Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies.

The need for intra-firm incentive schemes allows remodeling the Cournot duopoly in wages (rather than in output levels). In both versions of the Cournot model, a cartel agreement is unstable. The new formulation, however, allows us to demonstrate that a collective wage agreement on minimum wages can stabilize the cartel solution. Beyond its relevance for strategic management, this result has a policy implication: competition authorities should observe collective wage agreements for their potential collusive effect on product markets. Moreover, the model may provide a new explanation why firms in reality pay lower than efficient variable wages and higher fixed wages than predicted by contract theory. -- Die Oligopoltheorie klammert innerbetriebliche Konflikte i.a. aus. Die Notwendigkeit, Mitarbeiter durch Anreizschemata zu motivieren, ermöglicht es aber, das Cournot-Oligopol in Lohnsätzen zu reformulieren. Auch in dieser Formulierung sind Kartellvereinbarungen instabil; sie können jedoch über tarifvertragliche Mindestlöhne stabilisiert werden. Im Gegensatz zu Kartellvereinbarungen sind Tarifverträge rechtlich durchsetzbar. Dieses Resultat ist nicht nur für das strategische Management von Bedeutung, sondern auch für die Wirtschaftspolitik: Wettbewerbsbehörden sollten Tarifverträgen nicht nur wegen ihre Wirkung auf den Arbeitsmarkt Beachtung schenken, sondern auch wegen der möglichen Kartellstabilisierung auf dem Absatzmarkt. Schließlich kann das Modell einen Beitrag zur Lösung des "Fixlohnrätsels" leisten, da es erklärt, warum Unternehmen geringere variable und höhere fixe Löhne zahlen als von der Prinzipal-Agenten-Theorie vorhergesagt.Principal-agent theory,piece rate,fixed wage,collective wage agreements,Nash bargaining solution

Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

The instability of Cournot cartels can be overcome by a collective wage agreement if this agreement stipulates minimum fixed wages and piece rates that are legally enforceable. This new view on the institution of collective wage agreements is not only relevant for strategic management, it also has an important implication for economic policy: competition authorities should observe such agreements for their potentially collusive effect on product markets. Moreover, the model contributes to the explanation of the “fixed wage puzzle”, i.e., the observation that firms pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.Piece rate, fixed wage, collective wage agreements

Less Rationality, More Efficiency: a Laboratory Experiment on "Lemon" Markets.

We have experimentally tested a theory of bounded rational behavior in a "lemon market". It provides an explanation for the observation that real world players successfully conclude transactions when perfect rationality predicts a market collapse. We analyzed two different market designs : complete and partial market collapse. Our empirical observations deviate substantially from these theoretical predictions. In both markets, the participants traded more than theoretically predicted. Thus, the actual outcome is closer to efficiency than the theoretical prediction. Even after 20 repetitions of the first market constellation, the number of transactions did not drop to zero. Our bounded rationality approach to explain these observations starts with the insight that perfect rationality would require the players to perform an infinite number of iterative reasoning steps. Bounded rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between iteration types and observed price offers. --guessing games,beauty contests,market failure,adverse selection,lemon problem,regulatory failure,paternalistic regulation

Less Rationality, More Efficiency: a Laboratory Experiment on "Lemons" Markets

In this paper we experimentally test a theory of boundedly rational behavior in a "lemons market." We analyzed two different market designs, for which perfect rationality implies complete and partial market collapse, respectively. Our empirical observations deviate substantially from these predictions of rational choice theory: Even after 20 repetitions, the actual outcome is closer to efficiency than expected. Our bounded rationality approach to explaining these observations starts with the insight that perfect rationality would require the players to perform an infinite number of iterative reasoning steps. Boundedly rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between the iteration types and the observed price offers. --guessing games,beauty contests,market failure,adverse selection,lemon problem,regulatory failure,paternalistic regulation

The “Rainmaker’s Dilemma:” Bad Debt Loss Insurance in Settlement and Litigation

In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial can turn into a disaster when the defendant goes bankrupt before paying the plaintiff’s claim. “Rainmakers” face the following dilemma: the greater the success, the greater the defendant’s bankruptcy risk. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant’s bankruptcy, and of buying Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance have different impacts on the predicted outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, may have the opposite effect, as it decreases the settlement result.Strategic Insurance, British Cost Allocation Rule, Nash Bargaining Solution

Bayesian Monitoring.

This paper presents a modification of the inspection game: The ?Bayesian Monitoring? model rests on the assumption that judges are interested in enforcing compliant behavior and making correct decisions. They may base their judgements on an informative but imperfect signal which can be generated costlessly. In the original inspection game, monitoring is costly and generates a perfectly informative signal. While the inspection game has only one mixed strategy equilibrium, three Perfect Bayesian Equilibria exist in my model (one in pure strategies, two in mixed). These outcomes can be described with respect to their punishment styles: tyrannic, draconian, and lenient. The Bayesian Monitoring model, just as the inspection game, has different implications than enforcement models in the tradition of Becker (1968). Total deterrence of bad behavior is impossible, and the equilibrium probability of good behavior is independent of the suspect?s own payoff parameters. Hence, the maximum fine result does not apply. -- Dieses Paper präsentiert eine Modifikation des "Inspection Game". Bayesian Monitoring basiert auf der Annahme, daß Richter ein Interesse an korrekten Urteilen haben. Sie können ihr Urteil auf ein kostenlos verfügbares, aber imperfektes Signal stützen. Im "Inspection Game" ist Monitoring perfekt, wirft jedoch Kosten auf. Das Inspektion Game weist lediglich ein Gleichgewicht in gemischten Strategien auf, wohingegen es im Bayesian Monitoring Game drei Gleichgewichte gibt: eines in reinen, zwei in gemischten Strategien. Diese Gleichgewichte unterscheiden sich hinsichtlich des Bestrafungs-Stils: tyrannisch, drakonisch, freundlich. Wie das Inspektion Game führt Bayesian Monitoring zu anderen Ergebnissen als Rechtsdurchsetzungsmodelle in der Tradition von Becker (1968). Insbesondere gilt das "Maximum Fine"-Ergebnis nicht.Imperfect Decision-Making,Perfect Bayesian Equilibrium,Enforcement,Maximum Fine Result

Imperfect Monitoring of Monitoring Agents: One Reason Why Hierarchies Can Be Superior to "Lean" Organizations

Effective monitoring requires proper incentives and detection skill. Detection skills depend on the extent of specialization in monitoring and on the number of agents to be supervised. This paper demonstrates that hierarchy and monitoring of monitors can provide the necessary incentives for the monitoring agents, which induces them to make use of their detection skill. The model draws on the theory of imperfect diagnosis and explains why hierarchies can be superior to ?lean? organizations. -- Wirksames Monitoring erfordert nicht nur angemessene Anreize, sondern auch Überwachungsfähigkeit. Diese hängt von der Spezialisierung auf Monitoring ab, aber auch von der Zahl der zu überwachenden Agenten. In diesem Beitrag wird gezeigt, dass die Einrichtung einer Hierarchie es erlaubt, Monitoren zu überwachen, um ihnen die nötigen Anreize zu vermitteln kann, ihre Überwachungsfähigkeit zu nutzen. Das Modell nutzt die Theorie imperfekter Diagnosen und erklärt, warum Hierarchien im Vergleich zu ?lean organizations? überlegen sein können.Hierarchy,Imperfect Diagnosis,Monitoring,Incentives

Optimal Delegation in Nash Bargaining

When appointing a representative in negotiations, the principal can o er his agent a offer contract that promises a percentage of the bargaining result, and a bonus payment result (or penalty) if bargaining fails. Conventional wisdom of contract theory seems to suggest that the share should be as great as possible to provide proper incentives for a risk-neutral agent, while the bonus should be small or even negative. Drawing on the symmetric Nash bargaining solution, this paper argues that the optimal share is rather small, whereas the optimal bonus is rather large.Endogenous threat points, marginal valuation, strategic moves

Legal Cost Insurance as a Strategic Device

Legal Cost Insurance (LCI) is not only a device to reallocate risk, but also to enhance an insured's position in a settlement negotiation. The paper points out that this function of LCI is especially important in cases that have a negative expected value for potential plaintiffs. Hence LCI is of interest even for risk-neutral customers. -- Rechtsschutzversicherungen (LCI) dienen nicht nur der Risikoallokation, sondern verbessern auch die strategische Position des Versicherten in Vergleichsverhandlungen. Dies gilt insbesondere bei Klagen mit negativem Erwartungswert für den potentiellen Kläger. Dadurch sind LCI sogar für risikoneutrale Kunden interessant.Legal Cost Insurance,Bargaining,Settlement

The Condorcet Jury-Theorem with Two Independent Error-Probabilities

The Condorcet jury-theorem is derived from the implicit assumption that jury members may only commit one type of error. In binary decision situations however, two error types may occur, the probability of which is independent of each other. Taking this into account leads to a generalization of the theorem.Group decisions, judicial, imperfect decision-making,