Should We Have or Should We Have Not, and Who Should Have Paid?

We analyze an overlapping generations model which explicitly includes a secondary asset market. The economy is affected by a onetime shock which causes some of these assets to become toxic. As a response the government may intervene by buying these assets at market value and removing them from trade. When the shock is not anticipated we find that government intervention cannot improve upon the laissez-faire equilibrium. However, when agents anticipate that a crisis may occur, removing the toxic assets dominates laissez-faire, particularly when the toxic asset holders are financing the intervention scheme. Finally, we show that curbing incentives which drive investors to find high yield opportunities decreases the severity of a crisis once it occurs, but also output.Crisis; Toxic Assets; Intervention

Rules of Proof, Courts, and Incentives

We analyze the design of legal principles and procedures for court decision-making in civil litigation. The objective is the provision of appropriate incentives for potential tort-feasors to exert care, when evidence about care is imperfect and may be distorted by the parties. Efficiency is shown to be consistent with courts adjudicating on the basis of the preponderance of evidence standard of proof together with common law exclusionary rules. Inefficient equilibria may nevertheless also arise under these rules. Directing courts as to the assignment of the burden of proof is then useful as a coordination device. Alternatively, burden of proof guidelines are unnecessary if courts are allowed a more active or inquisitorial role, by contrast with that of passive adjudicator.evidentiary rules, standard of proof, burden of proof, inquisitorial, adversarial, discovery, deterrence

Technological Choice under Organizational Diseconomies of Scale

With adverse selection, diseconomies of scale associated with hierarchies may induce the implementation of a second-best technology. This occurs whenever rents to lower tiers of the hierarchy increase faster than total surplus. This is more likely with longer hierarchies.Adverse Selection, Hierarchies, Technology

Incentive Contracts and Efficient Unemployment Benefits

Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the worker's position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalisation

Limiting Court Behavior: A Case for High Minimum Sentences and Low Maximum Ones

We model a simple justice system in which a court is mandated by society to assess the guilt and the punishment of an accused. The court takes prison facilities as given and neglects its impact on the cost to society of implementing the sentence. Clearly, the court, in this world, will condemn more often than society and assign higher penalties. Under these circumstances, society at large would necessarily benefit from having maximum sentences. We show, however, as a series of perverse results, that (1) maximum penalties need to be lower than the highest socially desirable penalty; (2) society would benefit from imposing high minimum sentences even though it is precisely the harshness of courts, which it wants to curb.Maximum and minimum penalties, sentencing guidelines, social optimum

Group vs. Individual Performance Pay When Workers Are Envious

We compare the wage costs of providing incentives through group versus individual bonus schemes. When workers are envious, either scheme may be the least cost one owing to the trade-off between the dissatisfaction with the prospect of unequal pay and the incentives it generates Nous comparons les coûts salariaux des rémunérations incitatives par bonus de groupe et par bonus individuels. Quand les travailleurs ont une propension à l'envie, l'un ou l'autre de ces modes de rémunération peut s'avérer le moins coûteux étant donné l'arbitrage entre l'insatisfaction associée aux inégalités salariales et les incitations à l'effort qu'elles engendrent.Bonus, Efficiency Wage, Envy, Fairness, Incentives, Bonus, salaire d'efficience, envie, équité, incitations

Group vs. Individual Performance Pay When Workers Are Envious

We consider the effects on reward systems of workers' concern with relative pay by comparing the wage costs of providing incentives through group versus individual bonus schemes. When workers have a propensity for envy, either scheme may be the least cost one depending on the workers' outside opportunities and on the precision of available performance measures. The result follows from the trade-off between the dissatisfaction associated with the prospect of unequal pay and the incentives it generates when workers are envious.Bonus, efficiency wage, envy, fairness, incentives, moral hazard, performance measure, pay equality, wage compression

Incentive Contracts and Total Factor Productivity

This paper focuses on the endogenous determination of effort as a source of productivity growth. The economy is populated by infinitely lived households. Every period, members of each household may choose whether to be self-employed or become employees in a "corporate sector". Labor relations in the corporate sector are characterized by a double-moral hazard problem. To induce effort, the optimal labor contract stipulates for a bonus. Nevertheless, due to double moral hazard, employees extract some rents. As the economy grows, employees' rents increase, thereby raising the marginal benefit of monitoring. The ensuing changes in the optimal labor contract induce higher effort along the growth path. The model creates an endogenous association between growth and total factor productivity, and demonstrates that substantial cross-country productivity differences may be ascribed to differences in incentive structures.Incentive contracts, Total factor productivity, Economic growth

Do Factor Shares Reflect Technology?

This note demonstrates that it is easily possible to compute technological parameters out of national income accounting data in the presence of bargaining in the labor market. Applying the method to US data, we obtain that the output elasticity with respect to capital exceed 0.5.Factor Shares, Nash Bargaining

Costly Sanctions and the Maximum Penalty Principle

We study the problem of deterring undesirable behavior in a moral hazard framework with risk averse individuals, noisy information and costly sanctions. We find that, if sanctions are a pure loss, a utilitarian society should use a bang-bang penalty scheme satisfying the maximum penalty principle. If sanctions are monetary but imposing sanctions involves a sufficiently large resource cost, the maximum feasible sanction should also be imposed with positive probability. As a possible justification for endogenously limiting sanctions, we derive the optimal penalty scheme under a Rawlsian welfare function. The maximum sanction actually imposed is then smaller than in the utilitarian case, but it is imposed more frequently. Cet article analyse le problème de la dissuasion des comportemenmts indésirables dans un contexte d'aléa moral avec aversion au risque, information imparfaite et coûts de sanction. Nous montrons que, si les sanctions imposées aux individus sont une pure perte sociale, la politique utilitariste optimale consiste à utiliser un mécanisme de sanction dichotomique satisfaisant le principe de la sanction maximale. Si les sanctions sont pécuniaires mais qu'imposer des sanctions implique un coût en ressource suffisamment élevé, la sanction maximale permise devrait également être imposée avec une probabilité positive. Comme justification possible de sanctions limitées, nous analysons la politique de dissuasion optimale avec une fonction de bien-être rawlsienne. Le sanction maximale est dans ce cas inférieure à celle d'une politique utilitariste, mais elle est imposée plus fréquemment.Deterrence, optimal enforcement, moral hazard, maximal penalty, Rawl's criterion