This article characterizes the optimal procurement contract for a monopsonistic purchaser who contracts with a risk-averse supplier with private information about his costs and who contributes an unobservable effort. The costs incurred by the supplier may be uncertain, and the purchaser has...

We consider the incentives for oligopolistic manufacturers to adopt exclusive dealing. Manufacturers producing differentiated brands can choose to distribute through exclusive retail dealerships or nonexclusive dealerships. With nonexclusive dealing, manufacturers face an interbrand externality...

The article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator. By auditing at a cost, however, the regulator is assumed to be able to observe the realized cost of the firm. If the regulator "finds" that the firm had misrepresented its...

Empirical evidence suggests that there are substantial and persistent differences in the sizes of firms in most industries. We propose a dynamic model of capacity accumulation that is consistent with the observed facts. The model highlights the mode of product market competition and the extent...

We examine the investment decisions of regulated firms in a sequential-equilibrium model under asymmetric information. The regulator is unable to commit to a pricing policy, unlike mechanism-design models, but sets rates after observing the firm's investment. The information conveyed by the...

Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk, and variable costs, leading to distorted pricing decisions. This article investigates the extent to which market forces and learning eventually eliminate these...

Large sunk costs and incomplete regulatory contracts in public utilities create the possibility of opportunistic behavior by either regulators or regulated firms. We present an empirical methodology for identifying opportunism within a regulated setting, and apply it to the large-scale cost...

Regulators are commonly accused of using 20-20 hindsight to punish a firm for bad outcomes rather than bad decisions; it is often thought that such penalties lead to underinvestment by the firm. I find that this expectation is not borne out when retrospective review is based on the firm's...