Economics students need to be taught that opportunity costs are important for optimal decision making but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about...

Economics students need to be taught that opportunity costs are important for optimal decision making but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about...

Labor management practices in Japan are quite different from those in the United States. Based on recent developments in contract theory, we develop a conceptual framework to understand why the differences have been maintained for a long period time. Our basic message is that the American and...

Models of spatial competition have proven useful in describing differentiated product markets. A serious problem is the nonexistence of Nash equilibria. This problem is resolved by modelling the price formation process using the core. The equilibrium is the outcome of a two-stage process. In the...

In this paper the set of bilateral wage contracts in a dynamic model with observable effort is characterized. Our first result demonstrates that bond payments and severance pay do not increase the size of the set of incentive compatible contracts. Second, we show that unobservable effort can...

This paper studies the effect that a labour market for older workers will have on the ratchet effect. Even though we assume that the information on worker type that a firm obtains will not be transmitted to the other firms, the presence of the ex post labour market eliminates the ratchet effect....

This paper studies the effect of sunk cost on equilibria for a dynamic oligopoly with entry. Sunk costs are a hysteresis effect that cannot be adequately modelled in a static framework. When sunk costs are added to a dynamic model they do not act as a barrier to entry, contrary to general...

This paper characterizes all outcomes supportable by implicit employment contracts of the most general form when employee's performance is not public information. A strictly positive economic surplus must result from employment, the form of contract depending on how this surplus is divided...

This paper studies the effect of information and sunk costs on the set of equilibria for a dynamic oligopoly model that incorporates price and entry/exit decisions. Contrary to the accepted view, sunk costs do not act as a barrier to entry, but in general cause excessive entry. When entry and...

This paper uses local game theory to introduce a general framework for disequilibrium dynamics based on adjustment costs. In the context of oligopoly, the analysis shows that the existence of adjustment costs will result in a unique equilibrium where market shares are inversely proportional to...