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.

Reciprocal cooperation between unrelated rats depends on cost to donor and benefit to recipient

Background Although evolutionary models of cooperation build on the intuition that costs of the donor and benefits to the receiver are the most general fundamental parameters, it is largely unknown how they affect the decision of animals to cooperate with an unrelated social partner. Here we test experimentally whether costs to the donor and need of the receiver decide about the amount of help provided by unrelated rats in an iterated prisoner's dilemma game. Results Fourteen unrelated Norway rats were alternately presented to a cooperative or defective partner for whom they could provide food via a mechanical apparatus. Direct costs for this task and the need of the receiver were manipulated in two separate experiments. Rats provided more food to cooperative partners than to defectors (direct reciprocity). The propensity to discriminate between helpful and non-helpful social partners was contingent on costs: An experimentally increased resistance in one Newton steps to pull food for the social partner reduced the help provided to defectors more strongly than the help returned to cooperators. Furthermore, test rats provided more help to hungry receivers that were light or in poor condition, which might suggest empathy, whereas this relationship was inverse when experimental partners were satiated. Conclusions In a prisoner's dilemma situation rats seem to take effect of own costs and potential benefits to a receiver when deciding about helping a social partner, which confirms the predictions of reciprocal cooperation. Thus, factors that had been believed to be largely confined to human social behaviour apparently influence the behaviour of other social animals as well, despite widespread scepticism. Therefore our results shed new light on the biological basis of reciprocity.

Japanese-US common-arm analysis of paclitaxel plus carboplatin in advanced non-small-cell lung cancer: a model for assessing population-related pharmacogenomics

PURPOSE To explore whether population-related pharmacogenomics contribute to differences in patient outcomes between clinical trials performed in Japan and the United States, given similar study designs, eligibility criteria, staging, and treatment regimens. METHODS We prospectively designed and conducted three phase III trials (Four-Arm Cooperative Study, LC00-03, and S0003) in advanced-stage, non-small-cell lung cancer, each with a common arm of paclitaxel plus carboplatin. Genomic DNA was collected from patients in LC00-03 and S0003 who received paclitaxel (225 mg/m(2)) and carboplatin (area under the concentration-time curve, 6). Genotypic variants of CYP3A4, CYP3A5, CYP2C8, NR1I2-206, ABCB1, ERCC1, and ERCC2 were analyzed by pyrosequencing or by PCR restriction fragment length polymorphism. Results were assessed by Cox model for survival and by logistic regression for response and toxicity. Results Clinical results were similar in the two Japanese trials, and were significantly different from the US trial, for survival, neutropenia, febrile neutropenia, and anemia. There was a significant difference between Japanese and US patients in genotypic distribution for CYP3A4*1B (P = .01), CYP3A5*3C (P = .03), ERCC1 118 (P < .0001), ERCC2 K751Q (P < .001), and CYP2C8 R139K (P = .01). Genotypic associations were observed between CYP3A4*1B for progression-free survival (hazard ratio [HR], 0.36; 95% CI, 0.14 to 0.94; P = .04) and ERCC2 K751Q for response (HR, 0.33; 95% CI, 0.13 to 0.83; P = .02). For grade 4 neutropenia, the HR for ABCB1 3425C-->T was 1.84 (95% CI, 0.77 to 4.48; P = .19). CONCLUSION Differences in allelic distribution for genes involved in paclitaxel disposition or DNA repair were observed between Japanese and US patients. In an exploratory analysis, genotype-related associations with patient outcomes were observed for CYP3A4*1B and ERCC2 K751Q. This common-arm approach facilitates the prospective study of population-related pharmacogenomics in which ethnic differences in antineoplastic drug disposition are anticipated.

Generosity is a sign of trustworthiness—the punishment of selfishness is not

Peer-punishment is an important determinant of cooperation in human groups. It has been suggested that, at the proximate level of analysis, punitive preferences can explain why humans incur costs to punish their deviant peers. How punitive preferences could have evolved in humans is still not entirely understood. A possible explanation at the ultimate level of analysis comes from signaling theory. It has been argued that the punishment of defectors can be a type-separating signal of the punisher's cooperative intent. As a result, punishers are selected more often as interaction partners in social exchange and are partly compensated for the costs they incur when punishing defectors. A similar argument has been made with regard to acts of generosity. In a laboratory experiment, we investigate whether the punishment of a selfish division of money in a dictator game is a sign of trustworthiness and whether punishers are more trustworthy interaction partners in a trust game than non-punishers. We distinguish between second-party and third-party punishment and compare punitive acts with acts of generosity as signs of trustworthiness. We find that punishers are not more trustworthy than non-punishers and that punishers are not trusted more than non-punishers, both in the second-party and in the third-party punishment condition. To the contrary, second-party punishers are trusted less than their non-punishing counterparts. However, participants who choose a generous division of money are more trustworthy and are trusted more than participants who choose a selfish division or participants about whom no information is available. Our results suggest that, unlike for punitive acts, the signaling benefits of generosity are to be gained in social exchange.