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.

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

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

Do Auctions select Efficient Firms?

This paper considers a government auctioning off multiple licenses to firms who compete in a market after the auction. Firms have different costs, and cost efficiency is private information at the auction stage and the market competition stage. If only one license is auctioned, standard results say that the most efficient firm wins the auction (license) as it will get the highest profit in the aftermarket, i.e., it has the highest valuation for the license. This paper argues that this result does not generalize to the case of multiple licenses and aftermarket competition. In particular, we determine conditions under which auctions may select inefficient firms and therefore lead to an inefficient allocation of resources. Strategic interactions in the aftermarket, in particular firms’ preferences to compete with the least cost-efficient firms rather than with the most efficient firms, are responsible for our result

Continuous Time Trading in Markets with Adverse Selection

We investigate the nature of the adverse selection problem in a market for a durable good where trading and entry of new buyers and sellers takes place in continuous time. In the continuous time model equilibria with properties that are qualitatively different from the static equilibria, emerge. Typically, in equilibria of the continuous time model sellers with higher quality wait in order to sell and wait more than sellers of lower quality do. Among other things, we show that for any distribution of quality there exist an infinite number of cyclical equilibria where all goods are traded within a finite time after entering the market. This holds true even if the good is not perfectly durable or when buyers are not risk-neutral