We investigate the consequences of `haggling,' or inefficient bargaining, for the functioning of labor markets. For this purpose we develop a search model in which firms and workers are imperfectly informed about each others' costs of adjusting to external shocks. Agents commit to rigid employment contracts with high separation costs when frictions are high and to flexible contracts with low separation costs otherwise. A reduction in labor market frictions leads to an increase in inefficient job instability that is amplified by the switch in employment contracts. As a result some groups in society, and potentially society as a whole, can be made worse off.

We analyze the optimal delegation of authority by an uninformed principal to an informed but biased agent. When the principal cannot use message-contingent transfers, she offers the agent a set of decisions from which he can choose his preferred one. We fully characterize the optimal delegation set for general distributions of the state space and preferences with arbitrary continuous state dependent biases. We also provide necessary and sufficient conditions for commonly observed organizational arrangements to be optimal. Finally, we investigate how changes in the economic environment affect the agent's discretion.

In this paper we ask, what is the role of the marriage contract? We first formalize three prominent hypotheses on why people marry. These are based on marriage providing an exogenous payoff to married partners; marriage as a commitment device; and marriage as a signaling device. The comparative static we focus on is how a fall in divorce costs affects the divorce hazard. Each theory highlights that divorce costs affect the divorce hazard both through an effect on married couples directly; and through an effect on the composition of couples that decide to marry -- a selection effect. We then bring these alternative views of the marriage contract to bear on the data using individual marriage and divorce certificate data. Such disaggregated information allows us to identify both the direct and selection effects. The results emphasize the importance of viewing marriage as a commitment device for explaining behavior in the American marriage market.

We consider a multi-divisional organization in which decisions must be responsive to local circumstances but also coordinated with each other. Divisional managers are privately informed and communicate their information strategically. The only available formal mechanism is the allocation of control over decisions. We show that a higher need for coordination improves communication under decentralization but worsens communication under centralization. As a result, a decentralized organization can be optimal even when coordination is extremely important. Centralizing decision making in an independent headquarter is optimal when division managers are sufficiently biased towards their own divisions' profits and the need for coordination is sufficiently big. Centralizing decision making in one of the operating divisions is optimal if this division has more private information than the other divisions, the own division bias of division managers is sufficiently small and the need for coordination is sufficiently big. Finally, division managers communicate more information to an independent headquarter than they do to each other. As a result, a headquarter can be better informed about local circumstances than the division managers, in spite of the fact that the headquarter does not directly observe any information itself.

We explore the optimal delegation of decision rights by a principal to a better informed but biased agent. In an infinitely repeated game a long lived principal faces a series of short lived agents. Every period they play a cheap talk game ala Crawford and Sobel (1982) with constant bias, quadratic loss functions and general distributions of the state of the world. We characterize the optimal delegation schemes for all discount rates and show that they resemble organizational arrangements that are commonly observed, including centralization and threshold delegation. For small biases threshold delegation is optimal for almost all distributions. Outsourcing can only be optimal if the principal is sufficiently impatient.

In many settings a buyer and a seller who are in a bilateral trading relationship agree on contractual clauses that make it more difficult for either one of them to trade with third parties in the future. Prominent examples include exclusive supplier contracts, break-up clauses in preliminary merger agreements, and rights of first refusal that restrict the transferability of shares in closed corporations. The law and economics literature has focused on two broad explanations for the use of such contracts: they are either seen as anti-competitive weapons that restrict entry or as efficiency enhancing instruments that protect relationship-specific investments. In this paper we analyze a third potential reason for the use of contractual trade restrictions. In particular, we argue that such restrictions can facilitate bargaining between the contracting parties and thus reduce the risk of bargaining breakdowns. This motivation for contractual trade restrictions has been discussed informally by other authors but has so far not been analyzed formally. We derive the conditions under which contractual trade restrictions do or not facilitate bargaining. This allows us to derive a number of policy implications (for instance, exclusive contracts should be enforced in thin markets but not in thick markets) and empirical predictions (for instance, break-up fees are initially increasing in market thickness and then decreasing).

In this paper we develop a framework to assess the economic impact of foreign investment projects. If investment projects interact with other industries in the host economy, either by buying inputs locally or by selling their own product to local downstream firms, they can create sectoral linkages. The expansion of upstream and downstream industries can feed back to the project’s own industry leading to a further expansion of the local industry. We study the circumstances under which investment projects lead to the creation of sectoral linkages and characterise the factors that determine the project’s welfare impact. We link analytical findings to case studies undertaken for the EBRD.

We explore the role of human capital investments in the location decisions of firms. We show that whether human capital investments act as a force for or against concentration depends on who is undertaking them and whether they are industry- or firm-specific. We also discuss the empirical predictions of our theoretical analysis.

I develop a property rights theory of the firm to analyze the interdependence between the ownership structure of firms and the bargaining inefficiency that arises when managers have private information about the size of quasi-rents. I first show that if managers can only contract over the ownership structure they optimally choose one that minimizes (maximizes) their aggregate disagreement payoff if the minimum expected quasi-rents are large (small). I then allow the managers to contract over the ownership structure and the ex post bargaining game and show that the main results continue to hold if and only if ownership structures are required to be deterministic. Note: This paper is circulating as a working paper under the title "Information and the Optimal Ownership Structure of Firms"