Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory

Antitrust exemptions granted to businesses under extenuating circumstances are often justified by the argument that they benefit the public by helping producers adjust to otherwise difficult economic circumstances. Such exemptions may allow firms to coordinate their capacities, as was the case of post-September 11, 2001 antitrust immunity granted to Aloha and Hawaiian Airlines. We conduct economic laboratory experiments to determine the effects of explicit capacity coordination on oligopoly firms' abilities to adjust to negative demand shocks and on industry prices. The results suggest that capacity coordination speeds the adjustment process, but also has a clear pro-collusive effect on firm behavior.

Demand Shocks, Capacity Coordination and Industry Performance: Lessons from Economic Laboratory

Antitrust exemptions granted to businesses under extenuating circumstances are often justified by the argument that they benefit the public by helping producers adjust to otherwise difficult economic circumstances. Such exemptions may allow firms to coordinate their capacities, as was the case of post-September 11, 2001 antitrust immunity granted to Aloha and Hawaiian Airlines. We conduct economic laboratory experiments to determine the effects of explicit capacity coordination on oligopoly firms' abilities to adjust to negative demand shocks and on industry prices. The results suggest that capacity coordination speeds the adjustment process, but also has a clear pro-collusive effect on firm behavior.economic experiments; demand shocks; capacity coordination; collusion

Rat Races and Glass Ceilings- Career Paths in Organizations

In an ongoing organization, such as a large law partnership, employees are motivated not only by current rewards but also by the prospect of promotion, and the opportunity to influence policy and make rules in the future. This leads to a dynamic programming problem in contract design. We model career design in such a firm as a recursive mechanism design problem in an overlapping generations environment. Agents entering the firm may differ in their private characteristics which affect their costs of effort. We find that under recursive structure, a profit-maximizing principal offers, and promotion-motivated agents accept, "rat-race" contracts with very low wages and high effort levels. With wages driven down to zero, promotions become the main instrument to discriminate among agents in an adverse selection environment. The optimal adverse selection contract introduces a promotion barrier, or a "glass ceiling", for the high cost agents. We thus find that the issues of inefficiently high work levels (the "rat-race") and of unequal promotion rates (the "glass ceiling") are intimately interconnected. We apply this framework to equal opportunity and gender discrimination in employmentrecursive contracts, mechanism design, overlapping generations, rat-race, glass ceiling

How To Gerrymander: A Formal Analysis

The paper presents an effort to incorporate geographic and other possible exogenous constraints that might be imposed on districting into an optimal partisan gerrymandering scheme. We consider an optimal districting scheme for a party which maximizes the number of districts that it will, in expectation, win, given arbitrary distributions of voters and party supporters over the electoral territory. We show that such a scheme exists if an equal size requirement is the only constraint imposed on districting. If, further, the requirement of territorial connectedness is imposed, the optimal districting scheme still exists when arbitrarily small deviations from the equal size requirement are admissible. Additional constraints imposed on districting make gerrymandering more difficult and sometimes impossible. Although the party is assumed to ignore the risk associated with possible shifts in electoral votes and thus takes the expected share of votes as a perfect predictor of electoral outcomes, the presented approach is valid for a party with any attitude towards risk and for any kind of majority rule used in elections. The results are consistent with earlier findings on unconstrained optimal partisan gerrymandering

Collusion in private value ascending price auctions

We investigate bidder collusion in one-sided ascending price auctions without communication. If bidding rules in an English-type auction allow bidders to match each other’s' bids, collusion can be sustained as a Nash equilibrium of a one-shot auction game. Our earlier experiments show that in common value auctions with complete information, collusion does occur and is sustainable even when bidders cannot explicitly coordinate their strategies. In this study, we investigate the robustness of bidders' collusive behavior in private values, private information environments. We find that collusion still occurs as long as the bidders' gains from collusion are high

The Formation of Multiple Teams

Organizational forms such as task-oriented teams have often been proposed as a method to enhance the efficiency of a firm. Under asymmetric information, however, the costs of acquiring the information needed to improve efficiency may outweigh the efficiency gains and lead to lower profits. We illustrate this idea by considering a profit-maximizing principal who needs to allocate a group of agents among a number of projects, given that the principal has incomplete information about the agents' abilities. We study feasible incentive-compatible (truth-revealing) individually rational mechanisms under both the dominant strategy and Bayesian Nash behavioral assumptions. Some attention is also paid to Nash equilibrium mechanisms. The paper covers derivation of optimal mechanisms, efficiency analysis, and analysis of the principal's expected profit as a function of different types of environment and information structures. We find that if the principal has little or no information about the agents' private characteristics and the agents follow dominant strategy behavior, the principal may often run into losses in an attempt to discover the hidden information. Paradoxically, the loss occurs when the efficiency gains from team production are high and the competition among the agents is low. If the hidden information about each agent can be summarized as a one-dimensional type parameter, and if a prior distribution function of the agents ' types is common knowledge among the agents and the principal, an expected-profit maximizing Bayesian equilibrium mechanism exists and is of the optimal auction form (Myerson, 1 98 1 ) . Moreover, the mechanism can be equivalently implemented in dominant strategies with no expected profit loss for the principal. Yet, the principal's profit often decreases with an increase in the number of projects. These findings suggest that, in profit-maximizing firms with low competition among the employees, efficient organizational forms may often be foregone in favor of profits

Simultaneous Ascending Auctions With Common Complementarities

Competitive equilibria are shown to exist in two-object exchange economies with indivisibilities and additive complementarities in agent valuations between objects, provided that complementarities are common across agents. We further investigate whether the competitive equilibrium can be obtained as an outcome of a simultaneous English-type auction mechanism under non-strategic (honest) bidding.competitive equilibrium, complementarities, auctions

Cultural values and behavior in dictator, ultimatum, trust games: an experimental study

We explain laboratory behavior in the dictator, ultimatum and trust games based on two cultural dimensions adopted from social and cultural anthropology: grid and group, which translate into reciprocity and altruism, respectively, in such games. Altruism and reciprocity characteristics are measured for each individual using selected items from the World Values Survey. We find that altruism and reciprocity attributes systematically affect behavior. Subjects with higher altruism scores offer more, accept lower offers and return more. Subjects with higher reciprocity scores are more willing to punish violators of norms by rejecting offers more often, dividing fewer dollars and returning fewer dollars in the ultimatum and trust games.laboratory experiment, two-person game, survey, culture

Altruism and voluntary provision of public goods

We study how people's predisposition towards altruism affects their behavior in a voluntary contributions public good experiment. We investigate whether a high level of contributions can be sustained in groups of subjects who have been pre-selected on the basis of their altruistic inclinations. In the first stage of the experiment, each subject responds to a psychology questionnaire that measures various dimensions of one''s personality. The subjects are then matched in groups according to their altruism scores, and engage in a voluntary contributions game. We consider whether the levels and dynamics of group contributions differ significantly between the groups with altruists and non-altruists. We find that subjects'' altruism has only a weak positive effect on group behavior in the public good game.Altruism