Other
Other papers (without abstracts)
“Ratifiable Mechanisms: Learning from Disagreement,” (with Thomas R. Palfrey) Games and Economic Behavior, 10, 255–283, 1995.
“Relational Investing and Agency Theory,” (with Ian Ayres) Cardozo Law Review, 15, 1033–1066, 1994.
“Cartel Enforcement with Uncertainty About Costs,” (with Thomas R. Palfrey) International Economic Review, 31, 17–47, 1990. Reprinted in Stephen W. Salant and Margaret C. Levenstein (eds.), Cartels, Volume 1, Cheltenham, UK: Edward Elgar, 2005.
“Nonrandom Mixing Models of HIV Transmission,” (with Edward Kaplan, and A. David Paltiel) in Mathematical and Statistical Approaches to AIDS Epidemiology, edited by Carlos Castillo-Chávez, Lecture Notes in Biomathematics Series, Springer-Verlag, 218–239, 1989.
Other papers (with abstracts)
“Ratifiable Mechanisms: Learning from Disagreement,” (with Thomas R. Palfrey) Games and Economic Behavior, 10, 255–283, 1995.
In a mechanism design problem, participation constraints require that all types prefer the proposed mechanism to some status quo. If equilibrium play in the status quo mechanism depends on the players’ beliefs, then the inference drawn if someone objects to the proposed mechanism may alter the participation constraints. We investigate this issue by modeling the mechanism design problem as a two-stage process, consisting of a ratification stage followed by the actual play of the chosen game. We develop and illustrate a new concept, ratifiability, that takes account of inferences from a veto in a consistent way.
“Relational Investing and Agency Theory,” (with Ian Ayres) Cardozo Law Review, 15, 1033–1066, 1994.
This Article analyzes how, and when, corporate governance could be improved by utilizing “relational investing.” The term relational investing is just coming into vogue and there does not yet seem to be a consensus on what it means. Although the term has been trumpeted on the cover of Business Week, before the Conference on Relational Investing at Columbia University, relatively little legal writing had been published on the subject. For the purposes of this Article, we define relational investing to encompass commitments to buy and hold significant blocks of a corporation’s stock. And it is particularly important that the relational investors commit not to tender their shares to hostile bidders. Using our definition, relational investing is used to foreclose or reduce hostile takeover threats, replacing this form of external discipline with enhanced internal discipline by the relational investors. The long-term investment induces the relational shareholders to invest more in acquiring information about the effectiveness of management. To be effective internal monitors, however, relational investors must be able to use this information to influence corporate policy. At a minimum, relational investors must be “provocable” — they must be able to increase the likelihood that poor management or poor policies will be changed. Relational investors might accomplish these changes through either internal (informal negotiation or proxy contest) or external (tender offer) means. Although we will often assume that relational investors are committed to patient oversight, it is important to remember that these commitments are usually noncontractual, suggesting that an implicit commitment to buy and hold stock must be self-enforcing. This self-enforcement constraint might be especially useful in determining when relational investing is likely to arise. For example, the short-term illiquidity of large blocks of stock might make the buy and hold commitment more credible. Moreover, large block holders often will lack an incentive to reduce the size of their holdings. The 13(d) filing requirements of the Securities Exchange Act could also facilitate relational investing, because unfulfilled representations to buy and hold stock can give rise to legal liability. Using the minimalist definition that relational investors commit not to tender a large block of shares, it is possible that relational investing could reduce agency costs by providing a more effective form of corporate governance. This is far different from arguing that, as an empirical matter, relational investing is superior to more traditional forms of corporate governance. Indeed, some theorists suggest that with “friendly” relational investing, there is a substantial risk of entrenched managers and exacerbated agency costs. Without adjudicating the ultimate efficacy of relational investing, our analysis illuminates how relational investing might create value and highlights the contexts in which it is most likely to be effective. We generate three main conclusions from our analysis of relational investing: First, relational investing can reduce agency costs, both by increasing the principal’s incentive to acquire information, and by improving the principal’s ability to foster a monitoring reputation through a long-term relationship with the firm’s management. Large block holders have a greater incentive to monitor than do “rationally ignorant” atomistic shareholders. In addition, the commitment to hold for long periods of time permits relational investors to enter more credibly into self-enforcing implicit contracts that discipline poor managerial decisions and abilities. Second, relational investing may be better suited to mitigating “moral hazard” problems than traditional types of monitoring. In particular, potential third-party bidders are less likely to respond to problems of moral hazard than to problems of adverse selection. Even in a strong form efficient capital market, external monitors may not have an adequate incentive to discipline managers who have succumbed to moral hazard and caused the corporation to bear an inefficient sunk cost. Relational investors, in contrast, have a multiperiod incentive to respond. Third, relational investing can be rationalized by either of the following theories: (1) the threat that managers will lose their jobs is minimal; or (2) managers face too great a threat of losing their jobs.
“Cartel Enforcement with Uncertainty About Costs,” (with Thomas R. Palfrey) International Economic Review, 31, 17–47, 1990. Reprinted in Stephen W. Salant and Margaret C. Levenstein (eds.), Cartels, Volume 1, Cheltenham, UK: Edward Elgar, 2005.
What cartel agreements are possible when firms have private information about production costs? For private cost uncertainty we characterize the set of cartel agreements that can be supported, recognizing incentive and participation constraints. If defection results in either Cournot or Bertrand competition, the incentive problem in large cartels is severe enough to prevent the cartel from achieving the monopoly outcome. However, if the cartel agreement requires less than unanimous ratification by the member firms, then the incentive problem can be overcome in large cartels. With common cost uncertainty, perfect collusion is possible in large cartels, regardless of the ratification rule.
“Nonrandom Mixing Models of HIV Transmission,” (with Edward Kaplan, and A. David Paltiel) in Mathematical and Statistical Approaches to AIDS Epidemiology, edited by Carlos Castillo-Chávez, Lecture Notes in Biomathematics Series, Springer-Verlag, 218–239, 1989.
Models of HIV transmission and the AIDS epidemic generally assume random mixing among those infected with HIV and those who are not. For sexually transmitted HIV, this implies that individuals select sex partners without regard to attributes such as familiarity, attractiveness, or risk of infection. This paper formulates a model for examining the impact of nonrandom mixing on HIV transmission. We present threshold conditions that determine when HIV epidemics can occur within the framework of this model. Nonrandom mixing is introduced by assuming that sexually active individuals select sex partners to minimize the risk of infection. In addition to variability in risky sex rates, some versions of our model allow for error (or noise) in information exchanged between prospective partners. We investigate several models including random partner selection (or proportionate mixing), segregation of the population by risky sex rates, a probabilistic combination of segregation and random selection induced by imperfect information (or preferred mixing), and a model of costly search with perfect information. We develop examples which show that nonrandom mixing can lead to epidemics that are more severe or less severe than random mixing. For reasonable parameter choices describing the AIDS epidemic, however, the results suggest that random mixing models overstate the number of HIV infections that will occur.