Transplants and Implants: The Economics of Self‐Improvement

This article examines equilibrium self‐improvement and marriage proposal strategies in a two‐sided search model with nontransferable utility. Singles are vertically differentiated—some make better marriage partners than others. A complete characterization of equilibrium is provided. It is shown there are two externalities to self‐improvement decisions. Further, these externalities may support multiple Pareto rankable equilibria. By encouraging everybody to self‐improve, society can create a situation where everybody is forced to improve to remain “acceptable.” But a preferred equilibrium may exist where there is less (costly) self‐improvement.     

Under- versus overconfidence: an experiment on how others perceive a biased self-assessment

This paper reports findings of a laboratory experiment, which explores how reported self-assessment regarding the own relative performance is perceived by others. In particular, I investigate whether overconfident or underconfident subjects are considered as more likeable, and who of the two is expected to win in a tournament, thereby controlling for performance. Underconfidence beats overconfidence in both respects. Underconfident subjects are rewarded significantly more often than overconfident subjects, and are significantly more often expected to win. Subjects being less convinced of their performance are taken as more congenial and are expected to be more ambitious to improve, whereas overconfident subjects are rather expected to rest on their high beliefs. While subjects do not anticipate the stronger performance signal of underconfidence, they anticipate its higher sympathy value. The comparison to a non-strategic setting shows that men strategically deflate their self-assessment to be rewarded by others. Women, in contrast, either do not deflate their self-assessment or do so even in non-strategic situations, a behavior that might be driven by non-monetary image concerns of women.     

Contractual distortions in a market with frictions

This paper analyses contract design in a decentralized market environment with frictions. While principals (e.g., firms) have all contractual power, their market power is constrained as agents (e.g., workers) can choose to wait and search for better offers. We find that results depend crucially on how market frictions affect agents’ utilities. With type-independent costs of search and waiting, equilibrium contracts are always first-best. If agents are impatient and discount future payoffs, however, distortions vanish only gradually. In the latter case, we also characterize equilibrium offers and show that the market exhibits two types of externalities, both of which are absent in the case of type-independent costs of search.     

A search model of two-sided matching under nontransferable utility

In a decentralized marriage market there are different types of men and women. Agents sequentially search for mating partners and meet bilaterally in a random fashion. Upon meeting, the paired agents complete mating if both agree, and separate and continue searching otherwise. The polarization of interests between men and women appears as in Gale-Shapley marriage problems; as agents of one sex become more selective about their mates, agents of the other sex lose. As search costs disappear, the set of equilibrium outcomes in a search model reduces to the set of stable matchings in a corresponding Gale-Shapley marriage problem.     

Trade,environment, and income inequality: An optimal taxation approach

In a small open economy, how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly? And how does trade liberalization affect the economy's levels of pollution and inequalities, when taxes are optimally and endogenously adjusted? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor), and pollution, this paper characterizes the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies) with both production and consumption externalities. While optimal income taxes are not directly affected by environmental externalities, conditions are derived under which under‐ or over‐internalization of social marginal damage is optimal for redistributive considerations. Assuming that redistribution operates in favor of the unskilled workers and that the dirty sector is intensive in unskilled labor, simulations suggest that trade liberalization involves a clear trade‐off between the reduction of inequalities and the control of pollution when the source of externality is only production; this is not necessarily true with a consumption externality. Finally, an increase in the willingness to redistribute income toward the unskilled results paradoxically in less pollution and more income inequalities.     

Adoption externalities as public goods

A public good problem arises naturally in situations characterized by positive externalities or negative externalities. For positive externalities, agents furnish a public good by taking an action. Similarly, for negative externalities, agents furnish a public good by not taking an action. We examine these externalities in a binary choice problem, i.e. adoption externalities. In each case, there is a potential role for government intervention, even when equilibrium transfers are not allowed, since one equilibrium Pareto dominates all others. We analyze the positive and normative features of equilibria in these models, and we explore the possibility of useful government intervention.     

MARRIAGE,MARKETS, AND MONEY: A COASIAN THEORY OF HOUSEHOLD FORMATION

This article integrates search‐based models of marriage and money. We think about households as organizations, the way Coase thinks about firms, as alternatives to markets that become more attractive when transactions costs increase. In the model, individuals consume market‐ and home‐produced goods, and home production is facilitated by marriage. Market frictions, including taxes, search, and bargaining problems, increase the marriage propensity. The inflation tax encourages marriage because being single is cash intensive. Microdata confirm singles use cash more than married people. We use macrodata over many countries to investigate how marriage responds to inflation, taxation, and other variables.     

Notes on marriage markets with weak externalities

We consider marriage markets with externalities. We focus on weak externalities, that is, markets in which each agent is primarily concerned about her partner. We formalize and prove the claim that weak externalities are not so significant in the marriage market: in this case, the ω-core and the α-core coincide and are both nonempty. In addition, we show that, if we allow agents to block matchings without changing their mate, the results do not longer hold.     

Valuations and dynamics of negotiations

This paper analyzes three‐party negotiations in the presence of externalities. We obtain a closed‐form solution for the Markov perfect equilibrium of a multilateral non‐cooperative bargaining model, yielding an equilibrium value and dynamics of negotiations that are supported by experimental studies. Players’ values are monotonically increasing (or decreasing) in the amount of negative (or positive) externalities that they impose on others. Moreover, players’ values are continuous and piecewise linear on the worth of bilateral coalitions, and are inextricably related to their negotiation strategies: the equilibrium value is the Nash bargaining solution when no bilateral coalitions form; the Shapley value when all bilateral coalitions form; or the nucleolus, when either one bilateral coalition among “natural partners” or two bilateral coalitions including a “pivotal player” form.     

Optimal Dynamic Taxation with Distinctive Forms of Social Status Attainment

We examine the role of both consumption‐ and wealth‐induced social comparisons in setting dynamic optimal income taxation. Under complete information, state‐invariant labor income taxes are used to remedy the externality caused by consumption‐induced social comparisons, while state‐contingent capital income taxes are used to remedy the externalities caused by both consumption‐ and wealth‐induced social comparisons. Under incomplete information, distinct types of agents are subject to an identical marginal capital income tax, which removes social comparisons. To solve the information problem, low‐productivity agents could be subject to a lower marginal labor tax than high‐productivity agents, which contradicts the traditional result in the Mirrlees–Stiglitz models.     

Job design with sequential tasks and outcome externalities revisited

We revisit job design with sequential tasks and outcome externalities from a different perspective, extending Schmitz (2013a). When two sequential tasks need to be performed by wealth-constrained agents, the principal can hire only one agent or two different agents. When there exists an outcome externality in terms of the fixed cost and such an externality is not too large, if the two tasks are conflicting (resp. synergistic), then it is optimal for the principal to hire two different agents (resp. only one agent). When there exists an outcome externality regarding the marginal cost, the opposite result holds.     

Leadership in Public Good Provision: A Timing Game Perspective

We address in this paper the issue of leadership when two governments provide public goods to their constituencies with cross‐border externalities as both public goods are valued by consumers in both countries. We study a timing game between two different countries: before providing public goods, the two policymakers non‐cooperatively decide their preferred sequence of moves. We establish conditions under which a first‐ or second‐mover advantage emerges for each country, highlighting the role of spillovers and the complementarity or substitutability of public goods. As a result, we are able to prove that there is no leader when, for both countries, public goods are substitutable. When public goods are complements for both countries, each of them may emerge as the leader in the game. Hence a coordination issue arises. We use the notion of risk‐dominance to select the leading government. Finally, in the mixed case, the government for whom public goods are substitutable becomes the leader.     

Coordination and discrimination in contracting with externalities: divide and conquer?

The paper studies bilateral contracting between N agents and one principal, whose trade with each agent generates externalities on other agents. It examines the effects of prohibiting the principal from (i) coordinating agents on her preferred equilibrium, and (ii) making different contracts available to different agents. These effects depend on whether an agent is more or less eager to trade when others trade more. The prohibitions reduce the aggregate trade in the former case, and have little or no effect in the latter case. The inefficiencies under different contracting regimes are linked to the sign of the relevant externalities, and are shown to be typically reduced by both prohibitions.     

GROWTH AND BUBBLES WITH CONSUMPTION EXTERNALITIES*

This paper explores the role of consumption externalities in an overlapping generations economy with capital accumulation. If consumers in each generation are concerned with other agents’ consumption behaviours, there exist intergenerational as well as intragenerational consumption externalities. It is the presence of intergenreational consumption externalities that may produce fundamental effects both on equilibrium dynamics and on steady‐state characterization of the economy. This paper demonstrates this fact in the context of a simple model of endogenously growing, overlapping‐generations economy with or without asset bubbles.     

Coordination and bargaining power in contracting with externalities

Building on Genicot and Ray [G. Genicot, D. Ray, Contracts and externalities: How things fall apart, J. Econ. Theory 131 (2006) 71-100] we develop a model of non-cooperative bargaining that combines the two main approaches in the literature of contracting with externalities: the offer game (in which the principal makes simultaneous offers to the agents) and the bidding game (in which the agents make simultaneous offers to the principal). Allowing for agent coordination, we show that the outcome of our bargaining procedure may differ remarkably from those of the offer and the bidding games. In particular, we find that bargaining can break agents' coordination and that the principal's payoff can be decreasing in his own bargaining power.     

Love and taxes – and matching institutions

Abstract Income disparities and the intra‐family redistribution implied by a marriage may induce a high‐income earner to abstain from marrying a low‐income earner even though they would be a perfect match emotionally. Redistributive income taxation eases this problem, and the design of marriage matching institutions interacts with this role of redistributive taxation. Matching institutions that ensure that people largely from the same income groups meet each other can substitute for redistribution. Matching across income groups that focuses on emotional quality or preference congruence of the match may increase the efficiency‐enhancing role of taxation.     

Authority and Incentives in Organizations

I consider a corporation that consists of an owner, a manager, and two divisions. There exist externalities between the divisions: if a division behaves cooperatively, its success will increase the performance of the other division. The owner creates monetary effort incentives and allocates decision authority over the divisions. I characterize how externalities and benefits of control determine the corporation's optimal organization. The introduction of endogenous incentives changes the major findings of the existing literature, because then concentrated delegation of authority over both divisions to one of the division heads will be optimal if cooperation is important and divisions are difficult to incentivize.     

Information and crowding externalities

Summary. We analyze a model in which agents have to make a binary choice under incomplete information about the state of the world, but also care about coordination with other agents who have the same problem. In some of these situations, the larger the share choosing the same alternative, the better off are agents. In others, if too many people choose the same alternative, agents could be worse off, due to crowding externalities. Agents receive public and private information about the state of the world. We determine whether agents rely more on private or public information, and whether or not their choice behavior is socially efficient. We characterize existence conditions for equilibria in which either all available information, or only the public information is used for decisions, compare the two equilibria in terms of welfare, and analyze the effects of better information. Surprisingly, increasing signal accuracy may be welfare decreasing.Received: 24 March 2004, Revised: 19 November 2004, JEL Classification Numbers: D82. Correspondence to: C. Robert ClarkWe would like to thank Ig Horstmann, Gilbert Laporte, Andrew Leach, Matthias Messner, Bernard Sinclair-Desgagné, Howard Thomas, Nicholas Yannelis, and two anonymous referees for helpful comments. The first author wishes to acknowledge the Strategic Research Grant he received from HEC Montreal for this project.     

The roommates problem revisited

One of the oldest matching problems is Gale and Shapley's (1962) [8] “roommates problem”: is there a stable way to assign 2N students into N roommate pairs? Unlike the classic marriage problem or college admissions problem, there need not exist a stable solution to the roommates problem. However, stability ignores the key physical constraint that roommates require a room and is therefore too restrictive. This motivates a new matching problem: matching agents subject to an initial assignment. A particularly important example is kidney exchange where after an assignment has been made, subsequent tests may determine that a patient and donor are incompatible. This paper introduces an efficient algorithm for finding a Pareto improvement starting from any status quo roommates assignment.