The B.E. Journal of Theoretical Economics

Published by De Gruyter

Volume 20 Issue 2 -

June 2020

Issue of The B.E. Journal of Theoretical Economics

Contents
Journal Overview

Research Articles

February 1, 2020

The Effects of Entry when Monopolistic Competition and Oligopoly Coexist

Kenji Fujiwara

Article number: 20170161

Abstract

This paper proposes a model of a continuum of industries in which some industries are monopolistically competitive, the others are oligopolistic, and they interact in a labor market. We use this model to examine the effects of entry of oligopolistic firms. We show that this raises the equilibrium wage and induces exit of monopolistically competitive firms. Then, we find that the profits of each oligopolistic firm and the whole oligopolistic industry decrease. Finally, we establish that if the elasticity of substitution is the same in all industries, welfare improves as a result of an increase in the oligopolistic firms.

February 1, 2020

Managerial Delegation of Competing Vertical Chains with Vertical Externality

Kangsik Choi, Ki-Dong Lee, Seonyoung Lim

Article number: 20190029

Abstract

We examine that the bilateral supplier affects the incentive contracts that owners of retailers offer their managers, assuming that the manufacturer sets the input price after observing the terms of the incentive contracts offered to management in the downstream market. Thus, we compare the two models: (1) decentralized bargaining between manufacturers and retailers including two-part tariff contract (2) linear input pricing without bargaining. Contrast to previous studies, we find that in equilibrium, the owners of retailers offer delegation contracts to managers for output restriction regardless of competition modes when offering linear input pricing, which implies that owners do not face a prisoners’ dilemma situation and Pareto superior profit is obtained for retailer. Thus, managerial delegation of retailer is not socially desirable due to the output restriction. Furthermore, decentralized bargaining allows to equalize all the equilibrium outcomes in the different delegation structure under both Bertrand and Cournot competition and leads no delegation for the endogenous delegation problem.

February 26, 2020

Fiat Money as a Public Signal, Medium of Exchange, and Punishment

Pedro Gomis-Porqueras, Ching-Jen Sun

Article number: 20190098

Abstract

This paper studies different welfare-enhancing roles that fiat money can have. To do so, we consider an indivisible monetary framework where agents are randomly and bilaterally matched, while the government has weak enforcement powers. Within this environment, we analyze state contingent monetary policies and characterize the resulting equilibria under different government record-keeping technologies. We show that a threat of injecting fiat money, conditional on private actions, can improve allocations and achieve efficiency. This type of state contingent policy is effective even when the government cannot observe any private trades and agents can only communicate with the government through cheap talk . In all these equilibria fiat money and self-enforcing credit are complements in the off equilibrium. Finally, this type of equilibria can also emerge even when the injection of fiat money is not a public signal.

February 4, 2020

Education Spending, Fertility Shocks and Generational Consumption Risk

Patrick M. Emerson, Shawn D. Knabb

Article number: 20180134

Abstract

This paper develops a model with overlapping generations to show that human capital formation can potentially attenuate factor price movements in response to fertility shocks if education spending per child is inversely related to the size of the generation subject to the fertility shock. The degree of attenuation depends on the effectiveness of education spending in producing human capital. We also find this attenuation effect concentrates generational consumption risk around the generation subject to the fertility shock. The combination of these two results suggest that there is an inverse relationship between the degree of factor price movements and lifetime consumption profiles in response to fertility shocks. Relatively larger generations will experience larger drops in lifetime consumption and relatively smaller generations will experience larger increases in lifetime consumption the less factor prices move in response to generational size. Thus, factor price smoothing does not necessarily translate into welfare smoothing across all generations.

February 19, 2020

Should the Talk be Cheap in Contribution Games?

Jen-Wen Chang

Article number: 20190082

Abstract

This paper studies the equilibria of contribution games with commitment and with cheap talk under incomplete information. When agents contribute to a club good, we find that with commitment, high types contribute early to induce low types to contribute in later rounds. With cheap talk, low types signal to contribute early but may drop out later if they find the total contributions are low. When there are sufficiently many rounds, we construct a cheap talk equilibrium that implements the ex-post efficient and ex-post individually rational allocation. In contrast, every equilibrium of the commitment game is inefficient. When the good is a public good, the cheap-talk game admits no informative equilibria. In this case, the equilibria of the commitment game may be more efficient.

February 19, 2020

College Assignment Problems Under Constrained Choice, Private Preferences, and Risk Aversion

Allan Hernandez-Chanto

Article number: 20190002

Abstract

Many countries use a centralized admission system for admitting students to universities. Typically, each student reports a ranking of his preferred colleges to a planner, and the planner allocates students to colleges according to the rules of a predefined mechanism. A recurrent feature in these admission systems is that students are constrained in the number of colleges that they can rank. In addition, students normally have private preferences over colleges and are risk-averse. Hence, they face a strategic decision under uncertainty to determine their optimal reports to the planner. We characterize students’ equilibrium behavior when the planner uses a Serial Dictatorship (SD) mechanism by solving an endogenous decision problem. We show that if students are sufficiently risk-averse, their optimal strategy is to truthfully report the “portfolio of colleges” with the highest probabilities of being available. We then analyze the welfare implications of constraining student choice by stressing the differences between the so-called consideration and conditional-allocation effects.

March 13, 2020

Competition with Nonexclusive Contracts: Tackling the Hold-Up Problem

Guillem Roig

Article number: 20180190

Abstract

In an environment in which a buyer and a seller make ex-ante investments, competition among sellers can solve the hold-up problem without the design of ex-ante contracts but, in the case of low levels of competition, this may lead to inefficient investments. This paper shows that a seller invests efficiently when each seller offers latent contracts designed to exclude any other seller from trade (i. e. most intense competition). Because competition among sellers allows the buyer to appropriate part of the gains from his investment, the hold-up problem vanishes for most of the buyer’s investment costs. However, the seller appropriates more than his marginal contribution to the gains from trade, and over-invests, when a group of sellers does not offer latent contracts (under less intense competition). Therefore, efficient investments can only be implemented when competition is at its most intense.

March 14, 2020

Endogenous Authority and Enforcement in Public Goods Games

Wooyoung Lim, Jipeng Zhang

Article number: 20190057

Abstract

This paper investigates theoretically and experimentally the social benefits and cost to have an endogenous punishment-enforcing authority in public goods game. An authority is chosen among members of a society via an imperfectly discriminating contest prior to a public goods game. Once chosen the authority has a large degree of discretion to inflict punishment. Our theoretical result shows that an efficiency gain from having the endogenous authority always comes with a social cost from competing for being the authority. The larger the society is, however, the bigger the efficiency gain and the smaller the rent dissipation. The completely efficient outcome can be approximated as the size of society tends to infinity. The experimental results confirm that the presence of endogenous authority for a given group size increases the public goods contributions and the efficiency gain is significantly bigger in a larger group.

March 6, 2020

Disequilibrium Trade in a Large Market for an Indivisible Good

Luis C. Corchón, José Rueda-Llano

Article number: 20180194

Abstract

Disequilibrium trade can occur in a market lacking both recontracting and a computational system that maps utilities into prices. This paper studies disequilibrium trade in a large market for an indivisible good. We focus on the possible speed of adjustment when arbitrage among periods is feasible and the surplus loss. We find that incentive compatible sequential trade through a disequilibrium path is only compatible with sluggish price adjustments and sufficiently impatient agents. Thus, price adjustment does not depend on excess demand alone but on arbitrage opportunities and the willingness of agents to engage on them. We find that the upper bound on the speed of price adjustment involves a lower bound for the social surplus loss, whatever the kind of rationing. The reason is that even when the market price converges to the surplus maximizing value, as it happens when rationing is efficient, some pieces of surplus are not attainable at the current period due to arbitrage. Moreover, faster price adjustments do not imply less surplus loss, because the effect of price changes on transactions via arbitrage. Finally, under weaker-than-efficient rationing there is a one period incentive compatible trading procedure in which most of the surplus is destroyed. The procedure has the property that almost every agent in the market trades.

February 1, 2020

Pretrial Beliefs and Verdict Accuracy: Costly Juror Effort and Free Riding

Brishti Guha

Article number: 20180020

Abstract

If jurors care about reaching the correct verdict, but also experience costs to paying attention during the trial, even a small effort cost generates interesting interactions between pretrial beliefs and verdict accuracy. I demonstrate the existence of a strong free riding effect; jurors respond to a more informative prior by reducing their probabilities of paying attention, to the extent that over a non-empty range, a more informative prior will be associated with poorer verdicts. Pretrial beliefs can depend on several factors: I consider two – the extent of discovery during the pre-plea bargaining process, and the efficiency of the police. My results imply that more liberal discovery rules, which result in a less noisy plea bargaining process, will actually be complemented by greater juror effort over a range, resulting in more accurate verdicts. In contrast, greater police efficiency will, over a range, elicit a sufficient drop in juror effort such that verdicts are less accurate. Thus, improving discovery has added benefits over a range, while the benefits of exogenous improvements in policing may be dampened. I briefly extend the model to cases where attentive jurors receive an imperfect public signal instead of a perfect one, and to cases where jurors’ utilities from convicting a guilty defendant differ from their utilities from acquitting an innocent one.

February 1, 2020

Product R&D Coopetition and Firm Performance

Michał Ramsza, Adam Karbowski

Article number: 20180141

Abstract

We investigate firms’ behavior in demand-enhancing product R&D. We consider and compare a cooperative and non-cooperative R&D investment setting by firms. In a non-cooperative scenario (R&D competition), firms decide on their R&D investments and outputs unilaterally. In a cooperative scenario (R&D coopetition), firms engage in a bargaining process to reach a binding R&D agreement. Firms through bargaining can reach an R&D agreement which specifies their R&D investment levels. The investment levels under R&D coopetition are higher compared with the investment levels under R&D competition. Firms’ profits are also higher under R&D coopetition compared with R&D competition. We conclude that R&D coopetition can alleviate the individual R&D investment disincentive and work as a strategic instrument that enhances product innovation and firms’ profits.

March 11, 2020

A Model of Inequality Aversion and Private Provision of Public Goods

Hide-Fumi Yokoo

Article number: 20190066

Abstract

I develop a model of inequality aversion and public goods that allows the marginal rate of substitution to be variable. As a theoretical foundation, utility function of the standard public goods model is nested in the Fehr-Schmidt model. An individual’s contribution function for a public good is derived by solving the problem of kinky preference and examining both interior and corner solutions. Results show that the derived contribution function is not monotonic with respect to the other individual’s provision. Thus, the model can be used to explain empirical evidence for the effect of social comparison on public-good provision.

February 29, 2020

Managerial Accountability Under Yardstick Competition

Michele G. Giuranno, Marcella Scrimitore, Giorgos Stamatopoulos

Article number: 20190037

Abstract

Two well-known mechanisms for enhancing managers’ accountability are yardstick competition and internal monitoring. Yardstick competition puts managers in direct competition when firms make decisions for re-appointment. Monitoring is used by firms to detect managers’ rent-seeking activities. While common wisdom suggests that the joint use of the two means would reinforce each other in promoting managers good practices, we find that their interplay distorts managers’ behavior who may end up acting in a less accountable way. Furthermore, differences in monitoring across firms bias that distortion, yielding even more counterintuitive results.

February 19, 2020

On the Equilibrium Uniqueness in Cournot Competition with Demand Uncertainty

Stefanos Leonardos, Costis Melolidakis

Article number: 20190131

Abstract

We revisit the linear Cournot model with uncertain demand that is studied in Lagerlöf (2006. “Equilibrium Uniqueness in a Cournot Model with Demand Uncertainty.” The B.E. Journal of Theoretical Economics 6, no. 1. (Topics), Article 19: 1–6.) and provide sufficient conditions for equilibrium uniqueness that complement the existing results. We show that if the distribution of the demand intercept has the decreasing mean residual demand (DMRD) or the increasing generalized failure rate (IGFR) property, then uniqueness of equilibrium is guaranteed. The DMRD condition implies log-concavity of the expected profits per unit of output without additional assumptions on the existence or the shape of the density of the demand intercept and, hence, answers in the affirmative the conjecture of Lagerlöf (2006. “Equilibrium Uniqueness in a Cournot Model with Demand Uncertainty.” The B.E. Journal of Theoretical Economics 6, no. 1. (Topics), Article 19: 1–6.) that such conditions may not be necessary.

About this journal

Objective
The B.E. Journal of Theoretical Economics (BEJTE) welcomes submissions in all areas of economic theory, both applied and pure theory, as well as submissions on economic experiments that feature substantial theory components. The journal especially welcomes novel approaches and interdisciplinary work on economic theory. The editors of the BEJTE understand that novel and interdisciplinary approaches may be difficult to evaluate, that their relationship to standard approaches may not be entirely clear yet, and that not all potential applications of such novel and interdisciplinary have been fully developed yet. Pure theory papers to be published in the BEJTE include, but are by no means limited to, those in behavioral economics, decision theory, game theory, general equilibrium theory, information economics, mechanism design, matching theory, networks, and entirely new fields yet to be created. Applications could encompass, but are not restricted to, contract theory, financial economics, industrial organization, internet economics, labor economics, law and economics, personnel economics, public finance, and novel applications yet to be developed.

Topics

behavioral economics
decision theory
game theory
general equilibrium theory
information economics
mechanism design
contract theory
matching theory
social networks

Article formats
BEJTE recently switched from the previous four-tier system (Frontiers, Advances, Contributions, and Topics) to a two-tier system. Besides "Research Articles" we publish now also "Notes", which typically are more concise manuscripts.

> Information on submission process