Discussion Paper No. 22
November 3, 2021
Mean Field Games with Singular Controls
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This paper establishes the existence of relaxed solutions to mean field games (MFGs for short) with singular controls. As a by-product, we obtain an existence of relaxed solutions results for McKean-Vlasov stochastic singular control problems. Finally, we prove approximations of solutions results for a particular class of MFGs with singular controls by solutions, respectively control rules, for MFGs with purely regular controls. Our existence and approximation results strongly hinge on the use of the Skorokhod M1 topology on the space of càdlàg functions.
Keywords:
mean field game; singular control; relaxed control; Skorokhod M1 topology;
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Discussion Paper No. 23
Cooperating Over Losses and Competing Over Gains: a Social Dilemma Experiment
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Evidence from studies in international relations, the politics of reform, collective action and price competition suggests that economic agents in social dilemma situations cooperate more to avoid losses than in the pursuit of gains. To test whether the prospect of losses can induce cooperation, we let experimental subjects play the traveler’s dilemma in the gain and loss domain. Subjects cooperate substantially more over losses. Furthermore, our results suggest that this treatment effect is best explained by reference-dependent risk preferences and reference-dependent strategic sophistication. We discuss the implications of our results and relate our findings to other experimental games played in the loss domain.
Keywords:
traveler's dilemma; loss domain; diminishing sensitivity; strategic sophistication;
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Discussion Paper No. 25
Deception and Self-Deception
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Why are people so often overconfident? We conduct an experiment to test the hypothesis that people become overconfident to more effectively persuade or deceive others. After performing a cognitively challenging task, half of our subjects are informed that they can earn money by convincing others of their superior performance. The privately elicited beliefs of informed subjects are significantly more confident than the beliefs of subjects in the control condition. By generating exogenous variation in confidence with a noisy performance signal, we are also able to show that higher confidence indeed makes subjects more persuasive in the subsequent face-to-face interactions.
Keywords:
overconfidence; self-deception; motivated cognition; persuasion; deception;
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Discussion Paper No. 24
Sequential versus Static Screening: an Equivalence Result
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We show that every sequential screening model is equivalent to a standard text book static screening model. We use this result and apply well-established techniques from static screen- ing to obtain solutions for classes of sequential screening models for which standard sequen- tial screening techniques are not applicable. Moreover, we identify the counterparts of well– understood features of the static screening model in the corresponding sequential screening model such as the single-crossing condition and conditions that imply the optimality of deter- ministic schedules.
Keywords:
sequential screening; static screening; stochastic mechanisms;
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Discussion Paper No. 9
Image Concerns and the Political Economy of Publicly Provided Private Goods
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Governments often provide their citizens with goods and services that are also supplied in markets: education, housing, nutritional assistance, etc. We analyze the political economy of the public provision of private goods when individuals care about their social image. We show that image concerns motivate richer individuals to vote for the public provision of goods they themselves buy in markets, the reason being that a higher provision level attracts more individuals to the public system, enhancing the social exclusivity of market purchases. In effect, majority voting may lead to a public provision that only a minority of citizens use. Users in the public system may enjoy better provision than users in the private system. We characterize the coalitions that can prevail in a political equilibrium.
Keywords:
in-kind provision; status preferences; majority voting;
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Discussion Paper No. 8
November 2, 2021
Delegating Pricing Power to Customers: Pay What You Want or Name Your Own Price?
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Pay What You Want (PWYW) and Name Your Own Price (NYOP) are customer- driven pricing mechanisms that give customers (some) pricing power. Both have been used in service industries with high fixed costs to price discriminate without setting a reference price. Their participatory and innovative nature gives rise to promotional benefits that do not accrue to posted-price sellers. We explore the nature and effects of these benefits and compare PWYW and NYOP using controlled lab experiments. We show that PWYW is a very aggressive strategy that achieves almost full market penetration. It can be profitable if there are promotional benefits and if marginal costs are low. In contrast, NYOP can be used profitably also if marginal costs are high and if there are no such benefits. It reduces price competition and segments the market. In a second experiment, we generate promotional benefits endogenously. We show that PWYW monopolizes the follow-up market but fails to be profitable. NYOP is less successful in penetrating the market but yields much higher profits.
Keywords:
customer-driven pricing mechanism; pay what you want; name your own price; competitive strategies; marketing; laboratory experiment;
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Discussion Paper No. 7
Regulatory Competition in Capital Standards with Selection Effects among Banks
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Several countries have recently introduced national capital standards exceed- ing the internationally coordinated Basel III rules, which is inconsistent with the ‘race to the bottom’ in capital standards found in the literature. We study reg- ulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative external- ities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones and a ‘race to the top’ occurs when governments care equally about bank profits, taxpayers, and consumers.
Keywords:
regulatory competition; capital requirements; bank heterogeneity;
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Discussion Paper No. 6
Long-Term Employment Relations when Agents Are Present Biased
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We analyze how agents’ present bias affects optimal contracting in an infinite- horizon employment setting. The principal maximizes profits by offering a menu of contracts to naive agents: a virtual contract – which agents plan to choose in the future – and a real contract which they end up choosing. This virtual contract motivates the agent and allows the principal to keep the agent below his outside option. Moreover, under limited liability, implemented effort can be inefficiently high. With a finite time horizon, the degree of exploitation of agents decreases over the life-cycle. While the baseline model abstracts from moral hazard, we show that the result persists also when allowing for non-contractible effort.
Keywords:
employment relations; dynamic contracting; present bias;
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Discussion Paper No. 5
Self-Confidence and Unraveling in Matching Markets
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We document experimentally how biased self-assessments affect the outcome of matching markets. In the experiments, we exogenously manipulate the self-confidence of participants regarding their relative performance by employing hard and easy real-effort tasks. We give participants the option to accept early offers when information about their performance has not been revealed, or to wait for the assortative matching based on their actual relative performance. Early offers are accepted more often when the task is hard than when it is easy. We show that the treatment effect works through a shift in beliefs, i.e., underconfident agents are more likely to accept early offers than overconfident agents. The experiment identifies a behavioral determinant of unraveling, namely biased self-assessments, which can lead to penalties for underconfident individuals as well as efficiency losses.
Keywords:
market unraveling; experiment; self-confidence; matching markets;
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Discussion Paper No. 4
How Antitrust Enforcement Can Spur Innovation
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We study the 1956 consent decree against the Bell System to investigate whether patents held by a dominant firm are harmful for innovation and if so, whether compulsory licensing can provide an effective remedy. The consent decree settled an antitrust lawsuit that charged Bell with having foreclosed the market for telecommunications equipment. The terms of the decree allowed Bell to remain a vertically integrated monopolist in the telecommunications industry, but as a remedy, Bell had to license all its existing patents royalty-free. Thus, the path-breaking technologies developed by the Bell Laboratories became freely available to all US companies. We show that in the first five years compulsory licensing increased follow-on innovation building on Bell patents by 17%. This effect is driven mainly by young and small companies. Yet, innovation increased only outside the telecommunications equipment industry. The lack of a positive innovation effect in the telecommunications industry suggests that market foreclosure impedes innovation and that compulsory licensing without structural remedies is ineffective in ending it. The increase of follow-on innovation by small and young companies is in line with the hypothesis that patents held by a dominant firm act as a barrier to entry for start-ups. We show that the removal of this barrier increased long-run U.S. innovation, corroborating historical accounts.
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