Discussion Paper No. 364
January 4, 2023
Competition in Search Markets with Naive Consumers
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Abstract:
We study the interplay between quality provision and consumer search in a search market where firms may design products of inferior quality to promote them to naive consumers who fail to fully understand product characteristics. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, the share of firms offering superior goods in the market goes to zero. The presence of inferior products harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.
Keywords:
inferior products; competition; naivete; consumer search;
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Discussion Paper No. 362
Approximate Bayesian Implementation and Exact Maxmin Implementation: An Equivalence
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This paper provides a micro-foundation for approximate incentive compatibility using ambiguity aversion. In particular, we propose a novel notion of approximate interim incentive compatibility, approximate local incentive compatibility, and establish an equivalence between approximate local incentive compatibility in a Bayesian environment and exact interim incentive compatibility in the presence of a small degree of ambiguity. We then apply our result to the implementation of efficient allocations. In particular, we identify three economic settings—including ones in which approximately efficient allocations are implementable, ones in which agents are informationally small, and large double auctions—in which efficient allocations are approximately locally implementable when agents are Bayesian. Applying our result to those settings, we conclude that efficient allocations are exactly implementable when agents perceive a small degree of ambiguity.
Keywords:
approximate local incentive compatibility; ambiguity aversion; efficiency; informational size; modified VCG mechanism; double auction;
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Discussion Paper No. 361
Intertemporal Hedging and Trade in Repeated Games with Recursive Utility
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Recursive preferences have found widespread application in representative-agent asset-pricing models and general equilibrium. A majority of these applications exploit two decision-theoretic properties not shared by the standard model of intertemporal choice: (i) agents care about the intertemporal distribution of risk and (ii) rates of time preference, rather than being exogenously fixed, may vary with the level of consumption. We investigate what these features imply in the context of a repeated strategic interaction. Specifically, we identify novel opportunities for the players to manage risk and trade intertemporally, and characterize when such opportunities lead to an expansion of the fea- sible set of payoffs. Sharp implications for equilibrium behavior and the folk theorem are also deduced.
Keywords:
recursive utility; repeated games; correlation aversion; endogenous discounting; intertemporal trade; intertemporal hedging;
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Discussion Paper No. 356
Aggregate Information and Organizational Structures
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We study information flows in an organization with a top management (principal) and multiple subunits (agents) with private information that determines the organization's aggregate efficiency. Under centralization, eliciting the agents' private information may induce the principal to manipulate aggregate information, which obstructs an effective use of information for the organization. Under delegation, the principal concedes more information rent, but is able to use the agents' information more effectively. The trade-off between the organizational structures depends on the likelihood that the agents are efficient. Centralizing information flows is optimal when such likelihood is low. Delegation, by contrast, is optimal when it is high.
Keywords:
agency; aggregate information; organization design;
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Discussion Paper No. 348
November 30, 2022
Dynamic Screening with Verifiable Bankruptcy
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Abstract:
We consider a dynamic screening model where the agent may go bankrupt due to, for example, cash constraints. We model bankruptcy as a verifiable event that occurs whenever the agent makes a per period loss. This leads to less stringent truth-telling constraints than those considered in the existing literature. We show that the weaker constraints do not af- fect optimal contracting in private values settings but may do so with interdependent values. Moreover, we develop a novel method to study private values settings with continuous types and identify a new regularity condition that ensures that the optimal contract is deterministic.
Keywords:
dynamic screening; bankruptcy; verifiability; mean preserving spread;
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Discussion Paper No. 347
Correlation-Savvy Sellers
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A multi-product monopolist sells sequentially to a buyer who privately learns his valuations. Using big data, the monopolist learns the intertemporal correlation of the buyer's valuations. Perfect price discrimination is generally unattainable—even when the seller learns the correlation perfectly, has full commitment, and in the limit where the consumption good about which the buyer has ex ante private information becomes insignificant. This impossibility is due to informational externalities which requires information rents for the buyer's later consumption. These rents induce upward and downward distortions, violating the generalized no distortion at the top principle of dynamic mechanism design.
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Discussion Paper No. 332
July 21, 2022
Cooperation, Competition, and Welfare in a Matching Market
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We investigate the welfare effect of increasing competition in an anonymous two-sided matching market, where matched pairs play an infinitely repeated Prisoner’s Dilemma. Higher matching efficiency is usually considered detrimental as it creates stronger incentives for defection. We point out, however, that a reduction in matching frictions also increases welfare because more agents find themselves in a cooperative relationship. We characterize the conditions for which increasing competition increases overall welfare. In particular, this is always the case when the incentives for defection are high.
Keywords:
cooperation; prisoner's dilemma; competition; welfare; matching; trust building;
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Discussion Paper No. 329
May 18, 2022
Stochastic Contracts and Subjective Evaluations
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Subjective evaluations are widely used, but call for different contracts from classical moral-hazard settings. Previous literature shows that contracts require payments to third parties. I show that the (implicit) assumption of deterministic contracts makes payments to third parties necessary. This paper studies incentive contracts with stochastic compensation, like payments in stock options or uncertain arbitration procedures. These contracts incentivize employees without the need for payments to third parties. In addition, stochastic contracts can be more efficient and can make the principal better off compared to deterministic contracts. My results also address the puzzle about the prevalence of labor contracts with stochastic compensation.
Keywords:
Subjective evaluations; Stochastic contracts; Stochastic compensation; Budget-balanced contracts; Moral Hazard; Subjective performance measures; Incentives;
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Discussion Paper No. 327
May 5, 2022
Portfolio Liquidation Games with Self-Exciting Order Flow
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We analyze novel portfolio liquidation games with self-exciting order flow. Both the $N$-player game and the mean-field game are considered. We assume that players' trading activities have an impact on the dynamics of future market order arrivals thereby generating an additional transient price impact. Given the strategies of her competitors each player solves a mean-field control problem. We characterize open-loop Nash equilibria in both games in terms of a novel mean-field FBSDE system with unknown terminal condition. Under a weak interaction condition we prove that the FBSDE systems have unique solutions. Using a novel sufficient maximum principle that does not require convexity of the cost function we finally prove that the solution of the FBSDE systems do indeed provide open-loop Nash equilibria.
Keywords:
stochastic games; mean-field games; portfolio liquidation; Hawkes process; singular terminal value;
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Discussion Paper No. 324
April 19, 2022
Collective Brand Reputation
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We develop a theory of collective brand reputation for markets in which product quality is jointly determined by local and global players. In a repeated game of imperfect public monitoring, we model collective branding as an aggregation of quality signals generated in different markets. Such aggregation yields a beneficial informativeness effect for incentivizing the global player. It however also induces harmful free-riding by local, market-specific players. The resulting tradeoff yields a theory of optimal brand size and revenue sharing that applies to platform markets, franchising, licensing, umbrella branding, and firms with team production.
Keywords:
collective branding; reputation; free-riding; repeated games; imperfect monitoring;
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