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Author: Daron Acemoğlu
Publisher:
ISBN:
Category : Equilibrium (Economics)
Languages : en
Pages : 51
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Book Description
A "folk theorem" originating, among others, in the work of Stiglitz maintains that competitive equilibria area always or "generically" inefficient (unless contracts directly specify consumption levels as in Prescott and Townsend, thus bypassing trading in anonymous markets). This paper critically reevaluates these claims in the context of a general equilibrium economy with moral hazard. We first formalize this folk theorem. Firms offer contracts to workers who choose an effort level that is private information and that affects worker productivity. The clarify the importance of trading in anonymous markets, we introduce a monitoring partition such that employment contracts can specify expenditures over subsets in the partition, but cannot regulate how this expenditure is subdivided among the commodities within a subset. We say that preferences are nonseparable (or more accurately, not weakly separate) when the marginal rate of substitution across commodities within a subset in the partition depends on the effort level, and that preferences are weakly separate when there exists no such subset. We prove that the equilibrium is always inefficient when a competitive equilibrium allocation involves less than full insurance and preferences are nonseparable. This result appears to support the conclusion of the above-mentioned folk theorem. Nevertheless, our main result highlights its limitations. Most common-used preference structures do not satisfy the nonseparability condition. We show that when preferences are weakly separable, competitive equilibria with moral hazard are constrained optimal, in the sense that a social planner who can monitor all consumption levels cannot improve over competitive allocations. Moreover, we establish epsilon-optimality when there are only small deviations from weak separability. These results suggest that considerable care is necessary in invoking the folk theorem about the inefficiency of competitive equilibria with private information. Keywords: competitive equilibrium, double deviations, efficiency, general equilibrium theory, monitoring partition, moral hazard. JEL Classifications: D52, D61, D62, D82.
Author: Daron Acemoğlu
Publisher:
ISBN:
Category : Equilibrium (Economics)
Languages : en
Pages : 51
Get Book Here
Book Description
A "folk theorem" originating, among others, in the work of Stiglitz maintains that competitive equilibria area always or "generically" inefficient (unless contracts directly specify consumption levels as in Prescott and Townsend, thus bypassing trading in anonymous markets). This paper critically reevaluates these claims in the context of a general equilibrium economy with moral hazard. We first formalize this folk theorem. Firms offer contracts to workers who choose an effort level that is private information and that affects worker productivity. The clarify the importance of trading in anonymous markets, we introduce a monitoring partition such that employment contracts can specify expenditures over subsets in the partition, but cannot regulate how this expenditure is subdivided among the commodities within a subset. We say that preferences are nonseparable (or more accurately, not weakly separate) when the marginal rate of substitution across commodities within a subset in the partition depends on the effort level, and that preferences are weakly separate when there exists no such subset. We prove that the equilibrium is always inefficient when a competitive equilibrium allocation involves less than full insurance and preferences are nonseparable. This result appears to support the conclusion of the above-mentioned folk theorem. Nevertheless, our main result highlights its limitations. Most common-used preference structures do not satisfy the nonseparability condition. We show that when preferences are weakly separable, competitive equilibria with moral hazard are constrained optimal, in the sense that a social planner who can monitor all consumption levels cannot improve over competitive allocations. Moreover, we establish epsilon-optimality when there are only small deviations from weak separability. These results suggest that considerable care is necessary in invoking the folk theorem about the inefficiency of competitive equilibria with private information. Keywords: competitive equilibrium, double deviations, efficiency, general equilibrium theory, monitoring partition, moral hazard. JEL Classifications: D52, D61, D62, D82.
Author: Pierre Collin-Dufresne
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 0
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Book Description
We analyze a model of informed trading where an activist shareholder accumulates shares in an anonymous market and then expends costly effort to increase the firm value. We find that equilibrium prices are affected by the position accumulated by the activist, because the level of effort undertaken is increasing in the size of his acquired position. In equilibrium, price impact has two components: one due to asymmetric information (as in the seminal Kyle (1985) model) and one due to moral hazard (a new source of illiquidity). Price impact is higher the more severe the moral hazard problem, which corresponds to a more productive activist. We thus obtain a trade-off: with more noise trading (less `price efficiency') the activist can build up a larger stake, which leads to more effort expenditure and higher firm value (more `economic efficiency').
Author: Amy Finkelstein
Publisher: Columbia University Press
ISBN: 0231538685
Category : Medical
Languages : en
Pages : 161
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Book Description
Addressing the challenge of covering heath care expenses—while minimizing economic risks. Moral hazard—the tendency to change behavior when the cost of that behavior will be borne by others—is a particularly tricky question when considering health care. Kenneth J. Arrow’s seminal 1963 paper on this topic (included in this volume) was one of the first to explore the implication of moral hazard for health care, and Amy Finkelstein—recognized as one of the world’s foremost experts on the topic—here examines this issue in the context of contemporary American health care policy. Drawing on research from both the original RAND Health Insurance Experiment and her own research, including a 2008 Health Insurance Experiment in Oregon, Finkelstein presents compelling evidence that health insurance does indeed affect medical spending and encourages policy solutions that acknowledge and account for this. The volume also features commentaries and insights from other renowned economists, including an introduction by Joseph P. Newhouse that provides context for the discussion, a commentary from Jonathan Gruber that considers provider-side moral hazard, and reflections from Joseph E. Stiglitz and Kenneth J. Arrow. “Reads like a fireside chat among a group of distinguished, articulate health economists.” —Choice
Author: William J. Congdon
Publisher: Brookings Institution Press
ISBN: 0815704984
Category : Business & Economics
Languages : en
Pages : 260
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Book Description
Argues that public finance--the study of the government's role in economics--should incorporate principles from behavior economics and other branches of psychology.
Author: Jean Tirole
Publisher: Princeton University Press
ISBN: 1400830222
Category : Business & Economics
Languages : en
Pages : 657
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Book Description
"Magnificent."—The Economist From the Nobel Prize–winning economist, a groundbreaking and comprehensive account of corporate finance Recent decades have seen great theoretical and empirical advances in the field of corporate finance. Whereas once the subject addressed mainly the financing of corporations—equity, debt, and valuation—today it also embraces crucial issues of governance, liquidity, risk management, relationships between banks and corporations, and the macroeconomic impact of corporations. However, this progress has left in its wake a jumbled array of concepts and models that students are often hard put to make sense of. Here, one of the world's leading economists offers a lucid, unified, and comprehensive introduction to modern corporate finance theory. Jean Tirole builds his landmark book around a single model, using an incentive or contract theory approach. Filling a major gap in the field, The Theory of Corporate Finance is an indispensable resource for graduate and advanced undergraduate students as well as researchers of corporate finance, industrial organization, political economy, development, and macroeconomics. Tirole conveys the organizing principles that structure the analysis of today's key management and public policy issues, such as the reform of corporate governance and auditing; the role of private equity, financial markets, and takeovers; the efficient determination of leverage, dividends, liquidity, and risk management; and the design of managerial incentive packages. He weaves empirical studies into the book's theoretical analysis. And he places the corporation in its broader environment, both microeconomic and macroeconomic, and examines the two-way interaction between the corporate environment and institutions. Setting a new milestone in the field, The Theory of Corporate Finance will be the authoritative text for years to come.
Author: Martin Peitz
Publisher: Oxford University Press
ISBN: 0195397843
Category : Business & Economics
Languages : en
Pages : 615
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Book Description
The economic analysis of the digital economy has been a rapidly developing research area for more than a decade. Through authoritative examination by leading scholars, this Handbook takes a closer look at particular industries, business practices, and policy issues associated with the digital industry. The volume offers an up-to-date account of key topics, discusses open questions, and provides guidance for future research. It offers a blend of theoretical and empirical works that are central to understanding the digital economy. The chapters are presented in four sections, corresponding with four broad themes: 1) infrastructure, standards, and platforms; 2) the transformation of selling, encompassing both the transformation of traditional selling and new, widespread application of tools such as auctions; 3) user-generated content; and 4) threats in the new digital environment. The first section covers infrastructure, standards, and various platform industries that rely heavily on recent developments in electronic data storage and transmission, including software, video games, payment systems, mobile telecommunications, and B2B commerce. The second section takes account of the reduced costs of online retailing that threatens offline retailers, widespread availability of information as it affects pricing and advertising, digital technology as it allows the widespread employment of novel price and non-price strategies (bundling, price discrimination), and auctions, as well as better tar. The third section addresses the emergent phenomenon of user-generated content on the Internet, including the functioning of social networks and open source. Finally, the fourth section discusses threats arising from digitization and the Internet, namely digital piracy, privacy and internet security concerns.
Author: Michael R. Baye
Publisher: Elsevier
ISBN: 0762309717
Category : Business & Economics
Languages : en
Pages : 280
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Book Description
The first six chapters of the text examine four broad issues: the role of the Internet in fostering competition, its impact on price dispersion and on business-to-business transactions, and the importance of reputation and trust in the new economy. The last four chapters examine the impact of the Internet on the organization of firms, the efficiency of auctions in the Internet age, how consumers choose websites and acquire product information, and the growing problem of congestion on the Internet.
Author: Patrick Bolton
Publisher: MIT Press
ISBN: 9780262025768
Category : Business & Economics
Languages : en
Pages : 746
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Book Description
A comprehensive introduction to contract theory, emphasizing common themes and methodologies as well as applications in key areas. Despite the vast research literature on topics relating to contract theory, only a few of the field's core ideas are covered in microeconomics textbooks. This long-awaited book fills the need for a comprehensive textbook on contract theory suitable for use at the graduate and advanced undergraduate levels. It covers the areas of agency theory, information economics, and organization theory, highlighting common themes and methodologies and presenting the main ideas in an accessible way. It also presents many applications in all areas of economics, especially labor economics, industrial organization, and corporate finance. The book emphasizes applications rather than general theorems while providing self-contained, intuitive treatment of the simple models analyzed. In this way, it can also serve as a reference for researchers interested in building contract-theoretic models in applied contexts.The book covers all the major topics in contract theory taught in most graduate courses. It begins by discussing such basic ideas in incentive and information theory as screening, signaling, and moral hazard. Subsequent sections treat multilateral contracting with private information or hidden actions, covering auction theory, bilateral trade under private information, and the theory of the internal organization of firms; long-term contracts with private information or hidden actions; and incomplete contracts, the theory of ownership and control, and contracting with externalities. Each chapter ends with a guide to the relevant literature. Exercises appear in a separate chapter at the end of the book.
Author: Mr.Ayhan Kose
Publisher: International Monetary Fund
ISBN: 9781589062214
Category : Business & Economics
Languages : en
Pages : 68
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Book Description
This study provides a candid, systematic, and critical review of recent evidence on this complex subject. Based on a review of the literature and some new empirical evidence, it finds that (1) in spite of an apparently strong theoretical presumption, it is difficult to detect a strong and robust causal relationship between financial integration and economic growth; (2) contrary to theoretical predictions, financial integration appears to be associated with increases in consumption volatility (both in absolute terms and relative to income volatility) in many developing countries; and (3) there appear to be threshold effects in both of these relationships, which may be related to absorptive capacity. Some recent evidence suggests that sound macroeconomic frameworks and, in particular, good governance are both quantitatively and qualitatively important in affecting developing countries’ experiences with financial globalization.
Author: Ross M. Starr
Publisher: Cambridge University Press
ISBN: 9780521564731
Category : Business & Economics
Languages : en
Pages : 280
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Book Description
General Equilibrium Theory: An Introduction treats the classic Arrow-Debreu general equilibrium model in a form accessible to graduate students and advanced undergraduates in economics and mathematics. Topics covered include mathematical preliminaries, households and firms, existence of general equilibrium, Pareto efficiency of general equilibrium, the First and Second Fundamental Theorems of Welfare Economics, the core and core convergences, future markets over time and contingent commodity markets under uncertainty. Demand, supply, and excess demand appear first as (point-valued) functions, then optionally as (set-valued) correspondences. The mathematics presented (with elementary proofs of the theorems) includes a real analysis, the Brouwer fixed point theorem, and separating and supporting hyperplane theorems. Optional chapters introduce the existence of equilibrium with set-valued supply and demand, the mathematics of upper and lower hemicontinuous correspondences, and the Kakutani fixed point theorem. The treatment emphasizes clarity and accessibility to the student through use of examples and intuition.
