``Can High Prices Ensure Product Quality When Buyers do not Know the Sellers' Cost?'' (with Timothy Perri) , Economic Inquiry, 39: 561-567 (October 2001). The Klein- Leffler (1981) model of product quality does not explain why high-quality firms would dissipate the rents they earn from quality-assuring price premia, and it relies on consumers knowing the cost functions of firms. In the present paper, consumers do not know any firm's cost of producing quality goods, so high- quality firms must engage in conspicuous spending to demonstrate they earn a profitable mark-up over cost. Complete rent dissipation occurs only when high and low cost firms have the same cost of producing low quality.
"Explaining Incomplete Contracts as the Result of Contract-
Reading Costs," in the BE Press journal, Advances in
Economic Analysis and Policy. Vol. 1: No. 1, Article 2
http://www.bepress.com/bejeap/advances/vol1/iss1/art2. Much of
real-world contracting involves adding
finding new clauses to add to a basic agreement, clauses which may or
may not increase the welfare of both parties. The parties must decide
which complications to propose, how closely to examine the other
side's proposals, and whether to accept them. I model negotiation as
an auditing game in which one player offers a clause that the other
player may or may not examine carefully. Precommitment or
optimistic expectations can result in Pareto improvements. Perhaps
most important, the model suggests a reason for why contracts are
incomplete: contract-*reading* costs matter much more than contract-
*writing* costs. Fine print that is cheap to write can be expensive
to read carefully enough to detect the absence of trap clauses
artfully written to benefit the writer. As a result, complicated
clauses that purport to benefit both parties may be rejected outright,
even if they really do benefit both parties.
``Why Are Japanese Judges so Conservative in Politically Charged Cases?'' (with J. Mark Ramseyer ), American Political Science Review, 95: 331-344 (June 2001). We show that judges who defer to the LDP in politically salient disputes do better than those who do not defer. Similarly, judges who enjoin the national (but not local) government more frequently suffer in their careers. Moreover, lower- court judges do not suffer merely because the Supreme Court reverses them, which might just indicate incompetence; they suffer only if the Court reverses them in the most sensitive political cases.
Readings in Games and Information. Oxford: Blackwell Publishing,2001. ISBN's 0631215573 (paperback) and 0631215565 (hardback). A collection of clippings, journal articles, and original material to accompany my game theory book. Website: Http://www.rasmusen.org/GI/gireader.htm
``Aphorisms on Writing, Talking, and Listening.'' These are notes on the mechanics of doing research in economics, a series of short, unconnected tips that I think could be widely useful both to individuals and the profession. In Readings in Games and Information, Eric Rasmusen, editor, Oxford: Blackwell Publishers, 2001.
``Why is the Japanese Conviction Rate So High?'' (with J. Mark Ramseyer ), Journal of Legal Studies , January 2001) 30: 53-88. Using data on the careers and published opinions of 321 Japanese judges (all judges who published an opinion on a criminal case in 1976 or 1979), we find that a judge who--- trying a defendant alone-- acquits the defendant will spend during the next decade an extra year and a half in branch office assignments. Second, a judge who acquits a defendant but finds the acquittal reversed on appeal will spend an extra two years in branch offices. Conversely, a judge who finds a conviction reversed incurs no substantial penalty.
The Uneasy Case for the Flat Tax (with Frank Buckley), Constitutional Political Economy, (December 2000) (lead article) 11: 295-318. This article suggests that schemes of progressive taxation, in which marginal tax rates increase with taxable income, may be seen as a useful incentive strategy to bribe Leviathan from imposing inefficient regulations. Income taxes give Leviathan an equity claim in his state's economy, and progressive taxes give him a greater residual interest in upside payoffs. Leviathan will then demand a higher side payment from interest groups to impose value-destroying regulations.
Games and Information, Third Edition. Website at Http://www.rasmusen.org/GI/index.html. Games and Information , Oxford: Blackwell Publishers. First edition, 1989. 344 pp., ISBN: 0-631-15709-3. Second edition, 1994, 478 pp., ISBN: 1-55786-502-7. Third Edition, ISBN: 0631210954, 2001.
"Bertrand Competition Under Uncertainty" (with Maarten Janssen), forthcoming Journal of Industrial Economics. Consider a Bertrand model in which each firm may be inactive with a known probability, so the number of active firms is uncertain. This simple model has a mixed-strategy equilibrium in which industry profits are positive and decline with the number of firms, the same features which make the Cournot model attractive. Unlike in a Cournot model with similar incomplete information, Bertrand profits always increase in the probability other firms are inactive. Profits do decline more sharply than in the Cournot model, and the pattern is similar to that found by Bresnahan & Reiss (1991).
Measuring Judicial Independence: The Political Economy of Judging in Japan, forthcoming, University of Chicago Press. Mark Ramseyer and I have written a book on the Japanese judiciary based on the various articles we have written.
"Strategic Implications of Uncertainty Over One's Own Private Value in Auctions." Bidders have to decide whether and when to incur the cost of estimating their own values in auctions. This can explain sniping-- flurries of bids late in auctions with deadlines-- as the result of bidders trying to avoid stimulating other bidders into examining their bid ceiling more carefully.
"The Parking Lot Problem." (with Maria Arbatskaya and Kaushik Mukhopadhaya ).If there is queueing for an underpriced good, the queueing can eat up the entire surplus, eliminating the social value of the good. An implication is that there is a discontinuity in social welfare between ``enough'' and ``not enough'' for certain goods such as parking spaces. This implies that if there is uncertainty in the number of demanders, the amount of the good should be set well in excess of the mean demand.
"Should Candidates Flip a Coin if the Difference in Their Votes is Small?" } A coin flip can be a good way to settle an election if the margin of victory is small and it is known that there is a good chance of fraud by one candidate. In that case, however, an even better rule is to award victory to the apparent loser.
``Option Contracts and Renegotiation in Complex Environments,'' (with Thomas P. Lyon ). Hart & Moore (1999) construct a model to show that contracts perform poorly when the state of the world is unverifiable and renegotiation cannot be ruled out. They implicitly assume that one player can extort payment from another by threatening to take an inefficient action which hurts both of them. Without this assumption, a simple ``buyer option" contract can implement the first- best even as complexity becomes severe. The model is a good illustration of the need to be careful with the ideas of ``one party has all the bargaining power'' and ``one party can make a take-it-or- leave-it offer.''
"The Economics of Agency Law and Contract Formation." This article uses the economic approach to address issues that arise in agency law when agents make contracts on behalf of principals. The main issue is whether the principal should be bound when the agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow. The resulting tradeoffs resemble those in tort law, so the least-cost- avoider principle is useful for deciding when contracts are valid and may be the underlying logic behind a number of different legal doctrines applied to agency cases.
Indiana University, Department of Business Economics and Public Policy, in the Kelley School of Business , BU 456, 1309 East Tenth Street, Bloomington, Indiana 47405-1701, (812)855-9219. Comments: Erasmuse@Indiana.edu.