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.

The impact of associational life on trust in local institutions: a comparison of 57 Swiss municipalities

In this paper, we evaluate the impact of associational life on individual political trust in 57 Swiss municipalities. Our hierarchical regression models show that individual political trust is not only affected by individual associational membership but also by the exchange between associations and local political authorities in a community. In other words, if political authorities and associations are linked at the community level, citizens will place more trust in their local institutions. Furthermore, we find clear evidence for the rainmaker hypothesis: our results show that the positive effect of a vibrant connection between associational life and local politics on political trust is not solely confined to the associational members themselves, but rather indicate that the structure of the local civic culture fosters political trust among members and non-members at the same time. However, the internal democratic processes of associations have no effect on individuals’ trust in local political institutions.

Constraints on the thermal evolution of the Adriatic margin during Jurassic continental break-up: U–Pb dating of rutile from the Ivrea–Verbano Zone, Italy

The Ivrea–Verbano Zone (IVZ), northern Italy, exposes an attenuated section through the Permian lower crust that records high-temperature metamorphism under lower crustal conditions and a protracted history of extension and exhumation associated partly with the Jurassic opening of the Alpine Tethys ocean. This study presents SHRIMP U–Pb geochronology of rutile from seven granulite facies metapelites from the base of the IVZ, collected from locations spanning ~35 km along the strike of Paleozoic fabrics. Rutile crystallised during Permian high-temperature metamorphism and anatexis, yet all samples give Jurassic rutile U–Pb ages that record cooling through 650–550 °C. Rutile age distributions are dominated by a peak at ~160 Ma, with a subordinate peak at ~175 Ma. Both ~160 and ~175 Ma age populations show excellent agreement between samples, indicating that the two distinctive cooling stages they record were synchronous on a regional scale. The ~175 Ma population is interpreted to record cooling in the footwall of rift-related faults and shear zones, for which widespread activity in the Lower Jurassic has been documented along the western margin of the Adriatic plate. The ~160 Ma age population postdates the activity of all known rift-related structures within the Adriatic margin, but coincides with extensive gabbroic magmatism and exhumation of sub-continental mantle to the floor of the Alpine Tethys, west of the Ivrea Zone. We propose that this ~160 Ma early post-rift age population records regional cooling following episodic heating of the distal Adriatic margin, likely related to extreme lithospheric thinning and associated advection of the asthenosphere to shallow levels. The partial preservation of the ~175 Ma age cluster suggests that the post-rift (~160 Ma) heating pulse was of short duration. The regional consistency of the data presented here, which is in contrast to many other thermochronometers in the IVZ, demonstrates the value of the rutile U–Pb technique for probing the thermal evolution of high-grade metamorphic terrains. In the IVZ, a significant decoupling between Zr-in-rutile temperatures and U–Pb ages of rutile is observed, with the two systems recording events ~120 Ma apart.