Recursive contracts

We obtain a recursive formulation for a general class of contractingproblems involving incentive constraints. Under these constraints,the corresponding maximization (sup) problems fails to have arecursive solution. Our approach consists of studying the Lagrangian.We show that, under standard assumptions, the solution to theLagrangian is characterized by a recursive saddle point (infsup)functional equation, analogous to Bellman's equation. Our approachapplies to a large class of contractual problems. As examples, westudy the optimal policy in a model with intertemporal participationconstraints (which arise in models of default) and intertemporalcompetitive constraints (which arise in Ramsey equilibria).

Competition, innovation and growth with limited commitment

We study how barriers to business start-up affect the investment in knowledge capital when contracts are not enforceable. Barriers to business start-up lower the competition for knowledge capital and, in absence of commitment, reduce the incentive to accumulate knowledge. As a result, countries with large barriers experience lower income and growth. Our results are consistent with cross-country evidence showing that the cost of business start-up is negatively correlated with the level and growth of income.

Optimal regulation of a fully insured deposit banking system

We analyze risk sensitive incentive compatible deposit insurancein the presence of private information when the market value of depositinsurance can be determined using Merton's (1997) formula. We show that,under the assumption that transferring funds from taxpayers to financialinstitutions has a social cost, the optimal regulation combines differentlevels of capital requirements combined with decreasing premia on depositinsurance. On the other hand, it is never efficient to require the banksto hold riskless assets, so that narrow banking is not efficient. Finally,chartering banks is necessary in order to decrease the cost of asymmetricinformation.

Globalization and the provision of incentives inside the firm: The effect of foreign competition

This paper studies the effect of changes in foreign competition on the structureof compensation and incentives of U.S. executives. We measure foreign competitionas import penetration and use tariffs and exchange rates as instrumental variables toestimate its causal effect on pay. We find that higher foreign competition leads tomore incentive provision in a variety of ways. First, it increases the sensitivity of payto performance. Second, it increases whithin-firm pay differentials between executivelevels, with CEOs typically experiencing the largest wage increases, partly becausethey receive the steepest incentive contracts. Finally, higher foreign competition is alsoassociated with a higher demand for talent. These results indicate that increased foreigncompetition can explain some of the recent trends in compensation structures.

Bundling electronic journals and competition among publishers

Site licensing of e-journals has been revolutionizing the way academicinformation is distributed. However, many librarians are concerned aboutthe possibility that publishers might abuse site licensing by practicingbundling. In this paper, we analyze the private and social incentives forthe publishers to use bundling in the context of STM electronic journalmarket. In the short run in which the number of journals is exogenouslygiven, we find a strong conflict between the two incentives: each publisherfinds bundling optimal and bundling increases the industry profit butreduces social welfare. However, in the long run we find that publishersmight have higher incentives to introduce new journals under bundlingthan without bundling and, in this case, bundling can reduce the industryprofit while increasing social welfare. Finally, we examine publishers incentive to provide links to the websites of the rival publishers underbundling and show that even asymmetric publishers have incentive tointerconnect.

The organization of research corporations and researcher ability

This paper analyzes the formation of Research Corporations as an alternative governance structure for performing R&D compared to pursuing in-house R&D projects. Research Corporations are privatefor-profit research centers that bring together several firms with similar research goals. In a Research Corporation formal authority over the choice of projects is jointly exercised by the top management of the member firms. A private for-profit organization cannot commit not to interfere with the project choice of the researchers. However, increasing the number of member firms of the Research Corporation reduces the incentive of member firms to meddle with the research projects of researchers because exercising formal authority over the choice of research projects is a public good. The Research Corporation thus offers researchers greater autonomy than a single firm pursuing an identical research program in its in-house R&D department. This attracts higher ability researchers to the Research Corporation compared to the internal R&D department. The paper uses the theoretical model to analyze the organization of the Microelectronics and Computer Technology Corporation (MCC). The facts of this case confirm the existence of a tension between control over the choice of research projects and the ability of researchers that the organization is able to attract or hold onto.

Population based resource allocation: The use of hybrid risk adjustment

The emphasis on integrated care implies new incentives that promote coordinationbetween levels of care. Considering a population as a whole, the resource allocation systemhas to adapt to this environment. This research is aimed to design a model that allows formorbidity related prospective and concurrent capitation payment. The model can be applied inpublicly funded health systems and managed competition settings.Methods: We analyze the application of hybrid risk adjustment versus either prospective orconcurrent risk adjustment formulae in the context of funding total health expenditures for thepopulation of an integrated healthcare delivery organization in Catalonia during years 2004 and2005.Results: The hybrid model reimburses integrated care organizations avoiding excessive risktransfer and maximizing incentives for efficiency in the provision. At the same time, it eliminatesincentives for risk selection for a specific set of high risk individuals through the use ofconcurrent reimbursement in order to assure a proper classification of patients.Conclusion: Prospective Risk Adjustment is used to transfer the financial risk to the healthprovider and therefore provide incentives for efficiency. Within the context of a National HealthSystem, such transfer of financial risk is illusory, and the government has to cover the deficits.Hybrid risk adjustment is useful to provide the right combination of incentive for efficiency andappropriate level of risk transfer for integrated care organizations.

O efeito do sorriso na percepção psicológica da pessoa

O objectivo do estudo foi o de verificar o efeito do sorriso na percepção psicológica da pessoa em jovens, adultos, idosos e jovens negros. Pretendia-se verificar se o sorriso contribui para os traços diferenciais entre os grupos humanos em estudo e se o mesmo era descritor de género. O estudo envolveu um delineamento transversal analítico ou estudo não-experimental, também classificado por estudo pós-facto, estudo de observação passiva ou estudo correlacional e de observação, de comparação entre grupos, mediante o juízo ou julgamento psicológico da face neutra e do tipo de sorriso contrastados, de matriz factorial 4 x 2 x 2 (face neutra, sorriso fechado, sorriso superior, sorriso largo; género dos estímulos; género dos respondentes) e a sua finalidade foi descrever a percepção psicológica do sorriso em função das variáveis género do estímulo, género do respondente e grupo étnico, na Escala de Percepção do Sorriso (EPS), em formato diferenciador semântico, com 19 itens bipolares opostos, tendo a avaliação sido feita numa escala ordinal de 1 a 7 pontos, nas dimensões Avaliação (12 itens) e Movimento Expressivo (7 itens) resultante dos estudos preliminares sobre a atractividade facial (estudo preliminar 1) e a escolha de dípolos de adjectivos preditores para percepção psicológica da face neutra (estudo preliminar 2). Nos estudos principais 1, 2 e 3 foram utilizados 24 estímulos fotográficos apresentando o tipo de sorriso (fechado, superior e largo) e a face neutra (12 do estímulo mulher e 12 do estímulo homem) referentes aos três grupos etários (18-25 anos, 40-50 anos e 60-70 anos) e a Escala de Percepção do Sorriso (EPS) foi aplicada a uma amostra não probabilística ou intencional do tipo homogénea de 480 participantes portugueses de ambos os géneros (240 mulheres e 240 homens) distribuídos por grupos etários de jovens (80 mulheres e 80 homens, média: 22.2 anos), adultos (80 mulheres e 80 homens, média: 43.1 anos) e idosos (80 mulheres e 80 homens, média: 65.0 anos) No estudo principal 4, foram utilizados 8 estímulos fotográficos apresentando o tipo de sorriso (fechado, superior e largo) e a face neutra (4 do estímulo mulher e 4 do estímulo homem) de universitários de Cabo Verde, a estudar em Portugal, e a Escala de Percepção do Sorriso (EPS) foi aplicada a uma amostra não probabilística ou intencional do tipo homogénea de 160 participantes de ambos os géneros (80 mulheres e 80 homens) e estudantes universitários portugueses (média: 21.8 anos). Os resultados revelam e confirmam o efeito do sorriso na percepção psicológica da pessoa, à semelhança de outros estudos, isto é, sorrir torna a percepção psicológica mais positiva ou negativa e verifica-se que tal sucede em função do género do estímulo e do género do respondente. As diferenças significativas na percepção da face neutra e tipo de sorriso contrastados são justificadas pela pertença de género de quem os percepciona e pela pertença do género de quem é percepcionado. Tal apenas não sucede no factor Avaliação do grupo dos adultos. Os resultados obtidos indicam que, quer no factor Avaliação quer no factor Movimento Expressivo, os tipos de sorriso largo e superior são os que registam médias ponderadas mais elevadas. Pelo contrário, a face neutra e o sorriso fechado registam valores menos elevados na percepção. A análise da percepção da pessoa em função da face neutra e tipo de sorriso contrastados revelou uma correspondência entre a expressão facial, o género do estímulo e o género do respondente. No factor Avaliação, a mulher é percepcionada mais positivamente que o homem, verificando-se o inverso no factor Movimento Expressivo no grupo dos adultos e dos idosos. Verificou-se efeito do sorriso na percepção psicológica dos estímulos de cor negra. No grupo dos jovens que percepcionaram estímulos de cor negra, o homem é considerado mais positivo que a mulher em ambos os factores. O efeito significativo do género revela que a sua percepção é condicionada pelo seu próprio género. Os resultados apontam ainda para a configuração pronunciada de uma hierarquização ascendente da face neutra e tipo de sorriso contrastados em dois conjuntos bem delimitados e distinguindo diferentes formas topográficas de sorrir: a face neutra e o sorriso fechado e o sorriso superior e o sorriso largo.

O efeito do sorriso na percepção psicológica da pessoa

O objectivo do estudo foi o de verificar o efeito do sorriso na percepção psicológica da pessoa em jovens, adultos, idosos e jovens negros. Pretendia-se verificar se o sorriso contribui para os traços diferenciais entre os grupos humanos em estudo e se o mesmo era descritor de género. O estudo envolveu um delineamento transversal analítico ou estudo não-experimental, também classificado por estudo pós-facto, estudo de observação passiva ou estudo correlacional e de observação, de comparação entre grupos, mediante o juízo ou julgamento psicológico da face neutra e do tipo de sorriso contrastados, de matriz factorial 4 x 2 x 2 (face neutra, sorriso fechado, sorriso superior, sorriso largo; género dos estímulos; género dos respondentes) e a sua finalidade foi descrever a percepção psicológica do sorriso em função das variáveis género do estímulo, género do respondente e grupo étnico, na Escala de Percepção do Sorriso (EPS), em formato diferenciador semântico, com 19 itens bipolares opostos, tendo a avaliação sido feita numa escala ordinal de 1 a 7 pontos, nas dimensões Avaliação (12 itens) e Movimento Expressivo (7 itens) resultante dos estudos preliminares sobre a atractividade facial (estudo preliminar 1) e a escolha de dípolos de adjectivos preditores para percepção psicológica da face neutra (estudo preliminar 2). Nos estudos principais 1, 2 e 3 foram utilizados 24 estímulos fotográficos apresentando o tipo de sorriso (fechado, superior e largo) e a face neutra (12 do estímulo mulher e 12 do estímulo homem) referentes aos três grupos etários (18-25 anos, 40-50 anos e 60-70 anos) e a Escala de Percepção do Sorriso (EPS) foi aplicada a uma amostra não probabilística ou intencional do tipo homogénea de 480 participantes portugueses de ambos os géneros (240 mulheres e 240 homens) distribuídos por grupos etários de jovens (80 mulheres e 80 homens, média: 22.2 anos), adultos (80 mulheres e 80 homens, média: 43.1 anos) e idosos (80 mulheres e 80 homens, média: 65.0 anos) No estudo principal 4, foram utilizados 8 estímulos fotográficos apresentando o tipo de sorriso (fechado, superior e largo) e a face neutra (4 do estímulo mulher e 4 do estímulo homem) de universitários de Cabo Verde, a estudar em Portugal, e a Escala de Percepção do Sorriso (EPS) foi aplicada a uma amostra não probabilística ou intencional do tipo homogénea de 160 participantes de ambos os géneros (80 mulheres e 80 homens) e estudantes universitários portugueses (média: 21.8 anos). Os resultados revelam e confirmam o efeito do sorriso na percepção psicológica da pessoa, à semelhança de outros estudos, isto é, sorrir torna a percepção psicológica mais positiva ou negativa e verifica-se que tal sucede em função do género do estímulo e do género do respondente. As diferenças significativas na percepção da face neutra e tipo de sorriso contrastados são justificadas pela pertença de género de quem os percepciona e pela pertença do género de quem é percepcionado. Tal apenas não sucede no factor Avaliação do grupo dos adultos. Os resultados obtidos indicam que, quer no factor Avaliação quer no factor Movimento Expressivo, os tipos de sorriso largo e superior são os que registam médias ponderadas mais elevadas. Pelo contrário, a face neutra e o sorriso fechado registam valores menos elevados na percepção. A análise da percepção da pessoa em função da face neutra e tipo de sorriso contrastados revelou uma correspondência entre a expressão facial, o género do estímulo e o género do respondente. No factor Avaliação, a mulher é percepcionada mais positivamente que o homem, verificando-se o inverso no factor Movimento Expressivo no grupo dos adultos e dos idosos. Verificou-se efeito do sorriso na percepção psicológica dos estímulos de cor negra. No grupo dos jovens que percepcionaram estímulos de cor negra, o homem é considerado mais positivo que a mulher em ambos os factores. O efeito significativo do género revela que a sua percepção é condicionada pelo seu próprio género. Os resultados apontam ainda para a configuração pronunciada de uma hierarquização ascendente da face neutra e tipo de sorriso contrastados em dois conjuntos bem delimitados e distinguindo diferentes formas topográficas de sorrir: a face neutra e o sorriso fechado e o sorriso superior e o sorriso largo.

Country asymmetries, endogenous product choice and the speed of trade liberalization

In a world with two countries which differ in size, we study theimpact of (the speed of) trade liberalization on firms' profitsand total welfare of the countries involved. Firms correctlyanticipate the pace of trade liberalization and take it intoaccount when deciding on their product choices, which areendogenously determined at the beginning of the game. Competitionin the marketplace then occurs either on quantities or on prices.As long as the autarkic phase continues, local firms are nationalmonopolists. When trade liberalization occurs, firms compete in aninternational duopoly. We analyze trade effects by using twodifferent models of product differentiation. Across all thespecifications adopted (and independently of the price v. quantitycompetition hypothesis), total welfare always unambiguously riseswith the speed of trade liberalization: Possible losses by firmsare always outweighed by consumers' gains, which come under theform of lower prices, enlarged variety of higher average qualitiesavailable. The effect on profits depends on the type of industryanalyzed. Two results in particular seem to be worth of mention.With vertical product differentiation and fixed costs of qualityimprovements, the expected size of the market faced by the firmsdetermines the incentive to invest in quality. The longer the periodof autarky, the lower the possibility that the firm from the smallcountry would be producing the high quality and be the leader in theinternational market when it opens. On the contrary, when trade opensimmediately, national markets do not play any role and firms fromdifferent countries have the same opportunity to become the leader.Hence, immediate trade liberalization might be in the interest ofproducers in the small country. In general, the lower the size of thesmall country, the more likely its firm will gain from tradeliberalization. Losses from the small country firm can arise when itis relegated to low quality good production and the domestic marketsize is not very small. With horizontal product differentiation (thehomogeneous good case being a limit case of it when costs ofdifferentiation tend to infinity), investments in differentiationbenefit both firms in equal manner. Firms from the small country do notrun the risk of being relegated to a lower competitive position undertrade. As a result, they would never lose from it. Instead, firms fromthe large country may still incur losses from the opening of trade whenthe market expansion effect is low (i.e. when the country is very largerelative to the other).

Competition amongst contests

This article analyses the allocation of prizes in contests. While existing models consider a single contest with an exogenously given set of players, in our model several contests compete for participants. As a consequence, prizes not only induce incentive effects but also participation effects. We show that contests that aim to maximize players aggregate effort will award their entire prize budget to the winner. In contrast, multiple prizes will be awarded in contests that aim to maximize participation and the share of the prize budget awarded to the winner increases in the contests randomness. We also provide empirical evidence for this relationship using data from professional road running. In addition, we show that prize structures might be used to screen between players of differing ability.

Optimal contracts, adverse selection and social preferences: An experiment

It has long been standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. However, this assumption is clearly refuted by numerous experiments, and we feel that it may be useful to consider nonpecuniary utility in mechanism design and contract theory. Accordingly, we devise an experiment to explore optimal contracts in an adverse-selection context. A principal proposes one of three contract menus, each of which offers a choice of two incentive-compatible contracts, to two agents whose types are unknown to the principal. The agents know the set of possible menus, and choose to either accept one of the two contracts offered in the proposed menu or to reject the menu altogether; a rejection by either agent leads to lower (and equal) reservation payoffs for all parties. While all three possible menus favor the principal, they do so to varying degrees. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable contract menus (which one depends on the reservation payoffs) is proposed and agents accept a contract, selecting actions according to their types. Behavior is largely consistent with all recent models of social preferences, strongly suggesting there is value in considering nonpecuniary utility in agency theory.

How enforcement institutions affect markets

In an experiment we study market outcomes under alternative incentive structures for third-party enforcers. Our transactions resemble an anonymous credit market where lenders can give loans and borrowers can repay them. When borrowers default, judges are free to enforce repayment but are themselves paid differently in each of three treatments. First, paying judges according to lenders votes maximizes surplus and the equality of earnings. In contrast, paying judges according to borrowers votes triggers insufficient enforcement, destroying the market and producing the lowest surplus and the most unequal distribution of earnings. Lastly, judges paid the average earnings of borrowers and lenders achieve results close to those based on lender voting. We employ a steps-of-reasoning argument to interpret the performances of different institutions. When voting and enforcement rights are allocated to different classes of actors, the difficulty of their task changes, and arguably as a consequence they focus on high or low surplus equilibria.

Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets

We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusuallylong unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles.

Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers

In this paper we analyze the sensitivity of the labour market decisions of workers close toretirement with respect to the incentives created by public regulations. We improve upon the extensiveprior literature on the effect of pension incentives on retirement in two ways. First, bymodeling the transitions between employment, unemployment and retirement in a simultaneousmanner, paying special attention to the transition from unemployment to retirement (which is particularlyimportant in Spain). Second, by considering the influence of unobserved heterogeneity inthe estimation of the effect of our (carefully constructed) incentive variables.Using administrative data, we find that, when properly defined, economic incentives have astrong impact on labour market decisions in Spain. Unemployment regulations are shown to be particularlyinfluential for retirement behaviour, along with the more traditional determinants linked tothe pension system. Pension variables also have a major bearing on both workers reemploymentdecisions and on the strategic actions of employers. The quantitative impact of the incentives, however,is greatly affected by the existence of unobserved heterogeneity among workers. Its omissionleads to sizable biases in the assessment of the sensitivity to economic incentives, a finding thathas clear consequences for the credibility of any model-based policy analysis. We confirm theimportance of this potential problem in one especially interesting instance: the reform of earlyretirement provisions undertaken in Spain in 2002. We use a difference-in-difference approach tomeasure the behavioural reaction to this change, finding a large overestimation when unobservedheterogeneity is not taken into account.