Volume 19, Issue 2 -

This paper studies how organizations seek to promote cooperation between their members when individual contributions to an organization’s output are imperfectly observable. It considers an overlapping-generations game in which members with conflicting interests expend effort in pursuing activities outside the organization, in addition to the effort they devote to increasing the organization’s output. We show that cooperation is easier to enforce when organizations link rewards and punishments to effort in outside activities. In the best public perfect equilibrium, effort in outside activities is distorted in order to signal a member’s willingness to cooperate inside the organization.

While recent studies use asymmetric trade costs and non-homothetic preference to explain why trade grows strongly with income per capita, this paper proposes a new explanation using a random search framework based on Burdett and Judd (1983). I show that the values of international trade flows as a share of income are generally larger in high-income countries because the markups in high-income countries are generally larger than those in low-income countries. In addition, firms’ price setting strategy creates an endogenous wedge between bilateral trade flow and gains from trade.

Making use of a Conjectural Variation model, the present note re-examines the subject of the firms’ profits ranking under different degrees of market competition in a unionized duopoly with industry-wide Efficient Bargaining (EB). It is shown that, while Cournot-like competition profits are always larger than Bertrand-like ones with separated wage negotiations, an uniform wage bargaining can lead to the appearance of the reversal.

This paper presents an axiomatic approach to separately control for the attitudes toward intertemporal substitution and risk aversion under the expected utility theorem. The standard time-separable form is recovered only if the functions dictating the two attitudes are identical. Risk aversion is defined on consumption amount rather than on utility (as in Kihlstrom and Mirman (1974 and 1981)). Moreover, the agent is allowed to trade his lottery outcome to optimize his consumption. As a result, this approach provides a straightforward extension of the familiar Arrow-Pratt results to multiple periods. These include categorizing, measuring, and comparing risk aversions.

We introduce an explicit environmental incentive into a managerial compensation contract in the context of a Cournot duopoly with pollution externalities under an emissions tax regime. We show that, depending on the effectiveness of “green” R&D, compared to a standard sales compensation contract, the explicit environmental focused contract results in more abatement. As a consequence, the regulator sets a lower emissions tax, and social welfare is higher. Moreover, in general, firm owners earn higher profits when adopting the environmental delegation contract.

This paper extends the entry deterrence literature by examining coordinating advertising and pricing in markets with consumption externalities using a stochastic success function. Optimal advertising and pricing strategies are analysed when an incumbent firm faces a challenger with a product of equal quality. I show that strategic entry deterrence using advertising is possible and optimal entry deterrence involves strategic pre-commitment to over-investment relative to the non-strategic simultaneous advertising benchmark. I show that when entry deterrence is not possible the incumbent does not possess a first mover advantage and optimal entry accommodation involves strategic investment in advertising with intensified price competition congruent with the non-strategic simultaneous advertising benchmark. The findings suggest that an incumbent’s ability to deter entry through coordinating advertising in a market with products of equal quality is sensitive to the size of the fixed cost of entry that the challenger must incur and the consumption externality parameter.

We study the intertemporal consumption and portfolio rules in the model with the general hyperbolic absolute risk aversion (HARA) utility. The equivalent approximation approach is employed to obtain the Hamilton-Jacobi-Bellman (HJB) equations, and a remarkable property is shown: portfolio rules are independent of the discount function. Moreover, both the consumption and portfolio rates are non-increasing functions of wealth. Particularly illustrative cases examined in detail are the models with the most adopted discount functions, including exponential discounting and hyperbolic discounting. Explicit solutions for intertemporal decisions are found for these special cases, revealing that individual’s time preferences affect the consumption rules only. Moreover, the time-consistent consumption rate under hyperbolic discounting is larger than its counterpart under exponential discounting.

This article explores the evolution of a civilized exchange economy from an anarchistic environment. I analyze a model of stochastic jungle bargaining mechanism and show that it implements the Talmud Rule allocation (Aumann, R. J., and M. Maschler. 1985. “Game Theoretic Analysis of a Bankruptcy Problem from the Talmud.” Journal of Economic Theory 36 (2): 195–213.) in subgame perfect equilibrium. This Pareto-inefficient allocation constitutes the initial endowment of a stable exchange economy and supports stable Walrasian equilibria, implying that civilized economies could evolve from a Hobbesian state of nature without social contract or regulator. The moral implications of these results are also briefly discussed.

Current money matching models employ either random matching or endogenous matching processes, both of which oversimplify the problem. We maintain that, although most economic interactions are intentional, some randomness remains. We offer an endogenous matching model of money with random consumption preferences. Our model preserves the intentionality of economic interactions while leaving scope for chance. We identify the conditions for potential monetary and nonmonetary equilibria and compare them to those of other endogenous matching and random matching models.

This note considers an asymmetric duopoly model of price-frame competition in homogeneous product markets. The firms choose simultaneously prices and price formats, and frame differentiation limits price comparability leading to consumer confusion. Here, one firm is more salient than its rival and attracts a larger share of confused consumers. In duopoly equilibrium, the firms randomize on both prices and frames, make strictly positive profits, and pricing is frame-independent. However, the prominent firm sets a higher average price and charges the monopoly price with positive probability. Higher prominence boosts expected profit for both the industry and the salient firm but may harm the rival’s expected profit.

We examine an auction setting with private values and n≥2$n\geq 2$ bidders, which differ in the probability to have a low (high) value. We prove that for the first price auction, the equilibrium strategies can be written in closed form and there are gaps in the equilibrium bid distribution of each bidder except the strongest two. Our equilibrium characterization allows to prove that in this setting the seller prefers the second price auction to the first price auction for each n≥2$n\geq 2$.

In this paper we analyze the existence of stable matchings in a two-sided large market in which workers are assigned to firms. The market has a continuum of workers while the set of firms is countably infinite. We show that, under certain reasonable assumptions on the preference correspondences, stable matchings not only exist but are also Pareto optimal.