Volume 13, Issue 1 -

: This paper studies uniqueness of equilibrium in symmetric Bayesian games. It shows that if signals are highly but not perfectly dependent, then players play their risk-dominant actions for all but a vanishing set of signal realizations. In contrast to the literature on global games, noise is not assumed to be additive. Dependence is modeled using the theory of copulas.

I study a monopolist who sells a signal to a consumer with a hidden type. The consumer uses this signal to obtain social status, defined as the expectation of the consumer’s type conditional on the signal. The monopolist must decide how accurately different types are revealed. When pooling subsets of types, she reduces social surplus, but extracts greater information rents. I derive the optimal mechanism by examining the covariance between the consumer’s type and his virtual marginal value of social status.

The paper shows that, whenever the completion of a research project requires the overcoming of more than one research obstacle, then Research Joint Ventures enjoy an intrinsic advantage relative to independent firms. This advantage, which has hitherto escaped attention in the RJV literature, relates to the RJV’s ability to organize research more efficiently than independent firms. The fact that RJVs can be both more profitable and yield higher expected net welfare than independent firms is surprising because it is derived from a model in which RJVs do not optimize over R&D investment. The paper exploits a basic result in systems reliability theory to establish the organizational superiority of RJVs.

: We analyze forward-induction reasoning in games with asymmetric information assuming some commonly understood restrictions on beliefs. Specifically, we assume that some given restrictions Δ on players’ initial or conditional first-order beliefs are transparent , that is, not only do the restrictions Δ hold but there is also common belief in Δ at every node. Most applied models of asymmetric information are covered as special cases whereby Δ pins down the probabilities initially assigned to states of nature. But the abstract analysis also allows for transparent restrictions on beliefs about behavior, e.g. independence restrictions or restrictions induced by the context behind the game. Our contribution is twofold. First, we use dynamic interactive epistemology to formalize assumptions that capture foward-induction reasoning given the transparency of Δ, and show that the behavioral implications of these assumptions are characterized by the Δ-rationalizability solution procedure of Battigalli (1999, 2003). Second, we study the differences and similarities between this solution concept and a simpler solution procedure put forward by Battigalli and Siniscalchi (2003). We show that the two procedures are equivalent if Δ is “closed under compositions” a property that holds in all the applications considered by Battigalli and Siniscalchi (2003). We also show that when Δ is not closed under compositions, the simpler solution procedure of Battigalli and Siniscalchi (2003) may fail to characterize the behavioral implications of forward-induction reasoning.

We consider situations where the cooperation and negotiation possibilities between pairs of agents are given by an undirected graph. Every connected component of agents has a value, which is the total surplus the agents can generate by working together. We present a simple, sequential, bilateral bargaining procedure, in which at every stage the two agents in a link, (i,j) bargain about their share from cooperation in the connected component they are part of. We show that this procedure yields the Myerson value (Myerson, 1997) if the marginal value of any link in a connected component is increasing in the number of links in that connected component.

Standard economic models have long been applied to choices over private consumption goods, but have recently been extended to incorporate social situations as well. We challenge the applicability of standard decision-theoretic models to social settings. In an experiment where choices affect the payoffs of someone else, we find that a large fraction of subjects prefer randomization over any of the deterministic outcomes. This tendency prevails whether the other party knows about the choice situation or not. Such randomization violates standard decision theory axioms that require that lotteries are never better than their best deterministic component. For conceptually similar choices in classical non-social situations, we do not find much evidence for such violations, suggesting the need for theories of uncertainty that are targeted to social settings.

This paper considers procurement auctions with costly bidding when the auctioneer is unable to commit himself to restrict the number of bidders. The auctioneer can, however, publicly pledge to pay a financial reward to every contractor he has invited to bid, as an indirect commitment device. Rewards for short-listed bidders are costly. Nevertheless, it is generally optimal for the procurer to credibly implement the same restriction of the number of bidders that is optimal under full commitment.

In this article, we consider the impact of personal contacts on the labor market outcome. Unlike previous studies, we do not assume any particular network structure or vacancies communication protocol. Instead, we state three general properties of matching functions that allow us to establish the existence and uniqueness of equilibrium and characterize the impact of social ties on the labor market. In particular, we show that a monotonically increasing matching function in socialization level is a necessary and sufficient condition for having monotonically decreasing unemployment and increasing wage and market tightness. However, the same does not apply to vacancy rate. We establish a condition under which a monotonically increasing matching function produces a vacancy rate that first increases in socialization level, but then decreases.

We experimentally study an asymmetric coordination game with two Nash equilibria: one is Pareto-efficient, the other is Pareto-inefficient and involves a weakly dominated strategy. We assess whether information about the interaction partner helps eliminate the imperfect equilibrium. Our treatments involve three information-enhancing mechanisms: repetition and two kinds of individual signals: messages from partner or observation of his past choices. Repetition-based learning increases the frequencies of the most efficient outcome and the most costly strategic mismatch. Moreover, it is superseded by individual signals. Like previous empirical studies, we find that signals provide a screening of partners’ intentions that reduces the frequency of coordination failures. Unlike these studies, we find that the transmission of information between partners, either via messages or observation, does not suffice to significantly increase the overall efficiency of outcomes. This happens mostly because information does not restrain the choice of the dominated action by senders.

We provide new evidence about a positive correlation between the own amount sent and the own amount returned in the investment game. Our analysis relies on the experimental data collected under the strategy method. While the percentage returned is independent of the amount received for most of our subjects, it is strongly correlated to their amount sent as a trustor. Our analysis is based on a two-way classification of subjects: according to their trusting type and according to their reciprocal type. We show the existence of a strong positive relation between trusting types and reciprocal types within subjects.

Most research in contract theory concentrated on the role of incentives in shaping individual behavior. Recent research suggests that social norms also play an important role. From a point of view of a mechanism designer (a principal, a government, and a bank), responsiveness of an agent to the social norms is both a blessing and a curse. On the one hand, it provides the designer with extra instruments, while on the other it puts restrictions on how these new and the more conventional instruments can be used. The main objective of this paper is to investigate this trade-off and study how it shapes different contracts observed in the real world. We consider a model in which agent’s cost of cheating is triggered by the principal’s show of trust. We call such behavior a norm of honesty and trust and show that it drives incentives to be either low powerful or high powerful, eliminating contracts with medium powerful incentives.

This article is the first to study a bargaining model in a moral hazard framework where the principal is risk neutral and the agent is risk averse. We show that the power of incentives increases with the agent’s bargaining power if the contracts induce a high effort. However, under reasonable assumptions about the agent’s utility function, the contracts induce a high effort less often as the agent’s bargaining power increases. As for the social welfare, we are surprised to find that a utilitarian, who cares about the sum of the two parties’ certainty equivalents, is worse off as the agent’s bargaining power increases. These results are in sharp contrast to the literature, which features risk-neutral agents protected by limited liability.

This article develops an equilibrium sorting model with utility maximizing agents (researchers) on one side of the market, and on the other side institutions (universities) and an outside sector. Researchers are assumed to care about peer effects, their relative status within universities, and salary compensation. They differ in their concern for salary compensation as well as in their ability. We derive the unique stable equilibrium allocation of researchers and investigate the effects on the academic sector of changes in the outside option as well as the interaction between the outside option and the researchers’ concern for relative status. In any equilibrium, the right-hand side of the ability distribution is allocated to the academic sector, while the left-hand side of the ability distribution is allocated to the outside sector, with possible overlap between sectors and within the academic sector. The universities’ qualities are determined endogenously, and we show that an increase in the value of the outside option decreases the difference in quality between the higher and lower ranked universities. Furthermore, differences in average salaries between the institutions arise endogenously.

We provide a theorem that lists the necessary and sufficient dominance conditions for the poverty comparisons of the bivariate distributions function when considering an asymmetric treatment of attributes. The normative justification for an asymmetric treatment is based on the compensation principle proposed by Muller and Trannoy (2012), under which it makes sense to use one attribute to compensate another. The formulation results in a generalization of the needs approach in poverty analysis proposed by Atkinson (1992). The dominance conditions we found lie between those obtained by Bourguignon and Chakravarty (2002) and Duclos, Sahn, and Younger (2006a) when attributes are symmetric and those obtained within the needs framework by Atkinson (1992) and Jenkins and Lambert (1993) when attributes are asymmetric, but one is of discrete nature.

We study the possibility space of deterministic, dominant-strategy incentive compatible, individually rational, and Pareto efficient combinatorial auctions in a model with two players and two nonidentical items (four outcomes). Our model has multidimensional types, private values, nonnegative prices, and quasilinear preferences for the players with one relaxation – the players are subject to publicly known budget constraints. We show that the space we study essentially includes one type of mechanisms: autocratic mechanisms (a form of dictatorship). Furthermore, we prove that there are families of autocratic mechanisms that uniquely fulfill the basic properties of deterministic, dominant-strategy incentive compatible, individually rational, and Pareto efficient. The mechanisms in the autocratic families are identical except for two to three price parameters that differentiate them.

This article identifies the necessary and sufficient conditions under which a monopolist, producing a network good, benefits from introducing a higher quality in the market. It is shown that, if the network externality is higher than the intrinsic quality differential, quality improvement is not optimal. Also, we obtain that, for low levels of the network effect, the monopolist prefers not to cover the market, whereas for higher levels, optimal prices are such that all consumers buy one of the two qualities. Finally, there is an introductory price strategy which is optimal for the good that benefits from network externalities.

In this article, we study the problem of Nash implementation in private good economies with single-peaked, single-plateaued, and single-dipped preferences in the presence of at least one minimally honest agent. We prove that all solutions of the problem of fair division satisfying unanimity can be implemented in Nash equilibria as long as there are at least three agents participating in the mechanism (game form). To justify this result, we provide a list of solutions which violate the condition of no-veto power.

We consider an asymmetric auction setting with two bidders such that the valuation of each bidder has a binary support. First, we characterize the unique equilibrium outcome in the first price auction for any values of parameters. Then we compare the first price auction with the second price auction in terms of expected revenue. Under the assumption that the probabilities of low values are the same for the two bidders, we obtain two main results: (i) the second price auction yields a higher revenue unless the distribution of a bidder’s valuation first-order stochastically dominates the distribution of the other bidder’s valuation “in a strong sense” and (ii) introducing reserve prices implies that the first price auction is never superior to the second price auction. In addition, in some cases, the revenue in the first price auction decreases when all the valuations increase.