Revealed preference and indifferent selection

It is shown that preferences can be constructed from observed choice behavior in a way that is robust to indifferent selection (i.e., the agent is indifferent between two alternatives but, nevertheless, is only observed selecting one of them). More precisely, a suggestion by Savage (1954) to reveal indifferent selection by considering small monetary perturbations of alternatives is formalized and generalized to a purely topological framework: references over an arbitrary topological space can be uniquely derived from observed behavior under the assumptions that they are continuous and nonsatiated and that a strictly preferred alternative is always chosen, and indifferent selection is then characterized by discontinuity in choice behavior. Two particular cases are then analyzed: monotonic preferences over a partially ordered set, and preferences representable by a continuous pseudo-utility function.

On the quantitative importance of wage bargaining models

Four general equilibrium search models are compared quantitatively. Thebaseline framework is a calibrated macroeconomic model of the US economydesigned for a welfare analysis of unemployment insurance policy. Theother models make three simple and natural specification changes,regarding tax incidence, monopsony power in wage determination, and therelevant threat point. These specification changes have a major impacton the equilibrium and on the welfare implications of unemploymentinsurance, partly because search externalities magnify the effects ofwage changes. The optimal level of unemployment insurance dependsstrongly on whether raising benefits has a larger impact on searcheffort or on hiring expenditure.

On the justice of voting systems

What are the best voting systems in terms of utilitarianism? Or in terms of maximin, or maximax? We study these questions for the case of three alternatives and a class of structurally equivalent voting rules. We show that plurality, arguably the most widely used voting system, performs very poorly in terms of remarkable ideals of justice, such as utilitarianism or maximin, and yet is optimal in terms of maximax. Utilitarianism is bestapproached by a voting system converging to the Borda count, while the best way to achieve maximin is by means of a voting system converging to negative voting. We study the robustness of our results across different social cultures, measures of performance, and population sizes.

Sequential screening

We present a model of price discrimination where a monopolistfaces a consumer who is privately informed about thedistribution of his valuation for an indivisible unit ofgood but has yet to learn privately the actual valuation.The monopolist sequentially screens the consumer with amenu of contracts:the consumer self-selects once by choosing a contract andthen self-selects again when he learns the actual valuation. A deterministic sequential mechanism is a menu of refundcontracts, each consisting of an advance payment and a refundamount in case of no consumption, but sequential mechanismsmay involve randomization.We characterize the optimal sequential mechanism when someconsumer types are more eager in the sense of first-orderstochastic dominance, and when some types face greatervaluation uncertainty in the sense of mean-preserving-spread.We show that it can be optimal to subsidize consumer typeswith smaller valuation uncertainty (through low refund, as inairplane ticket pricing) in order to reduce the rent to thosewith greater uncertainty. The size of distortion depends bothon the type distribution and on how informative the consumer'sinitial private knowledge is about his valuation, but noton how much he initially knows about the valuation per se.

Estimating learning models from experimental data

We study the statistical properties of three estimation methods for a model of learning that is often fitted to experimental data: quadratic deviation measures without unobserved heterogeneity, and maximum likelihood withand without unobserved heterogeneity. After discussing identification issues, we show that the estimators are consistent and provide their asymptotic distribution. Using Monte Carlo simulations, we show that ignoring unobserved heterogeneity can lead to seriously biased estimations in samples which have the typical length of actual experiments. Better small sample properties areobtained if unobserved heterogeneity is introduced. That is, rather than estimating the parameters for each individual, the individual parameters are considered random variables, and the distribution of those random variables is estimated.

Forward induction and the excess capacity puzzle: An experimental investigation

While the theoretical industrial organization literature has long arguedthat excess capacity can be used to deter entry into markets, there islittle empirical evidence that incumbent firms effectively behave in thisway. Bagwell and Ramey (1996) propose a game with a specific sequence ofmoves and partially-recoverable capacity costs in which forward inductionprovides a theoretical rationalization for firm behavior in the field. Weconduct an experiment with a game inspired by their work. In our data theincumbent tends to keep the market, in contrast to what the forwardinduction argument of Bagwell and Ramey would suggest. The results indicatethat players perceive that the first mover has an advantage without havingto pre-commit capacity. In our game, evolution and learning do not driveout this perception. We back these claims with data analysis, atheoretical framework for dynamics, and simulation results.

North-South convergence and the allocation of CO2 emissions

We postulate a two-region world, comprised of North (calibrated after the US) and South(calibrated after China). Our optimization results show the compatibility of the following threedesiderata:(1) Global CO2 emissions follow a conservative path that leads to the stabilizationof concentrations at 450 ppm.(2) North and South converge to a path of sustained growth at 1% per year (28.2%per generation) in 2075.(3) During the transition to the steady state, North also grows at 1% per year whileSouth s rates of growth are markedly higher.The transition paths require a drastic reduction of the share of emissions allocated to North,large investments in knowledge, both in North and South, as well as very large investments ineducation in South. Surprisingly, in order to sustain North s utility growth rate, some output mustbe transferred from South to North during the transition.Although undoubtedly subject to many caveats, our results support a degree of optimism byproviding prima facie evidence of the possibility of tackling climate change in a way that is fairboth across generations and across regions while allowing for positive rates of humandevelopment.

Downsizing, job insecurity and firm reputation

This paper studies how firms make layoff decisions in the presence of adverse shocks. In this uncertain environment, workers' expectations about their job security affect their on-the-job performance. This productivity effect on job insecurity forces firms to strike a balance between laying off redundant workers and maintaining survivors' commitment when deciding on the amount and timing of downsizing. This framework offers an explanation of conservative employment practices (such as zero or reduced layoffs) based on firms having private information about their future profits. High retention rates and wages can signal that the firm has a bright future, boosting workers' confidence. Moreover, the model provides clear predictions about when waves of downsizing will occur as opposed to one-time massive cuts.

Stochastic evolution of rules for playing normal form games

The evolution of boundedly rational rules for playing normal form games is studied within stationary environments ofstochastically changing games. Rules are viewed as algorithms prescribing strategies for the different normal formgames that arise. It is shown that many of the folk results of evolutionary game theory typically obtained witha fixed game and fixed strategies carry over to the present case. The results are also related to recent experimentson rules and games.

Organized vs. competitive corruption

We study bureaucratic corruption in a model in which a constituencysets required levels for a given set of activities. Each activity iscarried out by an external provider, and its realization is supervisedby a bureaucrat. While bureaucrats are supposed to act on behalf of theconstituency, they can decide to be corrupt and allow providers todeliver lower activity levels than contracted in exchange for a bribe.Given this, the constituency sets the optimal activity levels weighingoff the value of activity levels, their costs, as well as the possibilityfor the bureaucrats to be corrupt. We use this setup to study the impacton equilibrium corruption of the degree of decentralization of corruption.To do this we compute equilibrium corruption in two different settings:1) Each bureaucrat acts in such a way as to maximize his own individualutility (competitive corruption); 2) An illegal syndicate oversee thecorruption decisions of the population of bureaucrats in such a way asto maximize total proceeds from corruption (organized corruption). Weshow that, since average corruption payoff is increasing in the activitylevels set by the constituency, and since the latter responds to highlevels of corruption by reducing required activity levels, in equilibriumthe illegal syndicate acts in such a way as to restrain the total numberof corrupt transactions, so that corruption is lower when it is organizedthan when it is competitive.

The growth and diffusion of knowlegde and the theory of the firm

We analyze the implications of a market imperfection related to the inability to establish intellectual property rights, that we label {\it unverifiable communication}. Employees are able to collude with external parties selling ``knowledge capital'' of the firm. The firm organizer engages in strategic interaction simultaneously with employees and competitors, as she introduces endogenous transaction costs in the market for information between those agents. Incentive schemes and communication costs are the key strategic variables used by the firm to induce frictions in collusive markets. Unverifiable communication introduces severe allocative distortions, both at internal product development and at intended sale of information (technology transfer). We derive implications of the model for observable decisions like characteristics of the employment relationship (full employment, incompatibility with other jobs), firms' preferences over cluster characteristics for location decisions, optimal size at entry, in--house development vs sale strategies for innovations and industry evolution.

R&D in the pharmaceutical industry: A world of small innovations

It is commonly argued that in recent years pharmaceutical companies have directed theirR&D towards small improvements of existing compounds instead of more risky drastic innovations. In this paper we show that the proliferation of these small innovations is likely to be linked to the lack of market sensitivity of a part of the demand to changes in prices. Compared to their social contribution, small innovations are relatively more profitable than large ones because they are targeted to the smaller but more inelastic part of the demand. We also study the effect of regulatory instruments such as price ceilings, copayments and reference prices and extend the analysis to competition in research.

Job dynamics, correlated shocks and wage profiles

We generalize the Mortensen-Pissarides (1994) model of the labor marketwith a more realistic structure for the stochastic process of theshocks to the worker-firm match. In this way we can acommodate theempirical observation that hazard rates of job termination decrease andaverage wages increase with job tenure. Besides being able to fit bettersome observables of the model, the changes we introduce are nontrivialfor the analysis of policies as well.

A non-quasi-competitive Cournot oligopoly with stability

This paper presents a classical Cournot oligopoly model with some peculiar features: it is non--quasi--competitive as price under N-poly is greater than monopoly price; Cournot equilibrium exists and is unique with each new entry; the successive equilibria after new entries are stable under the adjustment mechanism that assumes that actual output of each seller is adjusted proportionally to the difference between actual output and profit maximizing output. Moreover, the model tends to perfect competition as N goes to infinity, reaching the monopoly price again.

Endogenous information structures

Many models in the economics literature deal with strategic situations withprivately informed agents. In those models the information structure isassumed to be exogenous and common knowledge. We consider whether suchmodels, and the results they produce, are robust with respect theendogenization of the information structure. The results depend on whetherinformation acquisition is secret or private, and on whether the strategicsituation involves simultaneous or sequential moves. In particular we findthat only when information is secretly acquired and moves are simultaneous,the results are fully robust. When information is acquired secretly butmoves are sequential additional equilibria may appear. Instead, privateinformation acquisition may make the equilibrium set smaller.