Volume 23, Issue 1

Firms use standard contracts and possibly include unfavorable fine print which consumers may read at some positive cost. We propose a comparison between a monopoly and a perfect competition market under (1) an unregulated legal regime (duty to read) and (2) a regulation that mandates clause disclosure (duty to disclose). If consumers bear the duty to read contract terms, regardless of market structure, sellers disclose in equilibrium only if it is cheaper than reading for consumers. Conversely, if sellers bear the duty to disclose contract terms, then such regulation is never welfare improving in either market; it may turn out to be consumer protective only if there are several sellers, whereas it is uneffective on this regard in a monopoly.

In this paper, we investigate how pollution changes with preferences, focusing on a finite bilateral oligopoly model where agents have asymmetric Cobb-Douglas preferences. Producers are also consumers and the choice of heterogeneous preferences is related to the psychological foundations and identity aspects of group membership. We compare two strategic equilibria: the Stackelberg-Cournot equilibrium with pollution (SCEP) and the Cournot equilibrium with pollution (CEP). We show that considering the asymmetric preferences helps the public decision-maker to identify precisely the category of agents (consumer–producers or pure-consumers) for which a change in environmental preference parameters will most effectively reduce pollution. Furthermore, we find that firms’ emissions’ elasticity decreases with market power (when the market power increases) if their marginal cost is lower than their competitor. Finally, we show that when producers are also consumers, an action on pure-consumers’ preference parameters reduces more emissions than a similar action on consumer–producers, and this regardless of the timing of interaction.

For a dynamic partnership with adverse selection and moral hazard, we design a direct profit division mechanism that satisfies ϵ - efficiency , periodic Bayesian incentive compatibility , interim individual rationality , and ex-post budget balance . In addition, we design a voting mechanism that implements the profit division rule associated with this direct mechanism in perfect Bayesian equilibrium. For establishing these possibility results, we assume that the partnership exhibits intertemporal complementarities instead of contemporaneous complementarities; equivalently, an agent’s current effort affects other agents’ future optimal efforts instead of current optimal efforts. This modelling assumption fits a wide range of economic settings.

When a firm appoints a new manager, it reopens the possibility of new contractual friction with its partners. We explore strategic ambiguity as a potential for friction with a supplier. The firm’s new manager probably has fuzzy expectations about the supplier’s strategy. An optimistic manager weights favorable strategies more heavily than detrimental ones, whereas a pessimistic manager does the opposite. We show that the manager’s degree of optimism is critical: above a threshold, it can cause the supplier to change the timing of its contracting and increase its profits. We also find that this threshold degree of optimism depends on the degree of product substitution: it is more stringent with imperfect substitutes than with perfect substitutes or unrelated goods.

We consider a private-value auction with one-sided incomplete information in which two objects are sold in a sequence of two second-price auctions. The buyers have multiunit demand and are asymmetrically informed at the ex ante stage of the game. One buyer perfectly knows his type, and the other buyer is uninformed about her own type. We consider interim information acquisition by the uninformed buyer and derive an asymmetric equilibrium that is shown to produce a declining price sequence across both sales. The supermartingale property of the price sequence stems from the uninformed buyer’s incentives to gather private information, which leads to aggressive bidding in the first-stage auction.

We introduce the concept of an Arrowian social equilibrium that inverts the schemata of the famous impossibility theorem of Arrow (1950. “A Difficulty in the Concept of Social Welfare.” Journal of Political Economy 58 (4): 328–46) and captures the possibility of aggregating non-rational individual preferences into rational social preferences while respecting the Arrowian desiderata. Specifically, we consider individuals whose preferences may not be complete and who, accordingly, may be indecisive when faced with an issue. Breaking with tradition, we consider the possibility of such individuals drawing on their beliefs about society’s preferences that result from the aggregation process to resolve their indecisiveness. Formally, individual choices are modeled as a rational shortlist method (Manzini and Mariotti 2007. “Sequentially Rationalizable Choice.” The American Economic Review 97 (5): 1824–39), with own preferences followed by society’s as the pair of ordered rationales. This results in a mutual interaction between individual and social choices. We study this interaction using majority rule as the aggregator, with an Arrowian social equilibrium specifying how individual and social choices are co-determined , while requiring the latter to be rational. Our main result identifies minimal levels of societal indecisiveness needed to guarantee the existence of such equilibrium.

We study the relation between nuclear family ties and corruption. Our theoretical model shows that the population share of people who desire close ties with their families (i.e. the extensive margin) has an ambiguous effect on the level of corruption, due to the presence of conflicting mechanisms. However, the strength of this desire among people who want close family ties (i.e. the intensive margin) has an unambiguously negative effect on corruption. The latter outcome finds support from our empirical analysis: Using micro-level data, we show that, in contrast to conventional wisdom and cross-country reflections, stronger family ties are negatively correlated with a broad set of activities that measure corruption.

We study social efficiency of entry in the presence of downstream cost asymmetry and upstream price discrimination. We show that entry is excessive when the entrants are highly inefficient, and it is insufficient when either the entrants are efficient or their inefficiency is low. The results are in sharp contrast to the existing literature considering upstream uniform pricing (Cao, H., and L. F. S. Wang. 2020. “Social Efficiency of Entry in a Vertically Related Industry Revisited.” Economics Letters 129. Art. no. 109200), as discriminatory pricing alters the relative strengths of the business-stealing, business-creation and production-(in)efficiency effects.

This study considers a search market with an outside option and shows that entry may be insufficient. When a firm enters the search market, the price decreases, and consumers can search for more products, which increases the market demand and improves social welfare. However, firms do not internalize the effect, and insufficient entry can occur. Additionally, insufficient entry is likely to occur in a search market with low search costs and/or an attractive outside option, as these factors increase the socially optimal number of firms but decrease the firms’ profits.

This paper incorporates network externalities into a model of vertical product differentiation to examine how firms determine product quality and network size. We show that, with significant network benefits from quality improvement, the effects of network externalities differ depending on the type of competition. In response to an increase in network externalities, vertical product differentiation enlarges under price competition but shrinks under quantity competition. Moreover, under price competition, the network size of a high-quality product increases, whereas that of a low-quality product decreases for a sufficiently large extent of network externalities, resulting in a reversal in the leading position in terms of network size from the low- to the high-quality product. By contrast, the network sizes of high- and low-quality products both increase under quantity competition; moreover, the gap between their network sizes shrinks for a sufficiently large extent of network externalities.

The television broadcasting industry is of crucial economic and social importance. Traditionally, this industry has been dominated by free-to-air TV (FTV) but due to technological progress, subscription-based pay TV (PTV) has emerged as a competing business model. A key question for the PTV broadcasters is whether to air commercials in addition to charging subscription fees. Based on a theoretical model of asymmetric competition between a PTV and an FTV broadcaster, we examine the effects of placing PTV advertising on broadcaster market strategies, viewer demands, broadcaster profits and consumer surplus. We find that introducing advertising on PTV can induce a higher viewer demand on this channel but a lower viewer demand on the FTV channel. Surprisingly, consumers can benefit through the introduction of advertising in PTV and broadcaster profits can increase if the viewer disutility of advertising is sufficiently large. Our study provides an analytical framework for choosing and implementing an optimal PTV strategy when an FTV competitor preexists in the market. Furthermore, our study derives implications for policymakers and regulatory authorities by showing that additional PTV advertising is not necessarily socially undesirable due to the strategic market reactions.

This paper suggests a simple rule which identifies the coordination between optimal unemployment benefits paid and the tax system in the case of risk neutral workers but with moral hazard and hidden information on the worker’s type. Our model posits that, given a universal, linear income tax scheme, the optimal unemployment benefits paid does not depend on workers’ types. Standard government policy pays a positive replacement rate to unemployed workers. Optimal redistribution, taking moral hazard and adverse selection into account, instead suggests that the benefit paid should be the same for all and only depends on the underlying tax structure.

I study a model of strategic communication between a privately informed sender who can persuade a receiver using Blackwell experiments. Hedlund (2017). “Bayesian Persuasion by a Privately Informed Sender.” Journal of Economic Theory 167 (January): 229–68, shows that private information in such a setting results in extremely informative equilibria. I make three points: first, the informativeness of equilibria relies crucially on two features – the mere availability of a fully revealing experiment, and a compact action space for the receiver. I show by examples that absent these features, equilibria may be uninformative. Secondly, I characterize equilibria in a simple model with constraints for the sender (only two experiments available, none are fully revealing) and the receiver (discrete action space). I argue that noisy experiments and discrete actions are the norm rather than the exception (and therefore, private information need not result in information revelation). Thirdly, I define a novel refinement that selects the most informative equilibria in most cases.

We present a model that explains the process of strategy learning by the players in repeated normal-form games. The proposed model is based on a directed weighted graph, which we define and call as the game’s dynamic graph . This graph is used as a framework by a learning algorithm that predicts which actions will be chosen by the players during the game and how the players are acting based on their gained experiences and behavioral characteristics. We evaluate the model’s performance by applying it to some human-subject datasets and measure the rate of correctly predicted actions. The results show that our model obtains a better average hit-rate compared to that of respective models. We also measure the model’s descriptive power (its ability to describe human behavior in the self-play mode) to show that our model, in contrast to the other behavioral models, is able to describe the alternation strategy in the Battle of the sexes game and the cooperating strategy in the Prisoners’ dilemma game.

This paper studies optimal incentive contracting under moral hazard when workers exhibit relative income concerns and compare their earnings with the economy’s average wage. We show that when firms have access to a rich performance measure, the optimal contract takes a binary form if effort is sufficiently low and a ternary form otherwise. We then use these results to investigate how contractual structure varies throughout the economy when firm-worker pairs are heterogeneous with respect to either their productivity, or the information system used to align incentives. We argue that our findings suggest that the incidence of pay-for-performance should be highest for jobs which significantly contribute to overall firm profitability and for which a worker’s performance is difficult to measure. These predictions appear largely consistent with recent empirical evidence.

We analyze the decision of a firm to produce an input internally or to delegate the production to a better-informed supplier. The supplier can produce inputs of different qualities. As quality is not verifiable, a selfish supplier always produces the quality that minimizes his costs. A supplier that is motivated by reciprocity may instead produce the quality that maximizes the revenues of the buyer. Accordingly, reciprocity could increase the use of the market. To trigger reciprocal behavior the buyer must propose a contract that the seller perceives to be kind. We find that for reciprocal behavior to show up, it is enough that the supplier is moderately reciprocal. Lastly, we provide some intuitions about how our results change if the supplier is liquidity-constrained and must be granted non-negative profits in all circumstances.

The step by step model of innovation is a benchmark model in research investigating the relationship between competition and innovation. The model assumes an industry can be in one of two states; leveled or unleveled. In an unleveled state the lagging firm is the only innovator. In a leveled state firms compete in a patent race. In this patent race successful innovation probabilities are mutually exclusive. This formulation provides mathematical tractability, but it has no other justification. I relax this assumption and use numerical simulation to demonstrate that allowing for non mutually exclusive success in innovation has important consequences for the inverted U relationship. The inverted U relationship is no longer a prediction of the model. In addition, the model predicts that patent measures will under count innovation from the leveled state, allowing for an inverted U relationship between competition and patenting under a narrow set of parameter restrictions. This theoretical exercise has important implications for understanding the current state of the empirical record on this topic.

Companies are increasingly using data to predict behavior and improve the relation with their customers. In this context, data exchange raises important concerns regarding competition, concentration and welfare. This paper presents a novel linear demand approach that captures data and information effects in competitive markets, which are conveniently summarized in a precision parameter. Subsequently, the proposed approach is applied to study the firm’s incentives to exchange data and their impact in fundamental market variables, welfare and market concentration measures. We found that the incentives for data exchange between competitor firms emerge when the individual information gains are strong enough to compensate for the competitor’s information gains, and the associated strategic correlation effect between varieties. The results also suggest that market concentration tends to increase after data exchange, but both consumers and producers benefit from it. The reason is that better data allows firms to positioning closer to consumers’ needs.

Surprisingly, formal proof on the optimality of a linear decision rule in the discrete time AK model with a CRRA utility function has not been established in the growth literature while that in the continuous time counterpart is well-established. This note fills such a gap: I provide a formal proof that consumption being linearly related to investment is a sufficient and necessary condition for Pareto optimality in the discrete time AK model.

We study Butters’s (1977. “Equilibrium Distributions of Sales and Advertising Prices.” The Review of Economic Studies 44 (3): 465–91) model under concave advertising costs, and determine a class of cost functions such that each seller sends the same finite number of ads in equilibrium. Then we consider the limit economy where the number of buyers and sellers grow indefinitely, and show that the equilibrium of the finite economy does not converge to an equilibrium in the limit economy.