partnerships lemons and efficient trade we analyze the possibility of efficient trade with informationally interdependent valuations and with a dispersed ownership a crucial role is played by the sign of the derivatives that measure how valuation functions depend on others signals if valuations are increasing functions of other agents signals it is more difficult to achieve efficient trade with interdependent values than with private values where the respective derivatives are zero in contrast if valuations are decreasing functions of other agents signals it is easier to achieve efficient trade with interdependent values our results unify and generalize the insights of cramton et al 1987 myerson and satterthwaite 1983 and akerlof 1970

some comments on free riding in leontief partnerships hans k hvide holmstrom bell journal of economics 13 1982 324 40 showed that freeriding is inevitable in partnerships where inputs are substitutes legros and matthews review of economic studies 68 1993 599 611 and vislie journal of economics behavior and organization 23 1994 83 91 showed that when inputs are strict complements leontief technology free riding can be avoided with a linear sharing rule this paper considers the robustness and some extensions of the positive result of these articles first i show that legros and matthews s and vislie s results are not robust to the introduction of participation constraints and limited liability however i construct a novel rule that mitigates that problem second i perturb the deterministic model of the other authors it turns out that free riding is avoidable with noise added to joint output and is inevitable when noise is added to individual productivity jel c72 d20 d29 d82 i introduction a long tradition in economics compares the performance of different ownership arrangements of firms capitalist firms are defined through separating ownership and production by having an outside owner and partnership firms split the value of production in full between the partners building on alchian and demsetz 1972 the seminal paper by holmstrom 1982 argues that partnership firms may suffer from free riding problems holmstrom 1982 shows that efficient provision of effort is not consistent with nash behavior in static partnership games where inputs are substitutes and actions are noncontractible capitalist firms on the other hand can mitigate the free rider problems by a principal breaking the budget i e keep some of the surplus for oneself whenever one observes a low joint output motivated by the many examples of partnerships in the real world considerable literature has questioned the generality of holmstrom s result 1 the present article considers a particular branch of that literature works that explore effort taking in leontief partnerships partnerships where joint output is determined by the partner with the least effort 2 legros and matthews 1993 section 3 1 and vislie 1994 hereafter abbreviated lmv find that if production is determined in such a manner there exists a linear sharing rule denoted beta sup that implements the efficient provision of effort and hence eliminates free riding the intuition for this result is that given that the other agents stick to the efficient action no agent can gain by providing more effort because output does not change and can be made to support the full decrease in output since his deviation is proportional to the change in output the present article discusses the robustness of the implementation result of lmv in two different directions by introducing participation constraints and limited liability on one hand and by introducing noise in the production on the other hand let me articulate why it is important to test for robustness along these two directions first the partnership literature has largely ignored whether a partnership can be expected to agree ex ante on efficient sharing rules when such rules exist the interesting problem is that a partner with a strong bargaining power may wish to settle on a non efficient rule if that gives him or herself a greater return hence it is of importance to have sharing rules that make provision of effort incentive compatible under any distribution of participation constraints to distribute a large share of surplus to agents with strong bargaining power proposition 1 see below constructs a simple sharing rule that solves the participation problem this sharing rule which is inspired by the groves s mechanism has the attractive property of implementing the efficient provision of effort under any conceivable distribution of participation constraints

efficiency and equilibria in complementary teams abstract this paper considers a team or partnership where the partners effort levels enter as strict complements in the production function the existence of a linear budget balancing sharing mechanism is demonstrated which implements the team s efficient outcome as a nash equilibrium this result is in contrast to a result derived in holmstrom 1982

norms and contracting we argue that contracts establish the norms of a relationship and that individuals incur disutility when deviating from these norms in a laboratory experiment we allow agents to make simple contracts before they play one of four games and the most effective contract always includes an unenforceable handshake agreement to take the first best action in three games a contract with only this handshake agreement is at least weakly optimal the handshake is particularly effective in games with strategic complements our results highlight an explanation for contractual incompleteness establishing a norm can effectively substitute for weak enforceable restrictions this paper was accepted by brad barber teck ho and terrance odean special issue editors

information and volatility in an economy of interacting agents with both idiosyncratic and aggregate shocks we examine how the structure of private information in uences aggregate volatility the maximal aggregate volatility is attained in a noise free information structure in which the agents confound idiosyncratic and aggregate shocks and display excess response to the aggregate shocks as in lucas 14 for any given variance of aggregate shocks the upper bound on aggregate volatility is linearly increasing in the variance of the idiosyncratic shocks our results hold in a setting of symmetric agents with linear best responses and normal uncertainty we establish our results by providing a characterization of the set of all joint distributions over actions and states that can arise in equilibrium under any information structure this tractable characterization extending results in bergemann and morris 8 can be used to address a wide variety of questions linking information with the statistical moments of the economy

revisiting the lemons market this article extends the standard competitive adverse selection model by allowing for qualitatively different information structures of agents on the informed side of the market using the stylized framework of the market for used cars we examine the welfare properties of equilibria under the assumption that a fraction of the sellers remains uninformed about a parameter that is relevant for their own transaction whether market performance increases or decreases in the number of uninformed sellers is shown to depend on 1 the potential gains from trade in the market and 2 the average quality of the sellers information structure

peer pressure and partnerships partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie but in organizations of any significant size the free rider effects would seem to choke off

dynamic reform of public institutions a model of motivated agents and collective reputation abstract state capacity is optimized when public institutions are staffed by individuals with public service motivation however when motivated agents value the collective reputation of their place of employment steady state equilibria with both high and low aggregate motivation reputation in the mission oriented sector exist reforming a low motivation institution requires a non monotonic wage path since the effect of higher wages on motivation is negative for a high reputation institution but positive for a low reputation institution a transition to a high reputation steady state requires an initial wage increase to crowd motivated workers in followed by a wage decrease to crowd non motivated workers out

dynamics of a household norm in female labour supply abstract this paper develops a continuous variant of the theory of social custom of akerlof q j econom 94 1980 749 to model the impact of a traditional household norm on married women s labour supply the erosion of this norm is treated as the endogenous result of feedback of the labour supply behaviour on the norm beliefs these endogenous dynamics are shown to imply multiple long run equilibria on both the individual and collective levels exhibiting hysteresis and mutual transitions dependent on the wage rate it is suggested that these properties have played important roles in the long run increase in married women s labour supply in many oecd countries

foundations of dominant strategy mechanisms wilson 1987 criticizes applied game theory s reliance on common knowledge as sumptions in reaction to wilson s critique the recent literature of mechanism design has adopted the goal of finding detail free mechanisms in order to eliminate this re liance in practice this has meant restricting attention to simple mechanisms such as dominant strategy mechanisms however there has been little theoretical foundation for this approach in particular it is not clear the search for an optimal mechanism that does not rely on common knowledge assumption would lead to simpler mechanisms rather than more complicated ones this paper tries to fill the void in the context of an expected revenue maximizing auctioneer we investigate some foundations for using simple dominant strategy auctions

information and the market for lemons this paper revisits akerlofs 1970 classic adverse selection market and asks the following question do greater information asymmetries reduce the gains from trade perhaps surprisingly the answer is no better information on the selling side worsens the buyers curse thus lowering demand but may shift supply as well whether trade increases or decreases depends on the relative sizes of these effects a characteization is given on the other hand improving the buyers information i e making private information public unambiguously improves trade so long as market demand is downward sloping

social norms and moral hazard the probability of income loss depends on talent and effort effort has positive externalities and therefore individuals are awarded status in proportion to their perceived diligence the social no

social norms of work ethic and incentives in organizations abstract in this paper i model the relation between the dissemination of social norms of work effort work ethic in a given society and the choice of incentives by firms and i motivate it by presenting evidence from three different datasets that suggests that work ethic is correlated with the intensity of firms incentives when the effort choices of different agents in a firm are complementary having hard working coworkers makes an agent more productive therefore in equilibrium she will work harder foreseeing that a work ethic is more useful to hard working agents parents will be more willing to transmit it in societies in which the probability that their offspring will have coworkers with strong work ethic is higher i then expand the model to incorporate the firm technology choice allowing firms to decide between complementary and separable production processes in societies with wide dissemination of work ethic firms will want effort to be complementary as in modern production processes while the opposite is true when the dissemination of work ethic is narrow finally i investigate the comparative dynamics of the 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

on the consequences of eliminating capital tax differentials in the united states structure and equipment capital are eectively taxed at dierent rates recently president obama joined the group of policy makers and economists who propose to eliminate these dierentials this paper analyzes the consequences of such a reform using an incomplete markets model with equipment skill complementarity we nd that the reform increases average welfare by 0 1 importantly we nd that the reform does not involve the usual eciency vs equality trade o it improves both jel classication e62 h21

the robustness of equilibria to incomplete information a number of papers have shown that a strict nash equilibrium action profile of a game may never be played if there is a small amount of incomplete information see for example carlsson and van damme 1993a we present a general approach to analyzing the robustness of equilibria to a small amount of incomplete information a nash equilibrium of a complete information game is said to be robust to incomplete information if every incomplete information game with payoffs almost always given by the complete information game has an equilibrium which generates behavior close to the nash equilibrium we show that many games with strict equilibria have no robust equilibrium and examine why we get such different results from existing refinements if a game has a unique correlated equilibrium it is robust a natural many player many action generalization of risk dominance is a sufficient condition for robustness

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

efficient and nearly efficient partnerships this paper shows in two ways that the degree to which free riding diminishes the performance of deterministic partnerships may be less than has been generally thought first a necessary and sufficient condition is provided for a partnership to sustain full efficiency it implies that many non trivial partnerships sustain efficiency such as generic ones with finite action spaces and neoclassical ones with leontief technologies second approximate efficiency is shown to be achievable in a large class of partnerships including ones with smooth and monotonic production and disutility functions approximate efficiency is achieved by mixed strategy equilibria one partner takes with small probability an inefficient action the degree to which efficiency is approximated is restricted only by the amount of liability the partners can bear nonetheless their equilibrium payments are not arbitrarily large

public service motivation as an argument for government provision a public service motivation psm inclines employees to provide effort out of concern for the impact of that effort on a valued social service though deemed to be important in the literature on public administration this motivation has not been formally considered by economists when a psm exists this paper establishes conditions under which government bureaucracy can better obtain psm motivated effort from employees than a standard profit maximizing firm the model also provides an efficiency rationale for low powered incentives in both bureaucracies and other organizations producing social services 2000 elsevier science s a all rights reserved

an economic model of welfare stigma perhaps the most basic assumption of the economic theory of consumer demand is that more is better than less virtually all of the major propositions of consumer theory can in a certain sense be derived from the assumption that goods are good interestingly however this tenet seems to be violated by the behavior of many individuals in the low income population for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls for example it has been estimated that in 1970 only about 69 percent of the families eligible for afdc aid to families with dependent children participated in the program see richard michel 1980 the corresponding percentage for afdc u the program for which families with an unemployed male are eligible was only 43 percent and the participation rate in the food stamp program was only 38 percent see maurice mcdonald 1977 this phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets consequently most investigators ignore the problem when studying the effects of welfare programs on behavior in this paper this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma that is from disutility arising from participation in a welfare program per se 1 the existence of stigma has been amply documented in the sociological literature patrick horan and patricia austin 1974 lee rainwater 1979 where interviews of recipients have often uncovered feelings of lack of self respect and negative self characterizations from participation in welfare nevertheless this phenomenon has not been modeled and many questions consequently remain when is the disutility of participation strong enough to prevent participation shouldn t we expect individuals to weigh the disutility of participation against the potential benefit in their decisions what is the elasticity of participation with respect to the potential benefit also in a slightly different vein how are the work disincentives of welfare affected by stigma these questions have been given scant attention by economists yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population here these questions are addressed by modeling nonparticipation as a utility maximizing decision the model is developed and estimated for the afdc program 2 the model posits an individual utility function containing not just disposable income but

robustness of simple menus of contracts in cost based procurement abstract we consider a model of cost based procurement in which the principal faces knightian uncertainty about the agent s preferences for cost reduction we show that a particularly simple incentive scheme a menu comprising a fixed price contract and a cost reimbursement contract minimizes the maximum expected payment where this maximum is taken over the set of possible agent preferences for some parameters of the problem a range of alternative incentive schemes also satisfy this criterion we show that the simple incentive scheme is not weakly dominated by any of the alternatives there does not exist an alternative mechanism for which the expected payment is no higher for all realizations of the agent s preferences and strictly lower for some realization

optimal contracting with endogenous social norms research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers within an agency framework we model endogenous social norms by assuming that each agent s cost of implementing an action depends on the social norm for that action defined to be the average level of that action chosen by the agent s peer group we show how endogenous social norms alter the effectiveness of monetary incentives determine whether it is optimal to group agents in a single or two separate organizations and may give rise to a costly adverse selection problem when agents sensitivities to social norms are unobservable

work environment and individual background explaining regional shirking differentials in a large italian firm the prevalence of shirking within a large italian bank appears to be characterized by significant regional differentials in particular absenteeism and misconduct episodes are substantially more prevalent in the south we consider a number of potential explanations for this fact different individual backgrounds group interaction effects sorting of workers across regions differences in local attributes different hiring policies and discrimination against southern workers our analysis suggests that individual backgrounds group interaction effects and sorting effects contribute to explaining the north south shirking differential none of the other explanations appears to be of first order importance i introduction whether individual behavior is determined by group interactions or by individual background is undoubtedly a fundamental question for the social sciences this question presented itself forcefully when we stumbled onto the following piece of evidence there appear to be significant regional differentials in the prevalence of shirking among the employees of a large italian bank in particular absenteeism and misconduct episodes are considerably more frequent in the southern branches of the bank in this paper we examine several potential explanations for this fact first individual preferences for shirking versus working may differ according to one s region of hirth we will refer to this hj othesis as one of different individual hackgrounds the second possibility is one of locational sorting low shirking types may tend to migrate to the north high shirking types may tend to migrate to the south or hoth third the northern and southern

relative pay and its effects on firm efficiency in a transitional economy abstract in this study we examine the impact of relative pay manager pay divided by average worker pay on a firm s productivity using data from a major transitional economy china we find that relative pay is negatively associated with high productivity our results provide support for the view that workers are alienated when their incomes are far lower than that of top management and this leads to lower productivity this effect is most pronounced in labor intensive firms

understanding welfare stigma taxpayer resentment and statistical discrimination abstract welfare stigma is widely regarded to be of central importance in understanding the impact of welfare programs in their goal of alleviating poverty it affects both the decision to take up benefits and the well being of those who actually do this paper develops alternative models of the determinants of welfare stigma we identify two views a statistical discrimination approach and a taxpayer resentment view we discuss how each may be formalized and derive their implications we then examine what they imply about the relationship between stigma and program design

executive compensation and principal agent theory the empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants in contrast this paper analy

desert and inequity aversion in teams teams are becoming increasingly important in work settings we develop a framework to study the strategic implications of a meritocratic notion of desert under which team members care about receiving what they feel they deserve team members nd it painful to receive less than their perceived entitlement while receiving more may induce pleasure or pain depending on whether preferences exhibit desert elation or desert guilt our notion of desert generalizes distributional concern models to situations in

clean evidence on peer effects we study subjects who were asked to fill letters into envelopes with a remuneration independent of output in the pair treatment two subjects worked at the same time in the same room and peer effects were possible in the single treatment subjects worked alone and peer effects were ruled out we find evidence of peer effects in the pair treatment because the standard deviations of output are smaller within pairs than between pairs moreover average output is higher in the pair treatment thus peer effects raise productivity finally low productivity workers are the most sensitive to the behavior of peers

language meaning and games a model of communication coordination and evolution language is a powerful coordination device we generalize the cheap talk approach to pre play communication by way of introducing a meaning cor respondence between messages and actions and by postulating two axioms met by natural languages players have a lexicographic preference second to material payoffs against deviating from the meaning correspondence under two sided communication in generic and symmetric n 3 n coordination games a nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique pareto efficient out come of the underlying game we extend the analysis to one sided communica tion in arbitrary finite two player games jel c72 c73 z 3

can contracts signal social norms experimental evidence we investigate whether incentive schemes signal social norms and thus affect behavior beyond their direct economic consequences a one shot principal agent experiment is studied where prior to contract choice principals are informed about the past actions of other agents and thus have more information about norms of behavior compared with a setting in which principals are uninformed agents exert substantially higher effort under a fixed wage contract when they are aware that an informed principal chose this contract the informed principal s choice apparently signals a norm not to exploit trust which leads to more trustworthy behavior this mechanism s robustness is explored in further experiments data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2336 this paper was accepted by uri gneezy behavioral economics

the electronic mail game strategic behavior under almost common knowledge the paper addresses a paradoxical game theoretic example which is closely related to the coordinated attack problem two players have to play one of two possible coordination games only one of them receives information about the coordination game to be played it is shown that the situation with almost common knowledge is very different from when the coordination game played is common knowledge

efficiency in sequential partnerships abstract we consider sequential partnerships in which agents obtain non verifiable information about the actions taken by previous agents for such partnerships a budget balanced sharing rule exists that induces efficient production the sharing rule has many desirable features 1 it uniquely implements efficient production 2 it does not rely on message games 3 it does not rely on unlimited liability and 4 it is robust to renegotiation the rule is furthermore simple intuitive and robust to sabotage coalition formation and noise it also induces efficient production when agents obtain incomplete information about previous actions journal of economic literature classificationnumbers d82 l23

optimal information disclosure a sender randomly draws a prospect characterized by its profitability to the sender and its relevance to a receiver the receiver observes only a signal provided by the sender and accepts the prospect if his bayesian inference about the prospect s relevance exceeds his opportunity cost the sender s profits are typically maximized by partial information disclosure whereby the receiver is induced to accept less relevant but more profitable prospects switches by pooling them with more relevant but less profitable ones baits extensions include maximizing a weighted sum of sender profits and receiver surplus and allowing the sender to use monetary incentives

informationally robust trade and limits to contagion abstract two agents can each accept or reject a proposed deal whose value for each agent depends on an unknown state and may be positive or negative the deal takes place only if both accept each agent can be imperfectly informed in an arbitrary way about both her own value and the other agent s in such environments contagious adverse selection may prevent the deal from being reached even when it is mutually beneficial ex post we give an upper bound on the ex ante expected welfare loss in equilibrium due to such contagion valid for any information structure the welfare loss is small if negative values are unlikely ex ante and under an assumption of known aggregate gains from the deal our bound is sharp the bound has a succinct description even though the equilibrium itself in any given information structure may be hard to describe explicitly

social norms and economic incentives in firms abstract this paper studies the interplay between economic incentives and social norms in firms we introduce a general framework to model social norms arguing that norms stem from agents desire for or peer pressure towards social efficiency in a simple model of team production we examine the interplay of three types of contracts with social norms we show that one and the same norm can be output increasing neutral or output decreasing depending on the contract multiplicity of equilibria and crowding out effects of steeper incentives can arise

the limits of price discrimination we analyze the welfare consequences of a monopolist having additional information about consumers tastes beyond the prior distribution the additional information can be used to charge dierent prices to dierent segments of the market i e carry out third degree price discrimination we show that the segmentation and pricing induced by the additional information can achieve every combi nation of consumer and producer surplus such that i consumer surplus is non negative ii producer surplus is at least as high as pro ts under the uniform monopoly price and iii total surplus does not exceed the e cient gains from trade as well as characterizing the welfare impact of price discrimination we examine the limits of how prices and quantities can change under price discrimination we also examine the limits of price discrimination in richer environments with quantity discrimination and limited ability to segment the market

homo moralis preference evolution under incomplete information and assortative matching what preferences will prevail in a society of rational individuals when preference evolution is driven by the resulting payoffs we show that when individuals preferences are their private information a convex combination of selfishness and morality stands out as evolutionarily stable we call individuals with such preferences homo moralis a t one end of the spectrum is homo oeconomicus who acts so as to maximize his or her own payoff at the opposite end is homo kantiensis who does what would be the right thing to do in terms of payoffs if all others would do likewise we show that the stable degree of morality the weight placed on the moral goal is determined by the degree of assortativity in the process whereby individuals are matched to interact

efficient equilibrium selection in evolutionary games with random matching abstract this paper investigates the sensitivity of recent evolutionary models of learning to the specification of the matching mechanism we study a literally random matching mechanism combined with a process of strategy adjustment based on the realized average performance of each strategy in the key class of symmetric 2 2 coordination games the pareto efficient equilibrium per se is selected rather than the risk dominant equilibrium as the probability of experimentation or mutation goes to zero furthermore convergence to the equilibrium is relatively fast we extend these results for example to games of common interest journal of economic literature classification numbers c72 c73

social norms and welfare state dynamics the paper analyses the interaction between economic incentives and work norms in the context of social insurance if the work norm is endogenous in the sense that it is weaker when the population share of beneficiaries is higher then voters will choose less generous benefits than otherwise we also discuss welfare state dynamics when there is a time lag in the adjustment of the norm in response to changes in this population share and show how a temporary shift in the unemployment rate may cause persistence in the number of benefi

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives