Evolutionary Models of Preference Formation

The literature on the evolution of preferences of individuals in strategic interactions is vast and diverse. We organize the discussion around the following question: Supposing that material outcomes drive evolutionary success, under what circumstances does evolution promote Homo oeconomicus, defined as material self-interest, and when does it instead lead to other preferences? The literature suggests that Homo oeconomicus is favored by evolution only when individuals' preferences are their private information and the population is large and well-mixed so that individuals with rare mutant preferences almost never get to interact with each other. If rare mutants instead interact more often (say, due to local dispersion), evolution instead favors a certain generalization of Homo oeconomicus including a Kantian concern. If individuals interact under complete information about preferences, evolution destabilizes Homo oeconomicus in virtually all games

Evolutionary Models of Preference Formation

The literature on the evolution of preferences of individuals in strategic interactions is vast and diverse. We organize the discussion around the following question: Supposing that material outcomes drive evolutionary success, under what circumstances does evolution promote Homo oeconomicus, defined as material self-interest, and when does it instead lead to other preferences? The literature suggests that Homo oeconomicus is favored by evolution only when individuals' preferences are their private information and the population is large and well-mixed so that individuals with rare mutant preferences almost never get to interact with each other. If rare mutants instead interact more often (say, due to local dispersion), evolution instead favors a certain generalization of Homo oeconomicus including a Kantian concern. If individuals interact under complete information about preferences, evolution destabilizes Homo oeconomicus in virtually all games

Essays in Economic Theory

This thesis consists of three chapters. The first chapter studies the trade-off between realizing match values early and waiting for good matches that arises in a dynamic matching model with discounting. We consider heterogeneous agents that arrive stochastically over time to a centralized matching market. First, we derive the welfare-maximizing assignment rule, which displays the subtle trade-off between matching agents early and accumulating agents to form assortative matches. Second, we show that the welfare-maximizing policy is implementable when agents have private information about their types. The corresponding mechanism satisfies natural requirements. Furthermore, we identify situations in which the designer can abstain from using monetary incentives. The second chapter studies a seller whose reputation is determined by the types of her customers. In our model, a monopolist repeatedly sells a good to heterogeneous customers who, depending on their type, increase or decrease the seller's reputation. First, we study a trade-off between realizing current-period profits and building reputation for future periods. Second, we analyze reputation dynamics. Over time, reputation always converges to a stable level. Convergence behavior, however, depends strongly on the good's durability. While the reputation of less durable goods fluctuates around the long-run reputation, the reputation of more durable goods converges monotonically. The third chapter develops a model of the German health insurance system for identifying redistribution streams and evaluating proposals to change the system. A population, characterized by health and income, obtains health insurance either from a budget-balancing public insurer or a more flexible, revenue-maximizing private insurer. Redistribution occurs across health and income, and the private insurer extracts surplus, by attracting profitable customers, which cannot be used for redistribution. We analyze changes in redistribution when switching from the current contribution-based system to a premium-based system with only one type of insurer. Furthermore, we study the properties of welfare-maximizing fee schedules

Does Competition Solve the Hold-up Problem?

In an environment in which both workers and firms undertake match specific investments, the presence of market competition for matches may solve the hold-up problems generated by the absence of complete contingent contracts. In particular, this paper shows that when matching is assortative and workers' investments precede market competition for matches investments are constrained efficient. Inefficiencies can arise in this framework as multiple equilibria of the competition game. Only one of these equilibria is efficient in the sense that the worker with the higher innate ability matches with the better firm. A different type of inefficiencies arise when firms undertake their match specific investment before market competition. These inefficiency leads to firms under-investments. However, we show that in this case the aggregate inefficiency is small in a well defined sense independent of the market size.

The Comparative Advantages of Firms, Markets and Contracts: a Unified Theory

The most efficient labour market mechanism depends on the advantages of specialization, workers’ costs of switching between entrepreneurs, and the frequency with which needs change. Multilateral mechanisms are more efficient when specialization is more advantageous, when it is cheap for workers to switch between entrepreneurs, and when individual entrepreneurs cannot occupy a worker on a full-time basis. Given a bilateral mechanism, employment (a firm) is more efficient than contracts when in-process adjustments arise more frequently. There exist three regions in which firms, markets and sequences of bilateral contracts are weakly more efficient than all other mechanisms in a big class

To Score or Not to Score? Estimates of a Sponsored Search Auction Model

We estimate a structural model of a sponsored search auction model. To accomodate the "position paradox", we relax the assumption of decreasing click volumes with position ranks, which is often assumed in the literature. Using data from "Website X", one of the largest online market places in China, we find that merchants of different qualities adopt different bidding strategies: high quality merchants bid more aggressively for informative keywords, while low quality merchants are more likely to be sorted to the top positions for value keywords. Counterfactual evaluations show that the price trend becomes steeper after moving to a score-weighted generalized second price auction, with much higher prices obtained for the top position but lower prices for the other positions. Overall, there is only a very modest change in total revenue from introducing popularity scoring, despite the intent in bid scoring to reward popular merchants with price discounts