The paper provides a first analysis of market jump starting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost.

Thinking about contingencies, designing covenants, and seeing through their implications is costly. Parties to a contract accordingly use heuristics and leave it incomplete. The paper develops a model of limited cognition and examines its consequences for contractual design.

Studying the implications of uncoordinated borrowing, the paper first looks at whether and when countries borrow too much in the aggregate. It then revisits the “original sin” debate, analyzing whether and when equity portfolio investment, international portfolio diversification, domestic currency denomination and longer maturities enhance borrowing countries’ access to international lending. The paper thereby relates a country’s level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings, their location, the extent of control rights held by political authorities, and the interests of dominant domestic political forces.

Parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information. The issue of the parties' investment in the relationship before renegotiation is analyzed in a simple two-period procurement model. The firm invests in the first period. It then learns its production cost, and the sponsor learns its value for the project. Williamson's underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm's investment is not observable by the sponsor. The introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued. The role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed. Last, it is shown that if investment is observable by the sponsor andthus may become a joint decision variable, the two parties may choose to under- or overinvest.

A central tenet of economics is that individuals respond to incentives. For psychologists and sociologists, in contrast, rewards and punishments are often counterproductive, because they undermine “intrinsic motivation”. We reconcile these two views, showing how performance incentives offered by an informed principal (manager, teacher, parent) can adversely impact an agent's (worker, child) perception of the task, or of his own abilities. Incentives are then only weak reinforcers in the short run, and negative reinforcers in the long run. We also study the effects of empowerment, help and excuses on motivation, as well as situations of ego bashing reflecting a battle for dominance within a relationship.

We first point out that the recent property-rights literature is based on three assumptions: (1) that contracts are always subject to renegotiation; (2) that the exercise of a property right confers a private benefit and (3) that parties are risk-neutral. Building on Hart-Moore (1999), we provide conditions under which an optimal contract consists of nothing more than an assignment of property rights. We also examine the robustness of some of the literature's standard predictions about asset ownership to the introduction of mechanisms for eliciting parties' ex post willingness to pay for the assets (such as options or financial markets). To illustrate the issue, we revisit the Hart-Moore (1990) proposition that joint ownership is suboptimal, and argue that ownership by a single party is dominated by joint ownership with put options.

We scrutinize the conceptual framework commonly used in the incomplete contract literature. This literature usually assumes that contractual incompleteness is due to the transaction costs of describing—or of even foreseeing—the possible states of nature in advance. We argue, however, that such transaction costs need not interfere with optimal contracting (i.e. transaction costs need not be relevant), provided that agents can probabilistically forecast their possible future payoffs (even if other aspects of the state of the nature cannot be forecast). In other words, all that is required for optimality is that agents be able to perform dynamic programming, an assumption always invoked by the incomplete contract literature. The foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate. Moreover, we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality. However, even if renegotiation is allowed, the result still remains valid provided that parties are risk averse.

We develop a theory of moral behavior, individual and collective, based on a general model of identity in which people care about “who they are” and infer their own values from past choices. The model sheds light on many empirical puzzles inconsistent with earlier approaches. Identity investments respond nonmonotonically to acts or threats, and taboos on mere thoughts arise to protect beliefs about the “priceless” value of certain social assets. High endowments trigger escalating commitment and a treadmill effect, while competing identities can cause dysfunctional capital destruction. Social interactions induce both social and antisocial norms of contribution, sustained by respectively shunning free riders or do-gooders.

A principal has private information that directly affects her agent's payoff (i.e., "common values" obtains). The authors analyze their relationship as a three-stage game: (1) the principal proposes a contract; (2) the agent accepts or rejects; and (3) the contract is executed. They show that the equilibrium outcomes are the allocations that weakly Pareto dominate the allocation maximizing the payoff of each "type" of the principal within the class of incentive-compatible allocations ensuring the agent his reservation utility irrespective of his beliefs about the principal's type. The authors also characterize the equilibria that are immune to renegotiation.