Showing papers in "Economic Theory in 2009"
TL;DR: In this article, the authors consider cost reducing R&D and allow manufacturing firms to decide whether to outsource the project to research subcontractors or carry out the research in-house, and find that allowing for revenue-sharing contracts increases the chance of outsourcing and improves economic efficiency.
Abstract: This paper looks at the outsourcing of research and development (R&D) activities. We consider cost reducing R&D and allow manufacturing firms to decide whether to outsource the project to research subcontractors or carry out the research in-house. We use a principal-agent framework and consider fixed and revenue-sharing contracts. We solve for the optimal contract under these constraints. We find that allowing for revenue-sharing contracts increases the chance of outsourcing and improves economic efficiency. However, the principal may still find it optimal to choose a contract that allows the leakage to occur—a second-best outcome when leakage cannot be monitored or verified. Stronger protection of trade secrets can induce more R&D outsourcing without inhibiting technology diffusion and increase economic efficiency, as long as it does not significantly lengthen the product cycle.
175 citations
TL;DR: In this paper, the authors show that when bidders are risk averse, both types of auctions raise seller revenue for a wide range of buy prices, and that the Yahoo format raises more revenue than the eBay format when buyers have either CARA or DARA.
Abstract: eBay and Yahoo allow sellers to list their auctions with a buy price at which a bidder may purchase the item immediately. On eBay, the buy-now option disappears once a bid is placed, while on Yahoo the buy-now option remains in effect throughout the auction. We show that when bidders are risk averse, both types of auctions raise seller revenue for a wide range of buy prices. The Yahoo format raises more revenue than the eBay format when bidders have either CARA or DARA. Bidders with DARA prefer the eBay auction, while bidders with CARA are indifferent between the two.
132 citations
TL;DR: The main feature of the new integral is concavity, which might be interpreted as uncertainty aversion, and it is extended to fuzzy capacities, which assign subjective expected values to random variables and may assign subjective probability only to a partial set of events.
Abstract: A new integral for capacities is introduced and characterized. It differs from the Choquet integral on non-convex capacities. The main feature of the new integral is concavity, which might be interpreted as uncertainty aversion. The integral is extended to fuzzy capacities, which assign subjective expected values to random variables (e.g., portfolios) and may assign subjective probability only to a partial set of events. An equivalence between the minimum over sets of additive capacities (not necessarily probability distributions) and the integral w.r.t. fuzzy capacities is demonstrated. The extension to fuzzy capacities enables one to calculate the integral also in cases where the information available is limited to a few events.
115 citations
TL;DR: This article extended the axiomatic characterization of contest success functions of Skaperdas (Econ Theory 7:283-290, 1996) and Clark and Riis (econ Theory 11:201-204, 1998) to contests between groups.
Abstract: This paper extends the axiomatic characterization of contest success functions of Skaperdas (Econ Theory 7:283–290, 1996) and Clark and Riis (Econ Theory 11:201–204, 1998) to contests between groups.
109 citations
TL;DR: In this article, it was shown that when there is enough competition, revelation benefits the auctioneer when there are two or more bidders, and this allocation effect applies to other standard auctions and parallels the bundling decision in a multi-unit auction.
Abstract: When there are two bidders, releasing independent information in an English auction with private values makes the seller worse off. However, this is no longer true with more bidders: when there is enough competition, revelation benefits the auctioneer. In three examples the dividing case is shown to be three bidders. This allocation effect applies to other standard auctions and parallels the bundling decision in a multi-unit auction.
95 citations
TL;DR: In this paper, the authors characterize optimal selling mechanisms in auction environments where bidders must incur a cost to learn their valuations, and they prove a general "full extraction of the surplus" result.
Abstract: We characterize optimal selling mechanisms in auction environments where bidders must incur a cost to learn their valuations. These mechanisms specify for each period, as a function of the bids in previous periods, which new potential buyers should be asked to bid. In addition, these mechanisms must induce the bidders to acquire information about their valuations and to reveal this information truthfully. Using a generalized Groves principle, we prove a very general “full extraction of the surplus” result: the seller can obtain the same profit as if he had full control over the bidders’ acquisition of information and could have observed directly their valuations once they are informed. We also present appealing implementations of the optimal mechanism in special cases.
93 citations
TL;DR: In this paper, an endogenous growth model with offshoring is proposed to investigate its effects on product innovation and growth in the country of origin, which is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the off-shored and domestic divisions of firms.
Abstract: We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms Production and transport cost parameters affect the static decision to relocate plants but not R&D Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions
92 citations
TL;DR: In this article, an overlapping generations model where consumption is the source of polluting emissions is developed, and the authors detect a sort of degenerated environmental Kuznets curve that corresponds to the equilibrium trajectory leading to the irreversible solution.
Abstract: This paper develops an overlapping generations model where consumption is the source of polluting emissions. Pollution stock accumulates with emissions but is partially assimilated by nature at each period. The assimilation capacity of nature is limited and vanishes beyond a critical level of pollution. We first show that multiple equilibria exist. More importantly, some exhibit irreversible pollution levels although an abatement activity is operative. Thus, the simple engagement of maintenance does not necessarily suffice to protect an economy against convergence toward a steady state having the properties of an ecological and economic poverty trap. In contrast with earlier related studies, the emergence of the environmental Kuznets curve is no longer the rule. Instead, we detect a sort of degenerated environmental Kuznets curve that corresponds to the equilibrium trajectory leading to the irreversible solution.
92 citations
TL;DR: The authors generalizes these axiomatizations to the case where each agent can have multiple types of investments and provides a unified framework to extend and interpret the results of Skaperdas and Riis.
Abstract: The key element of models of contest is the contest success function (CSF) which specifies the winning probabilities of agents. The existing axiomatizations of CSFs assume that contestants can make only one type of investment. This paper generalizes these axiomatizations to the case where each agent can have multiple types of investments. This allows us to provide a unified framework to extend and interpret the results of Skaperdas (Econ Theory 7:283–290, 1996) and Clark and Riis (Econ Theory 11:201–204, 1998), and rationalize some seemingly ad hoc CSFs used by applied researchers.
74 citations
TL;DR: In this paper, an axiomatic characterization of the dependence of human behavior on a reference point is provided, and the appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled.
Abstract: Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Last, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.
65 citations
TL;DR: In this paper, the authors consider the case where the buyer does not have commitment power and find that without commitment full disclosure of the buyer's preferences is optimal, while without commitment the value of this information can be negative.
Abstract: In a complex procurement a buyer may consider biasing the auction rules in order to account for differences in product characteristics offered by the sellers. This paper studies the gathering, disclosure and use of information about this bias. While we also describe the optimal procurement auction in our setting, the main focus of the paper is on the case where the buyer does not have commitment power. We find that without commitment full disclosure of the buyer’s preferences is optimal. Furthermore, lack of commitment distorts the buyer’s incentives to learn about its preferences: unlike the commitment case, without commitment the value of this information can be negative.
TL;DR: In this article, the authors present a pool formation mechanism which prevents welfare decreasing pool equilibria to emerge, and which encourages welfare enhancing pools to form, in order to destabilize welfare decreasing pools, forcing coalitions members to offer individual licenses in parallel to the pool.
Abstract: Patent pools in the framework of Lerner and Tirole (Am Econ Rev 94:691–711, 2004) may enhance or reduce social welfare. This paper presents a pool formation mechanism which prevents welfare decreasing pool equilibria to emerge, and which encourages welfare enhancing pools to form. In order to destabilize welfare decreasing pools, forcing coalitions members to offer individual licenses in parallel to the pool has been suggested. I show that in general, this mechanism is not an efficient antitrust tool. However, the mechanism combined with exclusive pool membership avoids stability problems of welfare enhancing pools, while it creates instability of welfare decreasing pools.
TL;DR: In this paper, Yannelis and Sun presented new methods to obtain purification results for continuum games based on standard measure theory and in particular on the super-nonatomicity notion introduced in Podczeck.
Abstract: This paper presents new methods to obtain purification results for continuum games, which don’t make use of the “many more players than strategies” assumption (Yannelis in Econ Theory (in press) 2007) or of Loeb spaces (Loeb and Sun in Illinois J Math 50, 747–762, 2006). The approach presented doesn’t use nonstandard analysis; it is based on standard measure theory and in particular on the super-nonatomicity notion introduced in Podczeck (J Math Econ (in press) 2007).
TL;DR: In this article, it was shown that multiplicity is generic in the sense that it occurs in an open set of decision problems, even with small state-and action-spaces.
Abstract: Infinite horizon dynamic optimization problems with non-exponential time preferences may not only exhibit time inconsistency but may also have multiple solutions with distinct payoffs. We here show that such multiplicity is generic in the sense that it occurs in an open set of such decision problems, even with small state- and action-spaces. Non-exponential discounting allows for an “addictive” equilibrium alongside a “virtuous” equilibrium. We also provide a sufficient condition for uniqueness in infinitely repeated decision problems with general action spaces.
TL;DR: In this article, the authors study simultaneous ascending auctions of two identical objects when bidders are financially constrained and their valuations exhibit complementarities, and characterize noncollusive equilibria.
Abstract: We study simultaneous ascending auctions of two identical objects when bidders are financially constrained and their valuations exhibit complementarities. We assume the budget constraints are known but the values for individual objects are private information, and characterize noncollusive equilibria. Equilibrium behavior is affected by the exposure problem. Bidders with higher budgets are more reluctant to bid, because opponents with lower budgets may end up pursuing a single object, thus preventing the realization of complementarities. Therefore poor bidders may win both objects when they do not have the highest valuation.
TL;DR: In this paper, a heterogeneous-firm trade model in the Ricardian model of comparative advantage with a continuum of sectors introduced by Dornbusch et al. is presented.
Abstract: This paper incorporates Melitz’s Econometrica (71:1695–1725, 2003) heterogeneous-firm trade model in the Ricardian model of comparative advantage with a continuum of sectors introduced by Dornbusch et al. (Am Econ Rev 67(5), 823–839, 1977). In particular, we characterise the equilibrium outcomes when neither sectors nor countries are symmetric. We find that trade patterns can follow Ricardian comparative advantage, while wage rates are proportional to market size due to a home market effect. Interestingly, trade liberalisation hurts the large country but benefits the small one by reducing the number of sectors with two-way trade and expanding those with specialised (one-way) trade.
TL;DR: In this paper, the authors show how the Middle Products framework can be reinterpreted to support variety in production and in labor skills in a competitive small-dimension international trade model and show how with trade production patterns, a country's labor force becomes more heterogeneous in its skills.
Abstract: Competitive small-dimension international trade models perform well in comparing free (or restrictive) trade with autarky, especially in emphasizing that consumption patterns can differ from production patterns and that production becomes highly concentrated while consumption patterns are expanded. Variations on these small-dimensional models can usefully show how with trade production patterns may nonetheless be more diverse and a country’s labor force become more heterogeneous in its skills. The paper illustrates how the Middle Products framework can be reinterpreted to support variety in production and in labor skills.
TL;DR: In this article, the authors provide a framework for implementing and comparing several solution concepts for transferable utility cooperative games and construct bidding mechanisms where players bid for the role of the proposer.
Abstract: This paper provides a framework for implementing and comparing several solution concepts for transferable utility cooperative games. We construct bidding mechanisms where players bid for the role of the proposer. The mechanisms differ in the power awarded to the proposer. The Shapley, consensus and equal surplus values are implemented in subgame perfect equilibrium outcomes as power shifts away from the proposer to the rest of the players. Moreover, an alternative informational structure where these solution concepts can be implemented without imposing any conditions of the transferable utility game is discussed as well.
TL;DR: In this paper, the authors consider the problem of assigning a finite number of indivisible objects, like jobs, houses, positions, etc., to the same number of individuals.
Abstract: This paper considers the problem of assigning a finite number of indivisible objects, like jobs, houses, positions, etc., to the same number of individuals. There is also a divisible good (money) and the individuals consume money and one object each. The class of fair allocation rules that are strategy-proof in the strong sense that no coalition of individuals can improve the allocation for all of its members, by misrepresenting their preferences, is characterized. It turns out that given a regularity condition, the outcome of a fair and coalitionally strategy-proof allocation rule must maximize the use of money subject to upper quantity bounds determined by the allocation rule. If available money is nonnegative, objects may be jobs and the distribution of money a wage structure. If available money is negative, the formal model may reflect a multi-object auction. In both cases fairness means equilibrium, i.e., that each individual receives a most demanded object.
TL;DR: In this paper, the Arrow-Debreu model is used to study trade ex ante with private state verification, and the notion of objects of choice as lists of bundles out of which the market selects one for delivery is introduced.
Abstract: In an economy with private information, we introduce the notion of objects of choice as lists of bundles out of which the market selects one for delivery. This leads to an extension of the model of Arrow–Debreu that is used to study trade ex ante with private state verification. Under the assumption that agents are prudent, equilibrium is characterized by the fact that agents consume bundles with the same utility in states that they do not distinguish. This is a weaker condition than the restriction of equal consumption imposed by Radner (Econometrica 36(1), 31–58, 1968), therefore, some no trade situations are avoided and the efficiency of trade increases.
TL;DR: In this article, the optimal allocation of decision rights depends on the preferences of the organization's members and adopts a mechanism-design approach to show how the communication of private information affects the efficient allocation of authority.
Abstract: The assignment of authority entitles the decision maker to undertake decisions that impose externalities on the payoffs of other members of the organization. This paper studies how the optimal allocation of decision rights depends on the preferences of the organization’s members. It adopts a mechanism-design approach to show how the communication of private information affects the efficient allocation of authority. An extension to multiple decision areas shows that decentralized control rights may enhance organizational efficiency unless there exist strong complementarities between different decisions.
TL;DR: This paper identifies sufficient conditions under which it is in the seller’s interest to limit the number of potential bidders even if the revenue-maximizing symmetric threshold-entry auction is adopted.
Abstract: This paper studies revenue-maximizing auctions in an independent private value setting where potential bidders have known positive opportunity cost of bidding. The main findings are as follows. Firstly, there is no loss of generality in deriving the revenue-maximizing auctions within the class of threshold-entry mechanisms. Secondly, for any given set of entry thresholds, a second-price sealed-bid auction with properly set reserve prices and entry subsidy is revenue-maximizing. Thirdly, a variety of auctions are revenue-maximizing within the symmetric threshold-entry class. Two of them involve no entry subsidy (fee). Fourthly, we identify sufficient conditions under which it is in the seller’s interest to limit the number of potential bidders even if the revenue-maximizing symmetric threshold-entry auction is adopted. Lastly, the revenue-maximizing auction implements asymmetric entry across symmetric bidders in many cases.
TL;DR: In this article, a new Pareto-type criterion for social welfare functions over infinite utility streams that is not necessarily sensitive to increments in just a finite number of components is introduced, and it is shown that there is no social welfare function that satisfies both this criterion and Diamond's equity condition simultaneously.
Abstract: We introduce a new Pareto-type criterion for social welfare functions over infinite utility streams that is not necessarily sensitive to increments in just a finite number of components. We show that there is no social welfare function that satisfies both this criterion and Diamond’s equity condition simultaneously. With our result, we extend the impossibility theorem of Basu and Mitra. Moreover, we show that, even under a weaker version of equity related to Zame’s intergenerational equity condition, the impossibility results are obtained as well.
TL;DR: In this paper, a simple proof of equivalence between ex ante and ex post budget balance constraints in Bayesian mechanism design with independent types when participation decisions are made at the interim stage is given.
Abstract: We provide a simple proof of the equivalence between ex ante and ex post budget balance constraints in Bayesian mechanism design with independent types when participation decisions are made at the interim stage. The result is given an interpretation in terms of efficient allocation of risk.
TL;DR: In this paper, the authors provide several different generalizations of Debreu's social equilib- rium theorem by allowing for asymmetric information and a continuum of agents, which is achieved by imposing the assumption of many more agents than strategies.
Abstract: We provide several different generalizations of Debreu's social equilib- rium theorem by allowing for asymmetric information and a continuum of agents. The results not only extend the ones in Kim and Yannelis (J Econ Theory 77:330-353, 1977), Yannelis and Rustichini (Stud Econ Theory 2:23-48, 1991), but also new theo- rems are obtained which allow for a convexifying effect on aggregation (non-concavity assumption on the utility functions) and non-convex strategy sets (pure strategies). This is achieved by imposing the assumption of "many more agents than strategies" (Rustichini and Yannelis in Stud Econ Theory 1:249-265, 1991; Tourky and Yannelis in J Econ Theory 101:189-221, 2001; Podczeck in Econ Theory 22:699-725, 2003).
TL;DR: In this paper, the authors investigate how evolutionary stability, the existence of a uniform invasion barrier, local superiority and asymptotic stability relate to each other in games with continuous action spaces.
Abstract: Allowing for games with a continuous action space, we investigate how evolutionary stability, the existence of a uniform invasion barrier, local superiority and asymptotic stability relate to each other. This is done without restricting the populations of which we want to investigate the stability to monomorphic population states or to strategies with finite support.
TL;DR: In this article, the authors combine the classical approach to inequality, based on the division of society into classes with different saving propensities, and the social conflict approach, in which inequality inflicts costs to growth.
Abstract: This paper combines the classical approach to inequality, based on the division of society into classes with different saving propensities, and the social conflict approach, in which inequality inflicts costs to growth. We assume that each consumer’s discount factor is endogenously determined through two channels: (1) it is positively related to the consumer’s relative wealth, and (2) negatively affected by an aggregate measure of social conflict. Unlike in models with exogenous discount rates, steady state equilibria are indeterminate and the set of equilibria is a continuum parameterized by an index of income inequality. Under reasonable assumptions, the relationship between growth and inequality has an inverted-U shape.
TL;DR: This paper showed that a well-behaved utility function can generate Giffen behavior, where "wellbehaved" means that its indifference curves are smooth, convex, and closed in a commodity space; the resulting demand function of each good is differentiable with respect to prices and income.
Abstract: We demonstrate that a well-behaved utility function can generate Giffen behavior, where “well-behaved” means that its indifference curves are smooth, convex, and closed in a commodity space; the resulting demand function of each good is differentiable with respect to prices and income. Moreover, we show that Giffen behavior is compatible with any level of utility and an arbitrarily low share of income spent on the inferior good. This contrasts sharply with the common view that the Giffen paradox tends to occur when households’ wealth levels are low.
TL;DR: This paper investigated the implications of status-seeking behavior, induced by preferences for relative income, for the evolution of income inequality using an overlapping generations model, and showed that income inequality is shrinking over time in the KUJ economy, whereas it is expanding in the RAJ economy.
Abstract: Using an overlapping generations model, this paper investigates the implications of status-seeking behavior, induced by preferences for relative income, for the evolution of income inequality. When average income rises, an individual’s marginal utility of their own income may increase (keeping up with the Joneses, or KUJ), or decrease (running away from the Joneses, or RAJ). It is shown that income inequality is shrinking over time in the KUJ economy, whereas it is expanding in the RAJ economy. We also explore the implications for long-run growth and inequality, in the existence of both KUJ and RAJ agents.
TL;DR: This paper examined the rationale for multilateral agreements to limit investment subsidies and showed that when spillovers are low and competition is intense, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to nonintervention.
Abstract: This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are “friendly”, raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.