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Showing papers in "The Review of Economic Studies in 1988"


Journal ArticleDOI
TL;DR: A model for interdependent demand for health insurance and health care under uncertainty is developed to throw light on the issue of insurance-induced distortions in thedemand for health care services.
Abstract: This paper develops a model for interdependent demand for health insurance and health care under uncertainty to throw light on the issue of insurance-induced distortions in the demand for health care services. The model is used to empirically analyse the determinants of the choice of health insurance type and seven types of health care services using micro-level data from the 1977–78 Australian Health Survey. Econometric implementation of the model involves, simultaneously, issues of discreteness of choice, selectivity and stochastic dependence between health insurance and utilization. Health status appears to be more important in determining health care service use than health insurance choice, while income appears to be more important in determining health insurance choice than in determining health care service use. For a broad range of health care services both moral hazard and self selection are found to be important determinants of utilization of health care services.

523 citations


Journal ArticleDOI
TL;DR: In this article, the authors present a theory of the disciplinary role of takeovers based on an explicit model of managerial incentive problems stemming from asymmetric information and argue that an informed raider can reduce incentive problems by making managerial compensation more sensitive to information unavailable to shareholders.
Abstract: This paper presents a theory of the disciplinary role of takeovers based on an explicit model of managerial incentive problems stemming from asymmetric information. It is argued that an informed raider can reduce incentive problems by making managerial compensation more sensitive to information unavailable to shareholders. The paper also highlights the importance of specifying the source of contractual inefficiencies when analyzing the effect of takeovers on incentives.

486 citations


Journal ArticleDOI
TL;DR: In this article, the authors consider a long-term relationship between a seller and a buyer whose valuation (for a per-period service or a durable good) is private, and show that the optimal longterm contract and the non-commitment outcome in the standard Coasian durable good model can be found.
Abstract: Consider a long-term relationship between a seller and a buyer whose valuation (for a per-period service or a durable good) is private. As trade progresses, the valuation will be partially revealed, and it may be impossible for the parties to commit ex-ante not to take advantage of this. We analyse this situation first by supposing that the parties can sign a sequence of short-term contracts; and secondly by supposing that they can sign a long-term contract, but cannot commit not to renegotiate it later. We find a close relationship in the second case between the optimal long-term contract and the non-commitment outcome in the standard Coasian durable good model. Our results also have implications for hidden-information principal-agent models.

457 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examine long-term wage contracts between a risk-neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage.
Abstract: We examine long-term wage contracts between a risk-neutral firm and a risk-averse worker when both can costlessly renege and buy or sell labour at a random spot market wage. A self-enforcing contract is one in which neither party ever has an incentive to renege. In the optimum self-enforcing contract, wages are sticky: they are less variable than spot market wages and positively serially correlated. They are updated by a simple rule: around each spot wage is a time invariant interval, and the contract wage changes each period by the smallest amount necessary to bring it into the current interval.

433 citations


Journal ArticleDOI
TL;DR: In this paper, the authors extended the classical test for structural change in linear regression models to a wide variety of nonlinear models, estimated by a variety of different procedures, and provided a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models.
Abstract: This paper extends the classical test for structural change in linear regression models (see Chow (1960)) to a wide variety of nonlinear models, estimated by a variety of different procedures. Wald, Lagrange multiplier-like, and likelihood ratio-like test statistics are introduced. The results allow for heterogeneity and temporal dependence of the observations. In the process of developing the above tests, the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models.

228 citations


Journal ArticleDOI
TL;DR: In this article, a model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search, price dynamics and entry on the part of consumers and firms respectively, and a positive relationship between (smooth and perfectly anticipated) inflation and price dispersion or uncertainty is established.
Abstract: A model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search, price dynamics and entry on the part of consumers and firms respectively. Equilibrium price strategies are (S, s); these bounds increase continuously with consumer search costs, and so does price dispersion. Indeed, the whole equilibrium varies smoothly from the competitive (Bertrand) to the monopolistic (Diamond (1971)) end of the spectrum. The latter's paradoxical result is explained as a limiting case where frictions on firms' side of the market (price adjustment costs) but not on buyers' (search costs) tend to zero. A positive relationship between (smooth and perfectly anticipated) inflation and price dispersion or uncertainty is established.

198 citations


Journal ArticleDOI
Ching-To Ma1
TL;DR: In this paper, the authors consider the problem of implementation when a principal hires many agents and is not able to monitor their actions and show that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules.
Abstract: In this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions. We distinguish two cases: (i) when actions are mutually observable among agents, (ii) when actions are not observable at all. In (i), there is a mechanism in which the first-best arises as a unique perfect equilibrium. In (ii), we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules. However, we prove that the principal can use these optimal sharing rules as a starting point and construct a multi-stage mechanism that has a unique second-best perfect Bayesian equilibrium.

185 citations


Journal ArticleDOI
TL;DR: The authors analyzes contracts as means of strategic commitment, that is, commitment against outside parties to the agreement, and considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry.
Abstract: The paper analyzes contracts as means of strategic commitment, that is, commitment against outside parties to the agreement. It considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry. It assumes away the possibility for the parties to precommit not to make Pareto-improving renegotiations of the agreement once entry has taken place. Under symmetric information, the contract is thus found to be useless for entry deterrence. If the incumbent firm or workers possess some private information, excessive post-entry production levels can however be sustained ex post, since output reductions may not be incentive compatible. While information asymmetries are usually welfare-decreasing when the goal is optimal risk sharing, they can thus be welfare-improving for the contracting parties when commitment against outsiders is the goal of the contract. The role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper, and the general relevance of strategic contractual commitment is discussed.

175 citations


Journal ArticleDOI
TL;DR: In this paper, the authors study different solutions to a simple one-dimensional linear quadratic game with a large number of private agents and a government and show how control theory should be applied to calculate the equilibrium and how to relate these equilibria to the differential game literature.
Abstract: We study different solutions to a simple one-dimensional linear quadratic game with a large number of private agents and a government. A "time-consistent" solution is defined as a solution to the Hamilton-Jacobi-Bellman equation, i.e. as a policy for which the government has noprecommitment capability. This solution is compared to a policy where the government has an "instantaneous" pre-commitment, i.e. an equilibrium in which the government has a period by period leadership. In both cases, we show how control theory should be applied to calculate the equilibrium and how to relate these equilibria to the differential game literature.

164 citations


Journal ArticleDOI
TL;DR: In this paper, product heterogeneity is introduced into the context of spatial price discrimination and the strong properties of the standard homogeneous goods case (which are attained as a limit case here) are shown to be no longer valid.
Abstract: Product heterogeneity is introduced into the context of spatial price discrimination. Many of the strong properties of the standard homogeneous goods case (which are attained as a limit case here) are shown to be no longer valid. In particular, the social optimum is no longer sustainable as a market equilibrium unless products are either identical or else very different.

133 citations


Journal ArticleDOI
TL;DR: In this paper, the authors show that efficient contracting under moral hazard alone does not require long-term commitment from the principal, provided a short-term contract can punish the agent sufficiently (in a sense made precise).
Abstract: In repeated principal-agent models, long-term contracts can improve on short-term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short-term contract negotiated if that circumstance occurs. We show that efficient contracting under moral hazard alone does not require long-term commitment from the principal. Provided a short-term contract can punish the agent sufficiently (in a sense made precise), it requires no commitment from the agent either. Then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing.

Journal ArticleDOI
TL;DR: In this article, a family of generalized conditional moment estimators was proposed, with a binary probit with a f i r s t - o r d e r autoregressive error structure given as an example.
Abstract: UNIVERSITY OF CALIFORNIA, BERKELEY Department of Economics Berkeley, C a l i f o r n i a Working Paper 8734 PROBIT WITH DEPENDENT OBSERVATIONS Dale J . P o i r i e r and Paul A. Ruud March 6, 1987 Key words: ARMA, limited dependent v a r i a b l e s , p r o b i t , generalized method of moments, autocorrelation. Abstract Estimation of limited dependent variable models, and binary probit i n p a r t i c u l a r , i s examined. Asymptotic d i s t r i b u t i o n theory i s provided f o r the consistency and asymptotic normality of quasi- maximum l i k e l i h o o d estimators. A family of r e l a t i v e l y e f f i c i e n t estimators, c a l l e d generalized conditional moment estimators, i s proposed. Probit with a f i r s t - o r d e r aut©regressive error structure i s given as an example. JEL C l a s s i f i c a t i o n :

Journal ArticleDOI
TL;DR: In this article, an individual model of job search and learning is formulated, and it is shown that the declining trend of reservation wages naturally arises due to the selection process, when search costs are not too small.
Abstract: Empirical studies of job search strongly suggest that the reservation wages of unemployed job seeking individuals decline with the length of their respective unemployment spells. Previous explanations of this behaviour based on age-effects, liquidity constraints, and limited unemployment benefits are not adequate. We provide a new answer to this question, based on the reasonable assumption that workers do not have precise knowledge of the distribution of the prevailing wages. An individual model of job search and learning is formulated. It is shown that the declining trend of reservation wages naturally arises due to the selection process, when search costs are not too small. The example of a normal wage offer distribution is analysed and the implications are discussed.

Journal ArticleDOI
TL;DR: In this article, the authors characterized the unique equilibrium for the case of continuous time and infinite numbers of agents of both types, in terms of the probabilities (iF(t) (i = 1, 2) that an agent of type i will not find a bargaining partner between time 0 and t.
Abstract: ensures that exits from the market are matched precisely by new entries, thus maintaining the numbers of the two types at a steady level. With this and other "stationary" assumptions, they demonstrate the existence of a unique equilibrium. Binmore and Herrero (1984, 1987) show that equilibria in such markets are unique, without any stationary assumptions at all, provided that the agents are equipped with discount factors satisfying 0? 8< 1 (i = 1, 2). The current paper characterizes the unique equilibrium, for the case of continuous time and infinite numbers of agents of both types, in terms of the probabilities (iF(t) (i = 1, 2) that an agent of type i will not find a bargaining partner between time 0 and t. In principle, these probabilities, 'F1(t) and ?2(t), can be calculated from a knowledge of the search technology and the rates at which agents enter and leave the market. We carry through this enterprise for the simplest of search technologies in the case when agents of both types flow into the market at an equal exogenously determined rate.2 (The rate at which agents flow out of the market is determined by the equilibrium

Journal ArticleDOI
TL;DR: In this paper, it was shown that if the seller publicly reveals information which is positively linked to buyers' valuations, this also raises expected (gross) revenue from an auction, and the seller therefore reaps the entire surplus.
Abstract: assumptions. Maskin and Riley (1984) show that when the amount a buyer is willing to pay for the auctioned object is not independent of his wealth, expected revenue tends to be lower under open bidding. In contrast, Milgrom and Weber (1982) relax the assumption that valuations are independent and assume instead that buyers' private estimates of the item's value are affiliated. A buyer with a high estimate then tends to believe that other buyers will have higher estimates as well. Maintaining the other assumptions, Milgrom and Weber show that expected revenue is higher in the open ascending bid auction. The intuition behind this result is that in sealed high bid auctions a buyer's bid is determined not only by his own beliefs but, via their bids, by the beliefs of those with lower estimates. A buyer with a low estimate believes that others are more likely to have low estimates as well. He therefore bids less aggressively. It follows that a buyer can beat all opponents who have lower estimates with a bid which is lower than it would be if beliefs were independent.2 Milgrom and Weber also show that if the seller purchases and then publicly reveals information which is positively linked to buyers' valuations, this also raises expected (gross) revenue from an auction. The intuition here is that this helps to reduce the difference in bidders' willingness to pay.3 That such a reduction should raise expected revenue is easily understood for the limiting case in which the seller's information includes all the buyers' private information; for then all buyer asymmetry is eliminated and so expected buyer profit is bid away to zero. The seller therefore reaps the entire surplus. In the following pages the implications of correlated signals are further explored. While Milgrom and Weber emphasized the potential gains to a seller who reveals information ex ante, the focus here is on ex post information. In Section 2 it is shown that, under weak assumptions, the sealed high bid auction is dominated by any auction

Journal ArticleDOI
TL;DR: In this paper, a dynamic market in steady state in which prices are determined in first-price auctions is considered, and the authors investigate how different properties of the model determine the relative importance of these two aspects of the competition and how the non-market clearing price result of the matching and bargaining models is affected by the different properties.
Abstract: The model features a dynamic market in steady state in which prices are determined in first-price auctions. It combines competition over time familiar from the pairwise meeting models with instantaneous bidding competition. It inquires how different properties of the model determine the relative importance of these two aspects of the competition and, in particular, how the non-market-clearing price result of the matching and bargaining models is affected by the

Journal ArticleDOI
TL;DR: In this paper, the authors analyzed the very long run, or "stationary state," impact of an unfunded social security system using an overlapping generations model framework and found that the possibility of negative "net bequests" may make social security less harmful to private wealth accumulation than would otherwise be the case, while risk-loving behaviour may emerge for some households due to the nature of intergenerational transfers within family lines.
Abstract: This paper analyses the very long run, or "stationary state," impact of an unfunded social security system We use an overlapping generations model framework A key feature is that while parents care about their children and can leave non-negative bequests to them, children also care about their parents and can make non-negative "gifts" to them We show that the possibility of negative "net bequests" may make social security less harmful to private wealth accumulation than would otherwise be the case A subsidiary finding is that risk-loving behaviour may emerge for some households due to the nature of intergenerational transfers within family lines

Journal ArticleDOI
TL;DR: In this paper, the authors examined the effects of terms of trade changes on the external adjustment of a small open economy where each consumer has a life-cycle saving function and the supply side of the economy was given by the standard two-sector model with two primary factors: labour and capital.
Abstract: This paper examines the effects of terms-of-trade changes on the external adjustment of a small open economy where each consumer has a life-cycle saving function. The supply side of the economy is given by the standard two-sector model with two primary factors: labour and capital. It is shown that, when both commodities are produced, a terms-of-trade deterioration leads to a current account deficit (surplus) if the export (import) sector is more labour intensive.

Journal ArticleDOI
TL;DR: In this article, the effect of content protection on the nature of interactions between input suppliers in oligopolistic situations is investigated. And the relation between input demands, the form of protection, and the degree of substitution between inputs is defined to understand who might lobby for protection in different environments.
Abstract: In oligopolistic situations, content protection can have unexpected effects as it changes the nature of interactions between input suppliers. With a duopoly, it does so in a manner that makes the foreign firm wish to match price increases and decreases of the domestic firm. Domestic input suppliers can therefore lose from such policies, even when set at free trade levels. The relation between input demands, the form of protection, and the degree of substitution between inputs is shown to define the effects of content protection and to provide the basis for understanding who might lobby for protection in different environments.

Journal ArticleDOI
Helmut Bester1
TL;DR: In this article, the authors studied a bargaining model of equilibrium price distributions and showed that the market equilibrium converges to the competitive equilibrium under perfect information when search costs become small, and that the number of active sellers increases with higher search costs.
Abstract: This paper studies a bargaining model of equilibrium price distributions. Consumers choose a seller at random and face search costs to switching to another store. In the market equilibrium, the prices at all stores are determined simultaneously as the perfect equilibrium of a bargaining game. In this game, the buyer has the outside option to search for another seller. Differences between the sellers' types create price dispersions; typically the number of active sellers increases with higher search costs. The market equilibrium converges to the competitive equilibrium under perfect information when search costs become small.

Journal ArticleDOI
TL;DR: This paper showed that even if price can communicate no information directly about quality, it can do so indirectly because price will be a signal of quality, and that allowing advertising is shown to improve consumer welfare.
Abstract: Arguments in favour of self-enforced bans on advertising by professionals often rely on the stylized fact that advertising can communicate information about price but not about quality. This being the case, it is argued that allowing professionals to advertise runs the risk that firms will compete vigorously over price at the expense of the quality of their product. This paper shows that even if price can communicate no information directly about quality, it can do so indirectly because price will be a signal of quality. Because of this, allowing advertising is shown to improve consumer welfare.

Journal ArticleDOI
TL;DR: In this article, the Rawlsian maximin criterion is combined with non-paternalistic altruistic preferences in a non-renewable resource technology and a solution to this intergenerational conflict is found, under a given assumption, as a generically unique subgame-perfect equilibrium.
Abstract: The Rawlsian maximin criterion is combined with nonpaternalistic altruistic preferences in a nonrenewable resource technology. The maximin programme is shown to be time-inconsistent for a subset of initial conditions. A solution to this intergenerational conflict is found, under a given assumption, as a generically unique subgame-perfect equilibrium.

Journal ArticleDOI
TL;DR: In this paper, the authors report on an experimental investigation of four methods of allocating public goods: direct contribution, public goods auction, direct contribution and direct contribution with and without an additional unanimity feature.
Abstract: The paper reports on an experimental investigation of four methods of allocating public goods. The two basic processes studied are direct contribution and a public goods auction process. Both of these processes are studied with and without an additional unanimity feature. The results suggest that the auction process outperforms direct contribution. The effect of unanimity is to decrease the efficiency of both processes. Much of the paper is focused on an analysis of these results.

Journal ArticleDOI
TL;DR: In this article, the authors studied the private and social incentives to produce "general purpose" products within the "circular-road-model" of monopolistic competition, and showed that there are strong forces leading the market to supply products whose transport costs are excessively low.
Abstract: Most models of monopolistic competition study the question of the "optimal degree of product differentiation" by looking at the number of firms that will locate in characteristics space. This is somewhat restrictive. The development of "general purpose" products means that the needs of quite heterogenous consumers can be satisfied with the same homogenous product. The private and social incentives to produce "general purpose" products are studied in this paper within the "circular-road-model" of monopolistic competition. The degree of general purposeness of a product is approximated by its per unit distance transport costs. It is shown that there are strong forces leading the market to supply products whose transport costs are excessively low.

Journal ArticleDOI
TL;DR: In this paper, the authors report experimental tests of three search equilibrium models, which differ only in the search strategies available to the buyers and have qualitatively different predictions: price distributions, single price equilibria at the competitive price and at the monopoly price.
Abstract: This paper reports experimental tests of three search equilibrium models. These models which differ only in the search strategies available to the buyers have qualitatively different predictions, that is, equilibria: price distributions, single price equilibria at the competitive price and at the monopoly price and two price equilibria. The experimental outcomes generally were consistent with the models' predictions. This suggests that debate on the utility of this class of models should shift to the realism of the models' assumptions rather than focus on their ability to characterize market outcomes. Also, since the basic models have been validated, the project of analyzing experimentally the results of relaxing some of their assumptions seems worthwhile.

Journal ArticleDOI
TL;DR: In this paper, the authors present conditions under which the proportion of a given asset in the optimal portfolio of a risk averse agent is at least as large as some given proportion.
Abstract: The paper is concerned with conditions under which the proportion of a given asset in the optimal portfolio of a risk averse agent is at least as large as some given proportion. The paper provides a condition that is necessary and sufficient for such a result to hold. The analysis is then confined to portfolios in which the distributions of assets differ by either a first-degree stochastic dominance shift or by a mean-preserving shift. Examples are provided to show that under some conditions a risk averter may invest a smaller proportion of his wealth in the dominating asset than in the dominated asset. The paper then provides conditions that are necessary and sufficient for a risk averter to invest more in the dominating asset. The question of whether risk-averse agents should or should not choose diversified portfolios (as opposed to specialized ones) has been analysed quite extensively in the literature. Examples of such works are Samuelson (1967), Brumelle (1974), Hadar and Russell (1974), Russell and Seo (1979), Hadar and Seo (1980), and MacMinn (1984). What has not been examined at all (except for very special cases) is the question of the optimal proportions of the various assets in a diversified portfolio.' In this paper we present conditions which imply that the optimal amount invested in a particular asset is at least as large as some given proportion of the available fund. In the case of two-asset portfolios, one may especially want to know which of the two assets represents more than half the investible fund. Indeed, we find it convenient to start the analysis with the two-asset case. While the extension to n-asset protfolios is essentially straightfoward, it is presented in a subsequent section. Focusing first on the two-asset case will make it easier for the reader to see the main logical steps in the proofs of the theorems. Some of our analysis is facilitated by the use of a particular subset of risk averters. This subset has the property that if its members behave in a particular way, then all risk averters behave in that way. We refer to such a subset as a representative set of all risk averters.2 The usefulness of the representative set derives from the fact that its members have utility functions of a very simple form (consisting of two linear pieces), and its applicability to the problems on hand derives from the fact that any concave function can be approximated by a linear combination of members of the representative set. In the next section we present some formal results demonstrating the equivalence of "unanimity" among members of the representative set and "unanimity" among all risk averters in certain types of choice situations. These theorems are then used in Section 3 in which we present the results about optimal asset proportions.

Journal ArticleDOI
TL;DR: In this paper, a new technique is proposed for estimating demand and supply curves and the extent of shortage and slack in consumption goods markets of Czechoslovakia, the German Democratic Republic, Hungary, Poland, and Yugoslavia.
Abstract: As a consequence of aggregation over markets, the observed quantity may be less than the quantity demanded and less than the quantity supplied. To deal with such situations, a new technique is proposed for estimating demand and supply curves and the extent of shortage and slack. The technique is applied to the consumption goods markets of Czechoslovakia, the German Democratic Republic, Hungary, Poland, and Yugoslavia. It is found that shortage, even corrected for a discouraged consumer effect, is seldom as great as slack.

Journal ArticleDOI
TL;DR: In this article, a theory of price and quantity adjustments in response to stochastic changes in demand is developed for competitive markets, where the level of demand is observable but product quality is not.
Abstract: A theory of price and quantity adjustments in response to stochastic changes in demand is developed for competitive markets. The level of demand is observable but product quality is not. It is shown that the higher the serial correlation of demand, the more rigid are prices and the greater the change in ouputs. If the correlation is low, prices are less rigid than when quality is observable; if it is high, they can be more rigid. Even with downward sloping demand and upward sloping supply curves, prices can be completely rigid.

Journal ArticleDOI
TL;DR: In this article, the effects of advance production in posted offer and double auction markets are investigated and the results suggest that the differential effects of alternative trading institutions on market outcomes may be partially offset by the production conditions characterizing a market.
Abstract: The effects of advance production in posted offer and double auction markets are investigated. Previously observed differences between these institutions in mean contract prices and in the distribution of producers' and consumers' surpluses under the production to demand condition disappear when sellers make output decisions and incur production costs prior to the start of trading. The double auction institution remains more efficient under advance production. The results suggest that the differential effects of alternative trading institutions on market outcomes may be partially offset by the production conditions characterizing a market.

Journal ArticleDOI
TL;DR: This article developed a simple stochastic job matching model and used it to derive a set of testable restrictions on the conditional probability with which a worker will be observed to change jobs over time.
Abstract: This paper develops a simple stochastic job matching model and uses it to derive a set of testable restrictions on the conditional probability with which a worker will be observed to change jobs over time. The restrictions describe the manner in which this probability varies with observable characteristics—current wage, labour market experience, tenure on current job, and past mobility. Econometric methods are also discussed, and some illustrative calculations provided.