Managing Conflicts in Relational Contracts

By Jin Li and Niko Matouschek

American Economic Review, October 2013

A manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker. We show that the optimal relational contract generates periodic conflicts during which effort and expe...

The Cost of Contract Renegotiation: Evidence from the Local Public Sector

By Philippe Gagnepain, Marc Ivaldi, and David Martimort

American Economic Review, October 2013

Contract theory claims that renegotiation prevents attainment of the efficient solution that could be obtained under full commitment. Assessing the cost of renegotiation remains an open issue from an empirical viewpoint. We fit a structural principal-a...

Competition with Exclusive Contracts and Market-Share Discounts

By Giacomo Calzolari and Vincenzo Denicolò

American Economic Review, October 2013

We analyze firms that compete by means of exclusive contracts and market-share discounts (conditional on the seller's share of customers' total purchases). With incomplete information about demand, firms have a unilateral incentive to use these contrac...

Spontaneous Discrimination

By Marcin Pęski and Balázs Szentes

American Economic Review, October 2013

We consider a dynamic economy in which agents are repeatedly matched and decide whether or not to form profitable partnerships. Each agent has a physical color and a social color. An agent's social color acts as a signal, conveying information about th...

Incarceration and Incapacitation: Evidence from the 2006 Italian Collective Pardon

By Paolo Buonanno and Steven Raphael

American Economic Review, October 2013

In August 2006, the Italian government released one-third of the nation's prison inmates via a national collective pardon. We test for a discontinuous break in national crime rates corresponding to the mass release. We also test for the effect of the r...

Word-of-Mouth Communication and Percolation in Social Networks

By Arthur Campbell

American Economic Review, October 2013

This paper develops a model of demand, pricing and advertising in the presence of social learning via word-of-mouth communication between friends. In the model consumers must receive information about a monopolist's product in order to consider purchas...

The Nature of Risk Preferences: Evidence from Insurance Choices

By Levon Barseghyan, Francesca Molinari, Ted O'Donoghue, and Joshua C. Teitelbaum

American Economic Review, October 2013

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions—characte...

Consumer Spending and the Economic Stimulus Payments of 2008

By Jonathan A. Parker, Nicholas S. Souleles, David S. Johnson, and Robert McClelland

American Economic Review, October 2013

We measure the change in household spending caused by receipt of the economic stimulus payments of 2008, using questions added to the Consumer Expenditure Survey and variation from the randomized timing of disbursement. Households spent 12-30 percent (dep...

Trading Away Wide Brands for Cheap Brands

By Swati Dhingra

American Economic Review, October 2013

Firms face competing needs to expand product variety and reduce production costs. Access to larger markets enables innovation to reduce costs. Although firm scale increases, foreign competition reduces markups. Firms' ability to recapture lost markups dep...

Surplus Maximization and Optimality

By Edward E. Schlee

American Economic Review, October 2013

Expected consumer's surplus rarely represents preferences over price lotteries. Still, I give sufficient conditions for policies which maximize aggregate expected surplus to be interim Pareto Optimal. Besides two standard partial equilibrium conditions, I...

News Shocks and the Slope of the Term Structure of Interest Rates

By André Kurmann and Christopher Otrok

American Economic Review, October 2013

We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one shock can explain the majority of unpredictable movements in the slope. Impulse response fu...

Do We Follow Others When We Should? A Simple Test of Rational Expectations: Comment

By Anthony Ziegelmeyer, Christoph March, and Sebastian Krügel

American Economic Review, October 2013

The payoff of actions is estimated and the resulting empirical payoff is controlled for in regression analyses to formulate a test of rational expectations in information cascade experiments. We show that the empirical payoff of actions is a function of e...

Demand Estimation under Incomplete Product Availability

By Christopher T. Conlon and Julie Holland Mortimer

American Economic Journal: Microeconomics, November 2013

Incomplete product availability is an important feature of many markets, and ignoring changes in availability may bias demand estimates. We study a new dataset from a wireless inventory system on vending machines to track product availability every fou...

Strategic Tournaments

By Ayala Arad and Ariel Rubinstein

American Economic Journal: Microeconomics, November 2013

A strategic (round-robin) tournament is a simultaneous n-player game built on top of a symmetric two-player game G. Each player chooses one action in G and is matched to play G against all other players. The winner of the tournament is the player who a...

Optimal Contract under Moral Hazard with Soft Information

By Guillaume Roger

American Economic Journal: Microeconomics, November 2013

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two proble...

Middlemen Margins and Globalization

By Pranab Bardhan, Dilip Mookherjee, and Masatoshi Tsumagari

American Economic Journal: Microeconomics, November 2013

We study a competitive theory of middlemen with brand-name reputations necessary to overcome product quality moral hazard problems. Agents with heterogeneous abilities sort into different sectors and occupations. Middleman margins do not equalize acros...

Incentive-Compatible Matching Mechanisms: Consistency with Various Stability Notions

By M. Bumin Yenmez

American Economic Journal: Microeconomics, November 2013

I study the consistency of incentive compatibility with several stability notions for a one-to-one matching market with transfers. Ex post stability, studied in the matching literature, is too strong to be satisfied together with incentive compatibilit...

A Procurement Auction for Toxic Assets with Asymmetric Information

By Olivier Armantier, Charles A. Holt, and Charles R. Plott

American Economic Journal: Microeconomics, November 2013

The proposed 2008 TARP auction was intended to remove "toxic" assets from portfolios of financially stressed banks. The Treasury selected a design whereby bids to sell different securities would be normalized by "reference prices" that reflect relative...

Equilibrium Bids in Sponsored Search Auctions: Theory and Evidence

By Tilman Börgers, Ingemar Cox, Martin Pesendorfer, and Vaclav Petricek

American Economic Journal: Microeconomics, November 2013

This paper presents a game theoretic analysis of the generalized second-price auction that the company Overture operated in 2004 to sell sponsored search listings on search engines. We construct a model that embodies few prior assumptions about paramet...

The First-Order Approach to Merger Analysis

By Sonia Jaffe and E. Glen Weyl

American Economic Journal: Microeconomics, November 2013

Using information local to the premerger equilibrium, we derive approximations of the expected changes in prices and welfare generated by a merger. We extend the pricing pressure approach of recent work to allow for non-Bertrand conduct, adjusting the ...