Incomplete risk sharing arrangements and the value of information

Summary. The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5. Received: May 14, 2001; revised version: March 5, 2002     

Multi-activity contests

In many contests, players can influence their chances of winning through multiple activities or “arms”. We develop a model of multi-armed contests and axiomatize its contest success function. We then analyze the outcomes of the multi-armed contest and the effects of allowing or restricting arms. Restricting an arm increases total effort directed to other arms if and only if restricting the arm balances the contest. Restricting an arm tends to reduce rent dissipation because it reduces the discriminatory power of the contest. But it also tends to increase rent dissipation if it balances the contest. Less rent is dissipated if an arm is restricted as long as no player is excessively stronger than the other with that arm. If players are sufficiently symmetric in an arm, both players are better off if that arm is restricted. Nevertheless, players cannot agree to restrict the arm if their costs of using the arm are sufficiently low.     

Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada

This study measures the extent to which P2P file-sharing activities act as substitutes or complements to music purchases in markets for CDs. The paper breaks with the mainstream economics approach which dominates the music file-sharing discussion. Whereas such models assume relationships at the micro level (e.g. between file-sharing and purchases) based on observations made at the macro level, our evolutionary economics approach measures the direct effects using micro data representative of the Canadian population. The behavioral incentives underpinning free music downloading, novel to this paper, are the multiple effects of: ‘unwillingness to pay’ (market substitution), ‘hear before buying’ (market creation), ‘not wanting to buy a whole album’ (market segmentation), and ‘not available in the CD format or on electronic pay-sites’ (market creation). Although the two first mentioned incentives significantly influence CD album purchases—i.e. there is a negative and significant market substitution effect and a positive and significant market creation effect—on the whole, these two effects ‘cancel’ one another out, leading to no association between the number of P2P files downloaded and CD album sales.     

Foundations for contest success functions

In the literature, the outcome of contests is either interpreted as win probabilities or as shares of the prize. With this in mind, we examine two approaches to contest success functions (CSFs). In the first, we analyze the implications of contestants’ incomplete information concerning the ‘type’ of the contest administrator. While in the case of two contestants this approach can rationalize prominent CSFs, we show that it runs into difficulties when there are more agents. Our second approach interprets CSFs as sharing rules and establishes a connection to bargaining and claims problems which is independent of the number of contestants. Both approaches provide foundations for popular CSFs and guidelines for the definition of new ones.

“The strategic approach also seeks to combine axiomatic cooperative solutions and non-cooperative solutions. Roger Myerson recently named this task the ‘Nash program’.”(Rubinstein 1985, p. 1151)

     

Collective contests with externalities

This paper examines collective contests associated with externalities. The collective contest is modelled as a two-stage game in which intra-group sharing rules and individual outlays are determined sequentially. Depending upon the restrictions on the intra-group sharing rules and the extent of externalities, we identify three kinds of Nash equilibria, and compare them with the outcome of the contest between individuals. This paper also proposes a real rent-dissipation rate as a measure of social waste when externalities are present. The externalities are shown to have significant effects on the relationship between the number of players and the real rent-dissipation rate.     

Asymmetric technologies in contests

I consider a contest between two risk-neutral players over a common-value prize, in which one player has a linear cost-of-effort function and the other a strictly convex cost-of-effort function f. I show that if the value of the prize is above (below) a certain threshold level, then the equilibrium aggregate effort in this contest is larger (smaller) than in a contest in which both players are characterized by the strictly convex cost-of-effort function f, and smaller (larger) than in a contest in which both players are characterized by a linear cost-of-effort function. Therefore, in contrast to the general result in the literature, asymmetry in contests can increase competition.     

A generalization of Condorcet’s Jury Theorem to weighted voting games with many small voters

We extend Condorcet’s Jury Theorem (Essai sur l’application de l’analyse à la probabilité des décisions rendues à la pluralité des voix. De l’imprimerie royale, 1785) to weighted voting games with voters of two kinds: a fixed (possibly empty) set of ‘major’ voters with fixed weights, and an ever-increasing number of ‘minor’ voters, whose total weight is also fixed, but where each individual’s weight becomes negligible. As our main result, we obtain the limiting probability that the jury will arrive at the correct decision as a function of the competence of the few major players. As in Condorcet’s result the quota q = 1/2 is found to play a prominent role. I wish to thank Maurice Koster, Moshé Machover, Guillermo Owen and two anonymous referees for helpful comments.     

The Study of Ethnicity and Nationalism Needs Better Categories: Clearing up the Confusions that Result from Blurring Analytic and Lay Concepts

Synopsis It has been difficult to make progress in the study of ethnicity and nationalism because of the multiple confusions of analytic and lay terms, and the sheer lack of terminological standardization (often even within the same article). This makes a conceptual cleaning-up unavoidable, and it is especially salutary to attempt it now that more economists are becoming interested in the effects of identity on behavior, so that they may begin with the best conceptual tools possible. My approach to these questions has been informed by anthropological and evolutionary-psychological questions. I will focus primarily on the terms ‘ethnic group’, ‘nation’, and ‘nationalism’, and I will make the following points: (1) so-called ‘ethnic groups’ are collections of people with a common cultural identity, plus an ideology of membership by descent and normative endogamy; (2) the ‘group’ in ‘ethnic group’ is a misleading misnomer—these are not ‘groups’ but categories, so I propose to call them ‘ethnies’; (3) ‘nationalism’ mostly refers to the recent ideology that ethnies—cultural communities with a self-conscious ideology of self-sufficient reproduction—be made politically sovereign; (4) it is very confusing to use ‘nationalism’ also to stand for ‘loyalty to a multi-ethnic state’ because this is the exact opposite; (5) a ‘nation’ truly exists only in a politician’s imagination, so analysts should not pretend that establishing whether something ‘really’ is or is not ‘a nation’ matters; (6) a big analytic cost is paid every time an ‘ethnie’ is called a ‘nation’ because this mobilizes the intuition that nationalism is indispensable to ethnic organization (not true), which thereby confuses the very historical process—namely, the recent historical emergence of nationalism—that must be explained; (7) another analytical cost is paid when scholars pretend that ethnicity is a form of kinship—it is not.     

On the escalation and de-escalation of conflict

We introduce three extensions of the Hirshleifer–Skaperdas conflict game to study experimentally the effects of post-conflict behavior and repeated interaction on the allocation of effort between production and appropriation. Without repeated interaction, destruction of resources by defeated players can lead to lower appropriative efforts and higher overall efficiency. With repeated interaction, appropriative efforts are considerably reduced because some groups manage to avoid fighting altogether, often after substantial initial conflict. To attain peace, players must first engage in costly signaling by making themselves vulnerable and by forgoing the possibility to appropriate the resources of defeated opponents.     

Contests with size effects through costs

Eggert and Kolmar [Eggert, W., Kolmar, M., in press. Contests with size effects. European Journal of Political Economy.] examine the effects of group size on individual and aggregate payoffs in contests where prizes increase in the number of players. In a reconsideration of their paper, this note examines contests in which the unit cost of effort decreases in the number of players. In contests for fixed prizes, an increase in the number of players decreases individual and aggregate payoffs. In contests in which players face a trade-off between appropriative and productive investments, an increase in the number of players decreases individual payoffs while increasing aggregate payoffs.     

Dissertation abstract: Essays on veto bargaining games

This dissertation experimentally analyzes the outcomes of multilateral legislative bargaining games in the presence of a veto player. The first essay examines veto power—the right of an agent to unilaterally block decisions but without the ability to unilaterally secure his/her preferred outcome. Using Winter’s (1996) theoretical framework, I consider two cases: urgent committees where the total amount of money to be distributed shrinks by 50% if proposals do not pass and non-urgent committees where the total amount of money shrinks by 5% if proposals do not pass. Committees with a veto player take longer to reach decisions (are less efficient) than without a veto player and veto players proposals generate less consensus then non-veto players proposals, outcomes on which the theory is silent. In addition, veto power in conjunction with proposer power generates excessive power for the veto player. This suggests that limiting veto players’ proposer rights (e.g., limiting their ability to chair committees) would go a long way to curbing their power, a major concern in committees in which one or more players has veto power. Finally, non-veto players show substantially more willingness to compromise than veto players, with players in the control game somewhere in between. I relate the results to the theoretical literature on the impact of veto power as well as concerns about the impact of veto power in real-life committees. The second essay discusses in detail the voting patterns in the veto and control games reported in the first essay. The empirical cumulative density functions of shares veto players accepted first degree stochastically dominates that of shares for the controls and the empirical cdfs of shares the controls accepted first degree stochastically dominate that of shares for non-veto players. Random effect probits support this conclusion as well. In addition, regressions imply favorable treatment of voting and proposing between non-veto players which, however, does not result in larger shares in the end. Coalition partners consistently demand more than the stationary subgame perfect Nash equilibrium share except for veto players in non-urgent committees. JEL Classification C7, D7, C78, D72 Dissertation Committee: John H. Kagel, Advisor Massimo Morelli Alan Wiseman Stephen Cosslett     

Contests with size effects

In this paper we analyze the structure of contest equilibria with a variable number of individuals. First we analyze a situation where the total prize depends on the number of agents and where every single agent faces opportunity costs of investing in the contest. Second we analyze a situation where the agents face a trade-off between productive and appropriative investments. Here, the number of agents may also influence the productivity of productive investments. It turns out that both types of contests may lead to opposing results concerning the optimal number of individuals depending on the strength of size effects. Whereas in the former case individual utility is u-shaped when the number of agents increases, the opposite holds true for the latter case. We discuss the implications of our findings for the case of anarchic societies and market competition.     

Synergy Goes to War: A Bioeconomic Theory of Collective Violence

Synopsis Synergy – here defined as otherwise unattainable combined effects that are produced by two or more elements, parts or individuals – has played a key causal role in the evolution of complexity, from the very origins of life to the evolution of humankind and complex societies. This theory – known as the ‘Synergism Hypothesis’ – also applies to social behavior, including the use of collective violence for various purposes: predation, defense against predators, the acquisition of needed resources and the defense of these resources against other groups and species. Among other things, there have been (1) synergies of scale, (2) cost and risk sharing, (3) a division of labor (or, better said, a ‘combination of labor’), (4) functional complementarities, (5) information sharing and collective ‘intelligence’, and (6) tool and technology ‘symbioses’. Many examples can be seen in the natural world – from predatory bacteria like Myxococcus xanthus to social insects like the predatory army ants and the colonial raiders Messor pergandei, mobbing birds like the common raven, cooperative pack-hunting mammals like wolves, wild dogs, hyenas and lions, coalitions of mate-seeking and mate-guarding male dolphins, the well-armed troops of savanna baboons, and, closest to humans, the group-hunting, group-raiding and even ‘warring’ communities of chimpanzees. Equally significant, there is reason to believe that various forms of collective violence were of vital importance to our own ancestors’ transition, over several million years, from an arboreal, frugivorous, mostly quadrupedal ape to a world-traveling, omnivorous, large-brained, tool-dependent, loquacious biped. The thesis that warfare is not a recent ‘historical’ invention will be briefly reviewed in this paper. This does not mean that humans are, after all, ‘killer apes’ with a reflexive blood-lust or an aggressive ‘drive’. The biological, psychological and cultural underpinnings of collective violence are far more subtle and complex. Most important, the incidence of collective violence – in nature and human societies alike – is greatly influenced by synergies of various kinds, which shape the ‘bioeconomic’ benefits, costs and risks. Synergy is a necessary (but not sufficient) causal agency. Though there are notable exceptions (and some significant qualifiers), collective violence is, by and large, an evolved, synergy-driven instrumentality in humankind, not a mindless instinct or a reproductive strategy run amok.      

‘Give me a chance!’ An experiment in social decision under risk

This paper reports the results of a ‘probabilistic dictator game’ experiment in which subjects were given an option to share chances to win a prize with a dummy player. Using a within-subject design we manipulated two aspects of the decision, the relative cost of sharing and the nature of the lottery: the draws were either independent for the two players (‘noncompetitive’ condition) or one’s success meant other’s failure (‘competitive’ condition). We also asked for decisions in a standard, non-probabilistic, setting. The main results can be summarized as follows: first, a substantial fraction of subjects do share chances to win, also in the competitive treatments, thus showing concern for the other player that cannot be explained by outcome-based models. Second, subjects share less in the competitive treatment than in other treatments, indicating that procedural fairness alone cannot explain the data. Overall, these results suggest that models aiming at generalizing social concerns to risky environments will have to rely on a mix of distributive and procedural fairness.     

Round‐Robin Tournaments with a Dominant Player

We analyze the subgame perfect equilibrium of the round‐robin tournament with one strong (dominant) and two weak players, and we compare this tournament and the one‐stage contest with respect to the players' expected payoffs, expected total effort, and their probabilities of winning. We find that if the contest designer's goal is to maximize the players' expected total effort, then – if the asymmetry between the players is relatively low – the one‐stage contest should be used. However, if the asymmetry is relatively high, then the round‐robin tournament should be used.     

Competitive versus collective incentive pay: does workers’ mutual concern matter?

The paper shows that coworkers’ mutual concern may help explain the puzzling fact that wage premia based on ranked or relative performance are rare while group rewards are popular among employees. In the work environment studied, when workers are selfish the optimal effort-enhancing scheme is a labor contest with a single wage prize. It is shown that when workers care about coworkers’ material benefit a group reward scheme is optimal. Moreover, profit increases as workers’ mutual concern increases, so it is in the interest of the firm to foster mutual concern among its employees. I am indebted to Gianni De Fraja, Benedetto Gui, Antonio Nicolò , Lorenzo Rocco for insightful conversations. I also wish to thank Julio Rotemberg for advising me to carefully characterize the optimal incentive scheme. Finally, I am grateful to the Italian Ministry of Education, University and Research for a grant, and to the IRC, University of Minnesota, for its hospitality and support.     

Appropriation,Formal and Informal Sectors,and Efficient Endowment Distribution

By adding an informal sector whose output is not subject to appropriative interactions and assuming complementarity in the inputs for market production, this paper investigates how possible asymmetries in conflict affect the allocation of resources. It is shown that when the existing gap in relative appropriative skills is being closed, more resources are allocated to appropriative activities in the economy. We are, in this case, more likely to see a reduction in market activities but an increase in home activities. A poorer party is a natural producer rather than a natural fighter, which is the usual characterization of a less endowed party in the conflict analysis. By conducting a welfare analysis, this paper shows that a market-output-maximizing initial distribution of resources endowment is such that when one party has a comparative advantage in market production over appropriation, its initial fraction of total resource endowment should be greater than its relative productivity in market production.     

A simple note on herd behaviour

In his ‘Simple model of herd behaviour’, (Banerjee A (1992) A simple model of herd behaviour. Q J Econ CVII:797–817) shows that—in a sequential game—if the first two players have chosen the same action, player 3 and all subsequent players will ignore his/her own information and start a herd, an irreversible one. In this paper, we analyse the role played by the tie-breaking assumptions in reaching the equilibrium. We show that: players’ strategies are parameter dependent—an incorrect herd may be reversed; a correct herd is irreversible.

“Tell me what you need”: signaling with limited resources

We study the project allocation mechanisms trade-off between minimizing the waste of resources in the application process and maximizing the match of needs and projects when the recipient’s needs and resources are private information. We propose a signaling mechanism where the set of signals available to each agent is constrained by his capacity and by his truthful need of the project. The principal can control, at a given cost, the agent’s application cost and the utility of receiving the project by non-needy agents. Our findings suggest that there exists a threshold in the principal’s budget such that for smaller budgets, all instruments are used in the optimal mechanism, while for bigger budgets the optimal application complexity is independent of the budget and waste of resources is a decreasing share of the resources available.