This paper analyzes choice-theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur. An intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions. The goal of the analysis is to characterize the effect of choice-theoretic costly enforcement on the structure of optimal contracts. The paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is Ž . a decision variable Theorem 1 . In contrast, stochastic contracts are optimal when agents Ž . can commit to the ex-ante optimal decisions Theorem 2 . The paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect Bayesian Nash equilibrium.

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The purpose of this paper is to extend the bilateral contracting problem studied in Townsend (1979) and Gale and Hellwig (1985) to an explicit, multilateral contracting arrangement which resembles banking. We derive the structure of an optimal contract for a large but finite intermediary, establish gains from delegated monitoring, and study the incentive problem of the monitor in an economy where the intermediary has no information, risk, or cost advantage relative to individual agents. Unlike previous delegated monitoring studies, the law of large numbers is not sufficient to obtain our results. Instead, we appeal to a stronger result, the large deviation principle, which establishes that convergence in the law of large numbers is exponential.

This paper reports the results of a series of oral‐double‐auction experiments in which some traders possess market power. A market is set up in which the configuration of the supply and demand curves leads to an asymmetry between buyers and sellers in their abilities to influence transactions prices. This market structure does not always lead to convergence to the competitive equilibrium price despite the competitive nature of the oral‐double‐auction institution. The nonconvergence occurs most frequently in the experiments involving experienced subjects.

This paper analyzes the optimal inflation tax in economies with structural imperfections in labor, commodity, and currency markets. The Friedman rule is a classic result in economics that claims that the optimal monetary policy is to set a zero nominal interest rate. This Ramsey equilibrium is robust in a wide range of environments without imperfections in input, output, or financial markets. In many developing countries, however, a large fraction of activity takes place in the "informal" sector. Roughly speaking, the informal sector is the untaxed and unregulated market sometimes referred to as the underground economy. We obtain three results. First, we show that when structural imperfections such as an informal sector exist, the optimal inflation tax is positive. Second, we show that structural imperfections introduce an important asymmetry in the welfare cost function. Third, we provide quantitative results.We thank Stephen Parente, Rui Zhao, and two referees for helpful comments. We also thank seminar participants at