This paper tries to explain why government bureaucracies are often associated with red tape, corruption, and lack of incentives. The paper identifies two specific ingredients that together can provide an explanation: the fact that governments often act precisely in situations where markets fail and the presence of agency problems within the government. We show that these problems are exacerbated at low levels of development and in bureaucracies dealing with poor people. We also argue that we need to posit the existence of a welfare-oriented constituency within the government in order to explain red tape and corruption.

In this paper, we consider what can be learned about causal effects when one uses a contaminated instrumental variable. In particular, we consider what inferences can be made about the causal effect of teenage childbearing on a teen mother's subsequent outcomes when we use the natural experiment of miscarriages to form an instrumental variable for teen births. Miscarriages might not meet all of the conditions required for an instrumental variable to identify such causal effects for all of the observations in our sample. However, it is an appropriate instrumental variable for some women, namely those pregnant women who experience a random miscarriage. Although information from typical data sources does not allow one to identify these women, we show that one can adapt results from Horowitz and Manski (1995) on identification with data from contaminated samples to construct informative bounds on the causal effect of teenage childbearing. We use these bounds to re-examine the effects of early chilbearing on the teen mother's subsequent educational and labour market attainment as considered in Hotz, McElroy and Sanders (1995a, 1995b). Consistent with their study, these bounds indicate that women who have births as teens have higher labour market earnings and hours worked compared to what they would have attained if their childbearing had been delayed.

Traditional cross-sectional measures find greater inequality in the United States than in industrialized Western European countries, but are unable to distinguish transitory from permanent inequality. With longitudinal data, we measure cross-sectional inequality during the 1980s using the Shorrocks measure of income stability to find the degree to which single-period measures exaggerate permanent inequality. Surprisingly, given the smaller social welfare system and the less restrictive labor markets in the United States, we find that both single-period inequality and the share of that inequality that persists over time are greater in the United States than in Germany.

This article builds a theory of financial system architecture. We ask: what is a financial market, what is a bank, and what determines the economic role of each? Starting with basic assumptions about primitives—the types of agents and the nature of informational asymmetries—we provide a theory that explains which agents coalesce to form banks and which trade in the capital market. It is shown that borrowers of higher observable qualities access the financial market. Moreover, a financial system in its infancy will be bank-dominated, and increased financial market sophistication diminishes bank lending.

The quality of capacity planning significantly affects firm profitability, particularly for firms in service industries. In practice, firms use product cost data to infer the expected cost of under- and over-stocking capacity and to determine installed capacity. Theory shows that this is not optimal practice. In light of the informational and computational complexities associated with the optimal theoretical formulation, the use of product cost may be justified as a heuristic. For a multi-product, multi-resource firm, we use simulations to investigate the efficiency of four cost-based decision rules in determining the expected cost of under- and over-stocking capacity. Results indicate surprisingly high performance levels, relative to a benchmark solution. The performance of the product-based planning rule deteriorates as products increasingly share capacity resources. The opposite is true for resource-focused rules. There appears to be significant value from identifying mechanisms to balance installed capacity across resources.

This paper examines the factors influencing the relative weights placed on financial and non-financial performance measures in CEO bonus con- tracts. We find that the use of non-financial measures increases with the level of regulation, the extent to which the firm follows an innovation-oriented strategy, the adoption of strategic quality initiatives, and the noise in financial measures. We find no evidence that the choice of performance measures in bonus contracts is associated with the level of financial distress or the value of CEO equity holdings relative to salary and bonus. Our results also provide no support for the hypothesis that CEOs with greater influence over the board of directors are more likely to be compensated based on non-financial measures.