When does universal peace prevail? Secession and group formation in rent seeking contests and policy conflicts

This paper analyzes secession and group formation in a general model of contest inspired by Esteban and Ray (1999). This model encompasses as special cases rent seeking contests and policy conflicts, where agents lobby over the choice of a policy in a one-dimensional policy space. We show that in both models the grand coalition is the efficient coalition structure and agents are always better off in the grand coalition than in a symmetric coalition structure. Individual agents (in the rent seeking contest) and extremists (in the policy conflict) only have an incentive to secede when they anticipate that their secession will not be followed by additional secessions. Incentives to secede are lower when agents cooperate inside groups. The grand coalition emerges as the unique subgame perfect equilibrium outcome of a sequential game of coalition formation in rent seeking contests.

Rational sabotage in cooperative production

In this paper we consider a model of cooperative production in which rational agents have the possibility to engage in sabotage activities that decrease output. It is shown that sabotage depends on the interplay between the degree of congestion, the technology of sabotage, the number of agents the degree of meritocracy and the form of the sharing rule. In particular it is shown that, ceteries paribus, meritocratic systems give more incentives to sabotage than egalitarian systems. We address two questions: The degree of meritocracy that is compatible with absence of sabotage and the existence of a Nash equilibrium with and without sabotage.

Can competition in the credit market be excessive?

We study how market power affects investment and welfare when banks choose between restricting loan sizes and monitoring, in order to alleviate an underlying moral hazard problem. The impact of market power on aggregate welfare is the result of two countervailing effects. An increase in banks' market power results in: (i) higher lending rates, which worsens the borrower's incentive problem and reduces investment by unmonitored firms, (ii) higher monitoring effort, which reduces the proportion of credit-constrained firms. Whenever the second effect dominates, it is optimal to provide banks with some degree of market power.

Preventive health care and payment systems to providers

Prevention has been a main issue of recent policy orientations in health care. This renews the interest on how different organizational designs and the definition of payment schemes to providers may affect the incentives to provide preventive health care. We present, both the normative and the positive analyses of the change from independent providers to integrated services. We show the evaluation of that change to depend on the particular way payment to providers is done. We focus on the externality resulting from referral decisions from primary to acute care providers. This makes our analysis complementary to most works in the literature allowing to address in a more direct way the issue of preventive health care.

A dual characterization of incentive efficiency

We show that incentive efficient allocations in economies with adverse selection and moral hazard can be determined as optimal solutions to a linear programming problem and we use duality theory to obtain a complete characterization of the optima. Our dual analysis identifies welfare effects associated with the incentives of the agents to truthfully reveal their private information. Because these welfare effects may generate non-convexities, incentive efficient allocations may involve randomization. Other properties of incentive efficient allocations are also derived.

Candidate stability and voting correspondences

We study the incentives of candidates to enter or to exit elections in order to strategically affect the outcome of a voting correspondence. We extend the results of Dutta, Jackson and Le Breton (2000), who only considered single-valued voting procedures by admitting that the outcomes of voting may consist of sets of candidates. We show that, if candidates form their preferences over sets according to Expected Utility Theory and Bayesian updating, every unanimous and non dictatorial voting correspondence violates candidate stability. When candidates are restricted to use even chance prior distributions, only dictatorial or bidictatorial rules are unanimous and candidate stable. We also analyze the implications of using other extension criteria to define candidate stability that open the door to positive results.

Research policy and endogenous growth

This paper studies the effects of different types of research policy on economic growth. We find that while tax incentives to private research, public funding of private projects, and basic research performed at public institutions have unambiguously positive effects on economic growth, performing applied research at public institutions could have negative growth effects. This is due to the large crowding out of private research caused by public R\&D when it competes with private firms in the "patent race". Concerning the effects of these policies on welfare, it is found that research policy can either improve or reduce consumer welfare depending on the characteristics of the policy and that an excessively high research subsidy will reduce it.

Corporate governance in banking: the role of board of directors

We test hypotheses on the dual role of boards of directors for a sample of large international commercial banks. We find an inverted U shaped relation between bank performance and board size that justifies a large board and imposes an efficient limit to the board’s size; a positive relation between the proportion of non-executive directors and performance; and a proactive role in board meetings. Our results show that bank boards’ composition and functioning are related to directors’ incentives to monitor and advise management. All these relations hold after we control for bank business, institutional differences, size, market power in the banking industry, bank ownership and investors’ legal protection.

Demand elasticity and market power in the spanish electricity market

In this paper we check whether generator's bid behavior at the Spanish whosale electricity market is consistent with the hypothesis of profit maximization on their residual demands. Using OMEL data, we find the arc-elacticity of the residual demand around the system marginal price. The results suggest thet the larger firms are not actually profit-msximization. We argue how the regulatory environment may drive these results. Finally, we repeat the analysis for the first session of the intra-day market where presumably firms may not have the same incentives as in the day-ahead market.

Leadership and overcoming coordination failure with asymmetric costs

We study how the heterogeneity of agents affects the extent to which changes in financial incentives can pull a group out of a situation of coordination failure. We focus on the connections between cost asymmetries and leadership. Experimental subjects interact in groups of four in a series of weak-link games. The treatment variable is the distribution of high and low effort cost across subjects. We present data for one, two and three low-cost subjects as well as control sessions with symmetric costs. The overall pattern of coordination improvement is common across treatments. Early coordination improvements depend on the distribution of high and low effort costs across subjects, but these differences disappear with time. We find that initial leadership in overcoming coordination failure is not driven by low-cost subjects but by subjects with the most frequent cost. This conformity effect can be due to a kind of group identity or to the cognitive simplicity of acting with identical others.

Frames and games

Decision-makers are sometimes influenced by the way in which choice situations are presented to them or "framed" This can be seen as an important challenge to the social sciences, since strong and pervasive framing effects would make it difficult to study human behavior in a synthetic or theoretic manner. We present results from experiments with dilemma games designed to shed light on the effects of several frame variations. We study, among others, the particular public bad frame used by Andreoni (1995) and two more naturalistic frames involving stories. Our results show that none of the frame manipulations have a significant effect on average behavior, but we do find some effects on extreme behavior. We also find that incentives do matter where frames do not matter.

Democracy and the curse of natural resources

We propose a theoretical model to explain empirical regularities related to the curse of natural resources. This is an explicitly political model which emphasizes the behavior and incentives of politicians. We extend the standard voting model to give voters political control beyond the elections. This gives rise to a new restriction into our political economy model: policies should not give rise to a revolution. Our model clarifies when resource discoveries might lead to revolutions, namely, in countries with weak institutions. Natural resources may be bad for democracy by harming political turnover. Our model also suggests a non-linear dependence of human capital on natural resources. For low levels of democracy human capital depends negatively on natural resources, while for high levels of democracy the dependence is reversed. This theoretical finding is corroborated in both cross section and panel data regressions.

The Spread of free-riding behavior in a social network

We study a model where agents, located in a social network, decide whether to exert effort or not in experimenting with a new technology (or acquiring a new skill, innovating, etc.). We assume that agents have strong incentives to free ride on their neighbors' effort decisions. In the static version of the model efforts are chosen simultaneously. In equilibrium, agents exerting effort are never connected with each other and all other agents are connected with at least one agent exerting effort. We propose a mean-field dynamics in which agents choose in each period the best response to the last period's decisions of their neighbors. We characterize the equilibrium of such a dynamics and show how the pattern of free riders in the network depends on properties of the connectivity distribution.

Business-science research collaboration under moral hazard

I analyze, in the context of business and science research collaboration, how the characteristics of partnership agreements are the result of an optimal contract between partners. The final outcome depends on the structure governing the partnership, and on the informational problems towards the efforts involved. The positive effect that the effort of each party has on the success of the other party, makes collaboration a preferred solution. Divergence in research goals may, however, create conflicts between partners. This paper shows how two different structures of partnership governance (a centralized, and a decentralized ones) may optimally use the type of project to motivate the supply of non-contractible efforts. Decentralized structure, however, always choose a project closer to its own preferences. Incentives may also come from monetary transfers, either from partners sharing each other benefits, or from public funds. I derive conditions under which public interventio

Codes of best practice in competitive markets for managers

We study firms' corporate governance in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers. A firm, formed by a shareholder and a manager, can sign either an incentive contract or a contract including a Code of Best Practice. A Code allows for a better manager's control but makes manager's decisions hard to react when market conditions change. It tends to be adopted in markets with low volatility and in low-competitive environments. The firms with the best projects tend to adopt the Code when managers are not too heterogeneous while the best managers tend to be hired through incentive contracts when the projects are similar. Although the matching between shareholders and managers is often positively assortative, the shareholders with the best projects might be willing to renounce to hire the best managers, signing contracts including Codes with lower-ability managers.