Trust in China: A Cross-Regional Analysis

Using the cross-regional data, this paper shows that trust has a strong effect on uneven development of economy in China. As is discovered in many studies, it is found that trust affects the growth of economy, size distribution of enterprise, and FDI inflow and so on. We also find that cross-regional differences of trust in China are reflections of the regional diversities of education, marketization of economies, urbanization, population density and transportation facilities. Although not statistically significant, “too many officials” may damage social trust. The paper demonstrates that trust cannot simply be taken as a cultural heritage. The paper also argues that sustainability of further economic development of China much depends on how fast China can build trust-facilitating institution, and that the most fundamental institution for trust is the property right.Trust, Economic performance, Information Repeated game, Transaction

Essays on contract theory and organizational economics

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009."September 2009." Cataloged from PDF version of thesis.Includes bibliographical references.Chapter 1 develops a non-parametric methodology for identifying contract optimality in the presence of moral hazard. Following the first order approach, a standard method of computing optimal contracts, the paper first proves two theoretical properties of the solutions to the moral hazard problem. First, we show that the profit loss (relative to the optimal contract) for given effort level has a unique lower bound. The second property is an equivalence between the first order condition (Mirrlees-Holmstrom Condition) and the Cramer-Rao Lower Bound (CRLB). These two properties provide the foundations for (1) identifying optimality, and (2) performing statistical inference on the agent's primitives based on an observed sequence of pairs of outputs and payments. The paper shows that under some weak conditions, contract optimality is identified, as long as the output generating process is additive in effort and noise. Identification does not require the agent's effort to be observed by the principal or the econometrician, and requires no knowledge of (1) the details of the contract, (2) the agent's cost of effort, (3) the agent's monetary utility, or (4) the distribution of output. Based on the approach proposed in this paper, we test contract optimality for a piece-rate contract, and estimate bounds on the profit loss for cotton weavers in Zhejiang Province, China. Chapter 2 develops a new method to justify the validity of the first order approach (FOA). We first prove that checking the validity amounts to checking the existence of a fixed point of the agent's best response against a Mirrlees-Holmstrom (MH) class contract offered by the principal, given some specifications of complemetary conditions.(cont.) The main advantage of the current approach is the relaxation of the global concavity of agent utility. We show that under a set of mild conditions, the fixed point approach is applicable and the solution to the principal agent problem exists. In particular, if the log likelihood ratio is monotonically increasing in output but decreasing in effort, the best response correspondence against a MK contract has and only has one unique fixed point. Our approach unifies Jewitt's (1988) and Rogerson's (1985) proofs of validity of FOA, and provides a general method to judge validity of FOA. Based on the fixed-point approach, with some additional specifications, we restore Jewitt's (1988) results to situations where the distribution is not convex and the log likelihood ratio is not bounded from below (e.g., normal distribution), or there exists a limited liability constraint. Furthermore, we generalize our results to a situation where the agent's utility is non separable. In this fairly general environment, we prove a necessary and sufficient condition for the FOA to be valid, which provides an important method to identify the validity of FOA and compute the solution of the original problem. Finally, we provide a necessary and sufficient condition for a general non-linear bi-level optimization problem to be solvable based on FOA, without a convex constrained set. Chapter 3 constructs a concrete mechanism/auction to explore the consequence of imposing the ex post participation constraint.(cont.) The main findings are: (1) In private good cases (symmetric or asymmetric), we can obtain ex post first best, ex post budget balance, at least interim incentive compatibility and ex post individual rationality (we call it ex post social efficiency), whenever the VCG mechanism runs expected surplus. And the mechanism generating an ex post monotonic payoff is generically unique (up to an ex ante side-pay). In addition, compared with standard auctions, our mechanism generates a risk-free revenue to the seller and ex post invidually rational payoff to the bidders. (2) In a general preference case with externality, we show there exists an ex post socially efficient mechanism when the number of participants is sufficiently small (n = 2). And the choice of mechanism depends on whether the quantity is endogenous or not. (3) As an implication, we provide a general discussion on how divisibility, endowment distribution and preference affect the possibility of trade. For the negative result, we show a set of conditions for non-existence of an ex post socially efficient trade, such as either utility is linear or the lowest type agent's utility is independent of his endowment, which can be regarded as stronger version of no-trade theorem (Myerson-Satterthwaite, 1983). This proposition implies non-existence of an ex post socially efficient partner dissolving mechanism. For the positive side, we provide a sufficient condition for existence of ex post socially efficient trade mechanism and show an explicit example. JEL Code: D86 D81 C12 D82by Rongzhu Ke.Ph.D

A general solution method for moral hazard problems

Principal-agent models are pervasive in theoretical and applied economics, but their analysis has largely been limited to the "first-order approach" (FOA) where incentive compatibility is replaced by a first-order condition. This paper presents a new approach to solving a wide class of principal-agent problems that satisfy the monotone likelihood ratio property but may fail to meet the requirements of the FOA. Our approach solves the problem via tackling a max-min-max formulation over agent actions, alternate best responses by the agent, and contracts

Trust in China: A Cross-Regional Analysis

Using the cross-regional data, this paper shows that trust has a strong effect on uneven development of economy in China. As is discovered in many studies, it is found that trust affects the growth of economy, size distribution of enterprise, and FDI inflow and so on. We also find that cross-regional differences of trust in China are reflections of the regional diversities of education, marketization of economies, urbanization, population density and transportation facilities. Although not statistically significant, “too many officials” may damage social trust. The paper demonstrates that trust cannot simply be taken as a cultural heritage. The paper also argues that sustainability of further economic development of China much depends on how fast China can build trust-facilitating institution, and that the most fundamental institution for trust is the property right.http://deepblue.lib.umich.edu/bitstream/2027.42/39972/3/wp586.pd

A Fixed-point Method for Solving Principal-Agent Problems: Beyond the First-order Approach (Preliminary)

Abstract This paper generalizes Ke's (2010) …xed-point method and develops a uni…ed solution method for principal-agent problems with moral hazard under a general setting (i.e., multi-task and multi-signal). We show that the principal's problem with a complicated incentive compatibility constraint, which consists of in…nitely many inequalities, is equivalent to a Lagrangian dual problem with routine equality and inequality constraints. The discovered Lagrangian dual representation only includes the least necessary constraints for individual rationality and incentive compatibility. Thus, we can characterize the optimal contract and solve the principal-agent problem by a routine parametric programming. We provide a set of Kuhn-Tucker optimality conditions that can be applied to …nd a solution, regardless of the validity of the …rst-order approach. We also provide some examples and a comparative static analysis

Managing careers in organizations

Firms’ organizational structures impose constraints on their ability to use promotion-based incentives. We develop a framework for identifying these constraints and exploring their consequences. We show that firms manage workers’ careers by choosing personnel policies that resemble an internal labor market. Firms may adopt forced-turnover policies to keep lines of advancement open, and they may alter their organizational structures to relax these constraints. This gives rise to a trade-off between incentive provision at the worker level and productive efficiency at the firm level. Our framework generates novel testable implications that connect firm-level characteristics with workers’ careers

Principles of Microeconomics

This introductory course teaches the fundamentals of microeconomics. Topics include consumer theory, producer theory, the behavior of firms, market equilibrium, monopoly, and the role of the government in the economy. 14.01 is a Humanities, Arts, and Social Sciences (HASS) elective and is offered both terms. This course is a core subject in MIT's undergraduate Energy Studies Minor. This Institute-wide program complements the deep expertise obtained in any major with a broad understanding of the interlinked realms of science, technology, and social sciences as they relate to energy and associated environmental challenges