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The Theory of Industrial Organization

Economics has much to do with incentives--not least, incentives to work hard, to produce quality products, to study, to invest, and to save. Although Adam Smith amply confirmed this more than two hundred years ago in his analysis of sharecropping contracts, only in recent decades has a theory begun to emerge to place the topic at the heart of economic thinking. In this book, Jean-Jacques Laffont and David Martimort present the most thorough yet accessible introduction to incentives theory to date. Central to this theory is a simple question as pivotal to modern-day management as it is to economics research: What makes people act in a particular way in an economic or business situation? In seeking an answer, the authors provide the methodological tools to design institutions that can ensure good incentives for economic agents. This book focuses on the principal-agent model, the "simple" situation where a principal, or company, delegates a task to a single agent through a contract--the essence of management and contract theory. How does the owner or manager of a firm align the objectives of its various members to maximize profits? Following a brief historical overview showing how the problem of incentives has come to the fore in the past two centuries, the authors devote the bulk of their work to exploring principal-agent models and various extensions thereof in light of three types of information problems: adverse selection, moral hazard, and non-verifiability. Offering an unprecedented look at a subject vital to industrial organization, labor economics, and behavioral economics, this book is set to become the definitive resource for students, researchers, and others who might find themselves pondering what contracts, and the incentives they embody, are really all about.

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The Theory of Incentives: The Principal-Agent Model

Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena. This paper summarizes this approach and its achievements so far, and outlines directions for future research.

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Does culture affect economic outcomes

https://www.econstor.eu/bitstream/10419/101013/1/wp0503.pdf

Do Free Trade Agreements Actually Increase Members' International Trade?

Does culture have a causal effect on economic development? The data on European regions suggest that it does. Culture is measured by indicators of individual values and beliefs, such as trust and respect for others, and confidence in individual self determination. To isolate the exogenous variation in culture, we rely on two historical variables used as instruments: the literacy rate at the end of the 19th century, and the political institutions in place over the past several centuries. The political and social history of Europe provides a rich source of variation in these two variables at a regional level. The exogenous component of culture due to history is strongly correlated with current regional economic development, after controlling for contemporaneous education, urbanization rates around 1850, and national effects. (JEL: O10, F10, P10, N13)

https://www.ifs.org.uk/conferences/tabellini.pdf

Culture and institutions: economic development in the regions of europe

A prominent model in the recent political-economy literature on trade policy is Grossman and Helpman's (1994) Protection for Sale' model. This model yields clear predictions for the cross-sectional structure of trade protection. The objective of our" paper is to check whether the predictions of the Grossman-Helpman model are consistent with the data and, if the model finds support, to estimate its two key structural parameters: the government's valuation of welfare relative to contributions, and the fraction of the voting population represented by a lobby. We find that the pattern of protection in the U.S. in 1983 is consistent with the basic predictions of the model. Our estimate of the government's valuation of welfare relative to contributions is surprisingly high; the weight of welfare in the government's objective function is estimated to be between 50 and 88 times the weight of contributions.

Protection for Sale: An Empirical Investigation

The Grossman-Helpman "Protection for Sale" model, concerning the political economy of trade protection, yields clear predictions for the cross-sectional structure of import barriers. Our objective is to check whether the predictions of the Grossman-Helpman model are consistent with the data and, if the model finds support, to estimate its key structural parameters. We find that the pattern of protection in the United States in 1983 is broadly consistent with the predictions of the model. A surprising finding is that the weight of welfare in the government's objective function is many times larger than the weight of contributions.

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An argument often heard in favor of trade agreements is that, by committing to free trade, a government can credibly distance itself from domestic lobbies, But several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process. We develop a small‐country model in which factors are sector‐specific in the short run but mobile in the long run. We show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade, and hence it may value a trade agreement.

https://www.jstor.org/stable/pdf/10.1086/250022.pdf

The Value of Trade Agreements in the Presence of Political Pressures

The prevalence of shirking within a large Italian bank appears to be characterized by significant regional differentials. In particular, absenteeism and misconduct episodes are substantially more prevalent in the south. We consider a number of potential explanations for this fact: different individual backgrounds; group-interaction effects; sorting of workers across regions; differences in local attributes; different hiring policies and discrimination against southern workers. Our analysis suggests that individual backgrounds, group-interaction effects and sorting effects contribute to explain the north-south shirking differential. None of the other explanations appears to be of first-order importance.

Work Environment And Individual Background: Explaining Regional Shirking Differentials In A Large Italian Firm

The prevalence of shirking within a large Italian bank appears to be characterized by significant regional differentials. In particular, absenteeism and misconduct episodes are substantially more prevalent in the south. We consider a number of potential explanations for this fact: different individual backgrounds; group-interaction effects; sorting of workers across regions; differences in local attributes; different hiring policies; and discrimination against southern workers. Our analysis suggests that individual backgrounds, group-interaction effects, and sorting effects contribute to explaining the north-south shirking differential. None of the other explanations appears to be of first-order importance. I. INTRODUCTION Whether individual behavior is determined by group interactions or by individual background is undoubtedly a fundamental question for the social sciences. This question presented itself forcefully when we stumbled onto the following piece of evidence: there appear to be significant regional differentials in the prevalence of shirking among the employees of a large Italian bank. In particular, absenteeism and misconduct episodes are considerably more frequent in the southern branches of the bank. In this paper we examine several potential explanations for this fact. First, individual preferences for shirking versus working may differ according to one's region of hirth. We will refer to this hj^othesis as one of different "individual hackgrounds." The second possibility is one of locational sorting: low-shirking types may tend to migrate to the north, high-shirking types may tend to migrate to the south, or hoth. Third, the northern and southern

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Giovanni Maggi

Papers

Protection for Sale: An Empirical Investigation

Protection for Sale: An Empirical Investigation

The Value of Trade Agreements in the Presence of Political Pressures

Work Environment And Individual Background: Explaining Regional Shirking Differentials In A Large Italian Firm

Work Environment and Individual Background: Explaining Regional Shirking Differentials in a Large Italian Firm