Abstracts of Rasmusen's Five Best Papers, 17 April 2008

My Google Scholar results for April 2008 are here. The papers I list below come in with rankings 1, 4, 7, 18, and 23 in citation counts, so I guess I'd say "Explaining Incomplete Contracts as the Result of Contract- Reading Costs," and ``Managerial Conservatism and Rational Information Acquisition" are my most underrated papers.

To see other abstracts, go to Abstracts of my unpublished articles. To return to my homepage, go to www.rasmusen.org.

URL: www.rasmusen.org/papers/best.htm. 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: [email protected].

1. "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 (2001). http://www.bepress.com/bejeap/advances/vol1/iss1/art2. Much 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. This suggests a reason why contracts are incomplete in the sense of lacking Pareto-improving clauses: contract-reading costs matter as much as contract-writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.
   The working paper version with the two-period model, "A Model of Negotiation, Not Bargaining: Explaining Incomplete Contracts, " is available in PDF.

2. Stigma and Self-Fulfilling Expectations of Criminality , Journal of Law and Economics 39: 519-544 (October 1996). In modelling crime, economists have focussed on the expected cost of government sanctions to the criminal, but private sanctions--- notably economic or social stigma--- may be just as important. In the model here, workers decide whether to commit crimes and employers decide how much to pay ex- convicts. In one equilibrium, individuals refrain from crime and economic stigma--- the wage loss from conviction--- is high. In a second, pareto- inferior equilibrium, individuals commit crimes and stigma is low, because employers realize that nonconviction does not imply noncriminality. The model may help to explain large shifts in crime, such as that between 1960 and 1980, in which decreases and increases in government sanctions seem to have asymmetric effects. http://rasmusen.org/published/Rasmusen_96JLE.stigma.pdf

3. ``Managerial Conservatism and Rational Information Acquisition, '' Journal of Economics and Management Strategy (Spring 1992), 1: 175-202. Conservative managerial behavior can be rational and profit-maximizing. If the valuation of innovations contains white noise and the status quo would be preferred to random innovation, then any innovation that does not appear to be substantially better than the status quo should be rejected. The more successful the firm, the higher the threshold for accepting innovation should be, and the greater the conservative bias. Other things equal, more successful firms will spend less on research, adopt fewer innovations, and be less likely to advance the industry 's best practice. http://rasmusen.org/published/Rasmusen_92JEMS.conservatism.pdf

4. ``Naked Exclusion,'' American Economic Review (December 1991) 81: 1137-1145 (with J. Mark Ramseyer and John Wiley ). Exclusive-dealing contracts can be part of rational entry deterrence if there is even a small positive minimum efficient scale. The excluder can get the other side of the market to agree to his exclusive contract without a side payment if they believe all others will sign too, and so the excluder's rivals will cease to exist. Acrobat pdf http://rasmusen.org/published/Rasmusen_91.AER.exclusion.pdf

5. ``Stock Banks and Mutual Banks,'' Journal of Law and Economics (October 1988), 31: 395-422. Reprinted in Banking Law Anthology , Volume IV (1988), Bethesda, Md: International Library. Because mutual banks do not allow shareholders to discipline bad managers and so have higher costs, they have been disappearing since bank entry deregulation in the 1980's. They were common before regulation in the 1930's, and are more common in the 19th century. I propose that this is because of the absence of deposit insurance. Depositors wanted safety more than low operating costs, and a mutual manager, in a cushy job he could not lose except by bankrupting his firm, would also value safety. http://rasmusen.org/published/Rasmusen_88JLEC.mutual.pdf