A state-contingent production approach to principal-agent problems with an application to point-source pollution control

Two basic representations of principal-agent relationships, the 'state-space' and 'parameterized distribution' formulations, have emerged. Although the state-space formulation appears more natural, analytical studies using this formulation have had limited success. This paper develops a state-space formulation of the moral-hazard problem using a general representation of production under uncertainty. A closed-form solution for the agency-cost problem is derived. Comparative-static results are deduced. Next we solve the principal's problem of selecting the optimal output given the agency-cost function. The analysis is applied to the problem of point-source pollution control. (C) 1998 Published by Elsevier Science S.A. All rights reserved.

Separation and hedging results with state-contingent production

A state-contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty. Producer behaviour with both production and price risk, in the presence and in the absence of futures and forward markets, is analysed in this state-contingent framework. Conditions for the optimal hedge to be positive or negative are derived. We also show that, under plausible conditions, a risk-averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a nonstochastic technology. New separation results, which hold in the presence of both price and production risk, are then developed. These separation results generalize Townsend's spanning results by reducing the number of necessary forward markets by one.

Estimating state-contingent production frontiers

Chambers and Quiggin (2000) use state-contingent representations of risky production technologies to establish important theoretical results concerning producer behavior under uncertainty. Unfortunately, perceived problems in the estimation of state-contingent models have limited the usefulness of the approach in policy formulation. We show that fixed and random effects state-contingent production frontiers can be conveniently estimated in a finite mixtures framework. An empirical example is provided. Compared to conventional estimation approaches, we find that estimating production frontiers in a state-contingent framework produces significantly different estimates of elasticities, firm technical efficiencies, and other quantities of economic interest.

Estimating State-contingent Production Frontiers

Chambers and Quiggin (2000) use state-contingent representations of risky production technologies to establish important theoretical results concerning producer behavior under uncertainty. Unfortunately, perceived problems in the estimation of state-contingent models have limited the usefulness of the approach in policy formulation. We show that fixed and random effects state-contingent production frontiers can be conveniently estimated in a finite mixtures framework. An empirical example is provided. Compared to conventional estimation approaches, we find that estimating production frontiers in a statecontingent framework produces significantly different estimates of elasticities, firm technical efficiencies and other quantities of economic interest.

The state-contingent approach to production under uncertainty

The central claim of this paper is that the state-contingent approach provides the best way to think about all problems in the economics of uncertainty, including problems of consumer choice, the theory of the firm, and principal-agent relationships. This claim is illustrated by recent developments in, and applications of, the state-contingent approach.

Optimal taxation without state-contingent debt

To recover a version of Barro's (1979) `random walk'tax smoothing outcome, we modify Lucas and Stokey's (1983) economyto permit only risk--free debt. This imparts near unit root like behaviorto government debt, independently of the government expenditureprocess, a realistic outcome in the spirit of Barro's. We showhow the risk--free--debt--only economy confronts the Ramsey plannerwith additional constraints on equilibrium allocations thattake the form of a sequence of measurability conditions.We solve the Ramsey problem by formulating it in terms of a Lagrangian,and applying a Parameterized Expectations Algorithm tothe associated first--order conditions. The first--order conditions andnumerical impulse response functions partially affirmBarro's random walk outcome. Though the behaviors oftax rates, government surpluses, and government debts differ, allocationsare very close for computed Ramsey policies across incomplete and completemarkets economies.

Ground and excited state charmonium production in p plus p collisions at root s=200 GeV

We report on charmonium measurements [J/psi (1S), psi' (2S), and chi(c) (1P)] in p + p collisions at root s = 200 GeV. We find that the fraction of J/psi coming from the feed-down decay of psi' and chi(c) in the midrapidity region (vertical bar y vertical bar < 0: 35) is 9.6 +/- 2.4% and 32 +/- 9%, respectively. We also present the p(T) and rapidity dependencies of the J/psi yield measured via dielectron decay at midrapidity (vertical bar y vertical bar < 0.35) and via dimuon decay at forward rapidity (1.2 < vertical bar y vertical bar < 2.2). The statistical precision greatly exceeds that reported in our previous publication [Phys. Rev. Lett. 98, 232002 (2007)]. The new results are compared with other experiments and discussed in the context of current charmonium production models.

Fixed wages and bonuses in agency contracts: the case of a continuous state space

In this paper, we extend the state-contingent production approach to principal–agent problems to the case where the state space is an atomless continuum. The approach is modelled on the treatment of optimal tax problems. The central observation is that, under reasonable conditions, the optimal contract may involve a fixed wage with a bonus for above-normal performance. This is analogous to the phenomenon of "bunching" at the bottom in the optimal tax literature.

Drought policy: a graphical analysis

The standard approach to modelling production under uncertainty has relied on the concept of the stochastic production function. In the present paper, it is argued that a state-contingent production model is more flexible and realistic. The model is applied to the problem of drought policy.

Production under uncertainty and choice under uncertainty in the emergence of generalized expected utility theory

This paper presents a personal view of the interaction between the analysis of choice under uncertainty and the analysis of production under uncertainty. Interest in the foundations of the theory of choice under uncertainty was stimulated by applications of expected utility theory such as the Sandmo model of production under uncertainty. This interest led to the development of generalized models including rank-dependent expected utility theory. In turn, the development of generalized expected utility models raised the question of whether such models could be used in the analysis of applied problems such as those involving production under uncertainty. Finally, the revival of the state-contingent approach led to the recognition of a fundamental duality between choice problems and production problems.

Production and Characterization of β-glucosidase Obtained by the Solid-State Cultivation of the Thermophilic Fungus Thermomucor indicae-seudaticae N31

Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP)

Risk sharing with the monarch: Excusable defaults and contingent debt in the age of Philip II, 1556-1598

Contingent sovereign debt can create important welfare gains. Nonetheless,there is almost no issuance today. Using hand-collected archival data, we examine thefirst known case of large-scale use of state-contingent sovereign debt in history. Philip IIof Spain entered into hundreds of contracts whose value and due date depended onverifiable, exogenous events such as the arrival of silver fleets. We show that this allowedfor effective risk-sharing between the king and his bankers. The data also stronglysuggest that the defaults that occurred were excusable they were simply contingenciesover which Crown and bankers had not contracted previously.