INFORMATION

Critical Concepts in Economics

Edited by Michael R. Baye and David E. M. Sappington

Volume I Foundations of

Routledge R Taylor & Francis Croup LONDON AND NEW YORK C CONTENTS

VOLUME I Contents vii Chronological table of reprinted articles and chapters xv Acknowledgements xx

General introduction 1 MICHAEL R. BAYE AND DAVID E. M. SAPFINGTON

PARTI Modeling risk, uncertainty, and beliefs

1 The expected-utility hypothesis and the measurability of utility 35 AND L. J. SAVAGE

2 Risk aversion in the small and in the large 50 JOHN W. PRATT

3 Erratum: risk aversion in the small and in the large 67 JOHN W. PRATT

4 Rules for ordering uncertain prospects 68 JOSEF HADAR AND WILLIAM R. RUSSELL

5 Increasing risk: I. a definition 82 MICHAEL ROTHSCHILD AND JOSEPH E. STIGLITZ

6 Prices vs. quantities 102 MARTIN L. WEITZMAN

7 Good news and bad news: representation theorems and applications 123 PAUL R. MILGROM

VII CONTENTS

8 Sequential equilibria 138 DAVID M. KREPS AND ROBERT WILSON

9 Signaling games and stable equilibria 174 IN-KOO CHO AND DAVID M. KREPS

PART 2 Information and the functioning of markets

10 Counterspeculation, , and competitive sealed tenders 215

11 The economics of information 244 GEORGE J. STIGLER

12 The market for "lemons": quality uncertainty and the market mechanism 262 GEORGE A. AKERLOF

13 The vertical integration of production: market failure considerations 275 OLIVER E. WILLIAMSON

14 Job market signaling 290

15 Equilibrium in competitive insurance markets: an essay on the economics of imperfect information 309 MICHAEL ROTHSCHILD AND

16 Monopoly and product quality . 329 MICHAEL MUSSA AND SHERWIN ROSEN

17 On the impossibility of informationally efficient markets 346 SANFORD J. GROSSMAN AND JOSEPH E. STIGLITZ

18 The role of market forces in assuring contractual performance 369 BENJAMIN KLEIN AND KEITH B. LEFFLER

19 Credit rationing in markets with imperfect information 394 JOSEPH E. STIGLITZ AND ANDREW WEISS

viii CONTENTS

VOLUME II

Acknowledgements vii

PART 3 Contracting with moral hazard

20 Moral hazard and observability 3 BENGT HOLMSTROM

21 Moral hazard in teams 25 BENGT HOLMSTROM

22 The first-order approach to principal-agent problems 48 WILLIAM R ROGERSON

23 Limited liability and incentive contracting with ex-ante action choices 61 ROBERT D. INNES

24 Multitask principal-agent analyses: incentive contracts, asset ownership, and job design 83 BENGT HOLMSTROM AND PAUL R. MILGROM

PART 4 Tournaments

25 Rank-order tournaments as optimum labor contracts 115 EDWARD P. LAZEAR AND SHERWIN ROSEN

26 Prizes and incentives: towards a general theory of compensation and competition 139 BARRY J. NALEBUFF AND JOSEPH E. STIGLITZ

PART 5 Contracting with adverse selection

27 An exploration in the theory of optimum income taxation 175 J. A. MIRRLEES

28 Using cost observation to regulate firms 220 JEAN-JACQUES LAFFONT AND

IX CONTENT.S

29 Countervailing incentives in agency problems TRACY R. LEWIS AND DAVID E. M. SAPPINGTON

PART 6 Contractual incompleteness

30 The costs and benefits of ownership: a theory of vertical and lateral integration SANFORD J. GROSSMAN AND OLIVER D. HART

31 Incomplete contracts and strategic ambiguity B. DOUGLAS BERNHEIM AND MICHAEL D. WHINSTON

PART 7 Authority and in organizations

32 Hierarchies and bureaucracies: on the role of collusion in organizations JEAN TIROLE

33 Formal and real authority in organizations PHILIPPE AGHION AND JEAN TIROLE

PART 8 Contract renegotiation

34 Incomplete contracts and renegotiation AND JOHN MOORE

VOLUME III

Contents A cknowledgemen ts

PART 9 Auctions

35 Optimal design ROGER B. MYERSON

36 Optimal auctions JOHN G. RILEY AND WILLIAM F. SAMUELSON CONTENTS

37 A theory of auctions and competitive bidding 42 PAUL R. MILGROM AND ROBERT J. WEBER

38 Auctions versus negotiations 78 JEREMY BULOW AND PAUL KLEMPERER

39 Internet advertising and the generalized second-price auction: selling billions of dollars worth of keywords 99 BENJAMIN EDELMAN, MICHAEL OSTROVSKY AND MICHAEL SCHWARZ

PART 10 Bargaining

40 and the bargaining problem 127 ROGER B. MYERSON

41 Efficient mechanisms for bilateral trading 141 ROGER B. MYERSON AND MARK A. SATTERTHWAITE

PART 11 Search

42 Economics of information and job search 161 J. J. MCCALL

43 A model of price adjustment 175 PETER A. DIAMOND

44 Searching for the lowest price when the distribution of prices is unknown 187 MICHAEL ROTHSCHILD

45 A simple model of equilibrium price dispersion 211 JENNIFER F. REINGANUM

46 Optimal search 219 PETER MORGAN AND RICHARD MANNING

PART 12 The pricing of information

47 Information gatekeepers on the Internet and the competitiveness of homogeneous product markets 247 MICHAEL R. BAYE AND JOHN MORGAN

XI CONTENTS

PART 13 Advertising and price signaling

48 Advertising as information PHILLIP NELSON

49 Price and advertising signals of product quality PAUL R. MILGROM AND JOHN ROBERTS

PART 14 Communication

50 Strategic information transmission VINCENT P. CRAWFORD AND JOEL SOBEL

51 Multiple referrals and multidimensional MARCO BATTAGLINI

52 Modes of communication

MATHIAS DEWATRIPONT AND JEAN TIROLE

VOLUME IV

Contents

A cknowledgemen ts

PART 15 Modeling industry outcomes 53 Supply function equilibria in oligopoly under uncertainty PAUL D. KLEMPERER AND MARGARET A. MEYER

54 when rivals' costs are unknown DANIEL F. SPULBER

PART 16 Collusion

55 A theory of oligopoly GEORGE J. STIGLER

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56 Rational cooperation in the finitely repeated prisoners' dilemma 78 DAVID M. KREPS, PAUL MILGROM, JOHN ROBERTS, AND ROBERT WILSON

57 Noncooperative collusion under imperfect price information 86 EDWARD J. GREEN AND ROBERT H. PORTER

58 The folk theorem in repeated games with discounting or with incomplete information 102 AND

PART 17 Deterring entry through reputation of limit pricing

59 Reputation and imperfect information 129 DAVID M. KREPS AND ROBERT WILSON

60 Limit pricing and entry under incomplete information: an equilibrium analysis 155 PAUL R. MILGROM AND JOHN ROBERTS

61 Predation, reputation, and entry deterrence 173 PAUL R. MILGROM AND JOHN ROBERTS

PART 18 Regulation

62 Regulating a monopolist with unknown costs. 207 DAVID P. BARON AND ROGER B. MYERSON

63 Planning under incomplete information and the ratchet effect 229 XAVIER FREIXAS, ROGER GUESNERIE AND JEAN TIROLE

64 Exclusive dealing, common agency, and multiprincipals incentive theory 252 DAVID MARTIMORT

PART 19 Innovation

65 Uncertainty, industrial structure, and the speed of R&D 293 PARTHA DASGUPTA AND JOSEPH E. STIGLITZ

66 Uncertain innovation and the persistence of monopoly 327 JENNIFER F. REINGANUM

Xlll CONTENTS

PART 20 Commitment

67 Oligopoly and financial structure: the limited liability effect JAMES A. BRANDER AND TRACY R. LEWIS

68 Equilibrium incentives in oligopoly CHAIM FERSHTMAN AND KENNETH L. JUDD

69 Commitment and observability in games

KYLE BAGWELL

Index

xiv