Claude Fluet

Advertising and prices as signals of quality in a regime of price rivalry

Abstract This paper addresses the issue of whether firms use price or advertising to signal quality and whether advertising has pro- or anti-competitive effects. We show that, when there is price rivalry, advertising may be necessary to signal quality, in contrast to single-firm models. Signaling through price alone prevails for sufficient inter-brand quality differentials; joint price-advertising signals prevail when the quality differential is small. Finally, advertising in the form of variable rather than fixed costs is shown to increase the feasibility of signaling quality.

Monitoring versus incentives

Abstract This paper analyzes the trade-off between monitoring and incentives in a principal–agent relationship with moral hazard. We derive general results on the optimal monitoring – incentives mix for the case where both parties are risk-neutral and the agent faces a limited liability constraint. We show that the principal uses less monitoring and stronger incentives if the agents liability limit is relaxed or if monitoring costs increase. To induce more effort on the part of the agent, the principal resorts to more monitoring or to stronger incentives, or both. In particular, there are cases where the cheapest way to induce more effort is to use lower-powered money incentives, but with much more precise monitoring.

Output and Wages with Inequality Averse Agents

We analyze a two-task work environment with risk-neutral but inequality averse individuals. For the agent employed in task 2 effort is verifiable, while in task 1 it is not. Accordingly, agent 1 receives an incentive contract which, due to his wealth constraint, leads to a rent that the other agent resents. We show that inequality aversion affects the optimal contracts of both agents. Greater inequality aversion reduces the effort, wage and payoff of agent 1, while the effects on the wage and effort of agent 2 depend on whether effort levels across tasks are substitutes or complements in the firms output function. However, more inequality aversion unambiguously decreases total output and therefore average labor productivity.

Inequity Aversion in Tournaments

We consider the cost of providing incentives through tournaments when workers are inequity averse and performance evaluation is costly. The principal never benefits from empathy between the workers, by he may benefit from their propensity for envy depending on the costs of assessing performance. More envious employees are preferred when these costs are high, less envious ones when they are low.

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 incentives for potential tort-feasors to exert care when evidence is imperfect and may be distorted by the parties. Efficiency is consistent with courts adjudicating on the basis of the preponderance of evidence standard together with common law exclusionary rules. Inefficient equilibria may nevertheless also arise under these rules. Burden of proof guidelines are then useful as a coordination device. Alternatively, guidelines are unnecessary if courts are allowed a more active or inquisitorial role in contrast to that of passive adjudicator. Copyright (c)2008, RAND.

Deterrence versus Judicial Error: A Comparative View of Standards of Proof

We argue that the common-law standard of proof, given the rules of evidence, does not minimize expected error as usually argued in the legal literature, but may well be efficient from the standpoint of providing maximal incentives for socially desirable behavior. By contrast, civil laws higher but somewhat imprecise standard may be interpreted as reflecting a trade-off between providing incentives and avoiding judicial error per se. In our model, the optimal judicial system has rules resembling those in the common law when providing incentives is paramount. When greater weight is given to avoiding error, the optimal system has civil-law features.

Ranking of information systems in agency models: an integral condition

Summary. We provide a condition for ranking of information systems in agency problems. The condition has a straightforward economic interpretation in terms of the sensitivity of a cumulative distribution with respect to the agents effort. The criterion is shown to be equivalent to the mean preserving spread condition on the likelihood ratio distributions.

Complete Versus Incomplete Insurance Contracts under Adverse Selection with Multiple Risks

This article extends the standard adverse-selection model for competitive insurance markets, which assumes a single source of risk, to the case where individuals are subject to multiple risks. We compare the following market situations—the case where insurers can offer comprehensive policies against all sources or risks (complete contracts) and the case where different risks are covered by separate policies (incomplete contracts). In the latter case, we consider whether the insurer of a particular risk has perfect information regarding an individuals coverage against other sources of risks. The analysis emphasizes the informational role of bundling in multidimensional screening. When the market situation allows bundling, it is shown that in equilibrium the low-risk type with respect to a particular source of risk does not necessarily obtain partial coverage against that particular risk.

A Further Justification for the Negligence Rule

We use a principal-agent framework to reexamine the implications of the negligence and strict liability rules when the tort-feasor is an agency. We assume a unilateral care situation and consider both the cases of moral hazard and of adverse selection. In both instances the negligence rule is shown to Pareto dominate the strict liability rule when the activity level is exogenously given. We find a simple condition which guarantees that the result extends to an endogenous activity level. We also examine the case where this condition is not satisfied.

Price adjustment costs and the effect of endogenous technique on price stickiness

Abstract This paper analyzes a monopolistic firms pricing and choice of technique decisions, when it faces a random demand and must incur a fixed menu cost to adjust its price to demand shocks. We show that price adjustment costs have the same effect as an increase in the variability of demand, in that the firm will choose a technique yielding a flatter short-term marginal cost curve. Making the production technique endogenous widens the range of demand shifts that will be accommodated with an unchanged price; it allows for less price variation and more quantity variation when it is profitable to pay the menu cost and adjust the price.