Editor’s Introduction pp. 004- 005

The canonical principal±agent problem involves a risk-neutral principal who must use incentives to motivate a risk-averse agent to take a costly, unobservable action that improves the principal's payoff. The standard solution requires an inef®cient shifting of risk to the agent. This article, however, summarizes experimental research that throws doubt on the validity of this conclusion. Experimental subjects were routinely able to achieve ef®ciency in agent effort levels without inef®cient risk-sharing. These experimental outcomes, while anomalous from the standpoint of principal±agency theory, are quite consistent with other experimental data testing notions of trust-based implicit contracting. Such contracting within a hierarchy may allow an outcome preferred, by both principal and agent, to that deemed possible by principal± agency theory. If this is true, then the lessons to be learned from principal± agency theory are all the wrong ones. Concentrating on incentives can crowd out the very qualities in a relationship that make social ef®ciency possible.

This paper formulates a novel test to assess whether, and to what extent, firms might be using low-price guarantees to discourage rivals from cutting prices. The test is based on a comparison of paired observations of advertised prices set by competing firms at the same point in time on similar items, where one price is set by a firm that has a low-price guarantee and the other by a firm that does not have a guarantee. Using data on retail tire prices, we find that the majority of paired observations involving firms that have price-matching guarantees are consistent with what one would expect if firms were using them to discourage rivals from cutting prices, whereas the majority of paired observations involving firms that have pricebeating guarantees are not. This suggests that price-matching and price-beating guarantees may be serving different purposes. The evidence also suggests that guarantees that apply to advertised prices only should be distinguished from guarantees that apply to actual selling prices. ∗ We would like to thank Chuck Thomas, an anonymous referee, and seminar participants at the ENCORE workshop

This paper begins to answer the call to broaden current theories of individual decision-making by including in them the effects of human mood. Grounding our arguments in psychological literature on the effects of mood on information processing, motivation, and decision heuristics, we develop hypotheses about how mood can significantly affect individuals' use of structured decision protocols. In support of our hypotheses, results from an experimental study of complex decision-making suggest that, in situations where a structured decision protocol is the usual method of decision-making, individuals in moderately negative moods are significantly more likely than those in moderately positive moods to: (1) carefully execute all the steps of a structured decision protocol, (2) execute the steps of a structured decision protocol in the correct order, and (3) rely on the outcome of the structured decision protocol as the primary basis for the decision. We discuss these findings in terms of the...

Introduction (Slide 1) I am delighted to have this chance to speak today about common knowledge and accounting. I would like to thank Professors Chee Chow and Joan Luft for this opportunity. Emperor's Clothes Most of us have probably heard of the Hans Christian Andersen fable of the child who cried: "The emperor has no clothes" (Slide 2). For those who may not have, I shall tell the story briefly. Two scoundrels convinced a vain emperor that they could make a special gorgeous looking cloth of silk and gold threads that is invisible only to the incompetent and the stupid. The emperor gave them money and materials to make the royal garments, and they dressed him in nothing at all. No one at the court, including the emperor himself, dared admit that they could not see the clothes for the fear of being branded stupid and incompetent (Slide 3). When the emperor went out in a parade to show off his new clothes to the public, there was great applause and praise for

Do economies and markets make remediable errors in the choice of products? Does the economy "lock-in " to these incorrect choices even when the knowledge that these choices are incorrect is readily available? The literature of path dependence may be understood to argue that these lock-ins and errors occur, even in a world characterized by voluntary decisions and individually maximizing behavior. In this paper we examine path dependence and illustrate three different forms of the term, each having a different implication regarding market errors and lock-in. Two of these meanings are common in the economy but provide no support for the claims that remediable errors occur. The third meaning, which does imply irremediable error, we show to be based on restrictive assumptions that are likely to be overcome in the real world. The analysis is illustrated by examining the market's choice of videorecorder formats. Path dependence has been offered as an alternative analytical perspective for economics, a revolutionary reformulation of the neoclassical paradigm. Brian Arthur, a leading figure in this literature, distinguishes between "conventional economics, " which largely avoids

I investigate the relation between CEO, chairman, and board turnover and ask how these changes affect performance. I find that voluntary chairman turnover causes voluntary CEO turnover. Furthermore, directors do not leave voluntarily if the firm fires its CEO. I identify a group of directors with superior monitoring abilities: Outsiders with experience in the relevant industry increase the performance-sensitivity of CEO turnover and the probability of performance improvements. I also include relatively unexplored board dimensions such as gender and education and find no correlation with turnover and performance. Several anti-takeover mechanisms protect managers but do not affect performance.

‘Strategic behavior of incumbents ’ is a virulent problem in many recently liberalized markets. With the aim of analyzing this phenomenon, the paper starts with the derivation of general theoretical conditions under which strategic behavior is rational, followed by a classification of essential forms of strategic behavior. Subsequent, the questions of the welfare consequences of these strategic options are assessed in different contexts. The results provide the basis for the concluding discussion of the question how antitrust policy should react to strategic behavior of incumbents. JEL: L41, L12

honor of Ned Bowman at the Wharton School. Comments of the participants as well as suggestions

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