The use of modern microeconomics in policy is illustrated by the markets for spectrum, electricity, greenhouse-gas reductions, defense procurement, and Treasury bills. Further examples are antitrust divestiture rules, market-based redistribution, fishery conservation, and privatization. The limits of the use of theory are also discussed, by reference to China's economy-wide reforms. Lessons on the policy use of theory are drawn.

We characterize coordinated bidding strategies in two cases: a weak cartel, in which the bidders cannot make side-payments; and a strong cartel, in which the cartel members can exclude new entrants and can make transfer payments. The weak cartel can do no better than have its members submit identical bids. The strong cartel in effect reauctions the good among the cartel members.

Which is the tighter constraint on private sector investment: weak property rights or limited access to external finance? From a survey of new firms in post-communist countries, we find that weak property rights discourage firms from reinvesting their profits, even when bank loans are available. Where property rights are relatively strong, firms reinvest their profits; where they are relatively weak, entrepreneurs do not want to invest from retained earnings.