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.

Transmission of digital chaotic and information-bearing signals in optical communication systems

A new proposal to have secure communications in a system is reported. The basis is the use of a synchronized digital chaotic systems, sending the information signal added to an initial chaos. The received signal is analyzed by another chaos generator located at the receiver and, by a logic boolean function of the chaotic and the received signals, the original information is recovered. One of the most important facts of this system is that the bandwidth needed by the system remain the same with and without chaos.

An information theory model of hydrophobic interactions.

A molecular model of poorly understood hydrophobic effects is heuristically developed using the methods of information theory. Because primitive hydrophobic effects can be tied to the probability of observing a molecular-sized cavity in the solvent, the probability distribution of the number of solvent centers in a cavity volume is modeled on the basis of the two moments available from the density and radial distribution of oxygen atoms in liquid water. The modeled distribution then yields the probability that no solvent centers are found in the cavity volume. This model is shown to account quantitatively for the central hydrophobic phenomena of cavity formation and association of inert gas solutes. The connection of information theory to statistical thermodynamics provides a basis for clarification of hydrophobic effects. The simplicity and flexibility of the approach suggest that it should permit applications to conformational equilibria of nonpolar solutes and hydrophobic residues in biopolymers.

A novel information theory method for filter feature selection

In this paper, we propose a novel filter for feature selection. Such filter relies on the estimation of the mutual information between features and classes. We bypass the estimation of the probability density function with the aid of the entropic-graphs approximation of Rényi entropy, and the subsequent approximation of the Shannon one. The complexity of such bypassing process does not depend on the number of dimensions but on the number of patterns/samples, and thus the curse of dimensionality is circumvented. We show that it is then possible to outperform a greedy algorithm based on the maximal relevance and minimal redundancy criterion. We successfully test our method both in the contexts of image classification and microarray data classification.

Expertise in Ultra-Endurance Triathletes Early Sport Involvement, Training Structure, and the Theory of Deliberate Practice

The theory of deliberate practice (Ericsson, Krampe, & Tesch-Römer, 1993) is predicated on the concept that the engagement in specific forms of practice is necessary for the attainment of expertise. The purpose of this paper was to examine the quantity and type of training performed by expert UE triathletes. Twenty-eight UE triathletes were stratified into expert, middle of the pack, and back of the pack groups based on previous finishing times. All participants provided detailed information regarding their involvement in sports in general and the three triathlon sports in particular. Results illustrated that experts performed more training than non-experts but that the relationship between training and performance was not monotonic as suggested by Ericsson et al. Further, experts' training was designed so periods of high training stress were followed by periods of low stress. However, early specialization was not a requirement for expertise. This work indicates that the theory of deliberate practice does not fully explain expertise development in UE triathlon.

Process orientation and information technology:customer engagement at Xerox (UK) Ltd

Xerox Customer Engagement activity is informed by the "Go To Market" strategy, and "Intelligent Coverage" sales philosophy. The realisation of this philosophy necessitates a sophisticated level of Market Understanding, and the effective integration of the direct channels of Customer Engagement. Sophisticated Market Understanding requires the mapping and coding of the entire UK market at the DMU (Decision Making Unit) level, which in turn enables the creation of tailored coverage prescriptions. Effective Channel Integration is made possible by the organisation of Customer Engagement work according to a single, process defined structure: the Selling Process. Organising by process facilitates the discipline of Task Substitution, which leads logically to creation of Hybrid Selling models. Productive Customer Engagement requires Selling Process specialisation by industry sector, customer segment and product group. The research shows that Xerox's Market Database (MDB) plays a central role in delivering the Go To Market strategic aims. It is a tool for knowledge based selling, enables productive SFA (Sales Force Automation) and, in sum, is critical to the efficient and effective deployment of Customer Engagement resources. Intelligent Coverage is not possible without the MDB. Analysis of the case evidence has resulted in the definition of 60 idiographic statements. These statements are about how Xerox organise and manage three direct channels of Customer Engagement: Face to Face, Telebusiness and Ebusiness. Xerox is shown to employ a process-oriented, IT-enabled, holistic approach to Customer Engagement productivity. The significance of the research is that it represents a detailed (perhaps unequalled) level of rich description of the interplay between IT and a holistic, process-oriented management philosophy.

Understanding supply chain disruption risk with the aid of social networks and information flows analysis

Supply Chain Risk Management (SCRM) has become a popular area of research and study in recent years. This can be highlighted by the number of peer reviewed articles that have appeared in academic literature. This coupled with the realisation by companies that SCRM strategies are required to mitigate the risks that they face, makes for challenging research questions in the field of risk management. The challenge that companies face today is not only to identify the types of risks that they face, but also to assess the indicators of risk that face them. This will allow them to mitigate that risk before any disruption to the supply chain occurs. The use of social network theory can aid in the identification of disruption risk. This thesis proposes the combination of social networks, behavioural risk indicators and information management, to uniquely identify disruption risk. The propositions that were developed from the literature review and exploratory case study in the aerospace OEM, in this thesis are:- By improving information flows, through the use of social networks, we can identify supply chain disruption risk. - The management of information to identify supply chain disruption risk can be explored using push and pull concepts. The propositions were further explored through four focus group sessions, two within the OEM and two within an academic setting. The literature review conducted by the researcher did not find any studies that have evaluated supply chain disruption risk management in terms of social network analysis or information management studies. The evaluation of SCRM using these methods is thought to be a unique way of understanding the issues in SCRM that practitioners face today in the aerospace industry.

The development and application of a coding and classification system for manufacturing industry

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Basic Structure of the General Information Theory

The basic structure of the General Information Theory (GIT) is presented in the paper. The main divisions of the GIT are outlined. Some new results are pointed.

Information theory analysis of regenerative channels

In this paper we summarize our recently proposed work on the information theory analysis of regenerative channels. We discuss how the design and the transfer function properties of the regenerator affect the noise statistics and enable Shannon capacities higher than that of the corresponding linear channels (in the absence of regeneration).

Creating Educational Immersive Environments Using a Computer Game Engine: Case Studies and Design Theory

This paper aims to crystallize recent research performed at the University of Worcester to investigate the feasibility of using the commercial game engine ‘Unreal Tournament 2004’ (UT2004) to produce ‘Educational Immersive Environments’ (EIEs) suitable for education and training. Our research has been supported by the UK Higher Education Academy. We discuss both practical and theoretical aspects of EIEs. The practical aspects include the production of EIEs to support high school physics education, the education of architects, and the learning of literacy by primary school children. This research is based on the development of our novel instructional medium, ‘UnrealPowerPoint’. Our fundamental guiding principles are that, first, pedagogy must inform technology, and second, that both teachers and pupils should be empowered to produce educational materials. Our work is informed by current educational theories such as constructivism, experiential learning and socio-cultural approaches as well as elements of instructional design and game principles.

Information and the evolution of codon bias

The informational properties of biological systems are the subject of much debate and research. I present a general argument in favor of the existence and central importance of information in organisms, followed by a case study of the genetic code (specifically, codon bias) and the translation system from the perspective of information. The codon biases of 831 Bacteria and Archeae are analyzed and modeled as points in a 64-dimensional statistical space. The major results are that (1) codon bias evolution does not follow canonical patterns, and (2) the use of coding space in organsims is a subset of the total possible coding space. These findings imply that codon bias is a unique adaptive mechanism that owes its existence to organisms' use of information in representing genes, and that there is a particularly biological character to the resulting biased coding and information use.

Can the intermediate disturbance hypothesis and information on species traits predict anuran responses to fire?

Fire is a common form of recurrent disturbance in many ecosystems, but ecological theory has a poor record of predicting animal responses to fire, at both species and assemblage levels. As a consequence, there is limited information to guide fire regime management for biodiversity conservation. We investigated a key research gap in the fire ecology literature; that is, the response of an anuran assemblage to variation in the fire return interval. We tested two hypotheses using a spatially-explicit fire database collected over a 40 year period: 1) species richness would peak at intermediate levels of disturbance. 2) Species with traits which enabled them to escape fire - burrowing or canopy dwelling - would be better able to survive fires, resulting in higher levels of occurrence in frequently burned sites. We found no evidence for either a reduction in species richness at locations with short fire return intervals, or a peak in species richness at intermediate levels of disturbance. Although we found some support for individual species responses to fire return intervals, these were inconsistent with the interpretation of burrowing or climbing being functional traits for fire-avoidance. Instead burrowing and climbing species may be more likely to be disadvantaged by frequent fire than surface dwelling frogs. More generally, our results show that many species in our study system have persisted despite a range of fire frequencies, and therefore that active management of fire regimes for anuran persistence may be unnecessary. The responses of anurans to fire in this location are unlikely to be predictable using simple life-history traits. Future work should focus on understanding the mechanistic underpinnings of fire responses, by integrating information on animal behavior and species' ecological requirements.

Experientialist Epistemology and Classification Theory: Embodied and Dimensional Classification

What theoretical framework can help in building, maintaining and evaluating networked knowledge organization resources? Specifically, what theoretical framework makes sense of the semantic prowess of ontologies and peer-to-peer sys- tems, and by extension aids in their building, maintenance, and evaluation? I posit that a theoretical work that weds both for- mal and associative (structural and interpretive) aspects of knowledge organization systems provides that framework. Here I lay out the terms and the intellectual constructs that serve as the foundation for investigative work into experientialist classifi- cation theory, a theoretical framework of embodied, infrastructural, and reified knowledge organization. I build on the inter- pretive work of scholars in information studies, cognitive semantics, sociology, and science studies. With the terms and the framework in place, I then outline classification theory s critiques of classificatory structures. In order to address these cri- tiques with an experientialist approach an experientialist semantics is offered as a design commitment for an example: metadata in peer-to-peer network knowledge organization structures.