The logic of the linkage principle of Milgrom and Weber (1982) extends to price discrimination. A non-linear pricing monopolist who sells to a single buyer always prefers to commit to publicly reveal information affiliated to the valuation of the buyer. This is also valid when the value of the buyer affects the opportunity cost of the seller.
Evidence such as the Ellsberg Paradox shows that decision-makers do not assign probabilities to all events. It is intuitive that they may differ not only in the probabilities assigned to given events but also in the identity of the events to which they assign probabilities. This paper describes a theory of probability that is fully subjective in the sense that both the domain and the values of the probability measure are derived from preference. The key is a formal definition of `subjectively unambiguous event.'
We experimentally investigate the sensitivity of bidders demanding multiple units of a homogeneous commodity to the demand reduction incentives inherent in uniform price auctions. There is substantial demand reduction in both sealed bid and ascending price clock auctions with feedback regarding rivals’ drop-out prices. Although both auctions have the same normal form representation, bidding is much closer to equilibrium in the ascending price auctions. We explore the behavioral process underlying these differences along with dynamic Vickrey auctions designed to eliminate the inefficiencies resulting from demand reduction in the uniform price auctions. Key words: multi-unit demand auctions, uniform price auction, dynamic Vickrey auction, demand reduction, experiment.
This paper presents a full characterization of the equilibrium value set of a Ramsey tax model. More generally, it develops a dynamic programming method for a class of policy games between the government and a continuum of households. By selectively incorporating Euler conditions into a strategic dynamic programming framework, we wed two technologies that are usually considered competing alternatives, resulting in a substantial simplification of the problem.
The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze long-term debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long-term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short-term debt. The maturity structure of outstanding debt acts as a ‘‘budget constraint’’ determining which periods’ price levels the government can affect by debt variation alone. In addition, debt policythe expected pattern of future state-contingent debt sales, repurchases and redemptionsmatters crucially for the effects of a debt operation. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which long-term debt helps to stabilize inflation. I also find that the optimal policy produces time series that are similar to U.S. surplus and debt time series. To understand the data, I must assume that debt policy offsets the inflationary impact of cyclical surplus shocks, rather than causing price level disturbances by policy-induced shocks. Shifting the objective from price level variance to inflation variance, the optimal policy produces much less volatile inflation at the cost of a unit root in the price level; this is consistent with the stabilization of U.S. inflation after the gold standard was abandoned.
We identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs.First, for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached.Secondly, even when there are equilibria in which an agreement is reached, we find that the model always has an eqilibrium in which agreement is never reached, as well as equilibria in which agreement is delayed for an arbitrary length of time.Finally, the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for (some of) the opponent's deviations.We argue that this implies that, when the parties are given the opportunity to renegotiate out of these inefficiencies, the only equilibrium outcome which survives is the one in which agreement is never reached, regardless of the value of the transaction costs.
We prove a Folk Theorem for asynchronously repeated games in which the set of players who may not be able to change their actions simultaneously. We impose a condition, the finite periods of inaction (FPI) condition, which requires that the number of periods in which every player has at least one opportunity to move is bounded. Given the FPI condition together with the standard nonequivalent utilities (NEU) condition, we show that every feasible and strictly individually rational payoff vector can be supported as a subgame perfect equilibrium outcome of an asynchronously repeated game.
We study the implications of imperfect information for term structures of credit spreads on corporate bonds. We suppose that bond investors cannot observe the issuer’s assets directly, and receive instead only periodic and imperfect accounting reports. For a setting in which the assets of the firm are a geometric Brownian motion until informed equityholders optimally liquidate, we derive the conditional distribution of the assets, given accounting data and survivorship. Contrary to the perfect-information case, there exists a default-arrival intensity process. That intensity is calculated in terms of the conditional distribution of assets. Credit yield spreads are characterized in terms of accounting information. Generalizations are provided.
When individual statistics are aggregated through a strictly monotone function to an aggregate statistic, common knowledge of the value of the aggregate statistic does not imply, in general, that the individual statistics are either equal or constant. This paper discusses circumstances where constancy and equality both hold. The first case arises when partitions are independently drawn, and each individual's information is determined by their own partition and some public signal. In this case common knowledge of the value of the aggregator function implies (with probability one) that the individual statistics are constant, so that in the case where the individual statistics have the same expected value, they must all be equal. The second circumstance is where private statistics are related: affiliation of individual statistics and a lattice condition imply that the individual statistics are equal when the value of the aggregate statistic is common knowledge.