Sanford J. Grossman

The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1s control increases the productivity of its management more than the loss of control decreases the productivity of firm 2s management.

Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation

A spray gun especially adapted for dispensing foam type plastics or other coating materials which is characterized by two feed lines for the coating materials which are encased in return lines with valves which are selectively positioned to control the flow of the material so as to provide, selectively, for spray operation or for continuous return flow to the supply source without passage through the discharge control valves of the gun. The discharge control valve assemblies are readily removable as complete units for cleaning and repair. A solvent flush valve is arranged relative to the discharge control valves to enable the valves, the mixing chamber and passageways in the head to be flushed out with solvent while the valves are in place and while the coating material is recirculated through the supply lines.

An Analysis of the Principal-Agent Problem

Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent’s utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative procedure. If the agent’s preferences over income lotteries are independent of action, we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem. We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.

The Informational Role of Warranties and Private Disclosure about Product Quality

The Informational Role of Warranties and Private Disclosure about Product Quality Author(s): Sanford J. Grossman Source: Journal of Law and Economics, Vol. 24, No. 3, Consumer Protection Regulation: A Conference Sponsored by the Center for the Study of the Economy and the State (Dec., 1981), pp. 461-483 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/725273 Accessed: 27/08/2008 20:18

Liquidity and Market Structure

Market liquidity is modeled as being determined by the demand and supply of immediacy. Exogenous liquidity events coupled with the risk of delayed trade create a demand for immediacy. Market makers supply immediacy by their continuous presence and willingness to bear risk during the time period between the arrival of final buyers and sellers. In the long run the number of market makers adjusts to equate the supply and demand for immediacy. This determines the equilibrium level of liquidity in the market. The lower is the autocorrelation in rates of return, the higher is the equilibrium level of liquidity.

Perfect sequential equilibrium

Abstract Our equilibrium concept is a restriction of sequential equilibrium. A player chooses a “metastrategy” which specifies his act as a function of his belief. This permits players to evaluate how a game will evolve if new beliefs are assigned to a given node, and enables us to develop a restriction on the beliefs “off the equilibrium path.” A perfect sequential equilibrium is supported by beliefs p which prevent a player from deviating to an unreached node, when there is no belief q which, when assigned to the node, makes it optimal for a deviation to occur with probability q.

An Introduction to the Theory of Rational Expectations Under Asymmetric Information

Every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use. In a world not subject to random shocks, consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision. They need give no thought to the tastes, endowments or technology of other agents. However, in a world subject to random shocks, this is no longer the case. Agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents. Rational expectations theories provide a model of how agents make those forecasts. In a world subject to random shocks, it will be the case that agents acquire (or at least attempt to acquire) information about the future realization of the shocks. It will, in general, be the case that different agents have access to different information. The fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything. An efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses. Though many classical and neo-classical writers emphasize the informational role of prices, the standard Marshallian or Walrasian model of competitive equilibrium does not involve prices transferring information across traders. The purpose of this paper is to show that rational expectations models are radically different from Walrasian models in an economy where traders have diverse information. This is demonstrated by showing that unlike what occurs in a Walrasian equilibrium of an economy with heterogeneous information, if there is a complete set of insurance markets and utility is additively separable over time, then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economys information. This implies that, under the above assumptions, a central planner with all the economys information could not Pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations. This paper makes no attempt to survey the literature on rational expectations. The reader is referred to Shiller (1978), Barro (1981) for a survey of macroeconomics and rational expectations, and Radner (1980) for a survey of the microeconomics and mathematical theory of rational expectations. This paper will, however, try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the Walrasian model of equilibrium. The rest of this section is devoted to a discussion of pre-rational expectations ideas.

Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information

The consumption beta theorem of Breeden makes the expected return on any asset a function only of its covariance with changes in aggregate consumption. It is shown that the theorem is more robust than was indicated by Breeden. The theorem obtains even if one deletes Breedens assumptions that (a) all risky assets are tradable, (b) investors have homogeneous beliefs, (c) other assets can be traded without transactions costs and (d) that all assets have returns which are Ito processes.

Estimating the Continuous-Time Consumption-Based Asset-Pricing Model

The consumption-based asset-pricing model predicts that excess yields are determined by the markets degree of relative risk aversion and by the covariances of per capita consumption growth with asset returns. Estimation and testing are complicated by the fact that the models predictions relate to the instantaneous flow of consumption and point-in-time asset values, but only data on the integral or time average of the consumption flow are available. This article shows how to take account of the effects of time averaging on the covariances. We estimate the models parameters and test the overidentifying restrictions using six different data sets.

Sequential Bargaining Under Asymmetric Information

We analyze an infinite stage, alternating offer bargaining game in which the buyer knows the gains from trade but the seller does not. Under weak assumptions the game has a unique candidate Perfect Sequential Equilibrium, and it can be solved by backward induction. Equilibrium involves the seller making an offer which is accepted by buyers with high gains from trade, while buyers with medium gains reject and make a counteroffer which the seller accepts. Buyers with low gains make an unacceptable offer, and then the whole process repeats itself, Numerical simulations demonstrate the effects of uncertainty on the length of bargaining.