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Showing papers in "The Bell Journal of Economics in 1982"


Journal ArticleDOI
TL;DR: In this article, the authors study moral hazard with many agents and focus on two features that are novel in a multiagent setting: free riding and competition, and show that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally.
Abstract: This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.

3,991 citations


Journal ArticleDOI
TL;DR: In this article, a causal ambiguity inherent in the creation of productive processes is modeled by attaching an irreducible ex ante uncertainty to the level of firm efficiency that is achieved by sequential entrants.
Abstract: Causal ambiguity inherent in the creation of productive processes is modeled by attaching an irreducible ex ante uncertainty to the level of firm efficiency that is achieved by sequential entrants. Without recourse to scale economies or market power, the model generates equilibria in which there are stable interfirm differences in profitability, an above-normal industry rate of return, and a lack of entry even when firms are atomistic price-takers. The free-entry equilibrium for rational noncollusive firms is characterized for atomistic firms and for firms of fixed size, and some analytic results are obtained for the more realistic case in which firms have an arbitrary cost function. Numerical results for the associations implied between concentration, industry profitability, fixed entry costs, and the dispersion of firm profitabilities are obtained for selected cases.

2,513 citations


Journal ArticleDOI
TL;DR: In this paper, the distributions of firm size, span of control, and managerial incomes are modeled as the joint outcome of market assignments of personnel to hierarchical positions, and the distribution of reward and firm size are skewed relative to the distribution abilities.
Abstract: The distributions of firm size, span of control, and managerial incomes are modeled as the joint outcome of market assignments of personnel to hierarchical positions. Assigning persons of superior talent to top positions increases productivity by more than the increments of their abilities because greater talent filters through the entire firm by a recursive chain of command technology. These multiplicative effects support enormous rewards for top level management in large organizations. Also, superior managers control more than proportionately larger firms. Consequently, the distributions of reward and firm size are skewed relative to the distribution of abilities.

1,254 citations


Journal ArticleDOI
Abstract: This article tests a transactions cost theory of vertical integration with data from the U S. automobile industry. Existing theory is first refined to take into account industrial know-how and the cost of transferring such know-how. A testable model is then developed, which is estimated by using probit techniques. The results support the view that transactions cost considerations surrounding the development and deepening of human skills have important ramifications ]br delineating efficient organizational boundaries.

1,118 citations


Journal ArticleDOI
TL;DR: The authors analyzes markets in which consumers are imperfectly informed about product quality and analyzes the relationship between consumer information and product quality, and shows that reputation can work only imperfectly.
Abstract: This article analyzes markets in which consumers are imperfectly informed about product quality. An important force that prevents deterioration of the quality supplied by sellers is the formation of firm-specific reputations. It is shown in general that reputations, because they can reward high quality production only with a lag, can work only imperfectly. Viewing reputation as an expectation of quality, this article studies the properties of quality expectations that are fulfilled. When sellers set quality once and for all, any self-fulfilling quality level must lie below the perfect information quality level. The same is true of steady-state quality levels when sellers can vary quality over time. Finally, the relationship between consumer information and product quality is explored.

874 citations


Book ChapterDOI
TL;DR: Grether, Isaac, and Plott as discussed by the authors proposed an auction-based approach for the allocation of slots at four major airports (La Guardia, Washington National, Kennedy International, and O'Hare International).
Abstract: The Problem of Allocating Airport Slots In 1968 the FAA adopted a high density rule for the allocation of scarce landing and take-off slots at four major airports (La Guardia,Washington National, Kennedy International, and O'Hare International). This rule establishes slot quotas for the control of airspace congestion at these airports. Airport runway slots, regulated by these quotas, have a distinguishing feature which any proposed allocation procedure must accommodate: an airline's demand for a takeoff slot at a flight originating airport is not independent of its demand for a landing slot at the flight destination airport. Indeed, a given flight may take off and land in a sequence of several connected demand interdependent legs. For economic efficiency it is desirable to develop an airport slot allocation procedure that allocates individual slots to those airline flights for which the demand (willingness to pay) is greatest. Grether, Isaac, and Plott (hereafter, GIP) (1979, 1981) have proposed a practical market procedure for achieving this goal. Their procedure is based upon the growing body of experimental evidence on the performance of (1) the competitive (uniform price) sealed-bid auction and (2) the oral double auction such as is used on the organized stock and commodity exchanges. Under their proposal an independent primary market for slots at each airport would be organized as a sealed-bid competitive auction at timely intervals. Since the primary market allocation does not make provision for slot demand interdependence, a computerized form of the oral double auction (with block transaction capabilities) is proposed as an “after market” to allow airlines to purchase freely and sell primary market slots to each other. This continuous after market exchange would provide the institutional means by which individual airlines would acquire those slot packages which support their individual flight schedules. Thus, an airline that acquired slots at Washington National which did not flight-match the slots acquired at O'Hare could either buy additional O'Hare slots or sell its excess Washington slots in the after market.

742 citations


Journal ArticleDOI
TL;DR: In this article, the authors consider the question of whether the free market offers enough incentive for business to disclose and conclude that whether information is of purely private value or not, more than the socially optimal amount of disclosure takes place.
Abstract: This article is about disclosure of quality. The question that it seeks to answer is: Does the free market offer enough incentive for business to disclose? The article concludes that whether information is of purely private value or not, more than the socially-optimal amount of disclosure takes place. The optimal policy is for the government to subsidize sale without disclosure. The article offers no support for the policy of mandatory disclosure. The results should be viewed with care, however, as they seem to depend on special features of the model, in particular the assumed impossibility of misrepresentation.

503 citations


Journal ArticleDOI
TL;DR: In this article, the authors present the strongest evidence to date that chronic heavy drinkers' consumption is responsive to changes in the price of liquor, and they estimate that an increase in the liquor excise tax by one dollar (1967 prices) per proof gallon reduces the liver cirrhosis mortality rate by 5.4% in the short run and by perhaps twice that amount in the long run.
Abstract: In this article we present the strongest evidence to date that chronic heavy drinkers' consumption is responsive to changes in the price of liquor. We estimate that an increase in the liquor excise tax by one dollar (1967 prices) per proof gallon reduces the liver cirrhosis mortality rate by 5.4% in the short run and by perhaps twice that amount in the long run. (The liver cirrhosis mortality rate is a reliable proxy for the prevalence of chronic excess consumption.) Our estimate is based on an analysis of covariance of annual state-level data, for a 16-year panel of 30 states, with state excise taxes and per capita income as the covariates. Of course, our estimate is not sufficient to determine whether an increase in the liquor tax is worthwhile, much less to determine an "optimal" tax. It is, however, an important datum for making these determinations.

344 citations


Journal ArticleDOI
TL;DR: In this paper, the authors studied the fulfilled expectations equilibrium for a Cournot duopoly model in which firms acquire information about uncertain linear demand and established several propositions concerning the incentives to acquire and release information in this duopoly environment.
Abstract: This article studies the fulfilled expectations equilibrium for a Cournot duopoly model in which firms acquire information about uncertain linear demand Several propositions are established concerning the incentives to acquire and release information in this duopoly environment

308 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined how liability rules and insurance affect incentives to reduce accident risks and the allocation of such risks and concluded that both of the forms of liability create incentives to take care.
Abstract: The question considered in this article is how liability rules and insurance affect incentives to reduce accident risks and the allocation of such risks This question is examined when liability is strict or based on the negligence rule; and, if first-party and liability insurance are available, when insurers have information about insured parties' behavior and when they do not have such information The conclusions are in essence that although both of the forms of liability create incentives to take care, they differ in respect to the allocation of risk; that, of course, the presence of insurance markets mitigates this difference and alters incentives to take care; and that despite the latter effect, the sale of insurance is socially desirable

229 citations


Journal ArticleDOI
TL;DR: In this article, the authors examined the diffusion of this important innovation at a more micro level than previous studies by focusing on plant behavior and found that differences among firms in the rate of adoption of the basic oxygen furnaces are attributable both to the characteristics of the adopting plants that determine the profitability of this innovation and to the size of the firm.
Abstract: The major innovation in the steel industry in the post-World War II period has been the replacement of the open hearth furnace by the basic oxygen furnace. This article examines the diffusion ofthis important innovation at a more micro level than previous studies by focusing on plant behavior. Wide differences in the characteristics of the plants owned by a particular firm make this focus more appropriate. Using data from several large firms in the industry, estimates are first provided of the productivity of the basic oxygen furnace. Then, differences among plants and firms in the rate of adoption of the basic oxygen furnace are given and the causes of these differences are explored. The major finding of this article is that differences among firms in the rate of adoption of the basic oxygen furnaces are attributable both to the characteristics ofthe adopting plants that determine the profitability ofthis innovation and to the size of the firm.

Journal ArticleDOI
TL;DR: In this paper, the authors used laboratory experiments to explore the possible consequences of a proposed rate publication policy for the domestic, dry bulk commodity transportation industry on inland waterways, and concluded that rate filing policies cause higher prices, lower volume, and reduced efficiency.
Abstract: This study uses laboratory experiments to explore the possible consequences of a proposed rate publication policy for the domestic, dry bulk commodity transportation industry on inland waterways. The central problem is to determine the effects of a requirement that a carrier must file a proposed rate change with the Interstate commerce Commission at least fifteen days before the rate change is to become effective. The study concludes that in laboratory markets that have many of the essential economic features of the barge industry, rate filing policies cause higher prices, lower volume, and reduced efficiency, and they hurt the small participants. Claims that rate filing policies would improve the operations of markets with these economic features are not supported by the laboratory research conducted to date.

Journal ArticleDOI
TL;DR: This work derives several predictions about physical location behavior from standard location theory and concludes that at a theoretical level the ability of physicians to induce demand is neither necessary nor sufficient to demonstrate that physicians will locate only in large cities as their numbers increase.
Abstract: Public policy toward the geographic distribution of physicians presumes that the market fails because physicians can create their own demand. A number of government interventions attempt to correct this market failure. We derive several predictions about physician location behavior from standard location theory (i.e., assuming the market does not fail). The data generally support these predictions. At a theoretical level the ability ofphysicians to induce demand is neither necessary nor sufficient to demonstrate that physicians will locate only in large cities as their numbers increase. The premises of public policy toward the geographic distribution of physicians need rethinking.

Journal ArticleDOI
TL;DR: In this paper, the authors compared the relative efficiency of private and government hospitals in nuclear medicine services and examined the effects of service rivalry among hospitals on technical efficiency, and found that hospitals in geographic markets with structures conducive to service rivalry tend to be less efficient than hospitals in markets that are less conducive to such rivalry.
Abstract: This study tests several hypotheses about the relative efficiency of proprietary and nonprofit hospitals in the provision of nuclear medicine services. It also examines the effects that service rivalry among hospitals has on technical efficiency. Linear programming techniques and regression analysis are applied to data from over 900 proprietary, private nonprofit and government hospitals. The results indicate that proprietary hospitals are more efficient than all other types of hospitals and that government hospitals are less efficient than all other types. In addition, the findings support the hypothesis that hospitals in geographic markets with structures conducive to service rivalry tend to be less efficient than hospitals in markets that are less conducive to such rivalry.

Journal ArticleDOI
TL;DR: In this article, the authors report estimates of a cross national model for automobile ownership, fleet fuel efficiency, driving per vehicle, and as derived from these three, gasoline consumption, showing that gasoline consumption is much more income elastic than it was previously thought to be and that most of this income effect derives from the impact of income on auto ownership.
Abstract: This article reports estimates of a cross national model for automobile ownership, fleet fuel efficiency, driving per vehicle, and as derived from these three, gasoline consumption. The model is a recursive system of equations derived by aggregating individual behavioral equations for the choice of a durable good and its usage. The results suggest that across countries, gasoline price differences exert themselves primarily by affecting the amount of driving, and not as time series studies show, through fleet fuel efficiency. The estimates also suggest that gasoline consumption is much more income elastic than it was previously thought to be and that most of this income effect derives from the impact of income on auto ownership.

Journal ArticleDOI
TL;DR: Stahl et al. as discussed by the authors presented a location and spatial pricing theory with non-convex transport-scheduling schemes for the first time in the context of finance.
Abstract: LOCATION AND SPATIAL PRICING THEORY WITH NONCONVEX TRANSPORTATION SCHEDULES by Konrad Stahl* Working Paper No. 338 UNIVERSITY OF CALIFORNIA, BERKELEY AND UNIVERSITY OF DORTMUND, WEST GERMANY * Financial support from NSF and The Fulbright Commission is grate- fully acknowledged.

Book ChapterDOI
TL;DR: In this paper, a regulatory board meets every period and assigns the monopoly franchise for an industry to one of a competing number of entrants; the successful firm then earns It dollars in monopoly profits for that period.
Abstract: Suppose that a regulatory board meets every period and assigns the monopoly franchise for an industry to one of a competing number of entrants; the successful firm then earns It dollars in monopoly profits for that period. The theory of rent-seeking suggests that firms will in the aggregate spend some fraction of π dollars competing for the franchise by hiring lawyers, making presentations, etc. To the extent that these resources are misallocated, they represent a social cost of monopoly in addition to the normal deadweight loss.

Journal ArticleDOI
TL;DR: In this paper, the effects of regulation on the risk and value of the regulated firm in a dynamic context are discussed, and a notion of consistency in regulatory policy is developed, and it is shown how consistent regulatory policies may be implemented once the valuation problem is solved.
Abstract: This article is concerned with the effects of regulation on the risk and value of the regulated firm in a dynamic context Current regulatory practice is shown to be logically deficient, since it ignores the effect of regulatory policy on the cost of capital and therefore on the appropriate allowed rate of return A notion of consistency in regulatory policy is developed, and it is shown how consistent regulatory policies may be implemented once the valuation problem is solved

Journal ArticleDOI
TL;DR: In this paper, the authors show that public storage can substantially alleviate a price ceiling's adverse effects and that appropriate public storage behavior depends on tariff policy and other policy constraints as well as on private sector responses to current and anticipated public behavior.
Abstract: A government storing oil to reduce vulnerability to interruption in foreign supply should recognize the existence of private storage. In fact, public intervention is justified only if some distortion exists in the private market. A price ceiling that the government is unable to eliminate as a possible future policy is such a distortion. We show that public storage can indeed substantially alleviate a price ceiling's adverse effects. Appropriate public storage behavior depends importantly on tariff policy and other policy constraints as well as on private sector responses to current and anticipated public behavior.

Journal ArticleDOI
TL;DR: In this paper, a method for calculating the marginal cost of industrial power cuts is developed, in which firms are assumed to hedge against outages by acquiring back-up generators, and they use this method to infer the marginal costs of a power cut.
Abstract: A method for calculating the marginal cost of industrial power cuts is developed. Firms are assumed to hedge against outages by acquiring back-up generators. The marginal cost of back-up power enables us to infer the marginal cost of a power cut.

Journal ArticleDOI
TL;DR: In this article, the optimal regulatory strategy to promote research and development aimed at cost reduction is derived for an environment in which the firm's information about the technology of cost reduction, although initially imperfect, is better than that of the regulator.
Abstract: The optimal regulatory strategy to promote research and development aimed at cost reduction is derived for an environment in which the firm's information about the technology of cost reduction, although initially imperfect, is better than that of the regulator. The manner in which the optimal regulatory strategy varies with changes in the informational environment is also described.

Journal ArticleDOI
TL;DR: In this paper, the authors investigate the implications of misallocation of risk for the behavior of firms in which managers make decisions for owners and predict that, from the owner's perspective, managers will exhibit excessive risk aversion and underinvest in risky projects.
Abstract: When effort cannot be costlessly monitored, Pareto optimal employee compensation schemes require that owners and managers deviate from perfect risk sharing to improve the work incentives facing the manager. This article investigates the implications of this misallocation of risk for the behavior of firms in which managers make decisions for owners. The presented model predicts that, from the owner's perspective, managers will exhibit excessive risk aversion and underinvest in risky projects.

Journal ArticleDOI
TL;DR: In this article, the theory of optimal sequential search is used to study an industry where firms make homogeneous products and seek lower costs of production, and the research results are regarded as drawings from a probability distribution that depends on the research outlays.
Abstract: The theory of optimal sequential search is used to study an industry where firms make homogeneous products and seek lower costs of production. Research outlays correspond to the cost of search. The research results are regarded as drawings from a probability distribution that depends on the research outlays. Eventually, the production costs are so low, continuing the research no longer pays, the research era ends, and the mature era begins. Sequential research results in a cost level at the end of the research era and beginning of the mature era that is lower, the smaller the number of firms then in the industry. Firm market share and rate of return are positively related. The firm with the largest share during the research era retains its lead throughout, and its share tends to fall at a rate that is slower, the larger its share initially.

Journal ArticleDOI
TL;DR: In this paper, it is argued that despite the asymmetric information in their models, it is possible to achieve an efficient allocation of resources without the use of share contracts, by having tenants organize production.
Abstract: It has been suggested by Hallagan (1978) and Newbery and Stiglitz (1979) that the coexistence of rent, wage, and share contracts generates information on the abilities of tenants which allows landlords to allocate resources more efficiently. It is argued here that despite the asymmetric information in their models, it is possible to achieve an efficient allocation of resources without the use of share contracts, by having tenants organize production. An alternative model is then given where efficiency cannot be achieved in this way because the quality of land as well as the ability of tenants is unobservable. In this case the use of sets of wage and share contracts may lead to an efficient outcome.

Journal ArticleDOI
TL;DR: In this article, the authors characterize and give examples of the types of mechanisms that can be used to obtain the optimum optimorum allocation in the context of product quality and product liability problems.
Abstract: In the use of incentive contracts to compel a supplier to produce a product of optimal quality, the supplier's payoff typically depends on observed product quality. When the observable measure of quality employed in the contract varies also with the buyer's care or maintenance of the product, it becomes impossible to impute the product's performance to two unobservable casual determinants: innate product quality and buyer's care. In this article we characterize and give examples of the types of mechanisms that can be used to obtain the optimum optimorum allocation. In the context of product quality and product liability problems there exist mechanisms that can avoid the moral hazard problem.

Journal ArticleDOI
TL;DR: In this paper, the authors construct a decentralized growth model with two production sectors, one having competitive firms and the other having oligopolists, and show that imperfect competition can reduce steady-state national output through both a static effect on allocative efficiency and a dynamic effect on aggregative capital accumulation.
Abstract: This article constructs a decentralized growth model with two production sectors, one having competitive firms and the other oligopolists. Since capitalized pure profits for the latter sector constitute an asset which household savings must finance, we show that imperfect competition can reduce steady-state national output through both a "static effect" on allocative efficiency and a "dynamic effect" on aggregative capital accumulation. After presenting a theoretical analysis, we generate several numerical examples. The latter suggest that the "dynamic effect" of monopoly may be significantly larger than the "static effect" in practice.

Journal ArticleDOI
TL;DR: In this article, the authors define and discuss cross-subsidization in pricing from a game-theoretic perspective and derive sufficient conditions for the existence of subsidy-free prices.
Abstract: The purpose of this article is to define and discuss cross subsidization in pricing from a game-theoretic perspective. Cross subsidization may be said to exist when one group of customers pays more than they would if served by a separate firm producing exclusively for their demands. Previous game-theoretic approaches have considered primarily the properties of the cost function. This article discusses the reasons demand must be included in the analysis and suggests two possible ways of doing so. In the context of one general model, a number of sufficient conditions for the existence of subsidy-free prices are derived.

Journal ArticleDOI
TL;DR: In this paper, the main results of the sustainability literature on natural monopolies are shown to depend on the Bertrand conjecture, and the general efficiency results that have been obtained for sustainable configurations no longer hold under the Cournot assumption.
Abstract: The main results of the sustainability literature on natural monopolies (for example, Panzar and Willig (1977)), are shown to depend on the Bertrand conjecture First, for the natural monopoly case we prove that industry configurations that are sustainable in the sense of Willig (1980) are equivalent to special kinds of Bertrand equilibria Second, we show that sustainability under the Bertrand assumption does not necessarily imply sustainability under the Cournot assumption and vice versa The general efficiency results that have been obtained for sustainable configurations no longer hold under the Cournot assumption On the other hand, von Stackelberg behavior guarantees sustainability and an efficient industry structure, though not necessarily efficient pricing Third, under the Bertrand assumption, entry can be deterred if sunk costs comprise a sufficiently large fraction of total costs, but this result fails to hold under the Cournot assumption

Journal ArticleDOI
TL;DR: In this paper, the profit-maximizing price structure of a multiproduct firm subject to fully distributed cost rules is considered and it is shown that a firm that sells in both regulated and unregulated markets would choose a dominated price vector.
Abstract: The profit-maximizing price structure of a multiproduct firm subject to fully distributed cost rules is considered. It is shown that a firm that sells in both regulated and unregulated markets would choose a dominated price vector. Similar incentives for inefficient pricing are provided to a firm that sells in markets subject to different regulatory authorities.

Journal ArticleDOI
TL;DR: In this article, the authors considered a multiproduct market in which an established firm faces an unlimited number of potential competitors, and all firms have identical cost functions exhibiting scale economies, and they showed that, if von Stackelberg leadership is feasible, the established firm's profit-maximizing strategy will always involve entry deterrence.
Abstract: This article considers a multiproduct market in which an established firm faces an unlimited number of potential competitors, and all firms have identical cost functions exhibiting scale economies. It is shown that, if von Stackelberg leadership is feasible, the established firm's profit-maximizing strategy will always involve entry deterrence. The characteristics of alternative entry deterring policies are outlined. For a two-good model, it is argued that product diversification is a feature of optimal strategies when substitutability in demand between the goods is relatively low. This will (will not) be coupled with limit pricing when fixed costs are low (high).