Knowledge that Transforms

This paper examines the role of industry capacity in enforcing collusion in the context of repeated games. For a fixed capacity per firm it is shown that changes in the number of firms have a non-monotone effect on the best enforceable cartel price. This is due to the fact that while an additional firm lowers the share that each of the other firms enjoys at the collusive price it also increases the losses to each firm should the cartel fail.

This paper considers markets in which consumers are imperfectly informed about both product prices and quality levels offered by firms. We characterize necessary and sufficient conditions for existence of the various equilibrium configurations of price and quality that can arise in two paradigm cases; when all consumers prefer higher quality and when all consumers prefer lower quality. Our results suggest that firms will exploit imperfect information by charging noncompetitive prices as well as by offering other than ideal quality in the former case, but only by changing noncompetitive prices in the latter case.

This paper derives the limit distribution of the test statistics for the error components model proposed by Breusch and Pagan under the assumption of non-normal disturbances and under a sequence of local alternatives, and shows that the Breusch-Pagan tests are robust to non-normal disturbances. The paper also points out that the Breusch-Pagan tests do not make full use of the information provided by the one-sided alternative. And it proposes a one-sided alternative test for the case where time effects are absent from the model. The newly proposed test dominates the Breusch-Pagan test in the above case.

First, a model of horizontally and vertically integrated firms is developed. These firms are then embedded in a general equilibrium model of trading countries. It is shown how multinational corporations emerge as a result of differences across countries in factor compositions. Intersectoral, intraindustry, and intrafirm trade can coexist, and intrafirm trade takes place in invisibles (headquarter services) and intermediate inputs. It is shown how the various trade components depend on the structure of the world economy. The model predicts trade patterns which are close to observed trade patterns.

This paper investigates perfect equilibrium in a model of a race in which two players are competing for an indivisible prize. The winner is the first player to reach the finishing line. It is shown that the behaviour of the winner of the race is often exactly as if he were the only player: the rival makes no difference. Even if competition does affect the winner's behaviour, it does so only in the first stage of the race and not thereafter. It is shown how several factors combine to determine which player will win: relative valuations of the prize, discount rates, efficiency at making progress and initial distances from the finishing line. Insofar as the model applies to patent races, it suggests that the potential competition faced by one firm in a patent race (e.g. an incumbent monopolist) may be of little or no consequence.

Central planning of production is usually performed under asymmetric information which leads to use of an incentive scheme. As the planner revises the scheme over time to take into account information provided by the firm's performance, this induces firms to underproduce to avoid more demanding schedules in the future—the ratchet effect. This paper explores this phenomenon under the realistic assumption that the planner cannot commit himself to a revision procedure. We show that the ratchet effect exists, in the sense that the planner may choose a scheme which is suboptimal from a static viewpoint in order to induce revelation, with the marginal price of output exceeding its optimal static value.

This paper presents models in which one agent must decide whether to trust another, whose motives are uncertain. Reliability can only be communicated through actions. In this context, it pays for people to build a reputation based on reliable behaviour; someone becomes credible by consistently providing accurate and valuable information or by performing useful services. The theory provides a justification for long-term arrangements without binding contracts. It also describes those situations where it pays an agent to cash in on his reputation.

We study the adoption of a new technology to illustrate the effects of preemption in games of timing. We show that the threat of preemption equalizes rents in a duopoly, but that this result does not extend to the general oligopoly game. If the gain to preemption is sufficiently small, then the optimal symmetric outcome, which involves “late” adoption, is an equilibrium. This contrasts with Reinganum's result that in precommitment equilibria there must be “diffusion”. We develop a new and richer formalism for modeling games of timing, which permits a continuous-time representation of the limit of discrete-time mixed-strategy equilibria.

In a simple model of borrowing and lending with asymmetric information we show that the optimal, incentive-compatible debt contract is the standard debt contract. The second-best level of investment never exceeds the first-best and is strictly less when there is a positive probability of costly bankruptcy. We also compare the second-best with the results of interest-rate-taking behaviour and consider the effects of risk aversion. Finally we provide conditions under which increasing the borrower's initial net wealth must reduce total investment in the venture.

This paper examines the conditions for which it is optimal to permanently preserve natural environments in which a productive natural resource is found. The conditions are more restrictive than those previously indicated in the literature on the economics of natural environments. Increasing consumption and declining commodity prices are not sufficient to warrant permanent preservation. The initial capital stock can be an important determinant of the optimal level of preservation. In addition, resource amenity values will increase the initial resource price and decrease the rate of growth of the resource price.