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.

Evaluating Code Duplication to Identify Rich Business Objects from Data Transfer Objects

Java Enterprise Applications (JEAs) are complex software systems written using multiple technologies. Moreover they are usually distributed systems and use a database to deal with persistence. A particular problem that appears in the design of these systems is the lack of a rich business model. In this paper we propose a technique to support the recovery of such rich business objects starting from anemic Data Transfer Objects (DTOs). Exposing the code duplications in the application's elements using the DTOs we suggest which business logic can be moved into the DTOs from the other classes.

Regulatory Objectives for Contemporary Electronic Communications : Talking Business or Talking Culture?

The common mantra in telecommunications regulatory fora (be it national, regional or international) now goes along the lines of 'deregulation-good; regulation-bad' and competition is said to be the ultimate answer to basically every question. A generalised dictum like this is in itself suspicious and even more so, when it refers to a sector such as telecommunications, which has a history of heavy regulation and has been the very epitome of state intervention. In the contemporary environment of vibrant communications, subcribing to a purely 'black-or-white' aproach may be, to put it mildly, unsafe. Before answering the question of appropriate regulatory model for communications markets, it is essential to figure out what goals are to be pursued in order to consider what kind of measures could bring about their attainment. In the words of Robert Bork, 'only when the issue of goals has been settled is it possible to frame a coherent body of substantive rules'. Against this backdrop, the present paper looks into the goals and objectives of telecommunications regulation, their complexity and inherent tension between commercial and public interests.

Making business in the open: coping with economic and institutional risk and insecurity in the Kafue flats, Zambia

This paper deals with the difference between risk and insecurity from an anthropological perspective using a critical New Institutionalist approach. Risk refers to the ability to reduce undesirable outcomes, based on a range of information actors have on possible outcomes; insecurity refers to the lack of this information. With regard to the neo-liberal setting of a resource rich area in Zambia, Central Africa, local actors – men and women – face risk and insecurity in market constellations between rural and urban areas. They attempt to cope with risk using technical means and diversification of livelihood strategies. But as common-pool resources have been transformed from common property institutions to open access, also leading to unpredictability of competitors and partners in “free” markets, actors rely on magic options to reduce insecurity and transform it into risk-assessing strategies as an adaptation to modern times. Keywords: Risk, insecurity, institutional change, neo-liberal market, common pool resources, livelihood strategies, magic, Zambia.