We examine optimal dynamic incentive contracts when adverse selection and moral hazard problems are present. We find that early success is optimally penalized in the sense that the agent who succeeds early subsequently faces a lower-powered incentive contract. Penalizing success in this manner...

We construct a model of long-term bilateral competition between the supplier of an exhaustible resource and a consuming country capable of producing a perfect substitute for the resource. The technology for producing the substitute is known, and the strategy of the consuming country is to choose...

From experience, regulated monopolists learn to employ cost-reducing innovations. We characterize the optimal regulation of an innovating monopolist with unknown costs. Regulatory policy is designed to minimize current costs of service while encouraging development of cost-saving innovations. We...

We construct a simple model of the regulatory process in which a monopoly firm has private information about its capabilities and its cost-reducing activities. The optimal regulatory policy offers the firm a choice between two regulatory regimes, one of which resembles price-cap regulation. The...

Owners of property and assets frequently delegate decisions about operating and maintaining their property to managers who are better informed about local market conditions. We analyze how owners optimally contract with managers who vary in their expertise at prescribing service. We show that...

We analyze a procurement problem in which the quality of the delivered product can be observed perfectly by the buyer and supplier, but may not be verifiable, i.e., may not be observable to any third party. We present a set of plausible conditions under which the equilibrium welfare of both the...

We analyze the optimal design of capital structure in agency relationships. When a risk-averse principal controls the agent's capital structure, she awards a larger equity stake to outsiders the smaller the agent's productivity. When she controls both the timing and the terms of the agent's...

Constrained joint-profit-maximizing retail contracts are derived when the dealer is privately informed about demand conditions before contracting with the manufacturer. Demand is increased by dealer promotion, which is unobservable by the manufacturer. Consequently, the manufacturer does not...

We consider the design of regulatory policy when the regulator is imperfectly informed about both the firm's cost function and the demand function it faces. To some extent the optimal policy here is the natural "combination" of the optimal policies when there is uncertainty only about either...

The systematic cost overruns occurring in large-scale, long-term projects are rationalized as the outcome of the bilateral relationship between the sponsor and contractor in which neither party can credibly commit himself to a course of action over time. We model this long-term relationship as a...