Ralph A. Winter

The Law and Economics of Resale Price Maintenance

This paper reviews the economics of resale price maintenance and critiques selected Canadian cases since the passage of the Competition Act in 1986. Resale price maintenance (RPM) represents an area of active research in economics and continued controversy in competition law. In some respects, the US law has evolved to a more liberal treatment of contractual restrictions such as RPM, reflecting in part new learning on the explanations and effects of these restrictions. In Canada, the number of RPM cases brought by the Canadian Competition Bureau (the Bureau) has declined from the period 1980–1985, although the real value of the corresponding fines for those found guilty of the practice has increased: in 1980–85, there were 58 cases as compared to the period 1990–95 when there were 12 cases; the corresponding fines increased from

Optimal Insurance under Moral Hazard

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The economics of nuclear accident law

108,080.1 Some scholars have called for per se legality of vertical restraints but the appropriate antitrust treatment of these restraints remains unresolved. This symposium offers an opportunity to review the evidence on their treatment under Canadian law and to compare jurisprudence in Canada with that of the U.S. and other jurisdictions. In developing an economic framework for a synthesis of vertical restraints, a natural starting point is the benchmark of a simple, textbook contract for the transfer of a product. The simplest contract in a wholesale market would transfer to the retailer of a product a specific quantity of the product, which the retailer could then sell at any price and to any customer without limitations. The entire ownership of the product, i.e., the bundle of property rights associated with the product, would be transferred. The contract would allow the retailer to purchase any quantity at the uniform price posted by the seller. If the seller and the buyer are both firms in perfectly competitive and frictionless markets, then in fact this simple contract is optimal: the seller and retailer could not

Forward markets, currency options and the hedging of foreign exchange risk

This chapter surveys the theory of optimal insurance contracts under moral hazard, revisiting the topic in light of developments in contract theory over the past twenty-five years. Moral hazard leads to less than full insurance, so that the insured retains some incentive to reduce accident costs. What form does the partial insurance contract take: a deductible, co-insurance or a ceiling on coverage? Posed in the most general form, the problem is identical to the hidden-action principal-agent problem. The insurance context provides some structure that allows more specific predictions. Optimal insurance contracts vary, for example, depending on whether effort affects the probability of an accident or its severity. The chapter characterizes the optimal insurance contract and integrates developments in contract renegotiation, contract dynamics and other extensions.

Tying as a Response to Demand Uncertainty

Statutes restrict the application of common tort law to accidents at nuclear power plants in Canada, the U.S., and other countries. The statutes transfer to the operator of a nuclear plant liability that would otherwise be placed on input suppliers and in return limit the liability of the operator. This essay addresses the impact on safety incentives of nuclear accident law, with broader implications for the design of incentive systems that combine regulation and liability rules.

Asset Securitization and Asymmetric Information

Abstract Although transactions exposure to foreign exchange risk can be completely hedged in the forward market, the same is not true for economic exposure. We show that in some cases a portfolio of currency options can be constructed which hedges economic exposure, when the firm has ex post production flexibility. In the more general case of uncertainty in multiple exchange rates, however, more elaborate options than those currently available are required to hedge economic risk completely.

Inventory Dynamics and Supply Chain Coordination

This article examines requirements tying of a competitively supplied good to a monopolized good. It expands the set of market conditions in which this instrument is known to be profitable. With heterogeneous, privately informed buyers, a firm can profit by tying two goods even when demands for the goods are price independent - providing the demands are stochastically dependent. We investigate the profitability of tying as a response to stochastic demand, as well as the effects of tying on prices and the extent of the market served.

Moral Hazard and Insurance Contracts

We analyze the incentives for asset securitization that flow from informational asymmetries within a corporation. Within the framework of “hidden‐action” asymmetries, securitization of those cash flows that are relatively insensitive to managerial effort leaves critical incentive devices more high powered and more focused on cash flows that matter. In addition, asset securitization exchanges a stream of future cash inflows for a lump‐sum cash inflow, which enhances monitoring and control of management expenditures. Within the “hidden‐information” framework, asset securitization can be explained by asymmetric information (1) between insiders and outside investors about the value of nonsecuritized assets or (2) between insiders and outsider investors about the value of securitized assets. In both hidden‐information theories, asset securitization is driven by the propensity of the market to allocate assets to investors who are best informed about asset values.

On the role of revenue-sharing contracts in supply chains

This paper extends the theory of supply chain incentive contracts from the static newsvendor framework of the existing literature to the simplest dynamic setting. A manufacturer distributes a product through retailers who compete on both price and fill rates. We show that inventory durability is the key factor in determining the underlying nature of incentive distortions and their contractual resolutions. When the product is highly perishable, retailers are biased toward excessive price competition and inadequate inventories. Vertical price floors or inventory buybacks (subsidies for unsold inventory) can coordinate incentives in both pricing and inventory decisions. When the product is less perishable, the distortion is reversed and vertical price ceilings or inventory penalties can coordinate incentives.

On vertical control in monopolistic competition

This essay synthesizes and extends the theory of optimal insurance under moral hazard, with a focus on the form of insurance contracts. The simplest model illustrates the most fundamental result: that the market responds to moral hazard with partial insurance coverage. But this model is not general enough to predict the contractual form of this response. The most general model, the Principal-Agent model, yields mostly negative results. In extending the theory, I adopt an intermediate approach, distinguishing between moral hazard on the probability of an accident and moral hazard on the size of the loss. This approach generates predictions as to when deductibles, coinsurance and coverage limits will be observed. The essay reviews as well moral hazard with a partially informed insurer and dynamic models of moral hazard. It concludes with a discussion of open questions in the theory of moral hazard and insurance.