Quality upgrades and bypass under mandatory access

We analyze the interaction between the incumbent’s incentive to upgrade the quality of its network and the entrant’s incentive to build a bypass network when the regulator sets a two-part access tariff to the incumbent’s network. Under this context, the entrant’s investment in a bypass network is delayed with a higher incumbent’s investment in quality. Moreover, the possibility of investment in a bypass network by the entrant has a positive effect on the incumbent’s incentive to upgrade quality. We show that a regulator cannot achieve the first best with a constant access tariff. If he wants to design an alternative welfare improving access tariff, he should set an access fee increasing (decreasing) in quality if the business-stealing effect of quality upgrades is weak (strong). The analysis suggests that if the entrant’s investment costs are declining or its market share is increasing over time, it is not always optimal to require the incumbent to lease facilities at cost-based prices.     

Endogenous Minimum Participation in International Environmental Treaties

Many international treaties come into force only after a minimum number of countries have signed and ratified the treaty. Minimum participation constraints are particularly frequent in the case of environmental treaties dealing with global commons, where free-riding incentives are strong. Why do countries that know they have an incentive to free-ride accept to “tie their hands” through the introduction of a minimum participation constraint? This article addresses the above issues by modeling the formation of an international treaty as a three-stage non-cooperative coalition formation game. Both the equilibrium minimum participation constraint and the number of signatories—the coalition size—are determined. This article, by showing that a non-trivial partial coalition, sustained by a binding minimum participation constraint, forms at the equilibrium, explains the occurrence of minimum participation clauses in most international environmental agreements. It also analyses the endogenous equilibrium size of the minimum participation constraint.     

所有权类型的激励效果与国有资产布局的关系

从不同所有权类型的激励效果出发,在社会福利最大化的约束下,研究了私有产权与国有产权在产业间的配置问题。基本结论如下:私有制下企业经理工作努力水平、创新投资、成本降低投资高于国有制下的水平,但私有制下的公共投资低于国有制下的水平:就某一产业来说,从社会整体效益来看,存在国有产权与私有产权的权衡问题;具体而言,当产业外部收益较大且产业重要程度较高时,应采取国有所有权形式,否则应采取私有所有权形式。     

Can price regulation increase cost-efficiency?

This paper examines the possibility that price regulation increases a monopolist's cost-efficiency. When the firm's choice of cost-reducing effort depends on the output supplied, a binding price-cap, by compelling the monopolist to produce more, results in lower costs. On the basis of a two-period asymmetric information model, the paper demonstrates that price regulation increases efficiency when the elasticity of demand is sufficiently low, even assuming very conservative preferences of the regulator and asymmetric information. Moreover, contrary to previous findings and conventional wisdom, we find that a periodical rate base review may increase productive efficiency through the positive effect on future cost-reducing effort, counterbalancing its well known adverse effect on the current level of effort.     

Separation of Regulatory Powers When Contracts Are Incomplete

The investment of a regulated firm affects the service/good provided on many dimensions. Should an integrated regulator take care of them all? Or is it better to have separate regulators responsible for them? We analyze the effect of the separation of regulatory powers on the regulated firm's ex ante incentive to invest in a “cooperative” innovation. The effects of the innovation are not verifiable and the cost of investing is sunk, hence, there is a problem of hold‐up. We find that when the innovation produces opposite effects the ex ante firm's incentive to invest is larger in the case of separation than in the case of integrated regulation. We also stress the risk of over‐investment that the separation of regulatory powers may induce. We maintain that along with classical incentive regulation—which mainly provides incentives for the firm to be efficient—the separation of regulatory powers may play a role in providing an incentive for cooperative innovations.     

R&D COMPETITION WITH ASYMMETRIC FIRMS

This paper considers a non-tournament duopoly model of process innovation. Costs of production can be reduced by firms spending on R&D. Firms are asymmetric in the sense that they may differ in their initial costs of production. It is shown that the high-cost firm may spend more (or less) in R&D than its low-cost rival. This main result is dependent on the relative magnitude of two important forces: the incentive effect, whereby the low-cost firm always has a stronger incentive to spend on cost-reducing R&D, and the effectiveness factor, which favours the high-cost firm.     

Collusion Under Asymmetric Information: The Role of the Correlation

We consider the regulation of a duopoly under incomplete information. When firms act noncooperatively, the regulator uses yardstick mechanisms to bridge his informational gap at no cost. However, this provides the firms with an incentive to collude.
We interpret the correlation as a measure of the congruence/divergence between individual and coalitional incentives. Under positive correlation, these incentives are aligned: the threat of collusion forces the regulator to distort the allocation. Under negative correlation, these incentives are opposed: the regulator can, sometimes, exploit this conflict of interest inside the coalition to eradicate the stakes of collusion at no cost.     

Dissemination of spillovers in cost-reducing alliances

Firms raise cost-reducing alliances before competing with each other, but cannot fully appropriate the shared knowledge. When spillovers disseminate through the network of alliances, link formation enables firms to capture more spillovers, but by doing so they become intermediary in the spreading of spillovers to other firms. This leads to the emergence of asymmetric networks.     

The Shapley Value of a Patent Licensing Game: the Asymptotic Equivalence to Non-cooperative Results

We consider a game in characteristic form played by firms and an outside patent holder of a cost-reducing innovation. The worth of a coalition of players is the total Cournot profit the coalition can guarantee to obtain when it operates an optimal number of its firms while the complement operates any number of its firms as to minimize the profit of the coalition. Only firms in a coalition with the patent holder are allowed to use the efficient technology. We prove that when the number of firms is large, the Shapley value of the patent holder approximates the payoff he obtains in the non-cooperative auction game traditionally studied in the literature.We thank an anonymous referee for very helpful comments that significantly improved the paper. The second author is being partially supported by the Ministry of Education, Culture, Sports, Science and Technology (MEXT), Grant-in-Aid for 21 Century COE Program. He wishes to thank his advisor Yair Tauman and co-advisor Pradeep Dubey for their intellectual guidance, Akira Okada and Haruo Imai for their encouragement, and Shigeo Muto for his helpful comments to the first draft of this paper at the autumn meeting of the Japanese Economic Association in 2003.     

Coalition Stability in Public Goods Provision: Testing an Optimal Allocation Rule

We test the canonical model of international environmental agreements (IEAs) in a laboratory setting with asymmetric agents. IEA participation represents coalition formation and public good provision where there are gains to cooperation, but an incentive to free-ride. We test four competing methods of dividing the coalition’s worth: a recently proposed optimal rule which accounts for subjects’ payoffs as a single free-rider, the Shapley value, the Nash bargaining solution, and an equal split. Each treatment generates the theoretically predicted coalition size more often than not. The shares of the potential gains to cooperation achieved by each rule are: 51, 36, 40 and 13%, respectively. These results highlight the importance of using an optimal rule to improve IEAs, and more broadly for voluntary public good provision.     

The design of voluntary agreements in oligopolistic markets

This paper analyses the conditions under which a group of firms have the incentive to sign a voluntary agreement (VA) to control polluting emissions even in the presence of free-riding by other firms in the industry. We consider a policy framework in which firms in a given industry decide whether or not to sign a VA proposed by an environmental regulator. We identify the features that a VA should possess in order to provide firms with an incentive to participate in the VA and to enhance its economic and environmental effectiveness. Under very general conditions on the shape of the demand schedule, we obtain the following results. First, a VA does not belong to the equilibrium of the coalition game when benefits from voluntary emission abatement are a pure public good, unless an industry emission target is set by the regulator. Second, in the presence of partial spillovers—i.e. when signatories obtain more benefits from the VA than non-signatories—a VA can belong to the equilibrium only if a minimum participation rule is guaranteed. Third, a VA with a minimum participation rule and a minimum mandatory emission abatement may improve welfare (and even industry profits) compared to a VA in which firms are free to set their own profit maximizing abatement level.     

Matching soulmates

We study iterated matching of soulmates (IMS), a recursive process of forming coalitions that are mutually preferred by members to any other coalition containing individuals as yet unmatched by this process. If all players can be matched this way, preferences are IMS-complete. A mechanism is a soulmate mechanism if it allows the formation of all soulmate coalitions. Our model follows Banerjee, Konishi, and Sönmez, except reported preferences are strategic variables. We investigate the incentive and stability properties of soulmate mechanisms. In contrast to prior literature, we do not impose conditions that ensure IMS-completeness. A fundamental result is that, (1) any group of players who could change their reported preferences and mutually benefit does not contain any players who were matched as soulmates and reported their preferences truthfully. As corollaries, (2) for any IMS-complete profile, soulmate mechanisms have a truthful strong Nash equilibrium, and (3) as long as all players matched as soulmates report their preferences truthfully, there is no incentive for any to deviate. Moreover, (4) soulmate coalitions are invariant core coalitions—that is, any soulmate coalition will be a coalition in every outcome in the core. To accompany our theoretical results, we present real-world data analysis and simulations that highlight the prevalence of situations in which many, but not all, players can be matched as soulmates. In the Appendix we relate IMS to other well-known coalition formation processes.     

Regulation and grid expansion investment with increased penetration of renewable generation

The recent trend toward decarbonization led to crucial challenges for network operators and regulators in terms of network reliability and optimal grid expansion. In order to analyze the effects of rising shares of renewable energy sources on investment decisions in both, the generation and the transmission sector, the following article brings together the two sectors in a single real options framework. This allows us to derive the optimal timing of the production capacity expansion and the optimal transmission price which assures its connection. We find that an increasing penetration through renewables leads to investment postponement in both sectors, which goes along with increased systematic risk. However, we show that the negative effects on the transmission firm can be overcome by choosing an appropriate incentive system.     

Regulation of network infrastructure investments: an experimental evaluation

This paper reports the results of an experiment evaluating three regulatory schemes for network infrastructure, in terms of their ability to generate efficient levels of capacity investment. We compare the performance of (1) price cap regulation, (2) a regulatory holiday for new capacity, and (3) price cap regulation with long term contracts combined with a secondary market. The setting is one in which network users can benefit from acting strategically, and are better informed than the network operator about demand growth. We find that the regulatory holiday creates an incentive to underinvest relative to optimal levels. Long term contracts also fail to improve on single price-cap regulation, and may reduce investment by providing noisier signals about future demand.     

Edgeworth's taxation paradox when firms engage in cost-reducing investment

This study examines whether and when Edgeworth's taxation paradox, that taxation decreases the equilibrium price, occurs in a free-entry Cournot oligopoly with cost-reducing investment. In contrast to the fact that no paradox occurs in the short-run equilibrium, the paradox can occur in the long-run equilibrium, in which the number of firms is endogenous. However, the conditions under which the paradox occurs are restrictive when there is no investment. By incorporating cost-reducing investments into the model, we demonstrate that the paradox is likely to occur under less restrictive conditions, irrespective of whether the tax is specific or ad valorem.     

A Good Opening: The Key to Make the Most of Unilateral Climate Action

In this paper we argue that when a subgroup of countries cooperate on emission reduction, the optimal response of non-signatory countries reflects the interaction between three potentially opposing factors, the incentive to free-ride on the environmental benefits of cooperation, the incentive to expand energy consumption, and the incentive to adopt the cleaner technologies introduced by the coalition. Using an Integrated Assessment Model with a game-theoretic structure we find that the equilibrium abatement of the coalition composed by OECD countries would be moderate, in line with the Pledges subscribed in Copenhagen, but increasing. The mitigation strategy would consist of investments in energy R&D and deployment of cleaner technologies with high learning potentials. International knowledge and technology externalities would facilitate the diffusion of cleaner technologies in non-signatory countries, offsetting the free-riding incentive and reducing their emissions. If the OECD group curbs emissions beyond the optimal equilibrium level, reaching reduction rates between 40 and 45 % below 2005 levels in 2050, the benefits of technology externalities would no longer compensate the effect of lower fossil fuel prices. Our results suggest that a moderate unilateral climate policy could induce a virtuous behaviour in non-signatory countries and that policies promoting the international transfer of technologies and knowledge could represent an effective complement to mitigation targets.     

Technological innovation and multinational expansion: A two-way link?

The paper examines how investment in research influences the form of foreign expansion chosen by the firm, and vice versa. We consider a two-country model where a monopolist producing in one country can choose between export and foreign direct investment. We assume process innovation, where the cost-reducing technological innovations are an outcome of the firm's investment in R&D. The role of technology transfer costs is explored. The model shows that, with low costs of technology transfer, there is a two-way link between the firm's R&D effort and multinational expansion. We also prove that both the research choice and the multinational choice have a positive effect on consumers' welfare in both countries.     

Sequential procurement auctions with risk-averse suppliers

We compare two procurement mechanisms, bundling and unbundling, in a two-stage auction model with risk-averse suppliers. The mechanisms differ in that the two tasks of investment and production are procured through a single auction or two sequential auctions. Suppliers’ production costs are affected by two risk factors, aggregate risk and idiosyncratic risk, as well as by the cost-reducing investment. We show that the bundling mechanism is optimal for a buyer and socially desirable if the aggregate risk is below certain thresholds. The result may not hold true for idiosyncratic risk.     

Cartel formation and managerial incentives

We study the formation of cartels within two different contexts. First, we consider internal–external stability based models which, due to firms’ free-riding incentives, lead to the inexistence of stable cartels. Second, we introduce the dynamic aspect of coalition formation. That is, when considering a cartel we consider also any cartel that can be reached through a succession of moves. Despite firms’ free-riding incentive, the dynamic process predicts that the collusion of the whole industry can occur with some regularity. We show that free-riding incentives decrease and incentives to merge increase when firms’ owner delegate production decisions to managers.      

A Risk‐Dominant Allocation: Maximizing Coalition Stability

This paper presents a rule to allocate a coalition’s worth for superadditive games with positive externalities. The allocation rule awards each member their outside payoff, plus an equal share of the surplus. The resulting allocation maximizes coalition stability. Stable coalitions are Strong Nash equilibria since no subset of members has an incentive to leave. Similarly, no subset of non‐members has an incentive to join a stable coalition if the game is concave in this region. The allocation is risk‐dominant. All stable coalitions are robust to the maximum probability of 50% that players’ deviate from their individual best‐responses. The paper compares the allocation to the Shapley value and the Nash bargaining solution, and illustrates why these traditional rules result in small coalitions when applied to issues such as international environmental agreements.