We study a general equilibrium efficiency wage model characterized by fully optimizing agents, flexible prices, and imperfect information. The model has a unique competitive equilibrium with underemployment in a sector (called manufacturing) with efficiency wages, relative to a self-employment sector. Since prices are flexible, the multiplier of manufacturing output with respect to autonomous demand changes may or may not exceed unity: demand changes lead to price effects as well as income effects that work opposite each other. Nevertheless, there always exist government policies that achieve Pareto improvements by switching demand toward the manufacturing sector. Optimal demand-switching policies are explicitly characterized.

In a one principal two-agent model with adverse selection and collusion among agents, we show that delegating to one agent the right to subcontract with the other agent always earns lower profit for the principal compared with centralized contracting. Delegation to an intermediary is also not in the principal’s interest if the agents supply substitutes. It can be beneficial if the agents produce complements and the intermediary is well informed. Earlier versions of this paper have previously been circulated under different

We consider a principal-agent model to examine the effectiveness of responsibility centers, in particular cost or profit centers. We show that rather than contracting with each agent directly, the principal can create equally powerful incentives by setting up a responsibility center structure. The principal contracts with only the ‘manager’ of the center and delegates contracting with other agents and coordinating their activities. The principal then must monitor some measure of financial performance such as the center's cost of profit. We also find that responsibility centers dominate direct contracting with the agents when communication is limited.

Alternative wage structures under conditions of moral hazard are analyzed from a social-welfare standpoint. It is argued that ex post equity judgements in an uncertainty context should incorporate a preference for "positive correlation" of utilities of different individuals. In the design of compensation schemes, this may give rise to a conflict between ex post equity objectives and the need to provide effort incentives: relative performance clauses in compensation schemes that are useful for providing incentives are undesirable from an ex post equity standpoint. Copyright 1987 by The Review of Economic Studies Limited.

Economic inequality is of interest not only at some intrinsic level, but also for its close connections to diverse variables, ranging from economic indicators such as growth rates to sociopolitical outcomes such as collective action and conflict.It is only natural, then, to study the evolution of inequality in an economic system.It is fair to say that the dominant view on this topic is that inequality is the outcome of a constant battle between convergence and "luck" (Gary Becker and Nigel Tomes, 1979).Current asset inequalities may echo into the future, but their natural tendency is to die out (owing to a convex investment technology).Disparities are only sustained through ongoing stochastic shocks (see also David Champernowne, 1953;Glenn Loury, 1981).A second approach emphasizes that initial conditions determine final outcomes, owing principally to a nonconvex investment technology (see e.g.

Can historical wealth distributions affect long-run output and inequality despite “rational” saving, convex technology and no externalities? We consider a model of equilibrium short-period financial contracts, where poor agents face credit constraints owing to moral hazard and limited liability. If agents have no bargaining power, poor agents have no incentive to save: poverty traps emerge and agents are polarized into two classes, with no interclass mobility. If instead agents have all the bargaining power, strong saving incentives are generated: the wealth of poor and rich agents alike drift upward indefinitely and “history” does not matter eventually.

We consider mechanism design in which message sets are restricted owing to communication costs, preventing full revelation of information. A principal contracts with multiple agents each supplying a one-dimensional good at a privately known cost. We characterize optimal mechanisms subject to incentive and communication constraints, without imposing arbitrary restrictions on the number of communication rounds. We show that mechanisms that centralize production decisions are strictly dominated by those that decentralize decision-making authority to agents, and optimal communication mechanisms maximize information exchanged directly among agents. Conditions are provided for these to involve gradual release of information over multiple rounds either simultaneously or sequentially.

Dilip Mookherjee, Ivan Png; Optimal Auditing, Insurance, and Redistribution*, The Quarterly Journal of Economics, Volume 104, Issue 2, 1 May 1989, Pages 39

We investigate political determinants of land reform implementation in the Indian state of West Bengal. Using a village panel spanning 1974–1998, we do not find evidence supporting the hypothesis that land reforms were positively and monotonically related to control of local governments by a Left Front coalition vis-à-vis the right-centrist Congress party, combined with lack of commitment to policy platforms. Instead, the evidence is consistent with a quasi-Downsian theory stressing the role of opportunism (reelection concerns) and electoral competition.(JEL D72, O13, O17, Q15)

135 Despite the importance of this issue, not much systematic research appears to have been devoted to assessing the relative susceptibility of national and local governments to interestgroup capture. Here we describe a model of two-party electoral competition with “probabilistic” voting behavior and lobbying by specialinterest groups based on David Baron (1994) and Gene Grossman and Elhanan Helpman (1996) that helps identify determinants of relative capture at different levels of government. These include relative levels of voter awareness and interest-group cohesiveness, electoral uncertainty, electoral competition, heterogeneity of districts with respect to inequality, and the electoral system. While some of these uphold the traditional Madisonian presumption, others are likely to create a tendency for lower capture at the local level, so the net effect is theoretically ambiguous. This suggests that the extent of relative capture may be context-specific and needs to be assessed empirically.