Caps in asymmetric all-pay auctions with incomplete information

We study asymmetric all-pay auctions where two privately informed agents bid for a prize. We show that capping the bids is profitable for a designer who wants to maximize the sum of bids (revenue). This finding confims the results of Che and Gale (1998) in the context of incomplete information and completes the analysis of Gavious, Moldovanu and Sela (2002) by analyzing the case of ex-ante asymmetric players.All-pay auctions

How to Win Twice at an Auction. On the Incidence of Commissions in Auction Markets

We analyze the welfare consequences of an increase in the commissions charged by the organizer of an auction. Commissions are similar to taxes imposed on buyers and sellers and the economic problem that results looks similar to the question of tax incidence in consumer economics. We argue, however, that auction markets deserve a separate treatment. Indeed we show that an increase in commissions makes sellers worse off, but some (or all) buyers may gain. The results are therefore strikingly different from the standard result that all consumers lose after a tax or a commission increase. We apply our results to comment on the class action against Christie’s and Sotheby’s and argue that the method used to distribute compensations was misguided.Auction, Intermediation, Commissions, Welfare

Electoral incentives, term limits and the sustainability of peace

One of the few stylized facts in international relations is that democracies, unlike autocracies, almost never fight each other. We develop a theoretical model to examine the sustainability of international peace between democracies and autocracies, where the crucial difference between these two political regimes is whether or not policymakers are subject to periodic elections. We show that the fear of losing office can make it less tempting for democratic leaders to wage war against other countries. Crucially, this discipline effect can only be at work if incumbent leaders can be re-elected, suggesting that democracies with term limits should be more conflict prone, particularly when the executive is serving the last possible term. These results rationalize recent empirical findings on how term limits affect the propensity of democracies to engage in conflicts

Redistributive Politics with Distortionary Taxation

This paper proposes a first step towards a positive theory of tax instruments. We present a model that extends models of redistributive politics by Myerson (1993) and Lizzeri and Persico (2001). Two politicians compete in terms of targeted redistributive promises nanced through distortionary taxes. We solve for the case of both targetable and non-targetable taxes. We prove that there is an imperfect efficiency-targetability trade off on the tax side. Politicians prefer targetable taxes over non-targetable ones, especially when the latter are less efficient. Yet, targetable taxation is always used even when it is very inefficient compared to non-targetable t

Party Organization and Electoral Competition

We propose a model in which two parties select the internal organization that helps them win the election. Party choices provide incent

The structure of CEO pay: pay-for-luck and stock-options

We develop a stylized model of efficient contracting in which firms compete for CEOs. The optimal contracts are designed to retain and insure CEOs. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. We show that the optimal contract can be implemented with stockoptions based on a single performance measure which does not filter out luck. When the capacity to dismiss underperforming CEOs differs across firms, and the ability of different CEOs is more or less precisely estimated ex-ante, endogenous matching between CEOs and firms can explain the observed association between pay-for-luck and bad corporate governance. The model also predicts that an improvement in the governance of badly governed firms has spillover effects that increase CEO pay in all firms

Explaining the Association between Monitoring and Controversial CEO Pay Practices: an Optimal Contracting Perspective

Puzzling associations between low levels of ownership concentration and CEO pay practices such as pay-for-luck, a low pay-performance sensitivity, a more asymmetric pay-performance relation, and high salaries, have been documented. They have been interpreted as evidence that CEO pay is not set optimally. We explain these associations in a model in which firms design contracts optimally to attract and retain CEOs. The results are driven by the matching process: firms with greater ownership concentration have a higher monitoring capacity, and can better handle the downside risk of hiring CEOs with more uncertain ability. The outside option of these CEOs is more sensitive to their performance net of luck, which generates a higher pay-performance sensitivity and less pay-for-luck. If managerial skills are sufficiently transferable across firms and the cost of CEO dismissal is sufficiently high, these CEOs are less valuable and therefore receive relatively lower salaries

Pay-for-Luck in CEO Compensation: Matching and Efficient Contracting

We develop a stylized model of efficient contracting with matching between firms and managers with state-contingent reservation utility. We show that the optimal contract is designed to retain and insure the manager. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. This contract can be implemented with call options based on a single performance measure which generally does not filter out luck. When costs of involuntary managerial turnover differ across firms, and the abilities of different managers are more or less precisely estimated ex-ante, the model can also explain the observed association between pay-for-luck and bad corporate governance

Electoral incentives, terms limits, and the sustainability of peace

One of the few stylized facts in international relations is that democracies, unlike autocracies, almost never fight each other. Recent empirical findings show that binding term limits invalidate this result: democratic dyads in which at least one country imposes term limits on the executive are as conflict prone as autocratic and mixed dyads. Moreover, in democracies with two-term limits conflicts are more likely during the executive's second term. To rationalize these findings, we model international relations as a repeated prisoners' dilemma. We show that the fear of losing office makes democratic leaders less willing to start costly conflicts. Crucially, this discipline effect can only be at work if incumbent leaders can run for re-election. Term limits thus make it harder to sustain peaceful relations