Coevolution of trustful buyers and cooperative sellers in the trust game

Many online marketplaces enjoy great success. Buyers and sellers in successful markets carry out cooperative transactions even if they do not know each other in advance and a moral hazard exists. An indispensable component that enables cooperation in such social dilemma situations is the reputation system. Under the reputation system, a buyer can avoid transacting with a seller with a bad reputation. A transaction in online marketplaces is better modeled by the trust game than other social dilemma games, including the donation game and the prisoner's dilemma. In addition, most individuals participate mostly as buyers or sellers; each individual does not play the two roles with equal probability. Although the reputation mechanism is known to be able to remove the moral hazard in games with asymmetric roles, competition between different strategies and population dynamics of such a game are not sufficiently understood. On the other hand, existing models of reputation-based cooperation, also known as indirect reciprocity, are based on the symmetric donation game. We analyze the trust game with two fixed roles, where trustees (i.e., sellers) but not investors (i.e., buyers) possess reputation scores. We study the equilibria and the replicator dynamics of the game. We show that the reputation mechanism enables cooperation between unacquainted buyers and sellers under fairly generous conditions, even when such a cooperative equilibrium coexists with an asocial equilibrium in which buyers do not buy and sellers cheat. In addition, we show that not many buyers may care about the seller's reputation under cooperative equilibrium. Buyers' trusting behavior and sellers' reputation-driven cooperative behavior coevolve to alleviate the social dilemma.Comment: 5 figure

Should we pay for ecosystem service outputs, inputs or both?

Payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri-environmental schemes. The focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms. The farmer is better informed than the regulator in terms of hidden information about costs and hidden-actions relating to effort. The results show that with perfect information, the regulator can contract equivalently on inputs or outputs. With hidden information, input-based contracts are more cost effective at reducing the informational rent related to adverse selection than output-based contracts. Mixed contracts are also cost-effective, especially where one input is not observable. Such contracts allow the regulator to target variables that are “costly-to-fake” as opposed to those prone to moral hazard such as effort. Further results are given for fixed price contracts and input-based contracts with moral hazard. The model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract. The models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially-valuable ecosystem services

The political use of the term “moral hazard”: evidence from policymakers of the Eurozone. Bruges Political Research Papers 78/November/2019

Since the global financial crisis of 2007-8, the need for increased risk sharing between the members of the euro area has been acknowledged. However, the evolution towards an “insurance union” has been hampered by the political division between risk sharing and risk reduction. This paper intends to contribute to the explanation of this political deadlock by exploring the main explicit argument underpinning this division, that is to say moral hazard. Unlike most of the academic research on moral hazard, which takes the concept for granted, this paper explores moral hazard from an ideational point of view. The purpose of this research is to question the neutrality of the argument of moral hazard. Using discourse analysis techniques, the empirical study provides information on how and why policymakers of the Eurozone use the term “moral hazard”. This study argues that contrary to appearances, moral hazard is not a de-politicised concept. The author found evidence that the conception of moral hazard is shaped by strategic interests and/or prevailing set of ideas that explain divergent preferences towards risk sharing

Inequality of opportunity in the credit market

Credit market imperfections can prevent the poor from making pro table investments. Under asymmetric information observable features, such as wealth and collateral, play an important role in determining who gets credit, in violation of the Equality of Opportunity principle. We de ne equality of opportunity as the equal possibility of getting credit for a given aversion to e¤ort. We rst establish that, due to larger cross subsidization in high collateral classes of borrowers, richer individuals are more likely to get credit for a given aversion to e¤ort. Our second result is that Inequality of Opportunity is associated with an ine¢ cient allocation of resources among classes of borrowers. The marginal borrower in classes that post more collateral exerts less e¤ort in equilibrium (and therefore produces lower aggregate surplus) than the marginal borrower in lower collateral classes. This suggests that public credit policies should be targeted at poorer classes of would be borrowers both for equity and e¢ ciency reasons, which rarely occurs in practice.equality of opportunity; credit; moral hazard; cross subsidization; collateral.

Reverse Bayesianism and Act Independence

Karni and Vierø (2013) propose a model of belief revision under growing awareness—reverse Bayesianism—which posits that as a person becomes aware of new acts, consequences, or act-consequence links, she revises her beliefs over an expanded state space in a way that preserves the relative likelihoods of events in the original state space. A key feature of the model is that reverse Bayesianism does not fully determine the revised probability distribution. We provide an assumption—act independence—that imposes additional restrictions on reverse Bayesian belief revision. We show that with act independence knowledge of the probabilities of the new act events in the expanded state space is sufficient to fully determine the revised probability distribution in each case of growing awareness. We also explore what additional knowledge is required for reverse Bayesianism to pin down the revised probabilities without act independence

Biodiversity Conservation on Private Lands: Information Problems and Regulatory Choices

This survey paper examines various information insufficiencies in biodiversity conservation and their impact of regulatory choices. We surveyed the literature in the field and identified four major types of informational insufficiencies in making efficient biodiversity conservation decisions: 1) biological uncertainty 2) natural uncertainty 3) individual information, and 4) monitoring problem. The consequences of these four types of information insufficiencies on the choice of regulatory tools are explored. We discuss in this context three types of regulatory tools: land takings, environmental fees/charges, and contracts. The efficiency of each type of regulatory tools is shown dependent on the specific informational constraints that the regulatory faces.Biodiversity conservation, Information, Regulatory tools