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Über dieses Buch

Modern institutional economics witnesses a merging of formal and informal strands of theorizing. This development has offered new and vigorous perspectives which avoid both arbitrariness and theoretical sterility. The essays on contract theory gathered here exemplify this development. They propone new results on central issues in contractual theorizing. The theory of the firm in its variegated aspects forms, naturally, the core of the present set of contributions. Issues of ownership, integration, delegation, and finan­ ce are analyzed. Some contributions use the theoretical approach of contract theory to explore other issues, like medical care, public good problems, the economics of crime, environmental economics, and international trade. The contributors are leading young economists. They have participated in one or se­ veral classes of the 'International Summer School on the New Institutional Economics' which has been organized by Rudolf Richter in the years 1988 through 1994 and is now continued by Urs Schweizer. The theoretical style of these contributions has been influ­ enced by this experience. This collection of essays is intended to express the thanks of the contributors to Rudolf Richter. His initiatives for scholarly instruction and for inter­ national exchange of ideas have helped to create and to diffuse the understanding of and the engagement for the new institutional economics in Europe.

Inhaltsverzeichnis

Frontmatter

Debt as an Option to Own in the Theory of Ownership Rights

Abstract
In a seminal paper Grossman and Hart (1986) developed a theory of the optimal allocation of ownership rights based on incomplete contracts. In their model the only contracts feasible prior to investment decisions allocate ownership rights over physical assets. We investigate the role of a collateralized debt contract, which assigns ownership rights on an asset conditional on the repayment of the debt, in this setting. By allowing implicit conditioning on investments such a contract yields an efficiency improvement over the contracts considered by Grossman and Hart. In particular, if only one party has to invest an optimally designed debt contract implements the first best. Furthermore, the debt will be repayed in equilibrium.
Our work departs from most analyses of debt contracts by emphasizing that debt contracts have an incentive effect on the creditor’s investment decision. The key effect is that the creditor’s relationship-specific investment affects the value of the debtor’s ownership right and thus whether or not he defaults on his debt.
Georg Nöldeke, Klaus M. Schmidt

Asymmetric Information and the Horizontal Integration of Firms

Abstract
In the past, the determinants of the costs of vertical integration have been widely discussed. In contrast, the question of what determines the costs of horizontal integration has been somewhat neglected. It seems to be especially interesting to investigate why products of different qualities are often offered by different firms.
R. Wagner

Short-Termism and the Market for Corporate Control

Abstract
This paper analyzes how the threat of a hostile takeover affects managerial incentives to undertake firm-specific long-run and short-run investments. In course of a takeover a raider appropriates the rents enjoyed by the incumbent management. While this always improves ex-post efficiency, it may have a negative impact on the manager’s incentives to invest. It is shown that a manager exposed to takeover threats reduces his long-term investments but increases his effort to invest in the short-run. The total effect, however, is negative. This explains the phenomenon of inefficient short-run profit-boosting for which Anglo-American managers are often blamed. In the model, short-run profit-boosting is not a takeover defense but rather a strategy of the manager to appropriate a higher share of the returns of his investments.
Monika Schnitzer

The Influence of Transaction Costs in Labor Markets on the Organization of Industry

A Comparative Analysis of Japanese Industrial Organization
Abstract
Japanese industrial organization displays striking differences when compared to the organization of industries in other developed economies. On average, firms in Japanese manufacturing industries are much smaller when measured by number of employees. They are much less vertically integrated However, the business relations between vertically specialized firms are more ‘integrated’ than the market-relations which are predominant in other industrialized countries. Finally, there are marked differences in wage and productivity levels between large, medium-sized and small firms.
F. Waldenberger

Information Rent and Technology Choice in a Regulated Firm

Abstract
Regulated firms are not necessarily willing to invest in cost minimizing technologies, but evaluate different technologies according to their impact on the information rent. In a two-type adverse selection model three kinds of investments are considered: investments that increase the probability of having low costs; investments that reduce the cost of low-cost types; and investments that reduce the cost of high-cost types. If the investment costs are negligible and the regulator can commit to regulatory mechanisms before the firm invests, the firm will pick the first-best (cost minimizing) technology. This will also be the outcome without regulatory commitment as long as the investments are unobservable. If observable investments are sunk before the regulatory scheme is set up, the firm has generally weak incentives to invest, as well as distorted incentives regarding what type of investments to undertake.
Steinar Vagstad

Constitutional Contracting and Corporate Constitution

Abstract
Constitutional contracting theory has not yet been applied to problems of corporate constitutions. This is even more amazing considering the fact, that the name corporate constitution implies some parallels between corporate and state constitutions, which suggest that a theory that offers insights into state constitutions might also help understanding corporate constitutions. This paper provides an outline of how ideas on constitutional contracting as developed by the “Virginia School” might be integrated into a contractarian approach to understand the constitution of firms. Thus, this paper has two objectives: first, a synthesis of two different contractual theories and, secondly, an application of the integrated approach to corporate constitutions in order to explain what exactly corporate constitutions are and how they function.
Birgitta Wolff

Collusion and Budget Distortions in Hierarchical Organizations

Abstract
We reconsider Tirole’s (1986) framework of a three-tier principal/agent problem, in which he has argued that an additional incentive problem is caused by the possibility of collusion between the agent and the middle-level supervisor. We extend this basic model to allow for a variable size of the project to be carried out, and we assume that the supervisor has an interest in this size, thus incorporating an idea of the public-choice literature into a contract-theoretic analysis.
It is shown that for incentive purposes, all variables of the optimal contract must be adjusted to reflect the supervisor’s concern for the budget, even though — in contrast to the public choice literature — he has no direct say over these variables. We conclude that in an asymmetric-information setting, an external effect on utility should be internalized through the optimal incentive contract.
Joachim H. Wessels

Long-Term Franchise Contracts: A Closer Look at the Hold-Up Problem

Abstract
This paper considers the hold-up problem in franchise contracts. Ex ante the franchisee has to invest into specific equipment. Ex post the relationship to the franchisor is governed by asymmetric information about a local demand parameter. A typical result is a combination of underinvestment by the franchisee and distortions of the short-run allocation. The paper investigates the robustness of this result with respect to different model specifications. It is shown that the case of unobservable investment and unlimited franchisee-liability yields a first-best solution whereas all other cases yield underinvestment.
Ulf Schiller

Capital Structure, the Risk Incentive Problem, and Repeated Investment Opportunities

Abstract
The risk incentive problem is well known in the analysis of debt financing. Capital costs can be reduced by a credible commitment to select the efficient, less risky project. Here, in a two-period model it is shown that under certain circumstances merely revealing future investment opportunities is a sufficent commitment. Where in a single-period context the risky project is selected, in the two-period model the owner-manager chooses the less risky project in the first period in order to increase the probability for an amount of equity sufficient to commit to the less risky project in the second period, as well. Thus, for firms with ongoing operations commitments are much easier than for entrepreneurs with a one shot project.
Werner Neus

Financial Contracting with Adverse Selection and Moral Hazard

Abstract
This paper studies the problem of a bank which has to choose a contract offer to an entrepreneur in order to finance a risky investment project. The project outcome depends on the quality of the proposed project and the level of effort that the entrepreneur expends. Both quality and effort are not observable to the bank. Applying the revelation principle, the optimal contract is found by studying mechanisms which induce truthful revelation of the entrepreneur’s information. The optimal contract trades off gains in expected outcome from inducing higher effort against the increasing costs of truthful revelation. It is shown that a combination of debt and equity contracts solves the contracting problem and maximizes the bank’s profit. The bank proposes a menu of different combinations of debt and external equity financing, from which the entrepreneur can choose one.
Mark Wahrenburg

On the Rationality of Kidnaps, Blackguards, and Hostages

Abstract
In recent years the problem of terrorism has been addressed within a game-theoretic framework. In particular Lapan and Sandler [1988] and Lee [1988] analyze optimal governmental antiterrorist policies confronting politically motivated terroristic acts like e.g. skyjacking. A distinguishing feature of those analyses is that the perception of success of a terroristic attack (e.g., anticipated concessions of the government) is not assumed to be the only reason why those attacks occur in the first place. According to this literature benefits derived from publicity or martyrdom going along with terroristic action could explain terrorist activity, no matter what reactions government might take. In particular a precommitment not to concede is not ueccessarily a cure-all policy to prevent terrorism.
Bettina Mohr, Udo Schmidt-Mohr

Information Problems in the Market for Medical Services

Abstract
In Germany outpatient medical treatment is predominantly carried out by self-employed physicians. The service offered by physicians is a complex good whose quality cannot be controlled by patients prior to purchase. The underlying problem of asymmetric information resp. protecting patients from incompetent and careless physicians has been the rationale of a host of regulatory interventions in this market. These interventions include barriers to entry into the market and severe restrictions regarding the conduct of physicians.
Sabine Richard

Data Envelopment Analysis: A Basis for Incentive Contracting

Abstract
In this article we want to show that the internal structure of service organizations with a department organization can be used to measure the output and to build a controlling system to achieve the changing of behavior of leading employees to more efficiency.
Eva Hoffmann, Frank Hoffmann

Environmental Problems from a Property Rights Perspective

Abstract
Environmental problems are caused by a pollution of environmental media beyond their absorption capacity. From an economic perspective this situation can be characterized as follows: In former times no scarcity of environmental goods existed due to their vast abundance relative to human demands. Industrialization and population growth have led to a growing exploitation, thus creating scarcity. If this new scarcity is not reflected in market prices, inefficient allocation will result. As a remedy to this market failure, governmental regulation may be indicated. Such an environmental policy is the concern of our analysis.
Marita Balks

Efficient Allocation of an Indivisible Good: a Mechanism Design Problem under Uncertainty

Abstract
A simple mechanism is designed to implement the efficient allocation of an indivisible good under uncertainty where no money transfers are to take place in equilibrium. The desired outcome is shown to be the only trembling-hand perfect equilibrium.
Chun-Lei Yang

Risk Sharing Markets and Export Production

Abstract
We consider a competitive risk-averse exporting firm, in a two-period framework, facing exchange rate and interest rate uncertainty. We show that the existence of currency forward markets does not guarantee the separation property between real and financial decisions. However, when international capital markets are accessible then the firm’s export production is independent of its attitude towards risk and the joint distribution of the exchange rate and the domestic interest rate.
Udo Broll

Slot Allocation in the United States A Transaction Cost Economics Analysis

Abstract
This paper analyses allocation of slots in the airline industry with the tools of Transaction Cost Economics. The requirements of the transacting industries are analysed and compared to the mechanisms currently used in the United States. Objective is to understand the contracting arrangements between airline and airport industry in the United States.
Sabine J. Langner
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