I examine the welfare effects associated with having agents write incomplete contracts. When contracting parties are permitted to renegotiate existing contracts, I show that they will be able to design contracts that can implement the set of first-best allocations via renegotiation. Therefore,...

In search models, the property of "recall" has heretofore been treated as exogenous, with a distinction made between models with "no recall" and models with "perfect recall." However, an alternative interpretation is that recall is provided by the firms. Then, "perfect recall" corresponds to...

The optimal innovation, firm size, and growth are derived for a centrally controlled firm in which only the entrepreneur evaluates and restores current projects or evaluates and adopts new projects. Current projects are subject to failure (due to entry) and possible obsolescence, while new...

Book Review

We consider the difficulty of achieving efficient prices and investments when returns on a public utility's projects are vulnerable to opportunistic ratemaking. We model the long-term relationship between a firm and its regulator as a time-dependent supergame in which the regulator sets price...

A stochastic-cost model is used to show that both price-cap and rate-of-return regulation lead to overinvestment in capital and to excessive managerial slack. However, they differ in stochastic versus fixed intervals between hearings and in the use of test-year costs versus average costs since...

Economists presume that competition spurs a firm to be more efficient by forcing it to reduce its agency problems. This article investigates this presumption. It finds that the effects of competition on executive behavior can be decomposed into four effects, each of which is of potentially...

Recent regulatory and technological changes suggest that the local telecommunications market may soon present opportunities for profitable entry. Bypass activity by businesses, combined with the generally higher business rates, suggests that business-service revenues may be subsidizing...

In many imperfect-information models in industrial organization, a firm is induced to take an action that does not maximize its first-period profit because other firms view this action as a signal about the firm's private information. In these models, because the opponent firms can correctly...

This article considers a duopoly in which each firm produces two components of a system. If the components are compatible, consumers may "mix and match" the firms' components. The system components and consumer tastes are assumed to differ with regard to vertical characteristics. In the model,...