Collusion in Beauty Contests

During the recent sales of UMTS licenses in Europe some countries used auctions while others resorted to so-called Beauty Contests. There seems to be a wide consensus among economists that in these and other contexts like privatisation an auction is the better selling mechanism. However, why exactly an auction should be preferred is unclear. Here we present an argument why beauty contests or negotiations might be dominated by auctions, which is closely linked to the multi dimensionality on issues involved in this process. The important assumption we make is that bidding firms do not know the preferences of the government. As a consequence, during a beauty contest participants are uncertain about the final decision of the government. This uncertainty enables firms to collude.auctions, collusion, beauty contests.

On the role of patience in an insurance market with asymmetric information

We analyse a 2-period competitive insurance market which is characterized by the simultaneous presence of standard moral hazard and adverse selection with regard to consumer time preferences. It is shown that there exists an equilibrium in which patient consumers use high effort and buy a profit-making insurance contract with high coverage, whereas impatient consumers use low effort and buy a contract with low coverage or even remain uninsured. This finding may help to explain why positive profits and the opposite of adverse selection with regard to risk types can sometimes be observed empirically. JEL Classification: D82, G2

Contracts and Inequity Aversion

Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be ”too” complete. Along with these key insights we derive a couple of further results.contract theory, linear contracts, incentives, sufficient statistics result, inequity aversion, fairness

Strategic Interaction in the Market for Physician Services: The Treadmill Effect in a Fixed Budget System

We examine the strategic interaction in the market for physician services when the total budget for reimbursement is fixed. We show that this prospective payment system involves ƒ{ compared to a fee-for-service remuneration system ƒ{ a severe coordination problem, which potentially leads to the "treadmill effect". For the institutional setting of German primary physician service we provide evidence for decreasing reimbursement per treatment, which is consistent with theoretical predictions. When market entry is possible, a budget can be efficiency enhancing, if in addition a price floor is used.Health economics, supplier-induced demand, remuneration systems, coodination device

Contracts and Inequity Aversion

Inequity aversion is a special form of other regarding preferences and captures many features of reciprocal behavior, an apparently robust pattern in human nature. Using this concept we analyze the Moral Hazard problem and derive several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards linear sharing rules, giving a simple and plausible rationale for the prevalence of these schemes in the real world. Third, the Sufficient Statistics result no longer holds as optimal contracts may be ''too'' complete. Along with these key insights we derive a couple of further results.contract theory, linear contracts, incentives, sufficient statistics result, inequity aversion

Insurance in a Market for Credence Goods

We study the impact of insurance on the amount of fraud in a physician-patient relationship. In a market for credence goods, where prices are regulated by an authority, physicians act as experts. Due to their informational advantage, physicians have an incentive to cheat by inducing inappropriate treatment levels. It is shown that a higher coinsurance rate may lead to either less fraud in the market and a lower probability of patients searching for second opinions or more fraud and more searches. We also show that a higher coinsurance rate corresponds with a higher level of physicians specialising.insurance fraud, credence goods, supplier induced demand

Contract (re-)negotiation with private and common values

We analyze the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiating a chosen contract. We model this by allowing the principal to propose new contracts any number of times after observing the contract choice of the agent. We propose a characterization of renegotiation-proof states of this (re-)negotiation and show that those states are supported by a perfect Bayesian equilibrium of an infinite horizon game. The characterization of renegotiation-proof states provides a tool, which is both powerful and simple to use, for finding such states in specific environments. We proceed by applying the results to adverse selection environments with private and common values. We show that with private values and common values of the ’Spence’ type only, fully efficient and separating states can be renegotiation-proof. With common values of the "Rothschild-Stiglitz" type inefficient and (partial) pooling states may be renegotiation-proof

Internal decision-making rules and collusion

We study the impact of internal decision-making structures on the stability of collusive agreements. To this end, we use a three-firm spatial competition model where two firms belong to the same holding company. The holding company can decide to set prices itself or to delegate this decision to its local units. It is shown that when transportation costs are high, collusion is more stable under delegation. Furthermore, collusion with maximum prices is more profitable if price setting is delegated to the local units. Profitability is reversed for low discount factors

Sequential Information Disclosure in Auctions

We consider the design of an optimal auction in which the seller can determine the allocation and the disclosure rule of the mechanism. Thus, in contrast to the standard analysis of a optimal auctions, the seller can explicitly design the disclosure of the information received by each bidder as his private information. We show that the optimal disclosure rule is a sequential disclosure rule, implemented in an ascending price auction. In the optimal disclosure mechanism, each losing bidder learns his true valuation, but the winning bidder only learns that his valuation is sufficiently high to win the auction. We show that in the optimal auction, the posterior incentive and participation constraints of all the bidders are satisfied. In the special case in which the bidders have no private information initially, the seller can extract the entire surplus

The fall and rise of market power in Europe

This paper presents an analysis of the recent developments of average market power in Europe by using a broad firm-level database for EU member states. To indicate competitive pressure at the firm-level, markups are estimated following De Loecker (2011), and De Loecker and Warzynski (2012). The analysis reveals a sharp drop in markups during the crisis, followed by a post-crisis increase. The European average has not yet reached its pre-crisis level, which is in contrast to results for the US, where average markups have climbed to pre-crisis levels already in 2011. There is significant heterogeneity among European economies and the pre-crisis levels do have been exceeded in some countries