[PEN-L:34234] RE: Re: short vs. long-run contracts

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L:34233] Re: short vs. long-run contracts

the article seems to be totally disconnected from the empirical world, even if they get all the math right. That's what's called "autistic economics" these days and is quite silly. Of perhaps it's not silly, but it should be filed under fiction or pure mathematics.

I especially like [irony intended] assumption (3) below: these days, as Michael Perelman points out, profits of US business are more & more dependent on "intellectual property" rights, which means that the existence of "common knowledge about technology" is increasingly absurd. Bottling up intellectual property prevents it.

------------------------
Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine

> -----Original Message-----
> From: Gil Skillman [mailto:gskillman@xxxxxxxxxxxx]
> Sent: Thursday, January 30, 2003 3:57 PM
> To: pen-l@xxxxxxxxxxxxxxxxxxx
> Subject: [PEN-L:34233] Re: short vs. long-run contracts
>
>
> If the paper Sabri refers to is the 1991 J. Ec. Theory paper
> by these three
> authors, the point of the Fudenberg et al. paper is a bit
> more specific,
> and correspondingly less silly, than Sabri's short summary would
> suggest.   Here's the abstract:
>
>         Long-term contracts are valuable only if optimal contracting
> requires commitment to a plan today that would not
>         otherwise be adopted tomorrow. The authors show that
> commitments
> are unnecessary and, hence, short-term
>         contracts are sufficient if (1) all public
> information can be used
> in contracting, (2) the agents can access a bank on
>         equal terms with the principal, (3) recontracting
> takes place with
> common knowledge about technology and
>         preferences, and (4) the frontier of expected utility payoffs
> generated by the set of incentive compatible contracts is
>         downward sloping at all times.
>
> You may think that the above is not a very interesting thing
> to know--in
> the context of labor markets, which Fudenberg et al aren't
> specifically
> talking about, conditions (2) and (3) seem empirically
> doubtful at best--
> but that's a different indictment than the one Sabri suggests.
>
> Gil
>
>
>
>
> >Sabri writes: >Did you know about Fundenberg, Holmstrom and
> Milgrom paper
> >about long
> >versus short term contracts, for example? Using heavy mathematics
> >they "prove" that there is no difference between having a long
> >term contract and a sequence of short term contracts. That means,
> >don't worry, be happy, even when you have no job security. <
> >
> >I haven't seen that paper, but it's prima facie absurd. The
> equivalent
> >theory in finance says that there is no difference between having a
> >long-term bond and a sequence of short-term bonds rolled
> over from period
> >to period. (This is the "expectations hypothesis," for
> issues such as
> >treasury bills & bonds that don't differ in terms of
> inherent risk.) But
> >it doesn't work in the real world, despite the fact that
> financial markets
> >are 100 times more like the idealized market than
> labor-power markets are.
> >Long-term bonds have to pay higher interest rates than the
> average of
> >actual and expected short-term bonds to compensate financial
> investors for
> >extra risk & illiquidity.
> >
> >Of course long-term labor contracts may involve fewer
> pecuniary rewards
> >than similar short-term contracts, because the latter have the
> >non-pecuniary benefit of security. But that doesn't make
> them the same.
> >------------------------
> >Jim Devine jdevine@xxxxxxx
> >& 
> <http://bellarmine.lmu.edu/~jdevine>http://bellarmine.lmu.edu/~jdevine
>
>