National audience

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.

We develop a theory of internal commitments or “personal rules” based on self‐reputation over one’s willpower, which transforms lapses into precedents that undermine future self‐restraint. The foundation for this mechanism is the imperfect recall of past motives and feelings, leading people to draw inferences from their past actions. The degree of self‐control an individual can achieve is shown to rise with his self‐confidence and decrease with prior external constraints. On the negative side, individuals may adopt excessively rigid rules that result in compulsive behaviors such as miserliness, workaholism, or anorexia. We also study the cognitive basis of self‐regulation, showing how it is constrained by the extent to which self‐monitoring is subject to opportunistic distortions of memory or attribution, and how rules for information processing can themselves be maintained.

This paper addresses a basic, yet unresolved, question: Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the state have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means? In our model, firms can meet future liquidity needs in three ways: by issuing new claims, by obtaining a credit line from a financial intermediary, and by holding claims on other firms. When there is no aggregateuncertainty, we show that these instruments are sufficient for implementing the socially optimal (second‐best) contract between investors and firms. However, the implementation may require an intermediary to coordinate the use of scarce liquidity, in which case contracts with the intermediary impose both a maximum leverage ratio and a liquidity constraint on firms. When there is only aggregate uncertainty, the private sector cannot satisfy its own liquidity needs. The government can improve welfare by issuing bonds that commit future consumer income. Government bonds command a liquidity premium over private claims. The government should manage debt so that liquidity is loosened (the value of bonds is high) when the aggregate liquidity shock is high and is tightened when the liquidity shock is low. The paper thus suggests a rationale both for government‐supplied liquidity and for its active management.

This paper develops a theory of the allocation of formal authority (the right to decide) and real authority (the effective control over decisions) within organizations, and it illustrates how a formally integrated structure can accommodate various degrees of "real" integration. Real authority is determined by the structure of information, which in turn depends on the allocation of formal authority. An increase in an agent's real authority promotes initiative but results in a loss of control for the principal. After spelling out (some of) the main determinants of the delegation of formal authority within organizations, the paper examines a number of factors that increase the subordinates' real authority in a formally integrated structure: overload, lenient rules, urgency of decision, reputation, performance measurement, and multiplicity of superiors. Finally, the amount of communication in an organization is shown to depend on the allocation of formal authority.

"Income smoothing" is the process of manipulating the time profile of earnings or earnings reports to make the reported income stream less variable. This paper builds a theory of income smoothing based on the managers' concern about keeping their position or avoiding interference, and on the idea that current performance receives more weight than past performance when one is assessing the future. When investment is added to the model, so that income reports and dividends can be set independently, we find that both dividends and income reports may be smoothed and that dividends may convey information not present in the income report.

This paper studies the value of the stock market as a monitor of managerial performance. It shows that the stock price incorporates performance information that cannot be extracted from the firm's current or future profit data. The additional information is useful for structuring managerial incentives. The amount of information contained in the stock price depends on the liquidity of the market. Concentrated ownership, by reducing market liquidity, reduces the benefits of market monitoring. Integration is associated with weakened managerial incentives and less market monitoring. This may explain why shares of divisions of a firm are rarely traded. The model offers a reason why market liquidity and monitoring have both a private and a social value, a feature missing in standard finance models. This is used to study the equilibrium size of the stock market as a function of investor preferences and the available amounts of long- and short-term capital.

This paper shows that the stock price incorporates performance information that cannot be extracted from the firm's current or future profit data. The additional information is useful for structuring managerial incentives. The amount of information contained in the stock price depends on the liquidity of the market. Concentrated ownership, by reducing market liquidity, reduces the benefits of market monitoring. Integration is associated with weakened managerial incentives and less market monitoring. The paper also studies the equilibrium size of the stock market as a function of investor preferences and the available amounts of long- and short-term capital.

The paper studies a simple two-period principal/agent model in which the principal updates the incentive scheme after observing the agent's first-period performance. The agent has superior information about his ability. The principal offers a first period incentive scheme and observes some measure of the agent's first-period performance (cost or profit), which depends on the agent's ability and (unobservable) first-period effort. The relationship is entirely run by short-term contracts. In the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit. The strategies are required to be perfect, and updating of the principal's beliefs about the agent's ability follows Bayes' rule. The central theme of the paper is that the ratchet effect leads to much pooling in the first period. First, for any first-period incentive scheme, there exists no separating equilibrium. Second, when the uncertainty about the agent's ability is small, the optimal scheme must involve a large amount of pooling. The paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty.

This paper develops a normative model of regulatory policy toward bypass and cream skimming. It analyzes the effects of bypass on second-degree price discrimination, on the rent of the regulated firm, and on the welfare of low-demand customers. It shows that pricing under marginal cost may be optimal for the regulated firm, excessive cream skimming occurs if access to the bypass technology is not regulated, and the prohibition of bypass may increase or decrease the regulated firm's rent.