Colloquium in Applied Micro Theory, Spring 09

Colloquium in Micro Theory, Spring 2009 (joint with Law and Economics Seminar)

Time and place: For the Law and Economics Workshops, 4:10-6:00pm at Case Lounge (room 701, Jerome Greene Hall) unless otherwise noted.
For the graduate student presentations, 11:00-12:00 1027 IAB.
Professor: Patrick Bolton
If you would like to make a presentation, please contact: Anne Jirapattanakul

26 January George Geis, University of Virginia Law School will present:
An Empirical Examination of Business Outsourcing Transactions
Abstract:
Despite the widespread media focus on business outsourcing transactions, we only have a limited understanding of how firms actually select a contractual framework to govern these complex relationships. This article analyzes a sample of onshore and offshore outsourcing contracts to pursue the topic. I first conduct a positive examination of the key features in 60 outsourcing transactions and find that firms employ a diverse array of terms to mitigate agency and hold-up problems. This work then provides the foundation for a second empirical inquiry—analyzing why specific relationships take on their observed forms. Using the micro-analytical dataset to explore links between transactional context and governance structure, I find a greater use of hierarchical contracting for outsourcing contracts with a high degree of appropriability risk. This analysis therefore provides support for hypotheses derived from transaction cost theories of hybrid organizational structure.

A pdf of the paper is available below:
http://www2.law.columbia.edu/contracteconomics/conferences/laweconomicsS09/Geis%20paper.pdf

For optimal viewing, copy and paste the link into a browser.
Hard copies of both are available outside cubicle 700/7, across from room 726, and will be provided at the workshop itself.

4 February (1027 IAB) No Meeting

9 February (Law School) Oren Bar-Gill, New York University Law School will present:
Consent and Exchange (with Lucian Arye Bebchuk)
Abstract:
In some cases, the law permits a party that unilaterally provides a benefit to another party to recover the estimated value of this benefit. Despite calls for expanding the set of cases to which such a restitution rule applies, the law commonly applies a mutual consent rule under which a party providing another with a benefit cannot obtain any recovery without securing the advance consent of the beneficiary to the transaction. We provide an efficiency rationale for the undesirability of broad use of the restitution rule by identifying significant adverse ex ante effects of the rule that are avoided by the consent requirement. Even assuming that courts’ errors in estimating buyer benefits would be unbiased, a restitution rule would strengthen sellers’ hand by providing them with a put option that they may but do not have to use. As a result, the restitution rule would encourage inefficient market entry by low-quality sellers that would not contribute to any efficient transactions but would be able to extract payments from buyers seeking to avoid an exchange with them. Furthermore, the restitution rule would discourage efficient market entry by some or all potential buyers of a good or service. Beyond the restitution rule, we extend our analysis to show that similar adverse effects can also arise from other “pricing” rules that provide buyers or sellers with call or put options to force an exchange at a judicially-determined price.
A copy of the paper is available here.

18 February (1027 IAB) Youngwoo Koh will present:
TBA

23 February (Law School) Dick Craswell, Stanford Law School will present:
When is a Willful Breach "Willful"? The Link Between Definitions and Damages
Abstract:
The existing literature on willful breach has not been able to define what should count as "willful." I argue here that any definition we adopt has implications for just how high damages should be raised in those cases where a breach qualifies as willful. As a result, both of these issues -- the definition of "willful," and the measure of damages for willful breach -- need to be considered simultaneously.
Specifically, if a definition of "willful" excludes all breachers who behaved efficiently, then in theory we can raise the penalty on the remaining inefficient breachers to any arbitrarily high level ("throw the book at them"). But if, instead, a given definition of willful would catch even some efficient breachers in its net, the damages assessed against willful breachers should be more limited. In that case, damages for willful breach might still justifiably be raised, but they should be raised only to the level that is economically efficient. This second approach thus requires courts to be good at assessing the efficient level of damages, but does not require them to evaluate the efficiency of the breacher's behavior. By contrast, the first approach demands exactly the opposite skills: courts must be good at evaluating the efficiency of the breacher's behavior, but they do not need to be good at assessing the efficient level of damages.
A copy of the paper is available here.

4 March (1027 IAB) Petra Persson will present:
TBA

9 March (Law School) Glenn Ellison, MIT, Department of Economics
A Theory of Rule Development

25 March (1027 IAB) Marcos Nakaguma will present:
Endogenous Constitution Design

30 March (Law School) Andy Newman, Boston University, Department of Economics: will present
Loopholes: Social Learning and the Evolution of Contracts

1 April (1027 IAB) Carlos Perez: will present
Local Telephone Demand and Price Regulation

8 April (1027 IAB) Anne Jirapattanakul will present:
TBA

15 April (1027 IAB) CANCELED

20 April (Law School) Margaret Meyer, Nuffield College, Oxford: will present
Gaming and Strategic Ambiguity in Incentive Provision
with Richard Holden (MIT and University of Chicago) and Florian Ederer (MIT)
Abstract:
A central tenet of economics is that people respond to incentives. While an appropriately crafted incentive scheme can achieve the second-best optimum in the presence of moral hazard, the principal must be very well informed about the environment (e.g. the agent's preferences and the production technology) in order to achieve this. Indeed it is often suggested that incentive schemes can be gamed by an agent with superior knowledge of the environment, and furthermore that lack of transparency about the nature of the incentive scheme can reduce gaming. We provide a formal theory of these phenomena. We show that random or ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and who is better informed about the environment than the principal is. On the other hand, such random schemes impose more risk on the agent per unit of effort induced. By identifying settings in which random schemes are especially effective in inducing balanced efforts, we show that, if tasks are sufficiently complementary for the principal, random incentive schemes can dominate the best deterministic scheme.

29 April (1027 IAB) Heriberto Tapia will present:
TBA

26 January	George Geis, University of Virginia Law School will present: An Empirical Examination of Business Outsourcing Transactions Abstract: Despite the widespread media focus on business outsourcing transactions, we only have a limited understanding of how firms actually select a contractual framework to govern these complex relationships. This article analyzes a sample of onshore and offshore outsourcing contracts to pursue the topic. I first conduct a positive examination of the key features in 60 outsourcing transactions and find that firms employ a diverse array of terms to mitigate agency and hold-up problems. This work then provides the foundation for a second empirical inquiry—analyzing why specific relationships take on their observed forms. Using the micro-analytical dataset to explore links between transactional context and governance structure, I find a greater use of hierarchical contracting for outsourcing contracts with a high degree of appropriability risk. This analysis therefore provides support for hypotheses derived from transaction cost theories of hybrid organizational structure. A pdf of the paper is available below: http://www2.law.columbia.edu/contracteconomics/conferences/laweconomicsS09/Geis%20paper.pdf For optimal viewing, copy and paste the link into a browser. Hard copies of both are available outside cubicle 700/7, across from room 726, and will be provided at the workshop itself.
4 February (1027 IAB)	No Meeting
9 February (Law School)	Oren Bar-Gill, New York University Law School will present: Consent and Exchange (with Lucian Arye Bebchuk) Abstract: In some cases, the law permits a party that unilaterally provides a benefit to another party to recover the estimated value of this benefit. Despite calls for expanding the set of cases to which such a restitution rule applies, the law commonly applies a mutual consent rule under which a party providing another with a benefit cannot obtain any recovery without securing the advance consent of the beneficiary to the transaction. We provide an efficiency rationale for the undesirability of broad use of the restitution rule by identifying significant adverse ex ante effects of the rule that are avoided by the consent requirement. Even assuming that courts’ errors in estimating buyer benefits would be unbiased, a restitution rule would strengthen sellers’ hand by providing them with a put option that they may but do not have to use. As a result, the restitution rule would encourage inefficient market entry by low-quality sellers that would not contribute to any efficient transactions but would be able to extract payments from buyers seeking to avoid an exchange with them. Furthermore, the restitution rule would discourage efficient market entry by some or all potential buyers of a good or service. Beyond the restitution rule, we extend our analysis to show that similar adverse effects can also arise from other “pricing” rules that provide buyers or sellers with call or put options to force an exchange at a judicially-determined price. A copy of the paper is available here.
18 February (1027 IAB)	Youngwoo Koh will present: TBA
23 February (Law School)	Dick Craswell, Stanford Law School will present: When is a Willful Breach "Willful"? The Link Between Definitions and Damages Abstract: The existing literature on willful breach has not been able to define what should count as "willful." I argue here that any definition we adopt has implications for just how high damages should be raised in those cases where a breach qualifies as willful. As a result, both of these issues -- the definition of "willful," and the measure of damages for willful breach -- need to be considered simultaneously. Specifically, if a definition of "willful" excludes all breachers who behaved efficiently, then in theory we can raise the penalty on the remaining inefficient breachers to any arbitrarily high level ("throw the book at them"). But if, instead, a given definition of willful would catch even some efficient breachers in its net, the damages assessed against willful breachers should be more limited. In that case, damages for willful breach might still justifiably be raised, but they should be raised only to the level that is economically efficient. This second approach thus requires courts to be good at assessing the efficient level of damages, but does not require them to evaluate the efficiency of the breacher's behavior. By contrast, the first approach demands exactly the opposite skills: courts must be good at evaluating the efficiency of the breacher's behavior, but they do not need to be good at assessing the efficient level of damages. A copy of the paper is available here.
4 March (1027 IAB)	Petra Persson will present: TBA
9 March (Law School)	Glenn Ellison, MIT, Department of Economics A Theory of Rule Development
25 March (1027 IAB)	Marcos Nakaguma will present: Endogenous Constitution Design
30 March (Law School)	Andy Newman, Boston University, Department of Economics: will present Loopholes: Social Learning and the Evolution of Contracts
1 April (1027 IAB)	Carlos Perez: will present Local Telephone Demand and Price Regulation
8 April (1027 IAB)	Anne Jirapattanakul will present: TBA
15 April (1027 IAB)	CANCELED
20 April (Law School)	Margaret Meyer, Nuffield College, Oxford: will present Gaming and Strategic Ambiguity in Incentive Provision with Richard Holden (MIT and University of Chicago) and Florian Ederer (MIT) Abstract: A central tenet of economics is that people respond to incentives. While an appropriately crafted incentive scheme can achieve the second-best optimum in the presence of moral hazard, the principal must be very well informed about the environment (e.g. the agent's preferences and the production technology) in order to achieve this. Indeed it is often suggested that incentive schemes can be gamed by an agent with superior knowledge of the environment, and furthermore that lack of transparency about the nature of the incentive scheme can reduce gaming. We provide a formal theory of these phenomena. We show that random or ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and who is better informed about the environment than the principal is. On the other hand, such random schemes impose more risk on the agent per unit of effort induced. By identifying settings in which random schemes are especially effective in inducing balanced efforts, we show that, if tasks are sufficiently complementary for the principal, random incentive schemes can dominate the best deterministic scheme.
29 April (1027 IAB)	Heriberto Tapia will present: TBA