Dynamic Location Games

We study a location game where consumers are distributed according to some density f and where market entry is costly and occurs sequentially. This permits an endogenous determination of the number of active ¯rms, their locations and the sequence in which these locations are occupied. While in general the analysis of such games is complicated by the fact that equilibrium locations and the sequence of settlement must be determined simul-taneously, we show that they can be independently derived for certain classes of densities including monotone and, under some additional restrictions, hump-shaped and U-shaped ones. For these classes we characterize the subgame perfect equilibrium outcome. More-over, when f is monotone and concave the equilibrium locations in areas where the density is larger tend to be more pro¯table. When f is uniform the number of ¯rms entering in equilibrium is minimal.Spatial competition product differentiation dynamic games entry deterrence

How often should you open the door? Optimal monitoring to screen heterogeneous agents

This paper shows that monitoring too much a partner in the initial phase of a relationship may not be optimal if the goal is to determine his loyalty to the match and if the cost of ending the relationship increases over time. The intuition is simple: by monitoring too much we learn less on how the partner will behave when he is not monitored. Only by giving to the partner the possibility to mis-behave he might be tempted to do it, and only in this case there is a chance to learn his type at a time where separation would be possible at a relatively low costMonitoring; probation; effort; asymmetric information

Global and local players in a model of spatial competition

We consider Hotelling location games with global and local players. Global players are active in several markets, while local players act in a single market only. The decisive feature is that global players cannot tailor their product to each market but have to choose a location on the Hotelling line that is valid for all markets in which they are active. Obvious examples include the media industry and politics, where competitors typically compete in several markets with basically the same product. We determine equilibrium configurations for simple specifications of such games. We then show that the presence of gp s tends to induce lower product diversity across markets. Finally, when the number of firms is endogenous, we show how gp s may use their location choice as a preemptive deviceHotelling location games; spatial competition; multiple markets; product differentiation; diversity; preemption

Black Sheep and Walls of Silence

In this paper we analyze the frequently observed phenomenon that (i) some members of a team (“black sheep”) exhibit behavior disliked by other (honest) team members, who (ii) nevertheless refrain from reporting such misbehavior to the authorities (they set up a “wall of silence”). Much cited examples include hospitals and police departments. In this paper, these features arise in equilibrium. An important ingredient of our model are benefits that agents receive when cooperating with each other in a team. Our results suggest that teams in which the importance of these benefits varies across team members are especially prone to the above mentioned phenomenon.teams, misbehavior, wall of silence, asymmetric information

Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave

We characterize optimal incentive contracts in a moral hazard framework extended in two directions. First, after effort provision, the agent is free to leave and pursue some ex-post outside option. Second, the value of this outside option is increasing in effort, and hence endogenous. Optimal contracts may entail properties such as inducing first-best effort and surplus, or non-responsiveness with respect to changes in verifiable parameters. Moreover, while always socially inefficient, separation might occur in equilibrium. Except for the latter, these findings are robust to renegotiation. When the outside option is exogenous instead, the standard results obtain

Black Sheep and Walls of Silence

In this paper we analyze the frequently observed phenomenon that (i) some members of a team ("black sheep") exhibit behavior disliked by other (honest) team members, who (ii) nevertheless refrain from reporting such misbehavior to the authorities (they set up a "wall of silence"). Much cited examples include hospitals and police departments. In this paper, these features arise in equilibrium. An important ingredient of our model are benefits that agents receive when cooperating with each other in a team. Our results suggest that teams in which the importance of these benefits varies across team members are especially prone to the above mentioned phenomenonteams; misbehavior; wall of silence; asymmetric information

Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave

We characterize optimal incentive contracts in a moral hazard framework extended in two directions. First, after effort provision, the agent is free to leave and pursue some ex-post outside option. Second, the value of this outside option is increasing in effort, and hence endogenous. Optimal contracts may entail properties such as inducing first-best effort and surplus, or non-responsiveness with respect to changes in verifiable parameters. Moreover, while always socially inefficient, separation might occur in equilibrium. Except for the latter, these findings are robust to renegotiation. When the outside option is exogenous instead, the standard results obtain.moral hazard; limited commitment; ex-post outside option; limited liability

Unfair Contests

Real-world contests are often "unfair" in the sense that outperforming all rivals may not be enough to be the winner, because some contestants are favored by the allocation rule, while others are handicapped. Examples of such contests can be inter alia found in the area of litigation and procurement.This paper analyzes discriminatory contests (which are strategically equivalent to all-pay auctions) with a handicap for one of the participants. We first characterize the equilibriumstrategies, provide closed form solutions, and illustrate the additional strategic issues arising through this asymmetry. We then analyze the issue of the optimal degree of unfairness. From a social point of view, the following trade-off arises: The disadvantage of unfair contests is that the prize may be awarded to an inferior contestant. On the other hand, under the assumption that the effort exerted by contestants to increase their chancesof winning the prize is wasteful from a social point of view, one advantage of an unfair contest is that it leads to lower effort incentives. We characterize situations in which it is optimal for an authority to either stipulate a fair contest, an interior degree of unfairness or even an infinitely unfair contest where the prize is directly awarded to one of the ontestants.microeconomics ;

Contracts as Rent Seeking Devices: Evidence from German Soccer

Recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis-à-vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) clubs and players sign binding contracts which are, however, frequently renegotiated when other clubs (entrants) want to hire the player. Because they weaken entrants in renegotiations, long term contracts are useful rent seeking devices for the contracting parties. From a social point of view, however, they lead to allocative distortions in the form of deterring efficient transfers. Since incumbent clubs tend to benefit more from long term contracts in renegotiations than players, these must be compensated ex ante by a higher wage when agreeing to a long term contract. Using data from the German "Bundesliga", our model predictions are broadly confirmed. In particular, our analysis supports the concerns expressed in the theoretical literature about detrimental effects of strategic contracting on allocative inefficiency.strategic contracting, rent seeking, empirical contract theory, long-term contracts, breach of contract, sports economics

When Bidding More is Not Enough: All-Pay Auctions with Handicaps

We consider a standard two-player all-pay auction with private values, where the valuation for the object is private information to each bidder. The crucial feature is that one bidder is favored by the allocation rule in the sense that he need not bid as much as the other bidder to win the auction. Analogously, the other bidder is handicapped by the rule as overbidding the rival may not be enough to win the auction. Clearly, this has important implications on equilibrium behavior. We fully characterize the equilibrium strategies for this auction format and show that there exists a unique pure strategy Bayesian Nash Equilibrium.All-pay auction, contest, asymmetric allocation rule, rent-seeking, asymmetric information