 Department of Economics University of Munich Volkswirtschaftliche Fakultät Ludwig-Maximilians-Universität

### On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information

Finance 400 A. Penati - G. Pennacchi Notes on On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information by Sanford Grossman This model shows how the heterogeneous information

### Principal Agent Model. Setup of the basic agency model. Agency theory and Accounting. 2 nd session: Principal Agent Problem

Principal Agent Model 2 nd session: Principal Agent Problem This lecture is mostly based on: IMSc in Business Administration October-November 2007 Richard A. Lambert, Contracting Theory and Accounting,

### MARKET STRUCTURE AND INSIDER TRADING. Keywords: Insider Trading, Stock prices, Correlated signals, Kyle model

MARKET STRUCTURE AND INSIDER TRADING WASSIM DAHER AND LEONARD J. MIRMAN Abstract. In this paper we examine the real and financial effects of two insiders trading in a static Jain Mirman model (Henceforth

### Why payment card fees are biased against merchants

Why payment card fees are biased against merchants Julian Wright November 2010 Abstract I formalize the popular argument that payment card networks such as MasterCard and Visa charge merchants too much

### Financial Markets. Itay Goldstein. Wharton School, University of Pennsylvania

Financial Markets Itay Goldstein Wharton School, University of Pennsylvania 1 Trading and Price Formation This line of the literature analyzes the formation of prices in financial markets in a setting

### 6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games

6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games Asu Ozdaglar MIT February 4, 2009 1 Introduction Outline Decisions, utility maximization Strategic form games Best responses

### Remedies vs. Extreme Options in Merger Control

BECCLE 2015 Competition Policy Conference 1/18 Motivation Remedies: ˆ important device used by Antitrust Authorities (AA) to countervail mergers anticompetitive effects ˆ structural remedies (divestitures

### Please Do not Circulate Preliminary and Incomplete Mixed Bundling and Imperfect Competition

Abstract A model of two-product, Hotelling duopolists is examined in which firms can engage in mixed bundling. Even though products are independent in consumption, bundled pricing induces complementarity

### Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model

Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The Ramsey-Cass-Koopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous

### ESMT BUSINESS BRIEF. Exploitative Abuses. Lars-Hendrik Röller, ESMT. ESMT No. BB-107-002 ISSN 1866 4024

Business Brief Consolidation Index: Critical Success Factors for Industry Consolidation 1 ESMT No. BB-107-002 ESMT BUSINESS BRIEF Lars-Hendrik Röller, ESMT ISSN 1866 4024 2 Business Brief Consolidation

### What Is a Barrier to Entry?

WHEN ARE SUNK COSTS BARRIERS TO ENTRY? ENTRY BARRIERS IN ECONOMIC AND ANTITRUST ANALYSIS What Is a Barrier to Entry? By R. PRESTON MCAFEE, HUGO M. MIALON, AND MICHAEL A. WILLIAMS* Discussants: Steve Berry,

### Contract, Mechanism Design, and Technological Detail

Contract, Mechanism Design, and Technological Detail Joel Watson Preliminary version, May 2001 Revised January 2002 Abstract This paper develops a theoretical framework for studying contract and enforcement

### Information Exchanges Among Firms and their Impact on Competition*

Information Exchanges Among Firms and their Impact on Competition* Kai-Uwe Kühn Xavier Vives Institut d'anàlisi Econòmica (CSIC) Barcelona June 1994 Revised December 1994 *We are grateful to Paco Caballero,

### Commitment to Overinvest and Price Informativeness

Commitment to Overinvest and Price Informativeness James Dow Itay Goldstein Alexander Guembel London Business University of University of Oxford School Pennsylvania FMG financial stability conference,

### Bargaining Solutions in a Social Network

Bargaining Solutions in a Social Network Tanmoy Chakraborty and Michael Kearns Department of Computer and Information Science University of Pennsylvania Abstract. We study the concept of bargaining solutions,

### EMPIRICAL MACRO PRODUC TION FUNCTIONS SOME METHODOLOGICAL

- SaBHBBI ^ m v > x S EMPIRICAL MACRO PRODUC TION FUNCTIONS SOME METHODOLOGICAL COMMENTS by Sören Wibe Umeå Economic Studies No. 153 UNIVERSITY OF UMEÅ 1985 ISSN 0348-1018 - 1 - EMPIRICAL MACRO PR ODUCTION

### At t = 0, a generic intermediary j solves the optimization problem:

Internet Appendix for A Model of hadow Banking * At t = 0, a generic intermediary j solves the optimization problem: max ( D, I H, I L, H, L, TH, TL ) [R (I H + T H H ) + p H ( H T H )] + [E ω (π ω ) A

### tariff versus quota Equivalence and its breakdown

Q000013 Bhagwati (1965) first demonstrated that if perfect competition prevails in all markets, a tariff and import quota are equivalent in the sense that an explicit tariff reproduces an import level

### On the optimality of optimal income taxation

Preprints of the Max Planck Institute for Research on Collective Goods Bonn 2010/14 On the optimality of optimal income taxation Felix Bierbrauer M A X P L A N C K S O C I E T Y Preprints of the Max Planck

### On the Existence of Nash Equilibrium in General Imperfectly Competitive Insurance Markets with Asymmetric Information

analysing existence in general insurance environments that go beyond the canonical insurance paradigm. More recently, theoretical and empirical work has attempted to identify selection in insurance markets

### Credit card interchange fees

Credit card interchange fees Jean-Charles Rochet Julian Wright January 23, 2009 Abstract We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a