Nonlinear Pricing and Multimarket Duopolists

This paper studies competition in price-quality menus within the context of a horizontally differentiated duopoly, where each firm also operates in a local, monopolistic market. It is assumed that the consumer's unobservable valuation for quality is determined by the nature of his preferences over brand product characteristics. I show that if competition between the two firms is sufficiently fierce, the equilibrium contract features overprovision of quality for sufficiently low types. Thus, with respect to the monopoly setting, competition may introduce new types of distortions, namely upward distortions. This suggests that the relationship between 'toughness of competition' and welfare may not necessarily be monotonic.oligopoly, other forms of market imperfection

Trust, Introspection, and Market Participation: an Evolutionary Approach

We build a model where introspection matters - i.e., people rationally form expectations about others using the lens of their own attitudes. Since trustworthy individuals are more "optimistic" about people than opportunists, they are less afraid to engage in market-based exchanges, where they may be vulnerable to opportunistic behavior. Within this context, we use an indirect evolutionary approach to endogenize preferences for trustworthiness. In some cases, the material rewards from greater market participation may outweigh the material disadvantages from foregoing lucrative expropriation opportunities. This implies that trustworthiness may be evolutionary stable in the long-term. Although stricter enforcement (that limits the scope for opportunistic behavior) does in some cases favor preferences for trustworthy behavior (crowding in) we show that the opposite (crowding out) may also occur. Our findings are consistent with recent empirical evidence.Endogenous Preferences; Trust; Introspection; Institutions; Enforcement; Crowding Out

Why do parents socialize their children to behave pro-socially? An information-based theory

We present a model of intergenerational transmission of pro-social values in which parents have information about relevant characteristics of society that is not directly available to their children. Differently from existing models of cultural transmission of values (such as Bisin and Verdier, 2001, and Tabellini, 2008) we assume that parents are exclusively concerned with their children's material welfare. If parents coordinate their educational choices, a child would look at her system of values to predict the values of her contemporaries, with whom she may interact. A parent may thus choose to instil pro-social values into his child in order to signal to her that others can generally be trusted. This implies that parents may optimally decide to endow their children with values that stand in contrast with maximization of material welfare, even if their children's material welfare is all they care about.Intergenerational Transmission, Signaling, Values

The Role of the Agent's Outside Options in Principal-Agent Relationships

We consider a principal-agent model of adverse selection where, in order to trade with the principal, the agent must undertake a relationship-specific investment which affects his outside option to trade, i.e. the payoff that he can obtain by trading with an alternative principal. This creates a distinction between the agent’s ex ante (before investment) and ex post (after investment) outside options to trade. We investigate the consequences of this distinction, and show that whenever an agent's ex ante and ex post outside options differ, this equips the principal with an additional tool for screening among different agent types, by randomizing over the probability with which trade occurs once the agent has undertaken the investment. In turn, this may enhance the e¢ciency of the optimal second-best contract.adverse selection, randomization, type-dependent outside options.

The Role of Financial Intermediaries in Securities Issues: A Theoretical Analysis

We consider a model of securities issues where the quality of securities is private information to the issuer, and firms of higher quality are more reluctant to issue securities than low quality firms. We show that, when the issuer directly trades with investors, market breakdown may occur. This is caused by the issuer's attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which: i) underwrites the issue, ii) influences the offering price.Underwriting creates a wedge between the interests of the intermediary and those of the issuer, which allows trade with investors to be restored. A by-product of this conflict of interest is that trade is characterized by underpricing. Another implication is that the intermediary may act as a reliable screening device when she possesses private information about the firm's quality. In general, our analysis suggests that collusion between the intermediary and the issuer hinders trade, whereas collusion between the intermediary and investors may promote it.Signaling, Financial Intermediaries, Securities Issues, Underwriting.

Governance Reform in Legal Service Markets

This paper discusses proposed governance reforms of legal services markets. The model distinguishes between a status quo position supported by a system of professionally enforced collective reputation and forms of governance based more squarely on market mechanisms. We identify a number of forces which determine the success of reform. Focussing particularly on the rent recapture and relationship substitution effects, we highlight their impact on client welfare and quality of legal services in different types of market according to whether clients are transient or repeated users of the service.incomplete contracts, repeated interactions

The Costs and Benefits of "Strangers": Why Mixed Communities Are Better

Much of the literature on diversity assumes that individuals have an exogenous "taste for discrimination". In contrast with this approach, we build a model where preferences over the nature of one's community are derived indirectly, and arise because the composition of the community determines the behavior of its members. This allows us to gain a far deeper understanding of the forces that underpin the desirability of diversity or homogeneity within communities. Our main contribution is to show that there are always counteracting forces (heterogeneity involves both costs and benefits), and that, although people prefer to live in communities where their type is majoritarian, they always benefit from having some heterogeneity in the composition of their community.heterogeneity, social interactions, value of information, complementarities.

Trust, trustworthiness and the consensus effect: an evolutionary approach

People often form expectations about others using the lens of their own attitudes (the so-called consensus effect). We study the implications of this for trust and trustworthiness in an evolutionary model where social preferences are endogenous. Trustworthy individuals are more "optimistic" than opportunists and are accordingly less afraid to engage in market-based exchanges, where they may be vulnerable to cheating. Depending on the distribution of social preferences in the population, the material benefits from greater participation may compensate for the costs of being trustworthy. By providing an explicit account of how individuals form and revise their beliefs, we are able to show the existence of a polymorphic equilibrium where both trustworthiness and opportunism coexist in the population. We also analyze the effect of enforcement, distinguishing between its role as deterrence of future misbehavior and as retribution for past misbehavior. We show that enforcement aimed at deterring opportunistic behavior has ambiguous effects on social preferences. It may favor the spreading of trustworthiness (crowding in), but the opposite (crowding out) may also occur. By contrast, crowding out never occur when punishment is merely intended as retribution

An Economic Theory of the Glass Ceiling

The glass ceiling is one of the most controversial and emotive aspects of employment in organisations. This paper provides a model of the glass ceiling that exhibits the following features that are frequently thought to characterise the problem: (i) there is a lower number of female employees in higher positions, (ii) women have to work harder than men to obtain equivalent jobs, (iii) women are then paid less than men when promoted, and (iv) some organisations are more female friendly than others. These features emerge as an equilibrium phenomenon, when identical firms compete in "Bertrand-like" fashion. Furthermore, they also occur even when offering women the same contract as men in higher positions would be sufficient to ensure that women in those positions would always prefer permanent career over non-market alternatives.Glass Ceiling, Promotions, Career Options

An Economic Theory of Glass Ceiling

In the 'glass ceiling' debate there appear to be two strongly held and opposing interpretations of the evidence, one suggesting it is really the result of gender differences and the other that there is discrimination by gender. This paper provides an economic theory of the glass ceiling and one of the main insights of our analysis is that in some real sense these two interpretations are not in conflict with each other. The glass ceiling emerges as an equilibrium phenomenon when firms compete à la Bertrand even though employers know that offering women the same contract as men would be sufficient to erase all differences among promoted workers. The model also provides new insights into anti-discrimination policy measures. (Updated from working paper 07/183)glass ceilings, promotions, career options