strategic behavior in contests comment almost by definition contests involve strategy this is especially true in contests between unevenly matched contenders in a recent article avinash dixit 1987 explored strategic commitment in contests between a favorite and an underdog the favorite is defined as the player whose chance of victory exceeds one half at the nash equilibrium an underdog s chance is less than one half dixit concludes that if the favorite has the opportunity to move first then he will overcommit effort compared with the nash equilibrium an important implication of the favorite overcommitting effort is that strategic behavior leads to greater social costs see gordon tullock 1980 the opposite holds if the underdog has the opportunity to move first this paper demonstrates that the favorite will never overcommit effort given endogenous order of moves the favorite finds it advantageous to wait until the underdog moves surprisingly the underdog s best strategy is not to wait but to make the first move throwing the first punch the equilibrium order of play is for the underdog to move before the favorite in this equilibrium one never observes overcommitment of effort consequently extending dixit s model to allow for endogenous order of moves suggests that strategic behavior in contests will lead to undercommitment compared with nash behavior

deregulation consolidation and efficiency evidence from the spanish insurance industry this paper provides new information on the effects of deregulation and consolidation in financial services markets by analyzing the spanish insurance industry the sample period 1989 98 spans the introduction of the european union s eu third generation insurance directives which deregulated the eu insurance market deregulation has led to dramatic changes in the spanish insurance market the number of firms declined by 35 average firm size increased by 275 and unit prices declined significantly in both life and non life insurance we analyze the causes and effects of consolidation using modern frontier efficiency analysis to estimate cost technical and allocative efficiency as well as using malmquist analysis to measure total factor productivity tfp change the results show that many small inefficient and financially underperforming firms were eliminated from the market due to insolvency or liquidation as a result the market experienced significant growth in tfp over the sample period consolidation not only reduced the number of firms operating with increasing returns to scale but also increased the number operating with decreasing returns to scale hence many large firms should focus on improving efficiency by adopting best practices rather than on further growth

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

the value of commitment in contests and tournaments when observation is costly we study the value of commitment in contests and tournaments when there are costs for the follower to observe the leader s behavior in a contest the follower can pay to observe the leader s effort but cannot observe the effectiveness of that effort in a tournament the follower can pay to observe the effectiveness of the leader s effort but not the effort itself we show that this distinction matters significantly when observation is costly the value of commitment vanishes entirely in sequential and endogenous move contests regardless of the size of the observation cost by contrast in tournaments the value of commitment is preserved completely provided that the observation costs are sufficiently small

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

market structure and the efficiency of european insurance companies a stochastic frontier analysis abstract this paper is motivated by the progressive liberalisation of the european insurance market in recent years it uses stochastic frontier analysis to estimate flexible fourier cost functions for european insurance companies separate frontiers are estimated for life non life and composite companies we adopt a maximum likelihood approach to estimation in which the variance of both one sided and two sided error terms is modelled jointly with the frontiers this approach allows us to simultaneously control for the impact of heteroskedasticity on the estimation of scale economies as well as estimating the effect of firm size and market structure on x inefficiency the study draws on standard poor s eurothesys data set of financial reports for the period 1995 to 2001 this provides technical and non technical accounts at year end for life non life and composite insurance businesses in 14 major european countries our estimates suggest that over this period most european insurers were operating under conditions of decreasing costs increasing returns to scale and that company size and domestic market share were significant factors determining x inefficiency larger firms and those with high market shares tend to have higher levels of cost inefficiency

identity and the economics of organizations on plebes first day at west point called r day they strip down to their underwear their hair is cut off they are put in uniform they then must address an older cadet with the proper salute and with the statement sir new cadet doe reports to the cadet in the red sash for the first time as ordered plebes must stand and salute and repeat and stand and salute and repeat until they get it exactly right all the while being reprimanded for every tiny mistake in the summary of david lipsky 2003 pp 145 154 who spent four years tracking a company of cadets at west point on r day you surrender your old self in stages but r day is just the beginning of the training and personal re engineering that is to come so that west point graduates emerge four years later as loyal officers in the u s army lipsky shows that despite some failure this tough program is remarkably successful in creating officers with the will to lead in battle economists current picture of organizations and work incentives has no place for the west point program and the motivations it seeks to inculcate in recruits in a standard economic model an individual s preferences are fixed and utility depends only on pecuniary variables the army s aim at west point is to change cadets preferences they wish to inculcate non economic motives in the cadets so that they have the same goals as the u s army alternatively stated the goal of west point is to change the identity of the cadets so they will think of themselves above all else as officers in the u s army they will feel bad about themselves they will lose utility if they fall short of the ideals of such an officer this change in identity

extreme wage inequality pay at the very top we provide new evidence on the growth in pay at the very top of the wage distribution in the united kingdom sectoral decompositions show that workers in the financial sector have accounted for the majority of the gains at the top over the last decade new results are also presented on the pay of ceos in the united kingdom we show how improved measurement of pay points to a stronger pay performance link than previously estimated this link is stronger and more symmetric for those firms in which institutional investors play a larger role

prize sharing in collective contests the characteristics of endogenously determined sharing rules and the group size paradox are studied in a model of group contest with the following features i the prize has mixed private public good characteristics ii groups can differ in marginal cost of effort and their membership size iii in each group the members decide how much effort to put without observing the sharing rules of the other groups it is shown that endogenous determination of group sharing rules completely eliminates the group size paradox i e a larger group always attains a higher winning probability than a smaller group unless the prize is purely private in addition an interesting pattern of equilibrium group sharing rules is revealed the group attaining the lower winning probability is the one choosing the rule giving higher incentives to the members

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

repeated price competition between individuals and between teams abstract we conducted an experimental study of price competition in a duopolistic market the market was operationalized as a repeated game between two teams with one two or three players in each team we found that asking and winning prices were significantly higher in competition between individuals than in competition between two or three person teams there were no general effects of team size but prices increased with time when each team member was paid his or her own asking price and decreased when the team s profits were divided equally this result is consistent with a simple model of individual learning

optimal design of research contests procurement of an innovation often requires substantial effort by potential suppliers motivating effort may be difficult if the level of effort and quality of the resulting innovation are unverifiable if innovators cannot benefit directly by marketing their innovations and if the buyer cannot extract up front payments from suppliers we study the use of contests to procure an innovation in such an environment an auction in which two suppliers are invited to innovate and then bid their prizes is optimal in a large class of contests if contestants are asymmetric it is optimal to handicap the most efficient one

collective action and the group size paradox according to the olson paradox larger groups may be less successful than smaller groups in furthering their interests we address the issue in a model with three distinctive features explicit intergroup interaction collective prizes with a varying mix of public and private characteristics and nonlinear lobbying costs the interplay of these features leads to new results when the cost of lobbying has the elasticity of a quadratic function or higher larger groups are more effective no matter how private the prize with smaller elasticities a threshold degree of publicness is enough to overturn the olson argument and this threshold tends to zero as the elasticity approaches the value for a quadratic function we also demonstrate that these results are true irrespective of whether we examine group sizes over the cross section in some given equilibrium or changes in the size of a given group over different equilibria

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

rent seeking for pure public goods in this paper we present a formal analysis of rent seeking for public goods by two or more groups with different numbers of individuals we begin by considering equally wealthy groups under risk neutrality a case which constitutes our basic model several surprising and interesting results emerge from the analysis of this basic case the problem is then extended to deal with a groups with different wealth levels and b risk aversion this last extension brings about a further crop of interesting and useful results

rent seeking with non identical sharing rules the primary object of this paper is to examine the role of differential sharing rules within a collective rent seeking setting on the possible non existence of nash equilibrium focusing on groups that distribute part of the rent equally among their members and the residual according to relative effort we show that in rent seeking societies applying the two polar sharing rules equilibrium never exists in the general case where groups apply different but not necessarily the polar sharing rules we study the relationship between group variability in distributing rents and the problem of non existence of equilibrium in the rent seeking game

monitoring of workers and product market competition the role of works councils i introduction technological advancement allows firms to closely monitor their workers actions more than ever before for instance firms can acquire worker monitoring software to monitor activities on computers or cell phones such software enables firms to assess whether workers play games on their computers or surf the internet instead of working productively and even to track workers exact locations similarly firms scan emails or use video surveillance to monitor their workers behavior unsurprisingly the growing use of monitoring technologies has led to a debate on how closely firms should be allowed to monitor their workers actions and on whether government intervention is needed to protect workers privacy at first sight it appears that this debate centers around two different kinds of arguments economic arguments e g higher worker productivity in favor of extensive worker monitoring against ethical issues according to which workers privacy must be protected schmitz 2005 however demonstrates that this is not necessarily true in a contract theoretical model he finds that firms employ monitoring technologies not to increase efficiency but rather to reduce rents that must be paid to the workers in the case of imperfect monitoring he concludes that monitoring technologies may lead to inefficiencies and thus calls for laws protecting workers privacy whereas worker protection in the united states is rather weak in this respect it is typically stronger within the european union in germany for instance works councils are important institutions that provide workers with power on the firm level particularly with respect to working conditions within the system of co determination works councils have legally guaranteed influence on management decisions concerning working conditions within a firm for instance the law prescribes that worker representatives must consent to any introduction of technologies that monitor the workers effort and output 1 given these rights of works councils it may be puzzling that firm owners do not more strongly oppose this limitation of their control rights in this paper we offer an explanation to resolve this puzzle by analyzing the interaction between internal organization and market conduct we argue that works councils and their right to block monitoring of workers can act as a commitment device of firms to mitigate product market competition as relaxed competition increases profits and because workers receive an information rent from their co determination rights workers and firms have aligned interests in establishing works councils at the expense of consumers we derive these results in a simple model of two competing firms where each firm faces a moral hazard problem with its workforce that could be solved by installing a monitoring technology without monitoring inducing high effort by workers is more costly as a result effort levels will be lower and so will be output this may serve a similar purpose as quantity reduction in a cartel and it may thereby increase firm profits 2 however similar to quantity reduction in a cartel also with respect to monitoring there is a danger that a single firm deviates and installs the monitoring technology consequently the deviator can produce higher output more cheaply and free rides on the lower output of its competitor thus firms would like to ex ante commit not to use a monitoring technology usually no such commitment is possible however works councils may serve this unintended purpose because they must give their consent to monitoring technologies this provides them with a property right on the information rent arising in case of nonmonitoring to receive their consent the firm must offer the workers compensation for the foregone rent this additional cost of monitoring makes deviation from a nonmonitoring situation less attractive implying that works councils may serve as the desired commitment device

collective contests for commons and club goods abstract this paper focuses on collective contests for commons and club goods our main objective is to examine in this context the effect of group size on its performance the main results specify conditions for the existence non existence of the group size paradox namely the situation where a larger group is less more effective in pursuing its interest because of despite the combined effect of the incentives that result in the free riding problem and the tragedy of the commons the paper also explains under what circumstances there exists a bias towards excessive or inadequate winning group size finally it examines the effect of restricted excludability of the commons good within the winning group on the relationship between group size and its winning probability

in defense of lawyers moral hazard as an aid to cooperation abstract this paper studies strategic delegation in two player contests for an indivisible prize as in e g litigation where one party s probability of winning is determined by the relative investments of both even though neither player stands to gain anything from precommitment both players ex ante prefer compulsory representation by agents e g lawyers whose efforts are unobservable this delegation equilibrium is unaffected by secret renegotiation opportunities equivalently it does not matter whether contracts are observable or not hence the paper points out a role for delegation with moral hazard in facilitating cooperation an effect quite separate from precommitment journal of economic literature classification numbers c72 d72 d82 k41

increasing the profits of a subset of firms in oligopoly models with strategic substitutes consider an industry composed of n firms in a symmetric equilibrium designate a subset of s n firms and marginally reduce the strategic variables of the firms in the subset if the remaining firms simultaneously make the best reply to this exogenous displacement under what circumstances will profits of the firms in the designated subset increase we show that in the case of cournot competition among producers of perfect substitutes a marginal contraction is strictly beneficial strictly harmful if and only if the number of firms in the designated subset exceeds the adjusted number of firms outside it by strictly more strictly less than one the adjustment factor is unity when cost and demand functions are linear but more generally depends on the convexity of the cost and demand curves thus a marginal contraction of two firms in a triopoly has no effect on the profits of firms in the subset if cost and demand functions are linear if instead cost is linear but the inverse demand function is strictly concave strictly convex a marginal contraction will strictly decrease strictly increase profits the analysis is extended to the effects of nonmarginal exogenous changes in the outputs of the constrained firms this extension has implications for the relationship of stackelberg sequential move and nash simultaneous move equilibria our analysis has broad application to illustrate we show that it unifies results in the literature on export subsidies horizontal mergers and strikes the paper is organized as follows in section i our comparative static result is derived in section ii we present a wide range of applications in the conclusion and the appendix we generalize our analysis to other situations involving strategic substitutes

do rent seeking groups announce their sharing rules i introduction rent seeking can be seen all around us firms or coalitions of firms expend resources to influence government officials who have authority to award monopoly rights self interested pressure groups lobby for government subsidies foreign producers exert effort to avoid imposing tariffs or quotas on their products interest groups or lobbyists contribute to the election of politicians who promise to advance favorable legislation research and development rd then the groups announce their decisions simultaneously before choosing their sharing rules we examine the groups decisions on releasing sharing rule information their sharing rules and the effort levels and payoffs of the individual players in equilibrium we formally consider the following three stage game in the first stage each group decides and announces whether it will release to the rival group the information about its sharing rule which will be determined in the second stage in the second stage the players in each group jointly choose their sharing rule and then each group releases the information about its sharing rule if it decided to do so in the first stage in the third stage all the players in both groups choose their effort levels simultaneously and independently at the end of this third stage the winning player is chosen and the winner shares the prize with the other players in his group according to the sharing rule on which they agreed in the second stage solving the game we find the following first the case where both groups release their sharing rule information never occurs in equilibrium second the case where neither group releases its sharing rule information occurs only if the players are evenly matched third when the players are unevenly matched one group releases its sharing rule information and the other does not

inefficiency as a strategic device in group contests against dominant opponents i introduction many strategic situations in economics and politics can be understood as contests rd nitzan and ueda 2009 a private good nitzan 1991a 1991b nitzan and ueda 2009 or a mixed good esteban and ray 2001 nitzan and ueda 2011 to a large extent the intensity of free riding or conversely the motivation for individuals to exert effort in a contest is shaped by the intra group incentive scheme or governance structure in standard contests incentives are inseparably linked to the sharing rule i e to the usually exogenous procedure by which the rents acquired in the contest are distributed within the group 1 in a number of economic applications however incentives to exert effort appear to be separate or are even willfully separated from the sharing rule phenomena such as team spirit akerlof and kranton 2005 identification with the group sherif 1966 bornstein and ben yossef 1994 peer pressure kandel and lazear 1992 or social norms to contribute to the social good elster 1989 are examples for this separation alternatively groups could apply selective incentive schemes based on relative performance lazear and rosen 1981 or marginally align individual and group incentives nitzan and ueda 2009 in all these scenarios individuals behave cooperatively i e in the interest of the entire group even if the final distribution of rents follows a standard sharing rule mechanisms to induce cooperation often are costly sanchez pages and straub 2010 may only work under restrictive conditions che and gale 2003 require strategic coordination among individuals hardin 1995 or cannot be ensured to be obeyed unanimously oliver 1980 this might explain why they do not emerge universally or automatically the point we make in this article is even stronger even if there existed perfect and costless solutions to within group free riding problems which will henceforth be called intra group efficient incentive schemes igeis they might not always be adopted why would a group for which an igeis is freely available not wish to utilize it but rather adopt an apparently inefficient governance structure by definition an igeis internalizes all within group externalities and seems to be a safe way to increase one s payoffs however this reasoning ignores repercussions that arise in strategic environments like contests suppose for example that the competing groups have sufficiently unequal strengths say due to unequal sizes or different comparative advantages then the weaker group may refrain from implementing a costless igeis to avoid the contest from heating up adoption of an igeis makes a group more efficient and consequently more aggressive in the contest on one hand higher efforts constitute a cost on the other they affect the share of the rent that this group can hope to acquire or the likelihood of succeeding in the contest 2 an igeis clearly enhances a group s prospects if the other group did not change its behavior however if members of the opponent group reply with a sufficiently strong increase in their contest efforts this diminishes and may potentially more than offset the gains from one s own increased efforts whether this happens depends on the direction of the strategic interaction between groups the detrimental firing back effect can only become relevant if the other group s efforts are sufficiently strong strategic complements to one s own efforts

the value of commitment with imperfect observability and private information the idea that commitment is valuable plays a key role in many economic models however bagwell 1995 has shown that commitment may have no value if there is even a slight noise in the observation of the leader s action thus casting doubt on the notion that commitment has strategic value here i reconsider the commitment story in a model where the leader s action is imperfectly observed and the leader has private information and i examine how it is affected by uncertainty about the leader s type and by the observation noise

to deter or to moderate alliance formation in contests with incomplete information we consider two players choice about the formation of an alliance ahead of conflict in a framework with incomplete information about the strength of the potential ally when deciding on alliance formation players anticipate the self selection of other players and the informational value of own and other players choices in the absence of these signaling effects strong players have an incentive to stand alone which leads to a separating equilibrium this separating equilibrium can be destabilized by deception incentives if beliefs are updated on the basis of endogenous alliance formation choices weak players may find it attractive to appear strong in order to deter competitors from positive effort choices strong players may find it attractive to appear weak in order to give their competitors a false sense of security and then beat them with little effort moreover appearing weak allows players to free ride when alliances are formed jel d72 d74

voluntary export restraints profits and quality adjustment this paper develops a model of vertical differentiation to assess the impact of output constraints on the profits and quality choices of firms subject to them a competitive environment is developed with the automobile industry in mind multiproduct oligopolists producing differentiated goods who behave as coumot competitors the results show that an output constraint will not induce constrained firms to upgrade their product line when their unconstrained competitors produce higher quality models it is also shown that an output constraint can raise the profits of constrained firms despite output increases by unconstrained firms

strategic groups and rent dissipation we consider a rent seeking contest in which players can form strategic groups before expending their outlays we examine the profitability of endogenous group formation and the effect of such group formation on rent dissipation we show the following when just one strategic group is formed in equilibrium group formation is beneficial both to the group members and to the nonmembers and rent dissipation is smaller than with usual individual rent seeking however when more than two strategic groups are formed in equilibrium group formation is never profitable to any players and rent dissipation is greater than with individual rent seeking jel