Incomplete Contracts and Complexity Costs

This paper investigates, in a simple risk-sharing framework, the extent to which the incompleteness of contracts could be attributed to the complexity costs associated with the writing and the implementation of contracts. We show that, given any measure of complexity in a very general class, it is possible to find simple contracting problems such that, when complexity costs are explicitly taken into account, the contracting parties optimally choose an incomplete contract which coincides with the default division of surplus. Optimal contracts with complexity costs are constrained efficient in our model. We therefore interpret our results as saying that, in the absence of a strategic role for complexity costs, their effect is entirely determined by their size relative to the size of payoffs.     

Do Marginal Employment Subsidies Increase Re-Employment Probabilities? Preliminary Results on the Experiment of the Agenzia del Lavoro of Trento (Italy)

ABSTRACT: The purpose of this paper is to test whether a Marginal Employment Subsidy program (MES) is effective in reducing the length of unemployment spells. Our test is constructed in such a way as to isolate the direct effect of the MES from the business cycle effect (i.e. the variation in unemployment that would have normally occurred in the absence of the program). Specifically, we estimate a Markov chain duration model with time-varying covariates and we test if eligibility for an MES increases the hazard rate of leaving unemployment. One of the time-varying covariates is an index of macro-economic performance that controls for the variation in the hazard rate due to business cycle fluctuations. The net effect of the MES offered by the Agenzia del Lavoro of Trento, Italy, is shown to be significantly positive: the Marginal Employment Subsidy program increases the re-employment probability and reduces the expected duration of unemployment by twenty one months.     

ENDOGENOUS LOBBYING

In this article, we present a citizen‐candidate model of representative democracy with endogenous lobbying. We find that lobbying induces policy compromise and always affects equilibrium policy outcomes. In particular, even though the policy preferences of lobbies are relatively extreme, lobbying biases the outcome of the political process toward the center of the policy space, and extreme policies cannot emerge in equilibrium. Moreover, in equilibrium, not all lobbies participate in the policy‐making process. (JEL: D72, D74, D78)     

Costly Bargaining and Renegotiation

We identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs. First, for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached. Secondly, even when there are equilibria in which an agreement is reached, we find that the model always has an equilibrium in which agreement is never reached, as well as equilibria in which agreement is delayed for an arbitrary length of time. Finally, the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for (some of) the opponent's deviations. We argue that this implies that, when the parties are given the opportunity to renegotiate out of these inefficiencies, the only equilibrium outcome that survives is the one in which agreement is never reached, regardless of the value of the transaction costs.