This article develops a model with endogenously coarse rules. A principal hires an agent to take an action. The principal knows the optimal state-contingent action, but cannot communicate it perfectly due to communication constraints. The principal can use previously realized states as examples to define rules of varying breadth. We analyze how rules are chosen under several assumptions about how rules can be amended. We explore the inefficiencies that arise and how they depend on the ability to refine rules, the principal’s time horizon and patience, and other factors. Our model exhibits path dependence in that the efficacy of rule development depends on the sequence of realizations of the state. We interpret this as providing a foundation for persistent performance differences between similar organizations and explore the role of different delegation structures in ameliorating the effects of bounded communication. (JEL D23, K40, D83)
{"title":"A Theory of Rule Development","authors":"Glenn Ellison, Richard Holden","doi":"10.1093/JLEO/EWT016","DOIUrl":"https://doi.org/10.1093/JLEO/EWT016","url":null,"abstract":"This article develops a model with endogenously coarse rules. A principal hires an agent to take an action. The principal knows the optimal state-contingent action, but cannot communicate it perfectly due to communication constraints. The principal can use previously realized states as examples to define rules of varying breadth. We analyze how rules are chosen under several assumptions about how rules can be amended. We explore the inefficiencies that arise and how they depend on the ability to refine rules, the principal’s time horizon and patience, and other factors. Our model exhibits path dependence in that the efficacy of rule development depends on the sequence of realizations of the state. We interpret this as providing a foundation for persistent performance differences between similar organizations and explore the role of different delegation structures in ameliorating the effects of bounded communication. (JEL D23, K40, D83)","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"30 1","pages":"649-682"},"PeriodicalIF":1.1,"publicationDate":"2014-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75873792","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. Since implicit contracts are unobservable, we adopt a narrative approach to demonstrate that the Coca-Cola Company left a written evidence of the implicit contract with its customers—a very explicit form of an implicit contract. The implicit contract promised a 6.5oz Coca-Cola of a constant quality, the "secret formula," at a constant price, 5¢. We show that Coca-Cola attributes and market structure made it a suitable candidate for an implicit contract. Focusing on the observable implications of such an implicit contract, we offer evidence of the Company both acknowledging and acting on this implicit contract, which was valued by consumers. During a period of 74 years, we find evidence of only a single case of true quality change. We demonstrate that the company perceived itself as vulnerable to consumer backlash by reneging on the pledge, and conclude that the perceived costs of breaking the implicit contract were large. (JEL E12, E31, K00, K12, K22, K23, L14, L16, L66, M21, M31, N80, A14)
{"title":"Explicit Evidence of an Implicit Contract","authors":"A. Young, Daniel Levy","doi":"10.1093/jleo/ewt013","DOIUrl":"https://doi.org/10.1093/jleo/ewt013","url":null,"abstract":"We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. Since implicit contracts are unobservable, we adopt a narrative approach to demonstrate that the Coca-Cola Company left a written evidence of the implicit contract with its customers—a very explicit form of an implicit contract. The implicit contract promised a 6.5oz Coca-Cola of a constant quality, the \"secret formula,\" at a constant price, 5¢. We show that Coca-Cola attributes and market structure made it a suitable candidate for an implicit contract. Focusing on the observable implications of such an implicit contract, we offer evidence of the Company both acknowledging and acting on this implicit contract, which was valued by consumers. During a period of 74 years, we find evidence of only a single case of true quality change. We demonstrate that the company perceived itself as vulnerable to consumer backlash by reneging on the pledge, and conclude that the perceived costs of breaking the implicit contract were large. (JEL E12, E31, K00, K12, K22, K23, L14, L16, L66, M21, M31, N80, A14)","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"55 1","pages":"804-832"},"PeriodicalIF":1.1,"publicationDate":"2014-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87160288","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The price reactions to corrective disclosures often serve as a benchmark for settlements in securities class action lawsuits. When the firm bears litigation costs, this benchmark creates a feedback effect that exacerbates the price reaction to news that contradicts managers’ earlier reports. Litigation insurance provides value in this setting by reducing the need for investors to price the effects of anticipated litigation. Insurance also affects how changes in the litigation environment impact the firm, with some changes having opposite effects on the frequency of lawsuits against uninsured and insured firms. The pricing behavior of rational investors eliminates the valuation impact of the portion of settlements paid to the investors, similar to dividends. The valuation impact of litigation arises from transaction costs, such as attorney fees, which the firm can mitigate by constraining misreporting and by purchasing insurance. (JEL G14, G30, K22, M41).
{"title":"The Pricing Effects of Securities Class Action Lawsuits and Litigation Insurance","authors":"Judson Caskey","doi":"10.1093/JLEO/EWS048","DOIUrl":"https://doi.org/10.1093/JLEO/EWS048","url":null,"abstract":"The price reactions to corrective disclosures often serve as a benchmark for settlements in securities class action lawsuits. When the firm bears litigation costs, this benchmark creates a feedback effect that exacerbates the price reaction to news that contradicts managers’ earlier reports. Litigation insurance provides value in this setting by reducing the need for investors to price the effects of anticipated litigation. Insurance also affects how changes in the litigation environment impact the firm, with some changes having opposite effects on the frequency of lawsuits against uninsured and insured firms. The pricing behavior of rational investors eliminates the valuation impact of the portion of settlements paid to the investors, similar to dividends. The valuation impact of litigation arises from transaction costs, such as attorney fees, which the firm can mitigate by constraining misreporting and by purchasing insurance. (JEL G14, G30, K22, M41).","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"24 1","pages":"493-532"},"PeriodicalIF":1.1,"publicationDate":"2014-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78910954","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Daniele Nosenzo, T. Offerman, Martin Sefton, A. V. D. Veen
In this article we examine the effectiveness of bonuses and fines in an "inspection game," where costly inspection allows an authority to detect whether or not an individual complies with some standard of behavior. Standard game theoretic analysis predicts that in the inspection game non-compliant behavior is deterred by fines targeted at non-compliant individuals, but encouraged by bonuses awarded to compliant individuals. In an experiment we find that fines are effective in deterring non-compliance. However, in agreement with recent behavioral theories, we find that the effect of bonuses on compliance is much weaker than predicted. (JEL C72, C92, K42).
{"title":"Encouraging compliance: bonuses versus fines in inspection games","authors":"Daniele Nosenzo, T. Offerman, Martin Sefton, A. V. D. Veen","doi":"10.1093/JLEO/EWT001","DOIUrl":"https://doi.org/10.1093/JLEO/EWT001","url":null,"abstract":"In this article we examine the effectiveness of bonuses and fines in an \"inspection game,\" where costly inspection allows an authority to detect whether or not an individual complies with some standard of behavior. Standard game theoretic analysis predicts that in the inspection game non-compliant behavior is deterred by fines targeted at non-compliant individuals, but encouraged by bonuses awarded to compliant individuals. In an experiment we find that fines are effective in deterring non-compliance. However, in agreement with recent behavioral theories, we find that the effect of bonuses on compliance is much weaker than predicted. (JEL C72, C92, K42).","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"59 1","pages":"623-648"},"PeriodicalIF":1.1,"publicationDate":"2014-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77206942","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A vertically integrated firm, having acquired the intellectual property (IP) through innovation to become an input monopolist, can extract surplus by supplying efficient downstream competitors. That the monopolist would refuse to do so is puzzling and has led to numerous debates in antitrust. In this paper, I clarify the economic logic of refusal to deal, and identify conditions under which prohibiting such conduct would raise or lower consumer and social welfare. I further show how IP protection (as determined by IP laws) and restrictions on IP holders' conduct (as determined by antitrust laws) may interact to affect innovation incentive and post-innovation market performance.
{"title":"Refusal to Deal, Intellectual Property Rights, and Antitrust","authors":"Yongmin Chen","doi":"10.1093/JLEO/EWT004","DOIUrl":"https://doi.org/10.1093/JLEO/EWT004","url":null,"abstract":"A vertically integrated firm, having acquired the intellectual property (IP) through innovation to become an input monopolist, can extract surplus by supplying efficient downstream competitors. That the monopolist would refuse to do so is puzzling and has led to numerous debates in antitrust. In this paper, I clarify the economic logic of refusal to deal, and identify conditions under which prohibiting such conduct would raise or lower consumer and social welfare. I further show how IP protection (as determined by IP laws) and restrictions on IP holders' conduct (as determined by antitrust laws) may interact to affect innovation incentive and post-innovation market performance.","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"13 1","pages":"533-557"},"PeriodicalIF":1.1,"publicationDate":"2014-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87829971","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Zeynep K. Hansen, Hideo Owan, Jie Pan, S. Sugawara
In this article, we empirically analyze the effect of team characteristics on a team’s choice of group contract type (its governance structure) and examine the combined impact of team characteristics and the group contract choice on group and individual performance in a classroom setting. We utilize endogenous dummy variable models in both group-level and individual-level analyses due to the expected endogeneity of the contract choice. The estimation results confirm a statistically significant positive effect of a governance structure, democratic contract that includes a mechanism to punish free-riders on both group and individual performance. We also estimate switching regression models to account for the possible heterogeneous treatment effects but do not find any significant difference between the treated and the nontreated in the effect of the democratic contract option implying that the contract choice is not necessarily motivated by its performance-enhancing effect. (JEL D70, D86, I23)
{"title":"The Impact of Group Contract and Governance Structure on Performance—Evidence from College Classrooms","authors":"Zeynep K. Hansen, Hideo Owan, Jie Pan, S. Sugawara","doi":"10.1093/JLEO/EWT007","DOIUrl":"https://doi.org/10.1093/JLEO/EWT007","url":null,"abstract":"In this article, we empirically analyze the effect of team characteristics on a team’s choice of group contract type (its governance structure) and examine the combined impact of team characteristics and the group contract choice on group and individual performance in a classroom setting. We utilize endogenous dummy variable models in both group-level and individual-level analyses due to the expected endogeneity of the contract choice. The estimation results confirm a statistically significant positive effect of a governance structure, democratic contract that includes a mechanism to punish free-riders on both group and individual performance. We also estimate switching regression models to account for the possible heterogeneous treatment effects but do not find any significant difference between the treated and the nontreated in the effect of the democratic contract option implying that the contract choice is not necessarily motivated by its performance-enhancing effect. (JEL D70, D86, I23)","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"17 1","pages":"463-492"},"PeriodicalIF":1.1,"publicationDate":"2014-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85506013","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
US Civil War data allow examinations of theories of leadership. By observing both leaders and followers during the war and 40 years after it, I establish that the most able became wartime leaders, that leading by example from the front was an effective strategy in reducing desertion rates, and that leaders later migrated to the larger cities because this is where their superior skills would have had the highest payoffs. I find mixed evidence on whether leaders were created or born. I find that US cities were magnets for the most able and provided training opportunities for both leaders and followers: Men might start in a low social status occupation in a city but then move to a higher status occupation. (JEL M50, N31).
{"title":"Leaders: Privilege, Sacrifice, Opportunity, and Personnel Economics in the American Civil War.","authors":"Dora L Costa","doi":"10.1093/jleo/ewt005","DOIUrl":"https://doi.org/10.1093/jleo/ewt005","url":null,"abstract":"<p><p>US Civil War data allow examinations of theories of leadership. By observing both leaders and followers during the war and 40 years after it, I establish that the most able became wartime leaders, that leading by example from the front was an effective strategy in reducing desertion rates, and that leaders later migrated to the larger cities because this is where their superior skills would have had the highest payoffs. I find mixed evidence on whether leaders were created or born. I find that US cities were magnets for the most able and provided training opportunities for both leaders and followers: Men might start in a low social status occupation in a city but then move to a higher status occupation. (<i>JEL</i> M50, N31).</p>","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"30 3","pages":"437-462"},"PeriodicalIF":1.1,"publicationDate":"2014-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/jleo/ewt005","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"32668745","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This essay in celebration of Grossman and Hart (GH) (Grossman, S., and H. Oliver. 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," 94 Journal of Political Economy 691–719.) discusses how the introduction of incomplete contracts has fundamentally changed economists’ perspectives on corporate finance and control. Before GH, the dominant theory in corporate finance was the tradeoff theory pitting the tax advantages of debt (relative to equity) against bankruptcy costs. After GH, this theory has been enriched by the introduction of control considerations and investor protection issues. This essay assesses how our understanding of corporate finance has been improved as a result and where the incomplete contracts perspective has not yet been successfully applied. (JEL G30, G32, G33).
{"title":"Corporate Finance, Incomplete Contracts, and Corporate Control","authors":"P. Bolton","doi":"10.1093/JLEO/EWT010","DOIUrl":"https://doi.org/10.1093/JLEO/EWT010","url":null,"abstract":"This essay in celebration of Grossman and Hart (GH) (Grossman, S., and H. Oliver. 1986. \"The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,\" 94 Journal of Political Economy 691–719.) discusses how the introduction of incomplete contracts has fundamentally changed economists’ perspectives on corporate finance and control. Before GH, the dominant theory in corporate finance was the tradeoff theory pitting the tax advantages of debt (relative to equity) against bankruptcy costs. After GH, this theory has been enriched by the introduction of control considerations and investor protection issues. This essay assesses how our understanding of corporate finance has been improved as a result and where the incomplete contracts perspective has not yet been successfully applied. (JEL G30, G32, G33).","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"20 1","pages":"64-81"},"PeriodicalIF":1.1,"publicationDate":"2014-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82583729","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the impact of a merger to monopoly in a Cournot duopoly framework where managers make cost-reducing investment or effort decisions prior to choosing output. A well-established result is that, absent agency costs, the merger leads to greater investment and lower production costs. We show that, when agency costs are present, this result may be reversed, with mergers leading instead to lower investment/effort, higher production costs, and lower social welfare. (JEL L40, L13, D21, D82)
{"title":"Mergers, Agency Costs, and Social Welfare","authors":"Jean-Etienne de Bettignies, T. W. Ross","doi":"10.1093/JLEO/EWS047","DOIUrl":"https://doi.org/10.1093/JLEO/EWS047","url":null,"abstract":"We examine the impact of a merger to monopoly in a Cournot duopoly framework where managers make cost-reducing investment or effort decisions prior to choosing output. A well-established result is that, absent agency costs, the merger leads to greater investment and lower production costs. We show that, when agency costs are present, this result may be reversed, with mergers leading instead to lower investment/effort, higher production costs, and lower social welfare. (JEL L40, L13, D21, D82)","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"48 24 1","pages":"401-436"},"PeriodicalIF":1.1,"publicationDate":"2014-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79544472","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We review the formal literature in industrial organization that incorporates organizational models of the firm into the analysis of industry behavior. Although many insights have been generated, this "organizational industrial organization'' is still in its early stages: a complete theory of the relationship between organizational design and traditional IO variables such as price, quantity or welfare has yet to be developed. We show how the insights emanating from the incomplete contract literature can be used to address these questions and others of interest to both IO and organization economists: endogenous heterogeneity; the role of liquidity and surplus division in organizational design; the relationship between product price, industry supply and organizational choices; the response of industry supply to shocks in fundamentals.
{"title":"Contracts, Ownership, and Industrial Organization: Past and Future","authors":"P. Legros, A. Newman","doi":"10.1093/JLEO/EWU002","DOIUrl":"https://doi.org/10.1093/JLEO/EWU002","url":null,"abstract":"We review the formal literature in industrial organization that incorporates organizational models of the firm into the analysis of industry behavior. Although many insights have been generated, this \"organizational industrial organization'' is still in its early stages: a complete theory of the relationship between organizational design and traditional IO variables such as price, quantity or welfare has yet to be developed. We show how the insights emanating from the incomplete contract literature can be used to address these questions and others of interest to both IO and organization economists: endogenous heterogeneity; the role of liquidity and surplus division in organizational design; the relationship between product price, industry supply and organizational choices; the response of industry supply to shocks in fundamentals.","PeriodicalId":47987,"journal":{"name":"Journal of Law Economics & Organization","volume":"58 1","pages":"82-117"},"PeriodicalIF":1.1,"publicationDate":"2014-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80618130","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"社会学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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