Characterizations of bargaining solutions in production economies with unequal skills

In production economies with unequal skills, this paper characterizes bargaining solutions by using axioms on allocation rules rather than axioms on classical bargaining solutions. We introduce a new axiom, consistency w.r.t. technological innovations, so that the non-welfaristic characterizations of bargaining solutions in the production economies are provided. By the characterizations, we can classify the three bargaining solutions (the Nash, the Kalai-Smorodinsky, and the Egalitarian solutions) from the viewpoint of responsibility and compensation discussed by Dworkin.     

Cost sharing with multiple technologies

We study cost sharing problems where gains from cooperation can come from the presence of other agents, such as when agents share their technologies. A simple model is built, where economies of scale are eliminated in order to study this effect. We use as the key axiom the property that, if an agent does not improve the technology of any coalition he joins, he should not get any part of the gain from cooperation. With properties of linearity and symmetry, this axiom characterizes a well-defined set of rules. From this set, we propose a rule derived from the familiar Shapley value. We show that it is the only rule in that set satisfying an upper-limit property on individual cost allocations or a monotonicity property when technology improves. We also derive a distinct rule using a property that ensures that no coalition has an incentive to manipulate the individual demands of its members.     

Cost sharing with multiple technologies

We study cost sharing problems where gains from cooperation can come from the presence of other agents, such as when agents share their technologies. A simple model is built, where economies of scale are eliminated in order to study this effect. We use as the key axiom the property that, if an agent does not improve the technology of any coalition he joins, he should not get any part of the gain from cooperation. With properties of linearity and symmetry, this axiom characterizes a well-defined set of rules. From this set, we propose a rule derived from the familiar Shapley value. We show that it is the only rule in that set satisfying an upper-limit property on individual cost allocations or a monotonicity property when technology improves. We also derive a distinct rule using a property that ensures that no coalition has an incentive to manipulate the individual demands of its members.     

Response Strategies and Learning in Discrete Choice Experiments

This study explores ordering effects and response strategies in repeated binary discrete choice experiments. Mechanism design theory and empirical evidence suggest that repeated choice tasks per respondent induce strategic behaviour. We find evidence that strategic opportunities provided by the order in which choice sets are presented to respondents affect choice decisions (strategic response). The results suggest, however, that respondents may solely respond to high cost rather than low cost inconsistencies. That is, respondents are more cost sensitive, and thus have a lower willingness to pay (WTP), if the same or a similar level of provision was offered in a previous choice set at a lower cost than if it was not. Yet, the cost sensitivity, and thus WTP, remains unaffected if the same or a similar level of provision was offered in a previous choice set at a higher cost. Our findings further indicate that cost sensitivity increases (and thus WTP decreases), when respondents progress through the choice task, with this increase (decrease) lessening as more choice questions are answered. Possible explanations are value learning and strategic learning.     

Social optimality and cooperation in nonatomic congestion games

Congestion externalities may result in nonoptimal equilibria. For these to occur, it suffices that facilities differ in their fixed utilities or costs. As this paper shows, the only case in which equilibria are always socially optimal, regardless of the fixed components, in that in which the costs increase logarithmically with the size of the set of users. Therefore, achieving a socially optimal choice of facilities generally requires some form of external intervention or cooperation. For heterogeneous populations (in which the fixed utilities or costs vary across users as well as across facilities), this raises the question of utility or cost sharing. The sharing rule proposed in this paper is the Harsanyi transferable-utility value of the game—which is based on the users’ marginal contributions to the bargaining power of coalitions.     

Introduction to the share economy

This paper introduces the major ideas in Martin Weitzman's The Share Economy. It notes that a “share” economy is one in which the marginal cost of labor is less than the average cost of labor; moreover, this condition can be induced by sharing revenues or profits. According to share theory, such contracts will lead firms to create more vacancies and thereby lower the average unemployment rate. Weitzman proposes to induce more share arrangements by giving a tax preference to share-type income.     

Characterization of additive cost sharing methods

The set of additive cost sharing methods when individual demands are integer valued and cost shares are non negative is characterized by its extreme points and by a network flow representation. The extreme methods allocate costs incrementally along a chain of demand vectors independent of the cost function. The result generalizes Wang’s characterization in that we do not assume the Dummy axiom.     

Estimating VARs with long stationary heterogeneous panels: A comparison of the fixed effect and the mean group estimators

The most promising candidates for estimating vector autoregressive models with long, stationary, possibly heterogeneous panel data sets (panel-VARs) are the fixed effect (FE) and the mean group (MG) estimators. With a view to providing guidance to applied researchers on how to pool in a panel-VAR, this paper compares the performance of the FE and the MG estimators both asymptotically and in Monte Carlo simulations. The main results of the analysis suggest the use of both estimators in applied work. If FE and MG estimates give similar estimates, the FE estimator should be used because it is more efficient. If they differ, the MG estimator should be used only if the panel is sufficiently long — say, twice as long as usually recommended in the dynamic panel data literature. If FE and MG estimates differ and the panel is not long enough, neither is generally a desirable alternative and other estimation techniques are needed.     

Minimax regret with imperfect ex-post knowledge of the state

We consider decision problems under complete ignorance and extend the minimax regret principle to situations where, after taking an action, the decision maker does not necessarily learn the state of the world. For example, if the decision maker only learns what the outcome is, then all she knows is that the actual state is one of the (possibly several) states that yield the observed outcome under the chosen action. We refer to this situation as imperfect ex-post information. We show that, given a choice between more information and less information, the decision maker prefers the latter. We also extend the framework to encompass the possibility of less than the extreme degree of pessimism that characterizes the minimax regret criterion.     

Risk sharing and industrial specialization in China

We investigate how risk sharing shapes industrial specialization across prefecture-level cities in China. By unbundling the mechanisms of risk sharing, we find that ex ante risk sharing generates a first-order stimulant effect on the geographical concentration of manufacturing industries, particularly for non-state-owned enterprises and cyclical industries. Ex post risk sharing matters only for state-owned enterprises. This result remains robust to instrument variable estimation and controlling for other determinants of industrial specialization. Finally, we show that interregional labor migration (special fiscal transfers) plays an important role in promoting interregional ex ante (ex post) risk sharing. The study implies that much more risk sharing and efficiency gains from industrial specialization would be achieved if capital markets and credit markets are better developed.     

ON ADDITIVE METHODS TO SHARE JOINT COSTS*

The Shapley value theory is extended to cost functions with multiple outputs (or to production functions with multiple inputs) where each output is demanded by a different agent and the level of demand varies. Beyond the Additivity and Dummy axioms (Shapley's original axioms) we insist that the cost-share of an agent should not decrease when she increases her demand (Demand Monotonicity). This property rules out the Aumann-Shapley pricing formula, as well as any method charging average cost for homogeneous goods. We characterize the class of cost sharing methods satisfying Additivity, Dummy, Demand Monotonicity and Cross Monotonicity. The last says that when outputs i and j are cost complements (resp-cost substitutes) the cost share of i is non decreasing (resp-non increasing) in the demand of j. Two prominent methods in the class are the Shapley-Shubik method (i.e. the Shapley value of the Stand Alone cost game) and serial cost sharing (which extends to multiple goods a formula due to Moulin and Shenker). They are characterized respectively by a lower bound and by an upper bound on individual cost shares.     

The separability axiom and equal-sharing methods

A quasi-linear social choice problem is defined as selecting one (among finitely many) indivisible public decision and a vector of monetary transfers among agents to cover the cost of this decision. This decision is based upon individual preferences, which are assumed to be additively separable and linear in money. The Separability axiom is a consistency property for choice methods on societies with variable size: the decision is not affected if we remove an arbitrary agent under the condition that he be guaranteed his original utility level and the cost to the remaining agents is modified accordingly. Thus the utility level assigned by the social choice function to agent i is the price at which the other agents are unanimously willing to buy agent is share of the decision power. A general characterization of choice methods satisfying this axiom is provided. Three subclasses of particular interest are characterized by additional milder axioms. Those are: (i) equal sharing of the surplus left over some reference utility (e.g., the utility at a status quo decision), (ii) utilitarian methods that merely select the efficient public decision and perform no monetary transfers, and (iii) equal allocation of nonseparable costs, which divides equally the surplus left over from the utility derived from the pivotal mechanism (also known as the Vickrey-Clarke-Groves mechanism).     

Pricing traffic in a spanning network

Users need to connect a pair of target nodes in the network. They share the fixed connection costs of the edge. The system manager elicits target pairs from users, builds the cheapest forest meeting all demands, and choose a cost sharing rule satisfying:Routing-proofness: a user cannot lower his cost by reporting as several users along an alternative path connecting his target nodes;Stand Alone core stability: no group of users pay more than the cost of a subnetwork meeting all connection needs of the group.We construct two such rules. When all connecting costs are 0 or 1, one is derived from the random spanning tree weighted by the volume of traffic on each edge; the other is the weighted Shapley value of the Stand Alone cooperative game. Both rules are then extended by the familiar piecewise-linear technique. The former is computable in polynomial time, the latter is not.     

Sharing a Polluted River Network

A polluted river network is populated with agents (e.g., firms, villages, municipalities, or countries) located upstream and downstream. This river network must be cleaned, the costs of which must be shared among the agents. We model this problem as a cost sharing problem on a tree network. Based on the two theories in international disputes, namely the Absolute Territorial Sovereignty (ATS) and the Unlimited Territorial Integrity (UTI), we propose three different cost sharing methods for the problem. They are the Local Responsibility Sharing (LRS), the Upstream Equal Sharing (UES), and the Downstream Equal Sharing (DES), respectively. The LRS and the UES generalize Ni and Wang (Games Econ Behav 60:176–186, 2007) but the DES is new. The DES is based on a new interpretation of the UTI. We provide axiomatic characterizations for the three methods. We also show that they coincide with the Shapley values of the three different games that can be defined for the problem. Moreover, we show that they are in the cores of the three games, respectively. Our methods can shed light on pollution abatement of a river network with multiple sovereignties.     

Moral hazard with bounded payments

We study the moral hazard problem with general upper and lower constraints M on compensation. We characterize the optimal contract and show existence and uniqueness. When minimizing costs for given effort, a principal harmed by M will pay according to M on some range of outcomes; when M reflects limited liability or a minimum wage, the contract is option-like. When the principal also chooses effort, a principal harmed by M might nonetheless never pay according to M. This cannot occur if the cost of inducing effort in the standard principal-agent problem is convex, for which we provide sufficient conditions related to the informativeness of outcome about effort.     

Culture, caution, and trust

Trust is an important determinant of economic development. Understanding its origins is therefore critical. We develop a principal-agent model with heterogeneous players to determine the aggregate amount of trustworthiness and trust in a society. People are distributed according to their preference toward caution, which we model as loss aversion. The first two moments of the distribution across principals and agents—along with institutional quality—are critical to the process by which trustworthiness and trust are formed. A direct effect suggests that more caution leads to less societal trust. An indirect effect of greater caution, working through trustworthiness, leads to more trust. Paradoxically, the net effect is almost always positive. The results are similar when we use expected utility theory. Different distributional assumptions can influence the results.     

Self-insurance vs. self-financing: A welfare analysis of the persistence of shocks

We study the welfare cost of market incompleteness in a generalized Bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks. Market incompleteness in our framework has two dimensions. First, in the Bewley tradition, only a limited set of instruments for consumption smoothing is available. Second, entrepreneurs? capital rental is subject to collateral constraints. As is well known, it is harder to self-insure against more persistent shocks, and the welfare cost of missing consumption insurance increases with shock persistence. On the other hand, with collateral constraints, an increase in shock persistence leads to better allocation of production factors through entrepreneurs? self-financing, and the welfare cost of imperfect capital rental markets decreases with shock persistence. The overall welfare cost of market incompleteness can be increasing, decreasing, or even non-monotone in shock persistence, depending on the relative strengths of its two components—the cost of missing insurance and the cost of imperfect capital markets.     

Sequential auctions with imperfect quantity commitment

This paper studies sequential second price auctions with imperfect quantity commitment in environments involving single-unit demands, independent private values, and non-decreasing marginal costs. The paper characterizes the symmetric equilibrium strategy and demonstrates that the equilibrium price sequence is conditionally non-increasing, showing a downwards drift in cases in which the marginal cost exceeds the reserve price with positive probability. The paper also argues that unlike a strong seller who sets reserve prices strictly above marginal costs, a weak seller will typically prefer to commit to such inefficiently low reserve prices.     

Auction mechanisms and the measurement of WTP and WTA

We evaluate the impact of three auction mechanisms — the Becker–DeGroot–Marschak mechanism, the second-price auction, and the random nth-price auction — in the measurement of willingness to pay (WTP) and willingness to accept (WTA) measures of value. Our results show that initial bidding in trial 1 in each auction does not contradict the endowment effect; but that, if it is the endowment effect that governs people’s initial bidding behavior, it can be eliminated with repetitions of a second-price or random nth-price auction; and if the thesis is that the effect should persist across auctions and across trials is right, our results suggest that there is no fundamental endowment effect.     

AN ANALYSIS OF INTERNATIONAL PRICE DIFFERENTIALS ON EBAY

Online auction sites like eBay provide ways to measure what consumers buy and how much they pay. Does this imply that consumers pay similar prices, irrespective of their location? Comparing prices for homogeneous, tradable goods in the euro area and the United Kingdom, we find that prices differ significantly. The differential is not related to countries' having different currencies. However, price dispersion—the variance of prices—does seem to be smaller if two countries share a common currency. Our results confirm the importance of national borders in explaining price differences and their magnitude is related to (not) sharing a common currency. (JEL E30, E31, E50, F40)