Firm as an informational function

Coase explains the firm cooperation managed by organization as the transaction costs of using price mechanism is sometimes high. Williamson argues that these high transaction costs are due to high specificity when large assets or skill investment involve, which origin from incomplete contracts and lead to opportunism. Hart sees firm as assets and also start with the incompleteness of contracts which he think will make residual rights of control unclear and thus damage incentives.

To Coase, the transaction costs are mainly re-contracting costs. To Williamson, the costs are mainly the costs that might loss in future bargain, or say the risk from opportunism. To Hart, the costs are similar to Williamson’s costs as a result of  incomplete contracts, but work as an incentive function rather than a hierarchy function. (that’s why in Williamson’s theory the firm has the weakest incentive effect)

However,  just like some criticisms said, transaction costs are so elastic that can incorporate any costs when forming a transaction. The ones easily to be mentioned are searching for transaction participants, setting a suitable price, forecasting the prospect that related transaction, communication, bargain, and contracting costs, monitoring and enforcing costs, etc.. Lots of them are not mentioned or stressed by the theories above.

Here, I’d like to argue that a large part that have been largely overlooked is the searching cost that involve in any information searching and decision making of utility maximization and cost minimization. The information searching and decision making are not costless, and there is a tradeoff between efficient result and the transaction cost of finding the most efficient results. Within firm, having bounded needs to searching information and making decision (might be a little similar to bounded rationality) that would be demanded in market with price mechanism, employees accept the direction from entrepreneurs who instead do above works, and thus save the related transaction costs and can focus on efficient operation. In the case of intermediate product market, when one side find it costly to search the all possibility that the other will bring for the future transaction, it choose integration to make transaction under management with less costs.
(I’d like to admit that in the intermediate product market, asset specificity theory or residual control theory also makes sense that incomplete contract and private information makes it unavailable for one side to know everything about the other side and future, which creates a risk. However, as Coase and Willamson later observed, this risk can be overcome by long-term contract and informal relationship.)

My simple idea has been artfully illustrated by economists who work on informational economics like Stigler or Demsetz. This post will thus gather and read most cited papers about firm and information costs.

The economics of information GJ Stigler – Journal of political economy, 1961
Production, information costs, and economic organization AA Alchian, H Demsetz – The American economic review, 1972
– On the impossibility of informationally efficient markets SJ Grossman, JE Stiglitz – The American economic review, 1980
– The theory of the firm revisited H Demsetz – Journal of Law, Economics, & Organization, 1988
– The impact of information technology on the organization of economic activity: The “move to the middle” hypothesis EK Clemons, SP Reddi, MC Row – … of management information …, 1993

Technology, Information, and the Decentralization of the Firm D Acemoglu, P Aghion, C Lelarge… – … Quarterly Journal of …, 2007

The Revolution of Information Economics: The Past and the Future Joseph E. Stiglitz
NBER Working Paper, 2017

 

Might be relevant

Hayek and Bounded knowledge

Continue reading “Firm as an informational function”

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Bounded knowledge and rationality

1) Hayek
– The use of knowledge in society FA Hayek – The American economic review, 1945
– Friedrich von Hayek and mechanism design ES Maskin – The Review of Austrian Economics, 2015
– Retrospectives: Friedrich Hayek and the Market Algorithm Samuel Bowles Alan Kirman Rajiv Sethi JOURNAL OF ECONOMIC PERSPECTIVES VOL. 31, NO. 3, SUMMER 2017

2) Bounded rationality
–  Designing organizations for an information-rich world HA Simon – International Library of Critical Writings in Economics, 1969
– Rationality as process and as product of thought HA Simon – The American economic review, 1978
– Rational decision making in business organizations HA Simon – The American economic review, 1979
– Organizations and markets HA Simon – The Journal of Economic Perspectives, 1991
Inductive reasoning and bounded rationality WB Arthur – The American economic review, 1994

 

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The use of knowledge in society FA Hayek – The American economic review, 1945

to construct a rational economic order:

familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solu- tion of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications, and can never be so given

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circum- stances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources-if ”given’ is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been rather obscured than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathe- matics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.

 

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Designing organizations for an information-rich world   – HA. Simon, International Library of Critical Writings in Economics, 1969

Information processing is at the heart of executive activity, indeed at the heart of all social interaction.  

The Scarcity of Attention

a) “an information-rich world” → Whether a world is rich or poor is a relative matter
b) the obverse of a population problem is a scarcity problem, hence a resource-allocation problem.

in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes → the attention of its recipients
=> a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources

To formulate an allocation problem properly ← to measure the quantities of the scarce resource + these quantities must not be expandable at will
=> we can’t use the bit as a measure of an information-processing system’s capacity for attention ← the bit capacity of any device/person for receiving information depends entirely upon how the information is encoded
=> how much scarce resource a message consumes →
how much time the recipient spends on it (Human beings can attend to only one thing at a time)
=>> attention-capacity measure → time-sharing systems =>> an organization employing many people can be viewed as a time-sharing system
=>> measure: human executive’s time + a standard executive efficiency

most of the cost of information
→ the cost incurred by the recipient
→ not enough to know how much it costs to produce and transmit information
→ need to know how much it costs, in terms of scarce attention, to receive it
e.g. (recalculate how much the New York Times (or Washington Post) costs ← including  the cost of reading it  → usually causes them some alarm, but not enough for them to cancel their subscriptions → Perhaps the benefits still outweigh the costs)

(## not mentioned here: the cost of not only consuming info but also searching info. Put it differently, in a info-rich world, how people decide which one to consume? Such a decision must be affected by outside environment as well as inside knowledge or say path dependence. This is even more important than the cost of consuming because both the time and the executive efficiency are limited whatever how rich is info, while only the key one can get you most efficient decision-making in any specific time)

=> How can we design organizations, business firms, and government agencies to operate effectively in such a world? How can we arrange to conserve and effectively allocate then scarce attention?

↓ 3 examples, each illustrating a major aspect of the problem of organizational design

1] Information Overload

? information overload problem: certain information-processing services are almost free → resulting in an explosive demand for them → does not call for computers → it calls for a thoroughgoing application of price and market mechanisms
=>> dilemmas: organization’s unwillingness or inability to allocate and price scarce information-processing resources (whether the resources are sorting clerks or electronic devices) ← free or underpriced resources are always in desperately short supply

Whether a computer/organization (information-processing system: IPS) will solve information-overload problem, or instead compound it:
if will reduce the net demand on the rest of the organization’s attention → absorbs more information previously received by others than it produces (listens and thinks more than it speaks)
→ IPS must be an information condenser → an attention-conserving function for an organization in 2 ways:
(1) receive and store information that would otherwise have to be received by other systems
(2) transform or filter input information into output that demands fewer hours of attention than the input
=>> solved the information-overload problem simply by adding information processors

 

(the design principle that attention is scarce and must be preserved is very different from a principle of “the more information the better.”)

=> a management information system is not to bring the manager all the information he needs, but to reorganize the manager’s environment of information so as to reduce the amount of time he must devote to receiving it

2] The Need to Know

=> How do we decide where information should be stored in an information-rich world and who should learn about it?

The change in information-processing technology demands a fundamental change in the meaning attached to the familiar verb “to know.”

In the common culture, “knowing” might include having access to a file or book containing information, with the skill necessary for using it. ‘

In the scientific culture, the whole emphasis in “knowing” shifts from the storage or actual physical possession of information to the process of using or having access to it.

But copies are only one of three important forms of redundancy in information.

The most important and subtle form of redundancy derives from the world’s being highly lawful. Facts are lawful if certain of them can be predicted from certain others. We need store only the fraction needed to predict the rest. → This is exactly what science is: the process of replacing unordered masses of brute fact with tidy statements of orderly relations from which these facts can be inferred.

Let me recite an anecdote that illustrates the point very well. We are all aware that there is a DDT problem. DDT is one of technology’s mixed blessings. It is very lethal to noxious insects, but uncomfortably persistent and cumulatively harmful to eagles, game fish, and possibly ourselves. The practical problem is how to enjoy the agricultural and medical benefits afforded by the toxicity of DDT without suffering the consequences of its persistence.

A distinguished chemist of my acquaintance, who is a specialist neither in insecticides nor biochemistry, asked himself this question. He was able to write down the approximate chemical structure of DDT by decoding its name. He could recognize from general theoretical principles the component radicals in the structural formula that account for its toxicity. The formula also told him on theoretical grounds why the substance is persistent and why the molecule does not decompose readily or rapidly. He asked, again on theoretical grounds, what compound would have the toxicity of DDT but decompose readily. He was able to write down its formula and saw no theoretical reason why it could not easily be produced. (All of this took ten minutes.)

A phone call to an expert in the field confirmed all his conjectures. The new compound he had “invented” was a well-known insecticide, which had been available commercially before DDT. It is not as lethal as DDT over as broad a band of organisms but is nearly so, and it decomposes fairly readily. I do not know if the new-old chemical “solves” the DDT problem. The durability of DDT was intended by its inventors to avoid frequent respray- ing and reduce the costs of treatment. There may be other economic issues, and even chemical and biological ones.

What the story illustrates is that good problem-solving capacities com- bined with powerful (but compact) theories (and an occasional telephone call) may take the place of shelves of reference books. It may often be more efficient to leave information in the library of nature, to be extracted by experiment or observation when needed, than to mine and stockpile it in man’s libraries, where retrieval costs may be as high as the costs of recreat- ing information from new experiments or deriving it from theory.

These considerations temper my enthusiasm for using new technology to store and retrieve larger and larger bodies of data. I do not mean to express a blanket disapproval of all proposals to improve the world’s stores of information. But I do believe we must design IPS’s with data-analysis capabilities able to keep up with our propensities to store vast bodies of data.

Today’s computers are moronic robots, and they will continue to be so as long as programming remains in its present primitive state. Moronic robots can sop up, store, and spew out vast quantities of information. They do not and cannot exercise due respect for the scarce attention of the recipients of this information. Computers must be taught to behave at a higher level of intelligence. This will take a large, vigorous research and development effort.

In a knowledge-rich world, progress does not lie in the direction of reading and writing information faster or storing more of it. Progress lies in the direction of extracting and exploiting the patterns of the world so that far less information needs to be read, written, or stored. Progress depends on our ability to devise better and more powerful thinking programs for man and machine.

3] Technology Assessment

Attention is generally scarce in organizations, particularly scarce at the tops, and desperately scarce at the top of the organization called the United States Government. There is only one President. Although he is assisted by the Budget Bureau, the Office of Science and Technology, and other elements of the Executive Office, a frightening array of matters converges on this single, serial, human information-processing system.

There is only one Congress of the United States. It can operate in parallel through committees, but every important matter must occupy the attention of many Congressmen. Highly important matters may claim the time and attention of all.

There is only one body of citizens in the United States. Large public problems such as the Vietnam War, civil rights, student unrest, the cities, and environmental quality (to mention five near the top of the current agenda) periodically require a synchrony of public attention. This is more than enough to crowd the agenda to the point of unworkability or inaction.

Congressman Daddario has devoted a great deal of thought in recent years to improving the procedures in society and government for dealing with the new technology we produce so prodigiously. At the request of his House Subcommittee on Science, Research, and Development, a panel of the National Academy of Sciences on which I served recently prepared the report on technology assessment to which he referred.

Technology assessment is not just a matter of determining the likely good and bad effects of new technological developments. Even less is it a matter of making sure, before new technology is licensed, that it will have no undesirable effects. The dream of thinking everything out before we act, of making certain we have all the facts and know all the consequences, is a sick Hamlet’s dream. It is the dream of someone with no appreciation of the seamless web of causation, the limits of human thinking, or the scarcity of human attention.

The world outside is itself the greatest storehouse of knowledge. Human reason, drawing upon the pattern and redundancy of nature, can predict some of the consequences of human action. But the world will always remain the largest laboratory, the largest information store, from which we will learn the outcomes, good and bad, of what we have done. Of course it is costly to learn from experience; but it is also costly, and frequently much less reliable, to try through research and analysis to anticipate experience.

Technology assessment is an intelligence function. If it operated perfectly, which it is certain not to, it would do two things for us. First, it would warn us before our taking action of the really dangerous (especially the irreversibly dangerous) consequences possible from proposed innovations. Second, it would give us early warning of unanticipated consequences of innovations as they became visible, before major irreversible damage had been done. In performing both of these functions, technology assessment would be mindful of the precious scarcity of attention. It would put on the agenda only items needing attention and action (including the action of gathering information to evaluate the need for further attention).

A phrase like “technology assessment” conjures up a picture of scientific competence and objectivity, deliberateness and thoughtfulness, concern for the long run, and a systems view that considers all aspects and consequences. But these desirable qualities of a decision-making system cannot be imposed without considering the organizational and political environment of the system.

As our scientific and engineering knowledge grows, so does the power of our actions. They have consequences ramifying over vast reaches of space and time. The growth of knowledge allows us to recognize consequences we would have been ignorant of or ignored before. We are able to make bigger waves and at the same time have more sensitive instruments to detect the rocking of the boat. Today we sterilize and quarantine everything that travels between earth and moon. Less than five hundred years ago we diffused tuberculosis, smallpox, and syphilis throughout the Americas in happy ignorance.

The injunction to take account of all effects conjures up the picture of an integral stretching out through space and time without ever converging. We must assume, as mankind has always assumed, that a reasonable allocation of our limited attention and powers of thought will solve the crucial problems facing us at least as fast as new ones arise. If that assumption is wrong, there is no help for us. If it is right, then technology assessment becomes part and parcel of the task of setting an agenda for society and government.

To bring the notion of technology assessment out of the realm of abstraction, let me go back to the example of DDT. Although I have not researched the history of DDT, I believe it was introduced on a large scale without thorough (or at least adequate) study of its potential cumulative danger in the atmosphere and in organisms (especially predators). It was hailed for its agricultural and medical benefits as one of technology’s miracles. Now, some decades later, we learn that the miracle has a flaw.

The possible adverse effects of DDT have been known to specialists for some time. They were probably even known, but ignored, at the time DDT was introduced. If so, this would underscore my fundamental theme of the scarcity of attention.

Suppose the dangers of DDT were not known beforehand but were discovered only in the laboratory of nature. Then, with apologies to eagle lovers, I am not sure that we (or even the eagles) have suffered unconscionable or irreversible loss by letting actual use tell us about DDT rather than trying to anticipate this experience in advance. Technology assessment has been (and is being) made by the environment. We are getting signals from the environment calling attention to some of its findings, and these signals are strong enough to deserve and get our attention. The DDT issue has been claiming attention intermittently for some months, with the loudest environmental signal being the detection of DDT in Great Lakes game fish. The issue is now high enough on the agenda of newspapers, courts, and committees to bring action.

I know this sounds complacent, and I really do not feel complacent. But it serves no useful social purpose to treat with anguish and handwringing every public problem which by hindsight might have been avoided if we had been able to afford the luxury of more foresight. Now that we know the problems, we should address them rather than hold inquests about who should have seen the problems earlier.

Our information about the effects of DDT and of long-continued diffuse contamination is in many respects unsatisfactory. (So is our information about almost any issue of public policy.) But this does not mean we could improve the situation by massive collection of data. On the contrary, we mainly need carefully aimed, high-quality biological investigations of the cause and effect mechanisms underlying the diffusion and metabolism of DDT. After we understand better the chemistry and biology of the problem we might make sense of masses of data, but then we probably would not need as much.

First-rate biologists and chemists capable of doing the required research are in as short supply as most other high-quality information-processing systems. Their attention is an exceedingly scarce commodity, and we are unlikely to capture much of it soon. The practical question, as always, is how to .deal with the situation given the scrappy, inadequate data we now have.

We begin to ask questions like these: Assuming the worst possible case for the harmful effects of DDT, what is the magnitude of the effects in human, economic, and ecological terms, and to what extent are these effects irreversible? In the same terms, what would it cost us to do without DDT? What is the next best alternative?

These are common-sense questions. We do not have to know anything about the technology to ask them, although we might learn something about it from the answers. The most effective IPS for getting answers consists of a telephone, a Xerox machine (to copy documents the telephone correspondents suggest), and some very bright professionals (not necessarily specialists) who do know something about the technology. With this retrieval system, just about anything in the world now known on the problem can be extracted in a few man-weeks of work. (The time required goes up consid- erably if hearings and briefings are held or a research project is organized.)

There are numerous locations inside and outside the federal govern- ment where the questions may be asked. They may be asked by the Office of Science and Technology, the National Academy of Sciences, the National Academy of Engineering, the RAND Corporation, Resources for the Fu- ture, or a Congressional committee. (An excellent example of the last is the recent series of reports on steam-powered automobiles.)

The location of the investigating group is significant from only one standpoint, which may be crucial. The location of the group can determine the attention it commands and the legitimacy accorded its findings. These are interdependent but by no means identical matters.

Legitimacy may sometimes be achieved (and even attention secured) by the usual credentials of science: the right degrees, professional posts, and reputations. But many an impeccable report is ignored, and many a report without proper credentials gains a high place on the agenda. The Ralph Naders of the world demonstrate that writing and speaking forcefully, un- derstanding the mass media, and being usually right about the facts can compensate for missing union cards and lack of access to organizational channels. Rachel Carson showed that even literary excellence is sometimes enough to turn the trick.

I agree with Congressman Daddario that we can and should strengthen and make more effective the processes of technology assessment in our country. We shall still need the world itself as a major laboratory, but we may be able to substitute foresight for hindsight to a modest extent. Did we have to wait until all Los Angeles wept before doing anything about auto- mobile exhausts? Well-financed institutions for technology assessment should be spending a hundred million dollars a year instead of ten million to find out whether the steam automobile offers a long-term solution to the smog problem. Our current measures are temporary expedients at best.

Strengthening technology assessment means improving our procedures for setting the public agenda. It does not mean pressing more information and problems on an already burdened President, Congress, and public. In an information-rich world, there is no special virtue in prematurely early warnings. Let the world store information for us until we can focus atten- tion and thought on it

Assessing Information-Processing Technology

The final issue I should like to address is itself a problem in technology assessment.

How shall we assess the science and technology of information processing and make sure it develops in socially beneficial ways?

The most visible and superficially spectacular part of the technology is its hardware: computers, typewriter consoles, cathode-ray tubes, and asso- ciated gadgets. These devices give us powerful new ways for recording, storing, processing, and writing information to improve and replace the human IPS’s with which we had to make do throughout man’s history.

By itself, the hardware does not solve any organizational problems, including the problems of attention scarcity. The hardware boxes will begin to make inroads on these problems only as we begin to understand informa- tion-processing systems well enough to conceive sophisticated programs for them programs that will permit them to think at least as well as man does.

Each step we take toward increasing our sophistication and scientific knowledge about the automated IPS also increases our sophistication and What scientific knowledge about the human IPS, about man’s thought processes. we are acquiring with the new technology is something of deep sig- nificance a science of human thinking and organization.6

The armchair is no more effective a scientific instrument for under- standing this new technology than it was for previous technologies. If we are to understand information processing, we must study it in the laboratory of nature. We must construct, program, and operate many kinds of informa- tion-processing systems to see what they do and how they perform

Our first systems have performed and will perform in all sorts of unexpected ways (most of them stupid), and by hindsight they seem incred- ibly crude. They will never pass a cost-effectiveness test on their operating ment performance, and we shall have to write them off as research and develop- efforts. From their behavior, we may learn that the new technology contains dangers as well as promises. There already is considerable concern about threats to privacy that the new technology might create. Such con- cerns will be mere armchair speculations until they are tested against a broad base of experience.

Very early in the computer era, I advised several business firms not to acquire computers until they knew exactly how to use them and pay for them. I soon realized this was bad advice. Computers initially pay their way by educating large numbers of people about computers. They are the princi- pal forces for replacement of the vague, inadequate common-culture mean- ings of words in the information-processing vocabulary by the sharp, rich, scientific meanings these words must have in the future.

I think this points to a clear public policy for understanding and assessing the new technology. We need greatly increased public support for research and development efforts of as varied a nature as possible. They should certainly include network experiments of the sort John Kemeny envisages. They should include data-bank experiments. Above all, they should include experiments in robotry, large-scale memory organization, and artificial intelligence, leading to a basic foundation for a science of information processing.

Past experience suggests that a program pursued in the experimental spirit I have indicated will have valuable by-products. List processing is an esoteric development of computer-programming languages that was motivated initially about fifteen years ago by pure research interests in artificial intelligence. Today, its concepts are deeply imbedded in the design of large programming and operating systems regularly used in accounting and engineering computation.

The exploration of the moon is a great adventure. After the moon, there are objects still farther out in space. But man’s inner space, his, mind, is less well known than the space of the planets. It is time we establish a national policy to explore this inner space systematically, with goals, timetables, and budgets. Will you think me whimsical or impractical if I propose that one of these goals be a world-champion chess-playing computer program by 1975; and another, an order-of-magnitude increase by 1980 in the speed with which a human being can learn a difficult school subject, such as a foreign language or arithmetic?

If we are willing to dedicate ourselves to national goals of this kind (if you do not like my two, substitute your own), set deadlines for them, and commit resources to them (as we have committed resources to exploration of outer space), I think we soon shall have an understanding of both the information processors we call computers and those we call man. This understanding will enable us to build organizations far more effectively in the future than has ever been possible before.

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Organizations and markets HA Simon – The Journal of Economic Perspectives, 1991

in classical and neoclassical economic theory:
markets ← transactions (exchange of goods, services, money that both parties find advantageous to achieve these goals) ←  workers and consumers, households, firms, owners of resources, governments
→ consumption, work, leisure / profit (sole objective of firms) → utility functions

firms → more than simple nodes in a network of transactions →  producers that transforms “factors” into products → A large part of the behavior of the system takes place inside firms, and does not consist just of market exchanges
(most of the actors in a modern economy are employees, who either do not spend their days in trading, or trade as agents of the firm rather than in their own interest)

=> why there are firms at all, not all the actors independent contractors?
→ Why do most of them enter into employment contracts, selling their labor for a wage? → What determines the make-or-buy decisions of firms, hence the boundaries between them and markets?
→ When will two domains of activity lie within a single firm, and when will they be handled by separate contracting firms?

=> how the employees of firms are motivated to work for the maximization of the firm’s profit
→ How are their utility functions reconciled with those of the firm?
→ work = negative utility and leisure = positive utility → Why do employees often work hard?

→ simple (neoclassical) answer: employment contract
→ under which workers maximize their utility by accepting the authority of the firm = agreeing to accept orders from the profit maximizers in charge?? (Marx→exploitation) → how the employment contract is enforced by the employer + again incentive problem

=>> “the new institutional economics” → tries to explain when activities will be carried out through the market and when they will be carried out within firms + how it is possible for firms to operate efficiently
→ “transaction costs” and “opportunism” (Williamson 1975, 1985)
→ “information asymmetry” or “incomplete information” (Ross, 1973; Stiglitz, 1974)
→ agency theory: treats the employment contract as an optimal contract between principal and agents → how contractual arrangements can deal with shirking and other motivational problems

=> The idea behind:  reduce it to maximizing behavior of parties who are engaged in contracting, given the circumstances that surround the transaction
→ access of the parties to information + negotiating costs + the opportunities for cheating → often treated as exogenous variables that do not themselves need to be explained
→ even introduce a sort of bounded rationality into the behavior → with the exogeneity of the limits of rationality → allowing the theory to remain within the magical domains of utility and profit maximization.

NIE retains the centrality of markets and exchanges
→ All phenomena → market transactions based upon negotiated contracts
→ NIE is wholly compatible with and conservative of neoclassical theory
→ multiply the number of auxiliary exogenous assumptions that are needed for the theory to work: e.g. moral risk  + incompleteness of contracts from asymmetric information → no empirical support + a very ad hoc flavor

=> In general, the new institutional economics has not drawn heavily from the empirical work in organizations and decision-making for its auxiliary assumptions
(For introductions to that literature, see March and Simon, 1958; Cyert and March, 1963: Kornai, 1971; Simon, 1979) → acts of faith, or perhaps of piety
=> but appropriately subversive of neoclassical theory → suggests microeconomic empirical work that must be performed to estimate the exogenous parameters and to test the theory empirically

The Ubiquity of Organizations

Motivation and Efficiency in Organizations

Authority: The Employment Relation

Rewards as Motivations

Loyalty: Identification with Organizational Goals

Coordination

Conclusions

The economies of modern industrialized society
→ organizational economies than market economies
→ even market economies need a theory of organizations
→ NIE explain organizational behavior by terms that drawn from neoclassical economics: agency, asymmetric information, transaction costs, opportunism 
→ ignore key organizational mechanisms: authority, identification, and coordination

Theories (empirically sound) of the behavior of Large organizations → often “bureaucracies” → but often highly effective systems ← despite profit motive can penetrate these vast structures only by indirect means
→ framework close to classical political economy:
organizational goals (+ organizational identifications + material rewards + supervision) replace profit → enforcing of organizational efficiency (towards organizational goal)

→ re-answer when profit-making, nonprofit, and governmental organizations should be expected to operate well / when market competition is needed to discipline organizations to perform efficiently

 

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Appendix A

Imperfect Information: Is It For or Against Free Markets?

A. ← “Friedrich Hayek and the Market Algorithm,” by Samuel Bowles, Alan Kirman and Rajiv Sethi, appeared in the Journal of Economic Perspectives
In one much-quoted example (“The Use of Knowledge in Society”), Hayek offers a discussion of what  happens in the market for some raw material, like tin, when “somewhere in the world a new opportunity for the use” arises, or “one of the sources of supply of tin has been eliminated.”
(more generally, any potential for innovative new products or services)
→ Either of these changes (rise in demand, or a fall in supply) will lead to a higher market price.
=> But as Hayek points out, no company nor any consumer needs to know any details about what happened → Market participants don’t actually know just how they would react to the higher price until after it happens → Their reactions emerge through a process of trial and error
=> the shifts in demand or supply, and the corresponding changes in price, work themselves out with a larger number of small-scale shifts in the market

=> not only that government planners lack perfect information to act on adjusting reaction or development into cheaper substitutes, but that is is not even theoretically possible for them to have perfect information  → much of the information about production, consumption, and prices does not exist

“[The market is] a system of the utilization of knowledge which nobody can possess as a whole, which … leads people to aim at the needs of people whom they do not know, make use of facilities about which they have no direct information; all this condensed in abstract signals … [T]hat our whole modern wealth and production could arise only thanks to this mechanism is, I believe, the basis not only of my economics but also much of my political views …”

(He was writing in part with economic systems like the Communist Soviet Union in mind. Indeed, Hayek occasionally expressed support for a universal basic income and for certain kinds of bank regulation. )

B.  The Revolution of Information Economics: the Past and the Future,” by Joseph Stiglitz, a NBER working paper
available info highly imperfect about the expected path of housing prices,  complex financial securities based on home mortgages → market dysfunction and recession → the information about what could happen to the macroeconomy was imperfect)

Joseph Stiglitz (Nobel, 2001) → explained how imperfect information can hinder the functioning of a market → thus offer a justification for government intervention or regulation
→ emphasizes two particular aspects of imperfect information: it leads to a lack of competition + especially to problems in the financial sector

(arguing that imperfect information can offer a potential justification for government regulation doesn’t make a case that all or most government regulation is justified. especially given that the real-world government regulators labor with their own problems of political constraints and limited information → while Stiglitz tends to favor an increase in US economic regulations in a number of specific areas, his vision of the economy always leaves a substantial role for private sector ownership, decision-making, and innovation.)

=>> to hold two contradictory ideas at the same time: markets can often be a substantial improvement on government regulators, and government regulators can often be a substantial improvement on unconstrained market outcomes → either can be not efficient
()

Appendix B.

The Understanding and Misunderstanding Imperfect Information

A. The key point that Hayek was making is not so much that this “market order” is optimal in any static sense, but that if a central planner tried to replicate it, he would have to collect, process, and constantly update an impossibly huge quantity of information.

B. To suggest that Hayek conceived of a market economy as a system operating independently of the constraints of an evolving and increasingly sophisticated system of rules is to completely misunderstand Hayek’s conception of a market order and the legal underpinnings without which no such order could come into existence.

→ The most serious problems arise when substantial information asymmetries exist, allowing better-informed agents to make trades that exploit the ignorance or gullibility of their counterparties.
(financial sector / health sector → existing information asymmetries create opportunities and incentives for reprehensible behavior to engage in tireless efforts to find or create additional information asymmetries and to devote valuable resources to the search for and creation of such asymmetries)

“the financial sector, when seeking to profit from transitory informational advantages by anticipating short-term price movements, or by creating new financial products that counterparties do not understand as well as their creators do, wastes resources on a massive scale → can’t think of any reason why Hayek would have opposed changing “the rules of the game” to correct those malincentives”
“when malincentives truly are intractable, it is usually not obvious what the appropriate policy response is. But the theory of second best teaches us that, as soon as there is a single departure from optimality, maintaining all other optimality conditions will not achieve the next best outcome.”

## This is a interesting argument that says some utility maximization are through creating additional information asymmetries which is a negative externality. → should we blame web advertisement?

C. the core of the problem of imperfect information: (in Bowles, Kirman and Sethi 2017)

“The very usefulness of prices (and other economic variables) as informative messages—which is the centerpiece of Hayek’s economics—creates incentives to extract information from signals in ways that can be destabilizing. Markets can promote prosperity but can also generate crises. → a Hayekian understanding of the economy as an information-processing system does not support the type of policy positions that he favored. ”

=> make legislation and regulation not aimed at achieving specific concrete objectives, e.g., a particular distribution of income or the advancement of a particular special interest → but at making markets function more smoothly and more predictably, e.g., by prohibiting anticompetitive or collusive agreements between business firms.

The great or little divergence

Economic historian Gregory Clark has a famous book, A Farewell to Alms. Though being acknowledged as a top-recommend-read by people who know not much about economic history, it also suffers loads of critique from other economic historians who claim totally disagree with him. This resemblance to the controversial around Pomeranz’s famous “the great divergence”. The reason behind these debates is simply that, the research question/target, the economic divergence and other social divergences around, are too big, too ubiquitous, and too vague to argue on.

I will begin this blog with reading the review on a farewell to alms. And then add other not-too-long articles about the topic of divergence. The reading and gathering will take time as this is not directly relate to my own research, not to mention the huge amounts of contents under this topic. The object is to focus on the certain details in the long history and then see if we can grab some clue to the big picture.

A Farewell to Alms: Overview of My Critique  – reviewed by Bryan Caplan

A Farewell to Alms: A Brief Economic History of the World – reviewed by Margo, Robert A

The Little Divergence – Pseudoerasmus

A Review of Gregory Clark’s A Farewell to Alms: A Brief Economic History of the World – Robert C. Allen

 

 

Firm, Organization, Transaction Cost – OE Williamson

The most cited books written by Williamson are:

Markets and hierarchies: analysis and antitrust implications: a study in the economics of internal organization– 1975
The economic institutions of capitalism – 1985 **
– The mechanisms of governance – 1996 **

While a dozen of papers are also frequently mentioned:

The vertical integration of production: market failure considerations – The American Economic Review, 1971
Transaction-cost economics: the governance of contractual relations – The journal of Law and Economics, 1979
– The economics of organization: The transaction cost approach  – American journal of sociology, 1981
– Credible commitments: Using hostages to support exchange OE Williamson – The American Economic Review, 1983
– Transaction cost economics  – Handbook of industrial organization, 1989
– Comparative economic organization: The analysis of discrete structural alternatives  – Administrative science quarterly, 1991 **
Strategizing, economizing, and economic organization – Strategic management journal, 1991 *
Calculativeness, trust, and economic organization  – The Journal of Law and Economics, 1993 *
Strategy research: governance and competence perspectives  – Strategic management journal, 1999 *
– The new institutional economics: taking stock, looking ahead – Journal of economic literature, 2000
The theory of the firm as governance structure: from choice to contract  – The Journal of Economic Perspectives, 2002
More recently with less citations
– The economics of governance  – The American Economic Review, 2005
Transaction cost economics – S Tadelis, OE Williamson – The Handbook of Organizational Economics 2010
– Theories of Firm and Market Organization: Focal Transactions, Empirical Testing, and Scaling Up – S Tadelis, OE Williamson – 2011

My review will begin from the recent papers that review the transaction cost theory, and the go through the most representative work The economic institutions of capitalism 1985. After that the target will be 1990s papers on the Strategic management journal.

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Theories of Firm and Market Organization: Focal Transactions, Empirical Testing, and Scaling Up – S Tadelis, OE Williamson – 2012

Examines:
1) why it took so long form tc and economic organization to take hold
2) theories of firm and market organization since 1970s which differ from Coase and among themselves in i) conceptual, ii) empirical and iii) scaling up respects

Background – main papers:

Coase: though broadly in the spirit of marshallian marginal analysis (deminishing returns to management), tc is not a mtter for neoclassical concept of firm + the expansive conceptive of tc was so elastic as to permit any anomaly to be explained after the fact -tautological (Alchian and Demsetz (1972) )

1960s: Coase and Arrow showed that externalities and vertical integration would vanish if zero-transaction costs
1970s: conceptual papers about economics of governance  by Williamson (1971, 1979), Alchian and Demsetz (1972), and Klein Crawford and Alchian (1978)
1980s&90s: a) modern Property Rights Theory of the firm (PRT) by Grossman&Hart (1986) and Hart&Moore (1990), b) Agency approach to organizational design: Holmstrom&Milgrom (1991, 1994)

However, while formal modeling of TCE is challenging, prior theories aiming in uncovering the costs and benefits of different modes of organization did not always led to clear connections between theory and practice:

1) the choice of employment as the “focal transaction” by Coase and others

– focus on markets and hierarchies, without reference to intermediate levels of control (see Williamson (1983, 1991) for more on hybrid transactions)

– Whereas TCE views the relation between buyer and seller symmetrically, Coase put the purchaser in control (entrepreneur & employee: contract under certain limits to power), similar to Barnard(1938)’s “zone of acceptance” and Simon(1951)’s definition of employment (authority restricted to some given subset)
=> emphasis on employment relation → firm and market organization = authority and hierarchy

– Williamson (1971) first laid out the rudiments of TCE, as further developed in Williamson (1975, 1976, 1979, 1985) and in Klein, Crawford, and Alchian (1978), the intermediate product market transaction was made focal for 4 reasons:

a) employment relation is too encompassing: not clear buy-or-make problem as the supplier firms also produce those components with hired labor / employees are used in both of these scenarios

b) the intermediate product market transaction is simpler and better directs to central forces: instructive logic of make-or-buy

c) the intermediate product market transaction focuses especially on transactions as exchanges between technologically separable stages → directs to interface management within and between firms (as between make-or-buy)

e.g. Large firms outsource IT services to specialized providers, regardless of procured through market or within firm, employees are the ones performing the job

d) the employment relation limits the scope of analysis and precludes a more general understanding of the costs and benefits of different modes of organization as they relate to non-labor transactions and less tractable

TCE applied not only to vertical integration Williamson (1971):
– horizontal integration (organization form, to which Chandler (1962) is relevant)
– franchise bidding for natural monopoly (Williamson (1976))
– regulation (Goldberg (1976))
– corporate finance (Williamson (1988); Woodward(1988))
– corporate strategy (Nickerson and Silverman (2009))
– marketing (Gatignon and Gatignon (2010), John and Reve (2010))
– political economy (Dixit (1996), Levy and Spiller (1994))
– procurement (Bajari and Tadelis (2001))
– privatization (Levin and Tadelis (2010))
more than 900 empirical tests of TCE in economics, business, and the contiguous social sciences (Jeffrey Macher and Barak Richman (2008))

2) the lack of empirically measureable variables (review on main theories)

Coase: apply tc into reasoning of substitution at the margin:
a) transaction by entrepreneur organization v.s. by price mechanism
b) size is measured by transaction under firm v.s. market
→ measurable margin that determine firm size: diminishing return of management with increasing return of transaction cost
→ however, which transactions should be organized in the firm and which through the market (not so clear empirical hook) / how firms and markets differ in the way each mediates exchange

Williamson (1971):
a) focus on management of adaptation + b) market and hierarchy each deal with adaptation in different ways
=> contractual incompleteness (if complete then there is no advantage of internal organization over market transactions + a series of short-term contracts can in principle deal with the need for adaptation but pose problems on) → investment on a higher degree of specificity (specific assets/knowledge/skills) + bargain power change as the winner of the original contract acquires a cost advantage by ‘first mover’ advantages  → intermediate product market transactions → governance by hierarchy (inside the firm). 

=>> i) the different exchange/adaptation mechanism

スクリーンショット 2017-07-31 17.47.56

Market: exchange takes place between independently owned and operated stages / “high-powered incentives” in the agency literature
Hierarchy: coordinated adaptation promoted by unified ownership of the two stages coupled with the creation of a new actor, the interface coordinator(each stage reports to + subject to administrative direction and control + the absence of outside legal appeal) / low-powered incentives within stages 

=> ii) comparative statics: different kinds of transactions are better mediated through the form or the market: specificity: 
→ transactions with high levels of specificity are those for which organizing inside the firm is less costly than through the market + transactions become less specific, the benefit or organizing the transaction inside the firm drops

Property Rights Theory of the firm (PRT) by Grossman&Hart (1986) and Hart&Moore (1990):
– firm as being composed of the assets (e.g., machines, inventories) that it owns (1986, p. 692)
–  which stage has residual rights of control over the assets matters between two independent stages of production → directional integration/ (TCE: integration implies unified ownership and the use of hierarchy to implement coordinated adaptation at the interface)
=> joint ownership of assets is not optimal + firm with more important ex ante investments in specific human capital should acquire the other = directional inefficiency as weakened incentives to invest in ex ante specific human capital
=>> how market incentives operate

weakness of PRT:
a) difficult to measure directly or proxy measures for marginal variations in which party’s investment is more important (Whinston (2001, 2003),Holmstrom (1999)p. 87)
b) Hart-Moore model that joint production never is optimal is counterfactual given joint ventures (Holmstrom (1999)) / = PRT’s assumption: two separate managers are needed for the two stage v.s. one manager be in charge of both stages to maximize joint output (“interface coordinator” and creates separate managers to operate each stage → directional inefficiency relieved, albeit at the cost of an interface coordinator)
c) the action in PRT is at the individual level, and assets are owned by these individuals ← There are neither firms nor workers, organizational affiliations did not matter for transactions (the same critique directed at Alchian and Demsetz’ vision of the firm)

Agency theory of governance and organizations Holmstrom&Milgrom (1991, 1994):
– investigates the consequences of incomplete information (in that measuring the transaction there have zero costs of contracting while others have infinite cost)
– limited as being silent about how transactions differ with specificity or contractual incompleteness 
– contributions to multi-task agency and its applications are noteworthy, but has offered little insights on the function of hierarchy and governance → in stead valuable in understanding the employment relation (how individuals ought to be compensated, and how tasks should be allocated to individuals)

3) the challenge that the theories have in “scaling up” to correspond with the real-world organizations 

theory abstracts from many real and complex issues → simplify by focusing on central forces and key features → can be taken back / not limited to the caricature it depicts = scale up

Holmstrom’s criticisms of PRT as the inability of PRT to scale up:
– “there really are no firms in these [formal] models, just representative entrepreneurs.” (1999, p. 100)
– “firms are poorly defined in property rights models and it is not clear how one actually should interpret the identities of [the parties].” (Holmstrom and Roberts (1998), p. 79)
The same criticisms towards the Agency Theory models:
– these models are concerned more with design of incentive schemes and task allocations to employees than with how to coordinate and organize transactions within and between firms
– it is hard to see how one takes the results and conclusions of PRT to real world firms, either to explain or to prescribe the multitude of organizational design choices that are made by private sector firms and public sector bureaucracies

TCE’s scaling up:
– unlike PRT or Agency theory, where individuals/entrepreneur are at the center of attention, TCE deals with “mini-firms” – namely a series of producing stages, of within each of which the activity is technologically non-separable but between which stages the activities are technologically separable
– describe the boundary of the firm as technologically separable boundaries, as a series of interfaces which should be controlled and organized within a firm’s hierarchy by a series of interface coordinators, and which should be procured through the market

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The theory of the firm as governance structure: from choice to contract  – The Journal of Economic Perspectives, 2002

 

 

The Nature of the Firm

(I plan to go through the line of the study of firm theory from Coase – Williamson – Hart – other researchers (Teece, Holmstrom&Milgrom, Gibbons&Kevin, Simon, etc.). This is the first one.)

Reading notes on Coase’s classical papers + one Steven N. S. Cheung’s paper
Appendix: 組織の経済学:企業の境界 (伊藤秀史) + 組織と制度の経済分析:展望 (石黒真吾)

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The Nature of the Firm (1937)

Intro

A failure of economic theory to examine its foundational assumptions:
a clear definition of firm → should be 1) correspond with the real world, 2) tractable by 2 most powerful instruments: the margin and substitution

Economist: the economic system as working itself and being co-ordinated by the price mechanism to allocate factors of production between different use → admit individual planning but object to economic planning
=> however, Firm: allocation are decided by orders → not individual planning but economic planning that constitute a large sphere of our economic system

Although economists also admit organisation and co-ordinating within it, what’s the difference between the co-ordinating production of organization (ordered transaction /entrepreneur-co-ordinator without price mechanism) and market (a series of exchange transactions with price mechanism)?  → Why two co-ordinating methods? Which is alternative? Why choice? Why is there any organisation? (if market/price mechanism can do anything)  → the case of vertical integration

# => a combined economic system: individual obeying (bounded rationality) + firm planning (economic rationality) => economic specialisation

Coase’s theory

The main reason why it is profitable to establish a firm: there is a cost of using the price mechanism: (can be reduced/minimisied but not eliminated)
[1] (most obvious) discovering what the relevant prices are = information cost
[2] cost of negotiating and concluding a separate contract for each exchange transaction = cooperation (employment: contract that one agrees to obey entrepreneur for remuneration within certain limits = incomplete contracts)
[3] owing to risk attitude + difficulty of forecasting, the longer the contracting, the less possible and desirable (p) to specify that the other (a) is expected to do = contract expressed in general terms with the limits to what (a) to do not details what to do, the exact details left until later = residual control right 
=> a firm is likely therefore to emerge in cases where a very short term contract would be unsatisfactory (important in services and labours not commodities which can be state in advance with details)
==>> entrepreneurs forming an organisation (allowing some authority) to save costs of market operations/carry out his function at less cost

other reasons:
[4] firm emerge with the existence of uncertainty (but not relevant to Knight’s mode of payment as mark of firm) => facing uncertainty under entrepreneur-co-ordinator (not price mechanism)
[5] exchange on market and organised within firm are often treated differently by Governments other other regulatory powers (e.g. sales tax v.s. income tax) (only enforcement effect as firms already exist)
[6] quota schemes, and methods of price control, allowing advantages to who organises, necessarily encourage the growth of firms (again not brought firms into existence)

(note1: recently tc are generally/succinctly recognized as [i] search and information costs; [ii] bargaining and decision costs; [iii] policing and enforcement costs.
note2: there are also another interesting idea that tcs can also arise from natural human emotions)

=> a firm becomes larger as additional transactions of market through price mechanism are organised by the entrepreneur, and smaller as abandoning the organisation of such transactions → why is there market if firm lower costs?
=>>  diminishing returns to management: [1]+[2]
[1] cost of organising additional transactions within the firm rise → decreasing returns to the entrepreneur function 
[2] (as transactions organised increase) the entrepreneur fails to make the best use of the facotrs of production 
[3] the supply price of some factors of production may rise, as the other advantages of a small firm are greater
=>> a firm tend to be larger: a) the less the cost of organising and the slower these costs rise with increases in transactions organised, b) less likely the entrepreneur make mistakes and the smaller the increase in mistakes with …, c) the greater the lowering in the supply price of factors of production to firms of larger size
diminishing returns to management <= increase in a) spatial distribution of transactions organised, b) the dissimilarity of the transactions, c) probability of changes in the relevant prices (transactions tend to be different in kind or places)  ← inventions (e.g. telephone) that improve managerial technique can solve

=> “a point must be reached where the costs of organising an extra transaction (+loss through the waste of resources) within the firm are equal to the costs involved in carrying out the transaction (+marketing costs of the exchange transaction) in the open market”
=> “the firm stops its expansion at a point below the costs of marketing in the open market + at a point to the costs of organising in another firm => a market transaction between 2 producers (if not combination), each of whom could organise it as less than the actual marketing costs ” (as – cost of organising another’s work + costs of carrying out an exchange transactions in the open market)
=> combination = transactions previously organised by two entrepreneurs become by one / integration = organisation of transactions which previously carried out on the market

Comparison with other theories:

division of labour: the growth of economic differentiation creates need for integrating force
→ why one integrating force (entrepreneur) substituted for another (price mechanism)

Knight’ uncertainty:
→ with uncertainty, in the internal organisation, the primary problem or function is deciding what to do and how to do (deciding&controlling), the actual execution is the second
→ for social organisation, goods produced for market are based on the basis of entirely impersonal prediction of wants, producers take responsibility of forecasting + such forecasting work and technological direction and control of production are concentrated upon a very narrow class of producers = entrepreneur
→ the confident and venturesome assume the risk or insure the doubtful and timid by guaranteeing to latter a specified income in return for an assignment of actual results = the function of guarantee and direction power = enterprise and wage system, which existence is the direct result of uncertainty
# uncertainty → forecast ← confidence ← entrepreneur → guarantee → power
criticism: 1) people with better knowledge and judgement can sell advice instead of taking production, 2) in contract, the contractor is guaranteed a certain sum providing performance but without any direction, 3) even in an economic system with no uncertainty there would be co-ordinators, though only a routine function.

Cost-curve of the firm:
perfect competition: firm is limited in size if cost curve slopes upward
imperfect competition: … limited in MR=MC
But: ignores the fact that there may be a point where it is less costly to organise the exhchange transactions of a new product than further ones of the old product → upward cost curve not give limitation to firm size

Fit in with reality:
[1] the essence of the legal concept of employer and employee: direction = economic concept
[2] At the margin, the costs of organising within firm will be equal either to the costs of organising in anohter firm or in market by price mechanism ← business men will be constantly experimenting, controlling more or less, and in this way, equilibrium will be maintained => equilibrium for static analysis
[3] dynamic factors: effect that changes on the cost of organising within firm and on marketing costs → firm size => moving equilibrium
[4] Initiative: forecasting and operates through the price mechanism by making of new contracts / Management: merely reacts to price changes, rearranging the factors of production under its control

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The Problem of Social Cost

1. Nature of Firm: Origin (1988)

2. Nature of Firm: Meaning (1988)

3. Nature of Firm: Influence (1988)

The explicit introduction of the concept of transaction costs into economic analysis to explain the emergence of firm, and that’s all, not to change the character of economic theory ← developed by a young man who knew virtually no economics

“The problem of social cost”: used the transaction costs to demonstrate the way in which legal system could affect the working of the economic system, but not press beyond this

Williamson:
The alternative approach to industrial organization that Williamson presented depended on the distinction between markets and hierarchy, incorporated transaction costs into the analysis, and examined in much greater detail the problems of internal organization of the firm.
However, he ascribes the non-use of my thesis as “fundamental insight” but not “operational (to assess the efficacy of completing transactions as between firms and markets in a systemic way, 1975&reaffirmed1985).” ← “I think it is largely correct.” “Wallis and North have estimated that transaction costs are about 50% of the GNP.” “Incorporating these costs explicitly into analysis would have the most profound effects.” “The range of goods and services supplied, the pricing practices, the contractual arrangements, the forms of economic organization, all will be affect and interrelated”

Weakness:
1. unable to put transaction costs into mathematical form, due to no precise way to state the part which transaction costs play in the working
2. emphasis on the employer-employee relationship as the archetype of firm →  an emphasis on the role of firm as a purchaser of the services of factors of production + on the choice of the contractual arrangement which it makes with them → not examine the contracts that enable to direct the use of capital by acquiring, leasing or borrowing it + neglect the main activity of a firm, running a business
=> submerge the key idea: the costs of coordinating within the firm with the costs of coordinating with costs of bringing about same result by market transactions

An economic system without firms:
there are a vast number of possible contractual arranges, but non direction of factors of production → allocation of resources respond to prices, but a great part would be absorbed in making the arrangements for contracts and in providing the information (transaction costs)
An economic system with firm:
1) profitable to organize a firm when its costs of operating(costs of contracting +costs of selling) are less than the transaction costs incurred in market ← series of contracts is substituted one (less complicated) = within the firm individual bargains/competition are eliminated + market transaction is substituted as administrative decision (although maybe some markets within firms)
2) the costs of operating is also lower than the costs that other firms would incur ← if not, other organized firms will make the first firm not profitable => institutional structure of production that minimizes total costs for output produced

# here Coase only mentioned about the contracting costs between factors of production as a part of transaction costs that make forming firm is profitable and thus reasonable.  However, one would argue that administrative system also solve the problem of costs from meaningless internal bargaining, it also solve the bounded rationality. More important, this system that looks like a constrain can also provide incentives that market cannot provide by providing a large and consistent benefit prospect that an individual cannot imagine. This is done by sharing uncertainty (risk) and responsibility (right) which also comes from the same administrative system.

Vertical integration: 
asset specificity: the investment with no value outside this transaction that give rise to the incentive for opportunistic behavior → realizing the possible opportunism by one-side or both sides, players will be loathe to make investments + making them in-house
=> real situation, but should discover when best by long-term contracts, when by vertical integration
1) Klein, Crawford, Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process”: specific investment → quasi rents → possibility of opportunistic behavior → solved in integration or contracts + with high specificity, high rents, high gains from opportunism, costs of contracting will generally increase more t¥than costs of vertical integration
2) Coase: even though increase more, vertical integration will not displace long-term contract unless the costs of latter become greater than former + no systematic relationship
→ though the risk is real given the businessmen:”suppliers were often unwilling to sell too great a proportion of their output to one customer”, many contractual arrangements avoided the risk: a defrauding firm may make immediate gains but if it can be identified, future business is lost and thus make opportunistic behavior unprofitable at all
=> a) implementation of long-term contracts is commonly accompanied by informal arrangements not governed by contract; b) propensity for opportunistic behavior is usually effectively checked by the need to take account of the effect of firm’ action on future business; c) also contractual arrangements can reduce the profitability of opportunistic behavior (consuming firm paid for specialized equipment like dies)
=> sceptical about the asset-specificity argument

The acquisition by General Motors in 1926 of Fisher Body (+40%):
1) Klein…: the difficulties of drawing up contracts for the supply of bodies given incentive for opportunistic behavior  + Fisher refused to locate their body plants adjacent to GM assembly plants, a move which GM claimed necessary for efficiency but required  a large very specific investment
2) Coase: A. O. Smith, the largest frame makers with GM as main customer, had harmonious relations with GM for over 50 years without opportunism given expensive and highly specific equipment and shipping hundreds of miles to GM => sceptical about Fisher’s case
– not given an order for definite number of frames but releases of a specific quantity made throughout the year (similar to those in the long-term contracts)
– prices determined by annual negotiations but subject to renegotiation if there were modifications in design or changes in costs
– major model changes involve substantial expenditures for new tooling, the arrangement of production lines and learning time → tooling was either manufactured by Smith or purchased and the sold to and owned by their customers
=> nonetheless, as there were many aspects not covered by arrangement, GM was clearly in a position to act opportunistically / supported by metal trades in 19th century, highly specific investments which give an incentive for opportunistic behavior, but those who succumb would received little repeat business

=>>firms would emerge naturally to overcome the obstacles to their cooperation represented by extremely high transaction costs
/ but as these firms come into existence and expand, transaction costs would tend to fall because interfirm transactions would take the place of factor-factor transactions and this would brake expansion
/ bureaucratic rigidities/diminishing returns to management also raise a firm’s costs of coordinating as it expanded

=>> in “the nature of firm”: extend control as long as cost of organizing were less than costs of market transacting, but not investigate the factors that make costs of organizing lower for some firms than others → explain the institutional structure of production + why costs of organizing differs among firms → complex interrelationships: pricing practices, contractual arrangements, organizational forms (and all affected by the sate of law in “The problem of Social Cost”) => a theoretical scheme to be operational (require empirical work)

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The contractual nature of the firm SNS Cheung – The Journal of Law and Economics, 1983

piece-rate contracts offer a useful gateway to an understanding of the firm as an organization, because payment by the piece falls squarely in between the market and the firm

(we do not exactly know what the firm is-nor is it vital to know. The word “firm” is simply a shorthand description of a way to organize activities under contractual arrangements that differ from those of ordinary product markets)

1. Firm as a form of Contractual Arrangement

2. The Piece-Rate Contract as an Illustration 

3. The Ambiguity of firm Size

4. Concluding remarks

Coase meant by the market: the splitting of one transaction into two could not have gone so smoothly

Knight + Hayek, among others, shared an early interest in Coase’s subject matter
← But came the Keynesian revolution, and whatever not understand found refuge in various “imperfections.”

in 1960, Coase: social cost / Stigler: information / Arrow: appropriability of returns  inept explanatory power of price theory
+ late: Aaron Director’s: tie-in sales / Armen Alchian: interpreting price and competition in terms of property rights

Coase was fortunate just as a tide was turning. My view is that transaction costs and contracting will someday be regarded as a basis for analysis rivaling marginalism in neoclassical economics.

 

 

 

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What Is a Firm? – organizations and markets – Peter Klein, Harold Demsetz,  JC Spender

1] Coase (1937) defines the firm in terms of the employment relation → A one-person operation, in this definition, is not a firm, and vertical integration deals with the question of adding producers of intermediate products to the firm’s employment roll
2] Demsetz thinks independent contractors are firms → hence it makes little sense to speak of “firm” and “market” as alternatives, as Coase does
3] Oliver Williamson noted that Coase expressed more interest in intermediate product markets in his 1988 article than in “The Nature of the Firm.”
4] Knight, Williamson, Hart → the firm is defined not by the employment relationship, but by the ownership of alienable assets → question is who owns what, not who is employed by whom.
5] Dan Spulber → defining the firm as nexus of transactions with objectives different from those of its owners
6] Peter Klein: even in the Knightian approach → to get from [ one-person firm ] to [ multi-person firm ] → requires theory about the relative transaction costs of employment versus independent contracting (→ under which conditions the entrepreneur delegate judgment to subordinates)
7] Russell Coff: Barnard (1938) defined the term “Organization” as “System of consciously coordinated activities” → many theories of competitive advantage use this as a basis for defining the firm → cooperative relationships like alliances are well within the “firm.” → in some cases, aligns outside formal boundaries
8] Demsetz, Harold. (1997 ). The Economics of the Business Firm: Seven Critical Commentaries → reminds us there are several distinct definitions of the firm, including one that allows for the sole contractor → so Barnard’s definition cannot be the only one admissible

Comments by JC Spender 

the question is not ‘what is the firm?’ but about answering it using the ‘axioms of economics’ → Simple neoclassical notions do not work well here, leading to the observation that the ‘theory of the firm’ is actually a theory of markets.

To get into the ‘black box’ → two traditional approaches (Coase):
1) heterogeneous asset-based → ‘make or buy decision’
2) differential power relationship-based → employment relationship
=>  neither works well enough to give us insights that are not obviously entailed in the axioms adopted → i.e. if economics is about maximization, then firms are economic entities that maximize profit or, if firms are about the exercise of power, those with most power direct them

Knight proposed a new axiom
→ distinguishing between [ full rationality | the injection of human judgment or agency ] when the preconditions for rationality alone were not met
→ lead to Simon’s ‘bounded rationality’ (much cited and little used)
→ no theory of the firm beyond that sketched in Administrative Behavior.

→ an interesting new way lies in the Knightian direction → the generation and application of managerial judgment in response to Knightian uncertainty
→ Penrose translated Knight’s insights into the beginnings of a viable new theory → outside microeconomics → no useful answer within economics
→ see the firm as something managed – where both assets and relationships are being managed → a ‘theory of the managed firm’

 

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Appendix. 1.

組織の経済学:企業の境界 -伊藤秀史

組織の経済学の基本問題:
1。内部組織の分析:企業のblackboxを開けて,内部組織のさまざまな特徴・機能を明らか→
2。境界の分析:企業と市場を異なる資源配分のための仕組み・制度と位置づけて比較分析

市場の失敗の要因の多くはまた企業内にもある:
1。少数間競争:事業部間での顧客や資源をめぐる競争
2。外部性:業績格差の内部補助を起因とするただ乗り,シナジー
3。非対称情報:組織の中での分業により,必然的に組織内で情報が偏在する
→ 組織の非効率性の源泉 = 市場の非効率性の源泉

スクリーンショット 2017-07-24 6.25.33

関係特殊的投資(Asset specificity):(取引の生み出す価値を最大化にするはず)
準レントが大きいほど,相手に対する独占的な立場を利用して(barginning power)取引から生じる利益を少しでも多く獲得したいという意図 → 危険が高まる取引の価値が減少する
=> 取引当事者を (垂直) 統合し,取引を内部化することによっ て,非効率性が緩和される(階層的な管理機構が権限関係を用いて事後的に適応)← なぜ同様の権限関係を市場で実現できないのか?

企業組織の権限関係の源泉:
1。関連資産所有の集中:residual control
2。雇用関係がもたらす義務・権利:法的義務+従業員の忠実?
3。裁判所の対応:企業では,内部の権限関係を優先し,介入を控える

取引費用と不完備契約:
1。TC=「価格メカニズムを利用するための費用が存在する」= 取引相手の探索,適切な価格水準の設定,取引に関連する事態の予測,契約案の交渉・作成などにかかる費用など
2。Incomplete contract= a)規定されてない状況と義務 + b)完全観察が不可能
=> 取引が複雑なほど,または不確実性が大きいほど(the level of TC&incomplete contract),組織内で/垂直統合が行われる可能性が高まる

Empirical study: 
Francine Lafontaine and Margaret Slade. Vertical integration and firm boundaries: The evidence. Journal of Economic Literature, 45:629–685, 2007
関係特殊性 (準レント) の測定: 1)インタビュー,アンケート、定性的なデータ、2) 部品の複雑さ,労働者特有の知識,契約企業間の物理的な近さ,R&D 支出等

組織内/統合の費用:(Williamson, 1985, Chapter 6)
1。管理する傾向が強まる:権限を持つ者が直接権限を過剰に行使してしまう
2。決定が政治的に扱われる:権限を持つ組織上位者に対して下位の者が働きかけることで 生じる (influence活動とinfluence・cost)
3。厳しさがなくなり許容度が大きくなる:市場取引がもたらす強力なincentiveが低下させ
(????_??)

事前のincentive問題:(property rights approach)
1。以上のWilliamsonは事後不適応問題(が起こした事前incentive問題??)
2。asymmetric information → moral hazard + adverse selection
3。property rights approach (Grossman&Hart1986, Hart&Moore1990, Hart1995)
→ Williamsonと異なる(Gibbons,Four formal theories of the firm?, 2005, p.201)
→ 企業:(非人的) 資産の集合体 + 資産の所有:残余コントロール権の獲得
→ 企業の境界 (資産所有パターン)→事後交渉での外部機会→事後交渉での合意における利得→ 事前のインセンティブ
スクリーンショット 2017-07-24 7.10.45
→ 1。生産活動の成果を測定することが困難なほど,統合が選択される可能性が高い
→ 2。資産の価値の変動が大きいほど,統合が選択される可能性が高い
→ 3。直接的なインセンティブ設計が困難が重要なほど,統合が選択される可能性が高い

事後不適応問題への回帰:
1。(Hart,Reference points and the theory of the firm, 2007): move away from Coase (1960) and back in the direction of Coase (1937)
2。Gibbons (2005):◆事前incentive問題:“property-rights” and “incentive-systems” theories ◆ 事後適応問題:“rent-seeking” and “adaptation” theories
3。Baker et al. (2008),A theory of firm scope O Hart, B Holmstrom – The Quarterly Journal of Economics, 2010,Hold-up, asset ownership, and reference points O Hart – The Quarterly Journal of Economics, 2009

グレーゾーン (market&firm):
1。Williamson (1985, pp.83–4):かつて私は,中間的な種類の取引というのは組織化することが難しく安定的でないので,[現実の取引様式の分布としては,純粋な市場と純粋な組織の 2 つの山があるという意味で] 二峰性分布がより正確に現実を表すと考えていた (Williamson, 1975).しかし 今では,中間領域の取引は非常によく観察されるものだと考えるようになった
2。今井・伊丹・小池 (1982),Imai and Itami (1984) Interpenetration of organization and market: Japan’s firm and market in comparison with the u.s
→市場原理:M1 価格を情報媒体,個人的利益・効用最大化による自由な交換 M2 自由な参入・退出
→組織原理 O1 権限による命令,共通利害の最大化 O2 固定的・継続的関係
3。Relational Contracts and the Theory of the Firm G Baker, R Gibbons, KJ Murphy – The Quarterly Journal of …, 2002. (2008) Strategic alliances: Bridges between “islands of conscious power” GP Baker, R Gibbons, KJ Murphy – Journal of the Japanese and …, 2008

Organizations Are A Mess…But Not A Mystery:
1。組織の非効率性
2。組織のメンバー:合理的であろうとして,自身の選好にしたがって最適な意思決定を 行っている
3。さまざまな制約の下で,最適な組織デザインが選ばれる
4。結果:セカンドベスト,サードベスト,..

■“Economic Governance,” compiled by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences, 12 October 2009.
■ George Baker, Robert Gibbons, and Kevin J. Murphy. Relational contracts and the theory of the firm. Quarterly Journal of Economics, 117:39–84, 2002
■ George P. Baker, Robert Gibbons, and Kevin J. Murphy. Strategic alliances: Bridges between “islands of conscious power”. Journal of the Japanese and International Economies, 22:146–163, 2008
■ Robert Gibbons. Four formal(izable) theories of the firm? Journal of Economic Behavior and Organization, 58:200–245, 2005
■ Avinash Dixit. Governance institutions and economic activity. American Economic Review, 99:5–24, 2009
■ Sanford J. Grossman and Oliver D. Hart. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94:691–719, 1986
■ Oliver Hart. Firms, Contracts, and Financial Structure. Oxford University Press, Oxford, 1995
■ Oliver D. Hart. Reference points and the theory of the firm. NBER Working paper 13481, October 2007
■ Oliver Hart. Hold-up, asset ownership, and reference points. Quarterly Journal of Economics, 124:267– 300, 2009
■ Oliver Hart and Bengt Holmstrom. A theory of firm scope. NBER Working Paper 14613, December 2008
■ Oliver Hart and John Moore. Property rights and the nature of the firm. Journal of Political Economy, 98: 1119–1158, 1990
■ Bengt Holmstrom and Paul Milgrom. The firm as an incentive system. American Economic Review, 84(4): 972–990, September 1994
■ Ken-ichi Imai and Hiroyuki Itami. Interpenetration of organization and market: Japan’s firm and market in comparison with the u.s. International Journal of Industrial Organization, 2:285–310, 1984
■ Francine Lafontaine and Margaret Slade. Vertical integration and firm boundaries: The evidence. Journal of Economic Literature, 45:629–685, 2007
■ Herbert A. Simon. Organizations and markets. Journal of Economic Perspectives, 5:25–44, 1991
■ Oliver E. Williamson. Markets and Hierarchies: Analysis and Antitrust Implications. The Free Press, New York, 1975.
■ Oliver E. Williamson. The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. The Free Press, New York, 1985
■ Oliver E. Williamson. The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature, 38:595–613, 2000
■ 今井賢一・伊丹敬之・小池和男『内部組織の経済学』東洋経済新報社.
■ 伊藤秀史「市場と組織──原理の相互浸透と企業の境界」伊藤秀史・沼上幹・田中一弘・軽部大(編) 『現代の経営理論』 有斐閣,2008 年 11 月,pp.73–102.
■ 伊藤秀史「組織の経済学」石黒真吾・中林真幸 (編)『比較制度分析入門』有斐閣より出版予定,第 2 章.
■ 伊藤秀史「ノーベル経済学賞の2氏 市場の枠超え,ガバナンスの仕組み解く」『週刊エコノミス ト』11 月 24 日号. 16
■ 新原浩朗『日本の優秀企業研究:企業経営の原点――6 つの条件』日本経済新聞社,日経ビジネス人 文庫,2006 年.

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Appendix. 2.

組織と制度の経済分析:展望 石黒真吾

企業はなぜ市場に存在するのか?:
R. Coase (1937):市場取引を内部化することで,市場における取引費用(交渉費用,取引相手の探索費用,情報収集費用など)を節約できる => 一部取引が発生しない
→ では,なぜ市場取引すべてが企業に代替されてしまわないのか?
→ 問題:1。組織構成員の利害は完全には一致していない、2。情報の非対称性、3。契約の不完備性 => 結果:incentive低下、資源配分の歪み

# 組織は市場と比べ、他劣る点:官僚化の費用,インフルエンス活動の発生、また最優配分の探索の放棄

情報の非対称性:
1。G. Akerolf, J. Stiglitz, M. Spence など
2。mechanism design: 取引制度や組織構造を与件とみなすのではなく,それ自体を設計しようという問題(L. Hurwitz, E. Maskin, R. Myerson)

契約の不完備性:
1。asset specificity:当該取引相手以外での取引では価値が低下するような資産 → 事後的な交渉の費用による事前の過少投資の発生 → この「取引費用」を削減するために部品生産を内部化する (垂直統合)
2。情報の制約ではなく、契約の不完備性に注目(Grossman&Hart&Moore):取引に関わる将来起こりうるすべての事象を予想し,完備な契約を事前に作成することは難しい(また非常に費用がかかる)
→ 契約に代わる役割として「所有権」:残余コントロール権:契約に明記されない出来事が生じた場合,物的資産を自由に 処分・利用する権利 + 物的資産の所有を通じて他の主体に対する Power を獲得 (an empolyer has power over a worker becasue the empolyer owns the physical capital the worker uses… (Hart (1995, p.5)???) (権限=benefit)
→ 「コースの定理」:完備な契約が事前に書ければ,取引はすべて契約で実行可能.よ って,所有権の配分は効率性には影響なし/契約が不完備な場合,所有権を誰に配分するかは取引全体の効率性に影響を与える(権限=incentive)
(Weber:形式権限と実質権限、P. Aghion, J. Tirole:権限の配分、権限移譲:incentive促進+支配減少)

「Incentive・system」としての企業:
1。P. Milgrom & J. Roberts:「企業」=「(労働者と管理者?)相互に補完しあうincentive手段の束」
→ incentiveを与える:物的資産の保有、成果型報酬、制限の少ない生産活動(労働)(?) → この3っは相互に補完的(complementary/supermodular) :ある要素投入にともなう限界利益は,他の要素投入の増加によって上昇する

組織や制度の動学的な変化(進化)過程:(以上は静学的な制度の設計問題)
1。企業の組織はどのように変化するのか(例:分権化 vs 集権化)?/企業の組織変化は市場や経済発展のプロセスとどのように関 わるのか?(Ishiguro)
→ 企業組織の選択と市場均衡との動学的な相互作用:問屋制(分権)⇒ 工場制(集権)⇒ 現代大企業(分権)
→ 暗黙的な長期関係に基づく非市場システム(関係融資や共同体的配分など)を,市場システムの生成や経済発展との関連においてとらえる:関係依存型ガバナンス ⇒ 市場型ガバナンス

制度→マクロ経済:
1。制度選択は,経済発展など長期的なマクロ経済パフォーマンス に持続的な影響をもたらす:
→ 経済発展における公式制度(財産権保護,裁判所による公的な契約執行など)の役割 (D. North)
→ 歴史における私的な契約執行制度の役割(A. Greif)
(私的制度:明示的な契約・約束によらない,暗黙の了解に基づく行動規則(慣習,文化,規範なども含む)⇒ 人々は自己利益に基づき暗黙の合意に従う (D. Hume))
⇒ 公式制度の成立と私的制度の役割との関係(代替的 or 補完的)
→ 植民地政策と「制度の移植」(例:私的財産権保護など)との 関係(D. Acemoglu)
2。生産組織の効率:
→ 「分業」(A. Smith) とは技術効率の問題か組織の問題か?(D. Landes, S. Marglin).
3。社会階層的な「所有権」や「権限」の配分、「力関係」(Marx, Weber)

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Appendix. 3.

Economics of Organization (A): Models of the Firm – IESE business school

1. Transaction Cost economics

 Coase, “The nature of the firm”, Economica, 1937
 Williamsom, “Economics and Organization: A Primer”, California Management Review, Vol 38, n.2, winter 1996.
 Baumol, “Williamson’s The economic institutions of capitalism”, Rand Journal, vol 17 no. 2, Summer 1986

2. The problem of Asymmetric Information

 Akerlof, “The Market for Lemons”, Quarterly Journal of Economics, 89 pp. 488/500, 1970
 Spence, “Job Market Signaling “ Quarterly Journal of Economics, August 1973

3. Agency problems

 K.J. Arrow, “The economics of agency”, Chapter 2 in: Principals and Agents: The Structure of Business (Research colloquium / Harvard Business School) – February, 1991 Edited by John W. Pratt and Richard J. Zeckhauser

4. formal models for Employment

 Edward P. Lazear, “Labor Economics and the Psychology of Organizations”, Journal of Economic Perspectives, V.5, N.2, 1991.
 Edward P. Lazear, “Personnel Economics and Economic Approaches to Incentives,” HKCER Letters 61 (Sept/Oct 2000): 1-8. 

5. formal models for Employment and Executive Compensation

 George P. Baker, Michael C. Jensen y Kevin J. Murphy, “Compensation and Incentives: Practice vs. Theory”, Journal of Finance, V. XLIII, N.3, 1988
 Michael C. Jensen y Kevin J. Murphy, « CEO Bonus Plans: And How To Fix Them », HBS Working Paper 12-022.

8. conventional economic models of the Firm

 T.H. Chiles and J.F. McMackin, “Integrating Variable Risk Preferences, Trust, and Transaction Cost Economics”, Academy of Management Review, Jan. 1996.
 O. Williamson, “Calculativeness, Trust, and Economic Organization”, Journal of Law and Economics, 36, 453-486
 D.M. Kreps, “Corporate Culture and Economic Theory”,
 Baker, George, Robert Gibbons, and Kevin Murphy, “Informal Authority in Organizations”, Journal of Law, Economics and Organization, vol 15 no 1, 1999
 Gibbons, Robert, “Incentives in Organizations”, Journal of Economic Perspectives, vol 12 no. 4, Fall 1998, pp. 115/132

9. alternative approaches to Decision Making in organizations

 H. A. Simon, “Organizations and Markets”, Journal of Economic Perspectives, Spring 1991.
 Schelling, Thomas, “Egonomics or the art of Self-Management”, The American Economic Review, vol 68 no. 2, May 1978.
 Bazerman, Max, Ann E. Tenbrunsel, and Kimberly Wade-Benzoni, “Negotiating with yourself and losing: making decisions with internal competing preferences”, Academy of Management Review, vol 23 no. 2, pp 225-241, 1998. 
 Cooter, Robert, and Melvin Eisenberg, “Fairness, Character and Efficiency in Firms”, UC Berkeley School of Law, Public Law and Legal Theory Working Paper no. 55, April 2000
 O’Donoghue, Ted and Matthew Rabin, “Doing it Now or Later”, The American Economic Review, vol 89 no. 1, March 1999 

———————– Manangement ————————

6. the nature of Knowledge in organizations

 Nonaka, I. (1994). “A Dynamics Theory of Organizational Knowledge Creation”, Organization Science, vol. 5, No. 1, February.
 Spender, J-C. (1994) “Organizational Knowledge, Collective Practice and Penrose Rents”, International Business Review, vol. 3, No. 4.
 Andreu, R. and Sieber, S. (2000). “Learning Trajectories: A Source of Requirements for Effective Knowledge Management”, Proceedings of the BPRC Conference on Knowledge Management: Concepts and Controversies, Warwick University, February 10- 11.

7. Knowledge management in the theory of the firm

 Kogut, Bruce and Zander, Udo (1992). “Knowledge of the firm, combinative capabilities, and the replication of technology”, Organization Science.
 Connor, Kathleen R. (1991). “A historical comparison of resource-based theory and five schools of thought within industrial organization economics: Do we have a new theory of the firm?”, Journal of Management, vol. 17, No.1, pp. 121-154.
 Foss, Nicolai (1996). “Knowledge-based approaches to the theory of the firm: Some critical comments”, Organization Science, vol. 7, No. 5, pp. 470-476.
 Connor, Kathleen R. and Prahalad, C.K. (1996). “A resource-based theory of the firm: knowledge versus opportunism”, Organization Science, vol. 7, No. 5, pp. 477-501.
 Kogut, Bruce and Zander, Udo (1996). “What do firms do? Coordination, Identity, and Learning”, Organization Science, vol. 7, No. 5, pp. 502- 523.

10. Trust and the limits of economics

 S. Ghoshal and P. Moran, “Bad for Practice: A Critique of Transaction Cost Theory”, Academy of Management Review, Jan. 1996.
 O. Williamson, “Economic Organization: The Case for Candor”, Academy of Management Review, Jan. 1996.
 S. Ghoshal and P. Moran, “Theories of Economic Organization: The Case for Realism and Balance”, Academy of Management Review, Jan. 1996.
 C. Portales, JE Ricart and JM Rosanas, “Understanding Trust to Build Strong Relationships in Organizations”, in Managing Strategically in an Interconnected World, Ed. By MA Hitt, JE Ricart and R.D. Nixon, SMS Series, Willey, 1998. DI-360-E

Contract Theory literatures

The following theories relate very close to each other:

contract theory, incentives theory, principal-agent theory, agency theory and mechanism design

Moreover, all of them also deal with the following general theories:

game theory, theory of organizations, and information economics

I will gather some introductions of contract theory… and some lecture references in this post.

(I am recently learning laffont’s textbook which has a good introduction of contract theory)

+ 契約理論ミクロ経済学第3の理論への道程 伊藤秀史

 

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OLIVER HART AND BENGT HOLMSTRÖM: CONTRACT THEORY Nobel prize introdution

contract → mitigate/resolve conflicts of interests = obstacle to human cooperation ← by providing incentives to exploit the prospective gains from cooperation

adverse selection ← asymmetric info at/before contracting
– Mirrlees and Vickrey: economic theory of incentives under asymmetric information (1996 Prize)
– Akerlof, Spence, and Stiglitz:  analyses of markets with asymmetric information (2001)
– Hurwicz, Maskin, and Myerson: foundations of mechanism-design theory (2007)
– Tirole: moral hazard & adverse selection for the analysis of market power and regulation (2014)

moral hazard ← the principal cannot directly observe the agent’s actions / cannot measure performance precisely and timely
complete contracts that paying for performance: Holmstrom (1979, 80s with Milgrom) =informativeness principle, dynamic moral hazard, multi-tasking …
→ the optimal compensation schedule trades-off incentive provision against risk-sharing

incomplete contracting: measure and verify performance ex post + write sufficiently detailed contracts ex ante = not possible
→ Oliver Hart with Sanford Grossman & John Moore: allocation of decision rights [ ← determined by property rights/ownership → generate bargaining power ] → incentives
→ applied to corporate governance and organizational economics issues:
(costs and benefits of mergers, the distribution of authority within organizations, whether or not providers of public services should be privately owned, and how outside owners can control a company inside managers through the design of corporate governance and capital structure)

# contract theory does not rely on agents being completely rational and selfish ← applied to unselfish or boundedly rational agents, or agents with intrinsic non-material (psychological and sociological) motivations

……

 

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Contract Theory – Bolton & Dewatripont Oslo, August 2006

mostly stresses “classic papers”

General References

– * Bolton, P. and M. Dewatripont (2005), Contract Theory, Cambridge, Mass: MIT Press (especially chapter 1: Introduction).
– Hart, O. (1995), Firms, Contracts and Financial Structure, Oxford, England: Oxford University Press.
– Laffont, J.-J. and D. Martimort (2002), The Theory of Incentives: The Principal-Agent Problem. New York: Princeton University Press.
– Milgrom, P. and J. Roberts (1992). Economics, Organization and Management.
– Englewood Cliffs, N.J.: Prentice-Hall. Salanie, B. (1997), The Economics of Contracts: A Primer. MIT Press.

1. Moral hazard: static one principal, one agent.

B&D, Chapter 4. Moral Hazard & 6. Multidimensional incentive problems
– * Holmstrom, B. (1979). “Moral Hazard and Observability.” Bell Journal of Economics: 10:74-91.

– * Holmstrom, B. and P. Milgrom (1990), “Multi-Task Principal-Agent Analyses,” Journal of Law, Economics and Organization, 7, Special Issue.

– Grossman, S. and O. Hart (1983), “An Analysis of the Principal-Agent Problem”, Econometrica 51: 7-45.
– Jewitt, I. (1988), “Justifying the First-Order Approach to Principal-Agent Problems”, Econometrica 56: 1177-90.
– Mirrlees, J. (1999), “The Theory of Moral Hazard and Unobservable Behavior”, Review of Economic Studies 66: 3-21.
– Rogerson, W. (1985), “The First-Order Approach to Principal-Agent Problems”, Econometrica 53: 1357- 68.

2. Moral hazard in teams, tournaments and hierarchies.

B&D, Chapter 8. Multiagent Moral Hazard and Collusion
– * Dewatripont, M. and J. Tirole (1999), “Advocates,” Journal of Political Economy, 107(1): 1-39. Green, J. and N. Stokey (1983), “A Comparison of Tournaments and Contracts.” Journal of Political Economy, 91: 349-64.

– * Holmstrom, B. (1982). “Moral Hazard in Teams.” Bell Journal of Economics: 13:324-40.

– Calvo, G. and S. Wellisz (1978), “Supervision, Loss of Control, and the Optimum Size of the Firm,” Journal of Political Economy 75: 123-38.
– Holmstrom, B. and P. Milgrom (1990), “Regulating Trade Among Agents,” Journal of Institutional and Theoretical Economics, 146(1): 85-105.
– Itoh, H. (1991), “Incentives to Help in Multi-Agent Situations,”
– Econometrica, 59(3): 611-636. Lazear, E. and S. Rosen. (1981). “Rank-Order Tournaments as Optimum Labor Contracts.” Journal of Political Economy, 89: 841-864.
– Legros, P. and S. Matthews (1993), “Efficient and Nearly Efficient Partnerships”, Review of Economic Studies 6): 599-611.
– Qian, Y. (1994), “Incentives and Loss of Control in an Optimal Hierarchy”, Review of Economic Studies 61: 527-44.

3. Dynamic moral hazard and career concerns.

B&D, Chapter 10. Dynamic Moral Hazard
– * Chiappori, P.A., I. Macho, P. Rey and B. Salanie (1994), “Repeated Moral Hazard: The Role of Memory, Commitment and the Access to Credit Markets,” European Economic Review 38(8), 1527-53.

– * Holmstrom, B. (1982). “Managerial Incentive Problems–A Dynamic Perspective.” Republished in Review of Economic Studies 66 (1999): 169-82.
– * Holmstrom, B. and P. Milgrom (1987), “Aggregation and Linearity in the Provision of Intertemporal Incentives,” Econometrica, 55(2) p 303-328.

– Dewatripont, M., I. Jewitt, and J. Tirole. (1999). “The Economics of Career Concerns, Parts I & II.” Review of Economic Studies 66: 183-217.
– Fudenberg, D., Holmstrom, B. and P. Milgrom (1990), “Short Term Contracts and Long Term Agency Relationships,” Journal of Economic Theory, 51(1): 1-31.
– Fudenberg, D., and J. Tirole (1990). “Moral Hazard and Renegotiation in Agency Contracts,” Econometrica 58(6): 1279-1319.
– Hermalin, B. and M. Katz. (1991). “Moral Hazard and Verifiability: The Effects of Renegotiation in Agency.” Econometrica, 59(6): 1735-1753.  
– Radner, R. (1981), “Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship,” Econometrica, 49(5): 1127-48.
– Rogerson, W. (1985), “Repeated Moral Hazard,” Econometrica, 53: 69-76.

4. Static adverse selection.

B&D, Chapter 2. Adverse selection: screening & 6.
– * Maskin, E. and J. Riley (1984), “Monopoly with Incomplete Information,” Rand Journal of Economics, 15: 171-96.

– * Tirole, J. (1986), “Hierarchies and Bureaucracies: On the Role of Collusion in Organizations” Journal of Law, Economics and Organization, II(2):181-214.

– Adams, W. and J. Yellen (1976), “Commodity bundling and the burden of monopoly,” Quarterly Journal of Economics 90: 475-498.
– Baron, D. and R. Myerson (1982), “Regulating a Monopolist with Unknown Costs,” Econometrica, 50(4): 911-30.
– Laffont, J-J and J. Tirole (1986), “Using Cost Observation to Regulate Firms,” Journal of Political Economy, 94(3).
– Mirrlees, J. (1971), “An exploration in the theory of optimum income taxation,” Review of Economic Studies 38: 175-208.
– Mussa, M. and S. Rosen (1978), “Monopoly and Product Quality,” Journal of Economic Theory, 18: 301- 317.
– Rochet, J.C. and L. Stole (2003), “The Economics of Multidimensional Screening,” in M. Dewatripont, L. Hansen and S. Turnovsky (Eds), Advances in Economics and Econometrics, Cambridge: Cambridge University Press.
– Tirole, J. (1992), “Collusion and the Theory of Organizations,” in J.-J. Laffont (ed.), Advances in Economic Theory: Sixth World Congress, Volume 2, Econometric Society, Cambridge: Cambridge University Press, 151-206.

5. Mechanism design and auctions.

B&D, Chapter 7. Multiagent adverse selection
– * Myerson, R. (1981), “Optimal Auction Design,” Mathematics of Operations Research, 6: 58-73.

– * Myerson, R. and M. Satterthwaite (1983) , “Efficient Mechanisms for Bilateral Trading,” Journal of Economic Theory, 29: 265-281.

– Cremer, J. and R. McLean (1988), “Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions,” Econometrica 56, 1247-1258.
– d’Aspremont, C. and L. Gerard-Varet (1979), “Incentives and Incomplete Information,” Journal of Public Economics, 11: 24-45.
– Maskin, E. and J. Riley (1984), “Optimal Auctions with Risk-Averse Buyers,” Econometrica 52(6): 1473-1518.
– Milgrom, P. and R. Weber (1982), “A Theory of Auctions and Competitive Bidding,” Econometrica 50(5):1089-1122. 

6. Dynamic adverse selection.

B&D, Chapter 9. Dynamic Adverse Selection
– * Dewatripont, M. and Maskin, E. (1995), “Credit and Efficiency in Centralized and Decentralized Economies,” Review of Economic Studies 62(4), 541-555.

– * Townsend, R. (1982), “Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information,” Journal of Political Economy, 90, 1166-86.

– Dewatripont, M. (1989), “Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts,” Quarterly Journal of Economics, 104: 589-619.
– Dewatripont, M. and Maskin, E. (1990), “Contract Renegotiation in Models of Asymmetric Information,” European Economic Review, 34(2-3): 311-321.
– Diamond, D. (1989), “Reputation Acquisition in Debt Markets,” Journal of Political Economy, 97(4), 828-62.
– Hart, O. and J. Tirole (1988), “Contract Renegotiation and Coasian Dynamics,” Review of Economic Studies, 55: 509-540.
– Laffont, J.-J. and J. Tirole (1988), “The Dynamics of Incentive Contracts,” Econometrica, 56(5): 1153- 1175.
– Laffont, J.-J. and J. Tirole (1990), “Adverse Selection and Renegotiation in Procurement,” Review of Economic Studies, 57: 597-625.

7. Implementation, incomplete contracts and authority.

B&D, Chapter 11. Incomplete Contracts & 12. Foundations of contracting with unverifiable information.
* Aghion, P., and P. Bolton (1992), “An ‘Incomplete Contracts’ Approach to Financial Contracting,” Review of Economic Studies, 59:473-94.

* Aghion, P., M. Dewatripont and P. Rey (2002), “On Partial Contracting,” European Economic Review.
* Aghion, P. and J. Tirole (1997), “Formal and Real Authority in Organizations,” Journal of Political Economy, 105(1), 1-29.
* Grossman, S. and O. Hart (1986), “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” Journal of Political Economy, 94(4): 691-719.
* Hart, O. and J. Moore (1999), “Foundations of Incomplete contracts,” Review of Economic Studies, 66(1): 115-38.
* Hart, O. and J. Moore (1999), “Foundations of Incomplete contracts,” Review of Economic Studies, 66(1): 115-38.
* Maskin, E. (1999) “Nash Equilibrium and Welfare Optimality,” Review of Economic Studies, 66, 23-38.
* Tirole, J. (1999), “Incomplete Contracts: Where Do We Stand?” Econometrica, 67(4): 741-81

– Aghion, P., M. Dewatripont and P. Rey. (1994). “Renegotiation Design with Unverifiable Information.” Econometrica 62: 257-282.
– Che, Y. and D. Hausch. (1999). “Cooperative Investments and the Value of Contracting.” American Economic Review 89: 125-47.
– Dewatripont, M. (2001), “Authority,” Walras-Bowley Lecture presented at the 2001 North-American Meeting of the Econometric Society.
– Hart, O. (1995). Firms, Contracts, and Financial Structure. Oxford University Press.
– Hart, O. and J. Moore. (1988). “Incomplete Contracts and Renegotiation.” Econometrica 56: 755-85.
– Hart, O. and J. Moore (1990), “Property Rights and the Nature of the Firm,” Journal of Political Economy, 98 (6): 1119-1158.
– Legros, P. and A. Newman (2002), “Competing for Ownership,” mimeo. 
– Maskin, E. and J. Tirole (1999), “Unforeseen Contingencies and Incomplete Contracts,” Review of Economic Studies.
– Maskin, E. and J. Moore (1999), “Implementation and Renegotiation,” Review of Economic Studies.
– Moore, J. and R. Repullo (1988) “Subgame Perfect Implementation,” Econometrica, 56: 1191-1220.
– Noldeke, G. and K. M. Schmidt. (1995). “Option Contracts and Renegotiation: A Solution to the Hold-up Problem.” Rand Journal of Economics, 26(2): 163-179.
– Segal, I. (1999), “Complexity and Renegotiation: A Foundation for Incomplete Contracts,” Review of Economic Studies.

 

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Contract Theory – Simon Board and Moritz Meyer-ter-Vehn, ucla, 2009

– tools and techniques used in models of moral hazard, screening and incomplete contracting
– applications from industrial organisation, corporate finance, public finance, personnel economics, and many other areas
– recent innovations in the theory of relational contracts and dynamic signalling

Books and Manuscripts

Bolton and Dewatripont (2005), Contract Theory, MIT Press.
Laffont and Martimort (2002), The Theory of Incentives, PUP.
Mas-Colell, Whinston and Green (1995), Microeconomic Theory, OUP.
Salanie (1997), The Economics of Contracts: A Primer, MIT Press.
Segal and Tadelis (2002), Lectures on Contract Theory, Unpublished, Stanford University.

1. Useful Techniques

Topics: lattices, supermodularity, monotone comparative statics, comparing equilibria, envelope theorems, stochastic orders.

– Topkis (1998), Supermodularity and Complimentarity, PUP.
– Milgrom and Segal (2002), “Envelope Theorems for Arbitrary Choice Sets,”
– Econometrica. Shaked and Shanthikumar (2007), Stochastic Orders, Springer.
– Milgrom (1981), “Good News and Bad News: Representation Theorems and Applications,” Bell Journal.
– Karlin and Rinott (1980),“Classes of Ordering of Measures and Related Correlation Inequalities I: Multivariate Totally Positive Distributions,” Journal of Multivariate Analysis.
– Karlin and Rubin (1956), “The Theory of Decision Procedures for Distributions with Monotone Likelihood Ratio,” Annals of Mathematical Statistics.
– Amir, (2003), “Supermodularity and Complementarity in Economics: An Elementary Survey.”

2. Moral Hazard: One Agent

Topics: two action model, continuous action model, optimal linear contracts, comparative performance evaluation, multitasking, private evaluations, debt contracts.

– Bolton and Dewatripont, Chapters 4 and 6.2.
– Milgrom and Roberts (1992), Economics, Organization and Management, Prentice Hall.
– Holmstrom (1979), “Moral Hazard and Observability,”
– Bell Journal. Rogerson (1985), “The First-Order Approach to Principal-Agent Problems,” Econometrica.
– Mirrlees (1999), “The Theory of Moral Hazard and Unobservable Behaviour: Part I,” Review of Economic Studies.
– MacLeod (2003), “Optimal Contracting with Subjective Evaluation,” American Economic Review.
– Innes (1990), “Limited Liability and Incentive Contracting with Ex-ante Action Choices,” Journal of Economic Theory.
– Holmstrom and Milgrom (1991), “Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design,” Journal of Law, Economics, & Organization

3. Moral Hazard: Many Agents

Topics: tournaments, partnerships, comparative performance evaluation.

– Bolton and Dewatripont, Chapter 8.
– Lazear and Rosen (1981), “Rank-Order Tournaments as Optimum Labor Contracts,” Journal of Political Economy.
– Holmstrom (1982), “Moral Hazard in Teams,” Bell Journal.

4. Moral Hazard: Dynamics

Topics: repeated moral hazard, justifying simple contracts, renegotiation, career concerns.

– Bolton and Dewatripont, Chapter 10.
– Rogerson (1985), “Repeated Moral Hazard,” Econometrica.
Fudenburg, Holmstrom and Milgrom (1990), “Short-term Contracts and Long-term Agency Relationships,” Journal of Economic Theory.
– Holmstrom and Milgrom (1987), “Aggregation and Linearity in the Provision of Intertemporal Incentives,”
– Econometrica. Radner (1985), “Repeated Principal-Agent Games with Discounting,” Econometrica
– Hermalin and Katz (1991), “Moral Hazard and Verifiability: The Effects of Renegotiation in Agency,” Econometrica.
– Fudenberg and Tirole (1990), “Moral Hazard and Renegotiation in Agency Contracts,” Econometrica.
– Holmstrom (1999), “Managerial Incentive Problems: A Dynamic Perspective,” Review of Economic Studies.

5. Relational Contracts

Topics: Bilateral contracts, multilateral contracts, embedding relational contracts in markets.

– Abreu, Pearce and Stacchetti (1986), “Optimal Cartel Equilibria with Imperfect Monitoring,” Journal of Economic Theory.
– Shapiro and Stiglitz (1984), “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review.
– Macleod and Malcomson (1989), “Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment,” Econometrica.
– Macleod and Malcomson (1998), “Motivation and Markets,” American Economic Review.
– Levin (2003), “Relational Incentive Contracts,” American Economic Review.
– Thomas and Worrall (1988), “Self-Enforcing Wage Contracts,” Review of Economic Studies.
– Thomas and Worrall (1994), “Foreign Direct Investment and the Risk of Expropriation,” Review of Economic Studies.

6. Mechanism Design: One Agent

Topics: revelation principle, discrete type problems, continuous type problems, ironing, credit rationing, implicit labour contracts, regulation, insurance, labour contracts, contracts as barriers to entry, costly state verification.

– Bolton and Dewatripont, Chapter 2.
– Laffont and Martimort, Chapters 2 and 3.
– Myerson (1982), “Optimal Coordination Mechanisms in Generalized PrincipalAgent Problems,” Journal of Mathematical Economics.
– Maskin and Riley (1984), “Monopoly with Incomplete Information,” RAND Journal of Economics.
– Mussa and Rosen (1978), “Monopoly and Product Quality,” Journal of Economic Theory.
– Baron and Myerson (1982), “Regulating a Monopolist with Unknown Costs,” Econometrica

7. Mechanism Design: Many Agents

Topics: optimal auctions, bilateral trading.

– Mas–Collel, Whinston and Green, Chapter 23.
– Bolton and Dewatripont, Chapter 7.
– Myerson (1981), “Optimal Auction Design,” Mathematics of Operations Research.
– Krishna (2002), Auction Theory, Academic Press. Milgrom (2004), Putting Auction Theory to Work, CUP.
– Myerson and Satterthwaite (1983), “Efficient Mechanisms for Bilateral Trading,” Journal of Economic Theory.
– Cremer and McLean (1988), “Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist when Demands are Interdependent,” Econometrica.
– Neeman (2004), “The Relevance of Private Information in Mechanism Design ”, Journal of Economic Theory.

8. Mechanism Design: Dynamics

Topics: commitment solutions, no commitment, renegotiation, entry of new agents, durable goods monopoly, consumption smoothing.

– Bolton and Dewatripont, Chapter 9.
– Laffont and Martimort, Chapter 8.
– Baron and Besanko (1984), “Regulation and Information in a Continuing Relationship,” Information Economics and Policy.
– Courty and Li (2000), “Sequential Screening,” Review of Economic Studies.
– Board (2007), “Durable–Goods Monopoly with Varying Demand,” Review of Economic Studies.
– Segal (2003), “Optimal Pricing Mechanisms with Unknown Demand,” American Economic Review.
– Thomas and Worrall (1990), “Income Fluctuation and Asymmetric Information: An Example of a Repeated Principal-Agent Problem,” Journal of Economic Theory.
– Bulow (1982), “Durable-Goods Monopolists,” Journal of Political Economy.
– Gul, Sonnenschein and Wilson (1986), “Foundations of Dynamic Monopoly and the Coase Conjecture,” Journal of Economic Theory.
– Ausubel and Deneckere (1989), “Reputation in Bargaining and Durable Goods Monopoly,” Econometrica.
– Fuchs and Skrzypacz (2007), “Bargaining with Arrival of New Traders or New Information,” Working Paper, Chicago and Stanford GSB.
– Hart and Tirole (1988), “Contract Renegotiation and Coasian Dynamics,” Review of Economic Studies.
– Laffont and Tirole (1988), “The Dynamics of Incentive Contracts,” Econometrica.

9. Mixed Models

Topics: false moral hazard (optimal taxation), adverse selection and moral hazard.

– Bolton and Dewatripont, Chapter 6.3.
– Laffont and Martimort, Chapter 7.
– Mirrlees (1971), “An Exploration in the Theory of Optimum Income Taxation ”, Review of Economic Studies.
– Laffont and Tirole (1986), “Using Cost Observation to Regulate Firms,” Journal of Political Economy.
– McAfee and McMillan (1987), “Competition for Agency Contracts,” RAND Journal of Economics.

 

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CONTRACT THEORY – Jens Josephson, Stockholm University, 2012 

– an overview of important areas of the economics of information.
– classic papers of contract design under asymmetric information (moral hazard and adverse selection models), mechanism design and auctions, and reputation

General Treatments

– *Bolton, P. and M. Dewatripont (2005), Contract Theory. The MIT Press.
– * Mas-Collel A., Whinston, M.D., and J.R. Green (1995), Microeconomic Theory, Oxford University Press.

-Bergin, J. (2005). Microeconomic Theory. Oxford University Press. 
– Fudenberg and Tirole (1991), Game Theory. The MIT Press.
– Jehle, P. and P. J. Reny (2000), Advanced Microeconomic Theory, 2nd ed., Addison-Wesley.
– Laffont, J-J. and D. Martimort (2002), The Theory of Incentives, Princeton University Press.  
– Osborne and Rubinstein (1994), A Course in Game Theory, MIT Press.
– Perez, Castrillo, D. and Macho Stadler, I. (2001), An introduction to the economics of information, 2nd ed.,
– Oxford University Press. Salanié, Bernard (2005). The Economics of Contracts: A Primer. 2nd ed. Cambridge, MA: MIT Press.

1. Moral Hazard I: Static bilateral

* Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 4: Moral Hazard, and chapter 6.2: Multidimensional incentive problems.
* Holmstrom, B. (1979). “Moral Hazard and Observability.” Bell Journal of Economics 10, 74-91.
* Holmstrom, B. and P. Milgrom (1991), “Multi-Task Principal-Agent Analyses,” Journal of Law, Economics and Organization 7, Special Issue.
– Perez, Castrillo, D. and Macho Stadler, I. (2001), An introduction to the economics of information, 2nd Edition, Oxford University Press. 

2. Moral hazard II:

a) Multiagent

* Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 8: Multiagent Moral Hazard and Collusion.
* Holmstrom, B. (1982). “Moral Hazard in Teams.” Bell Journal of Economics: 13, 324-40. 

b) Dynamic

* Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 10: Dynamic Moral Hazard.
* Chiappori, P.A., I. Macho, P. Rey and B. Salanie (1994), “Repeated Moral Hazard: The Role of Memory, Commitment and the Access to Credit Markets,” European Economic Review 38(8), 1527-53.
* Holmstrom, B. (1982). “Managerial Incentive Problems–A Dynamic Perspective.” Republished in Review of Economic Studies 66 (1999), 169-82.
* Holmstrom, B. and P. Milgrom (1987), “Aggregation and Linearity in the Provision of Intertemporal Incentives,” Econometrica, 55(2), 303-328.
– Sannikov, Y. (2008), “A Continuous-Time Version of the Principal-Agent Problem,” Review of Economic Studies 73(3), 957-984.

3. Adverse Selection I: Screening

* Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 2: Adverse selection: screening, and chapter 6: Multidimensional incentive problems.
* Maskin, E. and J. Riley (1984), “Monopoly with Incomplete Information,” Rand Journal of Economics, 15, 171-96. 
* Riley, J.G. (2001), Silver signals: Twenty-five years of screening and signaling. J Econ Lit 39(2), 432–478.
* Rotschild, M., and J. Stiglitz (1976), “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Information,” The Quarterly Journal of Economics 90(4), 629-649.
– Rochet, J.C. and L. Stole (2003), “The Economics of Multidimensional Screening,” in M. Dewatripont, L. Hansen, and S. Turnovsky (Eds), Advances in Economics and Econometrics, Cambridge University Press.

4. Adverse Selection II:

a) Signaling, and Cheap Talk

* Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 3: Hidden Information, Signaling and chapter 13.1: Markets and Contracts.
* Riley, J.G. (2001), Silver signals: Twenty-five years of screening and signaling. J Econ Lit 39(2), 432–478.

b) Dynamic

* Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 9: Dynamic Adverse Selection.

5. Auctions and Mechanism Design

– * Bolton, P. and M. Dewatripont (2005), Contract Theory, chapter 7: Multiagent adverse selection.
– * Myerson, R. (1981), “Optimal Auction Design,” Mathematics of Operations Research, 6, 58-73.
Jackson, M. (2003), “Mechanism Theory,” mimeo.

6. Reputation 

* Bar-Isaac, H. and S. Tedelis (2008), “Seller Reputation,” Foundations and trends in Microeconomics 4(4), 273-351.
– Bar-Isaac, H. (2003), “Reputation and survival: Learning in a dynamic signalling model”. Review of Economic Studies 70, 231-251.
– Mailath, G. J. and L. Samuelson (2001), “Who wants a good reputation?,” Review of Economic Studies 68, 415–441.
– Holmstrom, B. (1982). “Managerial Incentive Problems–A Dynamic Perspective.” Republished in Review of Economic Studies 66 (1999), 169-82.

7. Various

– Baliga, S. and T. Sjostrom (2012), “The Strategy of Manipulating Conflict,” forthcoming American Economic Review.
– Bolton, P., Freixas, X., and J. D. Shapiro (2012), “The Credit Ratings Game,” Journal of Finance 67(1), 85-112.
– Gayle, G.-L., and R.A. Miller (2009), “Has Moral Hazard Become a More Important Factor in Managerial Compensation?,” American Economic Review 99(5), 1740–69.
– Rayo, L. (2007), “Relational Incentives and Moral Hazard in Teams,” Review of Economic Studies, 74(3), 937-963.
– Hart, O. and J. Moore. (2004),”Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In.” National Bureau of Economic Research Working Paper No. 10397.
– Levin, J. (2003). “Relational Incentive Contracts,” American Economic Review 93(3), 835-857.
– Tirole, J. (2003) “Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective.” American Economic Review 93(5), 1678-1702.
– Che, Y.-K., and S.-W. Yoo (2001), “Optimal Incentives for Teams.” American Economic Review 91(3), 525-541.
– Dewatripont, M. and J. Tirole (1999), “Advocates,” Journal of Political Economy, 107(1), 1-39.
– Maskin, E. and J. Tirole (1999), “Unforeseen Contingencies and Incomplete Contracts.” Review of Economic Studies 66, 83-114.
– Aghion, P., and J. Tirole (1997), “Formal and Real Authority in Organizations,” Journal of Political Economy, 105(1), 1-29. 
– Kocherlakota, N. (1996), “Implications of Efficient Risk Sharing without Commitment,” Review of Economic Studies 63, 595-609.
– Laffont, J.-J., and M. Salah Matoussi (1995), “Moral Hazard, Financial Constraints and Sharecropping in El Oulja,” The Review of Economic Studies, 62(3), 381-399.
– Qian, Y. (1994), “Incentives and Loss of Control in an Optimal Hierarchy”, Review of Economic Studies 61, 527-44.
– Lewis T.R., and D.E.M. Sappington (1993), “Ignorance in Agency Problems,” Journal of Economic Theory 61(1), 169-183.
– Crawford, V.P., and J. Sobel (1982) “Strategic Information Transmission.” Econometrica, 50(6), 1431-1451.
– Townsend, R. M. (1979), “Optimal contracts and competitive markets with costly state verification,” Journal of Economic Theory 21(2), 265-293.
– Calvo, G. and S. Wellisz (1978), “Supervision, Loss of Control, and the Optimum Size of the Firm,”Journal of Political Economy 75, 123-38.

 

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2017/07/23 update:

契約理論ミクロ経済学第3の理論への道程 伊藤秀史

新古典派(完全競争市場分析)の完成後、現代ミクロ経済学はおおまかに2つの方向:
1。不完全市場の分析:[1] 少数経済主体間の競争、[2] 情報の非対称性 、[3] 外部性などの市場の失敗の要因の統一した分析(ゲーム理論の進展により)
2。取引形態に分析対象の拡大:(black boxから)企業の組織やマネジメントの分析が経済学的に行われ
=> 契約理論 (contract theory)= 2つの方向で発展した理論群の総称
(standard textbook of CT = Bolton and Dewatripont 2005: theory of [ incentive + information + economic institution ] → contract theory)

1。不完全市場の分析→ [2] asymmetric information

private information = asymmetric information ← 情報の探索の費用+経済主体の分業によって必然的に発生 / その私的情報を利用し利益をえることができるために、個人の開示incentiveはない

取引においてasymmetric information:(Arrow, 1985)
[1] hidden action/moral hazard/agency problem:
初期は競争市場の効率性、今はagency問題により(p)望ましいincentive設計に注目(Holmstrom 1979, Grossman&Hart 1983:標準的な分析枠組みの確定)
[2] hidden information/adverse selection
問題発見から解消するための情報開示、情報伝達の可能性へと移す:a) signaling (Spence 1973) ; b) screening (Rothschild&Stiglitz 1976)
市場からagency問題に移す:auction (Vickrey 1961), mechanism design (Mirrlees l971) → 隠れた情報下での最適契約設計問題の標準的な方法論 (Myerson 1981) (Baron&Myerson 1982)

2。取引形態に分析対象の拡大 → economic institution/organizational structure

firm → agency problem(所有と経営の分離)  → 資本構成の適切設計によって経営者へincentive (Jensen&Meckling 1976)

asymmetric information以外の問題:
Coase: 企業を市場とは異なるルールで機能する資源配分の仕組み、取引費用の違い
取引費用:
a) 取引発生以前に被る事前費用(取引前/取引中の過程で起こりうる状態を探索する費用、取引条項の折衝・起草・明記のための費用など) => incomplete contract
b) 当初到達した合意を履行・遵守していく過程で被る事後費用(取引条項の再交渉や訴訟にかかる費用) => incomplete contract/asset specificity → hold up problem (williamson: 3っ概念に基づいてtransaction cost economicsを体系化し企業の境界を分析) → hold up problem: (Hart&Moore 1988) によって厳密に定式化、(Grossman&Hart 1986)(Hart&Moore l990)hold up緩和から、property rightsをどのように割り当てるのが望ましいかを分析し(property rights approach→企業の境界)

a) + b) => incomplete contract theory + nonverifiability (asy infoでもあるが、TCを強調→契約以外の制度)

Coase以外の「企業は何か」:
[1] Team生産とPrincipalによるmonitoring(ALchian & Demsetz 1972)
[2] → hidden actionを複数 agentからなるteamに拡張(Holmstrom 1982)
[3] 企業をnexus of contractsとみなし(Jensen and Meckling 1976)

3。incentive 
→ 「アメの期待とムチの恐れとを与えて,人を行動(選択・決断 )へと駆り立てるもの」+ 完全競争市場ならincentiveを考慮する必要ない、利己的に行動する各経済主体が自然的に社会の効率的な資源配へ導く/しかし市場の不完全性から経済主体の利己行動が最優状態から乖離、incentive問題発生、incentive設計により効率向上は可能

[1。+ 2。]Contract theory =>「非対称情報・契約の不完備性の下でのincentive設計」
3 fundamental models: a) moral hazard; b) adverse selection; c) hold up
典型的な問題以外: ラチェット効果、ソフトな予算制約、チーム生産など、さまざまなincentive問題が契約理論によって分析
Incentive設計契約設計財産権や権限の配分組織構造などにより、incentive compatibilityを達成
(pとaの契約合意のプロセスについては,「交渉の余地のない(take or leave)」方式が仮定され、いわば寡占市場でのStackelberg competitionと同様の,特定の展開形ゲームを仮定するわけだが,この仮定によって,契約理論は交渉プロセスを単純化し,交渉ゲームの理論がもたらす諸問題(交渉プロセスを特定化する必要性,複数均衡など)を回避してincentive設計の問題に集中する
+participation condition/individual rationality => 契約理論の基本モデルは部分均衡をとる発展 => 結果として,それが少数経済主体間の取引関係を分析する理論であることから,特定の展開形ゲームを分析するゲーム理論の一応用分野とみなされることがある/実際,契約理論の基本モデルの分析は,ゲーム理論的にいえば,pとaの間の展開形ゲームの部分ゲーム完全均衡(hidden actionの場合)もしくはベイズ完全均衡(hidden infoの場合))
=> 条件付き最適化が分析されるという点では契約理論は価格理論に近い(契約理論は価格埋論を拡張した理論として位置付けも可能)→ つまり価格理論で分析される市場「価格」を,契約理論では状態や義務に条件付けられた「契約」に拡張し、取引価格が数量などの条件によって変わる「非線形価格」の分析

### (as we have already told by Coase that every market has its transaction costs, can we actually imagine/describe a so-called complete competitive market in general sense? And if incentive problem comes from the incompleteness of market, where does this incompleteness come from? Surely it comes from asymmetric information, but incentive problems also occur in an individual sense. I’d rather think the source is not just asymmetric but bounded information – info are always bounded. Every single or combined participants do all decisions under bounded information. The traditional perfect market surely does not mean a market with no bounded information anywhere. Moreover, don’t forget another important factor of incentive problem that is the conflicting objectives. If we can create a limited situation in which all the individuals have the exactly same objective, the incentive problem will not bother us even we have asymmetric information. And this conflicting objectives certainly exist in any perfect market that you can imagine.)

Kim, et al.(2006) 1970〜2005 in 41 academic magazine over 500 citationスクリーンショット 2017-07-23 22.10.54

契約理論が経済学に与えた影響:
1)あらゆる社会制度におけるincentiveの分析や限定された情報がもたらす問題の再認識
2)second bestの考え方の浸透 ←問題の根源であるasy info&incomp conを解決できない+様々なシステムのTC&agency cost&仕組みを考え、最低費用で最高効率のincentive設計
3)managementの諸問題の研究とbusiness schoolへの影響:(Porter 1980)が経営戦略の分野に産業組織論やゲーム理論の考え方を導入して新しい競争戦略論を確立/その後契約理論は,組織,企業金融,人事,会計,marketingなどの多くのmanagement機能の研究で,agency関係の枠組みで行われ
4)ゲーム理論の「中間建築物」としての役割: (神取(1994)「ゲーム理論がもたらした経済学の変貌」: 1.配分の効率性からmechanismの効率性へ; 2.自由放任主義の限界; 3.誘因(incentive)制御問題の論理構造)

 

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2017/08/01 update:

「合同理论」有哪些实际应用?

国家和国家的有限承诺出尔反尔问题,设计renegociation-proof合约,看看Macro Battaglini。

企业给雇员设计长期合约来达到最优路径努力,Ilya Segal & Alexandro Pavan。

A theory of prostitution L Edlund, E Korn – Journal of political Economy, 2002

Bayesian Probability

Bayesian statistics for dummies

The importance of Bayes’ theorem is that it will tell you the true likelihood of an event that are in stark contrast to our intuitive understanding:

decided by various factors if not random walk → A probability from past experience → additional information about factors that affect/about experience → a clearer understanding upon different factors so that we can forecast based on observation on these factors

p(A|B) = p(B|A) p(A) / p(B) = p(B U A)/p(B)

p(B|A) is the probability of the evidence turning up, given that the outcome obtains.

### Above is the introduction of bayes theory that you can see anywhere, but it tells us little about why our intuition is wrong comparing to such simple equation, and why we can’t get the bayes results by intuition? Here’s my way to explain:

p(A|B) = p(A) * (p(B|A) / p(B))
We have a prior probability about event A, p(A), and we find a additional info/evidence that is B, we adjust our  p(A) by using the ratio of p(B|A) and p(B). While p(A) though intuitive is sometimes easily neglected, p(B|A)/p(B) though intuitive in direction is not intuitive in the exact extent which needs calculation.

A similar case: 概率论教你说谎:直觉思维的科学解释

怎样用非数学语言讲解贝叶斯定理(Bayes’ theorem)?

Bayes Factors for Dummies

 

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开放宇宙、企业家与挨千刀的概率论 (很好的一篇文章,反复学习)

一、概率测度:

X表示任意一个集合,其中的元素x\in X表示一个”随机结果“。这里对这个随机结果的要求是对逻辑或运算”不可分“。举个例子,扔一枚骰子,那么有X=\{1,2,3,4,5,6\},那么”骰子的点数是1“就是一个随机结果,而”骰子的点数小于5“就不是,因为它可以被拆解成”点数是4“或”点数小于4“。

2^X为集合X全部自己的全体,比如,如果X=\{1,2\},那么

2^X=\{\emptyset,X,\{1\},\{2\}\}

这东西一般被称作X的幂集,里面的元素通常被称作一个事件。

定义:事件Y\in 2^X是一个\sigma-代数,如果:

  • \emptyset\in Y,
  • 如果A\subseteq X(也就是说A\in 2^X),那么A^c\in Y,
  • 如果可数事件序列\{A_n\}_{n=1}^\infty满足A_n\in Y对任意自然数n都成立,那么\cup_{n=1}^\infty A_n\in Y (如果只要求有限多个就叫Booglean代数。)

定义:给定任意一个\sigma-代数Y\in2^X,可测函数p: Y\rightarrow[0,1]是一个(可加)概率测度,如果:

  • p(\emptyset)=0,
  • p(X)=1,
  • 对任意至多可数的事件\{A_n\},满足对任意i,jA_i\cap A_j=\emptyset,有p(\cup_n A_n)=\Sigma_{n}p(A_n)

有人说,妈蛋,概率不就是频率的极限吗!整这么复杂干嘛呀!

这里面问题多了去了。

频率的极限叫做”概率的古典定义“,另外还有概率的”几何定义“,这两种定义都有问题

在这种背景下,柯尔莫哥洛夫于1933年在他的《概率论基础》一书中第一次给出了概率的测度论式的定义和一套严密的公理体系。这一公理体系着眼于规定事件及事件概率的最基本的性质和关系,并用这些规定来表明概率的运算法则。它们是从客观实际中抽象出来的,既概括了概率的古典定义、几何定义及频率定义的基本特性,又避免了各自的局限性和含混之处。这一公理体系一经提出,便迅速获得举世的公认。它的出现,是概率论发展史上的一个里程碑,为现代概率论的蓬勃发展打下了坚实的基础。

二、奈特不确定性

翻开任何一本关于金融、风险控制和保险的初级教科书,老先生们会告诉你,当未来有不被偏爱的结果发生的可能性时,我们就有“危险”,而当危险的概率分布已知时,危险也叫做风险。换言之,风险是一种对关于危险的知识有充分掌握的状态。

一个问题:人类一开始是怎么知道扔一枚硬币某一面出现的概率是0.5的?

这个问题往根儿上说涉及到了康德经验主义和休谟经验主义的区别:人类的知识到底是演绎出来的还是归纳出来的?

不过,也可以这样回答:结合流体力学的知识,抛硬币的结果是敏感地依赖于抛硬币的人给的初始力的大小和方向的,而由于发力是高度随机的,所以结果就是一个“确定性混沌”。不过这个解释比较牵强,因为毕竟流体力学和混沌理论的成熟最远也就是近一百年的事情,远远晚于人类知道硬币结果的概率分布是一个以0.5为参数的伯努利分布。

所以,只有一个答案:做实验。可能历史上真的有人吃饱了饭没事儿干扔了几百次发现确实有这样的规律,虽然那个人真的挺无聊的。这种实验的特点是保证每次重复都满足独立同分布——哪怕只是稍微掌握了一点粗浅的计量经济学,就不难发现,要估计一个静态概率分布的未知参数,我们对样本的要求是:独立,同分布

这就是所谓的概率的古典解释:概率是频率的极限人们可确知的是频率,通过重复实验得到随机样本的频率,当样本足够大时,频率因大数定律收敛于概率。现代统计学和计量经济学就是根据这样的逻辑构建起来的。

那么,有一个自然的问题:这种频率收敛于概率的逻辑是否穷尽了人类关于不确定性的全部知识?不禁要问,当盖茨决心辍学设计windows系统之前,他知道这个系统能给他带来多少财富吗?肯定不知道,这个产品有不被市场接受的可能性,也就是说,他面临不确定性或者“危险”。

那他知道通过这个系统所能挣到的财富的概率分布吗?或者说,他有知道这个概率分布,即获取知识的可能性吗?

经济学家认为,人类有三种获取知识的方式:主动获取、被动接受、有意试错。

那么,他能花钱找人告诉他结果吗?不能,除非他相信算命先生,否则没有人比他自己更清楚windows的市场价值。

他能被动等待别人设计出windows然后看结果吗?不能,一来可能也没有什么人能够设计出一个一模一样的东西,再者就算有了你也只有一个样本点,拿一个样本点做回归,到学术会议上早让人喷死了。

有意试错呢?肯定也不行,因为这个东西是不能够做实验的。他不能涉及并发表windows五千次,构成一个大样本,然后统计出概率分布,再决定是不是设计windows。首先,连续实验五千次是不可能的,因为市场上有windows时windows的销量,与没有windows时的销量肯定不是独立同分布的。再者,他受限于时间的不可逆性——盖茨不能穿越到未来五千次,看结果然后再穿越回来决定是不是做这件事。

这就是企业家面临的独一无二的核心问题:企业家的核心职能是为创造,为了获得超额利润,企业家必须原创性地做出能够满足消费者欲望的产品。这个产品必须是别人没有想到过的,企业家才能获得由于其原创性而获得的租值。而创造性行为,不能够做实验,一旦实验过了,idea就不是原创的了。

这就是芝加哥学派的鼻祖Frank Knight在1921年的那部《风险、不确定性与利润》当中区分风险和不确定性之间的关系所基于的知识背景。Knight从而论证,企业家在市场中获得高额利润,并不只是因为他们承担了市场活动的风险(事实上哪怕股民也承担着风险),而是因为他们承担了创造性活动的不确定性这种不确定性是不可能知道概率分布的,因为创造性活动不可能做实验。

后世的经济学家管Knight定义的不确定性作“奈特不确定性”

奈特不确定性解释了为什么乔布斯这样的人,即便在市场中获得了“不合理”的报酬,但依然是推动社会进步的力量。这也解释了政府为什么不能对垄断企业的暴利持无原则的对抗态度,因为这将扼杀原创的精神。

当然,有人会问:如果一个人试图成为企业家的努力是在“奈特不确定性”的基础上做出的,那么企业家们成功与否是不是主要取决于运气呢?

答:不好意思,就是这么回事。所以企业家的个人传记和演讲我通常不看。

引用阿尔钦1950年那篇著名的“不确定性、演化和经济理论”里面的观点:引入不确定性后,“利润最大化”作为行动指南的意义就没有了,企业也有了一个所谓的“均值-方差”效用函数。但这篇文章接下来的两个标题弥补了这里面的逻辑缺憾,他说:“判断成功的标准是结果而非动机”,“运气是实现成功的手段”。所以说,企业家的行为是否成功是基于他的创造是否偶然间契合了市场的需求,市场上的达尔文过程能够筛选出谁成功。关于这一点,初学者可以去买一本《当经济学遇上心理学和生物学》作为科普。

去年JEP上的一篇文章综述了关于企业家收入的一系列研究,结果和很多人的直觉相左:企业家的收入分布是具有极高偏度(Skewness)的,正所谓“张村有个张千万,旁边九个穷光蛋”,企业家是一个成材率极低的职业。平均来看,在美帝,自我雇佣的劳动力的平均收入低于为别人打工的劳动力,超过50%的新盈利机构(当然也算上了小区里买冰棍儿的大妈)都挺不过5年。

那么,看起来,企业家有超额利润这件事似乎不成立:是否他们的暴利只是因为他们运气好拿到了风投的钱,又运气好获得了成功?

显然不是,因为决定自我雇佣,也就是有勇气在奈特不确定性存在时冒险,是能够碰触这种好运气的先决条件,一辈子委身体制内的人永远没有这种运气。虽然暴利来自运气,但拥有好运可能性的先决条件是企业家敢于挑战奈特不确定性

当然,人们为何喜欢这种有极大偏度的收益分布,是行为经济学家的工作。比较靠谱的理论是Quiggin在1982年提出的排序依赖的期望效用理论。

总结:企业家的超额利润=市场对不畏奈特不确定性而敢于创新的勇气的奖赏+市场对好运气或者毫无理由的远见的奖赏。

其中,勇气比运气更重要。

细心的读者应该已经注意到一个问题:Frank Knight的理论提出于1921年,柯尔莫哥洛夫的现代概率测度体系建立于1933年,也就是说,当Knight提出自己的理论时,他本人并不知道概率论还可以这么玩儿。

三,贝叶斯决策理论与埃尔斯伯格悖论

换言之,Knight所理解的概率还是“频率的极限”。

那么,是不是奈特不确定性可以被现代概率测度公理体系解决掉呢?

在这个问题上,有一些经济学家曾经做出过一些早期贡献,其中就包括了天妒英才拉姆齐和鲜有人知也是概率论专家的凯恩斯。不过,这个问题真正被彻底数学化是1954年萨维奇的贡献。

跑个题:事实上,长期以来,人们对概率就有两种截然不同的理解,一种叫频率主义,另一种叫贝叶斯主义。

大家学的计量几乎都是频率主义的东西:假设存在一个真实的参数,比如消费者对汽车和电瓶车的替代弹性,然后通过样本去估计这个参数。

贝叶斯主义不同,贝叶斯统计学家从来不认为这个真实的参数存在,他认为这东西最多只是一个概率分布,然后样本构成了进行贝叶斯推断的信息

可是,做任何一个推断都是一个“后验概率”,都需要一个“先验概率”作为基础。通常,如果我们在处理数据之前对这个分布一无所知,统计学的惯例是取一个均匀分布(因为经济学中的变量多数是连续变量,如果是类似于计数变量一般取多项分布)。

要我说,这么做多少有些懒,如果我们不认可先验概率是均匀分布,那么,最早的那个“先验概率”从何而来?贝叶斯学派的数学家们会告诉你,这玩意儿是主观的。

因为先验概率的选取,如果样本不大,会影响最终的推断,所以贝叶斯推断是一个十足的主观的东西。这也是两大学派上百年痛快撕逼的根源。

为什么要跑题说贝叶斯概率论,因为拉姆齐、凯恩斯和萨维奇的努力恰好是要把概率主观化,核心的假设是人们拥有一个高于传统理性概念的“贝叶斯理性”

在萨维奇的那本《统计学基础》中,他原创性地将“行为”定义为一个从“外在状态”集合S=\{1,2,\cdots,S\}到结果集合X上的映射。这样,如果行为集合上的偏好\succeq满足七个公理,其中包括“臭名昭著”的sure-thing principle,那么就可以找到一个概率测度p和一个Bernoulli效用函数u,使得对任意一个行为fg,有

V(f)=\sum_{s=1}^Sp(s)u[f(s)]

这就是著名的“主观概率期望效用理论”(SEUT)。Kreps在《决策理论讲义》里面评价这个模型:他应用于全部概率都是主观的情况。而到了1960年代,Anscombe和Aumann发展了这套理论,把行为定义做S=\{1,2,\cdots,S\}X上的全部概率分布\Delta(X)的映射。因为集合\Delta(X)是一个线性空间,因而新理论的公理化建构变得特别简单,而且里面不仅有主观概率,也有客观概率。也就是说,

V(f)=\sum_{s=1}^Sp(s)\int u(x)df_s(x)

其中f_s(x)是当自然状态s实现时x的概率分布。

现代决策理论最基本的理论框架就是Anscombe-Aumann体系,想了解的朋友可以参阅MWG,6.E-6.F,或者Kreps(2013),第五章。

萨维奇和A-A体系暗含了所谓的“贝叶斯理性”,这算是主流经济学对奈特不确定性的一种回应:虽然人不知道某个事件出现的概率,但是人有足够的理性可以对任何一个事件发生的可能性有一个估计,而且这个估计,作为一个测度函数,满足一个概率测度的所有要求

应用在我们上面说的企业家与创新问题上,盖茨虽然不知道Windows给他带来的财富的客观的概率分布,但是他对这个分布有一个主观的预测,并根据这个主观预测行动。换言之,盖茨一定是主观地认为windows系统能让他过上非常好生活的概率极大,他才会这么做,尽管这个估计可能是没有任何证据支撑的。

这套理论就叫贝叶斯决策理论

至于这个主观概率是怎么来的,决策理论家和经济学家表示不care,经济学要做的是给定偏好,看约束变动如何影响行为,而不是给定约束看偏好变化怎么影响行为(心理学),更不是做“偏好的起源”这种生物学研究。究竟这个主观概率的决定是生理结构决定的、是文化决定的、是冲动和情绪决定的,还是像我现在做的研究那样把它看做一个效用最大化问题的解,正统经济学家是不管的。Martin Perterson在他的书的开篇写道:

”不久之前,一个我女神向我求婚。我惊呆了。结婚?现在?你特么在逗我!忒早了吧!我还没到四十岁呢亲!但是,因为这样那样的原因我决定不把我自己阴暗的直觉反应告诉她。我说本屌有点儿乱,虽然我特惊喜,但是我需要缓缓。第二天一大早我踏上了冲向学校图书馆的路。我借阅了所有我能找到的决策理论的书。当天下午我已经对现代决策理论是个神马东西大概了解了,然而并没有什么卵用,我还是不知道该怎么回复她。“

这段文字直击了贝叶斯决策理论的软肋,它不能交给人们如何决策,或者说如何形成主观概率。经济学家们做的是:不管主观概率是怎么来的,只是假设这个东西存在

但是,贝叶斯决策理论里面有一个问题,就是在这套理论里面,所谓风险和奈特不确定性没有什么区别,唯一的区别是概率到底是主观的还是客观的。因为期望效用这个依概率线性的效用函数形式没变。显然,如果奈特不确定性真的存在,贝叶斯决策理论就是不够的,反过来,如果贝叶斯决策理论正确,奈特不确定性就不存在

打破这个坚冰的是一位叫做埃尔斯伯格的经济学家,他做了这样一个实验,(省略),告诉我们,如果SEUT成立,你在不同的决策问题中对同一个随机事件的概率估计可能是不一样的!这构成了大名鼎鼎的埃尔斯伯格悖论,这激励了决策理论家在后面半个世纪的研究。

四、模糊厌恶和信念的数学表达

于是,一部分人提出了模糊厌恶(Ambiguity Aversion)的概念:两个行动,一个概率分布已知,另一个未知,但有与第一个行动客观概率分布相同的贝叶斯先验,那么已知概率的行动更被偏爱。当然,这个定义并不那么严格,因为在经济学家看来,主观概率不可观察。在严格的决策理论文献中,经济学家通常会用一个叫做”对冲“(hedging)假设的东西代指不确定性厌恶,即两个行动的线性组合比单独某个行动更好。

自1980年代开始的二十年里,如何解释埃尔斯伯格悖论中表现出的行为倾向变成了决策理论当中一个不能再重要的课题。与此相关的A-A期望效用理论的替代性假设包括(下面所有的行动f都按照A-A框架假设,其中f_s(x)是集合X的一个客观概率分布):

  • Max-Min期望效用理论:Gilboa and Schmeidler (1989)V(f)=\min_{p\in C}\sum_{s=1}^Sp(s)\left[\int u(x)df_s(x)\right]

这里集合C是集合S上全部可能概率测度\Delta(S)的一个子集,可以从偏好中被识别出来。函数的意义是在一个概率测度集合里拿出每一个概率测度,算期望效用,然后取最小的那一个。当然这种偏好仅能刻画模糊厌恶的情形,如果是模糊喜好偏好,就把那个最小值函数改成最大值函数(Max-Max)即可。

  • Choquet期望效用理论:Schmeidler (1989)

V(f)=\int_{s\in S}\left[\int u(x)df_s(x)\right]dv(S)

这里,函数v表示一个S上的不可加概率分布,也就是说,独立事件概率的可加性在这里被放宽了。因为函数v不可加,所以就可以讨论凹凸性,说函数是凸的也就是说对任意互斥事件A,B\in 2^Sv(A)+v(B)\le V(A\cup B)。函数是凸的(凹的、线性的)当且仅当决策者是模糊厌恶(喜好、中性)的。

当然,也因为函数v不可加,所以勒贝格积分不存在,这里外面的一层积分用的是Choquet(近似可读作”烧盖“,法语)积分,所以这个理论也叫Choquet期望效用理论。

  • 二阶期望效用理论:Ergin and Gul (2009); Nau (2006); Neilson (1993)

V(f)=\sum_{s=1}^Sp(s)\phi\left[\int u(x)df_s(x)\right]

这里相当于对已知概率分布的风险的期望效用作为自变量再求一次自然状态的期望效用,故名。这里,函数\phi就是所谓的二阶Bernoulli效用函数,它是凹的(凸的、线性的)当且仅当决策者是模糊厌恶(喜好、中性)的。

  • 微分期望效用理论:Maccheroni et al. (2006a)

V(f)=\min_{p\in\Delta(S)}\sum_{s=1}^Sp(s)\left[\int u(x)df_s(x)\right]+c(p)

其中,函数c是一个在弱*拓扑下下半连续的凹函数。这个偏好的理论意义在于它解决了Max-min期望效用中集合C如何确定的问题,最小化只需要在全部概率测度集合而非其子集中找就可以了。

  • 乘子期望效用理论:Hansen and Sargent, (2001)V(f)=\min_{p\in\Delta(S)}\sum_{s=1}^Sp(s)\left[\int u(x)df_s(x)\right]+\theta R(p||q)

这两位作者如今都是诺奖得主了。这个偏好又丰富了微分效用里面的函数c,这里q是另一个概率测度,可以认为是一个”参考先验“,而函数R表示两个概率测度之间的相对熵。这个熵越大,概率测度p对应的函数值就越大,那么这个概率测度在最小化之后被选中的可能性就越小。好像两年前弊校另一个学院一位老师在《经济研究》上发表了一篇大概叫奈特不确定性与资产定价的文章,理论模型就是基于乘子效用。

  • 信心效用理论:Chateauneuf and Faro (2009),V(f)=\min_{\{p\in\Delta(S)|\phi(p)\ge\alpha\}}\frac{\sum_{s=1}^Sp(s)\left[\int u(x)df_s(x)\right]}{\phi(p)}

这个模型比较复杂,函数\phi是概率分布p的”信心指数“,而指标\alpha是一个概率分布被纳入考量所要求的最低信心标准。模型的含义是从所有概率分布中找到对这个概率分布信心足够大的那些,算出期望效用并除以信心,最后取最小的那一个。这里,信心越大,分母越大,那么这个概率分布就越有可能被选中。

第一,这些模型在挑战什么?我们重新看萨维奇 A-A体系,我们发现,”信念“这个描述我们”对事件可能性的主观判断“的概念,是用一个叫做”主观概率“的东西刻画出来的。而在上述模型当中,除了二阶期望效用,其他的理论中这个前提都被放宽了。比如,Max-Min、微分、乘子、信心四个理论中,信念是由一族概率测度,而非一个概率测度,而Choquet期望效用理论中,信念是一个不可加测度,而概率分布是可加的。

正是把”一个信念“和”一个概率“这两个概念分开了,模糊厌恶这种行为倾向才被完整地刻画了出来。这样,运用比较复杂的数学知识,决策理论家把信念这样一个极深刻的东西描述了出来。

第二,这些模型隐含地假设了什么?因为效用最大化这个形式依然保留着,也就是说,给定任何一个行为的集合Y,最优行为依然是通过\max_{f\in Y}V(f)给出的。那么,决策者也就被假设是理性的,毕竟,理性人才会最大化。不过,Economics and Philosophy杂志一篇2009年的文章中,两位西北大学的经济学家指出,埃尔斯伯格悖论中体现出的行为是不理性的,例如,遵从这种行为会考虑沉没成本。更一般地,Hammond (1987) 年的经典文章证明,不考虑沉没成本当且仅当sure-thing principle成立,也就是说,SEUT成立。所以说,这些理论虽然在静态中是理性的,但放在动态(序贯决策)的角度看就是不理性的。

第三,也是最重要的:我们关于奈特不确定性的讨论走到这一步似乎得到完美解决了,风险和奈特不确定性被剥离了。金融中我们常常提到”溢价“这个词,那么对于任何一个溢价,我们已经可以把它分解成风险溢价和不确定性溢价了,很多人解释equity premium也可以用这个模型了,风险厌恶和不确定性厌恶可以独立发挥作用了,企业家的高收入可以解释了。

可是,有心的你应该会发现一个问题,在这一节中,我不顾可能造成的误解,刻意规避使用了“奈特不确定性”这个词,而是改用“模糊”。这个区别在某些数学家眼里是不存在的,比如弊校数学系的彭院士及其团队,但是,有一个问题:

虽然我们可以用非贝叶斯决策理论描述概率分布未知的情况了,可是“创新”造成的概率分布未知,与非贝叶斯决策理论中描述的概率分布未知,是一回事吗?这些理论中的“模糊”,就是奈特所说的“不确定性”吗?

不是。

五、小世界假设与残差项中的开放宇宙

问一个问题:经济学为什么要考虑决策问题?

经济学对市场结果的直接预测是通过“均衡”的形式给出的,无论均衡是马歇尔的、瓦尔拉斯的还是纳什的。考虑决策问题,无非是所谓方法论个人主义的体现,是求解均衡性质的准备工作。那么,要看非贝叶斯决策理论与奈特不确定性的区别,最直接的方法是把非贝叶斯决策理论用到市场问题当中去——毕竟,奈特提出的并不是决策理论,而是经济理论。

一旦遇到市场,非贝叶斯理论的问题就暴露出来了,特别是遇到创新问题。

我们以纳什均衡为例,假设:一个双寡头垄断市场,两个厂商一开始都生产同样的产品,为了击败对手,双方都试图对自己的产品进行革命性的升级,但是由于双方的保密工作都很严密,所以双方都不知道对手革新出了一个什么东西。现在,双方同时考虑是否要把新产品投入市场,此时,他们面临奈特不确定性。

那么,传统的博弈模型,哪怕是假设了非贝叶斯决策理论,能分析这种情况吗?我们猛然发现,博弈论模型(演化博弈除外),无论怎样定义知识结构和均衡,都有一个先决条件,即事先知道对手所有可能的策略。否则,这一套完整的优化技术全部失效,均衡都不知道怎么定义。

可是如果这样,我作为A公司的总经理,根本就不知道B公司要出什么招数。我不仅不知道他“会怎样出招”,更不知道他“有什么招可出”。这就像面对泰拳高手的王语嫣一样,任她翻遍自家所有武学典籍,也可能想不到对面那个怪人的杀招是头和膝盖。

这种“不知道对手有什么招数可出”的状态,不仅仅是因为“知道很困难”,更是因为逻辑上就不可能:因为B公司所做的是一个创新,那么从逻辑上只有对手自己知道这个革新是什么,如果A能想象出来,那么B公司的新产品就不能算创新了。换言之,创新的东西一定是其他人想象都想象不出来的东西,否则就不叫创新了。

我们回头看萨维奇 A-A体系和上述所有非贝叶斯决策理论,我们能发现一个奇怪的东西,那就是S\in\{1,2,\cdots,S\},换言之,经济中所有可能的外部状态是已知的,而且是有限的。这个假设被萨维奇本人称作“小世界”假设。

集合S有限且已知,这种假设对数学家来说再自然不过了,但是放在经济学问题当中就产生了数学家预想不到的问题。有限尚且好办,决策理论家已经证明,上述结论可以在一些假设成立时至少被推广到可数多个,但是“已知”这个假设非常难办。从上面的企业创新的例子中我们看到了,只要集合S的结构是博弈双方的共同知识,那么创新就不存在,毕竟,对手的行动本质上构成了自己决策时的S。而S中的每一个s是什么,决定了双方的支付函数,而在这一前提下不可能知道当s发生时任何一方的效用。

有人会问:那把这个假设拿掉不就是了?

可是,回想第一节(我写那个第一节真的是有目的的!),我们发现了一个东西:一个S上的测度p是概率测度必然使得p(S)=1!结合可加性,我们必然有

\sum_{s\in S}p(s)=1

现在假如我知道s_1,s_2,\cdots,s_n\in S,而S里面到底还有什么我一无所知,还有多少不可分的状态?每个状态都是什么?都不知道。那么,我们只能知道

\sum_{s=1}^np(s_n)+P(\{s\in S|s\neq s_n,\forall n=1,2,\cdots,n\})=1

这句话告诉我们,ss_1,\cdots,s_n中的一员的概率,加上它不是其中一员的概率,等于一。我们能知道的仅此而已。

因此,在创新问题当中,我们不可避免地遇到一个残差项,这个残差项中包含着所有我们想象不出来的自然状态,一个除了所有我已知的自然状态之外的事件。这个事件不是不可分的,里面包含着逻辑上可能无穷多的不可分状态。

我们不可能说当这个残差事件发生时我们的payoff就是多少,就像A公司的经理不能断言如果B公司革新了自己的产品A公司的利润就是多少一样,毕竟,革新本身并不包含关于“如何革新”的任何信息。

用经济哲学大师宾默尔的话说,这表示“开放宇宙”,而当这个残差项不存在时,叫做“封闭宇宙”。这里的概念和数学里的开流形、闭流形很像,毕竟,物理学里面管闭流形宇宙就叫封闭宇宙。而在开放宇宙中,传统概率论必然无用。

概率是用来度量事件可能性的工具之一,按理说,对任何一个测度m,只要对任意事件A,B\in 2^S,满足A\subset B,那么只要这个测度满足单调性,即m(B)\ge m(A),它就足以构成一个这样的工具。

为什么人们不用任意的测度,而选择概率作为正统的分析方法呢?因为概率有很好的性质,一个事件发生的可能性越大,它的互补事件发生的可能性就越小,这是由两个事件概率之和等于一决定的。

在一个开放宇宙中,“互补事件”这样一个东西就不存在,只存在“条件互补事件”。两个事件取或关系是否就是整个S根本无从得知,我们知道的只有“所有我们能想象出来的自然状态的概率之和不大于一”,至于到底是几,没人知道。

英国经济学家Shackle说,概率方法……

“仅代表了某一种表达判断的方法,这种方法隐含地假设了,只有那些已经被穷举出的互斥假设才是与决策相关的。因此,主观概率作为一种语言只能在这种确定的含义下被使用。而另一部分含义(受限于概率语言)必须被排除在外,这是武断而愚蠢的”。

往大处说,这也是整个数学的局限,数学描述的是给定的封闭环境,把一个系统中的所有东西都定义清楚,是数学工具分析问题的前提。但创新就不在这个范围里面,因为创新不可能被这样一个系统穷尽掉,理论家绝不可能先于企业家想出企业家会做什么,否则谁还甘愿拿那几千块工资天天撸数据呢?

那么,是不是就没办法了呢?不是。Shackle自1942年起的一系列研究,据我所知,是在解决这个问题上(哲学上)走的最深刻的理论。当然,(技术上)走得最远,也就是提出了最多技术细节的理论,叫Dempster-Shafer决策理论。

Shackle的博士论文导师是大名鼎鼎的哈耶克,所以他的作品带着浓郁的奥地利学派的风格。不过,最为人津津乐道的是,他在毕业之前接触到了当时同在LSE的凯恩斯及其团队。他迅速被凯恩斯的理论所吸引,所以,现在有人提到Shackle时,都管他叫“后凯恩斯主义者”,甚至以我微薄的知识,如果把卡尔多这些边缘人士剔除,他似乎就是后凯恩斯主义唯一的代言人,他的理论被誉为“用奥地利学派的方法推导出了凯恩斯主义的结论”。有意思吧~

Shackle的想法很简单,如果概率不是一个好的工具,那么就提出一个新工具,这个工具的关键在于能够不依赖于所有状态可能性之和等于某个数。也就是说,每个状态的可能性应该与其他事件的可能性无关。只有这样,创新才能与人的认知结合在一起。

可是这样做的话,没有了概率提供给我们的好的性质,决策怎么做就是一个大问题。上面也论证过,任给一个测度,好像都能满足要求,但是这个测度能不能帮我们发展出一套易操作的决策模型,就要打一个大问号了。

先说这个测度的挑选。Fishburn(1986)综述了概率的公理化性质,也就是说,概率本身是一个序数变量的基数表达,这与偏好和效用的关系是一样的。如果我们效仿偏好构建一个2^S上的二元关系\succeq,对任何事件A,BA\succeq B表示事件A与事件B”至少一样可能“。那么,给定几个基本的公理,可以找到一个函数p起到和效用函数一样的作用。一言以蔽之,概率是一个序数变量。

Shackle在1953年的文章中敏锐地捕捉到了这样一个事实,概率是序数的,但信念未必。他argue道,一个变量是基数的还是序数的,主要在于我们是否能够找到一个零点和一个量纲,只要[0,1]区间能够被良好的定义出来,这个变量就能被称作基数的。对比一下,温度就是一个基数变量,0摄氏度就是水结冰的临界点,而量纲“摄氏度”无非是水结冰的临界点和水沸腾的临界点之间水银汞柱变化的一百分之一。而效用就是一个序数概念,因为首先0效用是一个很令人费解的状态,另外,我们也很难给所谓“快乐”找一个单位。

那么信念呢?如果我们用主观概率表达信念,它当然是序数的。但Shackle想到了另一个度量,叫做“潜在惊讶”。简单说,如果主观上一件事发生的可能性很大,那么,当这件事发生时,我不会感到太惊讶,如果这件事发生的可能性很小,那么,如果这件事发生我会非常惊讶。当然,任何人都不能预见事情真的发生了我能有多惊讶,但是人牛X的地方就是能做反事实的想象,我能问“如果某件事发生了我惊讶吗”这种问题。于是,惊讶构成了事件“不可能性”的一个测度,惊讶越大,越不可能。

Shackle首先论证,潜在惊讶是一个基数变量,因为,首先,“一点儿也不惊讶”是一个非常自然的东西,零点有了。另外,惊讶肯定有上限,这没问题,因为惊讶过度了人类肯定会死,于是量纲有了。发现它是一个基数变量带来了一个方便,那就是潜在惊讶这个测度在不同的事件之间完全没有替代关系:抛一枚硬币,人可以对两个可能的结果都不感到惊讶,但在概率语言中,两者概率之和必为一。

在这套理论中,知识即是某个特定行动与某个特定结果之间的因果关系,而人具有的对某件事情感到惊讶的能力,恰恰就是波兰尼意义下的”身体知识“,抑或哈耶克意义下的”默会知识“,是不依赖于人类引以为荣的”认知能力“而存在的知识系统。这与概率这一套依赖于严格数学建构的逻辑知识不同,也就因此存在很多逻辑漏洞。针对潜在惊讶对行为进行建模的困难可想而知。不过,Shackle自己还是提出了一个后世看来问题最小的理论。

首先,依据”惊讶“的逻辑,可以画出这样一张图:

这里横轴代表结果,纵轴代表结果对应的潜在惊讶指数。其中,存在着一个潜在惊讶为0的点,与这个点偏离越大,潜在惊讶也就越”不小“。有人会问,这不就是把一个概率密度函数倒过来吗?不是,抛开其他差异不谈,潜在惊讶根本不要求整个函数积分出来是一个定值。更重要的是,这个函数,根据定义,不是一个可加测度,也就不能求勒贝格积分,期望效用也就无从谈起(参考前文的Choquet期望效用)。

那么,决策怎么制定呢?

我们发现,潜在惊讶的最小值x_N把整个横轴分成了两半,直观看,左边可以称之为”失望“,左边可以称作”惊喜“,因为,以左边为例,任何一个曲线上的点都代表着正的惊讶水平和低于不惊讶水平的收入,就是一种”不好的惊讶“,也就是失望。Shackle从他多年从事银行工作的经验中内省出这样一个三步的decision rule:

第一步,打开冰箱门……哦不,引入一个叫做注意力的函数AX\times Y\rightarrow\mathbb{R},也就是说,对于任何一个财富水平x和这一财富水平对应的惊讶程度y,存在一个注意力的大小A(x,y)。

第二步,在”惊喜“和”失望“两个区段内分别求导致最高注意力的那对儿x和y,也就是

x_e(y)=\max_{x>x_N}A[x,y(x)],

x_d(y)=\max_{x<x_N}A[x,y(x)],

这里,x_e是求解出的”焦点收益“,即收益中最让决策者倾注注意力的一个,对称的,x_d就表示”焦点损失“。e和d这两个下表借鉴了Gul(1991)的”elation-disappointment分解“的用法。

第三步,假定存在(x_d,x_e)上的效用函数u(x_d,x_e),对第一个自变量递减,对第二个自变量递增。此时,由于行动与潜在惊讶函数是同胚对应的,因此,就有了

V(y)=u[x_d(y),x_e(y)]

看吧,一个不依赖于期望、概率和小世界假设的决策理论诞生了。

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概率(Probability)的本质是什么?

概率到底是由什么决定? (哲学理论)

♣ 问概率是什么,这有两层含义

(1)含有概率的陈述(probabilistic claims)的含义是什么?当人们说“掷硬币正面朝上的概率是50%,” 这是什么意思?

(2)概率现象是如何形成的?造成概率现象的原因是什么?

1):含有概率的陈述(probabilistic claims)的含义是什么?

当我们说,“这个粒子衰变的概率是50%;”“掷硬币正面朝上的概率是50%;”“这个手术成功的概率是60%;”“Trump被弹劾的概率是5%;”都是什么意思?

“掷硬币正面朝上的概率是50%” → 抛硬币无限次,正面朝上的比率是50%。→ 不是说真要抛硬币无限次:当抛硬币的次数趋近于无限次,正面和反面的比率是5:5;更确切地说,取次数趋近于无限次的极限,正面和反面的比率不是5:5的概率趋于0。

 

=> 哲学问题,“概率的解释(interpretations of probability)”。→ 解释概率的相关理论一般可以划分为两大传统:贝叶斯派和客观概率派。

(一)贝叶斯派(主观概率派)

贝叶斯派用信念的强度(degrees of partial belief)来定义概率。根据这个定义,概率并不是关于物理系统的,而是关于物理系统和我们之间的关系。

比如说,在经典力学的框架下,掷硬币这样的事件是完全决定性的(fully deterministic):大概来说,硬币和其所在环境的组成的物理系统在某个时刻的状态是由其前一个时刻的状态决定的。如果我们知道这个系统的初始状态,知道组成这个系统每一个粒子最开始的速度和位置,原则上通过经典的动态方程,可以计算出这个系统在之后每一个时刻的状态。也就是说,硬币落地的朝向是完全由其初始状态和物理定律决定的;而如果知道硬币、掷硬币的手、周围空气的分布,硬币落下接触的地面等等每一个细节,原则上我们是可以准确预测出最后硬币是朝上还是朝下的。
→ 但是,很明显,由于我们平时不知道这些细节,无法做出精准的预测,只能预测一个大概的结果,而这个结果就是通过概率的形式来表达的。

根据贝叶斯派,概率代表了我们对于某个事件的信念。如果我们相信这个事件一定会发生,概率则为1;如果我们相信这个事件一定不会发生,概率则为0;如果我们相信这个事件有可能发生,而测量关于它会发生这个信念的强度就是概率,介于0和1之间。

问题:
(1.1)我们是会有“川普会被弹劾”的信念,这个信念的强度也许比“宇宙存在外星人”要弱,但这并不代表对应着某个信念的强度存在着一个确切的数字。
(1.2)为什么测量信念的强度满足关于概率的形式上的公理?
(1.3)如果概率只是对于人们信念强度的测量,那么每个人对于同一个事件会有不同的信念,也就会给出不同的概率。但是,一般认为像掷硬币这样的事件是存在一个客观的、在不同的人之间统一的概率的。

(二)客观概率派

相比贝叶斯派,客观概率派认为概率是关于客观世界的,关于物理系统的,独立于人们对世界的信念。

(2.1)原始派Primitivism

原始派宣称,概率是单个物体或者整个系统的一种原始的属性(primitive property),无法用非概率的语言来解释。比如在欧几里得几何学中,点就是一个原始概念,你无法解释点是什么。如果克鲁星人说不懂概率是什么的话,要么它们是在撒谎,要么对于它们而言没有任何可以理解概率的希望。为什么你会觉得我们可以用非概率的语言来解释概率是什么?

原始派一般和倾向派(propensity)被划分为同一个观点。倾向派认为作为原始属性代表了物理系统具有某种倾向(or disposition, tendency)。比如盐在水中会有溶解的倾向;硬币被抛后有朝上或者朝下的倾向。波普(对,可证伪的那个波普)就是一个倾向派。

原始派的观点乍看起来也许符合我们日常的直觉。事件和事件之间是有区别的:有的事件会决定性地发展(比如,如果我松手,一般情况下,球会决定性地落在地上,而不会飞上天去;比如,如果有一屉虾饺摆在我面前,就会决定性地被我吃掉),而有的事件则会概率性地发展(比如,这个粒子在接下来可能会衰变,也有可能不会衰变)。而这决定性和概率性都是由事物(或者事件)的本质属性决定的。

(2.2)频率派Frequentism

如名字所示,频率派直接将概率和频率化作等号。

频率派的问题其实在开头和克鲁星人的对话中已经有所提及了。概括来说就是,也许用频率来解读概率看起来符合直觉,但事实上频率和概率并不完全相等

我们能做到的最好的证明是大数定则(the Law of Large Numbers),但大数定则并没有从真正意义上解决问题。

(2.21)最好的系统(The Best-System View)/休谟式解释(the Humean Account)

这是频率派目前最被看好的一个分支。这个学派将概率和自然法则的解释联系起来。关于对自然法则的理解,具体内容还要参考:因果关系是真实存在,还是我们认识世界的一种方法? – 知乎

简单来说,根据简单性(simplicity)和信息量(informativeness)的平衡,我们从众多不同的科学理论的系统中选出最好的一套系统;如果一个自然规律(regularity)是这套系统内的定律,那么这个规律就是自然法则(a law of nature)。

有些自然法则是决定性的(deterministic)–比如说牛顿定律,而有些则是概率的(probabilistic)–比如说量子力学中的玻恩定则(Born Rule)。

举个简单的例子,如果想要描述一系列投硬币的事件。完整的描述是细数每一个事件情况:第一次硬币朝上,第二次朝下,第三次朝下……列出一个长长长长长长长的名单。这样的描述信息量很大,但是并不简单。一个简单的描述方式是:投硬币的结果有两种可能性,其中正面朝上的概率是50%,背面朝上的概率是50%,这里的概率就是频率。虽然这种描述方式并不完全准确(如之前所述,概率和频率并不完全相等,但这并不影响。通过牺牲一部分的信息量,我们得到了更简单的描述–从这个角度来讲,这种概率式的描述,相比完整的名单来说,达到了在简单性和信息量上的更好的平衡。也就是说,作为频率派的一个分支,最好的系统解释并不面临传统频率派所面临的致命问题。

相比原始派,一个概率性的和一个决定性的系统并没有本质上的区别:没有什么更深层的动力属性(对于原始派来说,就是原始属性,或者概率倾向probabilistic propensity)来解释一个系统的概率性,或者决定性。概率性法则和决定性法则不过是我们描述、归纳事件和规律的不同方式罢了。也就是说,概率并没有什么神奇的地方,只是一种更精简的描述世界的方式

之后会在另外一个答案中更详细地讨论对贝叶斯派和两种客观概率派的反驳,以及它们支持者对反驳的解决方法。

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有小伙伴问到了,再啰嗦两句:贝叶斯概率和客观概率并不一定是完全不兼容的。实际上,学界很多人持有的是多元论的观点(A Pluralist View about Probability)。根据这个观点,我们同时有客观概率和主观概率。

如果有客观概率的话,很自然地,我们还面临着如何认知这客观概率的问题。哲学家David Lewis提出了如何联系客观概率和主观概率的原则,叫做The Principle Principle(原则原则)。

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♣ 概率现象是如何形成的?造成概率现象的原因是什么?

根据对于概率的不同理解,决定概率的因素也是不一样的。

(一)楼上提到的,概率是由观察者的信息不完备决定的、造成的,这只适用于贝叶斯派对于概率的理解。尤其地,如果这是一个全称判断,即所有概率都是由信息不完备造成的,那么它预设了这个世界是决定性的(deterministic)–因为它蕴含了客观世界并不存在任何概率性质(如果世界是非决定性的,那么会有概率是由世界本身的非决定性造成的,而不仅仅是观察者的信息不完备)。最后这一论断无法解释决定“抛硬币正面朝上”这种重复多次发生的事件的概率,和“第三次世界大战爆发”这种一次性事件的概率,之间的区别。

实际上,当我们在做还有概率的陈述时,对象不仅仅包含“Trump被弹劾的概率是5%”,或是“明天吃货省会局域性地漫天下虾饺的概率是0.00000000000001”,这类看起来直接和观察者信息不完备有关的概率;还包括粒子物理中“这个粒子衰变的概率是50%”,或是热力学和经典的统计力学中“放在热水中的冰块会逐渐融化的概率远远大于冰块会变得越来越大的概率”。而这些在物理学中用到的概率,一般认为,是存在于客观世界的,和观察者没有任何关系。

所以,贝叶斯派面临的常见挑战就是它无法很好地解释这些客观概率。即便是其分支之一的客观贝叶斯派(objective Bayesianism)。根据这个分支的观点,理性行为人的信念受到一条客观原则的限制,即无差别原则(the principle of indifference)。
(二)根据原始派Primitivism),概率是由事物或事件的本质属性决定的。有的粒子就是会有衰变的可能性,这是一种基本的概率。

在经典力学的框架下,一切都是决定性的。无论是抛硬币,还是布朗运动,展现出的概率性只是一种表象。如果我们仔细分析组成硬币以及花粉大分子的基本粒子构成,就会发现这些基本粒子的运动完全是决定性的。也就是说,物理系统会决定性地从一个状态演化A到下一个状态B,没有其他可能性。

但原始派所说的基本概率,与经典框架下的抛硬币不同,无法用更深层次的决定性的自然法则来解释。这样的概率是动态的(dynamical),它直接指引粒子从一个状态A在一段时间后演化到下一个状态,只不过下一个状态不是确定的,有可能是B1,有可能是B2等等。

这样的基本概率的存在推翻了经典力学的框架,说明在本质上我们的世界是概率性的。

目前只有量子力学中,只有GRW版本的量子力学中,存在这样的基本概率。(多世界诠释和非局域的隐变量理论的量子力学中,我们的世界从本质上来说依然是决定性的。)

原始派面临的一个问题则是无法解释经典的统计力学中的概率。比如热水中冰块融化的例子,明确了组成冰块和水的每一个基本粒子的初始状态(位置以及动量),通过牛顿力学,原则上可以推算出每一个粒子的运动轨迹,然后得到冰块和水的宏观系统的最终状态。但这么算太麻烦了,冰块和水的初始宏观状态对应着非常多可能的构成它们的粒子的微观状态—比如说其中某一个粒子的位置从A挪到B并不会改变冰块和水的状态。

而这些很多的微观状态对应着一个概率分布。由粒子的初始状态的概率分布,我们可以大致地计算出最终状态的概率分布。这个最终的概率分布会告诉我们“放在热水中的冰块会逐渐融化的概率远远大于冰块会变得越来越大的概率”。

经典的统计力学中的概率是由微观系统初始状态的概率分布决定的。

还有理论认为统计力学中的概率实际上是量子概率的一种结果。这种情况下,像“放在热水中的冰块会逐渐融化的概率”,也是由量子概率的本质属性决定的。
(三)根据频率派(Frequentism),其实没有什么决不决定概率的。概率就是频率,而频率只是一系列事件发生的统计方式。概率(Probability)的本质是什么? – 知乎举了一个例子,有两种描述一系列投硬币的事件的方式:

(1)完整地描述每一个事件情况:第一次硬币朝上,第二次朝下,第三次朝下……列出一个长长长长长长长的名单;

(2)统计一下正面朝上和朝下的频率,总结:正面朝上的概率是50%,背面朝上的概率是50%。

只是这样,一系列的事件发生了就是发生了。没有什么更深层次的原因解释或是决定概率

 

 

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Appendix

关于概率论主干课程的训练

概率论→研究 “随机现象” 的数学

1+1 可以观测,但是 “质地均匀的硬币出现正反面的可能性都等于二分之一” ← 主观上我们会认同这个结果,但不能观察 →我们能观测的只能是有限的样本以及永远都在变化着的频率,而这个 “真实的可能性”,也即“概率” 的确切值,却是无法观测的
=>> 概率的定义=“如何定量描述随机现象”本身就曾经是一个大难题  (在早年研究赌博问题的时候,一些数学家即能根据排列组合的方法计算一些简单的离散概率(即古典概型),但那主要是基于人们对概率的一些朴素认识,离构建一套完整的数学理论还差得很远)

→ 1930年代苏联数学家柯尔莫哥洛夫运用分析学中的测度理论(measure theory) 完成了概率论的公理化体系
← 事实上,柯尔莫哥洛夫的公理化体系并未直面 “概率是什么” 的问题,到现在人们对于概率在哲学层面的思辨仍然在进行
→ 但是公理化的作用:将人们对于概率的一些朴素共识或者基本性质抽象出来 → 形成一套公理体系 → 然后依据这套体系逐步发展出一套概率理论 (德国数学家希尔伯特所倡导的公理化思想)

然而
→ 概率论课程的学习往往不是从介绍柯尔莫哥洛夫的公理化体系开始 ← 严格的数学充分阐释概率论的公理化体系,必须要有测度论的数学基础,然而不需要这样学
← 概率论有两只手,1. 基于测度论的严格数学; 2. 概率的思考方法=概率的物理直观 (Durrett:研究生教材 Probability: Theory and Examples的前)
← 把概率论就当做测度论的一部分去学习,就只抓住1而忽略了2 → 2是概率论在现代数学之中最难能可贵的地方:
a) 概率论与包括物理学在内的科学领域的亲近,几乎所有的概率研究课题背后都有实际背景问题的支撑:如离散空间随机游动问题、复杂性科学等等
b) 概率论的发展也得到了来自社会科学领域的刺激,特别是以随机微分方程为代表的随机分析学已经成为了数理金融领域中的基本理论和工具之一
c) 借助概率论广泛联系物理直观的特点,很多数学家纷纷借助概率论的思想帮助解决了一系列传统数学中的很多重大问题
=>> 因此,为了尽早让大家了解概率论所联系的物理直观以及巨大的应用价值,本科课程会尽量回避测度论,用一些仅需用微积分和线性代数就讲明白的模型,引入概率论的基本概念,培养大家的概率直观,理解概率基本概念的实际意义,同时通过一些具体模型的学习,熟悉一些基本的概率运算 → 经过了这一阶段的训练,待到本科高年级或者研究生阶段,再借助测度论的基础,进一步明确概率论的数学理论,从而迈入现代概率论的门槛。

2.1 本科阶段准备

以往: 要求只是学好《初等概率论》,一般也简称《概率论》
但是: 随着随机过程这门课越来越受重视,《应用随机过程》

关于初等概率论。一般来说,初等概率论会涉及如下主要内容:

  1. 概率定义的引入:  “古典概型”、“几何概型” 等具体模型 → 朴素的概率思想 → 逐步引入概率的公理化定义 → 粗浅的讲一点 “概率空间” 的内容,并不涉及精细的可测空间的内容 → 介绍条件概率,独立性,全概率公式以及贝叶斯公式的基本内容
  2. 随机变量及其概率分布 → 由于 “可测性” 等基本概念的缺乏,不是特别强调随机变量的一般定义 → 重点介绍离散型和连续性随机变量的分布上(两点分布,二项分布,泊松分布,几何分布,均匀分布,指数分布以及正态分布等等) → 类似单变量微积分和多变量微积分,除了涉及一维随机变量,也会有高维随机变量,也称作随机向量 → 随之会衍生出联合分布、边缘分布以及条件分布的概念 → 还有一块重要内容叫做“随机变量函数的概率分布”,即对于随机变量 XX,考虑 f(X)f(X) 分布的求解方法
  3. 随机变量的数字特征 → 数学期望,方差,协方差,相关系数,条件期望以及母函数和特征函数等
  4. 极限定理。包括大数定律和中心极限定理 → 概率论中最具有 “统计” 思想的部分,对后来的数理统计学的学习具有很重要的意义

国外教材
Chung Kai-lai Elementary Probability Theory
W. Feller An Introduction to Probability Theory and Its Applications 这本书分上下册,涵盖的内容非常之多,并不适合作为教材使用,但作为参考书作为课下阅读甚好,培养概率直观

关于应用随机过程,内容比较多元化, 最基本也最重要的部分是马氏链 (Markov Chain),如果数理金融,建议可以再重点学一下鞅论和布朗运动 (Brownian motion)。

  1. 马氏链。马氏链实际包括离散时间马氏链和连续时间马氏链。由于测度论还没有学,一些定理结论无法给出严格证明,但这并不妨碍大家理解马氏链的物理直观。其中关于常返性以及不变分布等问题是本课程最核心的议题。作为马氏链最重要的一些模型,大家注意学习简单随机游动 (simple random walk),分枝过程(branching process),泊松过程(poisson process) 以及生灭过程(birth-death process)。作为实际应用还可以了解一点排队过程。
  2. 鞅论以及布朗运动。鞅论是随机过程理论中非常重要的部分,现代对它的兴趣很多是出于它在数理金融研究中的基础地位。布朗运动是一种具有非常好的性质的过程,也是学习随机分析学的入门基础。它的重要性是被广泛认可的,关于布朗运动的内容也是随机过程中最为丰富的部分之一。

教材:

S. M. Ross, Stochastic Processes. Wiley.
S. Karlin and H. M. A. Taylor, A First Course in Stochastic Processes. Academic press.
P. Bremaud, Markov Chains, Gibbs Fields Monte Carlo Simulation, and Queues. Springer-Verlag.

随机微分方程理论在金融业的大量应用,但是要想在回避测度论的前提下把随机微分方程的内容讲明白是一件特别困难的事情
龚光鲁《随机微分方程及其应用概要》
T. Mikosch  Elementary Stochastic Calculus

有了实变函数课程的训练,测度论的相当一部分内容其实是能够理解的。但仍然倾向把测度论看成研究生概率论课程的一部分

2.2 研究生阶段学习

主干课程,说得简单一些,就是在测度论的基础之上,将本科学过的内容重新梳理,逐步加深。← 在没学测度论的时候,很多基本的概率概念和定理的数学论证是没有办法严格给出的,相应地很多内容没有办法讲透
→ 大致上课程应包括《高等概率论》(测度论穿插其中学习),《随机过程论》以及《随机分析》

关于高等概率论:

  1. 测度论。首先,我想尝试从概率论的需求角度,谈谈测度论大致要学些什么?大家知道,概率论本质上是对随机事件的发生可能性赋以一种合理的度量。那么,在数学上我们要将 “事件” 这个概念抽象化,这就是为什么我们要从 “集合论” 讲起,利用集合论的语言,我们把事件表示成某个集合中的子集而已。进一步,对于事件我们总免不了要进行一些运算,这时就有必要考虑由这些事件组成的集合,即集合的集合,在测度论中叫做集合类。随后,就是要对事件进行度量,也就是赋以相应的概率测度。这当中有很多技术细节,主要是围绕如何在一个空间中构造测度来进行的。总之,测度论的第一步就是要把测度空间建立起来,从而定义概率空间。测度论后面的内容,我们大致可以这样理解:由于概率论要考虑随机变量,所以引入可测函数的概念;由于要考虑期望等数字特征,所以引入测度积分的概念;由于要考虑条件期望,所以要学符号测度和 R-N 导数的概念;由于要考虑多维随机变量、联合分布以及独立性等问题,所以要引入乘积空间的概念。所以,测度论的概念在概率论中都有相应的内容。因此,一方面,我们说测度论为概率论提供了严格的数学语言,另一方面,概率论也让测度论变得越发生动。
  2. 极限理论。概率论中的极限理论内容很多,其中很多部分也是现代测度论的核心内容。从概率的角度来看,概率的极限理论大致分为以中心极限定理为代表的 “弱收敛” 理论和以大数定律为代表的 “强收敛” 理论。不同的教材在这部分的处理上各有侧重。个人的建议对于大多数 COS 的读者,还是应该侧重有概率背景的相关内容。

教材:

偏重介绍测度论知识

P. R. Halmos, Measure Theory(测度论经典教材)

将测度论与概率论结合起来

钟开莱,概率论教程 (经典的研究生概率论教材)
P. Billingsley, Probability and Measure
A. N. Shiryaev. Probability

 

关于随机过程论
本科应用随机过程以学习马氏链和布朗运动这样的具体模型为主 → +测度论的基础 → 深入地学习像马氏链、跳过程和布朗运动这样的模型 + 随机过程的一些一般性理论,例如以马氏半群理论为代表的马氏过程构造性理论,鞅论 (martingale),平稳过程以及遍历论(ergodic theory) 等内容

R. Durrett, Probability: Theory and Examples (在美广泛流行的教材,前半部分是概率论,后半部分是随机过程论)

 

关于随机分析学
随着它在金融学当中日益广泛的应用,选修一般是金融数学专业的研究生
主要是学习随机积分 (特别是 Ito 积分),进而学习随机微分方程。这部分应该是概率论所有领域当中理论发展最为完备的分支,非常偏重分析学的风格。
学习过程中,在大家正式接触其核心内容(Ito 积分和随机微分方程)之前,教材一般要做很多理论上的铺垫。这个过程有点类似于咱们学定积分,在利用牛顿莱布尼茨公式计算定积分之前,要花很多功夫在引入黎曼积分的定义上。所以一开始学的时候会略显枯燥,慢慢地接触到其核心部分之时,会领略这套理论的美妙。

B. φKsendal, Stochastic Differential Equations 经典
I. Karatzas and S. E. Shreve, Brownian Motion and Stochastic Calculus 金融数学

 

总而言之,概率论课程的训练,1) 基于概率论公理化方面的数学训练,2) 具体概率模型的演算和掌握,加深对概率论物理直观的理解,不同的发展需求决定了学习的目的和内容
更重要的是,现在谁都很难估计统计学会以什么样的路径发展。时光倒流 30 年,概率课程毫无疑问是统计学最核心的基础课程。现在,随着人们对数据的需求和认识逐渐发生根本性的转变,高通量高维数据的不断产生对传统统计思维和方法提出严峻挑战,我们已经看到有大量其它数学分支的研究成果被用于高维数据的处理和分析问题当中。
但既然本质上概率论和统计学都在共同关注随机现象,共同面对 “观测” 所带来的困境,二者唇齿相依的关系就不会动摇。

 

The theory of Incentives 2

Chapter 2. The rent extraction-efficiency trade-off

1. Intro

(p) lack of time/lack of ability + bounded rationality → [delegation/contract (a) → Incentive → benefitting/conflicting benefits] ← asymmetric information/private knowledge (a) (e.g. cost of task, tech used, level of matching) === adverse selection

==> information rent/cost (+ technological cost of performing task) => distortions in trade (volume) =>> (p) trades-off allocative efficiency against costly information rent (given up to (a) to induce information revelation)

Delegation of task in a one-shot relationship:
== (p) (a) cannot rely on repetition of relationship to achieve efficient trades == short-term relationship is only regulated by a contract (under legal framework ← sometimes unrealistic)

==>>> (p) design contractual offer to (a) to realize optimal [rent extraction-efficiency] trade-off:
1) describe the [ set of allocations (output + distribution of gains) ] that (p) can achieve under [ a) info gap/asy info (a set of incentive compatibility constraints) + b) participation constraints ] == incentive feasible allocations
2) optimize the principal’s objective function within the set of incentive feasible allocations
== the optimal second-best contract (a distortion in the volume of trade away from the first-best) giving up some information rents to the most efficient agents

2. The basic model

Agent is informed about its type θ:
– efficient agent (θ_): C(q, θ_) = θ_q + F  /probabilities ν
– inefficient agent (¯θ):  C(q, ¯θ) = ¯θq + F  /probabilities 1 − ν
– ∆θ = ¯θ − θ_ > 0 = the spread of uncertainty on the agent’s marginal cost

A = {(q, t) : q ∈ IR+, t ∈ IR}
– q = quantity produced
– t = value received by the agent
– observable and verifiable by a third party

Time sequence:
(a) discovers his type θ (asymmetric info) → (p) offers a contract → (a) accepts or refuses the contract → the contract is executed

3. The complete information optimal contract

complete information efficient production levels: (p) marginal value = (a) marginal cost
S’ (q_∗ ) = θ_
S’ (¯q∗ ) = ¯θ

Social value:
W_∗ = S(q_∗) − θ_q_∗ − F ≥
W¯ ∗ = S(¯q∗) − ¯θq¯∗ − F ≥ 0
=> q_∗ > q¯∗

agent’s participation constraints (outside opportunity utility=0):
t_ − θ_q_ ≥ 0
t¯− ¯θq¯ ≥ 0
=> take-it-or-leave-it-offers:
t¯∗ = ¯θq¯∗
t_ ∗ = θ_q_∗
(delegation is costless for (p), and (p) could carry the task himself if cost function is the same)

V=S(q) – t   → strictly concave indifference curve of (p) is tangent to
U = t – θq   → zero rent iso-utility curve of the corresponding type (a)
( (p) having all bargaining power => V¯∗ = W¯∗ /  V_∗ = W_∗ )

スクリーンショット 2017-07-18 23.20.16

4. Incentive feasible menu of contracts

marginal cost θ is (a) private information => (p) offers the menu of contracts {(t_∗, q_∗); (t ¯∗, q¯∗)}, hoping θ_ choose former and ¯θ choose later

### => Offering the menu (A∗, B∗) fails to have the agents self-selecting properly within this menu => efficient type mimics the inefficient one and selects also contract B∗ to get a positive utility rather than 0
=> such {(t_∗, q_∗); (t ¯∗, q¯∗)} is not incentive compatible

=>> a) incentive compatibility constraints: allocations weakly preferred to each other by agents
t_ − θ_q_ ≥ t¯ − θ_q¯
t¯ − ¯θq¯ ≥ t_ − ¯θq_

=>> b) participation constraints: yield to each type at least its outside opportunity level
t_ − θ_q_ ≥ 0
t¯ − ¯θq¯ ≥ 0

a) + b) = incentive feasible allocations 

Special cases 1) bunching or pooling contracts:
t_ = t¯, q_ = ¯q  and both types of agents accept this contract
→ Incentive compatibility is thus easy to satisfy, but at the cost of an obvious loss of flexibility in allocations  = only the participation constraints of inefficient agent matter now ↓

Special cases 2) shut-down of the least efficient type:
t  − θ_q ≥ 0 , 0 ≥ t − ¯θq =>  only the efficient type accepts the non-zero contract (t, q)
= the cost of such a contract may be an excessive screening of less efficient types

# monotonicity constraint (not exist under complete information):
q_ ≥ q¯  = Any  (q, q¯) which can be reached by an incentive compatible contract, must satisfy this implementability condition

5. Information rents

the utility level that a θ_agent would get by mimicking a ¯θ agent:
t ¯− θ_q¯ = t ¯− ¯θq¯+ ∆θq¯ = U¯ + ∆θq¯
=> even if  U¯ = t ¯− ¯θq¯ = 0, the θ_agent benefits from an information rent = ∆θq¯ from mimic
=>> the principal must give up a positive info rent to a θ_agent ( from (a) info advantage)
==>>> (p) problem is to determine the smartest way to give up such a rent (to choose incentive feasible contract)

information rent (= utility without mimics):
U_ = t_ −  θ_q_
U¯ = t¯ − ¯θq¯

6. The optimization program of the principal

max{(t¯,q¯);(t_,q_)} [ ν (S(q_) − t_) + (1 − ν) (S(¯q) − t¯) ]  ==
max{(U¯,q¯);(U_,q_)} [ ν ( S(q_) − θ_q_ ) + (1 − ν)(S(¯q) − ¯θq¯) −  (νU_ + (1 − ν)U¯) ]
=   max [ expected allocative efficiency/social value  −  expected info rent ]

outputs →  impact on allocative efficiency and the overall gains from trade.
information rents →  distributive impact of asymmetric information.

The principal is ready to accept some distortions away from efficiency to decrease the agent’s information rent:

incentive constraints:
U_ ≥ U¯ + ∆θq¯, U¯ ≥ U_ − ∆θq_

participation constraints:
U_ ≥ 0, U¯ ≥ 0

=> SB ( second-best) the solution to this problem

7. The rent extraction-efficiency trade-off

both constraints must be binding at the optimum of the principal’s problem (P)

U_ = ∆θq¯  , U¯ = 0

→ max {(q_,q¯)} [ ν ( S(q_) − θ_q_ ) + (1 − ν) ( S(¯q) − ¯θq¯ )  − ν∆θq¯ ]

# Compared with the full information setting, asymmetric information alters the (p)’s optimization simply by the subtraction of the expected rent given up to the efficient type
# the inefficient type gets no rent
# the efficient type gets the information rent that he could obtain anyway by mimicking the inefficient type → rent depends only on the level of production requested from this inefficient type

=> S’ (q_SB) = θ or q_SB = q∗ 
=> (1 − ν) ( S’ (¯qSB) − ¯θ ) = ν∆θ  => S’ (¯qSB) = ¯θ + [ν/(1 − ν)] ∆θ
=>> trade-off between efficiency (expected marginal efficiency cost) and rent extraction (expected marginal cost of the rent brought)
=>>> No output distortion for the efficient type (v.s. the first-best), q_SB = q_∗ / A downward output distortion for the inefficient type, q¯SB < q¯∗
=>>> information rent: USB = ∆θq¯ SB

スクリーンショット 2017-07-19 22.34.40

Shut-down Policy:
If FOC has no positive solution of ¯q, ¯q=0, q_SB=q_* => no rent, but significant inefficiency as ¯θ not work
=> ν∆θq¯ SB ≥ (1 − ν) ( S(¯qSB) − ¯θq¯ SB)
=> expected cost of the efficient type’s rent due to inefficient one ≥ expected benefit from transacting with the inefficient type at the second-best level of output

=>> the occurrence of shut-down can also be interpreted as saying that the principal has, on top of the agent’s production, another choice variable to solve the screening problem

8. The theory of the firm under asymmetric information

When the delegation of task occurs within the firm, because of asymmetric information, the firm does not maximize the social value of trade (profit)
← allocative efficiency is only part objective, the allocation of resources within the firm remains constrained optimal once considering informational constraints

Leibenstein (1966): management failures within the largest firms ← the most likely to suffer from significant internal informational problems

Williamson (1975): transaction cost that impede transactions → “informational impactedness” as an important source of (allocative) inefficiency
transaction costs may be mitigated by the choice of convenient organizational forms → various organizational forms generate different degrees and costs of asymmetric information between partners => theory of vertical integration

(??? opportunistic behaviour still occurs under perfect information. ↓ That’s whyHart argue the basic problem is property rights. Probability of opportunism exist as long as there are benefits to bargain, which means the only way to avoid opportunism without buying property rights is that make each participants realize that the other has no benefit to bargain under the perspective of long-term profits = a nash equilibrium)

Arrow (1975): an upstream firm may want to integrate backward and acquire a downstream supplier to reduce the extent of asymmetric information between → limitation: vertical integration improves information as exogenous =>> debate
(proponents) Williamson (1985)) and (opponents) Grossman and Hart (1986): prefer to see information structures being derived from the property rights associated with different organizational forms

# those inefficiencies do not call for any public policy ← any benevolent policy maker when correcting these inefficiencies would face the same informational constraints as (p) + Nevertheless, the policy-maker might want to implement different trade-offs between efficiency and rent extraction for redistribution

9. Asymmetric Information and marginal cost pricing

(p) as consumers, (a) as a firm producing a consumption good, under complete info → (marginal utility of consumption) price = marginal cost

under asymmetric information
=> efficient firm (θ_): price equates marginal cost
=> inefficient firm (¯θ): p(¯θ) = ¯θ + [ν/(1 − ν)] ∆θ
=>> generalized marginal cost = traditional marginal cost of ¯θ + information cost
=>> p(¯θ) is higher than marginal cost to decrease the quantity ¯q produced by the inefficient firm +  reduce the efficient firm’s information rent

(??????? so the consumer will pay higher price for good produced by inefficient firm than efficient one?)

10. The revelation principle

↑ restricted (p) to offer a menu of contracts, one for each type → a) a more complex contract? b) communication device used to transmit information to (p)?  = not the case
=> Revelation Principle:  any allocation rule a(θ) obtained with a mechanism (M, g˜(·)) can also be implemented with a direct and truthful revelation mechanism
direct: a mapping g(·) from Θ to A which writes as g(θ)=(q(θ), t(θ)) for all θ belonging to Θ

truthful: direct revelation mechanism satisfies incentive compatibility constraints
→ simplification of contract theory as restricting the analysis to a simple and well defined family of functions [the truthful direct revelation mechanisms]

(revelation principle is from game theory and is a fundamental principle of mechanism design)

11. A more general utility function for the agent

Spence-Mirrlees condition: Cθq  a constant sign condition / different types of agent have indifference curves which cross each other at most once / a more efficient type is also more efficient at margin

incentive and participation constraints as the same:
U_ = t_ − C(q_, θ_) ≥ t ¯− C(¯q, θ_),
U¯ = t ¯− C(¯q, ¯θ) ≥ t_ − C(q_, ¯θ)
U_ = t_ − C(q_, θ_) ≥ 0
U¯ = t ¯− C(¯q, ¯θ) ≥ 0

Spence-Mirrlees condition guarantees that only the efficient type’s incentive constraint has to be taken into account

11.1 The optimal contract

U_ ≥ U¯ + Φ(¯q)
Φ(¯q) = C(¯q, ¯θ) − C(¯q, θ_)
U¯ ≥ 0
→ U_ = Φ(¯q)
Since Φ0 (·) > 0, reducing the inefficient agent’s output reduces also, as in Section 6, the efficient agent’s information rent

q_SB = q_∗ ,  S’ (q_∗ ) = Cq(q_∗ , θ_)  / no output distortion for efficient
q¯SB < q¯∗ ,  S’ (¯q∗ ) = Cq(¯q∗ , ¯θ)  / a downward output distortion for inefficient
→ S’ (¯qSB) = Cq(¯qSB, ¯θ) + [ν/ (1 − ν)] Φ’ (¯qSB)
→ U_SB = Φ(¯qSB) / information rent
→  t_SB = C(q_∗, θ_) + Φ(¯qSB) / t ¯SB = C(¯qSB, ¯θ)

11.2 Non-responsiveness

S(q, θ): common value model where the agent’s type directly affects the principal’s utility function
usual assumptions: a positive and decreasing marginal value + Sqθ(q, θ) > 1  the marginal gross value of trade for (p) increases sharply with the agent’s type

Sq(q_∗, θ_) = θ_  /  Sq(¯q∗, ¯θ) = ¯θ
Sqθ(q, θ) > 1 => q_∗ < q¯∗
→ not satisfy the monotonicity condition implied by incentive compatibility (Guesnerie & Laffont (1984): a phenomenon of non-responsiveness)
→ strong conflict makes screening of types quite difficult: Sq(¯qSB, ¯θ) = ¯θ + [ν/(1 − ν)] ∆θ ← when ν small, ¯qSB close to  ¯q∗ > q_SB=q_∗ → violate monotonicity condition q_SB ≥ q¯SB
=> forces (p) to use a pooling allocation: distort ¯q∗ down to q_∗ to decrease the θ-type’s information rent to contract D while still preserving incentive compatibility ← better by moving along the zero iso-utility line of a ¯θ-type  best pooling allocation:

max {(q,t)}  νS(q , θ_) + (1 − ν)S(q, ¯θ) − t
t − ¯θq ≥ 0
q < q¯∗  ← Sqθ(q, θ) > 0

スクリーンショット 2017-08-07 18.32.51

11.3 More than two goods

q = (q1,… ,qn), C(q, θ) with C(·) strictly convex in q, S(q) with S(·) strictly concave in q
U_ = Φ(q),  Φ(q) = C(q, ¯θ) − C(q, θ_)

q_SB = q∗ , Sqi (q_∗ ) = Cqi (q_∗ , θ_) for all i in {1,… ,n}
¯qSB ?? q¯∗ , Sqi (¯qSB) = Cqi (¯qSB, ¯θ) + [ν/(1 − ν)] Φqi (¯qSB), for all i in {1,… ,n}
→ without specifying further the value and cost functions, hard to compare second-best outputs above with the first-best outputs / may ¯qSBi > ¯q∗i for a subset of indices i

C(q_, ¯θ) − C(¯q, ¯θ) ≥ C(q_, θ_) − C(¯q, θ_), for all implementable pairs (¯q, q)
→this incentive compatibility condition satisfied if the Spence-Mirrlees conditions Cqiθ(·) > 0 + if monotonicity conditions ¯qi < q_i for all i (however, may ¯qSBi > q_SBi = ¯q∗i )

12. Ex ante versus ex post participation constraints

↑ contracts offered at the interim stage
/ sometimes, (p) (a) contract also at ex ante stage: before (a) discovers his type
optimal contract under various assumptions about risk aversion of (p) and (a)

12.1 Risk neutrality

(a) ex ante participation constraint: νU_ + (1 − ν)U¯ ≥ 0.

an example of ex post incentive compatible + ex ante participation constraint:
U_∗ = (1 − ν)∆θq¯∗ > 0 and U¯∗ = −ν∆θq¯∗ < 0 [← U_ ≥ U¯ + ∆θq¯ and U¯ ≥ U_ − ∆θq_]
→ with such a rent distribution, the optimal contract implements the first-best outputs costlessly for (p)
=>> (a) is rewarded when efficient and punished when inefficient => there must be some risk on the distribution of information rents to induce information revelation, but this risk is costless for the principal because of the (a)’s risk neutrality
(such an ex ante contract requires a strong ability of the Court of Justice to enforce contracts)

(in that case of non-responsiveness, even under ex ante contracting and risk neutrality, some inefficiency still arises)

more leeayway U_ and U¯ → incentive constraints hold + ex ante participation constraint an equality:
{(t_∗, q_∗); (t¯∗, q¯∗)} where t_∗ = S(q_∗)−T and t¯∗ = S(¯q∗)−T with T being a lump-sum payment → incentive compatible constrain:
スクリーンショット 2017-08-09 17.46.33
participation constrain: T = ν(S(q_∗) − θ_q_∗) + (1 − ν)(S(¯q∗) − ¯θq¯∗)
=>> implementation of the first-best outcome amounts to have (p) selling the benefit of the relationship to risk neutral (a) for a fixed up-front payment T → (a) will benefit from the full value of the good and will trade-off the value of any production against its cost = (a) is residual claimant for the firm’s profit (???)

# Harris and Raviv (1979): firm as a mechanism allocating resources at the ex ante stage → first best allocation remains implementable when the firm has a strong ability to enforce contracts
# Loeb and Magat (1979): regulation as a p-a problem with adverse selection → asymmetric info is not an obstacle to the implementation of marginal cost pricing if the regulated firm accepts the regulatory contract at the ex ante stage

12.2 Risk aversion

[1] A risk adverse (a)

↑ first-best is feasible with risk neutrality → but (a) is subject to risk→ such a risk is obviously costly if (a) is risk averse

a risk averse agent with a Von Neuman-Morgenstern utility function u(·):
ex ante participation constraint: νu(U_) + (1 − ν)u(U¯) ≥ 0
(p): max {(U¯,  q¯);(U_,q_)} [ν(S(q_) − θ_q_ − U_) + (1 − ν)(S(¯q) − ¯θq¯− U¯)]
incentive compatible: U_ ≥ U¯ + ∆θq¯

=>  q_SB = q_∗ / no output distortion for efficient
=> q¯SB < q¯∗ / a downward output distortion for inefficient, with
S'(¯qSB) = ¯θ + [ν (u'(U¯SB) − u'(U_SB)) ] / [νu'(U_SB) + (1 − ν)u'(U¯SB) ] * ∆θ
=> U_SB > 0 > U¯SB
→ to insure the participation of risk averse (a), (p) must also pay a risk premium for wedge between U_ and U¯ → reducing this premium calls for a downward reduction in the inefficient type’s output so that the risk is lower = (a)’s risk aversion leads the (p) to weaken the incentives(+ outputs)
(when zero risk aversion → section 12.1 / when infinitely risk adverse → section 2)

constant absolute risk aversion utility function u(x) = [1−exp(−rx)] / r
スクリーンショット 2017-08-09 17.03.16

# Salani´e (1990): the case of a continuum of types → pooling for the least efficient types occurs when risk aversion is large enough
# Laffont & Rochet (1998): a similar phenomenon with ex post participation constraints when a regulator (p) maximizes ex ante social welfare with a risk averse firm

[2] A risk adverse (p)

a risk averse principal with utility function v(·) on S(q) − t:
S(q_∗) − θ_q_∗ − U_∗ = S(¯q∗) − ¯θq¯∗ − U¯∗
νU_∗ + (1 − ν)U¯∗ = 0

=> U_∗ = (1 − ν) [ S(q_∗ ) − θ_q_∗ − (S(¯q∗) − ¯θq¯∗) ]
=> U¯∗ = −ν [ S(q_∗ ) − θ_q_∗ − (S(¯q∗ ) − ¯θq¯∗) ]

=> U_∗ − U¯∗ = S(q_∗ ) − θ_q_∗ − (S(¯q∗) − ¯θq¯∗) > ∆θq¯∗
=> U¯∗ − U_∗ =S(¯q∗) − ¯θq¯∗   − (S(q_∗ ) − θ_q_∗) > −∆θq_∗
→ satisfies both types’ incentive compatibility constraints 
=>> when (p) is risk averse over S(q) − t and contracting takes place ex ante, the optimal incentive feasible contract implements the first-best outcome (???)

<= the same in the case of lump-sum payment T
by making the risk neutral (a) residual claimant for the value of trade, ex ante contracting allows the risk averse (p) to implement the first-best outcome despite the informational problem

max {(U¯, q¯),(U_,q_)}  [ν v(S(q_) − θ_q_ − U_) + (1 − ν) v(S(¯q) − ¯θq¯− U¯)]
U_ ≥ U¯ + ∆θq¯  //  U¯ ≥ 0
=> q_SB = q_∗ / no distortion for efficient just as in the case of risk neutrality
=> ¯qSB < q¯∗ / a downward distortion of inefficient, with
スクリーンショット 2017-08-09 18.06.58
=> by increasing ¯q above its value with risk neutrality, the risk averse (p) reduces the difference between V_SB and V¯SB → gives insurance and increases ex ante payoff

# Risk aversion (p) is quite natural in some contexts: a local regulator with a limited budget (Lewis&Sappington (1995): regulation of public utilities) or a specialized bank dealing with relatively correlated projects may be insufficiently diversified to become completely risk neutral

13. Commitment

↑ (a) incentive problem with private info ← (p) a distribution of rents inducing information revelation + some allocative inefficiency designed at reducing the cost of this revelation ← 2 assumptions/imperfections:
[1] Court of Justice can perfectly enforce the contract
[2] neither renegotiating nor reneging on the contract is a feasible alternative

[2.1] renegotiating a contract

a limited commitment that should benefit both (p) and (a) = a Pareto improvement
→ after revelation by selecting, (p) can propose a renegotiation to raise allocative inefficiency on the inefficient (a) output = ¯qSB → q¯∗, t¯∗ = ¯θq¯∗ 
→ hardens the incentive compatibility constraint of the efficient (a) → no truthful revelation at all => a fundamental trade-off between raising efficiency ex post and hardening ex ante incentives

not a problem: 1) increasing productive capacity can be costly; 2) using indirect mechanism that led the agent choose the output → no scope for renegotiation since one-shot relationship

[2.2] reneging on a contract 

either (p) or (a) may breach the contract and thus renege on his previous contractual obligation:
1) once (a) has revealed type by selecting, (p) may propose the complete information contract which extracts all rents → this breach of contract should be anticipated by (a) and thus interfere with truthful revelation in the first place
2) (a) may want to renege on a contract with a negative ex post utility level (Section 12.1) → the threat of (a) reneging at the ex ante stage forces (a) participation to be written in ex post terms

14. Stochastic Mechanisms *

the optimal mechanism cannot be stochastic. To show this result suppose, on the contrary, that this mechanism is stochastic. A random direct revelation mechanism is then a probability measure on the set of possible transfers and outputs, which is conditional on the agent’s report of his type. Lett {(˜q_, U_˜ ); (˜q¯,  U˜¯)} be such a random stochastic mechanism. We can replace this stochastic mechanism by the deterministic mechanism constructed with the expectations of those variables, namely E(˜q¯), E(˜q_), E(U_˜ ) and E(U ˜¯)

15. informative signals to improve contracting *

how information exogenous to the relationship (observation in similar one + monitoring and auditing)  can help (p) to improve the contract designed with (a) by somewhat filling the information gap

15.1 ex post verifiable signal

15.2 ex ante non-verifiable signal

15.3 more or less favorable distribution of types

16. Contract Theory at Work

[1] Regulation

Baron&Myerson (1982): Regulating a Monopolist with Unknown Costs
(p) a regulator → (decide how the firm’s regulated price/quantity and subsidy/tax should be determined, as functions of some cost report from the firm) → maximizes
[1] a linear social welfare function of the consumers’ surplus S(q) − t |(t= qP(q)) ; [2] a regulated monopoly’s profit U = t − θq , with weight α<1
→ V = S(q) − θq − (1 − α)U
α<1  → socially costly to give up a rent to the firm
+ incentive and participation constraints → firm has nonnegative profit and has no incentive to misrepresent its costs

(The Revelation Principle: Without any loss of generality, the regulator may be restricted to regulatory policies which require the firm to report its cost parameter and which give the firm no incentive to lie →To see why it is true:
suppose that the regulator chose some general regulatory policy, not of the form described in the proposition. For each possible value of θ, let Φ(θ) be the cost report that the firm would submit if its true cost parameter were θ. That is, Φ(θ) maximizes the firm’s expected profit, when it is confronted with this regulatory policy and its true cost parameter is θ. Now consider the following new regulatory policy: ask the firm to report its cost parameter θ; then compute Φ(θ); and then enforce the regulations that would have been enforced in the original regulatory policy if Φ(θ) had been reported there. It is easy to see that the firm never has any incentive to lie to the regulator in the new policy. (Otherwise it would have had some incentive to lie to itself in the originally given policy.))

=> qSB = q∗ for the efficient type // a downward distortion for the inefficient type 
→ S’ (¯qSB) = ¯θ + [ν/(1 − ν)] (1 − α)∆θ

a higher value of α → reduces the output distortion ← regulator is less concerned by the distribution of rents within society

スクリーンショット 2017-08-17 15.16.01スクリーンショット 2017-08-17 15.21.13スクリーンショット 2017-08-17 15.22.05

Laffont and Tirole (1993): government intervention under asymmetric information ← a comprehensive view of theory + implications for designing real regulatory institutions

[2] Nonlinear Pricing of a Monopoly

Maskin&Riley (1984): Monopoly with incomplete information
p: seller of a private good, utility function V = t – cq
a: buyer, U = θu(q) − t  ←  θ of each buyer = {θ_, ¯θ} with respective probabilities 1 − ν | ν

スクリーンショット 2017-08-16 21.32.47
¯θ is the efficient type → binding constraints are U¯ ≥ U_ + ∆θu(q_) | U_ ≥ 0

=> ¯qSB = ¯q∗ | θ¯u'(q¯∗ ) = c
=> a downward distortion of the low valuation agent’s output:  q_SB < q_∗ 
[ θ_ − (ν/1 − ν) ∆θ ]  u’ (q_SB) = c

Tirole (1988) + Varian (1988) + Wilson (1993): reviews on literature on nonlinear pricing

[3] Quality and Price Discrimination

Mussa&Rosen (1978):  Monopoly and product quality
(a) buy a commodity with quality q + vertically differentiated with their preferences for the good
→ U = θq − t with θ in Θ = {θ_, ¯θ} with respective probabilities 1 − ν and ν
(p): V = t − C(q)
スクリーンショット 2017-08-16 21.48.41

¯θ is efficient type
=> ¯qSB = ¯q∗ | θ¯ = C’ (¯q∗)

=> a downward distortion of the low valuation agent’s output:  q_SB < q_∗ 
θ_ = C’ (q_SB) + [ν/(1 − ν)] ∆θ

the spectrum of qualities (¯q, q_)  larger under asymmetric information than under complete information → incentive of (p) to put a low quality good on the market ← a well documented phenomenon in the industrial organization literature
=> damaging its own goods may be part of optimal selling strategy when screening of the consumers’ willingness to pay for quality is important

[4] Financial Contracts

Freixas&Laffont (1990):  Optimal banking contracts
(p): a lender who provides a loan with size k to a borrower, utility function V = t − Rk, R = risk free interest rate
(a): V = θf(k) − t, f(k) = return on capital, t = borrower’s repayment to (p), θ = a productivity shock in Θ = {θ_, ¯θ} with 1 − ν and ν
スクリーンショット 2017-08-16 22.03.53

¯θ is high productivity/efficient type
=> ¯kSB = ¯ k∗ | ¯θf'(¯ k∗) = R
=> a downward distortion of the low productivity borrower’s loan: k_SB < k_∗
[ θ_ − (ν/1 − ν) ∆θ ]  f’ (k_SB) = R

Screening borrowers according to the size of their loans → rationing for the low productivity firms ← Freixas&Rochet (1999, Chapter 5)

[5] Labor Contracts

Green&Khan (1983) + Hart (1983): Optimal labour contracts under asymmetric information:
(p): a union who provides its labor force l to a firm, assuming that it has full bargaining power, utility function defined on consumption and labor → V = v(t − ψ(l)), ψ(·)=disutility of labor (increasing & convex)
(a): firm makes a profit: U = θf(l)−t, θ = a productivity shock in {θ_, ¯θ} with 1 − ν, ν
++ firm’s boundaries are determined before the realization of the shock and contracting takes place ex ante ++ a risk averse (p) and a risk neutral (a)

=> risk averse union will propose a contract to the risk neutral firm → provides full insurance and implements first-best levels/efficient employments l¯∗ and l_∗
=>  ¯θf'(¯l∗) = ψ'(¯l∗) | θf'(l_∗ ) = ψ'(l_∗)

more difficult case: a utility function exhibiting an income effect: V = v(t) − ψ(l)
→ first-best optimal contract would still require efficient employment in both state
→ can also equating the worker’s marginal utility of income across states: t_∗ = t¯∗
=> ν(¯θf(¯l∗ ) − t¯∗ ) + (1 − ν)(θf(l_∗ ) − t_∗ )=0.
=> t¯∗ = t_∗ = ν ¯θf(¯l∗) + (1 − ν)θf(l_∗ ) = E(θf(l∗))スクリーンショット 2017-08-18 15.41.16スクリーンショット 2017-08-18 15.42.05

 

optimal overemployment has often been critized ← worker’s utility function assume that labor is a normal good → more general preferences: underemployment can instead be obtained as an optimal solution to the asymmetric information problem ← Hart& Holmstrom (1987)

 

Continue reading “The theory of Incentives 2”

Useful Economics

So Many Critics of Economics Miss What It Gets Right

At this point, blanket critiques of the economics discipline have been standardized to a refrain is getting stale.  Simply calling for humility and methodological diversity accomplishes little. A more constructive tone would be preferable.

Here’s what economics get right:

1). some theories that really work → can makes testable predictions that apply to other situations

a) auction theory, (relies on individual rationality), which predicts how buyers will bid for things like online ads or spectrum rights

e.g. Google auctions its advertisement space with a setup known as a generalized second-price auction (developed relatively recently by economists such as Hal Varian), which is based on game theory  →  predicting which types of auctions most reliably lead to profitable trades  →  crucial to the profits of online-services companies

b)  matching theory, (basically an algorithm for central planning), which started from game theory, with impact on resource allocation , has main practical application on entry level labor markets, and also has made it a lot easier to get an organ transplant

e.g. 2 new and influential applications in practice: School Choice + Kidney Exchange

c) random-utility discrete choice theory, (neoclassical), which is used in everything from marketing to transportation planning to disaster preparedness

e.g. In 1972, San Francisco introduced a new train. While the authorities predicted that 15% of area commuters would use the system, economist McFadden predicted that usage would be only 6.3%, very close to actual number 6.2%.  ←  the models were “random-utility discrete choice models”, the extensions of simple utility theory which have been applied in a huge number of areas (product development, pricing decisions, marketing, energy usage and environmental-impact studies)

d)  gravity models of trade, which have proven very successful at predicting the flow of international trade

== one of the most robust empirical finding in economics: bilateral trade between two countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them.

###

=>> prove that anyone who claims that econ theories will never be reliable, because they deal with human beings instead of atoms, is simply incorrect.

(however, most of useful theories are from micro economics, while macro economics that attracts more public attention is still looking for its first big success in predicting booms and busts, which is certainly a doom if they insist. The difference is what I have argued that the 2 systems observed are very different on their systematic characteristics and element robustness.)

 

2). economics is becoming a lot more empirical → focusing more on examining the data than on constructing yet more theories (Hamermesh (2013), and more recent research using machine-learning techniques)

スクリーンショット 2017-07-16 21.39.59

Without empirical support, we can’t really be confident that a theory is a good framework for thinking about the world.

(Some economists claim that the main point is to learn how to pick models into the right place. However, we will definitely find it hard to do this if we refuse to reject any of them and claim none of them are wrong but fits some specific situation. One situation is what noah said in How should theory and evidence relate to each other?, some economists, especially a lot of young, smart economists, “do empirical work, observe the results, and then make one structural model per paper to “explain” the empirical result they just found. These models are generally never used or seen again.” Another situation is what I have seen in today’s doctoral program, all the young students begin their paper from ‘I construct a model’, which is just a pro-forma model-making of the older “theory generation” (who are always their advisers).
=> economists in general are extremely reluctant to toss out any theories at all. econ needs to get more comfortable with the idea of killing theories. The final part of this blog has an excellent conclusion.)

2.1). empirical economics is becoming more directly and immediately relevant to policy matters, partly due to the “credibility revolution”

The quasi-experimental economics evaluates the results of policy experiments (Seattle’s recent minimum wage hike / European countries’ acceptance of refugees).
== Instead of relying on complex theory or unrealistic assumptions, quasi-experimental studies give immediate clear answers and find believable estimates of the effects about the results of government action
=> That won’t make economic theory obsolete, but it vastly increases the speed with which economists can give policy makers reliable feedback.

Drawbacks:
a) Quasi-experiments only give us local understanding of the world, not the kind of global understanding that we’d need for really big bold policy moves. In the long run, being able to deeply understand the economy will require working structural models)
b) Quasi-experiments usually must be found by luck rather than purposefully implemented, and even the ones that are purposefully implemented (lotteries, RCTs) are limited in the set of things they can study.
(e.g., studies pretty conclusively show that the minimum wage doesn’t destroy many jobs in the short run, but the idea that minimum wage constrains job growth over the long run is much harder to study using quasi-experiments.)

Update 2017/09/08

Is there really an empirical turn in economics?

 

3). free-market ideology is no longer the case.

= today’s star economists likely to fall on the left side of the political spectrum + economists in general are more pro-government than the general public on most issues

スクリーンショット 2017-07-16 21.53.56

When pop economists still use simplistic old ideas to justify laissez-faire policies, economists just don’t look very ideological anymore, replaced by nuance, moderation and complexity.

###

Though “some economists still defend the idea that economic theory doesn’t need to make predictions in order to be useful, and instead merely has to give people a framework for thinking about the world”, I would prefer the following statement

“academics are working hard to make econ more scientific — to create reliable, applicable theories, to gather and understand new data, to provide rapid, useful feedback to policy makers, and to gain a more balanced and refined understanding of the economy.”

 

The theory of Incentives 1

THE THEORY OF INCENTIVES I : THE PRINCIPAL-AGENT MODEL   – Laffont & Martimort

Introduction 

central question of economics: how to design institutions in order to provide good incentives for economic agents

# market: the pressure of competitive markets → incentives for cost minimization + exogenous prices→ incentives for maximizing consumers’ utility levels

# firms:
1. decentralized information + identical objective functions → how to coordinate actions among the members of the team by the proper management of information
2. conflicting objectives (P/A) + no private information (no complete check) → contract design to perfectly control
=> conflicting objectives + incomplete information →  incentive design
(target: organizations, small numbers markets and any kind of collective decision ← in Social behavior cases, private incentives works in addition to norms of behavior culturally)

# private information problems:
1. moral hazard / hidden action: the agent can take an action unobserved by the principal
2. adverse selection / hidden knowledge: the agent has some private information about its cost or valuation that is ignored by the principal
3. nonverifiability: the principal and the agent share ex post the same information but no third party and, in particular, no Court of Justice can observe this information

=> (different) additional costs incurred from the strategic behavior of privately informed economic agents can be viewed as one category of the transaction costs emphasized by Williamson (1975)

# the general equilibrium theory + incentives:
–  Akerlof, G., (1970), “The Market for ’Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, 84, 488-500.
–  Spence, M., (1974), Market Signalling: Informational Transfer in Hiring and Related Processes, Harvard University Press, Cambridge.
–  Rothschild, M., and J. Stiglitz, (1976), “Equilibrium in Competitive Insurance Markets,” Quarterly Journal of Economics, 93: 541-562.
=>  asymmetric information was posing a much greater challenge to the proper generalization of the Arrow-Debreu theory
→  game theory and theory of organizations to build the theory of incentives, encompassing : contract theory, principal-agent theory, agency theory and mechanism design

# principal-agent theory:
a) principal delegates an action to a single agent through a take-it-or-leave-it offer of a contract
=> put aside the bargaining issues which is a topic for game theory + enforce the contract and to impose penalties if one deviates
=> a simple optimization on various trade-offs between allocative efficiency and the distribution of information rents arising under incomplete information
b) one principal and several agents
=> asymmetric information between agents + agents adopt an individualistic behavior
=> Bayesian Nash equilibrium describing the strategic interaction between agents under incomplete information
=> 1)  the free-rider problems when agents undertake a collective decision
2)  principal may attempt to benefit from the competition between the agents to relax the informational constraints and better reduce the agents’ information rents (mechanisms design: Auctions, tournaments, yardstick competition and supervision of an agent by another one)
3)  the principal to use competition between agents may also trigger their collusion  against the principal (group incentives)
c) various imperfections in contract design
=> informed principal, limited commitment, renegotiation, imperfect coordination among various principals, incomplete contracting on the value of trade
=> the Bayesian perfect equilibrium

 

Chapter 1. Incentives in Economic Thought

incentive theory emerges with the division of labor and exchange
=> conflicting objectives + incomplete information

1.  Incentive contracts in agriculture

– Adam Smith recognized wages are decided by the contractual nature of the relationship between the masters and the workmen <= conflicting interests + not evenly distributed bargaining power

* Basic constraints on model: agent’s participation ← life sufficient wage

–  the lack of appropriate incentives for slaves <= use non-economic motives to explain the survivance of such highly inefficient contracts

–  discouragement of sharecropping agriculture in the ancient state of Europe
=> incentive problems in the absence of investment in the land by tenants + the unobservable misuse of instruments of husbandry provided by the proprietor (e alternative use of cattle – a moral hazard problem)
=> the fundamental trade-off between incentive and the distribution  
=> an unexplained failure of the indivisible hand that should be either discouraged by taxation or improved by appropriate sharing of variable factors

2. Incentives in management

Babbage (1835): precise measurement of performances →  efficient piece-rate or profit-sharing / also benefits from any unexpected improvement

Barnard (1938) : a general theory of incentives in management:
– monetary (objective inducements) and non-monetary incentives (changing states of mind)
– material incentives → inefficient & even in purely commercial organization ← reinforced by other incentives: a) the creation of coercive conditions; b) the rationalization of opportunities; c) the unculcation of motives ← through competition  and organization growth, change of personel

==>> the incompleteness of contracts and the bounded rationality of members in the organization require that some leaders be given authority (authority relationship) to decide in circumstances not anticipated precisely by the contracts => the need to satisfy ex post participation constraints of members who accept non contractual orders only if they are compatible with their own long-run interests.

== Arrow (1963): moral hazard; extended by Wilson (1968) & Ross (1973) : agency problem
== inspired Simon (1951): formal theory of the employment relationship; Williamson (1975) followed: transaction costs theory for the case of symmetric but nonverifiable information between two parties
== Grossman and Hart (1986) modeled this paradigm which led to the large recent literature on incomplete contracts

### the fundamental trade-off between transaction costs and incentive

3. The free rider problem

Wicksell (1896): free-rider problem on public goods and finance <= a solution: the principle of (approximative) unanimity and voluntary consent

Dreze and de la Vall´ee Poussin (1971) extended: at each step of the procedure, agents announce their marginal rates of substitution between public goods and private good => revelation of the true marginal rates of substitution is a maximin strategy, a weak incentive property

Clarke (1971), Groves (1973), Groves and Loeb (1975): provided mechanisms with monetary transfers inducing truthful revelation of preferences and making the Pareto optimal public good decision => followed substantially incentive theory and the mechanism design methodology

4. Incentives in voting

Bowen (1943): “strategic voting”: the individual could not vote intelligently without knowing cost  + results would be unreliable if one suspected that his expression of preference would influence cost
=> exogenously fixed distribution of the cost of the public good  + considered successive votes on increments of the public good (according to true preferences)

Black (1948): a wide class of cases (single-peaked preferences) for which majority voting → transitivity of social choice → a solution to the 1785 Condorcet paradox => eliminated strategic issues

Arrow (1951): formal theory of social choice: impossibility theorem
a) a non dictatorial social ranking of social alternatives
b) avoids intransitivity
c) no restriction is placed on individual preferences
==>> when making social choices from individual tastes, individuals will find it rationally profitable to misrepresent their tastes by their actions, or
some other individual will be made so much better off by the first individual’s misrepresentation → he could compensate the first individual (both are better off than if everyone really acted in direct accordance with his tastes)

Vickrey (1960): question of strategic misrepresentation of preferences in a social welfare function (associates a social ranking to individual preferences):
– individuals may be able to gain by reporting a preference differing from that which they actually hold → such strategy could lead to a counterstrategy → Dummet and Farquharson (1961): non-cooperative Nash equilibria
=> social welfare functions which satisfy the assumptions of Arrow’s theorem (independence assumption) are immune to strategy
==>> impossibility of non-manipulable and non-dictatorial mechanisms of any method of aggregating individual preferences or of any voting mechanism

Gibbard (1973): prove that if a function is to be immune to strategy →  it must satisfy the independence criterion
=>> with no prior knowledge of preferences, non-dictatorial collective decision methods cannot be found where truthful behavior is a dominant strategy

(positive results of incentive methods in practice == restrictions on preferences, as in the principal-agent theory, or in the relaxation of the required strength of incentives by giving up dominant strategy implementation)

5. Regulation of Natural monopolies

Walras (1897): a natural monopoly as an industry where monopoly is the efficient market structure + to price the product of the firm by balancing its budget
Ramsey (1927) & Boiteux (1956): theory of optimal pricing under a budget constraint

19th century price cap regulation
Averch and Johnson (1962): rate of return regulation which ensures prices covering costs inclusive of a (higher than the market) cost of capital →  overemphasized over-capitalization

Loeb & Magat (1979): put the regulationin the framework of the principal-agent literature with adverse selection by stressing the lack of information of the regulator → use a Groves dominant strategy mechanism which solves the problem of asymmetric information at no cost (no social cost in transfers from the regulator to the firm)

Baron & Myerson (1982): a second-best problem by weighting the firm’s profit with a smaller weight than consumers’ surplus in the social welfare function maximized by the regulator →  optimal regulation entails a distortion from the first-best (pricing higher than marginal cost) to decrease the information rent of the regulated firm

Laffont and Tirole (1986) : a utilitarian social welfare function with the same weight for profit and consumers’ surplus, but introduced a social cost for public funds (due to distortive taxation) which creates also a rent-efficiency trade-off  →  technically an adverse selection model as ex-post observability of cost
Laffont and Tirole (1993): this model along many dimensions (dynamics, renegotiation, auctions, political economy…)

6. Incentives in Insurance

Arrow (1963): moral hazard, i.e., the ability of insured agents to affect the probabilities of insured events → a market failure as some insurance markets would not emerge → changes of ethical attitudes
Pauly (1968): it was quite natural for agents to react to zero price, thus not “moral” + not imply a market failure as no proof of the superiority of public intervention
Pauly (1974), Helpman&Laffont (1975): competitive insurance markets (with linear prices) were inefficient ← an uninformed government could improve upon the free market outcome
Rothschild and Stiglitz (1976): Pareto inefficiency of competitive insurance markets (with linear prices) with adverse selection

Spenc&Zeckhauser (1971): more sophisticated contracts (non-linear prices)  → solving the maximization of the welfare of a representative agent with a breakeven constraint for the insurance company  + the moral hazard constraint that each agent chooses its level of self-protection optimally.
— self-protection variable is chosen before, they obtained the moral hazard variable model with a continuum of agents and a break-even constraint
— self-protection variable is chosen after, they have both moral hazard and adverse selection → close to the Mirrlees optimal income tax problem

Ross (1973): the pure principal-one agent model with only moral hazard and an individual rationality constraint for the agent
its modern treatment in Mirrlees (1975), Guesnerie and Laffont (1979), Holmstr¨om (1979), Shavell (1979) and Grossman and Hart (1983).

In moral hazard: also the optimal non-linear tariff which maximizes the expected welfare of a population of agents having private information about their own risk characteristics → encountered on price discrimination with quality replacing quantity

7. Redistribution and Incentive

agents’ behavior → base for taxation → deadweight losses => raising money for redistributive purposes destroys efficiency
== when labor income is taxed, the leisure-consumption choices are distorted → the incentives for work are decreased → a redistribution-incentives trade-off (more equal more loss)

informational difficulty with income taxation: income, the observable variable ← the product of a moral hazard variable: the supply of labor + of an adverse selection variable: ability

Vickrey (1945): model the optimal income tax problem as a principal-agent problem where the principal is the tax authority and the agents the tax payers
Harsanyi (1955): the fundamental problem of optimal income taxation:
– The question of the ideal distribution of income (the proper tax system) → a matter of compromise between equality and incentives
←  some degree of inequality in needed in order to provide the required incentives and stimuli to efficient cooperation of individuals in the production process
== a relationship between output and effort + unknown productive characteristics of the individual ==>> utility function which depends now on consumption, output and the individual’s characteristics ← taxation creates a relationship between output and consumption
===>>> government’s optimization problem = maximize the sum of individuals’ utilities under the incentive compatibility conditions and the budget equation of the government.
(get supply of effort characterized by a first-order condition which is the first order condition of incentive compatibility for an adverse selection problem)
(recognizing a calculus of variation problem, he wrote the Euler equation and gave up)

8. Price discrimination

When a monopolist or a government wants to extract consumers’ surpluses in the pricing →  the problem of the heterogeneity of consumers’ tastes →  offering different menus of price-quality or price-quantity pairs (i.e., by using second degree price discrimination)
=> an incentive mechanism which leads consumers to reveal their information by their self-selection in the menu

Dupuit (1844): the concept of consumer surplus →  discuss price discrimination = the incentive problems faced by the pricing of infrastructures

Edgeworth (1913): price discrimination for the railways industry
Pigou (1920): different types of price discrimination.
Gabor (1955): block tariffs or two-part tariffs (electricity industry in England) = one type of consumers two part tariffs are equivalent to first degree price discrimination
Oi (1971): an optimal two-part tariff
Mussa&Rosen (1978), Spence (1977), Goldman, Leland and Sibley (1984): general framework to derive for a monopolist an optimal tariff (non-linear in prices or qualities)

9. Incentives in planned economies

Lange (1967): did not see any problem of incentives in the working of the socialist economy →  “let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second. The market process with its cumbersome tatonnements appears old fashioned”
Dr`eze and Vall´ee Poussin (1971): private characteristics was shown to be a maximum strategy in a planning procedure for public goods

Weitzman (1974): an explicit planning problem with asymmetric information in price mechanisms and quantity mechanisms

10. Mechanism design

Marschak (1955): Organization rules can be devised in such a way that, if every member pursues his own goal, the goal of the organization is served (consistent benefits)
(bonuses to executives and the promises to loot to besieging soldiers; and in theory, the ideal laisser faire economy.) (And there exist also negative incentive, punishments)
Hurwicz (1960): communication and incentives issues arose when extending the general equilibrium resource allocation mechanisms to non convex environments

Whittle (1954) and Hill (1960): the distributions of quality were endogenous and dependent on the care taken in the production process  → adverse selection appeared when forecasting probabilities of some events
Good (1952), McCarthy (1956) and later Savage (1971): payment formulas leading forecasters to announce their true estimated probabilities + discovered the incentive constraints for the revelation of information

Economists around Hurwicz: a general framework of the mechanism design approach == treated the competitive markets as just one particular institution in a much more general family of mechanisms run by benevolent planners => communication costs required by non conventional environments
Groves (1973): incentives in public policy + incentive compatible mechanisms in a team problem

Revelation Principle: with adverse selection and moral hazard, any mechanism of organizing society = an incentive compatible mechanism by which all informed agents reveal their private information to a planner who recommends actions
==>> appropriate framework for the normative analysis of economies with asymmetric information and contracts which can be written on all observable variables

11. Auction

Auctions: principals attempt to use the competition among agents to decrease the information rents (under incomplete information about the other agents’ valuations)

Friedman (1956): a method to determine optimal bids in a first-price, sealed-bib auction
Vickrey (1961): the first equilibrium theoretic analysis of the first price auction compared to the second price auction (Vickrey auction)

Harsanyi (1967, 1968): clarification of the Bayesian Nash equilibrium concept → the theory of auctions: 3 major models  The to
Vickrey (1961): the independent value model
Rothkopf (1969) & Wilson (1969, 1977):  the symmetric common value model
Wilson (1967, 1969): the symmetric common value model
Milgrom and Weber (1982): a major synthetic paper → most of models are special cases of the affiliated value paradigm
Myerson (1981): general mechanism approach to characterize the optimal auctions in models with private values