Preventing rather than punishing: An early warning model of malfeasance in public procurement

Is it possible to predict malfeasance in public procurement? With the proliferation of e-procurement systems in the public sector, anti-corruption agencies and watchdog organizations have access to valuable sources of information with which to identify transactions that are likely to become troublesome and why. In this article, we discuss the promises and challenges of using machine learning models to predict inefficiency and corruption in public procurement. We illustrate this approach with a dataset with more than two million public procurement contracts in Colombia. We trained machine learning models to predict which of them will result in corruption investigations, a breach of contract, or implementation inefficiencies. We then discuss how our models can help practitioners better understand the drivers of corruption and inefficiency in public procurement. Our approach will be useful to governments interested in exploiting large administrative datasets to improve the provision of public goods, and it highlights some of the tradeoffs and challenges that they might face throughout this process.     

Contests with multiple alternative prizes: Public-good/bad prizes and externalities

We study contests in which there are multiple alternative public-good/bad prizes, and the players compete, by expending irreversible effort, over which prize to have awarded to them. Each prize may be a public good for some players and a public bad for the others, and the players expend their effort simultaneously and independently. We first prove the existence of a pure-strategy Nash equilibrium of the game, then establish when the total effort level expended for each prize is unique across the Nash equilibria, and then summarize and highlight other interesting and important properties of the equilibria. Finally, we discuss the effects of heterogeneity of valuations on the players’ equilibrium effort levels and a possible extension of the model.     

Spurious Agglomeration

This paper shows that an incentive problem in investment can lead to an excessive concentration of economic activity. The incentive problem arises from the concern of developers for their reputations; they have a tendency to imitate each other′s location decisions because they fear denial of future credit if they make eccentric choices that do not work out. The excessive concentration can manifest itself in cities that are too large or in too many firms of one type choosing a location. In the extreme case, cities may exist in equilibrium even in the absence of agglomeration economies. The inefficiency can, however, be alleviated by an appropriate agglomeration tax.     

Social norms,costly punishment and the evolution of cooperation

Within a co-evolutionary framework of reputations, strategies and social norms, we study the role of punishment in the promotion of cooperation. Norms differ according to whether they allow or do not allow the punishment action to be a part of the strategies, and, in the case of the former, they further differ in terms of whether they encourage or do not encourage the punishment action. In such a framework, depending on the applied social norm, players are first given different reputations based on their employed strategies. Players then update their strategies accordingly after they observe the payoff differences among different strategies. Finally, over a longer horizon, the evolution of the social norms may be driven by the average payoffs of all members of the society. The strategy dynamics are articulated under different social norms. It is found that costly punishment does contribute to the evolution toward cooperation. Not only does the attraction basin of the cooperative evolutionary stable state become larger, but the speed of convergence to the CESS also becomes faster. These two properties are further enhanced if the punishment action is encouraged by the social norm.     

The endogenous formation of cartels

We discuss large but finite linear market games which are represented as minima of finitely many measures. These games describe markets in which the agents decompose into finitely many disjoint groups each of which holds a corner of the market. Most solution concepts like the core, the Shapley value, or the Walrasian equilibrium tend to favor the short side of such market excessively. That is, in the replicated limit or in the continuum version, the short side is awarded all the possible profits even though cooperation within the grand coalition is required. We show that vNM-Stable Sets differ markedly. For large but finite player sets we exhibit vNM solutions that assign wealth to the long side of the market. It turns out that the shape of the generic vNM-Stable Set suggests cartelization of the market.Received: 29 March 2000, Accepted: 26 October 2001, JEL Classification: C71, D70     

The efficiency of top agents: An analysis through service strategy in tennis

We consider the question whether top tennis players in a top tournament (Wimbledon) employ an optimal (efficient) service strategy. While we show that top players do not, in general, follow an optimal strategy, our principal result is that the estimated inefficiencies are not large: the inefficiency regarding winning a point on service is on average 1.1% for men and 2.0% for women, implying that–by adopting an efficient service strategy–players can (on average) increase the probability of winning a match by 2.4%-points for men and 3.2%-points for women. While the inefficiencies may seem small, the financial consequences for the efficient player at Wimbledon can be substantial: the expected paycheck could rise by 18.7% for men and even by 32.8% for women. We use these findings to shed some light on the question of whether economic agents are successful optimizers.     

Stopping with congestion and private payoffs

This paper analyses a two-player stopping game with multiarmed bandits in which each player chooses between learning about the quality of her private risky arm and competing for the use of a single shared safe arm. The qualities of the players’ risky arms are independent. A player whose risky arm produces a success no longer competes for the safe arm. We assume that a player observes her opponent’s actions but not his realised payoffs. She is therefore never certain whether her opponent is still competing for the safe arm. When the players’ prior probabilities of success are sufficiently close, there exists no pure strategy equilibrium, and we characterise the unique mixed strategy equilibrium. Otherwise, the unique equilibrium is in pure strategies. The amount of experimentation performed in equilibrium is inefficiently low but, for many priors, higher than if successes are publicly observed.     

Large games with countable characteristics

We consider anonymous games with an atomless probability space of players in which players’ characteristics are countable. Our main result shows that the set of equilibrium distributions coincides with the set of distributions induced by equilibrium strategies together with the function assigning characteristics to players. This result implies the existence of Nash equilibria in continuous large games with countable characteristics.     

The shared reward dilemma on structured populations

In this paper we study the recently introduced “shared reward dilemma” (Cuesta et al. in J Theor Biol 251:253–263, 2008) in the presence of a structure governing the interactions among the population. The shared reward dilemma arises when the prisoner’s dilemma is supplemented with a second stage in which a fixed reward is equally distributed among all cooperators. We first extend our previous results on the equilibrium structure of this game to the case of a one-shot game taking place on a regular network. Subsequently, we consider an evolutionary version of the game on both lattices and random networks. We show that the evolutionary game on graphs exhibits important differences with the case of well-mixed populations. In particular, there exists an important parameter range in which the cooperation is boosted and a single cooperator can invade a population of defectors. We study the dependence of the cooperation levels on the neighborhood size, finding that on random networks the level of cooperation reached decreases as the neighborhood size increases. Moreover, square lattices favor cooperation more than random networks, and on them cooperation may be almost full for certain parameter regions even for large neighborhood sizes. Further, we show that the effect of the population structure is never detrimental for cooperation. We interpret our results in terms of weak versus strong temptation and discuss the nontrivial issues involved in trying to promote cooperation exogenously by means of such a reward mechanism.     

Buying cooperation in an asymmetric environmental differential game

We consider a two-player asymmetric differential game of pollution control. One player is non-vulnerable to pollution, or unwilling to consider damages when choosing her production policy in a non-cooperative game. We characterize the feedback-Nash equilibrium and the cooperative solution. We establish conditions under which the vulnerable player can buy the cooperation of the non-vulnerable player to control her emissions. We further use the Nash bargaining solution to allocate the total cooperative dividend between the two players and propose a time-consistent decomposition overtime of the total payoff.     

Picking a loser: Strategic surprise in a design and development game

We take a setting in which upstream players produce design ideas and downstream players select among these ideas to develop finished products. Design diversity is valuable at the upstream stage and coordination is valuable at the downstream stage. However, this outcome is not always realized. We show that an intermediary between upstream and downstream can improve on equilibrium outcomes by acting as a coordination and commitment device whose optimal policy must sometimes reward inferior ideas. We apply the model to technology standards, trend‐driven industries, political primaries, and the management of process innovation. We discuss incentives to vertically integrate.     

重复占优策略博弈在团队培训中的应用及启发——基于一个体验式训练项目的思考

博弈论是研究决策主体行为发生直接相互作用时的决策以及这种决策的均衡问题的一门科学。占优策略博弈是指存在始终优于对方反应的博弈,占优策略博弈可能存在合作解和非合作解。在对一个基于重复非合作占优策略博弈而设计的培训项目进行分析的基础上,探讨有限重复占优策略博弈的非合作解和合作解的差别,并借鉴这种差别对于团队管理的启发,在管理实践中充分考虑主体的充分理性和最大化偏好,以团队利益为前提,尊重个体合理利益,设计科学的激励约束制度,促成一个良性的竞争合作团队氛围。     

The economics analysis of a <Emphasis Type="Italic">Q</Emphasis>-learning model of cooperation with punishment and risk taking preferences

The aim of this paper is to better understand how cooperation mechanisms work in the context of a Q-learning model. We apply a learning reinforcement model to analyse the conditions needed to have a stable cooperative equilibrium when people take part in a common project and could take advantages of free-riding. Our results show that a stable equilibrium can be reached thank to mechanisms of punishment, but the final result strongly depends on the risk-taking individuals’ preferences. In particular, we find that the penalties will be effective only with people having high exploration rates,namely with people able to adapt their strategies and learn to cooperate. Otherwise, it is possible to have an unstable equilibrium with cooperation until individuals have a very high intrinsic motivation to cooperate, whatever the others do.     

Inefficient entry order in preemption games

In a preemption game, players decide when to take an irreversible action. Delaying the action exogenously increases payoffs, but there is an early mover advantage. Riordan (1992) shows that in a preemption game with two asymmetric players, players act in decreasing order of efficiency. This provides a microfoundation to the assumption that entry in a market occurs in the order of profitability, commonly used in the empirical analysis of market entry. We provide a counterexample showing that with more than two players this intuitive result can be reversed. We present a preemption game of entry into a new market. The potential entrants are three asymmetric firms: one “efficient” firm with high post-entry profits, and two “inefficient firms”. We show that the set of parameters such that the equilibrium entry order does not reflect the efficiency ranking is nonempty, and analyse which changes in post-entry profits preserve this entry order.     

Estimation and testing of stochastic frontier models using variational Bayes

We show how a wide range of stochastic frontier models can be estimated relatively easily using variational Bayes. We derive approximate posterior distributions and point estimates for parameters and inefficiency effects for (a) time invariant models with several alternative inefficiency distributions, (b) models with time varying effects, (c) models incorporating environmental effects, and (d) models with more flexible forms for the regression function and error terms. Despite the abundance of stochastic frontier models, there have been few attempts to test the various models against each other, probably due to the difficulty of performing such tests. One advantage of the variational Bayes approximation is that it facilitates the computation of marginal likelihoods that can be used to compare models. We apply this idea to test stochastic frontier models with different inefficiency distributions. Estimation and testing is illustrated using three examples.     

Cooperation with a multiproduct corporation in a strategic managerial delegation

We consider an industry composed of a multiproduct corporation that adopts corporate social responsibility (CSR) as a strategic managerial delegation and examine the profit-incentive to form a cooperative group. We find that competition is an equilibrium for any degree of substitutability and yields the highest CSR, which is increasing in the degree of substitutability. We also show that full cooperation is an equilibrium for lower substitutability but induces no CSR, whereas partial cooperation with one uniplant firm is an equilibrium for higher substitutability but yields lower CSR than that under competition. Therefore, cooperation might reduce strategic CSR activities, whereas competition will encourage higher CSR but yield lower industry profits.     

Dynamics and equilibrium in a structural model of wide‐body commercial aircraft markets

This paper develops and estimates a dynamic equilibrium model of the market for new and used commercial aircraft. The model is estimated by maximum simulated likelihood using data on wide‐body aircraft owners and prices for transactions occurring 1978‐1997. The importance of explicitly modeling dynamics and equilibrium in new and used markets for durable goods is illustrated in two counterfactual experiments. Estimates of the structural model are used to show that implementing an investment tax credit not only increases demand for new wide‐body aircraft by the airlines that receive the tax credit, but also increases the number of new wide‐body aircraft owned by airlines not directly affected by the policy. Further, the model indicates that a policy which improves the efficiency of secondary markets for used wide‐body aircraft will also stimulate demand for new wide‐body aircraft. Copyright © 2010 John Wiley & Sons, Ltd.     

Estimating Production Uncertainty in Stochastic Frontier Production Function Models

One of the main purposes of the frontier literature is to estimate inefficiency. Given this objective, it is unfortunate that the issue of estimating firm-specific inefficiency in cross sectional context has not received much attention. To estimate firm-specific (technical) inefficiency, the standard procedure is to use the mean of the inefficiency term conditional on the entire composed error as suggested by Jondrow, Lovell, Materov and Schmidt (1982). This conditional mean could be viewed as the average loss of output (return). It is also quite natural to consider the conditional variance which could provide a measure of production uncertainty or risk. Once we have the conditional mean and variance, we can report standard errors and construct confidence intervals for firm level technical inefficiency. Moreover, we can also perform hypothesis tests. We postulate that when a firm attempts to move towards the frontier it not only increases its efficiency, but it also reduces its production uncertainty and this will lead to shorter confidence intervals. Analytical expressions for production uncertainty under different distributional assumptions are provided, and it is shown that the technical inefficiency as defined by Jondrow et al. (1982) and the production uncertainty are monotonic functions of the entire composed error term. It is very interesting to note that this monotonicity result is valid under different distributional assumptions of the inefficiency term. Furthermore, some alternative measures of production uncertainty are also proposed, and the concept of production uncertainty is generalized to the panel data models. Finally, our theoretical results are illustrated with an empirical example.     

An evolutionary model with best response and imitative rules

We formulate an evolutionary oligopoly model where quantity setting players produce following either the static expectation best response or a performance-proportional imitation rule. The choice on how to behave is driven by an evolutionary selection mechanism according to which the rule that brought the highest performance attracts more followers. The model has a stationary state that represents a heterogeneous population where rational and imitative rules coexist and where players produce at the Cournot–Nash level. We find that the intensity of choice, a parameter representing the evolutionary propensity to switch to the most profitable rule, the cost of the best response implementation as well as the number of players have ambiguous roles in determining the stability property of the Cournot–Nash equilibrium. This marks important differences with most of the results from evolutionary models and oligopoly competitions. Such differences should be referred to the particular imitative behavior we consider in the present modeling setup. Moreover, the global analysis of the model reveals that the above-mentioned parameters introduce further elements of complexity, conditioning the convergence toward an inner attractor. In particular, even when the Cournot–Nash equilibrium loses its stability, outputs of players little differ from the Cournot–Nash level and most of the dynamics is due to wide variations of imitators’ relative fraction. This describes dynamic scenarios where shares of players produce more or less at the same level alternating their decision mechanisms.     

Competitive equilibrium fraud in markets for credence-goods

This is a study of the nature and prevalence of persistent fraud in a competitive market for credence-quality goods. We model the market as a stochastic game of incomplete information in which the players are customers and suppliers and analyze their equilibrium behavior. Customers characteristics, idiosyncratic search cost and discount rate, are private information. Customers do not possess the expertise necessary to assess the service they need either ex ante or ex post. We show that there exists no fraud-free equilibrium in the markets for credence-quality goods and that fraud is a prevalent and persistent equilibrium phenomenon.