Bargaining for power and information : an experimental and theoretical analysis of the interaction between institutions, externalities and adverse selection

Bargaining is the building block of many economic interactions, ranging from bilateral to multilateral encounters and from situations in which the actors are individuals to negotiations between firms or countries. In all these settings, economists have been intrigued for a long time by the fact that some projects, trades or agreements are not realized even though they are mutually beneficial. On the one hand, this has been explained by incomplete information. A firm may not be willing to offer a wage that is acceptable to a qualified worker, because it knows that there are also unqualified workers and cannot distinguish between the two types. This phenomenon is known as adverse selection. On the other hand, it has been argued that even with complete information, the presence of externalities may impede efficient outcomes. To see this, consider the example of climate change. If a subset of countries agrees to curb emissions, non-participant regions benefit from the signatories’ efforts without incurring costs. These free riding opportunities give rise to incentives to strategically improve ones bargaining power that work against the formation of a global agreement. This thesis is concerned with extending our understanding of both factors, adverse selection and externalities. The findings are based on empirical evidence from original laboratory experiments as well as game theoretic modeling. On a very general note, it is demonstrated that the institutions through which agents interact matter to a large extent. Insights are provided about which institutions we should expect to perform better than others, at least in terms of aggregate welfare. Chapters 1 and 2 focus on the problem of adverse selection. Effective operation of markets and other institutions often depends on good information transmission properties. In terms of the example introduced above, a firm is only willing to offer high wages if it receives enough positive signals about the worker’s quality during the application and wage bargaining process. In Chapter 1, it will be shown that repeated interaction coupled with time costs facilitates information transmission. By making the wage bargaining process costly for the worker, the firm is able to obtain more accurate information about the worker’s type. The cost could be pure time cost from delaying agreement or cost of effort arising from a multi-step interviewing process. In Chapter 2, I abstract from time cost and show that communication can play a similar role. The simple fact that a worker states to be of high quality may be informative. In Chapter 3, the focus is on a different source of inefficiency. Agents strive for bargaining power and thus may be motivated by incentives that are at odds with the socially efficient outcome. I have already mentioned the example of climate change. Other examples are coalitions within committees that are formed to secure voting power to block outcomes or groups that commit to different technological standards although a single standard would be optimal (e.g. the format war between HD and BlueRay). It will be shown that such inefficiencies are directly linked to the presence of externalities and a certain degree of irreversibility in actions. I now discuss the three articles in more detail. In Chapter 1, Olivier Bochet and I study a simple bilateral bargaining institution that eliminates trade failures arising from incomplete information. In this setting, a buyer makes offers to a seller in order to acquire a good. Whenever an offer is rejected by the seller, the buyer may submit a further offer. Bargaining is costly, because both parties suffer a (small) time cost after any rejection. The difficulties arise, because the good can be of low or high quality and the quality of the good is only known to the seller. Indeed, without the possibility to make repeated offers, it is too risky for the buyer to offer prices that allow for trade of high quality goods. When allowing for repeated offers, however, at equilibrium both types of goods trade with probability one. We provide an experimental test of these predictions. Buyers gather information about sellers using specific price offers and rates of trade are high, much as the model’s qualitative predictions. We also observe a persistent over-delay before trade occurs, and this mitigates efficiency substantially. Possible channels for over-delay are identified in the form of two behavioral assumptions missing from the standard model, loss aversion (buyers) and haggling (sellers), which reconcile the data with the theoretical predictions. Chapter 2 also studies adverse selection, but interaction between buyers and sellers now takes place within a market rather than isolated pairs. Remarkably, in a market it suffices to let agents communicate in a very simple manner to mitigate trade failures. The key insight is that better informed agents (sellers) are willing to truthfully reveal their private information, because by doing so they are able to reduce search frictions and attract more buyers. Behavior observed in the experimental sessions closely follows the theoretical predictions. As a consequence, costless and non-binding communication (cheap talk) significantly raises rates of trade and welfare. Previous experiments have documented that cheap talk alleviates inefficiencies due to asymmetric information. These findings are explained by pro-social preferences and lie aversion. I use appropriate control treatments to show that such consideration play only a minor role in our market. Instead, the experiment highlights the ability to organize markets as a new channel through which communication can facilitate trade in the presence of private information. In Chapter 3, I theoretically explore coalition formation via multilateral bargaining under complete information. The environment studied is extremely rich in the sense that the model allows for all kinds of externalities. This is achieved by using so-called partition functions, which pin down a coalitional worth for each possible coalition in each possible coalition structure. It is found that although binding agreements can be written, efficiency is not guaranteed, because the negotiation process is inherently non-cooperative. The prospects of cooperation are shown to crucially depend on i) the degree to which players can renegotiate and gradually build up agreements and ii) the absence of a certain type of externalities that can loosely be described as incentives to free ride. Moreover, the willingness to concede bargaining power is identified as a novel reason for gradualism. Another key contribution of the study is that it identifies a strong connection between the Core, one of the most important concepts in cooperative game theory, and the set of environments for which efficiency is attained even without renegotiation.

Distribution and Transmission of Medicinal Plant Knowledge in the Andean Highlands: A Case Study from Peru and Bolivia

This paper presents a study of patterns in the distribution and transmission of medicinal plant knowledge in rural Andean communities in Peru and Bolivia. Interviews and freelisting exercises were conducted with 18 households at each study site. The amount of medicinal plant knowledge of households was compared in relation to their socioeconomic characteristics. Cluster analysis was applied to identify households that possessed similar knowledge. The different modes of knowledge transmission were also assessed. Our study shows that while the amount of plant knowledge is determined by individual motivation and experience, the type of knowledge is influenced by the community of residence, age, migratory activity, and market integration. Plant knowledge was equally transmitted vertically and horizontally, which indicates that it is first acquired within the family but then undergoes transformations as a result of subsequent contacts with other knowledge sources, including age peers.

Developmental changes of BOLD signal correlations with global human EEG power and synchronization during working memory

In humans, theta band (5-7 Hz) power typically increases when performing cognitively demanding working memory (WM) tasks, and simultaneous EEG-fMRI recordings have revealed an inverse relationship between theta power and the BOLD (blood oxygen level dependent) signal in the default mode network during WM. However, synchronization also plays a fundamental role in cognitive processing, and the level of theta and higher frequency band synchronization is modulated during WM. Yet, little is known about the link between BOLD, EEG power, and EEG synchronization during WM, and how these measures develop with human brain maturation or relate to behavioral changes. We examined EEG-BOLD signal correlations from 18 young adults and 15 school-aged children for age-dependent effects during a load-modulated Sternberg WM task. Frontal load (in-)dependent EEG theta power was significantly enhanced in children compared to adults, while adults showed stronger fMRI load effects. Children demonstrated a stronger negative correlation between global theta power and the BOLD signal in the default mode network relative to adults. Therefore, we conclude that theta power mediates the suppression of a task-irrelevant network. We further conclude that children suppress this network even more than adults, probably from an increased level of task-preparedness to compensate for not fully mature cognitive functions, reflected in lower response accuracy and increased reaction time. In contrast to power, correlations between instantaneous theta global field synchronization and the BOLD signal were exclusively positive in both age groups but only significant in adults in the frontal-parietal and posterior cingulate cortices. Furthermore, theta synchronization was weaker in children and was--in contrast to EEG power--positively correlated with response accuracy in both age groups. In summary we conclude that theta EEG-BOLD signal correlations differ between spectral power and synchronization and that these opposite correlations with different distributions undergo similar and significant neuronal developments with brain maturation.