Knowledge that Transforms

The author considers the problem of implementation when a principal hires many agents and is not able to monitor their actions. He distinguishes two cases: (1) when actions are mutually observable among agents; and (2) when actions are not observable. In (1), there is a mechanism in which th e first-best arises as a unique perfect equilibrium. In (2), there are typically multiple equilibria if the principal merely offers a set of optimal sharing rules. However, the author proves that the principal can use these optimal sharing rules as a starting point for a multistage mechanism that has a unique second-best perfect Bayesian e quilibrium.

In a repeated insurance model with differential learning and moral hazard, it is shown that the full-information competitive outcome is implementable when insurers employ a “good-faith” strategy.

The effects of advance production in posted offer and double auction markets are investigated. Previously observed differences between these institutions in mean contract prices and in the distribution of producers' and consumers' surpluses under the production to demand condition disappear when sellers make output decisions and incur production costs prior to the start of trading. The double auction institution remains more efficient under advance production. The results suggest that the differential effects of alternative trading institutions on market outcomes may be partially offset by the production conditions characterizing a market.

This paper reports experimental tests of three search equilibrium models. These models which differ only in the search strategies available to the buyers have qualitatively different predictions, that is, equilibria: price distributions, single price equilibria at the competitive price and at the monopoly price and two price equilibria. The experimental outcomes generally were consistent with the models' predictions. This suggests that debate on the utility of this class of models should shift to the realism of the models' assumptions rather than focus on their ability to characterize market outcomes. Also, since the basic models have been validated, the project of analysing experimentally the results of relaxing some of their assumptions seems worthwhile.

Empirical studies of job search strongly suggest that the reservation wages of unemployed job seeking individuals decline with the length of their respective unemployment spells. Previous explanations of this behaviour based on age-effects, liquidity constraints, and limited unemployment benefits are not adequate. We provide a new answer to this question, based on the reasonable assumption that workers do not have precise knowledge of the distribution of the prevailing wages. An individual model of job search and learning is formulated. It is shown that the declining trend of reservation wages naturally arises due to the selection process, when search costs are not too small. The example of a normal wage offer distribution is analysed and the implications are discussed.

A risk averse buyer and seller contract over the trade of an item. At the time of trading they each privately know their value s and cost r respectively, but these are not known when the contract is drawn up. The contract specifies a Bayesian revelation mechanism for implementing a trading rule and prices, as functions of their types s and r. An optimal (second-best) contract balances the goal of efficient trading and risk sharing against the need to provide the agents with incentives to reveal their type truthfully. An optimal contract is characterized. First, it is efficient to have some insurance from a third party: even though neither the buyer nor the seller will be fully insured, there is no need for the buyer to be exposed to the seller's risk or vice versa. Second, there will be less than first-best trade (underproduction). Third, once they have privately learnt their type—but before they have played the mechanism—both the buyer and the seller prefer that the final outcome will be trade rather than no trade. Fourth, although the trade prices increase with s and r, the rest of the contract need not be monotonic. This lack of monotonicity means that the standard methodology fails: it is not enough simply to appeal to local incentive compatibility, since global incentive constraints may bind. A nonstandard technique has to be used to find the nature of the second-best distortions.

This paper develops a simple stochastic job matching model and uses it to derive a set of testable restrictions on the conditional probability with which a worker will be observed to change jobs over time. The restrictions describe the manner in which this probability varies with observable characteristics-i-current wage, labour market experience, tenure on current job, and past mobility. Econometric methods are also discussed, and some illustrative calculations provided. 1.

This paper studies a bargaining model of equilibrium price distributions. Consumers choose a seller at random and face search costs to switching to another store. In the market equilibrium, the prices at all stores are determined simultaneously as the perfect equilibrium of a bargaining game. In this game, the buyer has the outside option to search for another seller. Differences between the sellers' types create price dispersions; typically the number of active sellers increases with higher search costs. The market equilibrium converges to the competitive equilibrium under perfect information when search costs become small.

The Rawlsian maximin criterion is combined with nonpaternalistic altruistic preferences in a nonrenewable resource technology. The maximin program is shown to be time-inconsistent for a subset of initial conditions. A solution to this intergenerational conflict is found, under a given assumption, as a generically unique subgame-perfect equilibrium.

This paper analyses the very long run, or "stationary state, " impact of an unfunded social security system. We use an overlapping generations model framework. A key feature is that while parents care about their children and can leave non-negative bequests to them, children also care about their parents and can make non-negative "gifts" to them. We show that the possibility of negative "net bequests" may make social security less harmful to private wealth accumulation than would otherwise be the case. A subsidiary finding is that risk-loving behaviour may emerge for some households due to the nature of intergenerational transfers within family lines.