This article introduces a market for the services of agents into a principal-agent model. The principal and the potential agents are risk neutral. The contract trades off adverse selection against moral hazard. In a broad range of circumstances the optimal contract is linear in the outcome. In...

This article provides a set of conditions under which the R&D undertaken in a market economy is invariant to the number (or size distribution) of firms and the market's allocation is efficient (i.e., given the aggregate expenditure, the market chooses socially optimal projects). As in several...

The common use of the profits-sales ratio as a measure of the Lerner index of monopoly power is flawed, even with the assumption of constant returns, because of problems connected with the valuation of capital. The size of the error is related to the cost of capital, the growth rate of the firm,...

A potential shortcoming of game-theoretic models in industrial organization is their failure to consider consumers as players. We introduce a customer coalition --- a cooperative -- as a potential entrant and compare the cooperative entry threat with that posed by the usual for-profit entrant....

This article examines the strategic pricing of duopolists in anticipation of a takeover of one by the other. In equilibrium the acquiring firm may expand its output to signal that it is a low-cost rival and thereby improve the takeover terms. If the merged form will face potential entry, a...

Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can...

Do firms with separate owners and managers maximize profits? We address this question for an oligopoly where managers compete in quantities or prices, as in the Cournot or Bertrand models, and owners choose their managers' incentives. We find that there is a strategic aspect in the problem of...

Recent work has investigated the effects of asymmetric information between an incumbent firm and a potential entrant. This study extends the analysis to allow the initial market structure to be a noncooperative oligopoly. We show that there is a Bayesian Nash equilibrium in which the incumbent...

Book review

Airline deregulation has brought a wave of airline mergers, approved by the Departments of Transportation (DOT). Where markets are truly contestable, approving mergers makes sense. Where entry is difficult, however, detailed analysis is required. United Airlines' acquisition of Pan American's...