dynamic adverse selection a theory of illiquidity fire sales and flight to quality we develop a dynamic equilibrium model of asset markets with adverse selection there exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price dividend ratio in less liquid markets sellers of high quality assets signal quality by accepting a lower trading probability we show how the distribution of sellers private information affects an asset s price and liquidity how a change in that distribution can cause a re sale and a ight to quality and how asset purchase and subsidy programs may raise prices and liquidity and reverse the ight to quality jel d82 g12 this paper develops a dynamic equilibrium model of asset markets with adverse selection the owners of heterogeneous assets are privately informed about the quality of their assets sellers set prices for their assets recognizing that sales may be rationed at high prices buyers set prices recognizing that the quality of available assets may depend on the price selected in equilibrium sellers of high quality assets are willing to set a high price despite the low sale probability because the continuation value from failing to sell a high quality asset is high conversely sellers of low quality assets opt for a low price buyers are indifferent between paying a low price for a low quality asset and a high price for a high quality asset we prove these results in a deliberately stylized dynamic general equilibrium framework assets are perfectly durable and pay a constant dividend each period some amount of a perfectly perishable consumption good better quality assets pay a higher dividend but only the asset s current owner observes the dividend this is the source of private information and the root of the adverse selection problem as in akerlof 1970 the only permissible trades are between the consumption good and the asset individuals are risk neutral and have a discount factor that changes over time independently across individuals creating gains from trade finally discount factors are observable which ensures that patient individuals never sell assets since there are no gains from trade we believe this framework is useful for capturing

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

premuneration values and investments in matching markets we analyze a model in which agents make investments and then match into pairs to create a surplus the agents can make transfers to reallocate their pretransfer ownership claims on the surplus mailath postlewaite and samuelson 2013 showed that when investments are unobservable equilibrium investments are generally inecient in this paper we work with a more structured model that is suciently tractable to analyze the nature of the investment ineciencies we provide conditions under which investment is ineciently high or low and conditions under which changes in the pretransfer ownership claims on the surplus will be pareto improving as well as examine how the degree of heterogeneity on either side of the market aects investment eciency

on the undesirability of commodity taxation even when income taxation is not optimal abstract an important result due to atkinson and stiglitz 1976 atkinson a b stiglitz j e 1976 the design of tax structure direct versus indirect taxation journal of public economics 6 55 75 is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax given weak separability of utility between labor and all consumption goods this article demonstrates that this conclusion holds regardless of whether the income tax is optimal in particular given any commodity tax and income tax system differential commodity taxation can be eliminated in a manner that results in a pareto improvement also differential commodity taxation can be proportionally reduced so as to generate a pareto improvement in addition for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation a simple efficiency condition is offered for determining whether a pareto improvement is possible

optimal contracting and the organization of knowledge we study contractual arrangements that support an efficient use of time in a knowledge intensive economy in which agents endogenously specialize in either production or consulting the resulting market for advice is plagued by informational problems since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess we show that spot contracting is not efficient because lemons in this case self employed producers with intermediate knowledge cannot be appropriately excluded from the market however an ex ante firm like contractual arrangement uniquely delivers the first best this arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts this simple characterization of the optimal ex ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge intensive sectors our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs

pigou meets mirrlees on the irrelevance of tax distortions for the second best pigouvian tax this paper extends the mirrlees 1971 model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities using general utility structures and exploring both linear and non linear taxes it is demonstrated that the optimal second best tax on an externality generating good should not be corrected for the marginal cost of public funds since it equals one in the optimal tax system in the optimum distortions of income taxes are equal to marginal redistributional gains if the government does not have access to a non distortionary marginal source of finance the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution the optimal second best corrective tax is then either higher or lower than the pigouvian level the findings in this paper generalize and amend prior results based on representative agent models shedding new light on the weak double dividend hypothesis and on the welfare gains of recycling revenue from environmental taxes

convergence to efficiency in a simple market with incomplete information a model of trade with m buyers and m sellers is considered in which price is set to equate revealed demand and supply in a bayesian nash equilibrium each trader acts not as a price taker but instead misrepresents his true demand supply to influence price in his favor this causes inefficiency we show that in any equilibrium the amount by which a trader misreports is o 1 m and the corresponding inefficiency is o 1 m2 the indeterminacy and the inefficiency that is caused by the traders bargaining behavior in small markets thus rapidly vanishes as the market increases in size

robust trading mechanisms we consider the problem of designing a trading institution for a single buyer and seller when their valuation of the good is private information it is shown that posted price mechanisms are essentially the only mechanisms such that each trader has a dominant strategy a posted price mechanism is one where a price is posted in advance and trade occurs if and only if all traders agree to trade

the possibility of efficient mechanisms for trading an indivisible object we study a trading problem in which the seller of an indivisible object races at least two potential buyers each trader s valuation is privately known and regarded by the others as an independent random variable we assume that the highest possible buyers valuation is greater by an arbitrarily small amount than the seller s highest possible valuation we show that for a family of distributions forming an open set in the space of probability distributions there exist individually rational ex post efficient bayesian mechanisms for trading the object in addition we show that any such mechanism is equivalent to a simple bidding game journal of economic literature classification numbers d82 c72

optimal trading mechanisms with ex ante unidentified traders abstract we analyze optimal trading mechanisms in an exchange economy where each trader owns some units of a good to be traded and may be either a seller or a buyer depending on the realization of the privately observed valuations the concept of virtual valuation is extended to ex ante unidentified traders the traders virtual valuations now depend on the choice of the trading mechanism and are generally nonmonotonic we show that the trading mechanisms that maximize a broker s expected profit or expected total gains from trade are generalized double auctions which maximize the gains from trade measured in some modified monotonic virtual valuations for the traders the bunching phenomena will be a general feature in these mechanisms we also show that the optimal mechanisms converge towards simple bid ask price mechanisms as the number of participants in the market increases journal of economic literature classification numbers d44 d82

efficiency of job creation in a search and matching model with labor force participation in a search and matching model where workers are ex ante heterogeneous with respect to productivity and there is labor force participation albrecht et al 2010 show that satisfying the hosios rule leads to excessive vacancy creation we show that efficient vacancy creation requires a modified version of the hosios condition that captures not only the standard search externalities but also the output externality and the participation externality

contracting in the shadow of the law economic models of contract typically assume that courts enforce obligations based on verifiable events corresponding to the legal rule of specific performance as a matter of law this is not the case this leaves open the question of optimal contract design given the available remedies used by the courts this article shows that american standard form construction contracts can be viewed as an efficient mechanism for implementing building projects given existing legal rules it is shown that a central feature of these contracts is the inclusion of governance covenants that shape the scope of authority and regulate the ex post bargaining power of parties our model also implies that the legal remedies of mistake impossibility and the doctrine limiting damages for unforeseen events developed in the case of hadley v baxendale are efficient solutions to the problem of implementing complex exchange

designing order book transparency in electronic communication networks a significant fraction of trade in stock exchanges e g euronext and nasdaq involves iceberg orders which are orders to sell or buy a certain number of shares with the caveat that only a part of that number be made public this paper provides a normative justification for the lack of transparency in this kind of order imperfect disclosure is shown to be a necessary feature of any optimal mechanism when the asset s potential buyers must incur a cost in order to become active and learn their valuations for the asset this finding raises a caveat for regulation that seeks to mandate the open order book or otherwise increase the pre trade transparency of stock exchanges

pollution claim settlements under private information abstract the classical problem of resolving a nuisance dispute between a pollution generating firm and nearby residents is modelled here as a mechanism design problem we assume that the designer of the mechanism is the firm that it is uncertain about the actual losses suffered by residents and that the initial assignment of property rights is one where each resident is entitled to prevail we derive a profitmaximizing scheme under the individual rationality and incentive compatibility constraints and examine its properties it is shown that the outcomes it yields are sometimes inefficient moreover when many residents are affected by pollution and the degree of uncertainty with respect to the losses they suffer is large these inefficiencies become rampant

auctions with contingent payments there now exists a host of results concerning the revenue performance of various auction methods this note delves deeper into auction markets by examining the effects on sellers revenue of certain noncash means of payment the basic result that bidding mediums which include some contingent pricing feature generally yield the seller more revenue than do cash bids is intriguing by itself and also points out the limitations of received theory since what follows builds on the independent preferences framework it is useful to first note the assumptions of that model and the major results pertaining to it to model an auction in the independent preferences tradition one assumes that bidders have reservation values vi that are known only privately and that can be depicted as being drawn independently from some distribution f v the most important result for this model is the revenue equivalence theorem as given in john riley and william samuelson 1981 any auction involving risk neutral bidders for which the following four conditions hold a a buyer can make any bid above some minimum reserve price b the buyer making the highest bid is awarded the object c the auction rules are anonymous and d there is a common equilibrium bidding strategy in which each buyer makes a bid bi which is a strictly increasing function of his reservation value vi yields an expected revenue of

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

unravelling of dynamic sorting we consider a two sided finite horizon search and matching model with heterogeneous types and complementarity between types the quality of the pool of potential partners deteriorates as agents who have found mutually agreeable matches exit the market when search is costless and all agents participate in each matching round the market performs a sorting function in that high types of agents have multiple chances to match with their peers however this sorting function is lost if agents incur an arbitrarily small cost in order to participate in each round with a sufficiently rich type space the market unravels as almost all agents rush to participate in the first round and match and exit with anyone they meet copyright 2005 wiley blackwell

pollution claim settlements reconsidered hidden information and bounded payments abstract a principal s production decision imposes a negative externality on an agent the principal may be a pollution generating firm the agent may be a nearby town the principal offers a contract to the agent who has the right to be free of pollution then the agent privately learns the disutility of pollution finally a production level and a transfer payment are implemented suppose there is an upper bound possibly zero on payments that the agent can make to the principal in the second best solution there is underproduction for low cost types while there is overproduction for high cost types in contrast to standard adverse selection models of pollution claim settlements there may thus be too much pollution compared to the first best solution

signaling through obstruction obstruction is a time honored tradition in legislative politics in many cases obstruction can be foreseen to be ultimately unsuccessful and in some of these cases purely costly even to the obstructor in this article i construct a model of obstruction in which the individual obstruction of a fait accompli policy proposal is potentially informative precisely and ironically because it is inefficient the theory based on the legislators reelection motivations offers comparative static predictions about the frequency and length of obstruction as a function of the individual characteristics of the legislator and his or her electoral setting including the legislator s value for reelection the appeal of the legislator s challenger the legislator s individual specific seniority competence and or valence and the visibility of the legislator s obstruction efforts to the voter finally the theory illustrates the potential for transparency of legislators individual actions to be strictly welfare reducing even in the absence of pandering

information gathering transaction costs and the property rights approach the property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives while bargaining is ex post efficient in contrast transaction cost economics emphasizes ex post inefficiencies in the present paper a party may invest and acquire private information about the default payoff that it can realize on its own inefficient rent seeking can overturn prominent implications of the property rights theory in particular ownership by party b may be optimal even though only the indispensable party a makes an investment decision

existence and convergence of equilibria in the buyer s bid double auction this paper concerns a bayesian game model of the buyer s bid double auction which is a procedure for organizing trade that selects a market clearing price from a list of offers bids strategic misrepresentation by traders may make the outcome of trade inefficient satterthwaite and williams 1989 showed that misrepresentation and inefficiency quickly converge to zero as the number of traders on each side of the market increases this is extended here to cases in which the number of buyers may differ from the number of sellers the existence of equilibria in a generic instance of the model is also proven this paper concerns a market in which each trader privately knows his own preferences such a trader may have an incentive to misrepresent his preferences in order to influence the market price in his favour a buyer for instance may bid less than his true evaluation of the good for sale in an attempt to drive the price down similarly a seller may ask for more than he is willing to accept with behaviour of this kind a seller s offer could exceed a buyer s bid even though a mutually profitable trade between them exists in the market as a whole a price may be determined at which all potential gains from trade are not achieved strategic misrepresentation may therefore cause inefficiency our confidence in markets rests upon the belief that this inefficiency is insignificant when there are a large number of small traders a small trader in a large market is unlikely to have much influence on the market price as a consequence he has little incentive to misrepresent and the market is therefore almost fully efficient this argument however is vague about a very important point when is a trader relatively small and how many traders constitute a large market the meaning of small and large in this context is critical to understanding when this intuitive argument applies this argument is investigated here by thoroughly analyzing a particular model of trade a market is considered in which money may be exchanged for indivisible units of a good for n m 1 there are n sellers each of whom has a unit to sell and m buyers each of whom wishes to buy a unit each trader is therefore small in that he trades at most one unit we shall consider arbitrary values of n and m however trade is organized with the following rules each seller submits an offer while each buyer submits a bid the n m offers bids are ordered in a list sl s2 sn m any

second best pigouvian taxation a clarification this paper argues that the search for a purely environmental component of a tax on goods or factors of production that impact the environment separate from its redistributive and distortive effects is fraught with difficulties the quest is often impossible because of the interconnectedness between labor supply consumption decisions and the environmental quality the paper differentiates between two conceptualization for the pigouvian tax that have been employed in the literature and argues that each has tried to isolate the environmental component in its own way one conceptualization due to cremer et al j public econ 70 343 364 1998 does so by ruling out direct feedback from changes in environmental quality on the incentive effect of the tax in the second conceptualization due to bovenberg and ploeg s j public econ 55 349 390 1994 incentive effects are ruled out by making consumers valuation of environmental quality independent of the labor supply this is achieved by assuming separability between labor supply and other goods including environmental equality to convey its message the paper studies the properties of optimal polluting and non polluting non labor input taxes in a mirrleesian model with endogenously determined wages

are positional concerns stronger in some domains than in others for more than one hundred years economists have discussed the concept of positional goods that the utility conferred by many perhaps even most goods depends not only on the amount the individual consumes but also on the amount others consume e g thorstein veblen 1899 james duesenberry 1949 john k galbraith 1958 robert frank 1985 while economic interest in positional goods is increasing e g mark pingle and mike mitchell 2002 kenneth arrow et al 2004 ed hopkins and tatiana kornienko 2004 the literature remains largely theoretical rather than empirical if status concerns affect all items in the utility function equally leisure as well as goods the positional effect would operate like a lump sum tax reducing well being without changing the allocation of time or money arrow et al 2004 however if positional concerns are stronger for some things than for others then in order to understand how people can become better off in well being not simply in wealth we must investigate how interpersonal competition interacts with material gains frank 1997 evidence about what goods are more positional than others is essential for correct policy recommendations gregory besharov 2002 but little is actually known about the relative positional rankings of items in the typical consumer s utility function four hypotheses proposed in the literature are

managerial incentives on the near linearity of optimal compensation contracts are examined when outcomes depend on managers choices as well as efforts as the cost of effort shrinks relative to payoffs the optimal contract converges to a linear payoff if the control space of the agent has full dimensionality but not otherwise thus when the agent can trade expected return for greater correlation with other returns it is better to ignore relative performance when the cost of effort is small when the choices include all fair gambles and hedges the linear schedule is no more expensive than any other schedule that induces effort unfair gambles are examined as well

sorting and decentralized price competition we investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents there are two aspects of value creation the match value when two agents actually trade and the probability of trading governed by the search technology we show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter this happens if and only if the match value function is root supermodular that is its nth root is supermodular where n reflects the elasticity of substitution of the search technology this condition is weaker than the condition required for positive assortative matching in markets with random search

property rights and the efficiency of bargaining we show that efficient bargaining is impossible for a wide class of economic settings and property rights these settings are characterized by i the existence of adverse efficient opt out types whose participation does not change the efficient allocation and who when they opt out are the worst type other agents can face and ii non existence of the marginal core and its multivaluedness with a positive probability we also examine the optimal allocation of property rights within a given class that satisfies i such as simple property rights liability rules and dual chooser rules we characterize property rights that minimize the expected subsidy required to implement efficiency with two agents simple property rights that are optimal in this way maximize the expected surplus at the status quo allocation but this no longer holds with more agents we also study second best budget balanced bargaining under a liability rule the optimal second best liability rule may differ from but is often close to the expectation of the victim s harm which would be optimal if there were no bargaining however liability rules that are close to a simple property right result in a lower expected surplus than the simple property right they are near

bargaining and regulation with asymmetric information about demand and supply abstract rate regulation is studied as a bargaining process in which consumers and the firm negotiate output and payments under asymmetric information the feasible set of transactions given incentive compatibility and individual rationality constraints is characterized the set of interim incentive efficient mechanisms for the direct revelation game is also characterized sufficient conditions are given for efficient mechanisms to be full information efficient efficient mechanisms are identified which correspond to nonlinear monopoly pricing monosony compensation schedules and the baron myerson regulation model

robustness and linear contracts abstract we consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do she knows some actions available to the agent but other unknown actions may also exist the principal demands robustness evaluating possible contracts by their worst case performance over unknown actions the agent might potentially take the model assumes risk neutrality and limited liability and no other functional form assumptions very generally the optimal contract is linear the model thus offers a new explanation for linear contracts in practice it also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty jel d81 d82 d86

redistribution and optimal mixed taxation in the presence of consumption externalities abstract the literature on externalities and optimal redistributive taxation in the presence of asymmetric information has so far been confined to the case where externalities are of the atmospheric type one of the main results from this literature has been that the so called additivity property discovered by sandmo sandmo a 1975 optimal taxation in the presence of externalities swedish journal of economics 77 86 98 holds true also in this more general context this paper extends previous analyses by considering a general model where even if there is only one externality generating good the externality is not constrained to be of the atmospheric type the model is sufficiently unrestrictive to admit a variety of interpretations for example it is possible to interpret it as reflecting the case of different types of agents being differently vulnerable to the same externality another possibility is to view agents of different types as not equally effective as externality generating units yet another interpretation can be in terms of positional goods we show that while the additivity property fails in general to hold conditions can be derived which are sufficient to recover it both with respect to the commodity tax structure and with respect to the shape of the income tax schedule moreover stressing one or the other of the aforementioned interpretations delivers different results for the validity of the additivity property

endogenous entry to security bid auctions we endogenize entry to a security bid auction where participation is costly and bidders must decide given their private valuations whether to participate we first consider any minimum reserve security bid of a fixed expected value that weakly exceeds the asset s value when retained by the seller demarzo kremer and skrzypacz 2005 establish that with a fixed number of bidders auctions with steeper securities yield the seller more revenues counterintuitively we find that auctions with steeper securities also attract more entry further enhancing the revenues from such auctions we then establish that with optimal reserve securities auctions with steeper securities always yield higher expected revenues

bargaining under incomplete information this paper presents and analyzes a bargaining model of bilateral monopoly under uncertainty under the bargaining rule proposed the buyer and the seller each submit sealed offers that determine whether the good in question is sold and the transfer price the nash equilibrium solution of this bargaining game implies an offer strategy of each party that is monotonic in its own reservation price and depends on its assessment of the opponent s reservation price issues of relative bargaining advantage and efficiency are examined for a number of special cases finally we discuss the appropriateness of the nash solution concept

special issue of games and economic behavior in honor of richard d mckelvey richard d mckelvey died on april 22 2002 at the age of 57 and the social sciences lost a great scholar he will be especially missed by fellow game theorists and academics who use game theory in their scholarly studies of economic and political institutions and behavior his students colleagues and friends will also miss a very humble and thoughtful human being who unselfishly contributed his time and intellectual energies throughout his career he influenced the careers of many of us and worked hard for many organizations and journals this journal in particular

risk sharing vs incentives contract design under two sided heterogeneity we study the matching patterns between heterogeneous principals and agents in a principal agent model the resulting equilibrium relationship between risk and incentives could be negative positive or u shaped these results may provide an explanation for the absence of systematic empirical support for the standard risk model d 2005 elsevier b v all rights reserved

negative assortative matching of risk averse agents with transferable expected utility abstract i give necessary and sufficient conditions for expected utility to be transferable among agents with different state independent risk preferences who share a risk they cannot influence in an assignment game where participants choose partners based on risk aversion the conditions permit a simple proof that matching is negative assortative

externalities and optimal taxation this paper reexamines the optimal tax design problem income and commodities in the presence of externalities the nature of the second best and the choice of the tax instruments are motivated by the informational structure in the economy the main results are i environmental levies linear or nonlinear differ in formula from pigouvian taxes by the expressions for the optimal tax on private goods ii externalities do not affect commodity tax formulas linear and nonlinear for private goods iii externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear and iv a general income tax plus strictly pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution at any given consumption bundle

ex ante efficient ex post individually rational trade abstract consider a bilateral trade model with two sided incomplete information for a general set of independent beliefs an ex post individually rational mechanism generating the same level of ex ante expected gains from trade as an ex ante efficient interim individually rational mechanism is constructed thus imposing the stronger notion of ex post individual rationality on this mechanism design problem generates no loss of efficiency

frictional assignment i efficiency abstract this paper examines the two sided matching problem where the agents on each side of the market are heterogeneous and the matching process is time consuming this is cast in a labor market setting where workers of different skills match with different machine qualities i characterize the efficient allocation and then show that it can be decentralized by a market mechanism the efficient assignment is not always positively assortative despite the fact that machine qualities and skills are complementary in production to decentralize the efficient allocation the market mechanism requires the firms to post wages and commit each machine quality to a particular skill implications on wage inequality are briefly examined journal of economic literature classification numbers j31 e24 j64

efficient allocation with continuous quantities abstract the inefficiency of allocation mechanisms in the presence of bilateral asymmetric information is reconsidered in an environment with continuous quantities the result of myerson and satterthwaite is proved in this environment under the condition that zero trade is efficient if the highest cost seller or the lowest value buyer appears in addition if this condition fails there may exist mechanisms implementing efficient allocations the problem of hidden endowments is considered where any agent may be either a buyer or seller depending on the realization of the privately observed information in this environment it is often possible to arrange efficient trades ex ante asymmetries rather than interim asymmetries tend to prevent efficient allocations

asymmetric and non atmospheric consumption externalities and efficient consumption taxation abstract we analyze the effects of a generalized class of negative consumption externalities asymmetric and non atmospheric on the structure of efficient commodity tax programs households are not only concerned about consumption reference levels that is they gain utility from keeping up with the joneses but they also exhibit altruism two sets of efficient tax regimes are compared based on a welfarist and a non welfarist optimality criterion respectively altruism turns out not to be at odds with the consumption externalities rather altruism implicates a bound on efficient utility allocations a non welfarist government tolerates less inequality than a welfarist one in the welfarist non welfarist case first best personalized commodity tax rates respond highly sensitively barely to whether or not a consumption externality is asymmetric or non atmospheric if personalized commodity tax rates are not available second best case the tax rate on a non positional good is typically different from zero for corrective reasons for plausible functional forms and parameter values numerical simulations suggest that second best tax rates are rather insensitive with respect to both the optimality criterion and the nature of the consumption externality

on the segmentation of markets this paper endogenizes the market structure of an economy with heterogeneous agents who want to form bilateral matches in the presence of search frictions and when utility is nontransferable there exist infinitely many marketplaces and each agent chooses which marketplace to be in agents get to choose not only whom to match with but also whom they meet with perfect segmentation is obtained in equilibrium where agents match with the first person they meet all equilibria have the same matching pattern although perfect assortative matching is not obtained in equilibrium the degree of assortativeness is greater than in standard models

marriage and class here we consider a matching model where agents are heterogeneous and utilities nontransferable we utilize this framework to study how equilibrium sorting takes place in marriage markets we impose conditions that guarantee the existence of a steady state equilibrium and then characterize it several examples are developed to illustrate the richness of equilibria the model reveals an interesting sorting externality that can support multiple steady state equilibria even with constant returns to matching excerpt

matching with noise and the acceptance curse abstract this paper explores matching with both search and information frictions specifically everyone observes only a noisy signal of the true type of any potential mate in this context matching decisions must incorporate not only information about a partner s attribute conveyed by the noisy signal but also as in the winner s curse in auction theory information about a partner s type contained in his or her acceptance decision we show that there exists an equilibrium exhibiting a stochastic positive assorting of types generalizing becker j polit economy 81 1973 813 846 in equilibrium selection is adverse being accepted reduces an agent s estimate of a potential partner s type a phenomenon that we call the acceptance curse effect

a dominant strategy asset market mechanism abstract asset markets institutions that reallocate goods among agents with heterogeneous endowments demands and valuations abound in the real world but have received little attention in mechanism and market design assuming constant marginal private values and known endowments and maximum demands we provide a detail free dominant strategy asset market mechanism that allocates efficiently or close to efficiently respects traders individual rationality constraints ex post and never runs a deficit if it does not allocate efficiently it sacrifices the trades that under efficiency would involve the lowest value trader who efficiently would be allocated a positive amount the mechanism always allocates the quantity traded efficiently and permits clock implementation as the market becomes large the mechanism s efficiency loss converges to zero under natural conditions

overcoming incentive constraints by linking decisions consider a bayesian collective decision problem in which the preferences of agents are private information we provide a general demonstration that the utility costs associated with incentive constraints become negligible when the decision problem is linked with a large number of independent copies of itself this is established by defining a mechanism in which agents must budget their representations of preferences so that the frequency of preferences across problems mirrors the underlying distribution of preferences and then arguing that agents incentives are to satisfy their budget by being as truthful as possible we also show that all equilibria of the linking mechanisms converge to the target utility levels the mechanisms do not require transferable utility or interpersonal comparisons of utility and are immune to manipulations by coalitions

partnerships versus corporations moral hazard sorting and ownership structure team production takes advantage of technological complementarities but comes with the cost of free ridership when workers differ in skills the choice of sorting pattern may be associated with a nontrivial trade off between exploiting the technological complementarities and minimizing the cost of free ridership this paper demonstrates that whether such a trade off arises depends i on how the power of incentives required for effort provision varies with workers types and ii on whether the workers are organized for production in partnerships or in corporations these results have implications for how production is organized in different industries in partnerships or in corporations jel d21 d82 g32 m12 m54 production in self managed teams and use of group incentives within corporations have become increasingly widespread over the last few decades e g see osterman 2000 and references therein increased reliance on group production can be attributed to the presence of technological complementarities between workers skills this in turn has implications for sorting of workers of different skills into teams namely expected output is maximized when high skilled workers are teamed with other high skilled workers at the same time team production comes with the problem of free riding recent studies such as franco mitchell and vereshchagina 2011 and kaya and vereshchagina 2013 have pointed out that the cost of alleviating this free rider problem may depend on how workers of different skills are sorted into teams therefore the sorting of workers may impact the total surplus from team production in at least two ways by taking advantage of technological complementarities and or by minimizing the cost of alleviating the freerider problem in this paper we illustrate that a nontrivial trade off between these two forces may arise and that this trade off has implications for how production is organized in partnerships or in corporations for this purpose we develop a model of joint production with two sided moral hazard in which workers of heterogeneous productivity may organize in partnerships or work for a corporation owned by an entrepreneur the technology available to

entitling the pollutee liability versus standard under private information this paper considers and compares two different legal means full liability and standard to reduce and to regulate pollution at a local level accounting for private information about benefits and costs the familiar polluter pays principle makes the polluter liable for any damage since the courts lack information about the true damage the pollutee can and presumably will overstate this damage nevertheless voluntary arrangements bypassing the courts exist e g for coasean reasons however such out of court arrangements fail to improve in many cases the inefficient allocation of pollution due to agency costs given these unsatisfactory consequences of the polluter pays principle even after allowing for contracts around the law we propose a modification of standards the pollutee is entitled that a certain standard is satisfied yet can trade this right for financial compensations contracts induced by this legal rule are countervailing the optimal mechanism switches between subsidies and payments and first best efficiency holds at both ends and this characteristic allows such a privatized standard to track the first best quite well and often better than the polluter pays principle this relative ranking under private information is the opposite of the one that holds under uncertainty here liability dominates the standard

inefficient sorting under output sharing abstract i study sorting in a frictional market asset owners post their terms then workers direct their search when the owners switch from prices to shares the competition between workers is handicapped the unique equilibrium features inefficient positive assortative matching the queue lengths are distorted even though the hosios efficiency condition holds for every pair of types for any distribution of types all workers pair up with better assets the best workers suffer while the weakest workers gain the opposite occurs on the asset side competition drives the asset owners to post flatter contracts it leads to constrained efficiency whenever prices are feasible otherwise handicapped competition results in inefficient sorting

efficiency in a search and matching model with endogenous participation abstract we show that in a search matching model with endogenous participation in which workers are heterogeneous with respect to market productivity satisfying the hosios rule leads to excessive vacancy creation

optimal taxation with rent seeking we develop a framework for optimal taxation when agents can earn their income both in traditional activities where private and social products coincide and in rent seeking activities where private returns exceed social returns either because they involve the capture of pre existing rents or because they reduce the returns to traditional work we characterize pareto optimal income taxes that do not condition on how much of an individual s income is earned in each of the two activities these optimal taxes feature an externality corrective term the magnitude of which depends both on the pigouvian correction that would obtain if rent seeking incomes could be perfectly targeted and on the relative impact of rent seeking externalities on the private returns to traditional and to rent seeking activities if rent seeking externalities primarily affect other rent seekers for example the optimal correction lies strictly below the pigouvian correction a calibrated model indicates that the gap between the pigouvian and optimal correction can be quantitatively important our results thus point to a hefty informational requirement for correcting rent seeking externalities through the income tax code

models for iterative multiattribute procurement auctions multiattribute auctions extend traditional auction settings to allow negotiation over nonprice attributes such as weight color and terms of delivery in addition to price and promise to improve market efficiency in markets with configurable goods this paper provides an iterative auction design for an important special case of the multiattribute allocation problem with special preferential independent additive structure on the buyer value and seller costs auction additive discrete provides a refined design for a price based auction in which the price feedback decomposes to an additive part with a price for each attribute and an aggregate part that appears as a price discount for each supplier in addition this design also has excellent information revelation properties that are validated through computational experiments the auction terminates with an outcome of a modified vickrey clarke groves mechanism this paper also develops auction nonlinear discrete for the more general nonlinear case a particularly simple design that solves the general multiattribute allocation problem but requires that the auctioneer maintains prices on bundles of attribute levels

optimal search auctions abstract we study the design of profit maximizing single unit auctions under the assumption that the seller needs to incur costs to contact prospective bidders and inform them about the auction with independent bidders types and possibly interdependent valuations the seller s problem can be reduced to a search problem in which the surplus is measured in terms of virtual utilities minus search costs compared to the socially efficient mechanism the optimal mechanism features fewer participants longer search conditional on the same set of participants and inefficient sequence of entry

asymmetric information and the property rights approach to the theory of the firm abstract in the grossman hart mooreproperty rights approach to the theory of the firm it is usually assumed that information is symmetric ownership matters for investment incentives provided that investments are partly relationship specific we study the case of completely relationship specific investments i e the disagreement payoffs do not depend on the investments it turns out that if there is asymmetric information then ownership matters for investment incentives and for the expected total surplus specifically giving ownership to party b can be optimal even when only party a has to make an investment decision and even when the owner s expected disagreement payoff is larger under a ownership

equilibria of the sealed bid mechanism for bargaining with incomplete information we study the nash equilibria of the sealed bid bargaining mechanism with incomplete information a nonzero sum game for the case of uniform priors we describe two uncountably numerous families of equilibria the first has differentiable strategies in the second the strategies are step functions the efficiencies of these equilibria range from second best to zero for independent nonuniform priors we show that a similar situation obtains these results seem discouraging with regard to using the sealed bid mechanism in practice the mechanism might be salvaged however if bargainers turn out to confine themselves to linear strategy equilibria

the economics of missing markets information and games part 1 out of equilibrium beliefs and out of equilibrium behaviour david m kreps the role of common knowledge assumptions in game theory adam brandenburger and eddie dekel repeated games a survey h sabourian information dynamics and equilibrium frank hahn part 2 the economics of parallel research partha dasgupta strategy variables and theories of industrial organization christopher doyle bargaining theory david canning imperfect competition and international trade k gatsios part 3 missing markets consequences and remedies david m newberry rational expectations information and asset markets margaret bray decision making in the presence of risk mark j machina part 4 theoretical modelling of banks and bank runs luca anderlini optimal multi unit auctions eric maskin and john riley labour contract theory tim worrall part 5 intertemporal general equilibrium models timothy j kehoe sunspots stephen burnell an introduction to nonlinear dynamics and its application to economics david kelsey part 6 some micro and macro implications of inventories j p thomas keynes s liquidity preference theory a suggested reinterpretation louis makowski

status quo bias in bargaining an extension of the myerson satterthwaite theorem with an application to the coase theorem we use a generalized version of the myerson satterthwaite theorem to study inefficiencies in bilateral bargaining over trade of an indivisible good where there is two sided private information on the valuations we show that when preferences are convex and quasi linear and when the private information represents the magnitude of the utility gain or loss and follows a uniform distribution that the most efficient mechanism always exhibits a bias towards the status quo in the case that utility functions are quadratic in the amount traded we prove that for any incentive compatible direct mechanism there is an expected bias towards the disagreement point in other words for the class of preferences we study there is a strategic advantage to property rights in the coase bargaining setup in the presence of incomplete information

the principal agent model with multilateral externalities an application to climate agreements we consider contracting of a principal with an agent if multilateral externalities are present the motivating example is that of an international climate agreement given private information about the willingness to pay wtp for emissions abatement due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation optimal contracts equalize marginal abatement costs and thus can be implemented by a system of competitive permit trading moreover optimal contracts can include a boundary part i e the endogenous type dependent participation constraint is binding which is not a copy of the outside option of no contract compared to this outside option a contract can increase emissions of the principal for types with a low wtp and reduce her payoff for high types subsidies can be constant or even decreasing in emission reductions and turn negative so that the agent reduces emissions and pays the principal

the assignment of workers to jobs in an economy with coordination frictions this paper studies the assignment of heterogeneous workers to heterogeneous jobs owing to the anonymity of a large labor market workers use mixed strategies when applying for jobs this randomness generates coordination frictions two workers may apply for a particular job whereas an identical job gets no applications the model generates assortative matching with a positive but imperfect correlation between matched workers and firms types it predicts that a worker s wage is increasing in her job s productivity and a firm s profit is increasing in its employees productivity the model also yields a version of the welfare theorems

performance pay and wage inequality an increasing fraction of jobs in the u s labor market explicitly pay workers for their performance using bonus pay commissions or piece rate contracts using data from the panel study of income dynamics we show that compensation in performance pay jobs is more closely tied to both observed and unobserved productive characteristics of workers than compensation in non performance pay jobs we also find that the return to these productive characteristics increased faster over time in performance pay than in non performance pay jobs we show that this finding is consistent with the view that underlying changes in returns to skill due for instance to technological change induce more firms to offer performance pay contracts and result in more wage inequality among workers who are paid for performance thus performance pay provides a channel through which underlying changes in returns to skill get translated into higher wage inequality we conclude that this channel accounts for 21 of the growth in the variance of male wages between the late 1970s and the early 1990s and for most of the increase in wage inequality above the eightieth percentile over the same period

information and the coase theorem abstract some economists think the coase theorem implies a lot about the proper scope of government intervention in the economy and about the welfare consequences of laissez faire others see it as a mere tautology that if people negotiate efficiently then every outcome will be efficient the coase theorem is important only if we believe that efficient negotiation is likely of course we can attribute inefficiencies to bargaining imperfection but it may not be useful to do so such attitudes sometimes seem to depend more on ideology than on reason this article gives one economist s reasoned view it discusses the coase theorem as a decentralization result and why decentralization results are interesting it considers mechanism design for revealing private information and describes the problems of centralization should the coase theorem should be viewed as a second best result property rights are more efficient than some reasonable alternative does the coase theorem recommend an institution or make

competition among sellers in securities auctions we study simultaneous security bid second price auctions with com petition among sellers for potential bidders the sellers compete by designing ordered sets of securities that the bidders can offer as payment for the assets upon observing auction designs potential bidders decide which auctions to enter we characterize all symmet ric equilibria and show that there always exist equilibria in which auctions are in standard securities or their combinations in large markets the unique equilibrium is auctions in pure cash we extend the model for competition in reserve prices and show that binding reserve prices never constitute equilibrium as long as equilibrium security designs are not call options jel d44 d82 g10 in economic and financial markets rights to control and exploit assets with the potential to generate cash flows are often sold through auctions while in some auc tions the winner s future profits from the asset cannot be used as a basis for payment so only cash bids are possible in many cases it is possible to observe and verify the ex post cash flows this means that bidders can submit their bids in the form of securities the values of which are contingent on future cash flows from the asset securities auctions are common in the real world examples include government sales of oil leases lead plaintiff wireless spectrum and highway building auctions many other transactions though not formally auctions are similar to securities auc tions in nature examples include corporate takeovers intercorporate asset sales book publishing advertising and venture capital markets 1 in this paper we analyze equilibrium auction mechanisms when sellers compete for potential bidders by altering security designs of their auctions rather than reserve prices as in the prior literature specifically we consider an environment in which

asymmetric information bargaining problems with many agents a yes or no decision must be made about some issue all agents must agree the coase theorem asserts that the efficient outcome will always result suppose the value positive or negative that an individual attaches to an affirmative decision is privately known to that individual it is proved under very mild conditions that with independent types as the number of agents increases the probability of an affirmative efficient decision goes to zero an example in which it is common knowledge that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given

bidding with securities auctions and security design we study security bid auctions in which bidders compete for an asset by bidding with securities that is they offer payments that are contingent on the realized value of the asset being sold the value depends on investment by the winner thus creating the possibility of moral hazard such auctions are commonly used both formally and informally in formal auctions the seller generally restricts bids to an ordered set such as an equity share or royalty rate by restricting the bids standard auction formats such as first and second price auctions can be used in informal settings with competing buyers the seller does not commit to a mechanism upfront rather bidders offer securities and the seller chooses the most attractive bid based on his beliefs ex post we characterize equilibrium payoffs and bidding strategies in this setting and show that an informal mechanism yields the lowest possible revenues across all mechanisms we also determine the optimal formal mechanism and show that the security design is more important than the auction format we show that the revenue equivalence principle that expected revenues are independent of the auction format holds if the set of permissible securities is ordered and convex such as equity otherwise it need not hold for example when bidders offer standard debt securities a second price auction is superior on the other hand if bidders compete on the conversion ratio of convertible debt a first price auction yields higher revenues finally we examine how different forms of moral hazard impact our results

capital income taxation when inherited wealth is not observable this paper extends the atkinson stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics productive ability and inherited wealth bequests are motivated by the joy of giving a child s inheritance is a random variable with a probability distribution that depends on his parent s investment in a bequest technology public borrowing is assumed and implies the modified golden rule we study the optimal tax policy when two instruments are available a non linear wage income tax and a proportional tax on capital income we show that the second instrument ought in general to be used but that the tax rate is not necessarily positive however a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability

adverse selection and liquidity distortion this article develops a tractable model with two dimensional asymmetric information in asset markets sellers are privately informed about their asset quality and distress positions illiquidity arises endogenously and manifests itself through two distinct market outcomes the first outcome features limited market participation resulting in a dry up in trading volume the second outcome involves a large volume at a depressed price only in the latter outcome do distressed sellers engage in fire sales quickly unwinding their positions at a steep price discount the article further establishes that this equilibrium can arise only when buyers expect that sellers with a higher need for immediacy will on average have higher quality assets hence both the information structure and the distribution of sellers distress are crucial for the existence of fire sales

bilateral trade with the sealed bid k double auction existence and efficiency for k in the unit interval the k double auction determines the terms of trade when a buyer and a seller negotiate transfer of an item the buyer submits a bid b and the seller submits an offer s trade occurs if b exceeds s at price kb 1 k s we model trade as a bayesian game in which each trader privately knows his reservation value but only has beliefs about the other trader s value existence of a multiplicity of equilibria is proven for a class of trader s beliefs for generic beliefs however these equilibria are shown to be ex ante inefficient

a note on optimal taxation in the presence of externalities abstract i consider the problem of optimal taxation with externalities in a general setup encompassing most of optimal taxation models found in the literature it is demonstrated that when direct taxation of externalities is possible optimal taxes can be expressed as the sum of the optimal pigouvian taxes and the optimal taxes in a related problem without externalities regardless of what other tax instruments are available this result generalizes the so called principle of targeting

redistribution and pollution taxes with non linear engel curves abstract this paper analyses optimal corrective taxation and optimal income redistribution the pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages moreover under general utility functions optimal pollution taxes should be set below the pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods however if engel curves are linear optimal pollution taxes should follow the first best rule for the pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods the often used quasi linear ces and stone geary utility functions all have linear engel curves if engel curves are linear and if pollution taxes are not optimised pareto improving green tax reforms exist that move the pollution tax closer to the pigouvian tax simulations demonstrate that optimal corrective taxes should be pigouvian if the demand for polluting goods is derived from a les demand system but deviate from the pigouvian taxes if demand for polluting goods demand is derived from a piglog demand system

the rate at which a simple market converges to efficiency as the number of traders increases an asymptotic result for optimal trading mechanisms private information in an independent private values market provides incentives to traders to manipulate equilibrium prices strategically this strategic behavior precludes ex post efficient market performance increasing the number of traders improves the efficiency of some trading mechanisms by enabling them to better utilize the private information traders bids and offers reveal this paper shows that the expected inefficiency of optimally designed mechanisms relative to ex post efficient allocations decreases almost quadratically as the number of traders increases