Theoretical Economics, Volume 15, Number 3 (July 2020) is now online

Theoretical Economics
Volume 15, Number 3 (July 2020)

Table of contents




Title: Production priorities in dynamic relationships

Pages: 861-889

Authors: Jean Guillaume Forand, Jan Zapal

Abstract: We characterise optimal contracts in a dynamic principal-agent model of joint production in which project opportunities are heterogenous, utility from these projects is non-transferable and the agent has the option to quit the relationship at any time. In order to demand the production of projects that benefit her but not the agent, the principal must commit to produce projects that benefit the agent in the future. Production at all stages of the relationship is ordered by projects' cost-effectiveness, which is their efficiency in transferring utility between the principal and the agent: cost-effective demands impose relatively low costs on the agent, and cost-effective compensation imposes relatively low costs on the principal.Over time, optimal contracts become more generous towards the agent by adding commitments to less cost-effective compensation. In turn, because this new compensation cannot be profitably exchanged against less cost-effective demands, the principal narrows the scope of her demands.

Keywords: Dynamic contracts, incentive provision, heterogenous projects

JEL classification: C73, D86, L24




Title: Short-term investments and indices of risk

Pages: 891-921

Authors: Yuval Heller, Amnon Schreiber

Abstract: Abstract We study various decision problems regarding short-term investments in risky assets whose returns evolve continuously in time. We show that in each problem, all risk-averse decision makers have the same (problem-dependent) ranking over short-term risky assets. Moreover, in each problem, the ranking is represented by the same risk index as in the case of CARA utility agents and normally distributed risky assets.

Keywords: Indices of riskiness, risk aversion, local risk, Wiener process

JEL classification: D81, G32




Title: Costly verification in collective decisions

Pages: 923-954

Authors: Albin Erlanson, Andreas Kleiner

Abstract: We study how a principal should optimally choose between implementing a new policy and maintaining the status quo when information relevant for the decision is privately held by agents. Agents are  strategic in revealing their information; the principal cannot use monetary transfers to elicit this information, but can verify an agent's claim at a cost. We characterize the mechanism that maximizes the expected utility of the principal. This mechanism can be implemented as a cardinal voting rule, in which agents can either cast a baseline vote, indicating only whether they are in favor of the new policy, or they make specific claims about their type. The principal gives more weight to specific claims and verifies a claim whenever it is decisive.

Keywords: Collective decision,costly verification

JEL classification: D82, D71




Title: Robust scoring rules

Pages: 955-987

Authors: Elias Tsakas

Abstract: Is it possible to guarantee that the mere exposure of a subject to a belief elicitation task will not affect the very same beliefs that we are trying to elicit? In this paper, we introduce mechanisms that make it simultaneously strictly dominant for the subject (a) not to acquire any information that could potentially lead to belief updating as a response to the incentives provided by the mechanism itself, and (b) to report his beliefs truthfully. Such mechanisms are called robust scoring rules. We prove that robust scoring rules always exist under mild assumptions on the subject's costs for acquiring information. Moreover, every scoring rule can become approximately robust, in the sense that if we scale down the incentives sufficiently, we will approximate with arbitrary precision the beliefs that the subject would have held if he had not been confronted with the belief-elicitation task.

Keywords: Non-invasive belief elicitation, prior beliefs, rational inattention, posterior-separability, Shannon entropy, population beliefs

JEL classification: C91, D81, D82, D83, D87




Title: Twisting the truth: foundations of wishful thinking

Pages: 989-1022

Authors: Matthew Kovach

Abstract: Considerable evidence shows that people have optimistic beliefs about future outcomes.  I present an axiomatic model of wishful thinking (WT), in which an endowed alternative, or status quo, influences the agent's beliefs over states and thus induces such optimism.  I introduce a behavioral axiom formalizing WT and derive a representation in which the agent overweights states in which the endowment provides a higher payoff. WT is a novel channel through which an endowment may influence choice behavior and provides a coherent explanation for a variety of observed behavior, including choice reversals among non-status quo alternatives when the status quo changes.  WT leads to inefficient risk sharing in an exchange economy and has unique implications for the gap between willingness to accept and willingness to pay for endowed goods.

Keywords: Wishful thinking, status quo bias, reference dependence, belief distortions, optimism

JEL classification: D01, D11, D80, D81, D83




Title: Uncertainty-driven cooperation

Pages: 1023-1058

Authors: Doruk Cetemen, Ilwoo Hwang, Ayça Kaya

Abstract: We consider dynamic team production in the presence of uncertainty. Team members receive interim feedback that depends on both their current effort level and the project's uncertain prospects. In this environment, each member can encourage the others by making them more optimistic about the project's prospects. We study the extent to which this incentive counters the usual free-riding incentive. Restricting the agents' access to feedback can increase their equilibrium effort levels by mitigating the ratchet effect.  In this case, using joint performance measures can be beneficial even when individual measures are available.

Keywords: Team production, free-riding, uncertainty, learning

JEL classification: C72, C73, D23, D83




Title: Preferences for partial information and ambiguity

Pages: 1059-1094

Authors: Jian Li

Abstract: We commonly think of information as an instrument for better decisions, yet  evidence suggests that people often decline free information in non-strategic scenarios.  This paper provides a theory for how a dynamically-consistent decision maker can be averse to partial information as a consequence of ambiguity aversion.  It introduces a class of recursive preferences on an extended choice domain, which allows the preferences to depend on how information is dynamically revealed and  to depart from the standard expected-utility theory.   A new notion of  ambiguity aversion, called Event Complementarity,  exactly characterizes aversion to partial information.  Familiar static ambiguity-averse preferences are embedded into the general recursive model, in which conditions for partial information aversion are identified.  The findings suggest that Event Complementarity overlaps with yet still differs from the conventional notion of ambiguity aversion.

Keywords: Information avoidance, ambiguity aversion,  recursive preferences


JEL classification: D81, D83, D90




Title: School choice with asymmetric information: priority design and the curse of acceptance

Pages: 1095-1133

Authors: Andrew Kloosterman, Peter Troyan

Abstract: We generalize standard school choice models to allow for interdependent preferences and differentially-informed students. We show that in general, the commonly-used deferred acceptance mechanism is no longer strategy-proof, the outcome is not stable, and may make less informed students worse off. We attribute these results to curse of acceptance. However, we also show that if priorities are designed appropriately, positive results are recovered: equilibrium strategies are simple, the outcome is stable, and less informed students are protected from the curse of acceptance. Our results have implications for the current debate over priority design in school choice.

Keywords: Matching, stability, asymmetric information

JEL classification: C78, D47




Title: Optimal incentive contract with endogenous monitoring technology

Pages: 1135-1173

Authors: Anqi Li, Ming Yang

Abstract: Recent technology advances have enabled firms to flexibly process and analyze sophisticated employee performance data at a reduced and yet significant cost. We develop a theory of optimal incentive contracting where the monitoring technology that governs the above procedure is part of the designer's strategic planning. In otherwise standard principal-agent models with moral hazard, we allow the principal to partition agents' performance data into any finite categories and to pay for the amount of information the output signal carries. Through analysis of the trade-off between giving incentives to agents and saving the monitoring cost, we obtain characterizations of optimal monitoring technologies such as information aggregation, strict MLRP, likelihood ratio-convex performance classification, group evaluation in response to rising  monitoring costs, and assessing multiple task performances according to agents' endogenous tendencies to shirk. We examine the implications of these results for workforce management and firms' internal organizations.

Keywords: Incentive contract, endogenous monitoring technology

JEL classification: D86, M15, M5




Title: Common learning and cooperation in repeated games

Pages: 1175-1219

Authors: Takuo Sugaya, Yuichi Yamamoto


Abstract: We study repeated games in which players learn the unknown state of the world by observing a sequence of noisy private signals. We find that for generic signal distributions, the folk theorem obtains using ex-post equilibria. In our equilibria, players commonly learn the state, that is, the state becomes asymptotic common knowledge.

Keywords: Repeated game, private monitoring, incomplete information, ex-post equilibrium, individual learning

JEL classification: C72, C73




Title: Optimal dynamic matching

Pages: 1221-1278

Authors: Mariagiovanna Baccara, SangMok Lee, Leeat Yariv

Abstract: We study a dynamic matching environment where individuals arrive sequentially. There is a tradeoff between waiting for a thicker market, allowing for higher-quality matches, and minimizing agents' waiting costs. The optimal mechanism cumulates a stock of incongruent pairs up to a threshold and matches all others in an assortative fashion instantaneously. In discretionary settings, a similar protocol ensues in equilibrium, but expected queues are inefficiently long. We quantify the welfare gain from centralization, which can be substantial, even for low waiting costs. We also evaluate welfare improvements generated by alternative priority protocols.

Keywords: Dynamic matching, mechanism design, organ donation, market design

JEL classification: D470





Publication Date: 
Friday, July 3, 2020