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Abstract:
Bargaining models ask how a surplus is split between two parties in bilateral monopoly. Much of real-world negotiation involves complications to the original split 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 when to accept them. Ex ante, this type of negotiation results in Pareto improvement, rather than reducing welfare. I model negotiation as a two-period auditing game, and find a variety of plausible equilibria. Precommitment or optimistic expectations can result in Pareto improvements. Perhaps most important, the model suggests a reason for contract incompleteness: contract-"reading" costs matter much more than contract-"writing" costs. Fine print that is very cheap to write can be very expensive to read carefully enough to detect the absence of booby trap clauses artfully written to benefit the writer.

Abstract:
Everyone realizes the importance of social norms as guides to behavior and substitutes or complements for law. Coming up with a paradigm for analyzing norms, however, has been surprisingly difficult, as has systematic empirical study. In this chapter of the Handbook of Law and Economics, edited by A. Mitchell Polinsky and Steven Shavell and forthcoming in 2005, we survey the topic.

Norms, behavior, conventions, law

Abstract:
A number of issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow? The tradeoffs resemble those in tort, 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 doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed principal rule, under which the principal is bound even when the third party is unaware that the agent is acting as an agent.

agency law, contracts,principal-agent problem, undisclosed principal

Abstract:
Most studies of executive compensation have data on pay, but not on total income. Studies of executives in Japan do not even have good data on pay. Although we too lack direct data on Japanese salaries, from income tax filings we compile data on total executive incomes, and from financial records obtain some indication of which executives have substantial investment income. We find that Japanese executives earn far less than U.S. executives - holding firm size constant, about one-third the pay of their U.S. peers. Using tobit regression analysis, we further confirm that executive pay in Japan depends on firm size, with an elasticity of .24, but not on accounting profitability or stock returns. Corporate governance variables such as board composition have little or no effect on executive compensation, except that firms with large lead shareholders do appear to pay less.

Executive compensation, Japan, Incentive pay, Corporate governance

Abstract:
This is an exposition of the BLP method of structural demand estimation using the random-coefficients logit model.

BLP, random coefficients logit, demand estimation, GMM

Abstract:
Social contract theories assume that because personal security and private property are at risk in a state of nature, citizens will agree to grant Leviathan a monopoly of violence. But what is to prevent Leviathan from turning on his citizens once they have lain down their arms? The social contract leaves citizens worse off unless Leviathan can fetter himself, as constitutional democracies seek to do. Self-binding fetters are hard to find. We suggest that schemes of progressive taxation, in which marginal tax rates increase with taxable income, may be useful incentives to realign Leviathan's incentives with those of his citizens. 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 higher side payments from interest groups before he imposes value-destroying regulations.

Abstract:
Social contract theories assume that because personal security and private property are at risk in a state of nature, citizens will agree to grant Leviathan a monopoly of violence. But what is to prevent Leviathan from turning on his citizens once they have lain down their arms? The social contract leaves citizens worse off unless Leviathan can fetter himself, as constitutional democracies seek to do. Self-binding fetters are hard to find. We suggest that schemes of progressive taxation, in which marginal tax rates increase with taxable income, may be useful incentives to realign Leviathan?s incentives with those of his citizens. 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 higher side payments from interest groups before he imposes value-destroying regulations.

Abstract:
We look at a Bertrand model in which each firm may be inactive with a known probability, so the number of active firms is uncertain. The 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 those in a Cournot model with similar uncertainty, Bertrand profits always increase in the probability that firms are inactive. Profits decline more sharply than in the Cournot model, the pattern found empirically in Bresnahan and Reiss [1991].

Abstract:
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 and Reiss (1991).

Abstract:
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.

Incomplete contracts, renegotiation, foundations debate, theory of the firm, credible threats, hold-up, bargaining power

Abstract:
Various theories, notably those of McCubbins & Schwartz and Landes & Posner, say why judicial independence might be desired by voters and politicians. Why, however, are judges independent in some elected regimes but not others? We develop an "alternating-parties" explanation based on the theory of repeated games and use it to explain the differences between Japan in the 1920's, Japan 1950-1990, and federal judges in the United States. We also discuss why other elite bureaucrats are treated differently from judges.

judges, bureaucrats, judicial independence, separation of powers, bundling

Abstract:
I am revising my game theory book, which is due at the publisher's September 1, 1999. This is the preface, which tells what I have changed from previous editions.

Abstract:
I am revising my game theory book, which is due at the publisher's September 1, 1999. This is the preface, which tells what I have changed from previous editions.

Abstract:
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.

Abstract:
Independent central bankers and judges can both be more usefully viewed as trustees than as agents. A trust is a legal institution with rules set up by a settlor, administered by a trustee on behalf of beneficiaries. Public trustees often are motivated more by Pride, Policy, Place, and Power than by money, and economists should take this into account.

Abstract:
A long-term relationship such as marriage will not operate efficiently without sanctions for misconduct, of which adultery is one example. Traditional legal sanctions can be seen as different combinations of various features, differing in who initiates punishment, whether punishment is just a transfer or has real costs, who gets the transfer or pays the costs, whether the penalty is determined ex ante or ex post, whether spousal rights are alienable, and who is punished. Three typical sanctions, criminal penalties for adultery, the tort of alienation of affections, and the self-help remedy of justification are formally modelled. The penalties are then discussed in a variety of specific applications to past and present Indiana law.

Abstract:
Competition for access to an underpriced good such as a free parking spot can eat up its entire surplus, eliminating the social value of the good. There is a discontinuity in social welfare between enough and not enough, with the minimum social welfare at slightly too small a parking lot because of the rent-seeking efforts of drivers. Full rent dissipation occurs only when drivers have identical preferences, but allowing for heterogeneous preferences does not alter the conclusion that the welfare losses from undercapacity and overcapacity are asymmetric and that parking lots should be overbuilt. Furthermore, when it is chosen optimally under uncertainty, the parking lot size will be well in excess of mean demand, and may even be chosen to accommodate all potential drivers. Uncertainty over the number of drivers, which is detrimental in the first-best, actually increases social welfare if the parking lot size is too small.

rent-seeking, all-pay auction, timing game, capacity size, queue.

Abstract:
There is a lot of confusion over what "hyperbolic discounting" means. I try to clear up that confusion.

Time inconsistency, hyperbolic discounting

Abstract:
In Japan, the government wins most of its tax cases against taxpayers. Why? We find, using statistical analysis, that judges who rule for taxpayers do not suffer in their future careers
in general. If, however, the loser, whether tax office or payers, appeals and wins, the trial judge's future job posting do worsen. We conclude that the Japanese government cares more about good judging than about rulings in its own favor, as makes sense since the government can legislate higher taxes if it so desires.

Abstract:
The tax office wins most cases in Japan. We think about why this might be. We find that although judges who rule in favor of the taxpayer do not suffer in their future careers, if the loser - whether governemnt or taxpayer - appeals and wins, the reversed judge's career does take a turn for the worse. This implies that the government cares more about accurate judging than about pro-government judging.

Abstract:
In a contestable market the possibility of "hit-and-run" entry prevents the price from rising above average cost. A contestable natural monopoly earns zero profits despite economies of scale. We show that informational imperfections can also result in a single firm serving the entire market with zero profits. This is possible even under constant returns to scale, and when barriers to exit preclude "hit-and-run" attacks and force potential entrants to consider the post-entry response of the incumbent firm. Furthermore, the equilibrium involves cross-subsidization, which is not possible in conventional contestable markets.

Abstract:
It is natural to suppose that a prosecutor's conviction rate - the ratio of convictions to cases prosecuted - is a sign of his competence. Prosecutors, however, choose which cases to prosecute. If they prosecute only the strongest cases, they will have high conviction rates. Any system which pays attention to conviction rates, as opposed to the number of convictions, is liable to abuse. As a prosecutor's budget increases, he allocates it between prosecuting more cases and putting more effort into existing cases. Either can be socially desirable, depending on particular circumstances. We model the tradeoffs theoretically in two models, one of a benevolent social planner and one of a prosecutor rewarded directly for his conviction rate as well as caring about convictions and personal goals. We also look at anecdotal evidence from Japan and detailed U.S. data drawn from county-level crime statistics and a survey of all state prosecutors by district. We find that prosecution rates vary little with budget, but conviction rates do increase, and that the conviction rate declines in the number of cases prosecuted and with the crime rate of a district.

Abstract:
Most studies of executive compensation focus on publicly traded companies. The high levels of compensation there are often attributed to agency slack due to ownership by diffused shareholders. If so, pay at private companies more closely held should be much lower. Governments in the United States and elsewhere do not require the pay of executives in private companies to be publicly disclosed, but until 2004 the tax office of Japan published the name and tax liability of any individual paying over about $100,000 in tax. We match this tax data with rosters of some 1,400 presidents of public and 4,100 presidents of private corporations. We find that public and private company presidents have similar incomes. Both groups earn incomes that rise with the size and profitability of the firm, but the presidents' incomes are more sensitive to profitability at public firms than at private ones. In Japan, at least, public firms pay their presidents no more than private firms do, and tie that compensation more closely to observable performance benchmarks.

Abstract:
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.

auctions, private values, sniping, bid ceilings, E-Bay

Abstract:
Using micro-level data (from tax records) on attorney incomes in 2004, we reconstruct the industrial organization of the Japanese legal services industry. These data suggest a bifurcated bar. The most talented would-be lawyers (those with the highest opportunity costs) pass the bar-exam equivalent on one of their first tries or abandon the effort. If they pass, they then opt for careers in Tokyo that involve complex litigation and business transactions. The work places a premium on their talent, and from it they earn appropriately high incomes. The less talented face lower opportunity costs, and willingly spend many years studying for the exam. If they eventually pass, they tend to forego the many amenities available to professional families in Tokyo and disproportionately opt for careers in the under-lawyered provinces. There, they earn monopoly rents not available in the far more competitive Tokyo market.

Abstract:
Imposing liability on a company for sexual harassment by supervisors cannot be justified as promoting equality between the sexes, protection of workers, or protection of the owners of the company. Such liability might be justified to prevent breach of contract or behavior offensive to the general public--a "civility code". The recent Supreme Court ruling in Oncale that same-sex harassment is illegal can be justified on these grounds. The ruling in Ellerth and Faragher concerning employer liability for sexual harassment by supervisors contrary to the employer's interest is less satisfactory because the Court's rule will encourage litigation and defensive bureaucratic complexity.

Abstract:
Is it better to move first, or second - to innovate, or to imitate? Suppose one player has superior information about which of two new markets is better. If he enters first, he might be able to secure a natural monopoly. (The less-informed player also has this motive.) If he enters second, he can prevent the other player from imitating him. We find, predictably, that the more accurate the informed player's information the more he wants to delay in order to prevent the spillover of his information. Also, the less accurate the informed player's information the more he wants to move first in order to foreclose a market. In addition, the bigger the difference in markets, the more likely the two players will make the same choice. More surprisingly, if the informed player's information becomes more accurate that can hurt both industry profits and consumer welfare by inducing both players to choose what they hope is the bigger market, leaving the other market not served.

Market Entry, First- and Second-Mover Advantage, Payoff Externalities, Informational Externalities, Endogenous Timing

Abstract:
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.

Voting, Elections, Bias, Estimation

Abstract:
It is well known that risk increases the value of options. This paper makes that precise in a new way. The conventional theorem says that the value of an option does not fall if the underlying asset becomes riskier in the conventional sense of the mean-preserving spread. This paper uses two new definitions of riskier to show that the value of an option strictly increases (a) if the underlying asset becomes pointwise riskier, and (b) only if the underlying asset becomes extremum riskier.

Options, risk, mean-preserving-spread, stochastic dominance

Abstract:
This paper uses the economic approach to address a recent legal question involving self incrimination: what is the effect of allowing a defendant to waive his right to exclude statements he makes during plea bargaining from evidence at trial if plea bargaining fails? This was the issue in the 1995 Mezzanatto Supreme Court decision. What is the reason for such waivers, and do they increase or decrease the amount of plea bargaining? I suggest that the waivers have two functions in ``cooperation bargaining'' as opposed to ``penalty bargaining'': (a) increasing the incentive of the defendant to provide the full cooperation he promises in return for leniency, and (b) increasing the reliability of the information the defendant provides.

Abstract:
This paper uses the economic approach to address a recent legal question involving self incrimination: what is the effect of allowing a defendant to waive his right to exclude statements he makes during plea bargaining from evidence at trial if plea bargaining fails? This was the issue in the 1995 Mezzanatto Supreme Court decision. What is the reason for such waivers, and do they increase or decrease the amount of plea bargaining? I suggest that the waivers have two functions in "cooperation bargaining" as opposed to "penalty bargaining": (a) increasing the incentive of the defendant to provide the full cooperation he promises in return for leniency, and (b) increasing the reliability of the information the defendant provides.

Abstract:
Some retail markets are more competitive than others. A manufacturer with market power in the wholesale market who sells his product to competing retailers in cities and monopolistic ones in each of various towns must set the wholesale price difference between towns and cities to be smaller than the transportation cost to prevent "grey market" arbitrage. If he uses linear pricing, the town retail price will be even higher than under single-retailer double marginalization. Two-part tariffs do not solve the problem as they would if there were a single retailer, because the wholesale unit price must be higher than marginal cost to prevent arbitrage to the cities. If transportation costs are low, price discrimination is difficult and two-part tariffs come to resemble inefficient linear monopoly pricing. High transportation costs allow greater efficiency in contracting, and this can outweigh the negative direct effect on welfare. We show that exclusive territories are the best vertical restraint to prevent retailer arbitrage.

Double marginalization, Exclusive territories, Price discrimination, Retailer arbitrage, Two-part tariffs

Abstract:
Although the executive branch appoints Japanese Supreme Court justices as it does in the United States, a personnel office under the control of the Supreme Court rotates lower court Japanese judges through a variety of posts. This creates the possibility that politicians might indirectly use the postings to reward or punish judges. For forty years, the Liberal Democratic Party (LDP) controlled the legislature and appointed the Supreme Court justices who in turn controlled the careers of these lower-court judges. In 1993, it temporarily lost control. We use regression analysis to examine whether the end of the LDP's electoral lock changed the court's promotion system, and find surprisingly little change. Whether before or after 1993, the Supreme Court used the personnel office to 'manage' the careers of lower court judges. The result: uniform and predictable judgments that economize on litigation costs by facilitating out-of-court settlements.

Judges, Japan, supreme court, political economy

Abstract:
Countries have different comparative advantages in quality. These might be due to technological differences, or to reputation differences of the sort described in Klein & Leffler (1981). Reputation differences are particularly interesting, since good reputations are a form of social capital that is amenable to modelling. They can explain why firms in these industries like to export even if the foreign price is no higher than the domestic one, and why governments would like to have large high-value sectors.

International trade, reputation, quality, high-value sector, technology diffusion

Abstract:
Bidders have to decide whether and when to incur the cost of estimating their own values in auctions. This can explain why people seem to get carried away, bidding higher than they had planned before the auction and then finding they had paid more than the object was worth to them. Even when such behavior is rational, ex ante, it may be perceived as irrational if one ignores other situations in which people revise their bid ceilings upwards and are happy when that enables them to win the auction.

Auctions, private-value, psychological, behavioral economics, information

Abstract:
In the reputation model of Klein Leffler (1981) firms refrain from cutting quality or price because if they did they would forfeit future profits. Something similar can happen even in a static setting. First, if there exist some discerning consumers who can observe quality, firms wish to retain their purchases. Second, if all consumers can sometimes but not always spot flaws, firms do not want to lose the business of those who would spot them on a given visit. Third, if the law provides a penalty for fraud, but not one so high as to to make fraud unprofitable, firms may prefer selling high quality at high prices to low quality at high prices plus some chance of punishment.

Reputation, product quality, moral hazard

Abstract:
Because of the risk of political interference, in countries with managed courts jurists who share ruling-party preferences disproportionately self-select into judicial careers. During political turmoil, such jurists will find judicial careers less attractive. Orthodox potential jurists will disproportionately shun the courts, and orthodox incumbent judges will disproportionately resign. Unorthodox potential jurists, on the other hand, might find the judiciary more attractive. Combining data on a random sample of 1,605 Japanese lawyers and all 2,502 judges hired between 1971 and 2001, we locate evidence consistent with these hypotheses: after the political crisis of 1993, the recruitment of young lawyers from elite universities lagged, while the number of early resignations increased.

Abstract:
Why do people have ambiguity aversion, preferring, a gamble with a 50% chance of success to one whose expected probability of success is 50% but where that 50% is an unbiased estimate? The answer modelled here, in the spirit of the career concerns literature, is learning: a risk-averse person does not wish observers to learn whether he is good or bad at estimating probabilities. He therefore prefers a gamble with objective probabilities.

ambiguity, Ellsberg paradox, career concerns

Abstract:
'Buyer-option' contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inefficient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is sufficient to induce first-best outcomes.

Abstract:
One reason to call an activity a vice and suppress it is that it reduces a person's future happiness more than it increases his present happiness. Gruber & Koszegi (2001) show how a vice tax can increase a person's welfare in a model of multiple selves with hyperbolic preferences across time. An interself analogy of the compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing. The puzzles that intrapersonal altruism raises, however, lend support to using the "Marshallian" wealth maximization criterion of Friedman (1988) instead of the Kaldor-Hicks criterion.

Internalities, sin tax, moral regulation, Kaldor-Hicks criterion, time inconsistency, hyperbolic preferences

Abstract:
"Buyer-option" contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inefficient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is sufficient to induce first-best outcomes.

Abstract:
It is natural to suppose that a prosecutor's conviction rate-the ratio of convictions to cases prosecuted-is a sign of his competence. Prosecutors, however, choose which cases to prosecute. If they prosecute only the strongest cases, they will have high conviction rates. Any system that pays attention to conviction rates, as opposed to the number of convictions, is liable to abuse. As a prosecutor's budget increases, he allocates it between prosecuting more cases and putting more effort into existing cases. Either can be socially desirable, depending on particular circumstances. We model the tradeoffs theoretically in two models, one of a benevolent social planner and one of a prosecutor who values not just the number of convictions but the conviction rate and unrelated personal goals. We apply the model to U.S. data drawn from county-level crime statistics and a survey of all state prosecutors by district. Conviction rates do have a small negative correlation with prosecutorial budgets, but conditioning on other variables in regression analysis, higher budgets are associated both with more prosecutions and higher conviction rates.

Abstract:
The unique Nash equilibrium of the finitely repeated n-person Prisoners' Dilemma calls for defection in all rounds. One way to enforce cooperation in groups is ostracism: players who defect are expelled. If the group's members prefer not to diminish its size, ostracism hurts the legitimate members of the group as well as the outcast, putting the credibility of the threat in doubt. Nonetheless, we show that ostracism can be effective in promoting cooperation with either finite or infinite rounds of play. The model can be applied to games other than the Prisoners' Dilemma, and ostracism can enforce inefficient as well as efficient outcomes.

Abstract:
Conviction rates in Japan exceed 99 percent. Because Japanese judges can be penalized by a personnel office if they rule in ways the office dislikes, perhaps they face biased incentives to convict. Using data on the careers and opinions of 321 Japanese judges, we find that judges who acquit do have worse careers following the acquittal. On closer examination, though, we find that the punished judges are not those who acquit on the ground that the prosecutors charged the wrong person. Rather, they acquit for reasons of statutory or constitutional interpretation, often in politically charged cases. Thus, the apparent punishment seems unrelated to any pro-conviction bias at the judical administration offices. We suggest an alternative explanation: the high conviction rates reflect case selection and low prosecutorial budgets; understaffed prosecutors present judges with only the most obviously guilty defendants.

Abstract:
Conviction rates are high in Japan. Why? First, Japanese prosecutors are badly understaffed. Able to bring only their strongest cases, they could be presenting judges only with the most obviously guilty defendants. High conviction rates would then follow naturally. Crucially, however, this is not the full story, for Japanese judges face seriously biased incentives. A judge who acquits a defendant runs significant risks of hurting his career and earns scant hope of positive payoffs. Using data on the careers and published opinions of 321 Japanese judges (all judges who published an opinion in a criminal case in 1976 or 1979), we find skewed incentives to convict. First, a judge who ? trying a defendant alone -? acquits a 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 three years in branch offices. Conversely, a judge who finds a conviction reversed incurs no substantial penalty. Unfortunately for innocent suspects, the absence of an unbiased judiciary also reduces the incentives Japanese prosecutors have to prosecute only the most obviously guilty defendants.

Abstract:
Two central puzzles about social norms are how they are enforced and how they are created or modified. The sanctions for the violation of a norm can be categorized as automatic, guilt, shame, informational, bilateral-costly, and multilateral-costly. The choice of sanction is related to problems in creating and modifying norms. We use our analysis of the creation, modification, and enforcement of norms to analyze the scope of feasible government action either to promote desirable norms or to repress undesirable ones. We conclude that the difficulty of predicting the effect of such action limits its feasible scope.

Abstract:
All judges in Japan, except those on the Supreme Court, become judges at a relatively young age by process of rigorous examination and then spend their career rotating through various positions. Although the judicial system handles its own promotion procedure, this raises the possibility that politics enters into judicial decisions. We look at the quality of postings that some 400 judges received after deciding various politically sensitive kinds of cases. In tobit regressions we find that judges who made decisions favored by the ruling Liberal Democratic Party did better in their careers. Judges who enjoin the national (but not local) government frequently suffer in their careers; so do those who ruled against the government on the constitutionality of the military; so do those who ruled that electoral redistricting was necessary before the LDP itself decided that.

Courts, judicial independence, Japan, civil law, administration

Abstract:
We are grateful to Ilya Segal and Michael Whinston for improving our analysis. We are pleased they confirm our two main conclusions. The first is that normally a firm cannot use contracts with its customers or suppliers inefficiently to exclude a rival from competition, because the high price of these contracts will make this strategy unprofitable. This is an old point, well summarized in Robert Bork's 1978 book. Second, and in contrast, exclusionary contracts can be profitable, effective, and socially inefficient--under certain limited conditions. One condition is that firms in the industry must be able to operate only at or above some minimum efficient scale. Another condition is that the victims--customers or suppliers--must expect that the exclusionary tactic will succeed, and must be unable to coordinate their actions to defeat the tactic. An excluding firm in this situation can buy naked exclusion affordably because it can scare victims into selling cheaply; no single victim can stop the exclusion by itself, so no single victim has any bargaining power. At a theoretical limit, the excluding firm can gain the exclusionary rights for free.

This striking result has implications for antitrust policy by suggesting that naked exclusion is, in theory, a potentially viable threat to efficient competition. Also striking from an antitrust perspective, however, is the lack of fit between this theory and the cases in which the United States Supreme Court has forged the law most relevant to exclusionary conduct. A simple legal label for contracts of naked exclusion is "exclusive dealing": "You agree to deal only with me, and not with my competitors." The facts of the three relevant Supreme Court cases, however, clearly violate the assumptions of the naked exclusion theory, as we explain in Rasmusen, Ramseyer and Wiley (1998).

Two important conclusions follow. We cannot establish whether this kind of naked exclusion ever really happens by looking at the three legally most relevant cases. The theory awaits other empirical testing. And second, naked exclusion--if it ever really occurs--cannot be the only explanation for exclusive dealing. Rather, exclusive dealing "often" serves legitimate business purposes, as Judge (now Justice) Stephen Breyer wrote in his 1987 opinion in Interface Group, Inc v. Massachusetts Port Authority. The theory at hand thus does not support outlawing exclusive dealing on a per se or summary basis. If a legal prohibition is justified at all, any sensible legal test would have to be far more discriminating. Lawyers and judges who might seek to translate this theory into practice, please take note.

Abstract:
We are grateful to Ilya Segal and Michael Whinston for improving our analysis. We are pleased they confirm our two main conclusions. The first is that normally a firm cannot use contracts with its customers or suppliers inefficiently to exclude a rival from competition, because the high price of these contracts will make this strategy unprofitable. This is an old point, well summarized in Robert Bork's 1978 book. Second, and in contrast, exclusionary contracts can be profitable, effective, and socially inefficient -- under certain limited conditions. One condition is that firms in the industry must be able to operate only at or above some minimum efficient scale. Another condition is that the victims -- customers or suppliers -- must expect that the exclusionary tactic will succeed, and must be unable to coordinate their actions to defeat the tactic. An excluding firm in this situation can buy naked exclusion affordably because it can scare victims into selling cheaply; no single victim can stop the exclusion by itself, so no single victim has any bargaining power. At a theoretical limit, the excluding firm can gain the exclusionary rights for free.

This striking result has implications for antitrust policy by suggesting that naked exclusion is, in theory, a potentially viable threat to efficient competition. Also striking from an antitrust perspective, however, is the lack of fit between this theory and the cases in which the United States Supreme Court has forged the law most relevant to exclusionary conduct. A simple legal label for contracts of naked exclusion is "exclusive dealing": "You agree to deal only with me, and not with my competitors." The facts of the three relevant Supreme Court cases, however, clearly violate the assumptions of the naked exclusion theory, as we explain in Rasmusen, Ramseyer and Wiley (1998).

Two important conclusions follow. We cannot establish whether this kind of naked exclusion ever really happens by looking at the three legally most relevant cases. The theory awaits other empirical testing. And second, naked exclusion - if it ever really occurs - cannot be the only explanation for exclusive dealing. Rather, exclusive dealing "often" serves legitimate business purposes, as Judge (now Justice) Stephen Breyer wrote in his 1987 opinion in Interface Group, Inc v. Massachusetts Port Authority. The theory at hand thus does not support outlawing exclusive dealing on a per se or summary basis. If a legal prohibition is justified at all, any sensible legal test would have to be far more discriminating. Lawyers and judges who might seek to translate this theory into practice, please take note.

Abstract:
An independent judiciary faces the problem of how to restrain high-court judges from indulging their personal whims. One restraint is the desire of judges to influence future judges. To do so, judges may have to maintain their own or the system's legitimacy by restraining their own behavior. This situation can be viewed as an equilibrium of an infinitely repeated game. Such a game has many equilibria, some of which are Pareto superior to others. In some equilibria, self-interested judges are responsible even without the threat of external penalties.

Abstract:
Bargaining models ask how a surplus is split between two parties in bilateral monopoly. Much of real-world negotiation involves complications to the original split 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 when to accept them. This type of negotiation raises welfare, rather than reducing it. Moreover, a player can benefit both sides by precommitting to considering all proposals carefully.

Abstract:
We consider the learning curve in an industry with free entry and exit, and price-taking firms. A unique equilibrium exists if the fixed or entry cost is positive. While equilibrium profits are zero, mature firms earn rents on their learning, and no firm can profitably enter after the date the industry begins. However, under some cost and demand conditions, firms may have to exit the market despite their experience gained earlier. Furthermore, in an equilibrium with exit, identical firms facing the same prices produce different quantities. Industry concentration need not increase in the intensity of learning. The market outcome is always socially efficient, even if it dictates that firms exit after learning. Finally, a perfectly competitive market might sustain firms having different costs and different learning capabilities.

Abstract:
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. In particular, an efficiency explanation can be found for the undisclosed principal rule, which says that the principal is generally bound even when the third party is unaware that the agent is acting as an agent for him.

Abstract:
When a symbol is desecrated, the desecrator obtains benefits while those who venerate the symbol incur costs. This paper asks whether the benefits are likely to exceed the costs. I conclude they do not. Desecration is often motivated by a desire to reduce the utility of others, which generally is inefficient. Also, if desecration occurs, people have less incentive to create and maintain symbols, which, like other produced goods, need property-rights protection. Laws against desecration are especially useful given the likely failure of the Coase Theorem and the escape valve of efficient law-breaking. It is not even clear whether desecration laws have a net negative effect on the amount of free expression, given the incentive they provide for symbol creation, the possibility of citizens' substitution into other forms of expression, and the possibility of government substitution into other forms of speech suppression.

Abstract:
Richard Posner suggests several arguments for increasing health care spending on males and reducing it on females in his book, "Aging and Old Age." I offer a formalization of his verbal arguments.

Abstract:
Because civil-law systems hire unproven jurists into career judiciaries, many maintain elaborate incentive structures to prevent their judges from shirking. We use personnel data (backgrounds, judicial decisions, job postings) on 275 Japanese judges to explore general determinants of career success and to test how extensively politicians manipulate career incentives for political ends. We find strong evidence that the judicial system rewards the smartest and most productive judges. Contrary to some observers, we find no evidence of on-going school cliques, and no evidence that the system favors judges who mediate over those who adjudicate. More controversially, we locate three politically driven phenomena. First, even as late as the 1980's, judges who joined a prominent leftist organization in the 1960's were receiving less attractive jobs. Second, judges who decided a high percentage of cases against the government early in their careers were still receiving less attractive jobs than their peers in the 1980s. Finally, whenever a judge decided a case against the government, he incurred a significant risk that the government would soon punish him with a less attractive post.