Promoting Intellectual Discovery: Patents Versus Markets

Because they provide exclusive property rights, patents are generally considered to be an effective way to promote intellectual discovery. Here, we propose a different compensation scheme, in which everyone holds shares in the components of potential discoveries and can trade those shares in an anonymous market. In it, incentives to invent are indirect, through changes in share prices. In a series of experiments, we used the knapsack problem (in which participants have to determine the most valuable subset of objects that can fit in a knapsack of fixed volume) as a typical representation of intellectual discovery problems. We found that our "markets system" performed better than the patent system

Robust bilateral trade and mediated bargaining

We consider bilateral trade problems subject to incomplete information on the reservation values of the agents. We address negotiations where the communication of proposals takes place through the filter of a third party, a mediator: traders submit proposals over continuous time to the mediator that receives bids and keeps them secret until they are compatible. A regular robust equilibrium (RRE) is an (undominated) ex post equilibrium where (with sufficient delay) all compatible traders reach agreement. We present a characterization of RRE for risk-neutral traders that discount the future at the same exponential rate. We show how to compute RRE strategy profiles, and we explicitly display the unique one where agreements split the net surplus in equal shares. Our results support the claim that bargaining through a mediator is an effective procedure to promote efficiency.</p

Identifying Community Structures from Network Data via Maximum Likelihood Methods

Networks of social and economic interactions are often influenced by unobserved structures among the nodes. Based on a simple model of how an unobserved community structure generates networks of interactions, we axiomatize a method of detecting the latent community structures from network data. The method is based on maximum likelihood estimation.

Nachbar, Max Stinchcombe and Jeroen Swinkels for encouragement and pointed questions,

Committee on Research for financial support. Views expressed here are those of the author and do not necessarily reflect the views of any funding agency. Incentives, Contracts and Markets: Toward A General Equilibrium Theory of Firms This paper takes steps toward integrating firm theory in the spirit of Alchian &amp; Demsetz (1972) and Grossman &amp; Hart (1986), contract theory in the spirit of Holmstrom (1979), and general equilibrium theory in the spirit of Arrow &amp; Debreu (1954) and McKenzie (1959). In the model presented here, the set of firms that form and the contractual arrangements that appear, the assignments of agents to firms, the prices faced by firms for inputs and outputs, and the incentives to agents are all determined endogenously at equilibrium. Agents choose consumption — but they also choose which firms to join, which roles to occupy in those firms, and which actions to take in those roles. Agents interact anonymously with the (large) market, but strategically within the (small) firms they join. The model accommodates moral hazard, adverse selection, signaling and insurance. Equilibria may be Pareto ranked

Caltech

We study the impact of delegated portfolio management on asset pricing in a large-scale experimental setting. With a few exceptions, models of asset pricing are formulated in terms of the preference functions of final investors. This effectively assumes that adding a layer of management does not affect market equilibrium. In early rounds of our experiments, delegation indeed has no impact on pricing; we replicate CAPM pricing as in earlier experiments without delegation. Choices are also in line with prior evidence. CAPM pricing fails in later rounds, however, and we even observe a negative equity premium. We attribute this to fund flows. Investors tend to increase allocations to managers who performed well in the past (not just the previous period). Moreover, fund flows implicitly reflect a reward for variance. As a result, funds become concentrated with a few managers, and the aggregation of deviations of individual manager demands from mean-variance optimality, needed to ensure CAPM pricing, no longer obtains. Given the predominance of delegated investing in actual equity markets, our results have important implications for asset pricing theory. JEL Classification: G11, G1