Aaron S. Edlin

Contract Renegotiation and Options in Agency Problems

This article discusses the ability of an agent and a principal to achieve the first-best outcome when the agent invests in an asset that has greater value if owned by the principal than by the agent. When contracts can be renegotiated, a well-known danger is that the principal can hold up the agent, undermining the agents investment incentives. We begin by identifying a countervailing effect: Investment by the agent can increase his value for the asset, thus improving his bargaining position in renegotiation. We show that option contracts will achieve the first best whenever his threat-point effect dominates the holdup effect. Otherwise, achieving the first best is difficult and, in many cases, impossible. Copyright 2000 by Oxford University Press.

Mixed Equilibria are Unstable in Games of Strategic Complements

In games with strict strategic complementarities, properly mixed Nash equilibria - equilibria that are not in pure strategies - are unstable for broad class of learning dynamics.

What is the Probability Your Vote Will Make a Difference

One of the motivations for voting is that one vote can make a difference. In a presidential election, the probability that your vote is decisive is equal to the probability that your state is necessary for an electoral college win, times the probability the vote in your state is tied in that event. We computed these probabilities a week before the 2008 presidential election, using state-by-state election forecasts based on the latest polls. The states where a single vote was most likely to matter are New Mexico, Virginia, New Hampshire, and Colorado, where your vote had an approximate 1 in 10 million chance of determining the national election outcome. On average, a voter in America had a 1 in 60 million chance of being decisive in the presidential election.

Strict single crossing and the strict Spence-Mirrlees condition : A comment on monotone comparative statics

A handle for a hand-carried article such as a handbag, pocketbook or the like; the handle consisting of two straps, one of which is secured to each opposite side of the article, each strap being twisted to form a loop through which a persons hand can be inserted, and each loop being stretchable so to fit different sizes of hands.

The Bundling of Academic Journals

Academic journal publishing has evolved rapidly in the past two decades. Prices, ownership concentration, the number of journals, and the means of distribution have all changed dramatically. Substantial price increases have been the norm. Average prices have risen severalfold over this period, with prices climbing the most at forprofit journals, where these prices are now as much as 500 percent higher than nonprofits (Gail Yokote, 2003). The price difference between forprofit and nonprofit academic journals is particularly striking, given that these journals are generally similar in format and editorial processes, and that for-profit journals do not appear to be of higher quality (Theodore C. Bergstrom, 2001 p. 183). Increased concentration provides one possible explanation for why prices of for-profit journals are so high. To take one example, measured by revenue, in 2001 Elsevier Science had a 22.9percent share of the Science, Technology, and Medicine (STM) industry, with Kluwer at 11.7 percent, and Thomson at 10.7 percent. But concentration offers at best only a partial answer. Bundling offers another, potentially more significant explanation, particularly for recent increases. The prices of for-profit journals could not be high and increasing without significant structural barriers to entry. Recently, however, a new strategic barrier has emerged. Major publishers have been offering libraries packages of journals that are bundled across journals and across print and electronic versions. The exact terms have varied from publisher to publisher, but a contract (sometimes called a “Big Deal” by librarians) typically involves a library entering into a long-term arrangement to get access to a large electronic library of journals at a substantial discount, in exchange for a promise not to cut print subscriptions (whose prices will increase over time); in this sense print and electronic are bundled. Since the electronic library becomes much less expensive when ordered in quantity, there is likewise bundling across electronic journals. Bundling can be seen as a device that erects a strategic barrier to entry. At a simple level of analysis, the Big Deal contracts leave libraries few budgetary dollars with which to purchase journals from new entrants. Looking one level deeper, we see that bundling entails average prices that exceed marginal prices, and this creates a barrier to entry if entrants compete with the marginal journal. Other things equal, bundling practices are likely to be anticompetitive to the extent that they allow for the maintenance of supracompetitive average prices that limit usage of academic journals by scholars and/or distort library choices between journals and monographs and books. There are, however, pro-competitive benefits associated with bundling. Recent deals have provided scholars with extra access to journals; moreover, when electronic databases contain journals not included in the libraries’ print collections, the collections expand. Finding an economic approach that analyzes a range of bundling practices and evaluates them by appropriately balancing benefits and costs † Discussants: V. Kerry Smith, North Carolina State University; Robert Hall, Stanford University.

Contract Renegotiation in Agency Problems

This paper studies the ability of an agent and a principal to achieve the first-best outcome when the agent invests in an asset that has greater value if owned by the principal than by the agent. When contracts can be renegotiated, a well-known danger is that the principal can hold up the agent, undermining the agents investment incentives. We begin by identifying a countervailing effect: Investment by the agent can increase his value for the asset, thus improving his bargaining position in renegotiation. We show that option contracts will achieve the first best whenever this threat-point effect dominates the holdup effect. Otherwise, achieving the first best is difficult and, in many cases, impossible. In such cases, we show that if parties have an appropriate signal available, then the first best is still attainable for a wide class of bargaining procedures. A noisy signal, however, means that the optimal contract will involve terms that courts might view as punitive and so refuse to enforce.

The Savings Impact of College Financial Aid

Abstract When parents save money for their childrens college education, a portion of their savings is later taken away in the form of reduced eligibility for college financial aid. We estimate the long-run impact of this implicit asset tax by estimating family preferences over life-cycle consumption, savings and college choices and then simulating family choices over these variables under various hypothetical financial aid systems with different asset treatments. Our simulations suggest that the implicit taxes in the current college financial aid system may in the long run reduce economy-wide asset holdings in the U.S. by

Getting Serious about Job Creation: Part I

186 billion versus aid systems with no implicit asset taxes. This figure is less than 1% of total U.S. wealth during the years of our data. It, however, reflects a 10.2% reduction is asset holdings for affected families.

Vote for Charity's Sake

The ideal economic stimulus would be something that should be done in any event --- making work pay with employee tax credits --- according to Aaron Edlin and Edmund Phelps.

Implementing the First Best in an Agency Relationship with Renegotiation: A Corrigendum

In a battleground state like Colorado or New Mexico, voting in the presidential election may be equivalent to giving