Yuk-Shee Chan

Prices and Qualities in Markets with Costly Information

This paper extends the seminal work of Akerlof, and Salop and Stiglitz in two directions: (i) the sellers can select both the selling prices and quality levels of their good, and (ii) the buyers can acquire price/quality information about individual sellers at a cost. We observe multiple price/quality combinations in equilibrium, which depend upon the distribution of information costs of consumers and upon whether quality, or price, or both are costly observable. Welfare comparisons of equilibrium are considered. We show that welfare will be greater when price advertising is permitted.

An incentive based theory of bank regulation

Abstract In this paper we analyze how depositors can employ both monitoring and capital requirements to control the risk of bank assets. We also analyze how monitors should be compensated if their actions are not directly observable and if there are binding limits on their liability. Second-best capital and monitoring levels (with unobservable actions) will be distorted away from their respective first-best levels. We derive some results about the nature of these distortions and characterize the optimal incentive scheme for monitors.

The Relationship between Ownership, Financing Decisions and Firm Performance: A Signaling Model

The authors develop a signaling model to show how adverse selection and moral hazard interact to determine a firms ownership structure and financing and investment decisions endogenously. Testable implications are derived regarding the relationship between insider ownership, performance measures such as Tobins Q ratio, and elements of financial structure such as the debt-equity ratio. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Incentive contracts for managers who discover and manage investment projects

We analyse how principals can select incentive contracts to induce managers to make optimal investment decisions when the managers privately observe information which is informative both about their own ability and about the value of projects. We show that there exist contracts based solely on actual returns which can implement the first-best investment decision and which entail no excess compensation to the managers. However, these contracts are unstable in competitive spot labor markets because of adverse selection. We demonstrate that the adverse selection problem can be remedied with a contract which involves precommitment of performance level by managers.

Incentives for Information Production and Optimal Job Assignment with Human Capital Considerations

In this paper, the authors examine the problem of inducing a manager to acquire information that is useful in determining his optimal job assignment but which might also adversel y affect his market value. The authors show that spot contracts are optimal and generate the first-best effort level when the manager is risk-neutral. When the manager is risk-averse, the optimal contract consists either of a partial insurance contract against downward revisions in compensation or a competitive spot contract, depending upon the nature of prior information. Copyright 1993 by The London School of Economics and Political Science.

REGULATION OF PRODUCT-SAFETY CHARACTERISTICS UNDER IMPERFECT OBSERVABILITY

In this paper, we consider the problem of setting minimum safety standards for observable safety characteristics and the proper amount of effort in the production of safety for a product which has some unobservable safety attributes. We formulate a second-best optimum for a regulator, examine the interplay between safety effort and a minimum safety standard, and study how the internalization of excess costs or benefits by a self interested regulator affects the minimum safety standard and the safety effort level. Finally, we present two examples using a utility function which is widely used in the law and economics literature.

Welfare and Product Testing by a Regulated Monopolist

This paper studies a monopoly firm with the ability to conduct costly pre-market testing of its product in order to predict how safe this product is to consume. While there are private incentives to test, the amount of testing effort supplied by a monopolist need not be optimal. In a model which allows for an imperfect system of liability, we characterize and compare the allocations of testing effort and output at the full social optimum, the pure monopoly solution, and the second-best regulated optimum wherein the regulator chooses testing effort and the monopolist chooses output and price.