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

This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals—or on occasions fails to deal—with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance. ( JEL G34, L25)

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The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey

Corruption is a persistent feature of human societies over time and space. The sale of parliamentary seats in 'rotten boroughs' in England before the Reform Act of 1832 and 'machine politics' in immigrant cities in the US at the turn of the 19th century are just two historical examples. Contemporaneous examples also abound and not only from developing countries such as Nigeria, India, and Philippines but also from transition economies such as Russia. Some of these and many other instances of corruption are extensively documented in The Politics of Corruption, edited by Robert Williams and associates. Its four volumes contain a large collection of articles published during the past 40 years in social science journals with contributions from political scientists, sociologists, anthropologists, law scholars, and a few economists including Andrei Shleifer and Robert W. Vishny. It is not surprising to find the work of Shleifer and Vishny represented in this interdisciplinary collection. As is evident from the collection of articles reprinted in The Grabbing Hand, they have, with various co-authors, made a large number of important contributions to the study of corruption and other government pathologies throughout the 1990s. Currently, the study of corruption is also high on the research agenda of international organisations such as the World Bank and the International Monetary Fund (IMF), and some of the most significant studies on corruption coming out of the IMF in recent years are collected in Governance,

Economic Analysis of Corruption: A Survey

Economic analysis of corruption: a survey*

With the fast-paced changing technologies in the power industry, new power references addressing new technologies are coming to the market. So there is an urgent need to keep track of international experiences and activities taking place in the field of modern unit-commitment (UC) problem. This paper gives a bibliographical survey, mathematical formulations, and general backgrounds of research and developments in the field of UC problem for past 35 years based on more than 150 published articles. The collected literature has been divided into many sections, so that new researchers do not face any difficulty in carrying out research in the area of next-generation UC problem under both the regulated and deregulated power industry.

Unit commitment-a bibliographical survey

In this model, shareholders can use auditors' reports to contract with a privately-informed manager. Imperfect audit technology allows the auditor and the manager to collude. Auditors are useful when they have good information and the manager's liability is high. Expected maximum deterrence is not desirable and production is suboptimal, even with unbounded punishments. Raising the manager's punishment raises the bribe he may offer the auditor, which raises the cost of preventing collusion. The authors also distinguish internal auditors (costless but collusive) from external ones (costly but not collusive) and show that the optimal contract may specify random external audits. Copyright 1993 by The Econometric Society.

Collusion in hierarchical agency

The bidding decision making problem is studied from a supplier's viewpoint in a spot market environment. The decision-making problem is formulated as a Markov decision process-a discrete stochastic optimization method. All other suppliers are modeled by their bidding parameters with corresponding probabilities. A systematic method is developed to calculate transition probabilities and rewards. A simplified market clearing system is also included in the implementation. A risk-neutral decision-maker is assumed, the optimal strategy is calculated to maximize the expected reward over a planning horizon. Simulation cases are used to illustrate the proposed method.

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Optimal electricity supply bidding by Markov decision process

This paper provides a state-of-the-art summary of risk assessment in energy trading. Techniques from financial engineering are needed by electric energy companies to manage price risk. These tools are needed by suppliers, distributors, and traders in a competitive electric power marketplace. Tools that have been adapted to the specific environment of the electric power system include portfolio analysis and hedging instruments. This paper provides a comprehensive critical literature survey of what has been applied to date in the power markets and which areas continue to need additional research. One example market scenario is used throughout the paper to demonstrate the usefulness of the risk assessment methods.

Risk assessment in energy trading

Accurate electricity price forecasting is critical to market participants in wholesale electricity markets. Market participants rely on price forecasts to decide their bidding strategies, allocate assets, negotiate bilateral contracts, hedge risks, and plan facility investments. Market operators can also use electricity price forecasts to predict market power indexes for the purpose of monitoring participants' behaviors. Various forecasting techniques are applied to different time horizons for electricity price forecasting in locational marginal pricing (LMP) spot markets. Available correlated data also have to be selected to improve the short-term forecasting performance. In this paper, fuzzy inference system (FIS), least-squares estimation (LSE), and the combination of FIS and LSE are proposed. Based on extensive testing with various techniques, LSE provides the most accurate results, and FIS, which is also highly accurate, provides transparency and interpretability

Day-Ahead Electricity Price Forecasting in a Grid Environment

This paper proposes solutions for electricity producers in the field of financial risk management for electric energy contract evaluation. The efficient frontier is used as a tool to identify the preferred portfolio of contracts. Each portfolio has a probability density function for the profit. For important scheduling policies, closed form solutions are found for the amount of futures contracts that correspond to the efficient frontier. Production scheduling must consider resource constraints. It is found that, without resource constraints, the portfolio with the highest expected profit can be preferred-even for a risk-averse decision-maker. When resource constraints are present, portfolios not corresponding to the maximum expected profit criteria will more frequently be preferred.

Jacques Lawarree

Papers

Collusion in hierarchical agency

Optimal electricity supply bidding by Markov decision process

Risk assessment in energy trading

Day-Ahead Electricity Price Forecasting in a Grid Environment

Financial risk management in a competitive electricity market