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Showing papers in "Quarterly Journal of Economics in 1988"


Journal ArticleDOI
TL;DR: In this paper, the importance of strategic complementarities in agents' payoff functions as a basis for macroeconomic coordination failures is discussed, where the optimal strategy of an agent depends positively upon the strategies of the other agents.
Abstract: This paper focuses on the importance of strategic complementarities in agents’ payoff functions as a basis for macroeconomic coordination failures. Strategic complementarities arise when the optimal strategy of an agent depends positively upon the strategies of the other agents. We first analyze an abstract game and find that multiple equilibria and a multiplier process may arise when strategic complementarities are present. Often these equilibria can be Pareto ranked. We then place additional economic content on the analysis of this game by considering strategic complementarities arising from production functions, matching technologies, and commodity demand functions in a multisector, imperfectly competitive economy. C 1988 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. © 1988 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

1,627 citations


Journal ArticleDOI
TL;DR: This article examined the relationship between variations in group size and free-riding behavior in the voluntary provision of public goods and found that increasing group size leads to a reduction in allocative efficiency when accompanied by a decrease in marginal return from the public good.
Abstract: This paper examines the relationship between variations in group size and "free-riding" behavior in the voluntary provision of public goods. We examine experimentally two pertinent concepts: the marginal return to an individual from contributions to the public good, and the actual number of members in the group. Our results strongly support a hypothesis that increasing group size leads to a reduction in allocative efficiency when accompanied by a decrease in marginal return from the public good (as from crowding or an association of large groups with imperceptibility of marginal benefits). Our results do not support a pure numbers-in-the-group effect.

1,091 citations


Journal ArticleDOI
TL;DR: In this paper, an economic analysis of the linkages in fertility rates and capital accumulation across generations is developed considering the determination of fertility and capital consumption in each generation when wage rates and interest rates are parameters to each family and to open economies.
Abstract: An economic analysis of the linkages in fertility rates and capital accumulation across generations is developed considering the determination of fertility and capital accumulation in each generation when wage rates and interest rates are parameters to each family and to open economies. The model is based on the assumption that parents are altruistic toward their children. The utility of parents depends on their own consumption and on the utility of each child and the number of children. By relating the utility of children to their own consumption and to the utility of their children a dynastic utility function was obtained that depends on the consumption and number of descendants in all generations. The term "reformulation" was used because of the emphasis on dynastic utility model of altruism toward children and deriving the budget constraint and utility function of a dynastic family the model was applied to the Great Depression and World War II. The 1st-order conditions to maximize utility imply that fertility in any generation depends positively on the real interest rate and the degree of altruism and negatively on the rate of growth in per capita consumption from 1 generation to the next. Consumption of each descendant depends positively on the net cost of rearing a desdendant. Applying the model it is shown that the analysis is consistent with baby busts during the Depression and the war and with a baby boom after the war. The effects on fertility of child mortality subsidies to (or taxes on) children and social security and other transfer payments to adults were considered. The demand for surviving children rises during the transition to low child mortality but demand for survivors return to its prior level once mortality stabilizes at a low level. Fertility falls in response to declines in international real interest rates and increases in an economys rate of technological progress. Extending the analysis to include life-cycle variations in consumption earnings and utility fertility emerges as a function of expenditures on the subsistence and human capital of children but not of expenditures that simply raise the consumption of children. The path of aggregate consumption in demographic steady states does not depend on interest rates time preference or other determinants of life-cycle variations in consumption.

1,081 citations


Journal ArticleDOI
TL;DR: In this article, a methodology for the valuation of claims on a real asset: an offshore petroleum lease is presented. And the authors show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves), emphasizing the advantages of this approach over conventional discounted cash flow techniques.
Abstract: This paper extends financial option theory by developing a methodology for the valuation of claims on a real asset: an offshore petroleum lease. Several theoretical and practical problems, not present in applying option pricing theory to financial assets, are addressed. Most importantly, we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves). The advantages of this approach over conventional discounted cash flow techniques are emphasized. The methodological development provides important insights for both company behavior and government policy. Promising empirical results are reported.

687 citations


Journal ArticleDOI
TL;DR: In this article, the authors illustrate three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist, showing that the merging firm increases its final good output and the resulting backward shift in the residual demand curve facing the independent final good producers ylowers their demand for the intermediate good.
Abstract: yThe model in this paper illustrates three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist. First, the merging firm increases its final good output. Second, the resulting backward shift in the residual demand curve facing unintegrated final good producers ylowers their demand for the intermediate good. Third, the merged firm withdraws from the intermediate good market. The increased concentration pushes the intermediate good price upward. Which effect dominates depends on market structure. Under some conditions, a vertical merger causes the price of the final good to increase.

608 citations


Journal ArticleDOI
TL;DR: In this article, the positive and normative effects of counterfeiting in markets where consumers are not deceived by forgeries are studied, and two policies designed to combat counterfeiting are analyzed: enforcement policy which increases the likelihood of confiscation of illegal items, and the imposition of a tariff on low-quality imports.
Abstract: We study the positive and normative effects of counterfeiting, i.e., trademark infringement, in markets where consumers are not deceived by forgeries. Consumers are willing to pay more for counterfeits than for generic merchandise of similar quality because they value the prestige associated with brand-name trademarks. Counterfeiters of status goods impose a negative externality on consumers of genuine items, as fakes degrade the status associated with a given label. But counterfeits allow consumers to unbundle the status and quality attributes of the brand-name products, and alter the competition among oligopolistic trademark owners. We analyze two policies designed to combat counterfeiting: enforcement policy which increases the likelihood of confiscation of illegal items, and the imposition of a tariff on low-quality imports.

552 citations


Journal ArticleDOI
TL;DR: In this article, a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime-separable was investigated empirically using postwar monthly U.S. data on quantities, real wages, and the real return on the one-month Treasury bill.
Abstract: This paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime-separable. The nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked. These cross-relations are examined empirically using postwar monthly U. S. data on quantities, real wages, and the real return on the one-month Treasury bill. The estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models. Several possible explanations of these discrepancies are discussed.

509 citations


Journal ArticleDOI
TL;DR: This article examined group differences in fertility and female labor supply as partial determinants of investment in child quality and showed that the groups with higher levels of schooling also have higher rates of return.
Abstract: Viewing the United States as comprising many racial and ethnic groups, it is shown that group differences in earnings, schooling, and rates of return from schooling are striking and that the groups with higher levels of schooling also have higher rates of return. These data are shown to be consistent with a child quality investment model, but they are not consistent with the hypotheses that the primary determinants of schooling level are discrimination, minority group status, differences in time preference (discount rates), or “tastes” for schooling. Group differences in fertility and female labor supply are examined as partial determinants of investment in child quality. Policy implications are discussed.

304 citations


Journal ArticleDOI
TL;DR: Farrer and Gallini as mentioned in this paper show that if customers are aware of this problem, the monopolist's profits can be improved through ex-ante commitment to competition in the post-adoption market.
Abstract: UNIVERSITY OF CALIFORNIA, BERKELEY Department of Economics Berkeley, California Working Paper SECOND-SOURCING AS A COMMITMENT: MONOPOLY INCENTIVES TO ATTRACT COMPETITION Joseph Farrell and Nancy T. Gallini December 1, 1986 Key words: second-sourcing, lock-in, dynamic consistency Abstract commitment, licensing, We show that a new product monopolist may benefit from delayed entry into its market when consumers of the product incur set-up costs. Set-up costs create a dynamic consistency problem: the monopolist cannot guarantee that it will set low future prices for the product once customers have incurred the costs of product adoption. We show that, if customers are aware of this problem, the monopolist's profits can be improved through ex-ante commitment to competition in the post-adoption market. The most profitable post-adoption market structure depends on the size of adoption costs and on future demand conditions. For sufficiently large set-up costs, an innovator of a product with static demand is better off with perfect competition than as a monopolist in the post-adoption periods. For lower set-up costs, first-best profits are achieved under monopoly in all periods. If new demand is expected in the future, licensed competition will improve the monopolist's profits. JEL Classification:

299 citations


Journal ArticleDOI
TL;DR: In this article, the authors investigate the quality change in Japanese car and truck imports over 1979-1985 and find evidence of substantial upgrading of Japanese car imports, with ambiguous quality changes in trucks.
Abstract: In this paper we investigate the quality change in Japanese car and truck imports over 1979–1985. Car imports have been subject to a quota restraint since April 1981, while compact trucks have faced an ad valorem tariff of 25 percent since August 1980. We find evidence of substantial upgrading in Japanese car imports, with ambiguous quality change in trucks. The welfare cost of the quota restraint in cars exceeds $1,000 per import in 1983 and 1984.

241 citations


Journal ArticleDOI
TL;DR: In this paper, the authors show that a monopolistically competitive economy with real investment can have multiple rational expectations equilibria: one is associated with entrepreneurs' optimistic expectations about future demand; another with entrepreneurs's pessimism.
Abstract: This paper shows that a monopolistically competitive economy with real investment can have multiple rational expectations equilibria: one is associated with entrepreneurs' optimistic expectations about future demand; another with entrepreneurs' pessimism. It also shows that an optimistic expectational equilibrium Pareto dominates a pessimistic equilibrium. An investment subsidy can be beneficial both by reducing the original underinvestment distortion and by changing firms' expectations from pessimistic to optimistic. The most important assumption is increasing returns to scale, and monopolistic competition makes increasing returns consistent with each producer's optimization.

Journal ArticleDOI
TL;DR: In this paper, the authors show that, under a variety of alternative assumptions about the private information of loan applicants, a competitive market for loans is characterized by screening, where banks separate out loan risks by offering higher loans at higher interest rates.
Abstract: In this paper we show that, under a variety of alternative assumptions about the private information of loan applicants, a competitive market for loans is characterized by screening. Banks separate out loan risks by offering higher loans at higher interest rates. Depending on the nature of the informational asymmetry, it may be that applicants with less risky projects select larger rather than smaller loans. Comparative statics implications are also examined. In particular, we explore the effects of an increase in banks' cost of funds on average loan quality.

Journal ArticleDOI
TL;DR: A finite horizon model of industrial exit is developed in this paper, which shows that after an initial lag, most exits are by young firms and the duration of the lag is positively related to sunk entry costs, but not due to the fallacy of sunk costs.
Abstract: A finite horizon model of industrial exit is developed. After an initial lag, most exits are by young firms. The duration of the lag is positively related to sunk entry costs, but not due to the fallacy of sunk costs. The conception of entry differs from previous research; as a result, not all entrants are identical; and firm size affects the rate of learning. On average, larger new firms last longer. Entrepreneurs in declining firms act more lazily as the firm declines. A number of empirical observations about declining firms are organized by the model.

Journal ArticleDOI
TL;DR: In this paper, a decision framework for regulating environmental health risks is introduced, which incorporates the characteristic uncertainty about the dissemination and toxicological impacts of environmental contaminants and the behavioral restrictions commonly encountered.
Abstract: This paper introduces a decision framework for regulating environmental health risks which incorporates the characteristic uncertainty about the dissemination and toxicological impacts of environmental contaminants and the behavioral restrictions commonly encountered. Analysis indicates that increases in uncontrollable uncertainty will increase emphasis on average performance, that more potent or less controllable risks will be regulated more stringently and that increasing aversion to uncertainty may result in poorer average performance. The paper also develops an alternative measure for valuing risk of loss of life taking into account uncertainty about health risk generation processes.

Journal ArticleDOI
TL;DR: The theory of stationary job search predicts that, controlling for other factors that affect the probability of leaving unemployment, duration and reservation wages are likely to be positively associated as mentioned in this paper, and this prediction was tested for British cross-sectional data from 1982 using an estimating equation implied by search theory.
Abstract: The theory of stationary job search predicts that, controlling for other factors that affect the probability of leaving unemployment, duration and reservation wages are likely to be positively associated. The paper tests this prediction for British cross-sectional data from 1982 using an estimating equation implied by search theory. Simultaneity is crucial in the evaluation of this prediction, with single-equation and instrumental-variable estimates differing markedly. Perhaps surprisingly, given the extreme paucity of both job interviews and offers in the sample, the main finding is that reservation wages play a significant role in the determination of duration.

Journal ArticleDOI
TL;DR: In this article, the authors consider whether the existence of such informational barriers to entry provides a valid reason for temporarily protecting infant producers of experience goods and services, and find that infant-industry protection often exacerbates the welfare loss associated with these market imperfections.
Abstract: In industries with imperfect consumer information, the lack of a reputation puts latecomers at a competitive disadvantage vis-a-vis established firms. We consider whether the existence of such informational barriers to entry provides a valid reason for temporarily protecting infant producers of experience goods and services. Our model incorporates both moral hazard in an individual firm's choice of quality and adverse selection among potential entrants into the industry. We find that infant-industry protection often exacerbates the welfare loss associated with these market imperfections.

Journal ArticleDOI
TL;DR: In this article, the authors argue that a city's frictional unemployment rate will be lower, the more industrially diversified is the city; that is the more evenly distributed is employment across industries.
Abstract: Since many individuals are immobile between city labor markets in the short run, the industrial structure of cities plays an important role in determining the national rate of unemployment. This paper argues that a city's frictional unemployment rate will be lower, the more industrially diversified is the city; that is, the more evenly distributed is employment across industries. The empirical work on 91 large SMSAs strongly supports the hypothesis. The difference in frictional unemployment rates between the twenty most and least diverse cities is estimated at about 2.4 percentage points.

Journal ArticleDOI
TL;DR: In this paper, the authors show that a competitive market allocation of operating licenses, whether attained through auctioning, selling, or allowing resale of the rights, does not, in general, assure efficiency.
Abstract: Some economists and policy makers have suggested that market allocation of scarce operating licenses, broadcasting licenses, and airport "slots," for instance, would lead to their efficient use. This paper demonstrates that a competitive market allocation of operating licenses, whether attained through auctioning, selling, or allowing resale of the rights, does not, in general, assure efficiency. The profit criterion that would guide the allocation of licenses in a competitive market would not necessarily lead to the uses that maximize social benefits. The paper shows that the difference between private and social incentives in the allocation process can be quite large. The theory is then applied to discussions of allocating airport takeoff and landing slots and broadcasting licenses.

Journal ArticleDOI
TL;DR: In this paper, it was shown that all stationary equilibria may be locally stable to perturbations, in the sense that there exist perfect foresight trajectories leading back to the equilibrium.
Abstract: It is shown that, in a class of models with multiple externalities (one positive and one negative), all stationary equilibria may be locally stable to perturbations, in the sense that there exist perfect foresight trajectories leading back to the equilibrium. Thus, scale diseconomies (arising, for example, out of a common resource pool) generally overturn the Liviatan-Samuelson result, that equilibria are either saddlepoints or sources.

Journal ArticleDOI
TL;DR: This paper showed that real exchange rate appreciation typically reduces, but may increase, the output costs of disinflation and that the direct favorable effects of cheaper imports on consumer prices, on the prices of imported inputs, on wage demands, and on the demand for money may be outweighed by the unemployment caused by the trade deficit.
Abstract: The paper shows first that real exchange rate appreciation typically reduces, but may increase, the output costs of disinflation. The direct favorable effects of cheaper imports on consumer prices, on the prices of imported inputs, on wage demands, and on the demand for money may be outweighed by the unemployment caused by the trade deficit. Second, the effects of wage indexation on the costs of disinflation are reexamined. Ex ante indexation speeds up disinflation. Ex post indexation, the type observed in practice, automatically increases the real wage at the start of a disinflation and may therefore increase the sacrifice ratio.


Journal ArticleDOI
TL;DR: In this article, a business cycle model is developed in which output is traded on Lucas-Phelps islands and labor services on each island are exchanged through costly search and recruiting with transactions externalities.
Abstract: A business cycle model is developed in which output is traded on Lucas-Phelps islands and labor services on each island are exchanged through costly search and recruiting with transactions externalities. The model exhibits persistent involuntary unemployment and inefficient equilibria, even though there are no nominal rigidities and no unexploited privately attainable gains from trade. It also exhibits employment fluctuations without any real-wage fluctuations. It yields a Lucas aggregate-supply curve (to a linear approximation). It also implies that the natural rate of unemployment depends positively upon the variability and persistence of relative price shocks.

Journal ArticleDOI
Peter Kugler1
TL;DR: In this article, the short-term interest rate stabilization explanation for the failure of the expectations theory of the term structure is subjected to an additional empirical test using recent monthly data, and the results showed that the spread had substantial predictive power for changes in the short rate in the period before the founding of the Federal Reserve (1890-1914).
Abstract: The expectations theory of the term structure of interest rates supplemented by the rational expectations and time-invariant risk premium assumption implies that the spread between the long and the short rate has in general predictive power for the short rate. This implication was consistently rejected in recent studies [Shiller, Campbell, and Schoenholtz, 1983; Fama, 1984; Mankiw and Summers, 1984] with data at the short end of the maturity spectrum (threeand six-month treasury bills). Time variations of the risk premium, which are probably important for the behavior of the yield on long-term bonds, are not an entirely satisfactory explanation for these findings. In a more recent article of Mankiw and Miron [1986], who analyzed quarterly data for threeand six-month interest rates over the period 1890-1979, an interesting new explanation for the failure of the expectations theory emerged. They showed that the spread had substantial predictive power for changes in the short rate in the period before the founding of the Federal Reserve (1890-1914), whereas for all other periods considered (1915-1933, 1934-1951, 1951-1958, and 1959-1979), the spread did not help to predict the short rate. Thus, Mankiw and Miron suggested that the rejection of the expectations theory with recent data is a consequence of the commitment of the Federal Reserve to stabilize interest rates resulting in random walk behavior of the short rate. Under these circumstances, expected future short rates are equal to the actual short rate and variations of the spread are only brought about by changes in the risk premium. In this note the short-term interest rate stabilization explanation for the failure of the predictive implications of the expectations theory of the term structure is subjected to an additional empirical test using recent monthly data. Thereby, the short end of the term structure of Swiss, German, and U. S. interest rates is analyzed for the years 1974-1986. These three cases are of great interest in our context. The Swiss National Bank and the German Federal Bank used the opportunity offered by the flexible exchange rate system to implement money supply targets and did not attempt to stabilize short-term interest rates, whereas the Federal Reserve was at

Journal ArticleDOI
TL;DR: This article showed that the average duration of major collective bargaining settlements negotiated in 1972-1987 has remained roughly constant in the United States, even after the oil price increases of 1973 and 1978.
Abstract: It is widely believed that increased uncertainty leads to shorter duration of labor contracts. This is indeed also the result obtained in the formal analysis in Gray [1978], who concludes that "[a]s expected, increased variability-regardless of source-shortens contract length" [1978, p. 8]. The basic argument is that production is inefficient, unless the real wage happens to equate the demand and supply of labor, and that the loss due to inefficient production increases with the deviation of the actual real wage from the real wage that would equate the demand and supply of labor. It is assumed that the economy is exposed to both aggregate real shocks and nominal shocks, but that the wage can only be indexed to the general price level, an imperfect signal of the underlying shocks. Since uncertainty is greater for more distant periods, the deviation of the actual real wage from the real wage that would equate the demand and supply also tends to be greater for more distant periods, and it follows that the per period expected loss due to inefficient production increases with contract duration. Consequently, increased uncertainty provides an incentive to reduce contract durations. The reason contracts do not become arbitrarily short is the existence of a fixed contracting cost that militates against shortening the contract duration. The oil-price hikes of 1973 and 1978 presumably increased the a priori importance of aggregate real shocks, and the efficientproduction hypothesis therefore leads one to expect a decrease in contract durations in the years following the price hikes. The empirical fact, however, is that there has been no such tendency, at least not in the United States. This is clearly brought out in Table I, which shows that the average duration of major collective bargaining settlements negotiated in 1972-1987 has remained roughly constant.'

Journal ArticleDOI
TL;DR: In this paper, a stochastic model of R&D investment whose predictions can be examined by using laboratory experiments is presented. But the experimental results support the hypothesis that the degree of appropriability is inversely related to R&DI spending, and the non-cooperative Nash equilibrium is a good predictor of central tendencies in the experiments.
Abstract: This research examines in the laboratory a class of game-theoretic equilibrium models of private research and development (R&D). We formulate a stochastic model of R&D investment whose predictions can be examined by using laboratory experiments. The noncooperative Nash equilibrium of our operational model yields testable predictions about the effects of appropriability and market structure on R&D. The experimental results support the hypothesis that the degree of appropriability is inversely related to R&D spending. The results strongly support the hypothesis that an increase in group size yields greater aggregate R&D. The noncooperative Nash equilibrium is shown to be a good predictor of central tendencies in the experiments.

Journal ArticleDOI
TL;DR: This paper presented a three-good, two-country, general equilibrium model that is consistent with several stylized facts of economic growth, including the fact that services, a nontraded good, must be more expensive in the country with higher per capita income.
Abstract: This paper presents a three-good, two-country, general equilibrium model that is consistent with several stylized facts of economic growth. The three goods are manufactures, agriculture, and services. Manufactures are subject to economies of scale. The model predicts that services, a nontraded good, must be more expensive in the country with higher per capita income. It also shows that as per capita income increases, we should expect the productivity in commodities relative to services to rise. The model is able to generate many other stylized facts of economic growth.

Journal ArticleDOI
TL;DR: In this article, the authors consider the case of a manufacturer who sells a homogeneous good to retailers who compete in prices and post-sales services and show that the optimal linear-price contract is inefficient from the point of view of the vertical structure.
Abstract: We consider the case of a manufacturer who sells a homogeneous good to retailers who compete in prices and "cum-sales" or "post-sales" services. We show that the optimal linear-price contract is inefficient from the point of view of the vertical structure and that simple forms of vertical restraints, such as resale price maintenance and franchise fees, dominate the optimal linear-price contract, but do not restore vertical efficiency. Our analysis is concluded with the description of an efficient contract.

Journal ArticleDOI
TL;DR: In this article, the authors investigated the welfare properties of equilibrium indexation in a decentralized economy and found that if indexation is costless, so all firms index, then the equilibrium degree of indexation was efficient.
Abstract: This paper investigates the welfare properties of equilibrium indexation in a decentralized economy. If indexation is costless, so all firms index, then the equilibrium degree of indexation is efficient. But if indexation is costly and this leads some firms not to index, equilibrium indexation is inefficient because indexation has externalities for nonindexed firms. Firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages. The results do not depend on the relative importance of real and nominal shocks.

Journal ArticleDOI
Jack Mintz1
TL;DR: In this paper, the authors quantify the impact of imperfect loss offsetting or refundability on industry effective tax rate measurements and use the refundability measures to estimate effective tax rates on Canadian firms by industry.
Abstract: The provisions of generous tax incentives during the 1970s and the recession of the early 1980s led to a marked increase in the number of nontaxable corporations in Canada. During the 1977 to 1982 period, over 40 percent of investment was done by corporations that were rarely taxable; 30 percent by corporations that were normally taxable; and the balance undertaken by corporations that were taxable about half the time.1 The degree to which taxable losses can be used to shelter other forms of taxable income has important implications with regard to the study of effective tax rates on capital income. This paper attempts to quantify the impact of imperfect loss offsetting or refundability on industry effective tax rate measurements. Section II of this note provides an estimate of the extent to which tax losses are written off current or future taxable income in a present value sense. Refundability is measured by discounting the estimated proportion of a taxable loss written off by companies through carryback and carryforward provisions. Section III uses the refundability measures to estimate effective tax rates on Canadian firms by industry. Three cases are compared. (i) The Taxpaying Firm. This firm expects to use all deductions and credits immediately. (ii) The Nontaxpaying Firm. This firm expects to be nontaxpaying with probability 1 in the period in which new investment is undertaken. Marginal tax losses on new investment are used up slowly over time.

Journal ArticleDOI
TL;DR: In this paper, the authors compare the standard principal-agent model presented by Grossman and Hart [1983] with a plausible self-selection model, where the firm only wants to hire a manager with a particular level of productivity.
Abstract: Managerial contracts often tie compensation to the performance of the firm. Two models of contracting under asymmetric information, moral hazard and self-selection, are used to explain this phenomenon.' An important direction for research in this area will be to use data on managerial contracts to sharpen our understanding of the settings in which a given informational problem is most important. The purpose of this paper is to ask whether this is possible using static models of contracting under asymmetric information. To address this question, we compare the standard principal-agent model presented by Grossman and Hart [1983] with a plausible self-selection model, where the firm only wants to hire a manager with a particular level of productivity. We call this self-selection model a talent search.