Information aggregation in financial markets with career concerns

What are the equilibrium features of a dynamic financial market in which traders care about their reputation for ability? We modify a standard sequential trading model to include traders with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. We characterize the most revealing equilibrium of this game and show that an increase in the strength of the traders' reputational concerns has a negative effect on the extent of information that can be revealed in equilibrium but a positive effect on market liquidity.     

Optimal risk-sharing with effort and project choice

We consider first-best risk-sharing problems in which “the agent” can control both the drift (effort choice) and the volatility of the underlying process (project selection). In a model of delegated portfolio management, it is optimal to compensate the manager with an option-type payoff, where the functional form of the option is obtained as a solution to an ordinary differential equation. In the general case, the optimal contract is a fixed point of a functional that connects the agent's and the principal's maximization problems. We apply martingale/duality methods familiar from optimal consumption-investment problems.     

Repeated moral hazard with effort persistence

I study a problem of repeated moral hazard where the effect of effort is persistent over time: each period's outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. For illustration, I present the computed solution of an example.     

Unique equilibrium in rent-seeking contests with a continuum of types

It is shown that rent-seeking contests with continuous and independent type distributions possess a unique pure-strategy Nash equilibrium.     

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.     

Knightian uncertainty and moral hazard

This paper presents a principal-agent model in which the agent has imprecise beliefs. We model this situation formally by assuming the agent?s preferences are incomplete as in Bewley (1986) [2]. In this setting, incentives must be robust to Knightian uncertainty. We study the implications of robustness for the form of the resulting optimal contracts. We give conditions under which there is a unique optimal contract, and show that it must have a simple flat payment plus bonus structure. That is, output levels are divided into two sets, and the optimal contract pays the same wage for all output levels in each set. We derive this result for the case in which the agent?s utility function is linear and then show it also holds if this utility function has some limited curvature.     

Large market games with demand uncertainty

We consider a market game with a continuum of consumers, where the measure of each type is stochastic. Nature selects the set of active consumers, who make bids and offers on ?−1 spot market trading posts. Existence of type-symmetric Nash equilibrium is proven. When facing price uncertainty, best responses are unique, and a Nash equilibrium to the sell-all game is typically not a Nash equilibrium to the original game. Under plausible circumstances, consumers strictly prefer to be on one side of the market.     

The economics of ‘new blood’

We construct a dynamic general-equilibrium model of search and matching where public knowledge grows through time and workers accumulate a fraction of this knowledge through education/retraining. Due to search delays, the unemployment pool is populated by vintages of workers of differing productivities. Through intergenerational rivalry, the human capital of older generations is rendered obsolete relative to that of the new blood. Higher knowledge growth exacerbates intergenerational competition, thereby lowering education and growth while raising unemployment and inequality. These findings help explain wage compression/expansion and the hump-shaped wage-tenure profile across cohorts.     

Employment and wages with sector-specific shocks and worker moral hazard

We study a model of worker moral hazard with identical workers and where sectoral prices are subject to stochastic shocks. When firms are short-run maximizers, employment is shown to be distorted downward relative to the case of certain prices, and more so the higher is the current price. This implies that employment is relatively insensitive to sectoral output-price changes, and that average employment and output are reduced when price volatility increases. When firms can commit to future employment levels, employment is greater in low-demand states (implying labor hoarding), and thus even less sensitive to shocks, while average employment is less distorted downward by uncertainty. The model gives a new explanation of how increased sector-specific volatility can lead to output losses, and of the possibility of negative comovements of unemployment and turnover.     

A two-person game of information transmission

We consider a statistical decision problem faced by a two player organization whose members may not agree on outcome evaluations and prior probabilities. One player is specialized in gathering information and transmitting it to the other, who takes the decision. This process is modeled as a game. Qualitative properties of the equilibria are analyzed. The impact of improving the quality of available information on the equilibrium welfares of the two individuals is studied. Better information generally may not improve welfare. We give conditions under which it will.     

Ranking agencies under moral hazard

Summary. We provide rankings across uncertain outputs generated by agents functioning within the Principal-Agent paradigm. For agents who are identical except for their productivity, a necessary (but not sufficient) condition for an agent to be preferred is that her output dominates that of lower agents in the sense of First Degree Stochastic Dominance (FDSD) at every level of effort. Sufficient conditions are based on Blackwells ranking of information systems and involves a characterization of FDSD using stochastic matrices. Our conditions for ranking outputs extends earlier results concerning the value of information within the agency framework. We also show how our techniques can be adapted to rank agents even if the first-order approach for determining optimal contracts fails to hold.Received: April 2, 1996; revised version: October 30, 1996This revised version was published online in February 2005 with corrections to the cover date.     

Core of convex distortions of a probability

This paper characterizes the core of a differentiable convex distortion of a probability measure on a nonatomic space by identifying it with the set of densities which dominate the derivative of the distortion, for second order stochastic dominance. The densities that have the same distribution as the derivative of the distortion are the extreme points of the core. These results are applied to the differentiability of a Yaari's or Rank Dependent Expected utility function. The superdifferential of a Choquet integral at any point is fully characterized. Examples of use of these results in simple models where some agent is a RDEU maximizer are given.     

A note on cheap talk and burned money

Austen-Smith and Banks [Cheap talk and burned money, J. Econ. Theory 91(1) (2000) 1-16] study how money burning can expand the set of pure cheap talk equilibria of Crawford and Sobel [Strategic information transmission, Econometrica 50(6) (1982) 1431-1451]. I identify an error in the main Theorem of Austen-Smith and Banks, and provide a variant that preserves some of the important implications. I also prove that cheap talk can be influential with money burning if and only if it can be influential without money burning. This strengthens a result of Austen-Smith and Banks, but uncovers other errors in their analysis. Finally, an open conjecture of theirs is proved correct.     

Coordination and delay in global games

What is the effect of offering agents an option to delay their choices in a global coordination game? We address this question by considering a canonical binary action global game, and allowing players to delay their irreversible decisions. Those that delay have access to accurate private information at the second stage, but receive lower payoffs. We show that, as noise vanishes, as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late, the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time. We outline the welfare implications of this finding, and probe the robustness of our results from a variety of angles.     

Trembling-hand myopia and trembling-hand perfection

In 1975 Selten introduced trembling-hand perfection, however it was implicitly assumed that specific values of rationality imperfections are common knowledge. Relaxing this assumption, we develop the notion of trembling-hand myopia, and completely characterize equilibria which are robust in this setting.     

Decision-making in competitive framings—Strategic behavior of chess players in mini-ultimatum game chess puzzles

We introduce a competitive framing in the mini-ultimatum game utilizing chess puzzles. Therein, our chess playing participants accept low offers significantly more often compared to a neutral framing. We conclude that in familiar competitive surroundings egoistic behavior is more acceptable.     

Gender differences in lying

Aversion to lying has been consistently observed in sender-receiver games. Women have demonstrated greater aversion to lying for a small monetary benefit in these games than men. We test the robustness of this gender difference in a sender-receiver game with larger stakes. We find no difference in lying by gender.     

On the efficiency of participation with vertically differentiated workers

In this journal Albrecht et al. (2010) assume that the planner problem is constrained by participation decisions. When this constraint is relaxed participation is too high whereas market tightness is too low. Subsidizing non-participants improves market efficiency and reduces unemployment.     

Redistribution, fertility, and growth: The effect of the opportunities abroad

This article analyzes the effect of the opportunities abroad on the growth path that a small open economy, in which redistribution policy in favor of less prosperous segments takes place, is expected to follow. The model shows that redistribution policy raises fertility among the unskilled recipients, lowers fertility among the contributing skilled, slows human capital accumulation, and reduces per-capita output growth. The paper demonstrates that the opportunities abroad determine the share of income redistributed and ultimately induce the offspring of the unskilled to invest in human capital and decrease their family size.     

The desire for land: Strategic lending with adverse selection

This paper deals with a setting in which borrowers and lenders place different values on an asset that can be used as collateral. Under adverse selection, lenders may rationally choose credit contracts with the object of attracting a relatively risky group of clients, so raising their chances of gaining possession of the asset through default. Contracts of differing attractiveness to borrowers can also coexist in equilibrium. When an ‘inside’ and an ‘outside’ lender compete, the latter placing a lower value on the collateral, and their loanable funds are sufficiently limited, a separating equilibrium may exist in which the insider offers a contract which attracts risky borrowers, whereas the outsider's contract is aimed at a safer group. If loanable funds are ample, the only equilibrium will involve pooling contracts, but the insider may still offer more attractive contracts in an entry game.