Recontracting and competition

We characterize the set of Walrasian allocations of an economy as theset of allocations which can be supported by abstract equilibria that satisfy a recontracting condition which reflects the idea that agents can freely trade with each other. An alternative (and weaker) recontracting condition characterizesthe core. The results are extended to production economies by extending thedefinition of the recontracting condition to include the possibility of agentsto recontract with firms. However, no optimization requirement is imposed onfirms. In pure exchange economies, an abstract equilibrium is a feasible allocation and a list of choice sets, one for each agent, that satisfy thefollowing conditions: an agent's choice set is a subset of the commodity space that includes his endowment; and each agent's equilibrium bundle isa maximal element in his choice set, with respect to his preferences. Therecontracting condition requires that any agent can buy bundles from any other agent's choice set by offering the other agent a bundle he prefers tohis equilibrium bundle.

An agenda-setting model of electoral competition

This paper presents a model of electoral competition focusing on the formation of thepublic agenda. An incumbent government and a challenger party in opposition competein elections by choosing the issues that will key out their campaigns. Giving salience toan issue implies proposing an innovative policy proposal, alternative to the status-quo.Parties trade off the issues with high salience in voters concerns and those with broadagreement on some alternative policy proposal. Each party expects a higher probabilityof victory if the issue it chooses becomes salient in the voters decision. But remarkably,the issues which are considered the most important ones by a majority of votes may notbe given salience during the electoral campaign. An incumbent government may survivein spite of its bad policy performance if there is no sufficiently broad agreement on apolicy alternative. We illustrate the analytical potential of the model with the case of theUnited States presidential election in 2004.

Dynamic price competition with fixed capacities

Many revenue management (RM) industries are characterized by (a) fixed capacities in theshort term (e.g., hotel rooms, seats on an airline flight), (b) homogeneous products (e.g., twoairline flights between the same cities at similar times), and (c) customer purchasing decisionslargely influenced by price. Competition in these industries is also very high even with just twoor three direct competitors in a market. However, RM competition is not well understood andpractically all known implementations of RM software and most published models of RM donot explicitly model competition. For this reason, there has been considerable recent interestand research activity to understand RM competition. In this paper we study price competitionfor an oligopoly in a dynamic setting, where each of the sellers has a fixed number of unitsavailable for sale over a fixed number of periods. Demand is stochastic, and depending on howit evolves, sellers may change their prices at any time. This reflects the fact that firms constantly,and almost costlessly, change their prices (alternately, allocations at a price in quantity-basedRM), reacting either to updates in their estimates of market demand, competitor prices, orinventory levels. We first prove existence of a unique subgame-perfect equilibrium for a duopoly.In equilibrium, in each state sellers engage in Bertrand competition, so that the seller withthe lowest reservation value ends up selling a unit at a price that is equal to the equilibriumreservation value of the competitor. This structure hence extends the marginal-value conceptof bid-price control, used in many RM implementations, to a competitive model. In addition,we show that the seller with the lowest capacity sells all its units first. Furthermore, we extendthe results transparently to n firms and perform a number of numerical comparative staticsexploiting the uniqueness of the subgame-perfect equilibrium.

Competition, innovation and growth with limited commitment

We study how barriers to business start-up affect the investment in knowledge capital when contracts are not enforceable. Barriers to business start-up lower the competition for knowledge capital and, in absence of commitment, reduce the incentive to accumulate knowledge. As a result, countries with large barriers experience lower income and growth. Our results are consistent with cross-country evidence showing that the cost of business start-up is negatively correlated with the level and growth of income.

Globalization and the provision of incentives inside the firm: The effect of foreign competition

This paper studies the effect of changes in foreign competition on the structureof compensation and incentives of U.S. executives. We measure foreign competitionas import penetration and use tariffs and exchange rates as instrumental variables toestimate its causal effect on pay. We find that higher foreign competition leads tomore incentive provision in a variety of ways. First, it increases the sensitivity of payto performance. Second, it increases whithin-firm pay differentials between executivelevels, with CEOs typically experiencing the largest wage increases, partly becausethey receive the steepest incentive contracts. Finally, higher foreign competition is alsoassociated with a higher demand for talent. These results indicate that increased foreigncompetition can explain some of the recent trends in compensation structures.

The effect of intergroup competition on group coordination: An experimental study

We report an experiment on the effect of intergroup competition on group coordination in the minimal-effort game (Van Huyck et al., 1990). The competition was between two 7-person groups. Each player in each group independently chose an integer from 1 to 7. The group with the higher minimum won the competition and each of its members was paid according to the game s original payoff matrix. Members of the losing group were paid nothing. In case of a tie, each player was paid half the payoff in the original matrix. This treatment was contrasted with two control treatments where each of the two groups played an independent coordination game, either with or without information about the minimum chosen by the outgroup. Although the intergroup competition does not change the set of strict equilibria, we found that it improved collective rationality by moving group members in the direction of higher-payoff equilibria. Merely providing group members with information about the minimal-effort level in the other group was not sufficient to generate this effect.

Managing competition in professional services and the burden of inertia

Professional services require certain organizational patterns in order to avoid information asymmetries and external effects. These same patterns are used within production structures involving various degrees of monopoly. However, competitive restraints are justified today only when substantial external effects are clearly present, whereas information asymmetries hardly justify such restraints because reputational investments have become widespread in the economy and are relatively efficient in overcoming such asymmetries. As a consequence, innovation in the production of externalities can make competitive constraints unnecessary.

Bundling electronic journals and competition among publishers

Site licensing of e-journals has been revolutionizing the way academicinformation is distributed. However, many librarians are concerned aboutthe possibility that publishers might abuse site licensing by practicingbundling. In this paper, we analyze the private and social incentives forthe publishers to use bundling in the context of STM electronic journalmarket. In the short run in which the number of journals is exogenouslygiven, we find a strong conflict between the two incentives: each publisherfinds bundling optimal and bundling increases the industry profit butreduces social welfare. However, in the long run we find that publishersmight have higher incentives to introduce new journals under bundlingthan without bundling and, in this case, bundling can reduce the industryprofit while increasing social welfare. Finally, we examine publishers incentive to provide links to the websites of the rival publishers underbundling and show that even asymmetric publishers have incentive tointerconnect.

Partisan competition, growth and the franchise

We present an argument for changes in the franchise in which an elite split along economic interests use the suffrage to influence implemented policies. Through the influence of these policies on the character of industrialization, we analyze the effects of franchise changes on economic growth. We identify in the social structure of society an explanation for the connection between enfranchisement and growth: When (1) there exist an economic conflict among the elite, (2) landed classes are not politically strong, and (3) there exists a critical mass of industrial workers, we observe both growth and democratization. The lack of conditions (1) or (2) resolves in stagnant autocracies while the absence of condition (3) drives growth-deterring democratic expansions. We provide historical support for our argument by analyzing the experience of 11 countries.

Strategic ambiguity in electoral competition

Many have observed that political candidates running for election areoften purposefully expressing themselves in vague and ambiguous terms. In thispaper we provide a simple formal model of this phenomenon. We model theelectoral competition between two candidates as a two--stage game. In thefirst stage of the game two candidates simultaneously choose their ideologies,and in the second stage they simultaneously choose their level of ambiguity.Our results show that ambiguity, although disliked by voters, may be sustainedin equilibrium. The introduction of ambiguity as a strategic choice variablefor the candidates can also serve to explain why candidates with the sameelectoral objectives end up ``separating'', that is, assuming different ideological positions.

Competition and cost overruns. Optimal misspecification of procurement contracts

Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper deals with the problem of design specification in public procurement and provides a rationale for design misspecification. We propose a model in which the sponsor decides how much to invest in design specification and awards competitively the project to a contractor. After the project has been awarded the sponsor engages in bilateral renegotiation with the contractor, in order to accommodate changes in the initial project s design that new information makes desirable. When procurement takes place in the presence of horizontally differentiated contractors, the design s specification level is seen to affect the resulting degree of competition. The paper highlights this interaction between market competition and design specification and shows that the sponsor s optimal strategy, when facing an imperfectly competitive market supply, is to underinvest in design specification so as to make significant cost overruns likely. Since no such misspecification occurs in a perfectly competitive market, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.

Allocating ideas: Horizontal competition in tournaments

We develop a stylized model of horizontal and vertical competition intournaments with two competing firms. The sponsor cares about the qualityof the design but also about the design location. A priori not even thesponsor knows his preferred design location, which is only discoveredonce he has seen the actual proposals. We show that the more efficientfirm is more likely to be conservative when choosing the design location.Also, to get some differentiation in design locations, the cost differencebetween contestants can neither be too small nor too big. Therefore, ifthe sponsor mainly cares about the design location, participation in thetournaments by the two lowest cost contestants cannot be optimal for thesponsor.