Overconfidence in the Market for Lemons

We extend Akerlof ’s (1970) “Market for Lemons” by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is at display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. The main finding is that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market

Price Discrimination in Input Markets: Quantity Discounts and Private Information

We consider a monopolistic supplier’s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on thirddegree price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts—the usual legal practice in the EU and US— often is beneficial for social welfare. This result is shown to be robust even when the upstream supplier faces competition in the form of fringe supply

Overconfidence in the Markets for Lemons

We extend Akerlof (1970)’s “Market for Lemons” by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is on display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. We show that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market

Performance of Procrastinators: On the Value of Deadlines

Earlier work has shown that procrastination can be explained by quasi-hyperbolic discounting. We present a model of effort choice over time that shifts the focus away from completion to performance on a single task. We show that quasi-hyperbolic discounting is detrimental for performance. More intrestingly, we find that being aware of the own self-control problems not necessarily increases performance. Extending this framework to a multi-task model, we show that deadlines help an agent to structure his workload more efficiently, which in turn leads to better performance. Moreover, being restricted by deadlines increases a quasi-hyperbolic discounter's well-being. Thus, we give a theoretical underpinning for recent empirical evidence and numerous casual observations.Effort Choice; Deadlines; (Quasi-) Hyperbolic Discounting; Naiveté; Present-Biased Preferences; Sophistication

Price Discrimination in Input Markets: Downstream Entry and Welfare

The extant theory on price discrimination in input markets takes the structure of the intermediate industry as exogenously given. This paper endogenizes the structure of the intermediate industry and examines the effects of banning third-degree price discrimination on market structure and welfare. We identify situations where banning price discrimination leads to either higher or lower prices for all downstream firms. These findings are driven by the fact that upstream profits are discontinuous due to entry being costly. Moreover, permitting price discrimination fosters entry which in many cases improves welfare. Nevertheless, entry can also reduce welfare because it may lead to a severe inefficiency in production.Entry, Input Markets, Market Structure, Price Discrimination, Vertical Contracting

Unlocking the Potential of Flexible Energy Resources to Help Balance the Power Grid

Flexible energy resources can help balance the power grid by providing different types of ancillary services. However, the balancing potential of most types of resources is restricted by physical constraints such as the size of their energy buffer, limits on power-ramp rates, or control delays. Using the example of Secondary Frequency Regulation, this paper shows how the flexibility of various resources can be exploited more efficiently by considering multiple resources with complementary physical properties and controlling them in a coordinated way. To this end, optimal adjustable control policies are computed based on robust optimization. Our problem formulation takes into account power ramp-rate constraints explicitly, and accurately models the different timescales and lead times of the energy and reserve markets. Simulations demonstrate that aggregations of select resources can offer significantly more regulation capacity than the resources could provide individually.Comment: arXiv admin note: text overlap with arXiv:1804.0389

The Optimality of Simple Contracts: Moral Hazard and Loss Aversion

This paper extends the standard principal-agent model with moral hazard to allow for agents having reference- dependent preferences according to Köszegi and Rabin (2006, 2007). The main finding is that loss aversion leads to fairly simple contracts. In particular, when shifting the focus from standard risk aversion to loss aversion, the optimal contract is a simple bonus contract, i.e. when the agent's performance exceeds a certain threshold he receives a fixed bonus payment. Moreover, if the agent is sufficiently loss averse, it is shown that the first-order approach is not necessarily valid. If this is the case the principal may be unable to fine-tune incentives. Strategic ignorance of information by the principal, however, allows to overcome these problems and may even reduce the cost of implementation.Agency Model; Moral Hazard; Reference-Dependent Preferences; Loss Aversion