American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Regular Article Regulation, Competition and Liberalization MarkArmstrong David E.M.Sappington 325 366 In many countries throughout the world, regulators are struggling to determine whether and how to introduce competition into regulated industries. This essay examines the complexities involved in the liberalization process. While stressing the importance of case-specific analyses, this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies. http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=1&issue_date=June 2006 10.1257/jel.44.2.325 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Regular Article Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective DilipMookherjee 367 390 Separation of ownership from management, multidivisional firm organizations, delegation of production decisions to worker teams, delegation of pricing and advertising decisions to retail franchisers, reliance on intermediaries in trade or finance, and distribution of regulatory authority across different agencies represent examples of organizations that delegate and distribute decision-making authority instead of centralizing it. This paper reviews literature on costs and benefits of delegated decision making in hierarchical organizations or contracting networks with regard to problems of incentives and coordination. It starts by describing incentive and coordination costs of delegation in simple canonical examples of hierarchies where both information and incentives of different decisionmakers differ. One class of models pertain to contexts where the classical Revelation Principle applies, i.e., where costs of contractual complexity, information processing, or communication are absent, agents do not collude, and the mechanism designer can commit to the mechanism. Delegation may conceivably entail a loss of control and coordination arising from the divergence of information and incentives. Sufficient and necessary conditions for this loss to be mitigated entirely include risk neutrality, top-down contracting, and monitoring of transfers or production assignments between subordinates. The next class of models introduces communication costs that restrict the performance of centralized arrangements relative to delegation owing to a resulting loss of flexibility, which has to be traded off against possible control losses of delegation. Finally, consequences of collusion among agents is discussed, which typically enlarge the range of circumstances under which delegation can attain optimal second-best outcomes. The paper concludes with a discussion of the relevance of this theoretical literature to recently emerging empirical studies of industrial organizations where delegated decision making plays an important role: adoption of innovative human resource management practices, new information technologies and retail franchising. http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=2&issue_date=June 2006 10.1257/jel.44.2.367 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Regular Article Schumpeter Redux: A Review of Raghuram G. Rajan and Luigi Zingales's Saving Capitalism from the Capitalists RichardSylla 391 404 Saving Capitalism from the Capitalists1 is an ambitious probe into capitalism's past, present, and future. Whereas Joseph A. Schumpeter viewed capitalism as doomed because it was losing its political and social supports, Rajan and Zingales see it more as threatened from within by established or "incumbent" industrialists and financiers who become enemies of free markets. The authors contend that free financial markets foster economic progress while undermining the ability of incumbents to have their way. Rajan and Zingales may overstate the significance of "the great reversal" of financial development in the middle decades of the twentieth century, and their evidence and interpretations are sometimes flawed. Nonetheless, they make a strong case for the fundamental importance of financial development for economic modernization and their warnings about the antimarket tendencies of incumbents are well worth pondering. http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=3&issue_date=June 2006 10.1257/jel.44.2.391 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Regular Article A Review of Steven Shavell's Foundations of Economic Analysis of Law Richard A.Posner 405 414 Steven Shavell's Foundations of Economic Analysis of Law (Harvard University Press, 2004) is a major theoretical contribution to "law and economics," the applied field of economics that studies the economic properties and consequences of legal doctrines and institutions. It is a field of immense practical importance, but unfamiliar to many economists--a situation that Shavell's book bids fair to rectify. This review essay situates Shavell's book in the history of economic scholarship about law and uses the book as a springboard for speculation about new directions in that scholarship. http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=4&issue_date=June 2006 10.1257/jel.44.2.405 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Regular Article A Review of Peter Isard's Globalization and the International Financial System: What's Wrong and What Can be Done? BarryEichengreen 415 419 Peter Isard's recent book (Globalization and the International Financial System: What's Wrong and What Can be Done?, Cambridge University Press, 2005) provides a thoughtful and balanced review of the scholarly literature on the past operation and potential reform of the international monetary and financial system. The author's approach, from which much can be learned, is to draw lessons from the history of exchange rates and capital flows and, especially, from the financial crises of the 1990s. But this retrospective focus is also revealing of what is new and different about our current international monetary and financial environment and in the ongoing debate surrounding the future of its steward, the International Monetary Fund. http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=5&issue_date=June 2006 10.1257/jel.44.2.415 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Book Review Book Reviews 420 461 http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=6&issue_date=June 2006 10.1257/jel.44.2.420 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Back Matter Annotated Listing of New Books 461 570 http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=7&issue_date=June 2006 10.1257/jel.44.2.462 American Economic Association Nashville, TN 0022-8282 Journal of Economic Literature http://www.aeaweb.org/journal.html 44 2 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=JEL&volume=44&issue=2&issue_date=June 2006 Back Matter JEL Classification System 571 583 http://www.aeaweb.org/articles/article_detail.php?journal=JEL&volume=44&issue=2&article=8&issue_date=June 2006 10.1257/jel.44.2.571