Cycles and Multiple Equilibria in the Market for Durable Lemons

We investigate the nature of market failure in a dynamic version of Akerlof (1970) where identical cohorts of a durable good enter the market over time. In the dynamic model, equilibria with qualitatively different properties emerge. Typically, in equilibria of the dynamic model, sellers with higher quality wait in order to sell and wait more than sellers of lower quality. Among other things, we show for any distribution of quality that there exist an infinite number of cyclical equilibria where all goods are traded within a certain number of periods after entering the market.

On Bundling in Insurance Markets

This paper analyzes the welfare consequences of bundling different risks in one insurance contract in markets where adverse selection is important. This question is addressed in the context of a competitive insurance model a la Rothschild and Stiglitz (1976) with two sources of risk. Accordingly, there are four possible types of individuals and many incentive compatibility constraints to be considered. We show that the effect of bundling on these incentive compatibility constraints is such that bundling always yields a welfare improvement, and this result only holds when all four types have strictly positive shares in the population. Due to the competition between insurance companies, these benefits accrue to consumers who potentially have fewer contracts to choose from, but benefit from the better sorting possibilities due to bundling.

Auctions, Market Prices and the Risk Attitude Effect

This paper develops one possible argument why auctioning licenses to op- erate in an aftermarket may lead to higher prices in the aftermarket compared to a more random allocation mechanism. Key ingredients in the argument are differences in firms' risk attitudes and the fact that future market prof- its are uncertain so that winning an auction is like winning a lottery ticket. li one license is auctioned, auctions select the firm that is least risk averse. This is what we call the risk attitude effect. Firms that are less risk averse tend to set higher prices (or higher quantities in case quantity is the decision variable) in the marketplace than an average firm. When multiple licenses are auctioned, this conclusion gets strengthened when there is a differenti- ated Eertrand oligopoly in the marketplace. In case of Cournot competition, a strategic effect works against the risk attitude effect so that under certain conditions the more risk averse firms will be selected leading (again) to higher market prices

Information Overload in Multi-Stage Selection Procedures

The paper studies information processing imperfections in a fully rational decision-making network. It is shown that imperfect information transmission and imperfect information acquisition in a multi-stage selection game yield information overload. The paper analyses the mechanisms responsible for a seeming bounded rational behavior of the network and shows their similarities and distinctions. Two special cases of filtering selection procedures are investigated, where the overload takes its most limiting forms. The model developed in the paper can be applied both to organizations and to individuals. It can serve as a rational foundation for bounded rationality

Optimal signaling with cheap talk and money burning

We study Sender-optimal signaling equilibria with cheap talk and money-burning. Under general assumptions, the Sender never uses money-burning to reveal all states, but always wants to garble information for at least some states. With quadratic preferences and any log-concave density of the states, optimal communication is garbled for all states: money-burning, if used at all, is used to adjust pooling intervals. This is illustrated by studying in depth the well-known uniform-quadratic case. We also show how the presence of a cost of being “caught unprepared” that gives rise to a small change in a common assumption on the Receiver’s utility function makes full revelation through money-burning Sender-optimal

Gaming in Combinatorial Clock Auctions

In recent years, Combinatorial Clock Auctions (CCAs) have been used around the world to allocate frequency spectrum for mobile telecom licenses. CCAs are claimed to significantly reduce the scope for gaming or strategic bidding. In this paper, we show, however, that CCAs significantly enhance the possibilities for strategic bidding. Real bidders in telecom markets are not only interested in the spectrum they win themselves and the price they pay for that, but also in the price competitors pay for that spectrum. Moreover, budget constraints play an important role. When these considerations are taken into account, CCAs provide bidders with significant gaming possibilities, resulting in high auction prices and problems associated with multiple equilibria and bankruptcy (given optimal bidding strategies)

Evaluation Problem versus Selection Problem in Organizational Structures

We consider a hierarchical organization with two fully rational agents. The goal of the organization is that of selecting the best alternative out of several available, and agents are heterogenous in the accuracy with which they screen the alternatives. We show that, if internal communications between agents is not possible, the ordering of agents affects the performance of the organization. More specifically, we find that the expected payoff of the organization improves when the more accurate agent screens first. Finally, we note that such optimal ordering makes the hierarchy formally identical to one in which the internal communication flow is perfect

Dynamic Insurance and Adverse Selection

We take a dynamic perspective on insurance markets under adverse selection and study a generalized Rothschild and Stiglitz model where agents may differ with respect to the accidental probability and their expenditure levels in case an accident occurs. We investigate the nature of dynamic insurance contracts by considering both conditional and unconditional dynamic contracts. An unconditional dynamic contract has insurance companies offering contracts where the terms of the contract depend on time, but not on the occurrence of past accidents. Conditional dynamic contracts make the actual contract also depend on individual past performance (like in car insurances). We investigate whether allowing insurance companies to offer dynamic insurance contracts results in Pareto- improvements over static contracts. Our main results are as follows. When agents only differ in their accidental expenditures, then dynamic insurance contracts yield a welfare improvement only if dynamic contracts are conditional on past performance. When, however, agents' expenditures differ just a little bit dynamic insurance contracts are strictly Pareto improving even for unconditional dynamic contracts