A theory of commerce

The theory of commerce advanced here captures prominent features of retail trade: large employment, congestion effects, anonymous posted prices, and quantity discounts. This theory is built around a directed search model where buyers’ preferences are private information. The analytical solution is easily inserted in a Neoclassical growth framework. In this framework, the parameters of retail trade are calibrated using commercial margins and employment. Welfare properties depend on the sellers’ ability to charge two-tier prices. With two-tier prices, the directed search equilibrium is efficient. Otherwise, it is not. This contrasts with the full information benchmark, where directed search is always efficient.     

Toward an efficiency rationale for the public provision of private goods

Public provision of a private goods is justified on efficiency grounds in a model with no redistributive preferences. A government’s involvement in the provision of a private good generates information about preferences that facilitates more efficient revenue extraction for the provision of public goods. Public provision of the private good improves economic efficiency under a condition that is always fulfilled under independence and satisfied for an open set of joint distributions. The efficiency gains require that consumers cannot arbitrage the publicly provided private good, so our analysis applies to private goods where it is easy to keep track of the ultimate user, such as schooling and health care, but not to easily tradable consumer goods.     

The relevance of private information in mechanism design

Recent results in mechanism design show that as long as agents have correlated private information and are sufficiently risk neutral, it is possible to design mechanisms that leave agents with arbitrarily small information rents. We show that these full-rent-extraction results hinge on the implicit assumption that the agents’ beliefs uniquely determine their preferences. We present an example of the voluntary provision of a public good in which this assumption is relaxed, and consequently, even in highly correlated environments, if agents’ beliefs do not uniquely determine their preferences, then the extraction of the agents’ entire information rents is impossible.     

Observable preferences for public goods

This paper discusses the circumstances under which it is possible to use the market or aggregate demand functions generated from individual utility maximization to obtain consumers' preferences for certain classes of public goods, and thus obtain the information needed to satisfy the Samuelsonian efficiency conditions for these public goods. The restrictions on the preferences of all consumers which are sufficient to use the aggregate demand function are: (i) there exists a price vector such that the level of public good provisiion is valueless, and (ii) the marginal rate of substitution of the private good price for the level of public good provision is independent of income.     

Dynamic sorting in durable goods markets with buyer heterogeneity

In a competitive dynamic durable good market where sellers have private information about quality, I identify certain inefficiencies that arise due to heterogeneity in buyers' valuations. Even if the market induces dynamic sorting among sellers and all goods are eventually traded, inefficiency can arise because high valuation buyers buy early when low‐quality goods are sold, while high‐quality goods are allocated to low valuation buyers that buy later. This misallocation adds to the inefficiency caused by delay in trading. Under certain circumstances, high‐quality goods may never be traded as in a static market.     

Buyer search and price dispersion: a laboratory study

We study markets with costly buyer search in which sellers simultaneously post prices. Buyers costlessly observe one or (with probability 1−q) two of the posted prices, and can accept one or pay to search again. The experiment varies q, the search cost, and the number of buyers. Equilibrium theory predicts a unified very low (high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual prices conform closely to the predictions in some treatments. Buyers’ reservation prices are biased away from the extremes, however, and sellers’ prices have positive autocorrelation and cross-sectional correlation.     

Financing public goods and attitudes toward immigration

We study a model where individuals choose both the level of provision of a public good and the quota of low-skilled immigrants that are allowed into the country. Individuals can supplement the public good in the private market. Immigrants affect natives through three channels: (i) the labor market; (ii) tax collection; (iii) the quality of the public good. We find that the higher the political weight of the rich (highly skilled) is, the less tolerant the poor and the middle-class are toward immigration and the more demanding they are toward increasing public spending. The rich are the most favorable to immigration. As they have more weight, the political outcome is closer to their preferences and further from the preferences of the other groups. We use data from the European Social Survey to test the implications of our model.     

A STABLE NASH MECHANISM FOR QUASI-ADDITIVE PUBLIC-GOOD ENVIRONMENTS*

In this paper we present a simple game form implementing Lindahl allocations as Nash equilibrium outcomes, which has nice stability properties. we show that if the preferences of eaach consumer are representable by a utility function of the form a(y)x_i+b_i(y), where x_i(y), where x_i is the amount of private good and y, the amount of public good, then the Nash equilibrium of our geme is locally stable under the gradient adjustment process. This restriction on the preferences has been known in hte literature as the necessary and sufficient condition for the Pareto optimal amount of pukic goods to be independent of the private goods distribution. This type of preference includes quasi-linear preferences as a special case. but unlike quasi-linearity, this allows a non zero income effect of demand for public goods as well as private goods, which is often supported by empirical evidence. Our result shows how an equilbirium can be achieved over time by a decentralized strategy adjustement process for a fairly general class of environments, even in the absence of a dominant-strategy equilibrium.     

A utilitarian approach to the provision and pricing of excludable public goods

This paper studies utilitarian welfare maximization in a large economy with an excludable public good where individual preferences are private information. If inequality aversion is large, optimal allocations involve the use of admission fees and exclusion to redistribute resources from people who benefit a lot from the public good to people who benefit little. If inequality aversion is close to zero, optimal admission fees are zero. Because of inequality aversion, information rents of people who benefit a lot from the public good receive less weight, so optimal provision levels for the public good are below first-best levels.     

Does endogenous formation of jurisdictions lead to wealth-stratification?

Conditions under which endogenous processes of jurisdiction formation entail wealth-stratification are examined in a model where unequally wealthy households with identical preferences form jurisdictions in order to produce a public good financed by proportional taxation. We define a stable jurisdiction structure to be a partition of the households into jurisdictions that is immune to individual deviations. We define a jurisdiction structure to be wealth-stratified when each jurisdiction is composed of households who form an interval with respect to the ordering of their wealth. We show that a necessary and sufficient condition for the stratification of any stable jurisdiction structure is for the individual preferences for the public and the private good to exhibit a relation of gross substitutability/complementarity between the public good and the private good that is independent from prices and wealth.     

Strategic Buyers and Privately Observed Prices

A model of finitely repeated price competition between two sellers with differentiated goods and a large buyer is analyzed. The set of pure strategy sequential equilibria is investigated under public and private monitoring. With private monitoring, i.e., when prices are not observable to the competing sellers, all sales are made by the better seller and the set of repeated game equilibrium payoffs coincides with the stage game subgame perfect equilibrium payoffs. This is in sharp contrast to the game with perfect monitoring where the folk theorem obtains. Journal of Economic Literature Classification Numbers: C72, D43.     

DYNAMIC TRADING IN A DURABLE GOOD MARKET WITH ASYMMETRIC INFORMATION*

We analyze a dynamic version of the Akerlof–Wilson “lemons” market in a competitive durable good setting. There is a fixed set of sellers with private information about the quality of their wares. The price mechanism sorts sellers of different qualities into different time periods—prices and average quality of goods traded increase over time. Goods of all qualities are traded in finite time. Market failure arises because of the waiting involved—particularly for sellers of better quality. The equilibrium path may exhibit intermediate breaks in trading.     

Efficient Mechanisms for Public Goods with Use Exclusions

Constrained efficient provision of an excludable public good is studied in a model where preferences are private information. The provision level is asymptotically deterministic, making it possible to approximate the optimal mechanism with a mechanism that provides a fixed quantity of the good and charges fixed user fees for access. In general, the fixed fees involve third degree price discrimination, but, if names are uninformative about preferences, the analysis provides a justification for average cost pricing.     

On the evolution of conditional cooperation

A long series of laboratory and field experiments, as well as conventional empirical studies, has established that (1) individuals voluntarily provide themselves with public goods at levels exceeding those predicted by the Nash voluntary contributions mechanism, and (2) agents reciprocate increases in the contributions of their counterparts in such settings (conditional cooperation). This paper presents a simple model of the evolution of preferences for conditional cooperation in the presence of a public good, which explains these two empirical findings without employing reputational or group selection arguments. In this model, individuals inherit preferences to match other agents' contributions to the provision of a public good, at some specified “matching rate.” Agents whose preferences induce them to be relatively successful – in material terms – increase in number, from one generation to the next. Under complete information and with randomly matched groups of N agents who have quasilinear preferences over the public good and a private good, the unique evolutionarily stable matching rate is 1, leading to Pareto optimal voluntary provision of the public good, regardless of group size N. The evolutionarily stable matching rate can be viewed as an endogenous social norm.     

Competitive search markets for durable goods

Summary. This paper considers a dynamic version of Akerlof's (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation. Received: August 24, 2000; revised version: October 24, 2000     

When Does Everyone Contribute in the Private Provision of Local Public Goods?

When does everyone genuinely contribute in the private provision of a local public good? We first introduce a monotonic condition to characterize the relationship between the structure of the network that underlie the noncooperative game of private provision of local public goods on the one hand, and the preferences of the agents on the other, showing that the monotonic condition is a sufficient and necessary condition of existence of a distributed Nash equilibrium (DNE) in which each agent exerts a positive amount of effort to provision of the public good (Theorem 1). We then study the number of equilibria, and, by using the monotonic condition, characterize the condition under which the DNE set is a singleton, a continuum, or null (Theorem 2). As it turns out, the structure of the network and the agents’ preferences jointly shape the effort profile in the provision of local public goods.     

PRIVATE PROVISION OF PUBLIC GOODS AND INFORMATION DIFFUSION IN SOCIAL GROUPS

I describe a dynamic model of costly information sharing where private information affecting collective‐value actions is transmitted by social proximity. Individuals make voluntary contributions toward the provision of a pure public good, and information transmission about quality of provision is a necessary condition for collective provision to take place in a stationary equilibrium. I show that unlike in the case of private goods, better informed individuals face positive incentives to incur a cost to share information with their neighbors and that these incentives are stronger and provision of the pure public good greater the smaller are individuals' social neighborhoods.     

Communication of preferences in contests for contracts

This paper models a contest where several sellers compete for a contract with a single buyer. There are several styles of possible designs with a subset of them preferred by the buyer. We examine what happens when the buyer communicates information about his preferences. If the sellers are unable to change their style, then there is no effect on the welfare of the sellers. If the sellers are able to make adjustments, extra information may either boost or damage the sellers?? profits. While the chance that there will be a proposal of a style preferred by the buyer cannot decrease, the buyer??s surplus may increase or decrease.     

Estimation of hedonic price functions with incomplete information

Existence of persistent price dispersion suggests that some buyers find lower prices through search and information acquisition, while some sellers charge higher prices by gathering information on potential buyers. If buyers are not fully informed of the lowest price available in the market they end up paying a price higher than if they had full information. Similarly, if sellers are not fully informed about the highest price they could charge, they too suffer by receiving a price lower than had they had full information. This paper develops a hedonic price model that incorporates the effects of incomplete information on both sides of the market and obtains estimates of the discrepancies between market prices and buyers’ maximum willingness to pay and sellers’ minimum willingness to accept. Correlates of such price discrepancies are also explored. We apply the technique to a data set constructed from the American Housing Survey, and find that incomplete information has had a significant impact on housing prices.     

The determination of public tuition fees in a mixed education system: A majority voting model

We study the determination of public tuition fees through majority voting in a vertical differentiation model where agents' returns on educational investment differ and public and private universities coexist and compete in tuition fees. The private university offers higher educational quality than its competitor, incurring higher unit cost per trained student. The tuition fee for the state university is fixed by majority voting while that for the private follows from profit maximization. Then agents choose to train at the public university or the private one or to remain uneducated. The tax per head adjusts in order to balance the state budget. Because there is a private alternative, preferences for education are not single‐peaked and no single‐crossing condition holds. An equilibrium is shown to exist, which is one of three types: high tuition fee (the “ends” are a majority), low tuition fee (the “middle” is a majority), or mixed (votes tie). The cost structure determines which equilibrium obtains. The equilibrium tuition is either greater (majority at the ends) or smaller (majority at the middle) than the optimal one.