This paper analyzes optimal contracting when an agent has private information before contracting and exerts hidden effort that stochastically affects the output. Additionally, the contract is constrained to satisfy the agent’s ex post participation. We highlight three features of this model. First, the agent faces countervailing incentives. Second, the separation of types is never optimal. Thir...

When politicians are provided with insufficient incentives by the democratic election mechanism, we show that social welfare can be improved by threshold contracts. A threshold incentive contract stipulates a performance level which a politican must reach in order to have the right to stand for reelection. Read my lips would turn into read my contracts. Reelection thresholds can be offered by p...

Payment for Ecosystem Services from Forests Every year between 2000 and 2010, our planet lost native forests roughly the size of Costa Rica. (FAO, 2010). This rapid deforestation has dramatically changed the chemical composition of the world’s atmosphere, the level of biodiversity, and the presence of vegetation key to maintaining watershed function and preventing landslides. There has been a b...

In the 1992 Rio Earth Summit, developing countries (DCs) were adamant that, in order to protect the environment for the future, new institutions were needed which would channel resources from the wealthy developed countries to the poor DCs. With this backdrop, I analyze the problem faced by an asymmetrically informed supranational governmental authority (SNGA) who wishes to design an Internatio...

We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: The value o...

When the quality of a good is at the discretion of the seller, how can buyers assure that the seller provides the mutually efficient level of quality? Contracts that provide a bonus to the seller if the quality is acceptable, or impose a penalty on the seller if quality is unacceptable, can in theory provide efficient incentives. But how are such contracts enforced? While the courts can be used...

We develop a two-period general equilibrium model of portfolio delegation with competitive, differentially skilled managers and convex compensation contracts. We show that convex incentives lead to significant equilibrium mispricing, but reduce price volatility. In particular, price informativeness and volatility may exhibit opposite behaviour. Investors do not internalize the externality that ...

We investigate the information content of dealers’ quoting activity as measured by the frequency of price revisions in the Euro/Dollar foreign exchange market. We use the multivariate double autoregressive conditional Poisson model designed for time series of count data. We find that dealers react differently to the same news announcements, some dealers increasing their activity, whilst others ...

The notion of contracts as reference points provides the basis for a deeper understanding of important phenomena such as the employment contract, vertical integration, firm scope, authority, and delegation. Previous experiments lend support to this notion but they ignore realistic aspects of trading relationships such as informal agreements and ex-post renegotiation or revision. Here we show th...

JEL Classification Code(s): J 31, J 71) "Perceptions of Discrimination, Effort to Obtain Psychological Balance, and Relative Wages: Can We Infer a Happiness Gradient?" There is a substantial literature that finds a linkage between happiness and relative economic well being as measured by earnings or wages. There is also a well documented racial gap in wages. One explanation for this is disparat...