Showing papers by "Jean Tirole published in 2016"

Mindful Economics: The Production, Consumption, and Value of Beliefs

Abstract: In the economic models of old, agents had backward-looking expectations, arising from simple extrapolation or error-correction rules. Then came the rational-expectations revolution in macroeconomics, and in microeconomics the spread and increasing refinements of modern game theory. Agents were now highly sophisticated information processors, who could not be systematically fooled. This approach reigned for several decades until the pendulum swung back with the rise of behavioral economics and its emphasis on “heuristics and biases” (as in Tversky and Kahneman 1974). Overconfidence, confirmation bias, distorted probability weights, and a host of other “wired-in” cognitive mistakes are now common assumptions in many areas of economics. Over the last decade or so, the pendulum has started to swing again toward some form of adaptiveness, or at least implicit purposefulness, in human cognition. In this paper, we provide a perspective into the main ideas and findings emerging from the growing literature on motivated beliefs and reasoning. This perspective emphasizes that beliefs often fulfill important psychological and functional needs of the individual. Economically relevant examples include confidence in ones’ abilities, moral self-esteem, hope and anxiety reduction, social identity, political ideology and religious faith. People thus hold certain beliefs in part because

Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops

Abstract: The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.

Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization

Abstract: Game theory has had a deep impact on the theory of industrial organization, in a similar (but less controversial) way as the rational expectations revolution in macroeconomics. The reason it has been embraced by a majority of researchers in the field is that it imposes some discipline on theoretical thinking. It forces economists to clearly specify the strategic variables, their timing, and the information structure faced by firms. As is often the case in economics, the researcher learns as much from constructing the model (the "extensive form") as from

Bonus culture: : Competitive pay, screening, and multitasking

Abstract: To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.

Optimal Bypass and Cream Skimming

Abstract: This paper develops a normative model of regulatory policy toward bypass and cream skimming It analyzes the effects of bypass on second-degree price discrimination, on the rent of the regulated firm, and on the welfare of low-demand customers It shows that pricing under marginal cost may be optimal for the regulated firm, excessive cream skimming occurs if access to the bypass technology is not regulated, and the prohibition of bypass may increase or decrease the regulated firm's rent (JEL 026, 613) The regulation of "natural monopolies" is often associated with policies toward competition, including restrictions on entry This paper is concerned with a common form of competition, which threatens the regulated firm on its most lucrative markets Examples abound: in the telecommunications industry, the development of microwave radio and communication satellites in the 1960's introduced the possibility that big telecommunication customers might bypass the major common carrier (ATT and the 1978 Natural Gas Policy Act in the United States has created the possibility for industrial plants to bypass the local distribution utilities by building direct connections to the pipelines, gas producers, or intermediaries

From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection

Abstract: In a number of interesting environments, dynamic screening involves positive selection: in contrast with Coasian dynamics, only the most motivated remain over time. The paper provides conditions under which the principal's commitment optimum is time consistent and uses this result to derive testable predictions under permanent or transient shocks. It also identifies environments in which time consistency does not hold despite positive selection, and yet simple equilibrium characterizations can be obtained.

Patent Disclosures and Standard-Setting

Abstract: A key role of standard setting organizations (SSOs) is to aggregate information on relevant intellectual property (IP) claims before deciding on a standard. This article explores the firms’ strategies in response to IP disclosure requirements—in particular, the choice between specific and generic disclosures of IP—and the optimal response by SSOs, including the royalty rate setting. We show that firms with a stronger downstream presence are more likely to opt for a generic disclosure, as are those with lower quality patents. We empirically examine patent disclosures made to seven large SSOs, and find results consistent with theoretical predictions.