This paper focuses on the importance of strategic complementarity in agents’ payoff functions as a basis for macroeconomic coordination failures. We first analyze an abstract game and find that inefficient equilibria and a multiplier process may arise in the presence of strategic complementarities (essentially positively sloped reaction curves). We then place additional economic content on complementarities arising from production functions, matching technologies and commodity demand functions in a multi-sector economy.
This paper considers a model in which all exchange is mediated by contracts. The analysis explores the indexation of labor and commodities contracts to observable variations in government spending financed by money creation. In one of the many equilibria, prices and nominal wages are shown to be independent of current money shocks. Except in the extreme equilibrium exhibiting full indexation, policy shocks will generate correlated movements in output and employment over time. The analysis thus suggests an inverse relationship between indexation of contracts and persistence of policy effects.
This paper explores a model of warranties in which moral hazard problems play a key role. The goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage. We analyze a model in which buyers and sellers take actions which affect a product’s performance. Since these actions are not cooperatively determined, an incentives problem arises. We characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality.
This paper considers non-contingent trades through either forward markets or simple contracts. The point of the inquiry is to understand the costs and benefits of trades of this nature. We focus on the tradeoff between insurance (a benefit) and the loss of flexibility in decisions (a cost) as determining properties of trading in forward markets. This tradeoff is also used to explore contract length.
This essay is concerned with a monopolist’s incentives to provide a high quality goods when some of its customers cannot observe quality prior to purchase. We show that if all buyers have the same tastes for quality, the monopolist will not try to take advantage of the poorly informed. When tastes differ, however, some quality randomization may become profitable as a means to loosen binding self-selection constraints. The profitability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the firm’s cost of quality function. We view our results as pointing to some potential benefits from imperfect quality control.
This paper extends the optimal labor contracts literature to consider an environment with both real and nominal shocks. In an overlapping generations model, we compare alternative means of trading labor services: spot markets, fixed nominal wage contracts and price-contingent contracts. The ordering of these market structures will depend on the relative variability of the real and nominal shocks and the costs of contingent contracts. We also investigate the role of monetary policy and the circumstances under which feedback rules are neutral. Finally, we show that a non-stochastic monetary policy is optimal.
This paper considers the general structure of self-selection models. By imposing conditions which permit the ordering of agents by their preferences, we provide a characterization of the distortions inherent in the sorting process. We also discuss extensions of the basic model such as randomization.