Information Acquisition and Efficient Mechanism Design

We consider a general mechanism design setting where each agent can acquire (covert) information before participating in the mechanism. The central question is whether a mechanism exists that provides the efficient incentives for information acquisition ex‐ante and implements the efficient allocation conditional on the private information ex‐post. It is shown that in every private value environment the Vickrey‐Clark‐Groves mechanism guarantees both ex‐ante as well as ex‐post efficiency. In contrast, with common values, ex‐ante and ex‐post efficiency cannot be reconciled in general. Sufficient conditions in terms of sub‐ and supermodularity are provided when (all) ex‐post efficient mechanisms lead to private under‐ or over‐acquisition of information.     

DOES RELATIONSHIP SPECIFIC INVESTMENT DEPEND ON ASSET OWNERSHIP? EVIDENCE FROM A NATURAL EXPERIMENT IN THE HOUSING MARKET

In this paper, I test the most basic prediction of Grossman and Hart (1986, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Journal of Political Economy, 691–719): allocations of asset ownership that expose a party to ex‐post expropriation reduce this party’s ex‐ante relationship‐specific investments. In the empirical context of the German housing market, I find that relationship‐specific investments, such as bathroom renovations, are more frequent if the occupant is protected against expropriation because he owns his home. To avoid the endogeneity of the homeownership allocation, I rely on the natural experiment of the German reunification: under the communist regime, ownership existed but was economically meaningless; yet after reunification, ownership unexpectedly reacquired legal force.     

HOW DO INFORMAL AGREEMENTS AND REVISION SHAPE CONTRACTUAL REFERENCE POINTS?

The notion of contracts as reference points provides the basis for a deeper understanding of important phenomena such as the employment contract, vertical integration, firm scope, authority, and delegation. Previous experiments lend support to this notion but they ignore realistic aspects of trading relationships such as informal agreements and ex‐post renegotiation or revision. Here we show that the central behavioral mechanism underlying contractual reference points is robust to such considerations. Our data reveal that informal agreements can mitigate the trade‐off between rigidity and flexibility but they do not fully resolve the problem of misaligned reference points. Our experiments also show that contract revision is a more nuanced process than the previous literature has recognized. We find, for example, that it is sometimes better for parties to write a simple (rigid) contract and then revise it ex post if needed, rather than to anticipate and include future contingencies in a (flexible) contract from the outset.     

Benefit Analysis for Natural Hazards

The objective of this paper is to develop the ex ante perspective for benefit analysis with natural hazards. It defines an ex ante evaluation of the economic benefits that arise from policies designed to reduce either the risk of or the detrimental effects associated with a natural hazard. In the process the paper compares the ex ante and ex post perspectives and discusses the prospects for implementing the framework by measuring the valuation concepts that are developed.     

REFERENCE POINTS,SOCIAL NORMS,AND FAIRNESS IN CONTRACT RENEGOTIATIONS

How does an ex‐ante contract affect behavior in an ex‐post renegotiation game? We address this question in a canonical buyer–seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threat points. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex‐ante contract was written. The ex‐ante contract causes sellers to ask for markups that are 45% lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. These effects do not depend on whether the contract was written under competitive or monopolistic conditions. Our results provide strong evidence supporting the hypothesis that contracts serve as reference points that shape and coordinate the expectations of the contracting parties.     

INCOMPLETE SOCIAL CONTRACTS

There is a long normative ‘Social Contract’ tradition that attempts to characterize ex‐post income inequalities that are agreeable to all ‘behind a veil of ignorance.’ This paper takes a similar normative approach to characterize social decision‐making procedures. It is shown that quite generally some form of majority‐voting is preferred to unanimity ‘behind a veil of ignorance’ whenever society faces deadweight costs in making compensating transfers. Deviations from unanimity (or ex‐post Pareto optimality) are ex‐ante efficient to the extent that they economize on costly compensating transfers. Put another way, the optimal decision rule trades off the benefits of minority protection and those from greater flexibility. (JEL: H11, G33, G34, D63, P16, P48)     

基于参照点的产学研知识产权冲突协调契约设计

产学研合作中，企业方和学研方由于主体异质性，容易引发知识产权冲突，从而导致效率损失或合作破裂。对此，本文采用不完全契约理论下的参照点契约理论框架，选择实践中知识产权交易价格和知识产权成果价值两个矛盾集中点入手，基于契约参照点偏差，引入企业方和学研方在议价能力、价值认知及折减行为上的不对称假定，从事前知识产权的最优分配、事后自我履约价格区间求解以及事后最优知识产权交易价格的选取三个方面，建立了参照点契约模型，对产学研研发合作契约进行优化设计。研究表明，创新知识产权份额的分配将对产学研合作整体效率产生影响，签订弹性价格契约有助于事后价格位于自我履约区间内，从而在一定程度上提高事后效率，但仍不能完全避免折减行为，需优化选取事后价格以实现产学研合作整体效率的最优。     

Representing Preferences with a Unique Subjective State Space

We extend Kreps' (1979) analysis of preference for flexibility, reinterpreted by Kreps (1992) as a model of unforeseen contingencies. We enrich the choice set, consequently obtaining uniqueness results that were not possible in Kreps' model. We consider several representations and allow the agent to prefer commitment in some contingencies. In the representations, the agent acts as if she had coherent beliefs about a set of possible future (ex post) preferences, each of which is an expected‐utility preference. We show that this set of ex post preferences, called the subjective state space, is essentially unique given the restriction that all ex post preferences are expected‐utility preferences and is minimal even without this restriction. Because the subjective state space is identified, the way ex post utilities are aggregated into an ex ante ranking is also essentially unique. Hence when a representation that is additive across states exists, the additivity is meaningful in the sense that all representations are intrinsically additive. Uniqueness enables us to show that the size of the subjective state space provides a measure of the agent's uncertainty about future contingencies and that the way the states are aggregated indicates whether these contingencies lead to a desire for flexibility or commitment.     

LIQUIDITY AND INEFFICIENT INVESTMENT

We study consumer liquidity in a general equilibrium model where the friction is the nonpledgeability of future income. Liquidity helps to overcome the absence of a double coincidence of wants. Consumers over‐hoard liquidity and the resulting competitive equilibrium is constrained inefficient. Fiscal policy following a large negative shock can increase ex‐ante welfare. If the government cannot commit, the ex‐post optimal fiscal policy will be too small from an ex‐ante perspective. The model throws light on the holding of foreign reserves in international markets.     

Informing Ex Ante Event Studies with Macro‐Econometric Evidence on the Structural and Policy Impacts of Terrorism

Economic consequence analysis is one of many inputs to terrorism contingency planning. Computable general equilibrium (CGE) models are being used more frequently in these analyses, in part because of their capacity to accommodate high levels of event‐specific detail. In modeling the potential economic effects of a hypothetical terrorist event, two broad sets of shocks are required: (1) physical impacts on observable variables (e.g., asset damage); (2) behavioral impacts on unobservable variables (e.g., investor uncertainty). Assembling shocks describing the physical impacts of a terrorist incident is relatively straightforward, since estimates are either readily available or plausibly inferred. However, assembling shocks describing behavioral impacts is more difficult. Values for behavioral variables (e.g., required rates of return) are typically inferred or estimated by indirect means. Generally, this has been achieved via reference to extraneous literature or ex ante surveys. This article explores a new method. We elucidate the magnitude of CGE‐relevant structural shifts implicit in econometric evidence on terrorist incidents, with a view to informing future ex ante event assessments. Ex post econometric studies of terrorism by Blomberg et al . yield macro econometric equations that describe the response of observable economic variables (e.g., GDP growth) to terrorist incidents. We use these equations to determine estimates for relevant (unobservable) structural and policy variables impacted by terrorist incidents, using a CGE model of the United States. This allows us to: (i) compare values for these shifts with input assumptions in earlier ex ante CGE studies; and (ii) discuss how future ex ante studies can be informed by our analysis.     

Equity in Social Risk: Some Empirical Observations

In societal risk analysis the equity of the distribution of risks is often an important consideration owing to the special nature of health risks. We empirically validate some assumptions about equity that have been discussed in the decision analytic literature. Our results show that the way fatalities are distributed throughout a society is considered along with the number of fatalities in evaluating alternative policies involving mortality risks. The concepts of ex ante equity and ex post equity are both shown to be important in judgments of fairness. We next present a decision model based on multiattribute preference theory incorporating the number of fatalities, as well as ex ante equity and ex post equity. When ex ante equity and ex post equity are positively weighted in this fair-risk model , options with more equal risk distributions are ranked higher. Next we empirically show that the distribution of benefits has an impact on judgments of fairness. The fair-risk model does not include information on the benefits distribution, so it would apply when benefits are distributed equally or when the decision maker wishes to not include benefits in the model. We briefly discuss how the notion of proportional equity can incorporate benefits into judgments of the fairness of risk distributions. We then include benefits in a more general model in which fair risk-benefit combinations are those that are exchange equitable. A key implication of this envy-free risk–benefit model is that an unequal distribution of risks may be preferred if it is accompanied by a compensatory differential in benefits consistent with peoples' preference tradeoffs between received benefits and assumed risks. Finally, we discuss how perceived deservedness may influence judgments about equity. We conclude with a discussion of the implications of research on alternative notions of equity for policy makers dealing with social risks.     

CREDIT,WAGES, AND BANKRUPTCY LAWS

We analyze how bankruptcy laws affect the general equilibrium interactions between credit and wages. Soft laws reduce the frequency of liquidations and thus ex post inefficiencies, but they worsen credit rationing ex ante. This hinders firm creation and thus depresses labor demand. Rich agents who need few outside funds can invest even if creditor rights are weak. Hence, they favor soft laws that exclude poorer agents from the credit market and reduce the competition for labor. Such laws can generate greater utilitarian welfare than under perfect contract enforcement: By barring access to credit to some agents, soft laws lower wages, which increases the pledgeable income of richer agents and decreases the liquidation rates they must commit to. When they induce strong credit rationing, however, soft laws are Pareto‐dominated by tougher laws combined with subsidies to entrepreneurs. (JEL: D82, G33, K22)     

THE CHOICE OF EXCHANGE‐RATE REGIME AND SPECULATIVE ATTACKS

We develop a framework that makes it possible to study, for the first time, the strategic interaction between the ex ante choice of exchange‐rate regime and the likelihood of ex post currency attacks. The optimal regime is determined by a policymaker who trades off the loss from nominal exchange‐rate uncertainty against the cost of adopting a given regime. This cost increases, in turn, with the fraction of speculators who attack the local currency. Searching for the optimal regime within the class of exchange‐rate bands, we show that the optimal regime can be either a peg (a zero‐width band), a free float (an infinite‐width band), or a nondegenerate band of finite width. We study the effect of several factors on the optimal regime and on the probability of currency attacks. In particular, we show that a Tobin tax induces policymakers to set less flexible regimes. In our model, this generates an increase in the probability of currency attacks. (JEL: F31, D84)     

Policy Incentives for Dangerous (But Necessary) Operations

In industries where firms perform dangerous (but necessary) operations, liability costs—due to potential harm to third parties—can be significant. Firms may therefore find it optimal to exit the market, and this may lead to an inefficiently low number of incumbents. A social planner can discourage exit by offering appropriately designed subsidies. Ex ante subsidies defray the costs associated with making operations safer (e.g., funds to subsidize the purchase of safety equipment). Ex post subsidies mitigate the financial damages caused by an accident (e.g., funds to defray the cost of cleaning up a toxic spill). We consider a model where (i) firms have private information about their ability to improve reliability and (ii) reliability investments are unobservable. We demonstrate that when the social value of reliability outweighs the benefit of increased competition, it is optimal to offer ex ante subsidies alone (i.e., to subsidize the cost of making operations safer). Conversely, when the benefits of competition outweigh the benefits of reliability, a combination of ex ante and ex post subsidies is optimal (i.e., not only to subsidize safer operations, but also to share the costs of a potential accident).     

Ex Ante and Ex Post Values for Changes in Risks

In this paper, I take risk to mean a composite of the probability of an adverse event and the severity of the consequences of the event. I explore two issues in the economic valuation of changes in individual risks brought about by public policies. These are: (1) the relationship between the values of risk prevention (i.e., the lowering of the probabilities of adverse events) and risk reduction (i.e., the reduction of the severity of the consequences of adverse events); and (2) the relationship between ex ante and ex post measures of the value of changes in risk.     

Flood Risk Acceptability and Economic Value of Evacuation

The economic value of evacuation and its relationship with flood risk acceptability in Japan were studied by applying the contingent valuation method (CVM). Flood risk acceptability here refers to the extent to which people accept the occurrence of floods, in terms of scale and frequency. The economic value of evacuation refers to people's willingness to pay (WTP) for avoiding evacuation inconvenience because of its inconvenience and the potential for certain losses as a result of evacuation. Our main finding was that over half of the people (56%) who actually evacuated in a real flood situation reported inconvenience. The greatest inconveniences were the shortages of information and food. Evacuation inconvenience can be regarded as an important factor causing the low rate of evacuation in Japan. The WTP for avoiding current inconvenience was approximately half of the estimated economic value of evacuation, implying that the current budget for evacuation is too small and should be increased to improve the conditions of evacuation sites. The economic value of evacuation can be taken into consideration in the risk assessment process in order to evaluate the efficiency of risk reduction measures. Flood risk acceptability and home ownership are two major statistically significantly determinants of the WTP. Considering that those who accept flood risk have a lower WTP for flood risk control (ex ante measures) than those who reject it, it is reasonable to think that there may be a tradeoff between the public WTPs for ex ante or ex post measures.     

Socioeconomic Vulnerability and Adaptation to Environmental Risk: A Case Study of Climate Change and Flooding in Bangladesh

In this article we investigate the complex relationship between environmental risk, poverty, and vulnerability in a case study carried out in one of the poorest and most flood-prone countries in the world, focusing on household and community vulnerability and adaptive coping mechanisms. Based upon the steadily growing amount of literature in this field we develop and test our own analytical model. In a large-scale household survey carried out in southeast Bangladesh, we ask almost 700 floodplain residents living without any flood protection along the River Meghna about their flood risk exposure, flood problems, flood damage, and coping mechanisms. Novel in our study is the explicit testing of the effectiveness of adaptive coping strategies to reduce flood damage costs. We show that, households with lower income and less access to productive natural assets face higher exposure to risk of flooding. Disparity in income and asset distribution at community level furthermore tends to be higher at higher risk exposure levels, implying that individually vulnerable households are also collectively more vulnerable. Regarding the identification of coping mechanisms to deal with flood events, we look at both the ex ante household level preparedness for flood events and the ex post availability of community-level support and disaster relief. We find somewhat paradoxically that the people that face the highest risk of flooding are the least well prepared, both in terms of household-level ex ante preparedness and community-level ex post flood relief.     

Infrastructure in Developing and Transition Countries: Risk and Protection

This article examines two possible strategies for financing post-disaster infrastructure rehabilitation in developing and transition countries: relying on ex ante financing instruments (including insurance, catastrophe bonds, and other risk-transfer instruments) and ex post borrowing or credit. Insurance and other ex ante instruments will increase a country's stability, especially if the government authorities have a difficult time borrowing or otherwise raising funds after a major disaster; however, these instruments have an opportunity cost and can reduce the country's economic growth potential. The cost-benefit tradeoff is therefore one between economic growth through infrastructure investment and added solvency and stability for the economy. This article develops a model to illustrate this tradeoff. The model, which views the infrastructure of a developing or transition country as a nondiversifiable portfolio that generates returns, can provide a basis for evaluating alternative financing options depending on the country's objectives in terms of growth, solvency, and stability.     

Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?

We identify the effects of monetary policy on credit risk‐taking with an exhaustive credit register of loan applications and contracts. We separate the changes in the composition of the supply of credit from the concurrent changes in the volume of supply and quality, and the volume of demand. We employ a two‐stage model that analyzes the granting of loan applications in the first stage and loan outcomes for the applications granted in the second stage, and that controls for both observed and unobserved, time‐varying, firm and bank heterogeneity through time*firm and time*bank fixed effects. We find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default. A lower long‐term interest rate and other relevant macroeconomic variables have no such effects.     

Can governments make credible promises? Insights from infrastructure projects in emerging economies

Despite deregulation and privatization, governments in emerging economies continue to play important roles in private infrastructure projects, thereby exposing private investors to the risk of government reneging. The government's role as deal maker—and deal breaker—in infrastructure investments stems from its role as financier, customer, supplier, competitor, and/or regulator. (The only role governments have shed as a result of recent economic reforms is that of producer.) Based on the literature, I propose three explanations for government reneging: (1) economic uncertainty, which necessitates contract renegotiation; (2) the logic of the “obsolescing bargain,” which makes deals less attractive to governments ex post than they were ex ante; and (3) political change, which puts new leaders in charge with incentives to renege on old promises. I assert that these risks can be contained, respectively, through contract design, investment strategy, and institutional design. Using this framework, I conclude that Enron's strategy in the controversial Dabhol project in India was sensitive to first of the three factors and relatively less mindful of the other two. The policy implication for MNCs is that they should be attentive to all three factors that cause government reneging rather than just one or two.