We propose a tractable model of asset management in which benchmarking arises endogenously, and analyze its welfare consequences. Fund managers' portfolios are not contractible they incur private costs running them. Incentive contracts for fund managers create pecuniary externality through their effect on prices. Benchmarking inflates prices creates crowded trades. The crowding reduces the effe...

It is well-known that in two-sided matching markets (with contracts) that the existence of a stable outcome can be guaranteed if and only if agents’ preferences are substitutable and contracts are bilateral. We show that, in markets with a continuum of each type of agent, it is only necessary that agents on one side of the market have substitutable preferences in order to guarantee the existenc...

This paper analyzes regulatory design for agroecosystem management on public rangelands. We present an informational and institutional environment where three of the most prominent regulatory instruments on public rangelands – input regulation, cost-sharing/taxation, and performance regulation – can be defined and compared. The paper examines how the optimal regulation is shaped by the informat...

There is a small but growing literature on the theory of the firm based around the “reference point” theory of (incomplete) contracts formulated in Hart and Moore (2008). The reference point approach has been applied to the theory of the firm in Hart (2008, 2009), Hart and Moore (2007) and Hart and Holmström (2010). This introduction reviews the main theoretical aspects of each of these papers....

Holmstrom (1982) argues that a principal is required to restrain moral hazard in a team: wasting output in a certain state is required to enforce efficient effort, and the principal is a commitment device for such enforcement. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (1984) to show that competitive contracts can exploit the futures...

Commitment to Self-Rewards Self-administered rewards are ubiquitous. They serve as incentives for personal accomplishments and are widely recommended as tools for overcoming self-control problems. However, it seems puzzling why self-rewards can work: the prospect of a reward has a motivating force only if the threat of self-denial of the reward after low performance is credible. We explain how ...

In this paper we investigate sorting patterns among chicken contract producers. We show that the sub-game perfect Nash equilibrium of this contracting game reveals a positive sorting where higher ability producers sort themselves into contracts to grow larger chickens and lower ability types sort themselves into contracts to grow smaller birds. We also show that eliciting this type of sorting b...

We propose a duality approach to solving contracting models with either one-sided or two-sided limited commitment in continuous time. We establish weak and strong duality theorems and provide a dynamic programming characterization of the dual problem. The dual problem gives a linear Hamilton-Jacobi-Bellman equation with a known state space subject to free-boundary conditions, making analysis mu...

We investigate a competitive labor market with team production. Workers differ in their motivation to exert team effort, and types are private information. We show that there can exist a separating equilibrium in which workers self-select into different firms and firms employing cooperative workers make strictly positive profits. Profit differences across firms persist because cooperation stric...

In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from defendant, and the parties often negotiate settlement to avoid costly trial. Liability insurance creates bargaining leverage for defendant in this negotiation. We study characteristics of monopoly equilibrium contracts settings where effect is substantial source value insurance. Our results show that under ...