Volume 15, Issue 2 -

Fundamental non-recurrent choices, like location or education, affect the attitudes and beliefs with which the individual consequently analyzes day-to-day decision problems. These effects cannot be assumed to be transparent to the individual. To restore methodological discipline in the analysis of such choices, we propose a solution concept based on an idea of self-justification and consistency : the individual should not regret her fundamental choice after her preferences and beliefs regarding day-to-day decisions have adjusted thereof. We show that even single-person fundamental choice problems admit multiple, Pareto-ranked solutions: the individual might be stuck in an aspiration trap.

We study a game in which a lobby with verifiable private evidence discloses her evidence to a policy-maker if and only if she agrees to a transfer that is proposed by the policy-maker. This setting is motivated by the literature of pay-and-lobby politics, which finds that politicians schedule informative meetings with lobbyists on the basis of their campaign contributions. We admit both positive transfers (fees) and negative transfers (compensations), which implies not only that the policy-maker can commit to not listen but also that the lobby can commit to not talk. In a binary action space, we solve the game for all timings, prior beliefs, information structures, and valuation parameters. We identify the settings in which the policy-maker strategically discourages the lobby’s participation by announcing an unacceptable transfer. Whether ‘burying one’s head in the sand’ increases or decreases welfare depends on the degree of the policy-maker’s benevolence.

We develop a spatial model in which consumers receive firm-specific location shocks and firms endogenously determine both franchise/product locations and prices. Remarkably, firms fail to profit from endogenous product-specific heterogeneity alone: while ex-post consumer heterogeneity ensures positive gross profits, competition for market share results in socially excessive product lines and zero net profits. With added exogenous taste heterogeneity, endogenous spatial heterogeneity drives profits below their levels with only taste heterogeneity. Finally, we introduce multiple product lines and show that when product costs differ across lines, firms earn positive profits as long as consumer preferences over lines are imperfectly correlated.

We study a large economy where capacity-constrained sellers post prices to attract buyers. Capacity is costly and each seller chooses how many units to stock, which allows us to study the relationship between search frictions and capacity. We show that no equilibrium exists with linear costs; however, sufficiently convex costs are enough for existence. There may be several equilibria, but we show that the equilibrium payoffs to the agents are unique as well as constrained efficient. Finally, we numerically analyze how the magnitude of search frictions is affected by the capacity choices of the firms.

This paper studies a multi-stage version of Crawford and Sobel’s communication game. In every period the receiver determines a test about the unknown state whose result is privately observed by the sender. After the sender sends a costless message about an outcome of the test, the receiver selects a test in the next period. After a finite number of periods of interaction, the receiver makes a decision. The paper offers a sequence of tests that refine sender’s information step-by-step and preserve truthtelling in every period. This sequence allows the receiver to learn the state in a subinterval of the state space with an arbitrary precision and has appealing theoretical properties. It consists of simple binary tests which reveal whether the state is above a certain cutoff, where the cutoffs are monotonic across periods and independent from results of the previous tests. Finally, we show that the relative payoff efficiency of multi-stage interaction compared to a single-stage game increases without a bound as the bias in preferences tends to zero.

Judicial torture to extract information or to elicit a confession was a common practice in pre-modern societies, both in the east and the west. This paper proposes a positive theory for judicial torture. It is shown that torture reflects the magistrate’s attempt to balance type I and type II errors in the decision-making, by forcing the guilty to confess with a higher probability than the innocent, and thereby decreases the type I error at the cost of the type II error. Moreover, there is a non-monotonic relationship between the superiority of torture and the informativeness of investigation: when investigation is relatively uninformative, an improvement in technology used in the investigation actually lends an advantage to torture so that torture is even more attractive to the magistrates; however, when technological progress reaches a certain threshold, the advantage of torture is weakened, so that a judicial system based on torture becomes inferior to one based on evidence. This result can explain the historical development of the judicial system.

This study develops a war-of-attrition model with the asymmetric feature that one player can be defeated by the other but not vice versa; that is, only one player has an exogenous probability of being forced to capitulate. With complete information, the equilibria are almost identical to the canonical war-of-attrition model. On the other hand, with incomplete information on a player’s robustness, a war where both players fight for some duration emerges. Moreover, a player who is never defeated may capitulate in equilibrium, and this player will give in earlier if the other player’s fighting costs are greater.

We analyze the effects of asymmetry in incentive contracts on the possibility of collusion between managers. When their compensation is based on the relative performance evaluation contracts, managers can achieve better outcomes by colluding. Using the concept of balanced temptation introduced by Friedman (1971), we find that asymmetry in incentives increases the likelihood of collusion. The result contradicts the general wisdom that asymmetries make collision harder to maintain.

We analyze how leniency affects cartel pricing in an infinitely repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Ex-ante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To reduce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.

This paper proposes a simple model for understanding transaction costs – their composition, size and policy implications. We distinguish between investments in institutions that facilitate exchange and the cost of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk adverse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues.

This article is set within the real options approach applied to patent valuation. Such evaluation is based on the knowledge of the impact of some events on the underlying state, which is modeled in discrete time as a spatial point process, i.e. both size and time of the jumps can be treated as random variables. This assumption allows us to improve upon the current theory of patent valuation in some respects. In particular, the propagation of the jumps from the economic environment to the patent value is not restricted to be immediate, but can occur with a random delay and with varying intensity, depending on the time to maturity. These actual features lead to a more general formula for patent value that may give rise to a non-trivial difference not accounted for in the existing literature.

The Hotelling game of pure location allows interpretations in spatial competition, political theory, and strategic forecasting. In this paper, the doubly symmetric mixed-strategy equilibrium for n≥4$n \ge 4$ firms is characterized as the solution of a well-behaved boundary value problem. The analysis suggests that, in contrast to the cases n=3$n = 3$ and n→∞$n \to \infty $, the equilibrium for a finite number of n≥4$n \ge 4$ firms tends to overrepresent locations at the periphery of its support interval. Moreover, in the class of examples considered, an increase in the number of firms universally leads to a wider range of location choices and to a more dispersed distribution of individual locations.

This note shows that in a general symmetric quantity-setting oligopoly, the conjectural variations solution replicates that of a model where the “coefficient of cooperation” defined by Cyert and DeGroot (1973) is interpreted as the parameter indicating severity of competition.