Incentive compatible networks and the delegated networking principle

We construct a model of a principal-agent game of network formation (over layered networks) with asymmetric information and we consider the following two questions: (1) Is it possible for the principal to design a mechanism that links the reports of agents about their private information and the set of connections allowed and recommended by the principal via the mechanism in such a way that players truthfully reveal their private information to the principal and follow the recommendations specified by the mechanism. (2) An even more fundamental question we address is whether or not it is possible for the principal to achieve the same outcome (as that achieved via a mechanism and centralized reporting) by instead choosing a profile of sets of allowable ways to connect (here modeled as player—club specific sets - or catalogs - of networks) and then delegating connection choices to each pair of agents. We call this approach to network formation with incomplete information delegated networking and we show, under relatively mild conditions on our game-theoretic model of network formation, that strategic network formation with incomplete information, implemented via a mechanism and centralized reporting, is equivalent to implementation via delegated networking with monitoring

Communicating Vertical Hierarchies: the Adverse Selection Case

I study the rationale for information sharing in a model where two principals, which exert production externalities one on another, endogenously decide whether to exchange information about their exclusive agents. I show that one novel effect shapes communication decisions when agents are privately informed about production costs. This effect is absent under complete information and it turns out to be of first-order magnitude relative to those emerging in such benchmark. Roughly, what matters is how sharing information impacts contracting relationships within opponent organizations, and therefore its effect on equilibrium outputs. Information exchange induces strategies to be correlated via the distortions channel. Because of those distortions, the equilibrium value of communication depends on the interplay between the nature of upstream externalities and the sign of cost correlation. When upstream externalities and cost correlation have the same sign, there exists a unique symmetric equilibrium with no communication. By contrast, when upstream externalities and cost correlation have opposite signs there exists a unique symmetric equilibrium where both principals share information. I also show that, unlike in previous models, under asymmetric information principals might run into a prisoner dilemma when there is no communication at equilibrium. Information sharing is also shown to have an unambiguous negative effect on rents. Moreover, there exists a system of transfers such that the equilibrium outcome obtained when both principals share information is collusion-proof.Adverse selection, communication, information sharing, vertical hierarchies

Network formation and heterogeneous risks

We gratefully acknowledge the financial help of the European Union’s Horizon 2020 research and innovation programme under the Marie Sklodowska-Curie grant agreement No 89112

Networks of Relations

We model networks of relational (or implicit)contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model, relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members’ sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable subnetworks inhibit more valuable larger networks.Networks; Relational Contracts; Peering; Indirect Multimarket Contact; Information transmission; Social Capital.

The Formation of Networks with Transfers among Players

We examine the formation of networks among a set of players whose payoffs depend on the structure of the network. We focus on games where players may bargain by promising or demanding transfer payments when forming links. We examine several variations of the transfer/bargaining aspect of link formation. One aspect is whether players can only make and receive transfers to other players to whom they are directly linked, or whether they can also subsidize links that they are not directly involved in. Another aspect is whether or not transfers related to a given link can be made contingent on the full resulting network or only on the link itself. A final aspect is whether or not players can pay other players to refrain from forming links. We characterize the networks that are supported under these variations and show how each of the above aspects is related either to accounting for a specific type of externality, or to dealing with the combinatorial nature of network payoffs.Networks, Network games, Network formation, Game theory, Efficient networks, Side payments, Transfers, Bargaining, Externalities

What factors determine the number of trading partners?

The purpose of the paper is to provide a simple model explaining buyer-supplier relationships and show what factors determine the number of trading partners. We show that when the supplier is able to determine the number of trading partners, the optimal number is small if the supplier's bargaining power with them is weak, the economy of scope in the supplier's variable costs is significant, and that in its sunk investment is weak. Investment may be greater when the number of trading partners is small. The results may be consistent with the formation of Japanese buyer-supplier relations.

The World Bank’s Prototype Carbon Fund and China

As the first global carbon fund, the World Bank’s Prototype Carbon Fund (PCF) aims to catalyze the market for project-based greenhouse gas emission reductions while promoting sustainable development and offering a learning-by-doing opportunity to its stakeholders. Since the inception in 2000, the PCF has engaged in a dialogue with China to get it to sign up as a host country, because the World Bank and other international and bilateral donors expect great potential of the clean development mechanism (CDM) in China and feel the significant need for building CDM capacity in China to enable it to gain more insight into the CDM and increase its capacity to initiate and undertake CDM projects. This paper first discusses why China had hesitated to sign up as a host country of PCF projects until September 2003. Then the paper explains what has led China to endorse the PCF projects. The paper ends with discussions on the implications of the PCF’s offering prices for the emerging global carbon market.Carbon prices, Carbon market, China, Prototype Carbon Fund, The World Bank

Managerial Compensations and Information Sharing under Moral Hazard: Is Transparency Good?

We study the effects of information sharing on optimal contracting in a vertical hierarchies model with moral hazard and effort externalities. The paper has three main objectives. First, we determine and compare the equilibrium contracts with and without communication. We identify how each principal relates her agent’s wage to the opponent’s performance when they share information about agents’ performances. It turns out that the type of effort externalities across organizations is the main determinant of the responsiveness of each agent’s reward to the opponent’s performance. Second, in order to throw novel light on the emergence of information sharing agreements, we characterize the equilibria of a non- cooperative game where principals first decide whether to share information and then offer contracts to their exclusive agents. We explore the implications of introducing certification costs and show that three types of equilibria may emerge depending on the nature and (relative) strength of effort externalities: principals bilaterally share information if agents’ effort choices exhibit strong complementarity; only the principal with stronger monitoring power discloses information in equilibrium for intermediate levels of effort’s complementarity; principals do not share information if efforts are substitutes and for low values of effort’s complementarity. Moreover, differently from the common agency framework studied in Maier and Ottaviani (2009), in our model a prisoner’s dilemma may occur when efforts are substitutes and certification costs are negligible: if a higher effort by one agent reduces the opponent’s marginal productivity of effort the equilibrium involves no communication although principals would jointly be better off by sharing information. Finally, the model also offers novel testable predictions on the impact of competition on the basic trade-off between risk and incentives, the effects of organizations’ asymmetries on information disclosure policies as well as on the link between corporate control and the power of incentives.Competing Hierarchies, Information Sharing, Moral Hazard