What is law and why do people obey it? This question from jurisprudence has recently been tackled... more What is law and why do people obey it? This question from jurisprudence has recently been tackled using the tools of economics. The field of law-and-economics has for many years studied how fines and imprisonment affect behavior. Nobody believes, however, that all compliance is motivated by penalties and it is questionable whether that is even the typical motivation. Two books published in 2015, Frederick Schauer's The Force of Law and Richard McAdams's The Expressive Powers of Law, consider alternative motivations, Schauer skeptically and McAdams more sympathetically. While coercion, either directly or in its support of internalized norms, seems to dominate law qua law (and not as a mere expression of morality), a considerable portion of law serves other uses such as coordination, information provision, expression, and reduction of transaction costs. (H11,K00, K40)
We consider the learning curve in an industry with free entry and exit, and price-taking firms. A... more We consider the learning curve in an industry with free entry and exit, and price-taking firms. A unique equilibrium exists if the fixed cost is positive. While equilibrium profits are zero, mature firms earn rents on their learning, and, if costs are convex, no firm can profitably enter after the date the industry begins. Under some cost and demand conditions, however, firms may have to exit the market despite their experience gained earlier. Furthermore identical firms facing the same prices may produce different quantities. The market outcome is always socially efficient, even if dictates that firms exit after learning. Finally, actual and optimal industry concentration does not always increase in the intensity of learning.
%me values of 2 perfectly reveal d: if d = p -3, for example, it would be clear that d = p -1, cp... more %me values of 2 perfectly reveal d: if d = p -3, for example, it would be clear that d = p -1, cp = -1, and E, = -1. This feature of the model is accidental. I have verified the propositions for other error specifications which do not have the perfect-revelation property, such as, for example, when measurement errors are not cumulative and the measured damage is constrained to lie within [IL -1, p + 11, the case in the working paper version of this at&e, Rasmusen (1992b).
Politicians trade off the cost of acquiring and processing information against the benefit of bei... more Politicians trade off the cost of acquiring and processing information against the benefit of being re-elected. Lobbyists may possess private information upon which politicians would like to rely without the effort of verification. If the politician does not try to verify, however, the lobbyist has no incentive to be truthful. This is modelled as a game in which the lobbyist lobbies to show his conviction that the electorate is on his side. In equilibrium, sometimes the politician investigates, and sometimes the information is false. The lobbyists and the electorate benefit from the possibility of lobbying when the politician would otherwise vote in ignorance, but not when he would otherwise acquire his own information. The politician benefits in either case. Lobbying is most socially useful when the politician's investigation costs are high, when he is more certain of the electorate's views, and when the issue is less important.
Much real-world contracting involves adding finding new clauses to add to a basic agreement, clau... more Much real-world contracting involves adding finding new clauses to add to a basic agreement, clauses which may or may not increase the welfare of both parties. The parties must decide which complications to propose, how closely to examine the other side's proposals, and whether to accept them. This suggests a reason why contracts are incomplete in the sense of lacking Pareto-improving clauses: contract-reading costs matter as much as contract-writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.
... and the Federal Savings and Loan Insurance Corporation (FSLIC) were created to be the regulat... more ... and the Federal Savings and Loan Insurance Corporation (FSLIC) were created to be the regulatory equivalents of the Federal Reserve and the FDIC for S&Ls.28 New Deal regulation went far toward equalizing the riskiness of depos-its in different kinds of banks, and when all ...
... We focus on exclusionary conduct that is "naked": conduct unabashedly meant... more ... We focus on exclusionary conduct that is "naked": conduct unabashedly meant to ex-clude rivals, for which no one offers any efficiency justification. Court records reveal various examples that judges considered ex-clusionary. ... So far, none is robust and widely applicable. ...
... He hires the agent, and so can select an agent with the appropriate talents.20 He can negotia... more ... He hires the agent, and so can select an agent with the appropriate talents.20 He can negotiate a contract to give him incentive to use those talents properly.21 He can instruct the ... instruction and mistake. He can expressly instruct the agent not to take certain actions and ...
Everyone realizes the importance of social norms as guides to behavior and substitutes or complem... more Everyone realizes the importance of social norms as guides to behavior and substitutes or complements for law. Coming up with a paradigm for analyzing norms, however, has been surprisingly difficult, as has systematic empirical study. In this chapter of the Handbook of Law and Economics, edited by A. Mitchell Polinsky and Steven Shavell and forthcoming in 2005, we survey the topic.
Efficiency wages are wages that exceed a worker's reservation wage. A standard explanation for su... more Efficiency wages are wages that exceed a worker's reservation wage. A standard explanation for such wages is “bonding”: high wages increase the cost of being discharged for misbehavior and so help ensure worker honesty. A neglected alternative is “satiation”: by decreasing the worker's marginal utility of income, the high wage decreases the benefit from misbehavior. Satiation, unlike bonding, applies even in a one-period model, but it relies on the misbehavior having a monetary benefit and on at least part of the punishment being nonmonetary.
We look at a Bertrand model in which each ¢rm may be inactive with a known probability, so the nu... more We look at a Bertrand model in which each ¢rm may be inactive with a known probability, so the number of active ¢rms is uncertain. The model has a mixed-strategy equilibrium, in which industry pro¢ts are positive and decline with the number of ¢rms, the same features which make the Cournot model attractive. Unlike those in a Cournot model with similar uncertainty, Bertrand pro¢ts always increase in the probability that ¢rms are inactive. Pro¢ts decline more sharply than in the Cournot model, the pattern found empirically in Bresnahan and Reiss [1991].
Bidders in auctions must decide whether and when to incur the cost of estimating the most they ar... more Bidders in auctions must decide whether and when to incur the cost of estimating the most they are willing to pay. This can explain why people seem to get carried away, bidding higher than they had planned before the auction and then finding they had paid more than the object was worth to them. Even when such behavior is rational, ex ante, it may be perceived as irrational if one ignores other situations in which people revise their bid ceilings upwards and are happy when that enables them to win the auction.
uyer-option'' contracts, in which the buyer selects the product variant to be traded and chooses ... more uyer-option'' contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inef®cient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is suf®cient to induce ®rst-best outcomes.
Page 1. m '*:. * gamQS and4E information An Introduction to Game Theory er/c... more Page 1. m '*:. * gamQS and4E information An Introduction to Game Theory er/c rasmusen Page 2. games and4E information Page 3. Page 4. ... Games and information : an introduction to game theory / Eric Rasmusen. 4th ed. p. cm. Includes bibliographical references and index. ...
Conviction rates are high in Japan. Why? First, Japanese prosecutors are badly understaffed. Able... more Conviction rates are high in Japan. Why? First, Japanese prosecutors are badly understaffed. Able to bring only their strongest cases, they could be presenting judges only with the most obviously guilty defendants. High conviction rates would then follow naturally. Crucially, however, this is not the full story, for Japanese judges face seriously biased incentives. A judge who acquits a defendant runs significant risks of hurting his career and earns scant hope of positive payoffs. Using data on the careers and published opinions of 321 Japanese judges (all judges who published an opinion in a criminal case in 1976 or 1979), we find skewed incentives to convict. First, a judge who -trying a defendant alone --acquits a defendant will spend during the next decade an extra year and a half in branch office assignments. Second, a judge who acquits a defendant but finds the acquittal reversed on appeal will spend an extra three years in branch offices. Conversely, a judge who finds a conviction reversed incurs no substantial penalty. Unfortunately for innocent suspects, the absence of an unbiased judiciary also reduces the incentives Japanese prosecutors have to prosecute only the most obviously guilty defendants.
Most studies of executive compensation have data on pay but not total income. Because exchange-li... more Most studies of executive compensation have data on pay but not total income. Because exchange-listed Japanese firms (unlike exchange-listed U.S. firms) need not disclose executive compensation figures in their securities filings, most studies on Japan lack even good data on pay. Through 2004, however, the Japanese tax office disclosed the tax liabilities of the 73,000 Japanese with the highest incomes. We obtained this data, and match the high-tax list against the list of CEOs of the firms listed in Section 1 of the Tokyo Stock Exchange. We thus estimate salaries and risk exposure in a new way. We confirm survey and anecdotal evidence that Japanese executives earn less than American—about one-fifth the pay, adjusting for firm size and outside income. Tobit regressions show that pay in Japan depends heavily on firm size (a .22 elasticity) and on accounting profitability, but not on stock returns. Additionally, family owned firms and those with large lead shareholders pay less to employee CEOs not in the family or with large shareholdings, as do firms whose directors have less tenure on the board.
What is law and why do people obey it? This question from jurisprudence has recently been tackled... more What is law and why do people obey it? This question from jurisprudence has recently been tackled using the tools of economics. The field of law-and-economics has for many years studied how fines and imprisonment affect behavior. Nobody believes, however, that all compliance is motivated by penalties and it is questionable whether that is even the typical motivation. Two books published in 2015, Frederick Schauer's The Force of Law and Richard McAdams's The Expressive Powers of Law, consider alternative motivations, Schauer skeptically and McAdams more sympathetically. While coercion, either directly or in its support of internalized norms, seems to dominate law qua law (and not as a mere expression of morality), a considerable portion of law serves other uses such as coordination, information provision, expression, and reduction of transaction costs. (H11,K00, K40)
We consider the learning curve in an industry with free entry and exit, and price-taking firms. A... more We consider the learning curve in an industry with free entry and exit, and price-taking firms. A unique equilibrium exists if the fixed cost is positive. While equilibrium profits are zero, mature firms earn rents on their learning, and, if costs are convex, no firm can profitably enter after the date the industry begins. Under some cost and demand conditions, however, firms may have to exit the market despite their experience gained earlier. Furthermore identical firms facing the same prices may produce different quantities. The market outcome is always socially efficient, even if dictates that firms exit after learning. Finally, actual and optimal industry concentration does not always increase in the intensity of learning.
%me values of 2 perfectly reveal d: if d = p -3, for example, it would be clear that d = p -1, cp... more %me values of 2 perfectly reveal d: if d = p -3, for example, it would be clear that d = p -1, cp = -1, and E, = -1. This feature of the model is accidental. I have verified the propositions for other error specifications which do not have the perfect-revelation property, such as, for example, when measurement errors are not cumulative and the measured damage is constrained to lie within [IL -1, p + 11, the case in the working paper version of this at&e, Rasmusen (1992b).
Politicians trade off the cost of acquiring and processing information against the benefit of bei... more Politicians trade off the cost of acquiring and processing information against the benefit of being re-elected. Lobbyists may possess private information upon which politicians would like to rely without the effort of verification. If the politician does not try to verify, however, the lobbyist has no incentive to be truthful. This is modelled as a game in which the lobbyist lobbies to show his conviction that the electorate is on his side. In equilibrium, sometimes the politician investigates, and sometimes the information is false. The lobbyists and the electorate benefit from the possibility of lobbying when the politician would otherwise vote in ignorance, but not when he would otherwise acquire his own information. The politician benefits in either case. Lobbying is most socially useful when the politician's investigation costs are high, when he is more certain of the electorate's views, and when the issue is less important.
Much real-world contracting involves adding finding new clauses to add to a basic agreement, clau... more Much real-world contracting involves adding finding new clauses to add to a basic agreement, clauses which may or may not increase the welfare of both parties. The parties must decide which complications to propose, how closely to examine the other side's proposals, and whether to accept them. This suggests a reason why contracts are incomplete in the sense of lacking Pareto-improving clauses: contract-reading costs matter as much as contract-writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.
... and the Federal Savings and Loan Insurance Corporation (FSLIC) were created to be the regulat... more ... and the Federal Savings and Loan Insurance Corporation (FSLIC) were created to be the regulatory equivalents of the Federal Reserve and the FDIC for S&Ls.28 New Deal regulation went far toward equalizing the riskiness of depos-its in different kinds of banks, and when all ...
... We focus on exclusionary conduct that is "naked": conduct unabashedly meant... more ... We focus on exclusionary conduct that is "naked": conduct unabashedly meant to ex-clude rivals, for which no one offers any efficiency justification. Court records reveal various examples that judges considered ex-clusionary. ... So far, none is robust and widely applicable. ...
... He hires the agent, and so can select an agent with the appropriate talents.20 He can negotia... more ... He hires the agent, and so can select an agent with the appropriate talents.20 He can negotiate a contract to give him incentive to use those talents properly.21 He can instruct the ... instruction and mistake. He can expressly instruct the agent not to take certain actions and ...
Everyone realizes the importance of social norms as guides to behavior and substitutes or complem... more Everyone realizes the importance of social norms as guides to behavior and substitutes or complements for law. Coming up with a paradigm for analyzing norms, however, has been surprisingly difficult, as has systematic empirical study. In this chapter of the Handbook of Law and Economics, edited by A. Mitchell Polinsky and Steven Shavell and forthcoming in 2005, we survey the topic.
Efficiency wages are wages that exceed a worker's reservation wage. A standard explanation for su... more Efficiency wages are wages that exceed a worker's reservation wage. A standard explanation for such wages is “bonding”: high wages increase the cost of being discharged for misbehavior and so help ensure worker honesty. A neglected alternative is “satiation”: by decreasing the worker's marginal utility of income, the high wage decreases the benefit from misbehavior. Satiation, unlike bonding, applies even in a one-period model, but it relies on the misbehavior having a monetary benefit and on at least part of the punishment being nonmonetary.
We look at a Bertrand model in which each ¢rm may be inactive with a known probability, so the nu... more We look at a Bertrand model in which each ¢rm may be inactive with a known probability, so the number of active ¢rms is uncertain. The model has a mixed-strategy equilibrium, in which industry pro¢ts are positive and decline with the number of ¢rms, the same features which make the Cournot model attractive. Unlike those in a Cournot model with similar uncertainty, Bertrand pro¢ts always increase in the probability that ¢rms are inactive. Pro¢ts decline more sharply than in the Cournot model, the pattern found empirically in Bresnahan and Reiss [1991].
Bidders in auctions must decide whether and when to incur the cost of estimating the most they ar... more Bidders in auctions must decide whether and when to incur the cost of estimating the most they are willing to pay. This can explain why people seem to get carried away, bidding higher than they had planned before the auction and then finding they had paid more than the object was worth to them. Even when such behavior is rational, ex ante, it may be perceived as irrational if one ignores other situations in which people revise their bid ceilings upwards and are happy when that enables them to win the auction.
uyer-option'' contracts, in which the buyer selects the product variant to be traded and chooses ... more uyer-option'' contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inef®cient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is suf®cient to induce ®rst-best outcomes.
Page 1. m '*:. * gamQS and4E information An Introduction to Game Theory er/c... more Page 1. m '*:. * gamQS and4E information An Introduction to Game Theory er/c rasmusen Page 2. games and4E information Page 3. Page 4. ... Games and information : an introduction to game theory / Eric Rasmusen. 4th ed. p. cm. Includes bibliographical references and index. ...
Conviction rates are high in Japan. Why? First, Japanese prosecutors are badly understaffed. Able... more Conviction rates are high in Japan. Why? First, Japanese prosecutors are badly understaffed. Able to bring only their strongest cases, they could be presenting judges only with the most obviously guilty defendants. High conviction rates would then follow naturally. Crucially, however, this is not the full story, for Japanese judges face seriously biased incentives. A judge who acquits a defendant runs significant risks of hurting his career and earns scant hope of positive payoffs. Using data on the careers and published opinions of 321 Japanese judges (all judges who published an opinion in a criminal case in 1976 or 1979), we find skewed incentives to convict. First, a judge who -trying a defendant alone --acquits a defendant will spend during the next decade an extra year and a half in branch office assignments. Second, a judge who acquits a defendant but finds the acquittal reversed on appeal will spend an extra three years in branch offices. Conversely, a judge who finds a conviction reversed incurs no substantial penalty. Unfortunately for innocent suspects, the absence of an unbiased judiciary also reduces the incentives Japanese prosecutors have to prosecute only the most obviously guilty defendants.
Most studies of executive compensation have data on pay but not total income. Because exchange-li... more Most studies of executive compensation have data on pay but not total income. Because exchange-listed Japanese firms (unlike exchange-listed U.S. firms) need not disclose executive compensation figures in their securities filings, most studies on Japan lack even good data on pay. Through 2004, however, the Japanese tax office disclosed the tax liabilities of the 73,000 Japanese with the highest incomes. We obtained this data, and match the high-tax list against the list of CEOs of the firms listed in Section 1 of the Tokyo Stock Exchange. We thus estimate salaries and risk exposure in a new way. We confirm survey and anecdotal evidence that Japanese executives earn less than American—about one-fifth the pay, adjusting for firm size and outside income. Tobit regressions show that pay in Japan depends heavily on firm size (a .22 elasticity) and on accounting profitability, but not on stock returns. Additionally, family owned firms and those with large lead shareholders pay less to employee CEOs not in the family or with large shareholdings, as do firms whose directors have less tenure on the board.
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