increasing dominance with no efficiency effect abstract i uncover a new force towards increasing dominance the property whereby in dynamic games the leader tends to increase his or her lead in expected terms the new effect results from the strategic choice of covariance in races i assume that players must choose not the amount of resources to spend but how to allocate those resources i show that in equilibrium the laggard chooses a less promising path in effect trading off lower expected value for lower correlation with respect to the leader this results in increasing dominance and holds true even if no joint payoff or efficiency effect is present journal of economic literature classification numbers c7 l1

investment and market dominance we analyze a model of oligopolistic competition with ongoing investment special cases include incremental investment patent races learning by doing and network externalities we investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments to this end we derive a new comparative statics result for general games with strategic substitutes which applies to our investment game finally we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards or in dynamic games when firms are sufficiently patient

the importance of group coverage how tax policy shaped u s health insurance in 1954 the internal revenue service stipulated that employer contributions to the health insurance plans of their employees were to be excluded from employee taxable income today the tax subsidy is major feature of the u s health care market this paper examines the initial effects of the tax subsidy on the demand for health insurance using previously unexamined data from 1953 and 1958 results suggest that the tax subsidy increased the growth of group insurance particularly among union members and employed persons this is a critical effect because group insurance is not only less expensive than individual insurance but it is also easier to obtain and households with access to group health insurance are far more likely to purchase health insurance coverage than those without similar access by increasing access to group insurance the tax subsidy fostered an increase in the purchase of group health insurance by people who may not have purchased individual coverage and generated institutional change as it cemented an employment based system of group health insurance in the united states this abstract was borrowed from another version of this item

optimal management of an r d budget abstract this paper characterizes the optimal allocation of a budget between several stages of an r d project when intermediate stages are profitable the optimal allocation involves greater expenditures in early stages increasing the budget does not necessarily increase expenditures in every stage but does increase the budget that remains unspent at each stage a simple necessary and sufficient condition is given for the optimality of bold play the spending of all remaining budget on the current stage if profits are realized only after all stages are successfully completed decreasing returns in the innovation production function implies that the optimal strategy is to spread the budget evenly between the stages of the r d project

toilet cleaning and department chairing volunteering a public service abstract who will do a job that nobody wants but that someone has to do the search for a volunteer is modelled as a war of attrition in which everyone is tempted to just wait for someone else to do it we show that the volunteer will be ceteris paribus the individual for whom the benefit cost ratio of performing the public service is largest the one most impatient to consume it or the one who stands to benefit from it the longest

how not to sell nuclear weapons we consider situations where a sale affects the ensuing interaction between potential buyers these situations are modeled by assuming that an agent who does not acquire the object for sale incurs an identity dependent externality we construct a revenue maximizing auction for the seller we observe that 1 outside options and participation constraints are endogenous 2 the seller extracts surplus also from agents who do not obtain the auctioned object 3 the seller is better off by not selling at all while obtaining some payments if externalities are much larger than valuations

firm value illiquidity risk and liquidity insurance abstract our interest here concerns liquidity supply to firms we first examine the relation between firm value and access to liquidity supply and then we investigate the existence conditions and efficiency properties of financial contracts with a liquidity covenant in a continuous time infinite horizon stochastic model of a repeated firm investors relationship where the key problem is the mutual commitment between the two parties to model this problem we consider liquidity supply as a stochastic regulator mechanism that prevents the firm s ability to pay from falling below a predefined threshold here the market fixed coupon and we then apply recent developments in dynamic programming techniques for regulated processes to obtain a close form solution for the firm s value our main finding is that efficient i e actuarially fair and renegotiation proof contracts emerge in the absence of perfect commitment as the firm and the investor can exert mutual threat of termination

understanding overbidding in second price auctions an experimental study we present results from second price private value auction spa experiments where bidders may receive noisy signals about their opponentsvalue such signals change biddersperception about the strengthof their opponent and the relationship between biddersperception of their opponent and overbidding provides a novel channel to understand overbidding in spa we found that small and medium overbids are more likely to occur when bidders perceive their rivals to have similar values supporting a modifiedjoy of winninghypothesis but large overbids are more likely to occur when bidders believe their opponents to have much higher values consistent with thespite hypothesis second price private value auctions spas are the most easily understood auction format from a theoretical point of view 1 in standard private value auction models of fully rational bidders with standard preferences bidding one s own value is a weakly dominant strategy this theoretical prediction holds irrespective of biddersrisk atti tudes the number of rival bidders symmetry in the value distributions and so on in laboratory experiments however subjects are found to exhibit a consistent pattern of overbidding kagel et al 1987 found that the actual bids are on average 11 above the dominant strategy bids kagel and levin 1993 found that about 62 of all bids in their five bidder spa sessions exceed the bidder s value while only 8 of all bids were below it both kagel and levin 1993 and harstad 2000 further reported that experience has only a small effect in reducing overbidding in spa an important related finding is that overbidding in english auctions a mechanism that is strategically equivalent to the spa in the case of private values is known to be a short term phenomenon that subjects quickly learn not to undertake kagel and levin 1993 thus any explanation for the prevalence and persistence of overbidding in the spa must also explain its rarity in the english auction given the robustness of the findings of overbidding in spa it is surprising that economists have little understanding of why it happens kagel et al 1987 conjectured that bidding above one s own value in a spa is based on the illusion that it improves the probability of winning with little cost because the winner only pays the second highest bid 2 moreover they argue that overbidding is sustainable because bidders still on average earn positive profits and because the negative feedback from overbidding is a weak mechanism in the spa for example if a bidder overbids in a spa by 10 above her value it is quite possible that she does not win at all and thus does not experience

the war of attrition in continuous time with complete information this paper provides a complete characterization of the nash equilibrium outcomes for the war of attrition when time is continuous and information is complete it allows for asymmetric payoffs and an arbitrary time horizon in addition to certain asymme tric pure strategy equilibria that always exist the authors establi sh the conditions under which there is also a continuum of mixed strategy equilibria these are most likely to exist when either the horizon is infinite or the game is symmetric copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

potential competition in preemption games we consider a preemption game with two potential competitors who come into play at some random secret times the presence of a competitor is revealed to a player only when the former moves which terminates the game we show that all perfect bayesian equilibria give rise to the same distribution of players moving times moreover there exists a unique perfect bayesian equilibrium in which each player s behavior from any time on is independent of the date at which she came into play we flnd that competitive pressure is nonmonotonic over time and that private information tends to alleviate rent dissipation our results have a natural interpretation in terms of eroding reputations

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

continuous time repeated games in this paper the authors develop a model of strategic behavior in continuous time games of complete information which includes conventional repeated games in discrete time as a special case the model developed here admits a very large class of strategies that allows one to extend the repeated game model to continuous time the set of equilibria in this game may be large in many cases equal to the feasible individually rational set of payoff s the authors also study the restriction of renegotiation proofness in this framework and apply these results to a cournot duopoly example copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

patentability r d direction and cumulative innovation we present a model of cumulative innovation where firms can conduct r d in both a safe and a risky direction innovations in the risky direction produce quality improvements with higher expected sizes and variances as patentability standards rise an innovation in the risky direction is less likely to receive a patent that replaces the current technology which decreases the static incentive for new entrants to conduct risky r d but increases their dynamic incentive because of the longer duration and hence higher reward for incumbency these together with a strategic substitution and a market structure effect result in an inverted u shape in the risky direction but a u shape in the safe direction for the relationship between r d intensity and patentability standards there exists a patentability standard that induces the efficient innovation direction whereas r d is biased towards against the risky direction under lower higher standards the optimal patentability standard may distort the r d direction to increase the industry innovation rate that is socially deficient

dynamic pricing in the presence of individual learning abstract this paper studies price dynamics in a setting in which a monopolist sells a new experience good over time to many buyers and the seller can neither price discriminate among the buyers nor commit to a price rule buyers learn from their own experiences about the effectiveness of the product individual learning generates ex post heterogeneity which affects the buyers purchasing decisions the monopolist s pricing strategy and efficiency when learning occurs through good news signals buyers receive a rent because of the possible advantageous belief caused by short lived deviations if a good news signal arrives the price can instantaneously increase or decrease depending on the arrival time of this signal the equilibrium is inefficient because the monopolist s incentive to exploit known buyers leads to inefficient early termination of exploration when learning occurs through bad news signals ex post heterogeneity has no such effect since only homogeneous unknown buyers purchase the experience good

a silent battle over a cake the division of a cake by n players is modeled as a silent game of timing we show that such games admit a unique nash equilibrium

a model of the evolution of duopoly does the asymmetry between firms tend to increase or decrease this paper is an attempt to identify some of the factors that affect the evolution of market structure in a model of dynamic competition between two firms the stochastic evolution of the state of competition depends on the respective effort rates of the firms the question is whether the current leader works harder than the laggard does the gap between firms tend to increase or decrease we show that several effects are at work the state tends to evolve in the direction where joint payoffs are greater since joint payoffs are related to joint product market profits less joint effort costs there are two classes of effect the joint profit effect and various joint cost effects the latter result in part from the pattern of profits and in part from endpoint effects that give relief from efforts asymptotic expansions illuminate these influences moreover we show by numerical simulation that there is another kind of joint cost effect the pattern of joint effort costs can influence the pattern of evolution of market structure and the evolution of the pattern of market structure can influence the pattern of efforts in a mutually self reinforcing manner in particular there may be equilibria in which this last effect means that the laggard works harder than the leader even though all the other effects work in favour of the leader

price elasticity and adverse selection in the demand for supplementary health insurance probit regression estimates show the effects of the price of insurance anticipated medical expenditures and other factors on reported decisions about purchasing hypothetically offered supplementary insurance policies the demand estimates can characterize how much supplemental insurance would be purchased under different tax policies affecting health insurance purchases although eliminating the current tax subsidy to insurance is shown to decrease demand the results indicate a substantial demand for supplementary insurance even in the absence of present tax incentives however our results on adverse selection raise concerns about the potential stability of supplemental insurance markets

competition and irreversible investments abstract incumbent monopolists frequently claim that the introduction of competition will reduce future profits and therefore delay future investments in this paper we show that not only is this not generally true but in the oligopolistic industry model of dixit and pindyck investment under uncertainty 1994 this is never the case we extend this result to situations in which investments have positive externalities and situations in which the monopolist has multiple investment opportunities

household debt and the tax reform act of 1986 prior to the tax reform act of 1986 tra 86 interest paid on all types of household debt was deductible from income before the payment of taxes in 1986 congress changed the law to phase out the deductibility of consumer interest over a five year period congress believed deductibility of interest provided an incentive to invest in consumer durables rather than assets which produce taxable income and therefore an incentive to consume rather than save by phasing out the present deductibility of personal interest congress intended to eliminate from the prior tax law a significant disincentive to saving joint committee on taxation jct 1987 p 263 the other goal of the provision was to raise 9 6 billion per year in tax revenue by 1991 because congress determined that encouraging home ownership is an important policy goal achieved in part by providing a deduction for residential mortgage interest it chose to retain the residential mortgage interest deduction jct 1987 pp 263 64 thus mortgage interest was fully deductible for interest paid on debt secured by a taxpayer s first or second residence up to his basis in the residence the omnibus budget reconciliation act of 1987 obra 87 changed the law so that interest paid was fully deductible on up to 1 million in acquisition debt and 100 000 in home equity debt 2 debt is categorized as acquisition debt if it is used for the purchase or improvement of a home home equity debt includes all other debt secured by a home by keeping the mortgage interest deduction congress may have provided a loophole that some taxpayers could exploit there was no restriction on the use of home equity debt and taxpayers who owned homes could borrow against their home equity to pay for the same purchases they had previously funded with consumer loans homeowners were given an incentive to shuffle their portfolios away from consumer debt into mortgage debt the widespread introduction of home equity lines of credit in the mid 1980 s which may have been spurred in part by the change in tax law provided an inexpensive and flexible method for households to make this shift 3 measuring the extent of portfolio shuffling is important for understanding whether households view mortgage and consumer debt as close substitutes clearly the substitution of mortgage debt for consumer debt undermines the goals of congress to boost saving and increase revenue moreover homeowners already have substantial tax preferences through the lack of taxes on the imputed income from housing and the preferential tax treatment of capital gains on their principal residence the ability to use deductible mortgage debt to finance consumer purchases provides homeowners another tax advantage relative to renters figure 1 plots the percentage change in putnam investments one post office square bos on ma 02109 e mail dean maki putnaminv com this paper was completed while i was on the staff of the board of governors of the federal reserve system financial support from the stanford institute for economic policy research and the lynde and harry bradley foundation is gratefully acknowledged i would like to thank john shoven orazio attanasio john pencavel tim bresnahan anne royalty doug bernheim al teplin craig furfine martha starrmccluer raphael bostic len burman julia coronado two anonymous referees seminar participants and the financial institutions research review group for helpful comments the views expressed in this paper are those of the author and do not necessarily reflect the views of putnam investments or the federal reserve board or its staff 1 in this paper consumer interest refers to interest paid on consumer loans that are not secured by a residence 2 under tra 86 interest paid on qualified educational and medical debt secured by a home was also deductible even if this debt exceeded the household s basis this provision was not renewed in obra 87 under obra 87 home equity debt also could not exceed the difference between the fair market value of the home and the amount of acquisition debt even if this difference was less than 100 000 3 of course homeowners can also increase their mortgage debt by taking out a traditional home equity loan by taking cash out when refinancing their mortgage or by taking out a larger mortgage when they durchase a home

properties of the combinatorial clock auction the combinatorial clock auction has become popular for large scale spectrum awards and other uses replacing more traditional ascending or clock auctions we describe some surprising properties of the auction including a wide range of ex post equilibria with demand expansion demand reduction and predation our results obtain in a standard homogeneous good setting where bidders have well behaved linear demand curves and suggest some practical difficulties with dynamic implementations of the vickrey auction

a continuous dilemma we study prisoners dilemmas played in continuous time with flow payoffs accumulated over 60 seconds in most cases the median rate of mutual cooperation is about 90 percent control sessions with repeated matchings over eight subperiods achieve less than half as much cooperation and cooperation rates approach zero in one shot sessions in follow up sessions with a variable number of subperiods cooperation rates increase nearly linearly as the grid size decreases and with one second subperiods they approach continuous levels our data support a strand of theory that explains how capacity to respond rapidly stabilizes cooperation and destabilizes defection in the prisoner s dilemma jel c72 c78 c91

reputational bargaining with minimal knowledge of rationality two players announce bargaining postures to which they may become committed and then bargain over the division of a surplus the share of the surplus that a player can guarantee herself under first order knowledge of rationality is determined as a function of her probability of becoming committed as is the bargaining posture that she must announce in order to guarantee herself this much this maxmin share of the surplus is large relative to the probability of becoming committed e g it equals 30 if the commitment probability is 1 in 10 and equals 13 if the commitment probability is 1 in 1000 and the corresponding bargaining posture simply demands this share plus compensation for any delay in reaching agreement

a perpetual race to stay ahead this paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity the state of competition measured by the difference between the number of innovations introduced by the firms evolves stochastically according to their effort level the structure of markov perfect equilibria is identified it is generally not true that competition is fiercest when firms are closest rather firms invest under two distinct circumstances while sufficiently ahead to outstrip their rival and secure a durable leadership while behind to regain leadership and prevent the situation from worsening to the point where their rival outstrips them industry such a market structure cannot be adequately modelled by a repeated game since history obviously affects market opportunities more precisely previous outcomes determine the range of available actions and pay offs economists have thus resorted to the study of races to gain insights into the strategic issues raised by such competition with the notable exceptions of aoki 1991 harris 1991 and budd harris and vickers 1993 most of the literature has analysed formal races displaying exogenous finishing lines or deadlines as well as final prizes and rewards and the corresponding results rely on backward induction however such assumptions do not seem to capture accurately the essential features of many markets often the rivalry only ends if at all when one of the competitors withdraws so that the deadline should be endogenized moreover benefits and losses are continuously collected additionally the emerging empirical literature on races stresses the inadequacy of standard models and the need to model r d as a race with multiple prizes in the words of cockburn and henderson 1994 our finding that the modern game theoretic literature is of only limited usefulness as an empirical guide points to the need to model r d as a race with multiple prizes the model analysed in this paper is an attempt to offer an adequate framework for this type of dynamic competition the stochastic evolution of the state of competition between two firms depends on their respective effort levels the state of competition is measured by the

the learning curve market dominance and predatory pricing sufficient conditions for id and iid are given in the case of two step learning in which a firm reaches the bottom of its learning curve after just two sales however examples are also constructed for the two step learning case in which neither id nor iid holds it is also shown that in equilibrium iid implies that learning is privately disadvantageous although it is socially advantageous finally introducing avoidable fixed costs and possible exit into the model yields a new theory of predatory pricing based on the learning curve hypothesis

selection effects in auctions for monopoly rights we demonstrate that auctioning market licenses may result in higher market prices than assigning them via more random allocation mechanisms when future market profit is uncertain winning an auction is like winning a lottery ticket if firms differ in risk attitudes auctions select the least risk averse firm which in turn set a higher price or a higher quantity in case quantity is the decision variable in the marketplace than an average firm

raising rivals cost in multi unit auctions abstract the objective many telecom regulators want to achieve when they decide to auction spectrum is that acquiring firms pay a market price based on the opportunity cost principle the simultaneous ascending auction may fail in this respect as it provides bidders with an opportunity to engage in strategic demand reduction this paper asks whether the combinatorial clock auction cca fares better in this respect we show that the answer to this question depends on the objectives bidders have if bidders have only the slightest preference to raise rivals cost they will use the opportunities the cca provides them to engage in strategic demand expansion this is even the case when the clock phase ends with excess demand

tax incentives and the decision to purchase health insurance evidence from the self employed the tax reform act of 1986 introduced a new tax subsidy for health insurance purchases by the self employed we analyze the changing patterns of insurance demand before and after tax reform to generate new estimates of how the after tax price of insurance affects the discrete choice of whether to buy insurance we employ both traditional regression models and difference in difference methods that compare changes in insurance coverage across groups around tra86 the results from our most carefully controlled comparison suggest that a 1 percent increase in the cost of insurance coverage reduces the probability that a self employed single person will be insured by 1 8 percentage points

a theory of exit in duopoly we develop a duopoly model in which exit occurs because of the existence of fixed costs or opportunity costs each firm enters the market knowing its own cost but not that of its opponent as times goes on each firm becomes increasingly pessimistic about the cost of its remaining rival the time of exit is the only strategic variable so that our model is a war of attrition in contrast to the classic war of attrition however we assume that with positive probability each firm s costs may be low enough that staying in forever is a dominant strategy thus our model unlike the classic one has a unique equilibrium

firm asymmetries and sequential r d theory and evidence from the mainframe computer industry we incorporate strategic considerations into the analysis of a problem that has hitherto been treated in a decision theoretic fashion the allocation of scarce r d resources when r d proceeds in stages in doing so we formalize a notion of system complexity and investigate its implications for the allocation of these scarce resources using detailed data from fieldwork at all mainframe manufacturers in the world to investigate our theoretical predictions we provide evidence that larger market share firms set more aggressive stage targets as do more resource rich firms our results can be seen as a verification of the mechanism underlying arrow s replacement effect

negatively correlated bandits we analyse a two player game of strategic experimentation with two armed bandits either player has to decide in continuous time whether to use a safe arm with a known pay off or a risky arm whose expected pay off per unit of time is initially unknown this pay off can be high or low and is negatively correlated across players we characterize the set of all markov perfect equilibria in the benchmark case where the risky arms are known to be of opposite type and construct equilibria in cut off strategies for arbitrary negative correlation all strategies and pay offs are in closed form in marked contrast to the case where both risky arms are of the same type there always exists an equilibrium in cut off strategies and there always exists an equilibrium exhibiting efficient long run patterns of learning these results extend to a three player game with common knowledge that exactly one risky arm is of the high pay off type

health insurance and the demand for medical care evidence from a randomized experiment we estimate how cost sharing the portion of the bill the patient pays affects the demand for medical services the data come from a randomized experiment a catastrophic insurance plan reduces expenditures 31 percent relative to zero out of pocket price the price elasticity is approximately 0 2 we reject the hypothesis that less favorable coverage of outpatient services increases total expenditure for example by deterring preventive care or inducing hospitalization

did workers pay for the passage of workers compensation laws market responses to legislative reforms often mitigate the expected gains that reformers promise in legislation contemporaries hailed workers compensation as a boon to workers because it raised the amount of postaccident compensation paid to injured workers despite the large gains to workers employers often supported the legislation analysis of several wage samples from the early 1900s shows that employers were able to pass a significant part of the added costs of higher postaccident compensation on to some workers in the form of reductions in wages the size of the wage offsets however was smaller for union workers

the impact of increased tax subsidies on the insurance coverage of self employed families evidence from the 1996 2004 medical expenditure panel survey the share of health insurance premiums that self employed workers can deduct when computing federal income taxes rose from 30 percent in 1996 to 100 percent in 2003 data from the 1996 2004 medical expenditure panel survey are used to show that the increased tax subsidy was associated with substantial increases in private coverage among self employed workers and their spouses estimated effects on public coverage and the coverage of children were smaller in magnitude and less precisely estimated simulation results show that much of the post 1996 subsidy increase represented an inframarginal transfer to persons who would have had held private insurance anyway nevertheless increased subsidization expanded private coverage by 1 1 to 1 7 million persons at a cost per newly insured person less than 2 300 in all simulations a cost below that found in simulations of more broadly based subsidies

go for broke or play it safe dynamic competition with choice of variance we consider a differential game in which the joint choices of the two players influence the variance but not the mean of the one dimensional state variable we show that a pure strategy perfect equilibrium in stationary markov strategies me exists and has the property that patient players choose to play it safe when sufficiently ahead and to take risks when sufficiently behind we also provide a simple condition that implies both players choose risky strategies when neither one is too far ahead a situation that ensures a dominant player emerges quickly

an economic perspective on auctions the recent spectrum auctions in europe have shown that serious problems can wise in auctions where multiple complementary objects are being sold such as blocks of radio spectrum that will subsequently be used by the wining bidders to compete against each other in downstream markets other important instances of such situations include take off and landing slots at airports and rights for electricity and gas transmission t i first review some of the theory describing multi object auctions i i next outline the importance of strategic effects arising in auctions that are followed by competition between the bidders and the tension arising between various goals such as efficiency and revenue maximization although more flexible auction formats can have virtues particularly in taking into account complementarities they can also be manipulated by bidders to build market power to the detriment of consumers we next apply these insights to the recent european umts licence auctions finally we draw the main conclusions and policy implications

an efficient ascending bid auction for multiple objects when bidders exhibit multi unit demands standard auction methods generally yield inefficient outcomes this article proposes a new ascending bid auction for homogeneous goods such as treasury bills or telecommunications spectrum the auctioneer announces a price and bidders respond with quantities items are awarded at the current price whenever they are clinched and the price is incremented until the market clears with private values this dynamic auction yields the same outcome as the sealed bid vickrey auction but has advantages of simplicity and privacy preservation with interdependent values this auction may retain efficiency whereas the vickrey auction suffers from a generalized winner s curse

a non cooperative bargaining model with strategically timed offers abstract rubinstein s alternating offers bargaining model is enriched by allowing players to choose when and whether or not to make an offer time is continuous and players make offers whenever they wish it is assumed that upon making an offer players must wait a fixed amount of time before making another it is shown that if players can react arbitrarily quickly to their opponent s offers then all subgame perfect equilibrium outcomes are rubinstein like in particular efficient however if it takes time to react then some delay can be supported this potential delay becomes arbitrarily large as reaction times increase journal of economic literature classification numbers c78 c72

the evolution of medical spending risk how has the economic risk of health spending changed over time for u s households we describe trends in aggregate health spending in the united states and how private insurance markets and public insurance programs have changed over time we then present evidence from consumer expenditure survey microdata on how the distribution of household spending on health that is out of pocket payments for medical care plus the household s share of health insurance premiums has changed over time this distribution has shifted up over time households spend more on medical care and insurance than they used to but for the purposes of measuring change in risk it is not the mean but the dispersion of this distribution that is of interest we consider two measures of dispersion that serve as proxies for household risk the standard deviation of the distribution of household health spending and the ratio of the 90th percentile of spending to the median the so called 90 50 gap we find surprisingly that neither has increased despite the rapid rise in aggregate health spending this conclusion holds true for broad subgroups of the population for example the nonelderly as a group but not for some narrowly defined subgroups for example low income families with children we next consider how much risk households should face from the perspective of economic efficiency household risk may not have changed much over the past several decades but do we have any evidence that this level represents either too much or too little risk finally we discuss implications for public policy in particular for current debates over expanding health insurance coverage to the uninsured

employment based health insurance and job mobility is there evidence of job lock the majority of privately insured americans obtain their health insurance through their own or a family member s employment the rationale for employers to provide health insurance is straightforward by pooling the risks of individuals employers can reduce adverse selection and lower administrative expenses in addition they benefit from tax laws allowing businesses to deduct their health insurance costs these advantages of employer provision however must be weighed against the distortions they may generate in individual labor market decisions in particular health insurance may distort job mobility if employees decide to keep jobs they would rather leave for fear of losing coverage for preexisting conditions a possibility that has been termed job lock this paper attempts to quantify the effect of employer provided health insurance on the labor market mobility of individuals the link between employer provided health insurance and

precautionary saving insurance and the origins of workers compensation in this article we test whether the introduction of social insurance has led to a reduction in private insurance purchases and precautionary saving by examining the introduction of workers compensation our empirical analysis is based on the financial decisions of over 7 000 households surveyed for the 1917 19 bureau of labor statistics cost of living study we find that the presence of workers compensation at least partially crowded out private accident insurance and led to a substantial reduction in precautionary saving the introduction of workers compensation caused private saving to fall by approximately 25 percent with other factors held constant

bidding for the future signaling in auctions with an aftermarket abstract this paper considers auctions where bidders compete for an advantage in future strategic interactions when bidders wish to exaggerate their private information equilibrium bidding functions are biased upwards as bidders attempt to signal via the winning bid signaling is most prominent in second price auctions where equilibrium bids are above value in english and first price auctions signaling is less extreme since the winner incurs the cost of her signaling choice the opportunity to signal lowers bidders payoffs and raises revenue when bidders understate their private information separating equilibria need not exist and the auction may not be efficient

optimal auctions with asymmetric financial externalities abstract this paper studies optimal auction design with asymmetric linear financial externalities among bidders when the matrix that relates bidders payoffs to their payments is nonsingular the payment related component in the design objective must equal a unique linear combination of its counterparts in bidder s payoffs if all multipliers of the linear combination are nonnegative a modified myerson procedure is discovered for deriving the optimal design if any multiplier is negative an arbitrarily high value can be achieved for design objective by setting proper fixed transfers to bidders when the matrix is singular the unbounded optimum result typically prevails we applied our method to auctions with cross shareholdings and charity auctions for revenue maximizing and efficient designs

portfolio choice in research and development we analyze the effects of a winner take all patent mechanism on the riskiness of the research strategies chosen by competingfirms as well as on thefirms incentives to duplicate research projects nash equilibrium choices are compared with the social optimum in a oneshot simultaneous move game in which competitors choose the riskiness or correlation of their research performances we show that neither society nor firms have any preference for correlation per se while the divergence between social and privately optimal levels of risk depends on skewness characteristics of the probability distribution over discovery dates and on levels of risk aversion

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

continuous time games of timing abstract we address the question of existence of equilibrium in general timing games with complete information under weak assumptions any two player timing game has a markov subgame perfect e equilibrium for each e 0 this result is tight for some classes of games symmetric games games with cumulative payoffs stronger existence results are established

continuous time stochastic games abstract we study continuous time stochastic games with a focus on the existence of their equilibria that are insensitive to a small imprecision in the specification of players evaluations of streams of payoffs we show that the stationary namely time independent discounting game has a stationary equilibrium and that the discounting game and the more general game with time separable payoffs have an epsilon equilibrium that is an epsilon equilibrium in all games with a sufficiently small perturbation of the players valuations a limit point of discounting valuations need not be a discounting valuation as some of the mass may be pushed to infinity it is represented by an average of a discounting valuation and a mass at infinity we show that for every such limit point there is a strategy profile that is an epsilon equilibrium of all the discounting games with discounting valuations that are sufficiently close to the limit point

the income tax and nonwage compensation d ramatic changes in the division of labor compensation between wage and nonwage payments have occurred since world war ii voluntary employer contributions to private pension and welfare funds have risen from 1 2 of wage and salary compensation in 1947 to 8 3 in 1979 with half the increase taking place since 1969 see table 1 major changes in the composition of the fringe benefit package have also taken place during this period employer contributions to group health insurance plans have risen from 24 of total fringe benefits in 1947 to 40 o in 1979 if this growth continues group health insurance will replace pension and profit sharing plans as the largest fringe benefit expenditure by employers these trends in the compensation mix have long been noted by researchers and various factors have been offered as explanations including the favorable tax treatment of fringe benefits demographic changes such as increased life expectancy and unionization rice 1966 ture 1976 mabry 1973 freeman 1978 however most explanations have not been subjected to rigorous empirical testing and the few results that have been published are both questionable and dated for example rice 1966 estimated that changes in the tax rate structure had little influence on the relative increase in fringe benefits from world war ii to 1963 more recent studies schiller and weiss 1979 1980 have examined a specific fringe benefit the private pension plan for its impact on turnover and its role as an equalizing difference but these studies have not analyzed the determinants of the compensation mix this paper discusses the theoretical determinants of the division of labor compensation between fringe benefits and cash income and empirically estimates their importance it concentrates on the impact of taxation on the compensation mix for several reasons first the assumption that rising tax rates encourage individuals to substitute fringe benefits for cash income underlies estimates of the welfare cost of tax preferences browning 1979 second proposals to fully tax employee fringe benefits under a comprehensive9 income tax have surfaced in recent years nolan 1977 clotfelter 1979 finally current federal tax policy is calling for large tax rate reductions to increase supply incentives unlike the determinants of the compensation mix that change slowly over time such as life expectancy tax rate changes can occur rapidly through legislative action reducing tax rates might enlarge the tax base by increasing the fraction of labor income received as taxable cash wages and salaries section ii outlines the tax treatment of various forms of labor compensation and in section iii other factors thought to influence the choice between wage and nonwage compensation are discussed empirical analyses of the compensation mix are presented in section iv a brief summary and implications of the major findings for the future growth of fringe benefits follow in section v

tax policy and the demand for health insurance estimates of the price and income elasticities of demand for health insurance are derived from econometric estimates of the parameters of a discrete choice model of health insurance demand using data from a survey of plan choices among a sample of federal government employees the estimated income elasticity 0 01 is similar to most previous estimates the estimated price elasticity 0 16 is in absolute value much less than the earlier previous estimates and somewhat less than the more recent previous estimates possible causes of these differences in price elasticity estimates are discussed

interim rank risk taking and performance in dynamic tournaments we empirically study the impact of interim rank on risk taking and performance using data on professionals competing in tournaments for large rewards as we observe both the intended action and the performance of each participant we can measure risk taking and performance separately we present two key findings first risk taking exhibits an inverted u relationship with interim rank revealing information on relative performance induces individuals trailing just behind the interim leaders to take greater risks second competitors systematically underperform when ranked closer to the top despite higher incentives to perform well disclosing information on relative ranking hinders interim leaders

what do discounted optima converge to a theory of discount rate asymptotics in economic models abstract this paper considers a sequence of stochastic dynamic problems in which the discount rate goes to zero sufficient conditions are given under which the limit of discounted optimal policies and normalized values are a i long run average optimal and ii catching up optimal policy and value these conditions are shown to be satisfied in many economic models a new decision criterion for the undiscounted problem the strong long run average is introduced this criterion refines the long run average is often equivalent to the catching up and is easier to use than the latter since it has a recursive representation a generalization of fatou s lemma which has wider applicability is also proved

the generalized war of attrition abstract we model a war of attrition with n k firms competing for n prizes in a natural oligopoly context the k 1 lowest value firms drop out instantaneously even though each firm s value is private information to itself in a standard setting context in which every competitor suffers losses until a standard is chosen even after giving up on its own preferred alternative each firm s exit time is independent both of k and of other players actions our results explain how long it takes to form a winning coalition in politics solving the model is facilitated by the revenue equivalence theorem jel d43 d44 l13 o30

a noncooperative view of coalition formation and the core a noncooperative implementation of the core is provided for games with transferable utility the implementation obtained here is meant to reflect the standard motivation for the core as closely as possible in the model proposed time is continuous this idealized treatment of time is most amenable for capturing an essential feature of the core there is always time to reject a noncore proposal before it is consumated

developing real option game models by mixing concepts from both game theoretic analysis and real options theory an investment decision in a competitive market can be seen as a game between firms as firms implicitly take into account other firms reactions to their own investment actions we review two decades of real option game models suggesting which critical problems have been solved by considering game theory and which significant problems have not been yet adequately addressed we provide some insights on the plausible empirical applications or shortfalls in applications to date and suggest some promising avenues for future research

bidding for a process innovation under alternative modes of competition abstract this paper examines whether a first price sealed bid auction is efficient in allocating a process innovation amongst oligopolists engaged in either cournot or bertrand competition standard bidding behavior is modified by the incentive to signal private information in order to influence the oligopoly outcome it is shown that for cournot there exists a unique equilibrium in strictly increasing strategies that is symmetric and therefore allocatively efficient for bertrand an efficient equilibrium may not exist however efficiency is restored as the market becomes perfectly competitive the results underline the sensitivity of efficient auction design to downstream market structures

taxes fringe benefits and faculty the growth of employee benefits in academe has closely paralleled their economy wide growth this study estimates a complete system describing the demand for benefits and wages using panel data on 1477 institutions of higher learning the demand for benefits is very responsive to changes in real income and the tax price of benefits these conclusions are robust with respect to varying definitions of the tax price treating it as endogenous and accounting for unmeasured individual effects on demand simulations suggest that the tax reform act of 1986 sharply reduced the demand for benefits extrapolating the impact to the entire economy the annual flow of compensation shifted away from benefits by at least 15 billion copyright 1992 by mit press

how not to run auctions the european 3g telecom auctions abstract there were enormous differences in the revenues from the european third generation 3g or umts mobile phone license auctions from 20 euros per capita in switzerland to 650 euros per capita in the uk though the values of the licenses sold were similar poor auction designs in some countries facilitated collusion between firms and failed to attract entrants the sequencing of the auctions was also crucial we discuss the auctions in the uk netherlands germany italy austria switzerland belgium greece and denmark

revenue management without commitment dynamic pricing and periodic flash sales a seller has a fixed number of goods to sell by a deadline at each time he posts a regular price and decides whether to hold a flash sale over time buyers privately enter the market and strategically time their purchases if a buyer does not purchase when she arrives she can pay an attention cost to recheck the regular price afterwards or she can wait for future flash sales where she may obtain a good at a discounted price in the unique markov perfect equilibrium the seller sporadically holds flash sales to lower the stock of goods a flash sale increases the willingness to pay of future buyers but decreases the willingness to pay of buyers who arrive early in the game when it is very likely that a buyer will obtain a good in a flash sale the seller holds a big initial flash sale for all but one unit of the good

preemption and rent equalization in the adoption of new technology we study the adoption of a new technology to illustrate the effects of preemption in games of timing we show that the threat of preemption equalizes rents in a duopoly but that this result does not extend to the general oligopoly game if the gain to preemption is sufficiently small then the optimal symmetric outcome which involves late adoption is an equilibrium this contrasts with reinganum s result that in precommitment equilibria there must be diffusion we develop a new and richer formalism for modeling games of timing which permits a continuoustime representation of the limit of discrete time mixed strategy equilibria

on the existence of pure and mixed strategy nash equilibria in discontinuous games a game is better reply secure if for every nonequilibrium strategy x and every payoff vector limit u resulting from strategies approaching x some player i has a strategy yielding a payoff strictly above u i even if the others deviate slightly from x if strategy spaces are compact and convex payoffs are quasiconcave in the owner s strategy and the game is better reply secure then a pure strategy nash equilibrium exists better reply security holds in many economic games it also permits new results on the existence of symmetric and mixed strategy nash equilibria

preemption games under levy uncertainty abstract we study a stochastic version of fudenberg tirole s preemption game two firms contemplate entering a new market with stochastic demand firms differ in sunk costs of entry if the demand process has no upward jumps the low cost firm enters first and the high cost firm follows if leader s optimization problem has an interior solution the leader enters at the optimal threshold of a monopolist otherwise the leader enters earlier than the monopolist if the demand admits positive jumps then the optimal entry threshold of the leader can be lower than the monopolist s threshold even if the solution is interior simultaneous entry can happen either as an equilibrium or a coordination failure the high cost firm can become the leader we characterize subgame perfect equilibrium strategies in terms of stopping times and value functions analytical expressions for the value functions and thresholds that define stopping times are derived

entry and vertical differentiation this paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities the value of the new product is initially uncertain and new information is generated through purchases in the market we derive the unique markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion the qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices the robustness of these results with respect to different model specifications is discussed

a dynamic oligopoly with collusion and price wars we provide a collusive framework with heterogeneity among jirms investment entry and exit it is a symmetric information model in which it is hard to sustain collusion when there is an activejim that is likely to exit in the near future numerical analysis is used to compare a collusive to a noncollusive environment only the collusive industry generates price wars also the collusive industry offers both more and higherquality products to consumers albeit often at a higher price the positive effect of collusion on variety and quality more than compensates consumers for the negative effect of collusive prices so that consumer surplus is larger with collusion

gambling in contests this paper presents a strategic model of risk taking behavior in contests formally we analyze an n player winner take all contest in which each player decides when to stop a privately observed brownian motion with drift a player whose process reaches zero has to stop the player with the highest stopping point wins unlike the explicit cost for a higher stopping time in a war of attrition here higher stopping times are riskier because players can go bankrupt we derive a closed form solution of a nash equilibrium outcome in equilibrium highest expected losses occur at an intermediate negative value of the drift

employment separation and health insurance coverage abstract we study the interrelationship between employment separation and insurance coverage we first document that employment separation is associated with large reductions in insurance coverage even conditioning on underlying tastes for insurance we then show that reducing the cost of insurance through state laws mandating continued access to employer provided health insurance for the non employed increases the likelihood of having insurance after separating from a job by 6 7 these mandates also increase the number of individuals who separate and the total amount of time spent jobless finally at least some of this increased non employment appears to be spent in productive job search as the availability of continuation coverage is related to significant wage gains among those who separate from their jobs

plant size and the decline of unionism abstract declining plant size is shown to explain a significant portion of the recent decline in unionism particularly in manufacturing the paper also shows how to use the probit model to decompose the change in unionism into explained and unexplained components

strategic learning in teams this paper analyzes a two player game of strategic experimentation with three armed exponential bandits in continuous time players face replica bandits with one arm that is safe in that it generates a known payoff whereas the likelihood of the risky arms yielding a positive payoff is initially unknown it is common knowledge that the types of the two risky arms are perfectly negatively correlated i show that the efficient policy is incentive compatible if and only if the stakes are high enough moreover learning will be complete in any markov perfect equilibrium with continuous value functions if and only if the stakes exceed a certain threshold

preemptive investment under uncertainty abstract this paper provides a general characterization of subgame perfect equilibria for strategic timing problems where two firms have the real option to make an irreversible investment profit streams are uncertain and depend on the market structure the analysis is based directly on the inherent economic structure of the model in particular determining equilibria with preemptive investment is reduced to solving a single class of constrained optimal stopping problems further tools are derived for analyzing markovian state space models applications to typical models from the literature complete commonly insufficient equilibrium arguments show when uncertainty leads to qualitatively different behavior and establish additional equilibria that are pareto improvements

substitution between wage and nonwage benefits you gotta be kidding ollie you re just robbing yourself schuylkill mutual offers a terrific deal on keogh and we could plug you in in fact we advise plugging you in on the corporate end so not a nickel comes out of your personal pocket it comes out of the corporate pocket and there s that much less for uncle to tax these poor saps carrying their own premiums with no company input are living in the dark ages there s nothing shady about rigging it this way we re just using the laws the government has put there they want people to take advantage it all works to up the gross national product you know what i mean by keogh don t you you re looking kind of blank john updike p 296

is the market biased against risky r d this article analyzes the riskiness of the r d strategies chosen by firms engaged in a winner takes all patent race in contradiction to dasgupta and stiglitz 1980 we show that when the distribution of invention times is symmetric the market equilibrium cannot be safer and may be riskier than is socially optimal we identify the economic reason for the emergence but only if there are few competitors

workplace compensation practices and the rise in benefit inequality this article aims to explain why inequality in fringe benefits has grown faster than wage inequality over the past four decades we depart from previous income inequality research by studying benef