ALBERT

Notes: Many long-term contracts incorporate a termination clause. This paper argues that when agents have hidden information, such a clause has a beneficial incentive effect—it enables a principal to screen agents' private information at a lower cost. In a two-period model, this paper characterizes the optimal long-term contract with a termination clause, which specifies that the principal will switch agents in the second period when the first-period cost is high. The analysis delineates how the optimality of this clause depends on the intertemporal cost correlation structure, on the limits to agents' liability, and on the principal's degree of commitment.

Notes: Takeovers give raiders the opportunity of breaking implicit contracts inside the firm. If implicit contracts are adopted by workers and management to reach more efficient outcomes, then the possibility of takeovers may cause a welfare loss. We show that, under some conditions, this argument can go through even if the firm and the workers can write explicit and complete contracts. The crucial assumption is that the profitability of the firm is linked to its financial situation, in the sense that a firm which has a high probability of bankruptcy will face fewer opportunities than a financially solid firm. In this framework, the possibility of takeovers imposes constraints on the set of feasible employment contracts, leading to inefficient outcomes.

Notes: This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts.

Notes: Why is it so common for the seller to provide guarantees that say “Satisfaction guaranteed or your money back” along with the sale of a product? Newly introduced goods and mail-ordered products are usually sold with such guarantees. In honoring money-back guarantees, why is it a common business practice to pay back exactly the purchase price rather than a portion of it? In this paper we study the informational role and optimality of the common business practice of money-back guarantees in a signaling model with quality uncertainty and risk-neutral buyers. We find that money-back guarantees and price together completely reveal a monopoly firm's private information about product quality, Moreover, the private information is revealed at no signaling cost. Furthermore, we show that in terms of the level of monetary compensation specified by a guarantee, price is the profit-maximizing level of monetary payback in case of product failure.

Notes: Manufacturers may intentionally damage a portion of their goods in order to price discriminate. Many instances of this phenomenon are observed. It may result in a Pareto improvement.

Notes: It is generally believed that industries with greater product differentiation have higher rates of return. This paper shows that this effect breaks down in the presence of firm-specific cost shocks. Greater substitutability in products generates two opposing effects: (1) it allows a larger increase in demand when a firm has a favorable cost shock, which more than compensates for the reduction in demand when it has an unfavorable cost shock, and (2) it results in more intense price competition. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation.

Notes: We present a model of industry evolution where the dynamics are driven by a process of endogenous innovations followed by subsequent embodiments in physical capital. Traditionally, the only distinction between R&D and physical investment was one of labeling: the first process accumulates an intangible stock, knowledge, while the second accumulates physical capital. Both stocks affect output in a symmetric fashion. We argue that the story is not that simple, and that there is more to it than differences in the object of accumulation. Our model stresses the causal relationship between past R&D expenditures and current investments in machinery and equipment. This causality pattern, which is supported by the data, also explains the observed higher volatility of physical investment relative to that of R&D expenditures.

Notes: We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.

Notes: This paper develops the hypothesis that firms possess a stock of well-established brands, a stock termed brand capital. The firm with the greatest capital is able to introduce new products in response to new information about consumer tastes before rivals. The results using data from the ready-to-eat cereal industry not only support this hypothesis, but also distinguish brand capital from other sources of firm heterogeneity.

Notes: This paper attacks the problem of developing strategies for a firm to deal with technological change. We show that the product market strategies of the firm—including pricing, product positioning, and rent preemption strategies—can play a role in the efficient search for technology-related information when information search is costly and there are adaptation costs due to the presence of agency. We utilize a dynamic model of spatial competition with uncertain technological innovations in which firms can learn from each other about technological developments. Private information and agency conflicts are shown to increase the effective information search costs of incumbents, who then use interfirm learning to their advantage in equilibrium. This viewpoint also allows us to see the role of mergers and acquisitions, subsidiary formation, and internal R&D labs in a new light. The more general point is that organizational structures and, in particular, the differential distribution of information within the organization impose constraints on the information-search and adaptation strategies of the firm, and the formulation of product-market and R&D strategies serves to relax these constraints.

Notes: We consider the general problem of price discrimination with nonlinear pricing in an oligopoly setting where firms are spatially differentiated. We characterize the nature of optimal pricing schedules, which in turn depends importantly upon the type of private information the customer possesses–either horizontal uncertainty regarding brand preference or vertical uncertainty regarding quality preference. We show that as competition increases, the resulting quality distortions decrease, as well as price and quality dispersions. Additionally, we indicate conditions under which price discrimination may raise social welfare by increasing consumer surplus through encouraging greater entry.

Notes: We model an internal labor market in which employee behavior and compensation are affected by the firm's financial position and the threat of hostile takeover or other exercise of shareholder “voice.” We show how good past performance can result in excessively generous promotion and pay decisions. While the threat of shareholder activism will remove this “slack,” activists optimally face a positive cost barrier, which in turn varies across firms. The cost barrier is higher when cooperation or “helping” between employees is more important, and is lower when employees receive efficiency wages due to an inability to “pay” for their jobs. Since the importance of helping is associated with pay compression and “flat” pay ladders, such firms should also exhibit a greater degree of management entrenchment.

Notes: The literature on the incentives for R & D cooperation with spillovers typically deals only with the factors affecting cooperative profits. This paper focuses on the incentives to cheat and the stability of such cooperative agreements in a repeated game framework. It is shown that the stability of cooperation is influenced by the nature and magnitude of spillovers, relative to the nature and degree of product market competition. While cooperative profits are higher with large positive (exogenous, unintended) know-how spillovers, such as in fundamental research, our anslysis shows that it may be easier to sustain cooperation in areas with lower spillovers, such as applied research, because of the smaller incenfives to cheat on the initial agreement, at least when firms produce substitutes. Alternatively, the possibility of technology sharing (i.e., intended or endogenous spillovers), besides R&D coordination, not only increases cooperative profits but also reduces the incentives to defect from a cooperative equilibrium.

Notes: In a moral hazard setting, we model the fact that the agent may get private signals about the final outcome of his effort before the public realization of this outcome. Actions affect both the distribution of the outcome and the quality of the agent's private information. We compare simple contracts, based on output only, with revelation contracts, based on output and messages about signals. Revelation contracts give the agent some discretionary power during the course of the relationship; they are optimal if and only if lowering effort does not increase the quality of private information in the sense of Blackwell (1953). In the context of managerial compensation schemes, the revelation contracts we analyze can be viewed as allowing the agent to exercise an option on the final profits before the realization of these profits. The theory thus provides an alternative justification of the widespread use of stock options in managerial compensation schemes, as opposed to compensation schemes that rely only on salary, bonus, and (restricted) stock plans.

Notes: This paper analyzes the strategic incentive of oligopolists to create autonomous rival divisions when products are differentiated. We consider a two-stage game where firms choose the number of autonomous divisions in the first stage and all the divisions engage in Cournot competition in the second. It is shown that product differentiation ensures the existence of an interior subgame perfect Nash equilibrium (SPNE), and the equilibrium number of divisions increases with the degree of substitution among products and the number of firms. Further, if divisions are allowed to divide further, they always will, which leads to total rent dissipation. Thus, parent firms have incentives to unilaterally restrict their divisions from further dividing. In the free-entry equilibrium, it is found that the possibility of setting up autonomous divisions is a natural barrier to entry. Incumbents may persistently earn abnormally high profits. In the cases where product differentiation is difficult, the only pure-strategy free-entry SPNE is the monopoly outcome even if the entry cost is relatively low.

Notes: It is common practice for firms to pool their expertise by forming partnerships such as joint ventures and strategic alliances. A central organization problem in such partnerships is that managers may behave noncooperatively in order to advance the interests of their parent firms. We ask whether contracts can be designed so that managers will maximize total profits. We characterize first best contracts for a variety of environments and show that efficiency imposes some restrictions on the ownership shares. In addition, we evaluate the performance of two termination contracts that are widely used in practice: the shotgun rule and price competition. We find that although these contracts do not achieve full efficiency, they both perform well. We provide insight into when each rule is more efficient.

Notes: This paper presents a simple model to analyze the effect of geographically localized spillovers on the internationalization decision of firms. It is shown that, once spatially bounded externalities are taken into account, the standard predictions on the nature and direction of foreign direct investment (FDI) flows may be reversed. We highlight three effects. First, an FDI-en-hancing effect: the presence of spillovers increases the profitability of the FDI strategy when the competitive gap between firms is narrow. Second, a dissipation effect: firms may refrain from investing abroad for fear of diffusion of their firm-specific assets. Third, a sourcing effect: the presence of spillovers may induce a firm to invest abroad, even in the absence of exporting costs.

Notes: Reimbursement systems for health-care providers are very complex, like the production systems that they regulate. This complexity has led to some important misperceptions about the incentive consequences of major reimbursement reforms. One example is the prospective payment system (PPS), developed to provide “high-powered” incentives through fixed prices for hospital admissions for the US elderly. In fact, various features of the DRG system allow reimbursement to vary with actual treatment decisions during an admission, and so are not prospective. This paper develops a general method for measuring actual reimbursement incentives in complex regulated price systems. The method uses regression techniques with variance decompositions to quantify the effects of particular features of the payment system on prospective and retrospective cost sharing, as well as overall generosity of payments. I apply this method to microdata on 20 percent of Medicare hospital admissions in 1987 and 1990 to summarize the incentives created by PPS in practice, and how the incentives are evolving over time. I show that PPS involves limited and decreasing cost sharing with hospitals, most of which is not prospective. The reimbursement incentives vary substantially across diagnoses, demographic groups, and types of intensive treatments, possibly with important implications for hospital behavior and medical expenditure growth. The techniques developed here can be used to analyze a broad range of provider reimbursement mechanisms.

Notes: In a health insurance market, a large employer or an organized “buyer alliance” is in a position to influence the design of plans offered to its members. We study how the sponsors of buyer alliances manage competition among insurance firms by focusing on their choices of the format of competition, the number of firms allowed to compete, and the quality of care offered by the firms. We find deviations from optimality in all three dimensions. Specifically, we find a tendency toward too many firms and too much quality, and a bias toward a format involving the prescreening of insurance plans by the sponsor.

Notes: This paper explores the conditions under which a monopolist selling a system consisting of a main component and differentiated secondary components can increase profits by allowing competition in the aftermarket for the secondary components. Opening the system in this fashion can increase profits by giving consumers an added incentive to incur the setup cost of purchasing the main component. This paper extends the second-sourcing literature by showing the explicit effects of various parameters of demand on the decision to open the system. The results show that an open system is likely to be more profitable than a closed one when demand for the system is more elastic, when secondary-component variety is more valued, and when the share of the main component in the total system budget of the consumer is high.

Notes: This paper contrasts assignments to punitive tasks and terminations as alternative incentive devices. The basic question we ask here is: does the threat of assigning employees to a punitive task allow one to attain higher effort levels than termination threats? The answer critically depends on whether employers are able or not to commit themselves not to fire. We show that in the no-commitment case the only relevant incentive device is termination threats. In contrast, when employers commit themselves not to fire, by threatening punitive task reassignments there obtain effort levels that are not implementable by termination. The implementation results are then applied to the study of incentive problems arising when investment infirm-specific human capital is unverifiable.

Notes: This paper empirically examines the effect of firm-specific characteristics on the length of time required by the Food and Drug Administration (FDA) to review and approve new-drug applications between 1990 and 1992. The approach treats regulatory decisions as endogenous and explains the variation in regulatory behavior as a function of differences that exist between firms and drugs. Results show that, controlling for drug-specific characteristics, regulators respond to firm-specific characteristics when evaluating new drug applications. For instance, firms that are less diversified and more R&D-inten-sive receive shorter review times for their new-drug applications than more diversified and less R&D-intensive firms. The reason is that most firm characteristics signal information to reviewers about either firm reputation or application quality. This information reduces reviewers' uncertainty about approving a dangerous or ineffective drug and leads to faster review times. The results suggest that regulators respond to the heterogeneities among firms in the pharmaceutical market in systematic ways.

Notes: Analysis of seven wholesale and retail markets for long-distance telephone services since the AT & T divestiture indicates that service provider concentration declined in the later 1980s and then stabilized in the 2990–1993 period. In addition to this stability in market shares, a number of other conditions established since 1990 have been conducive to the development of market sharing rather than significant price competition. The most important of these conditions has been the tarifing process of the Federal Communications Commission by which MCI and Sprint replicate ATGT's price announcements. As market shares stabilized and became more equal, and as regulation formalized the price-setting process, the price-cost margins of the three large carriers increased and became more nearly identical. These results are consistent not with price competition but rather with emerging tacit collusion among AT&T, MCI, and Sprint.

Notes: The Federal Communications Commission held its first auction of radio spectrum at the Nationwide Narrowband PCS Auction in July 1994. The simultaneous multiple-round auction, which lasted five days, was an ascending bid auction in which all licenses were offered simultaneously. This paper describes the auction rules and how bidders prepared for the auction. The full history of bidding is presented. Several questions for auction theory are discussed. In the end, the government collected $617 million for ten licenses. The auction was viewed by all as a huge success an excellent example of bringing economic theory to bear on practical problems of allocating scarce resources.

Notes: This study examines the investment patterns of all large local exchange telephone companies in the United States over time. It identifies how different regulatoy environments have influenced the recent historical pattern of investment in modern infrastructure equipment. It focuses exclusively on the postdivestiture experience of local telephone exchange companies (LECs). It examines the growth of fiber-optic deployment and of complementary equipment associated with the modernization of today's information infrastructure. The study estimates the influence of different regulatory structures on infrastructure deployment by LECs. The study is unique in that if relates individual LEC investment patterns to LEC-specific regulatory, demographic, and economic characteristics. Thus, it isolates the contribution of state regulatory policies from that of other demographic and economic factors in the determination of infrastructure deployment at the state LEC rather than at the corporate level. Its main findings are as follows: First, price regulation (and, in particular, price caps) is a more potent regulatory mechanism than the standard earnings sharing scheme. Second, when associated with an earnings sharing scheme, price regulation is less effective in triggering infrastructure deployment than when it is implemented by itself. These results raise questions about the effectiveness of a popular regulatory instrument-earnings sharing schemes-and highlight the effectiveness of generic price-cap regulation. These results have implications for the design of regulatory policy at both the state and federal levels. In particular, given the importance currently being placed on the development of the information superhighway, regulatory emphasis should be focused more on price regulation than on regulating profits.

Notes: The House and Senate of the United States Congress recently passed legislation that directs the FCC to establish a system for using auctions to allocate the use of radio spectrum for personal communications services. There is a unique and unprecedented set of issues that arise in this context, which are of interest to economists, industry analysts, regulators, and policymakers. We discuss these issues and evaluate their likely impact on the outcome of the spectrum auctions. In addition, we argue that there may be pitfalls in the auction procedure adopted by the FCC, and we discuss possible alternative procedures.

Notes: Royalty payments from a franchisee to a franchisor serve as incentive for the franchisor to provide appropriate levels of quality and brand, name investment. However, since they also distort the service provided by the franchisee, we should expect relatively lower royalty rates in franchises that are primarily service-oriented. Casual examination of royalty rates across product-oriented and service-oriented franchises shows that the opposite is true, with service-type franchises enjoying higher royalty rates. We resolve this apparent puzzle. The basic argument we put forth is that in product-type franchises, a franchisor can charge a wholesale price on goods transferred to the franchisee, thus using an alternative instrument that also serves as an incentive for the franchisor. Moreover, in general, a franchisor will use both wholesale price and royalty to minimize distortions in retail price and service at the retail level. We then test the predictions of our model on different industries and find confirmation for the same.

Notes: When the transportation risk posed by shipments of hazardous chemical and radioactive materials is being assessed, it is necessary to evaluate therisks associated with both vehicle emissions and cargo-related risks. Diesel exhaust and fugitive dust emissions from vehicles transporting hazardous shipments lead to increased air pollution, which increases the risk of latent fatalities in the affected population along the transport route. The estimated risk from these vehicle-related sources can often be as large or larger than the estimated risk associated with the material being transported. In this paper, data from the U.S. Environmental Protection Agency's Motor Vehicle-Related Air Toxics Study are first used to develop latent cancer fatality estimates per kilometer of travel in rural and urban areas forall diesel truck classes. These unit risk factors are based on studies investigating the carcinogenic nature of diesel exhaust. With the same methodology, the current per-kilometer latent fatality risk factor used in transportation risk assessments for heavy diesel trucks in urban areas is revised and the analysis expanded to provide risk factors for rural areas and all diesel truck classes. These latter fatality estimates may include, but are not limited to, cancer fatalities and are based primarily on the most recent epidemiological data available on mortality rates associated with ambient air PM-10 concentrations.

Notes: Risk assessors often use different probability plots as a way to assessthe fit of a particular distribution or model by comparing the plotted points to a straight line and to obtain estimates of the parameters in parametric distributions or models. When empirical data do not fall in a sufficiently straight line on a probability plot, and when no other single parametricdistribution provides an acceptable (graphical) fit to the data, the risk assessor may consider a mixture model with two component distributions. Animated probability plots are a way to visualize the possible behaviors of mixture models with two component distributions. When no single parametric distribution provides an adequate fit to an empirical dataset, animated probability plots can help an analyst pick some plausible mixture models for the data based on their qualitative fit. After using animations during exploratory data analysis, the analyst must then use other statistical tools, including but not limited to: Maximum Likelihood Estimation (MLE) to find the optimal parameters, Goodness of Fit (GoF) tests, and a variety of diagnostic plots to check the adequacy of the fit. Using a specific example with two LogNormal components, we illustrate the use of animated probability plots asa tool for exploring the suitability of a mixture model with two component distributions. Animations work well with other types of probability plots, and they may be extended to analyze mixture models with three or more component distributions.

Notes: For carcinogens, this paper provides a quantitative examination of the roles of potency and weight-of-evidence (WOE) in setting permissible exposure limits (PELs) at the U.S. Occupational Safety and Health Administration (OSHA) and threshold limit values (TLVs) at the private American Conference of Governmental Industrial Hygienists (ACGIH). On normative grounds, both of these factors should influence choices about the acceptable level of exposures. Our major objective is to examine whether and in what ways these factors have been considered by these organizations. A lesser objective is to identify outliers, which might be candidates for further regulatory scrutiny. Our sample (N=48) includes chemicals for which EPA has estimated a unit risk as a measure of carcinogenic potency and for which OSHA or the ACGIH has a PEL or TLV. Different assessments of the strength of the evidence of carcinogenicity were obtained from EPA, ACGIH, and the International Agency for Research on Cancer. We found that potency alone explains 49% of the variation in PELs and 62% of the variation in TLVs. For the ACGIH, WOE plays a much smaller role than potency. TLVs set by the ACGIH since 1989 appear to be stricter than earlier TLVs. We suggest that this change represents evidence that the ACGIH had responded to criticisms leveled at it in the late 1980s for failing to adopt sufficiently protective standards. The models developed here identify 2-nitropropane, ethylene dibromide, and chromium as having OSHA PELs significantly higher than predicted on the basis of potency and WOE.

Notes: Much has been written about the development and application of quantitative methods for estimating under uncertainty the long-term radiological performance of underground disposal of radioactive wastes. Until recently, interest has been focused almost entirely on the technical challenges regardless of the role of the organization responsible for these analyses. Now the dialogue between regulators, the repository developer or operator, and other interested parties in the decision-making process receives increasing attention, especially in view of some current difficulties in obtaining approvals to construct or operate deep facilities for intermediate or high-level wastes. Consequently, it is timely to consider the options for regulators’review and evaluation of safety submissions, at the various stages in the site selection to repository closure process, and to consider, especially, the role for performance assessment (PA) within the programs of a regulator both before and after delivery of such a submission. The origins and broad character of present regulations in the European Union (EU) and in the OECD countries are outlined and some regulatory PA reviewed. The issues raised are discussed, especially in regard to the interpretation of regulations, the dangers from the desire for simplicity in argument, the use of regulatory PA to review and challenge the PA in the safety case, and the effects of the relationship between proponent and regulator. Finally, a very limited analysis of the role of PA in public hearings is outlined and recommendations are made, together with proposals for improving the mechanisms for international collaboration on technical issues of regulatory concern.

Notes: In this paper the problem of high-level nuclear waste disposal is viewed as a five-stage, cascaded decision problem. The first four of these decisions having essentially been made, the work of recent years has been focused on the fifth stage, which concerns specifics of the repository design. The probabilistic performance assessment (PPA) work is viewed as the outcome prediction for this stage, and the site characterization work as the information gathering option. This brief examination of the proposed Yucca Mountain repository through a decision analysis framework resulted in three conclusions: (1) A decision theory approach to the process of selecting and characterizing Yucca Mountain would enhance public understanding of the issues and solutions to high-level waste management; (2) engineered systems are an attractive alternative to offset uncertainties in the containment capability of the natural setting and should receive greater emphasis in the design of the repository; and (3) a strategy of “waste management” should be adopted, as opposed to “waste disposal,” as it allows for incremental confirmation and confidence building of a permanent solution to the high-level waste problem.

Notes: Physiologically-based toxicokinetic (PBTK) models are widely used to quantify whole-body kinetics of various substances. However, since they attempt to reproduce anatomical structures and physiological events, they have ahigh number of parameters. Their identification from kinetic data alone is often impossible, and other information about the parameters is needed to render the model identifiable. The most commonly used approach consists of independently measuring, or taking fom literature sources, some of the parameters, fixing them in the kinetic model, and then performing model identification on a reduced number of less certain parameters. This results in a substantial reduction of the degrees of freedom of the model. In this study, we show that this method results in final estimates of the free parameters whose precision is overestimated. We then compared this approach with an empirical Bayes approach, which takes into account not only the mean value, but also the error associated with the independently determined parameters. Blood and breath 2H8- toluene washout curves, obtained in17 subjects, were analyzed with a previously presented PBTK model suitable for person-specific dosimetry. Model parameters with the greatest effect onpredicted levels were alveolar ventilation rate QPC, fat tissue fraction VFC, blood air partition coefficient Kb, fraction of cardiac output to fat Qa/co and rate of extrahepatic metabolismVmax.p. Differences in the measured and Bayesian-fitted values of QPC, VFc and Kb were significant (p 〈 0.05), andthe precision of the fitted values Vmax.p and Qa/co went from 11 ± 5% to 75 ± 170% (NS) and from 8 ± 2% to 9 ± 2% (p 〈 0.05) respectively. The empirical Bayes approach did not result in less reliable parameter estimates: rather, it pointed out that the precision of parameter estimates can be overly optimistic when other parameters in the model, eitherdirectly measured or taken from literature sources, are treated as known without error. In conclusion, an empirical Bayes approach to parameter estimation resulted in a better model fit, different final parameter estimates, and more realistic parameter precisions.

Notes: The US Department of Transportation was interested in the risks associated with transporting Hydrazine in tanks with and without relief devices. Hydrazine is both highly toxic and flammable, as well as corrosive. Consequently, there was a conflict as to whether a relief device should be used or not. Data were not available on the impact of relief devices on release probabilities or the impact of Hydrazine on the likelihood of fires and explosions. In this paper, a Monte Carlo sensitivity analysis of the unknown parameters was used to assess the risks associated with highway transport of Hydrazine. To help determine whether or not relief devices should be used, fault trees and event trees were used to model the sequences of events that could lead to adverse consequences during transport of Hydrazine. The event probabilities in the event trees were derived as functions of the parameters whose effects were not known. The impacts of these parameters on the riskof toxic exposures, fires, and explosions were analyzed through a Monte Carlo sensitivity analysis and analyzed statistically through an analysis of variance. The analysis allowed the determination of which of the unknown parameters had a significant impact on the risks. It also provided the necessary support to a critical transportation decision even though the values of several key parameters were not known.

Notes: During the modernization of the municipal waste incinerator (MWI, maximum capacity of 180,000 tons per year) of Metropolitan Grenoble (405,000 inhabitants), in France, a risk assessment was conducted, based on four tracerpollutants: two volatile organic compounds (benzene and 1,1,1 trichloroethane) and two heavy metals (nickel and cadmium, measured in particles). A Gaussian plume dispersion model, applied to maximum emissions measured at the MWI stacks, was used to estimate the distribution of these pollutants in the atmosphere throughout the metropolitan area. A random sample telephone survey (570 subjects) gathered data on time-activity patterns, according to demographic characteristics of the population. Life-long exposure was assessed as a time-weighted average of ambient air concentrations. Inhalation alone was considered because, in the Grenoble urban setting, other routes of exposure are not likely. A Monte Carlo simulation was used to describe probability distributions of exposures and risks. The median of the life-long personal exposures distribution to MWI benzene was 3.2 · 10−5μg/m3 (20th and 80th percentiles = 1.5 · 10−5 and 6.5 · 10−5μg/m3), yielding a 2.6 · 10−10 carcinogenic risk (1.2 · 10−10 - 5.4 · 10−10). For nickel, the corresponding life-time exposure and cancer risk were 1.8 ·10−4μg/m3 (0.9 ·10−4 - 3.6 ·10−4μg/m3) and 8.6 · 10−8 (4.3 · 10−8 - 17.3 ·10−8); for cadmium they were respectively 8.3 ·10−6μg/m3 (4.0 ·10−6 - 17.6 ·10−6) and 1.5 · (7.2 · 10−9 - 3.1. · 10−8). Inhalation exposure to cadmium emitted by the MWI represented less than 1% of the WHO Air Quality Guideline (5 ng/m3), while there was a margin of exposure of more than 109 between the NOAEL (150 ppm) and exposure estimates to trichloroethane. Neither dioxins nor mercury, a volatile metal, were measured. This could lessen the attributable life-long risks estimated. The minute (VOCs and cadmium) to moderate (nickel) exposure and risk estimates are in accord with other studies on modern MWIs meeting recent emission regulations, however.

Notes: Methods of quantitative risk assessment for toxic responses that are measured on a continuous scale are not well established. Although risk-assessment procedures that attempt to utilize the quantitative information in such data have been proposed, there is no general agreement that these procedures are appreciably more efficient than common quantal dose-response procedures that operate on dichotomized continuous data. This paper points out an equivalence between the dose-response models of the nonquantal approach of Kodell and West(1)) and a quantal probit procedure, and provides results from a Monte Carlo simulation study to compare coverage probabilities of statistical lower confidence limits on dose corresponding to specified additional risk based on applying the two procedures to continuous data from a dose-response experiment. The nonquantal approach is shown to be superior, in terms of both statistical validity and statistical efficiency.

Notes: This paper discusses a successful public involvement effort that addressed and resolved several highly controversial water management issues involving environmental and flood risks associated with an electrical generation facility in British Columbia. It begins with a discussion of concepts for designing public involvement, summarizing research that indicates why individuals and groups may find it difficult to make complex choices. Reasons for public involvement, and the range of current practices are discussed. Next, four principles for designing group decision process are outlined, emphasizing decision-aiding concepts that include “value-focused thinking” and “adaptive management.” The next sections discuss the Alouette River Stakeholder Committee process in terms of objectives, participation, process, methods for structuring values and creating alternatives, information sources, and results. Discussion and conclusions complete the paper.

Notes: During the 1980s, seismic research suggested that Oregon and the City of Portland had a higher risk of a major earthquake than had previously been assumed. In 1993, the State of Oregon adopted a new version of the Oregon Structural Specialty Code, which changed the designation of western Oregon from seismic zone 2b to seismic zone 3. The City of Portland established a program and a Task Force on Seismic Strengthening of Buildings to recommend actions that would encourage upgrading of city buildings. A survey of adult city residents was conducted in April, 1996 to determine public attitudes and opinions about earthquake risks, management and mitigation of earthquake hazards, priorities for protection by strengthening buildings, evaluations of strategies for informing the public about earthquake risks, and support for specific options the city might take to protect citizens against earthquake events. Social and demographic information on individuals and households was also collected. Respondents provided ratings for a wide range of social and environmental risks, provided information on priorities for strengthening key buildings and infrastructure facilities, and answered hypothetical questions about voting for bond measures to pay for city earthquake mitigation programs. Respondents recognized significant risk from earthquakes and supported programs to protect people, especially vulnerable residents such as children and the sick. There was strong support for protecting emergency response capabilities. There was much less support for using public funds to reduce the risks associated with privately owned buildings. There were also some strong pockets of resistance to publicly funded mitigation programs in response to the hypothetical bond measures.

Notes: From a comprehensive search of the literature, the hormesis phenomenon was found to occur over a wide range of chemicals, taxonomic groups, and endpoints. By use of computer searches and extensive cross-referencing, nearly 3000 potentially relevant articles were identified. Evidence of chemical and radiation hormesis was judged to have occurred in approximately 10oO of these by use of a priori criteria. These criteria included study design features (e.g., number of doses, dose range), dose-response relationship, statistical analysis, and reproducibility of results. Numerous biological endpoints were assessed, with growth responses the most prevalent, followed by metabolic effects, reproductive responses, longevity, and cancer. Hormetic responses were generally observed to be of limited magnitude with an average maximum stimulation of 30 to 60 percent over that of the controls. This maximum usually occurred 4- to 5-fold below the NOAEL for a particular endpoint. The present analysis suggests that hormesis is a reproducible and generalizable biological phenomenon and is a fundamental component of many, if not most, dose-response relationships. The relatively infrequent observation of homesis in the literature is believed to be due primarily to experimental design considerations, especially with respect to the number and range of doses and endpoint selection. Because of regulatory considerations, most toxicologic studies have been carried out at high doses above the low-dose region where the hormesis phenomenon occurs.

Notes: As the use of digital computers for instrumentation and control of safety-critical systems has increased, there has been a growing debate over the issue of whether probabilistic risk assessment techniques can be applied to these systems. This debate has centered on the issue of whether software failures can be modeled probabilistically. This paper describes a “context-based” approach to software risk assessment that explicitly recognizes the fact that the behavior of software is not probabilistic. The source of the perceived uncertainty in its behavior results from both the input to the software as well as the application and environment in which the software is operating. Failures occur as the result of encountering some context for which the software was not properly designed, as opposed to the software simply failing “randomly.” The paper elaborates on the concept of “error-forcing context” as it applies to software. It also illustrates a methodology which utilizes event trees, fault trees, and the Dynamic Flowgraph Methodology (DFM) to identify “error-forcing contexts” for software in the form of fault tree prime implicants.

Notes: Australian state and federal agencies use a broad range of methods for setting conservation priorities for species at risk. Some of these are based on rule sets developed by the International Union for the Conservation ofNature, while others use point scoring protocols to assess threat. All of them ignore uncertainty in the data. In this study, we assessed the conservation status of 29 threatened vascular plants from Tasmania and New South Wales using a variety of methods including point scoring and rule-based approaches. In addition, several methods for dealing with uncertainty in the data were applied to each of the prioritysetting schemes. The results indicatethat the choice of a protocol for setting priorities and the choice of the way in which uncertainty is treated may make important differences to the resulting assessments of risk. The choice among methods needs to be rationalized within the management context in which it is to be applied. These methods are not a substitute for more formal risk assessment.

Notes: This paper describes a multi-stakeholder process designed to assess thepotential health risks associated with adverse air quality in an urban industrial neighborhood. The paper briefly describes the quantitative health risk assessment conducted by scientific experts, with input by a grassroots community group concerned about the impacts of adverse air quality on theirhealth and quality of life. In this case, rather than accept the views of the scientific experts, the community used their powers of perception toadvantage by successfully advocating for a professionally conducted community health survey. This survey was designed to document, systematically and rigorously, the health risk perceptions community members associated with exposure to adverse air quality in their neighborhood. This paper describes theinstitutional and community contexts within which the research is situated as well as the design, administration, analysis, and results of the community health survey administered to 402 households living in an urban industrial neighborhood in Hamilton, Ontario, Canada. These survey results served tolegitimate the community's concerns about air quality and tohelp broaden operational definitions of ‘health.’ In addition, the resultsof both healthrisk assessment exercises served to keep issues of air quality on the localpolitical agenda. Implications of these findings for our understanding of theenvironmental justice process as well as the ability of communitiesto influence environmental health policy are discussed.

Notes: Psychometric data on risk perceptions are often collected using the method developed by Slovic, Fischhoff, and Lichtenstein, where an array of risk issues are evaluated with respect to a number of risk characteristics, such as how dreadful, catastrophic or involuntary exposure to each risk is. The analysis of these data has often been carried out at an aggregate level, where mean scores for all respondents are compared between risk issues. However, this approach may conceal important variation between individuals, and individual analyses have also been performed for single risk issues. This paper presents a new methodological approach using a technique called multilevel modelling for analysing individual and aggregated responses simultaneously, to produce unconditional and unbiased results at both individual and aggregate levels of the data. Two examples are given using previously published data sets on risk perceptions collected by the authors, and results between the traditional and new approaches compared. The discussion focuses on the implications of and possibilities provided by the new methodology.

Notes: The use of uncertainty factors in the standard method for deriving acceptable intake or exposure limits for humans, such as the Reference Dose (RfD), may be viewed as a conservative method of taking various uncertainties into account. As an obvious alternative, the use of uncertainty distributions instead of uncertainty factors is gaining attention. This paper presents a comprehensive discussion of a general framework that quantifies both the uncertainties in the no-adverse-effect level in the animal (using a benchmark-like approach) and the uncertainties in the various extrapolation steps involved (using uncertainty distributions). This approach results in an uncertainty distribution for the no-adverse-effect level in the sensitive human subpopulation, reflecting the overall scientific uncertainty associated with that level. A lower percentile of this distribution may be regarded as an acceptable exposure limit (e.g., RfD) that takes account of the various uncertainties in a nonconservative fashion. The same methodology may also be used as a tool to derive a distribution for possible human health effects at a given exposure level. We argue that in a probabilistic approach the uncertainty in the estimated no-adverse-effect-level in the animal should be explicitly taken into account. Not only is this source of uncertainty too large to be ignored, it also has repercussions for the quantification of the other uncertainty distributions.

Notes: This research explores public judgments about the threat-reducing potential of experts, individual behavior, and government spending. The data are responses of a national sample of 1225 to mail surveys that include measures of several dimensions of public judgments about violent crime, automobile accidents, hazardous chemical waste, air pollution, water pollution, global warming, AIDS, heart disease, and cancer. Beliefs about who can best mitigate threats are specific to classes of threats. In general, there is little faith that experts can do much about violent crime and automobile accidents, moderate faith in their ability to address problems of global warming, and greater expectations for expert solutions to the remaining threats. People judge individual behavior as effective in reducing the threats of violent crime, AIDS, heart disease, and automobile accidents but less so for the remaining threats. Faith in more government spending is highest for AIDS and the other two health items, lowest for the trio of violent crime, automobile accidents, and global warming, and moderate for the remaining threats. For most threats, people are not distributed at the extremes in judging mitigators. Strong attitudinal and demographic cleavages are also lacking, although some interesting relationships occur. This relative lack of sharp cleavages and the generally moderate opinion indicate ample opportunity for public education and risk communication.

Notes: Recreational and subsistence hunters and anglers consume a wide range of species, including birds, mammals, fish and shellfish, some of which represent significant exposure pathways for environmental toxic agents. This study focuses on the Department of Energy's (DOE'S) Savannah River Site (SRS), a former nuclear weapons production facility in South Carolina. The potential risk of contaminant intake from consuming mourning doves (Zenaida macroura), the most popular United States game bird, was examined under various risk scenarios. For all of these scenarios we used the mean tissue concentration of six metals (lead, mercury, cadmium, selenium, chromium, manganese) and radiocesium, in doves collected on and near SRS. We also estimated risk to a child consuming doves that had the maximum contaminant level. We used the cancer slope factor for radiocesium, the Environmental Protection Agencies UptakeBiokinetic model for lead, and published reference doses for the other metals. As a result of our risk assessments we recommend management of water levels in contaminated reservoirs so that lake bed sediments are not exposed to use by gamebirds and other terrestrial wildlife. Particularly, measures should be taken to insure that the hunting public does not have access to such a site. Our data also indicate that doves on popular hunting areas are exposed to excess lead, suggesting that banning lead shot for doves, as has been done for waterfowl, is desirable.

Notes: Exposure duration is an important component in determining long-term dose rates associated with exposure to environmental contaminants. Surveys of exposed populations collect information on individuals' past behaviors, including the durations of a behavior up to the time of the survey. This paper presents an empirical approach for determining the distribution of total durations that is consistent with the distribution past durations obtained from surveys. This approach is appropriate where the rates of beginning and ending a behavior are relatively constant over time. The approach allows the incorporation of information on the distribution of age in a population into the determination of the distribution of durations. The paper also explores the impact of “longevity” bias on survey data. A case study of the application of this approach to two angler populations is also provided. The results of the case study have characteristics similar to the results reported by Israeli and Nelson (Risk Anal. 12, 65-72 (1992)) from their analytical model of residential duration. Specifically, the average period of time for the total duration in the entire population is shorter than the average period of time reported for historical duration in the surveyed individuals.

Notes: Information format can influence the extent to which target audiences understand and respond to risk-related information. This study examined four elements of risk information presentation format. Using printed materials, we examined target audience perceptions about: (a) reading level; (b) use of diagrams vs. text; (c) commanding versus cajoling tone; and (d) use of qualitative vs. quantitative information presented in a risk ladder. We used the risk communication topic of human health concerns related to eating noncommercial Great Lakes fish affected by chemical contaminants. Results from the comparisons of specific communication formats indicated that multiple formats are required to meet the needs of a significant percent of anglers for three of the four format types examined. Advisory text should be reviewed to ensure the reading level is geared to abilities of the target audience. For many audiences, a combination of qualitative and quantitative information, and a combination of diagrams and text may be most effective. For most audiences, a cajoling rather than commanding tone better provides them with the information they need to make a decision about fish consumption. Segmenting audiences regarding information needs and communication formats may help clarify which approaches to take with each audience.

Notes: Using exploratory data analysis, probability plots, scatterplots, and computer animations to rotate and visualize the data, we fit a trivariate Normal distribution to data for the height, the natural logarithm of body weight, and the body fat for 646 men between the ages of 50 and 80 years as reported by the medical staff of the U.S. Veterans Administration's “Normative Aging Study” in Boston, MA. Although these data do not include any children, women, or young men, the measurements represent the best data that we could find through a 4-year search. We believe that these data are well measured and reliable for men in the specified age range and that these data reveal an interesting statistical pattern for use in probabilistic PBPK models.

Notes: Significant research work has been completed in the development of risk-based inservice inspection (ISI) and testing (IST) technology for nuclear power plant applications through the ASME Center For Research and Technology Development. This paper provides technology that has been developed for these engineering applications. The technology includes risk-based ranking methods, beginning with the use of plant probabilistic risk assessment (PRA), for the determination of risk-significant and less risk-significant components for inspection and the determination of similar populations for pumps and valves for inservice testing. Decision analysis methods are outlined for developing ISI and IST programs. This methodology integrates nondestructive examination data, structural reliability/risk assessment results, PRA results, failure data, and expert opinion to evaluate the effectiveness of ISI programs. Similarly, decision analysis uses the output of failure mode and causes analysis in combination with data, expert opinion, and PRA results to evaluate the effectiveness of IST programs. Results of pilot applications of these ASME methods to actual nuclear plant systems and components are summarized. The results of this work are already being used to develop recommended changes in ISI and IST requirements by the ASME Section XI and the ASME Operation and Maintenance Code organizations. A perspective on Code and regulatory adoption is also outlined. Finally, the potential benefits to the nuclear industry in terms of safety, person-rem exposure, and costs are summarized.

Notes: Probabilistic Seismic Hazard Analysis (PSHA) is a methodology that estimates the likelihood that various levels of earthquake-caused ground motions will be exceeded at a given location in a given future time period. Due to large uncertainties in all of the geosciences data and in their modeling, multiple model interpretations are often possible. This leads to disagreements among the experts, which in the past has led to disagreement on the selection of a ground motion for design at a given site. This paper reports on a project, co-sponsored by the U.S. Nuclear Regulatory Commission, the U.S. Department of Energy, and the Electric Power Research Institute, that was undertaken to review the state-of-the-art and improve on the overall stability of the PSHA process, by providing methodological guidance on how to perform a PSHA. The project reviewed past studies and examined ways to improve on the present state-of-the-art. In analyzing past PSHA studies, the most important conclusion is that differences in PSHA results are commonly due to process rather than technical differences. Thus, the project concentrated heavily on developing process recommendations, especially on the use of multiple experts, and this paper reports on those process recommendations. The problem of facilitating and integrating the judgments of a diverse group of experts is analyzed in detail. The authors believe that the concepts and process principles apply just as well to non-earthquake fields such as volcanic hazard, flood risk, nuclear-plant safety, and climate change.

Notes: Trichloroacetic acid (TCA) is major metabolite of trichloroethylene (TRI) thought to contribute to its hepatocarcinogenic effects in mice. Recent studies have shown that peak blood concentrations of TCA in rats do not occur until approximately 12 hours following an oral dose of TRI. However, blood concentrations of TRI reach maximum within an hour and are nondetectable after 2 hours.(1) The results of study which examined the enterohepatic recirculation (EHC) of the principle TRI metabolited(2) was used to develop physiologically-based pharmacokinetic model for TRI, which includes enterohepatic recirculation of its metabolites. The model quantitatively predicts the uptake, distribution and elimination of TRI, trichloroethanol, trichloroethanol-glucuronide, and TCA and includes production of metabolites through the enterohepatic recirculation pathway. Physiologic parameters used in the model were obtained from the literature.(3.4) Parameters for TRI metabolism were taken from Fisher et al.(5) Other kinetic parameters were found in the literature or estimated from experimental data.(2) The model was calibrated to data from experiments of an earlier study where TRI was orally administered(2) Verification of the model was conducted using data on the enterohepatic recirculation of TCEOH and TCA(2) chloral hydrate data (infusion doses) from Merdink,(1) and TRI data from Templin(l) and Larson and Bull.(1)

Notes: Estimates were made of the numbers of liver carcinogens in 390 long-term bioassays conducted by the National Toxicology Program (NTP). These estimates were obtained from examination of the global pattern of p-values obtained from statistical tests applied to individual bioassays. Representative estimates of the number of liver carcinogens (90% confidence interval in parentheses) obtained in our analysis compared to NTP's determination are as follows: female rats—49 (23, 76), NTP = 30; male rats—88 (59, 116), NTP = 35; female mice—131 (105, 157), NTP = 81; male mice—100 (73, 126), NTP = 61; overall—166 (135, 197), NTP = 108. The estimator from which these estimates were obtained is biased low by an unknown amount. Consequently, this study provides persuasive evidence of the existence of more rodent liver carcinogens than were identified by the NTP.

Notes: We evaluate the relationship between insurers (payers) and providers of health care (hospitals) when they each have a nonnegligible share of the market. We focus in particular on their incentives to merge and the existence of equilibria where payers offer preferential treatment to a subset of hospitals. We demonstrate that hospitals are more likely to merge without consolidating their capacities the less competitive they are vis-à-vis the payer's market. Payers are more likely to merge without consolidating their capacities the less competitive either the hospitals' or the payers' market is. A given payer follows an exclusionary strategy when its starting bargaining position vis-à-vis hospitals is weak. At such exclusionary equilibria, payers tend to distinguish themselves from neighboring payers by contracting with a different subset of hospitals.

Notes: This paper evaluates the usefulness of a model (McClellan, 1997) that was recently proposed for measuring reimbursement incentives under ongoing refinements to the hospital prospective payment system. The model is applied to a single major disease category (HIV infection) for which the hospital reimbursement system has undergone dramatic refinements in recent years. The paper highlights a problem in the original specification, namely, the use of endogenous costs as an explanatory variable. The paper illustrates how hospital response to both marginal price incentives (e.g., a change in the supply of payment-related services) and average price incentives (e.g., a change in the supply of non-payment-related services) can cause either over-or underestimation of payer cost sharing. In the present case study, overestimation of the marginal reimbursement incentives was evidenced. Obtaining cost-sharing estimates that can be used to evaluate alternative payment classification systems requires controlling for endogenous changes in hospital behavior.

Notes: This paper demonstrates that there is a strategic reason why software firms have followed consumers' desire to drop software protection. We analyze software protection policies in a price-setting duopoly software industry selling differentiated software packages, where consumers' preference for particular software is affected by the number of other consumers who (legally or illegally) use the same software. Increasing network effects make software more attractive to consumers, thereby enabling firms to raise prices. However, it also generates a competitive effect resulting from feircer competition for market shares. We show that when network effects are strong, unprotecting is an equilibrium for a noncooperative industry.

Notes: With one-way spillovers, the standard symmetric two-period R&D model leads to an asymmetric equilibrium only, with endogeneous innovator and imitator roles. We show how R&D decisions and measures of firm heterogeneity—market shares, R&D shares, and profits—depend on spillovers and on R&D costs. While a joint lab always improves on consumer welfare, it yields higher profits, cost reductions, and social welfare only under extra assumptions, beyond those required with multidirectional spillovers. Finally, the novel issue of optimal R&D cartels is addressed. We show an optimal R&D cartel may seek to minimize R&D spillovers between its members.

Notes: This paper examines some policy issues related to the interaction between internal and external corporate control mechanisms—board dismissals and takeovers—by focusing on the information aggregation and other effects related to this interaction. We model the functioning of corporate control mechanisms as an example of a multilayered principal-agent relationship in which shareholders delegate the task of monitoring management quality to the board and rely on the external takeover market to provide additional disciplining of the manager as well as of the board. This gives rise to two effects: (1) a substitution effect, whereby the takeover market partially substitutes for board dismissal of the manager, leading to greater lenience toward the manager by a board acting in the shareholders' best interest, and (2) a kick-in-the-pants effect, whereby the board is stricter with the manager because it may be dismissed by a successful acquirer who views it as lax. The interaction of these two effects leads to various implications about the behavior of boards and potential acquirers. In particular, a well-functioning internal control mechanism (the board) does not obviate the need for external control (takeovers). Moreover, somewhat counterintuitively, there may be a greater incidence of takeovers when the internal control mechanism is working well than when it is not.

Notes: I analyze the marketing strategy of an incumbent monopolist facing a threat of entry. Product quality is unknown to consumers, and the monopolist's cost is unknown to the potential entrant. The incumbent uses both price and advertising to signal cost and quality. The monopolist faces a dilemma because signaling a high quality attracts customers but requires a high price, whereas signaling low cost prevents entry but requires a low price. I characterize the unique (stable) separating equilibrium and show that dissipative advertising may be used, while it is never used if either quality or cost is known. Some equilibria may involve pooling on cost. A welfare analysis indicates that potential entry may improve welfare and that the effect of unknown quality is not always negative when it interferes with entry deterrence.

Notes: This paper examines minimum advertised price (MAP), a vertical restraint that is observed in manufacturer-retailer interactions. Under MAP, the manufacturer announces that it will reimburse retailers for a fraction of their advertising expenditures if retailers do not advertise the product at below a specified price. MAP can be considered a combination of resale price maintenance (RPM) and a cooperative advertising subsidy. Current antitrust law treats RPM as illegal per se, whereas MAP is judged according to a rule of reason. A framework is presented within with neither a minimum retail price nor a cooperative advertising subsidy is individually sufficient to enable maximization of profits in the complete manufacturer-retailer structure, but the two instruments together are. MAP is therefore a sufficient instrument for the maximization of joint profits. We argue that MAP can also be designed as a second-best instrument that replicates RPM.

Notes: The average chief executive at one of Britain's twelve regional electricity distribution companies experienced nearly a threefold salary increase in the two years following the industry privatization in 1990. It is hard to account for the tremendous pay raises with conventional explanations for executive compensation rates. They are not attributable to increases in managerial talent, because privatization brought virtually no changes in personnel at the top rank. In addition, the salary increases did not coincide with dramatic changes in firm scale, and cross-firm differences in the raises are uncorrelated with stock-market returns and other measures of firm performance. By contrast, salary increases are highly correlated with firms' potential profits (as measured by the administratively assigned price cap). The findings presented here thus provide new perspectives on the determinants of executive compensation.

Notes: Sellers of consumer durables often provide financing to customers. This paper shows that when customers desire consumption smoothing and when financial markets are imperfect, a seller can find it optimal to offer a menu of deferred-payment plans. A monopolist seller price discriminates among customers with different intertemporal income profiles by making such menu offers, and the interest rate on the seller credit can be significantly lower than the market borrowing rate. Seller financing can be an equilibrium outcome in a game where sellers and banks with market power choose payment plans and interest rates strategically.

Notes: Television networks spend about 16% of their revenues on tune-ins, which are previews or advertisements for their own shows. In this paper, we examine two questions. First, what is the informational content in advertising? Second, is this level of expenditures consistent with profit maximization? To answer these questions, we use a new and unique micro-level panel dataset on the television viewing decisions of a large sample of individuals, matched with data on show tune-in advertisements. The difference in effectiveness of advertisements between “regular” shows (about which viewers are assumed to have substantial information a priori) and “specials” (about which they have very little) reveals the value of information in advertisements and the different roles that information can play. The number of exposures for each individual is likely to be correlated with their preferences, since networks target their audiences. We address this endogeneity problem by controlling for observed, and integrating the unobserved, characteristics of individuals, and find that the estimated effects of tune-ins are still large. Finally, we find that actual expenditures on tune-ins closely match the predicted optimal levels of spending.

Notes: We discuss two contrasting styles of vertical organization of complementary activities or components in an industry: systems competition versus component competition. When firms' competencies differ, systems competition is not a perfect substitute for component competition, even with Bertmnd behavior. Costs, prices, industry profits, and the distribution of those profits among firms all differ between the two styles of organization. Moreover, firms' profit incentives do not generally guide them towards the socially efficient form of vertical organization. In duopoly, there is a bias towards open organization (component competition), but with enough firms (three or more, in an exponential example) this bias is reversed.

Notes: This paper proposes a simple test of the leader-follower model of strategic behavior. This test relates the temporal notions of leadership central to such models to the empirical methods of statistical causality. This test is performed using data from the US softwood plywood industry of the last three decades. Others have productively explored the spatial pricing practices of this industry by applying a leader-follower model. Similarly, we find that a leader-follower model explains well the temporal relations between key strategic variables (prices) in the industry. We conclude that the leader-follower model imposes meaningful restrictions on observable time-series data and that statistical causality is a useful method for testing these restrictions.

Notes: This paper builds an economic model of the relationship between influence activity and resistance to change in organizations. I show that influence activity can create harmful barriers to change and that the influence costs of change are positively related to the firm's prospects. The model rationalizes the widely held view that firms often must endure a survival-threatening crisis before meaningful change can be achieved. I show that employees' choices of whether to engage in influence activity can depend on their beliefs as to whether the firm will choose to change its organizational form. If employees expect change, their best response is to try to affect the form of the change in their favor.

Notes: In active investment climates where firms sequentially improve each other's products, a patent can terminate either because it expires or because a non-infringing innovation displaces its product in the market. We define the length of time until one of these happens as the effective patent life, and show how it depends on patent breadth. We distinguish lagging breadth, which protects against imitation, from leading breadth, which protects against new improved products. We compare two types of patent policy with leading breadth: (1) patents are finite but very broad, so that the effective life of a patent coincides with its statutory life, and (2) patents are long but narrow, so that the effective life of a patent ends when a better product replaces it. The former policy improves the diffusion of new products, but the latter has lower R&D costs.

Notes: We characterize equilibria of a multistage game in which competing duopolists may acquire and share information in advance of choosing their financial structure which, in turn, precedes production. Given sufficient uncertainty, equilibria exist in which the efficiency and, possibly, coordination gains to acquiring and sharing perfect information are sufficient to break Brander and Lewis's (1986) result wherein both firms issue debt to their mutual disadvantage. However, more interesting may be the robustness of that result when uncertainty is low or when information is imperfect. The key insight is that the consequences of issuing debt are invariant to the level of uncertainty, given that firms can recalibrate the terms of debt to achieve the Stackelberg solution.

Notes: I examine the outcomes of cases of entry by merchant shipping lines into established markets around the turn of the century. These established markets are completely dominated by an incumbent cartel composed of several member shipping lines. The cartel makes the decision whether or not to begin a price war against the entrant; some entrants are formally admitted to the cartel without any conflict. I use characteristics of the entrant to predict whether or not the entrant will encounter a price war conditional on entering. I find that weaker entrants are fought, where “weaker” means having fewer financial resources, less experience, smaller size, or poor trade conditions. The empirical results provide most support for the long-purse theory of predation. Due to the small number of observations available, 47, I discuss qualitative evidence (such as predatory intent expressed in correspondence between cartel members) that supports the empirical results. The results are also found to be robust to misclassification of the dependent variable, which is a particular concern when dealing with historical data.

Notes: We examine the nature of incentive schemes between the principal and the risk-neutral agent in the presence of the agent's limited liability and ex ante action choice. We consider alternative schemes when a simple rental contract is infeasible due to the limited liability of the agent and study the effectiveness of a performance bonus scheme in achieving the first-best outcome. We also discuss some implications of such schemes in real practices.

Notes: Recent theories of vertical integration based on incomplete contracts assume perfect competition on at least one side of the market. As a result, the make-or-buy choice has no redistributive effect and will reflect efficiency considerations only. This paper introduces imperfect competition into an otherwise standard model of a vertical relationship with noncontractable specific investments. We assume that there are a finite number of potential input suppliers with private information about their costs. We first show that a monopoly buyer of such inputs will often prefer to own the seller's assets even though it would be more efficient for the seller's assets not to be so owned. We then show that an increase in the number of potential partners on either side of the market reduces this inclination towards vertical integration. With perfect competition on either side of the market, the make-buy decision will reflect only efficiency considerations.

Notes: The paper studies managerial incentives in a model where managers choose product market strategies and make takeover decisions. The equilibrium contract includes an incentive to increase the firm's sales, under either quantity or price Competition. This result contrasts with previous findings in the literature, and hinges on the fact that when managers are more aggressive, rival firms earn lower profits and thus are willing to sell out at a lower price. However, as a side effect of such a contract, the manager might undertake unprofitable takeovers.

Notes: For U.S. futures exchanges, controlling costs while maintaining market performance is an ongoing, difficult challenge. New market realities have made that challenge even more daunting in recent years as costs have escalated, competition has expanded, and the role of information technology has expanded. It is always difficult for regulatory statutes to keep pace with ever-changing markets. Futures markets are no exception. The basic statutory framework represented by the Commodity Exchange Act (CEA) was enacted in 1922, over seventy years ago. In order to maintain appropriate regulatory balance, periodic review and reform has been essential over the years. Our current federal regulatory systems were built for different markets with different competitive realities than we face today. Reforming the CEA to take into account those new market realities is vital to the survival of U.S. futures exchanges.

Notes: We develop a game-theoretic version of the right-to-manage model of firm-level bargaining where strategic interactions among firms are explicitly recognized. Our main aim is to investigate how equilibrium wages and employment react to changes in various labor and product market variables. We show that our comparative statics results hinge crucially on the strategic nature of the game, which in turn is determined by the relative bargaining power of unions and managers.

Notes: We develop a simple model in which there is both interfirm (or intraproduct) and intrafirm (or interproduct) competition. The purpose is to develop a classificatoy framework in order to understand product-range or diversification decisions alongside conventional competition. The equilibrium outcomes commonly involve a limited range of the available goods being produced. Deterrence equilibria and other strategic actions are also examined.

Notes: DeGraba and Postlewaite (1992) show that the seller of a durable input can solve the time inconsistency problem by offering most-favored-customer (MFC) protection to buyers. McAfee and Schwartz (1994) show that if a supplier sells inputs to competing firms using two-part tariffs, MFC protection that allows a firm to replace its contract with a contract executed by any other firm will not solve the commitment problem, and argue this implies managers cannot use MFCs as a strategic commitment device in complex contracting situations. This paper shows that if the profits of the seller and the buyers are monotonic in each term of the contract, then applying MFC protection to each term of a contract allows a manager to solve his commitment problem in complex contacting situations. We show that “standard” contract arrangements (two-part tariffs, declining block tariffs, and royalties as a percentage of sales) meet this condition.