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MORAL HAZARD IN REMOTE TEAMS
Abstract
We re‐examine the ability of teams to credibly self‐impose group punishments and prevent free‐riding when individual inputs are unobservable. We formulate self‐imposed group punishments as performance under‐reporting by the team. While under‐reporting is not credible in a static game, we show that simple strategies can sustain under‐reporting in a repeated game, and that the threat of under‐reporting improves welfare only if team members' preferences between shirking and team output consumption are non‐separable. Our results suggest that self‐assessments can replace increased managerial monitoring in remote work environments. This article is protected by copyright. All rights reserved
Teams are increasingly popular decision-making and work units in firms. This paper uses a novel real-effort experiment to show that (a) some teams in the workplace reduce their members' private benefits to achieve a group optimum in a social dilemma and (b) such endogenous choices by themselves enhance their work productivity (per-work-time production)-a phenomenon called the "dividend of democracy." In the experiment, worker subjects are randomly assigned to a team of three, and they then jointly solve a collaborative real-effort task under a revenue-sharing rule in their group with two other teams, while each individual worker can privately and independently shirk by playing a Tetris game. Strikingly, teams exhibit significantly higher productivity (per-work-time production) when they can decide whether to reduce the return from shirking by voting than when the policy implementation is randomly decided from above, irrespective of the policy implementation outcome. This means that democratic culture directly affects behavior. On the other hand, the workers under democracy also increase their shirking, presumably due to enhanced fatigue owing to the stronger productivity. Despite this, democracy does not decrease overall production thanks to the enhanced work productivity.
bcec This paper was written by researchers affiliated with the Bankwest Curtin Economics Centre ('the Centre'). While every effort has been made to ensure the accuracy of this document, the uncertain nature of economic data, forecasting and analysis means that the Centre, Curtin University and/or Bankwest are unable to make any warranties in relation to the information contained herein. Any person who relies on the information contained in this document does so at their own risk. The Centre, Curtin University, Bankwest, and/or their employees and agents disclaim liability for any loss or damage, which may arise as a consequence of any person relying on the information contained in this document. Except where liability under any statute cannot be excluded, the Centre, Curtin University, Bankwest and/or their advisors, employees and officers do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage suffered by the reader or by any other person. The views in this publication are those of the authors and do not represent the views of Curtin University and/or Bankwest or any of their affiliates. This publication is provided as general information only and does not consider anyone's specific objectives, situation or needs. Neither the authors nor the Centre accept any duty of care or liability to anyone regarding this publication or any loss suffered in connection with the use of this publication or any of its content.
Instructors often incorporate self- and peer evaluations when they use teamwork in their classes, which is common in management education. However, the process is often time consuming and frequently does not match well with guidance provided by the literature. We describe the development of a web-based instrument that efficiently collects and analyzes self- and peer-evaluation data. The instrument uses a behaviorally anchored rating scale to measure team-member contributions in five areas based on the team effectiveness literature. Three studies provide evidence for the validity of the new instrument. Implications for management education and areas for future research are discussed.
This article summarizes the Hawthorne studies related to work groups and their legacy and traces applications of work groups and related empirical research through the 1990s. A selective review of empirical studies of work group effectiveness conducted in work settings and published in the last 20 years addresses 4 questions: (a) What identifying features have field researchers used in operationally defining work groups? (b) What research strategies have been used, and to address what kinds of questions? (c) What criteria of work group effectiveness has the field research measured, using what sources of data? (d) What variables have researchers sought to link with measures of work group effectiveness? On the basis of answers to these questions, an agenda for future research about work groups and work teams is suggested.
A field study involving 190 employees in 38 work groups representing five diverse organizations provided evidence that social networks, as defined in terms of both positive and negative relations, are related to both individual and group performance. As hypothesized, individual job performance was positively related to centrality in advice networks and negatively related to centrality in hindrance networks composed of relationships tending to thwart task behaviors. Hindrance network density was significantly and negatively related to group performance.
We formulate and analyze a model of team structure and monitoring within a LEN agency framework. We incorporate three key instruments in the internal design of an organization involving team production: team size, monitoring activities, and incentive contracts. We show that the complex trade-offs among these instruments lead to surprisingly simple implications. One such result is that the equilibrium level of pay-for-performance for workers is attenuated, and is at times invariant to most environmental variables of interest. As such, our model helps explain the empirical puzzle of the lack of a tradeoff for risk/incentives shown in standard agency models. Our work also demonstrates the presence of complementarities between team size and monitoring, and between worker talent and managerial monitoring ability. Finally, we derive predictions about the impact of environmental variables on the choice of optimal team size, incentives and employee quality, even in the presence of an external marketplace for talent.
Abstract Consider a group of individuals in a strategic environment with moral haz- ard and adverse selection, and suppose that providing incentives for a given outcome requires a monitor to detect deviations. What about the monitor’s deviations? This paper proposes a contractual arrangement that makes the monitor responsible for the monitoring technology (but not the entire,rm), and asserts that his deviations are eectively,irrelevant. Hence, nobody needs to monitor the monitor. The contract successfully provides incentives even when the monitor’s observations are not only private, but costly, too. We also characterize exactly when such a contract can provide monitors with the right incentives to perform. In doing so, virtual enforcement is characterized. JEL Classication : D21, D23, D82.
In this paper, we study infinitely repeated games with imperfect public monitoring and the possibility of monetary transfers. We develop an effcient algorithm to compute the set of pure strategy public perfect equilibrium payoffs for each discount factor. We also show how all equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick-and-carrot punishments.
Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.
This paper shows in two ways that the degree to which free-riding diminishes the performance of deterministic partnerships
may be less than has been generally thought. First, a necessary and sufficient condition is provided for a partnership to
sustain full efficiency. It implies that many non-trivial partnerships sustain efficiency, such as generic ones with finite
action spaces, and neoclassical ones with Leontief technologies. Second, approximate efficiency is shown to be achievable in a large class of partnerships, including ones with smooth and monotonic production
and disutility functions. Approximate efficiency is achieved by mixed-strategy equilibria: one partner takes, with small probability,
an inefficient action. The degree to which efficiency is approximated is restricted only by the amount of liability the partners
can bear. Nonetheless, their equilibrium payments are not arbitrarily large.
This paper investigates pure strategy sequential equilibria of repeated games with imperfect monitoring. The approach emphasizes the equilibrium value set and the static optimization problems embedded in extremal equilibria. A succession of propositions, central among which is "self-generation," allow properties of constrained efficient supergame equilibria to be deduced from the solutions of the static problems. The authors show that the latter include solutions having a "bang-bang" property; this affords a significant simplification of the equilibria that need be considered. These results apply to a broad class of asymmetric games, thereby generalizing their earlier work on optimal cartel equilibria. Copyright 1990 by The Econometric Society.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
What is a firm? Why do firms exist? How is production and administration best co-ordinated? What are the reasons for vertical integration? And disintegration? Is there a conflict between establishing and developing long-term relationships on the one hand, and the operation of free market competition on the other? Is there a choice between markets and hierarchies? What about networks and clans? These questions continue to be explored with economics, management, sociology and other related disciplines. Firms, Organizations and Contracts brings together the best inter-disciplinary analysis of the topic, and contains classic contributions and material not normally seen by those outside their own particular disciplines. It combines pioneer articles with more recent discussions of an area attracting growing attention amongst those studying industrial organization--whether on courses in economics, management, strategy, organization, law, or public administration. The volume includes Coase's initial enquiry into `The Nature of the Firm' and Ouchi's analysis of `Markets, bureaucracies and clans'; Kaldor's questioning of `The Nature of the Firm' and Dore's discussion of `Goodwill and the spirit of market capitalism'. This book will be an invaluable tool for students in economics, management and sociology. In view of the growing use of contracts within the public sector, and within the private regulated sector, the book also sets out some of the key issues of concern to policy makers and public sector strategists.
This article studies moral hazard in teams where workers' wages depend on two types of performance measures: objective team output and subjective evaluations. The evaluations include both self‐ and peer evaluations. I find that when evaluations become less subjective, workers' wages should be more sensitive not only to their evaluations but also to the team's output. I also show that subjective evaluations should be used in relative terms only when the degree of subjectivity is not too high. The results also associate the introduction of a budget breaker with the level of subjectivity within organizations.
Credible monitoring of remote workers presents unique challenges that may reduce the benefits of formal organization for their management. We consider whether increasing the salience of monitor productivity without changing incentive contracts or monitoring technology leads to changes in remote worker performance. Results from a field experiment run among multi-dimensional task workers in Kenya demonstrate that increasing the visibility of monitor activity improves performance on task dimensions not being directly paid for. Our evidence is consistent with the importance of conspicuous monitoring when managers and workers are not co-located.
Flexible work arrangements present managers with challenges regarding how to manage employees using these arrangements. To date, little research has investigated how managers address these challenges. We investigate the relationship between the use of a specific implementation of flexible work (teleworking) and control system design, specifically the emphasis on output controls. Teleworking reduces the feasibility of monitoring employee behaviour as a control mechanism. Control theory suggests that this might be compensated by placing more emphasis on output controls. We conduct a survey (N = 897) among employees of a financial services institution, of whom 69% is allowed to telework. We find that among teleworking employees, the share of teleworking hours is positively related to the emphasis on output controls. However, employees who are allowed to telework report less emphasis on output controls by their manager relative to those not allowed to telework. We pose various directions for future research, which may help in explaining these findings.
In repeated normal-form (simultaneous-move) games, simple penal codes (Abreu, Journal of Economic Theory 39(1) (1986), 191–225; and Econometrica 56(2) (1988), 383–96) permit an elegant characterization of the set of subgame-perfect outcomes. We show that in repeated extensive-form games such a characterization no longer obtains. By means of examples, we identify two types of settings in which a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator but also to the nature of the deviation.
In repeated normal-form (simultaneous-move) games, simple penal codes (Abreu, Journal of Economic Theory 39(1) (1986), 191–225; and Econometrica 56(2) (1988), 383–96) permit an elegant characterization of the set of subgame-perfect outcomes. We show that in repeated extensive-form games such a characterization no longer obtains. By means of examples, we identify two types of settings in which a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator but also to the nature of the deviation. © (2017) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
We introduce the possibility of direct punishment by specialized enforcers into a model of community enforcement. Specialized enforcers need to be given incentives to carry out costly punishments. Our main result shows that, when the specialized enforcement technology is sufficiently effective, cooperation is best sustained by a “single enforcer punishment equilibrium,” where any deviation by a regular agent is punished only once, and only by enforcers. In contrast, enforcers themselves are disciplined (at least in part) by community enforcement. The reason why there is no community enforcement following deviations by regular agent is that such actions, by reducing future cooperation, would decrease the amount of punishment that enforcers are willing to impose on deviators. Conversely, when the specialized enforcement technology is ineffective, optimal equilibria do punish deviations by regular agents with community enforcement. The model thus predicts that societies with more advanced enforcement technologies should rely on specialized enforcement, while less technologically advanced societies should rely on community enforcement. Our results hold both under perfect monitoring of actions and under various types of private monitoring.
When either there are only two players or a “full dimensionality” condition holds, any individually rational payoff vector of a one-shot game of complete information can arise in a perfect equilibrium of the infinitely-repeated game if players are sufficiently patient. In contrast to earlier work, mixed strategies are allowed in determining the individually rational payoffs (even when only realized actions are observable). Any individually rational payoffs of a one-shot game can be approximated by sequential equilibrium payoffs of a long but finite game of incomplete information, where players’ payoffs are almost certainly as in the one-shot game. © 2009 by World Scientific Publishing Co. Pte. Ltd. All rights reserved.
In
recent
years, telecommuting
has
increased
exponentially, although rates vary across different countries. The US has one of the highest rates of telecommuting adoption in the world, with approximately 16 million US employees working from home at least 1 day per month—about 10 % of all employees (Shieh and Searle SOAC 2013: 6th State of Australian Cities Conference. State of Australian Cities Research Network, 2013). In Australia, it has been estimated that in 2013, 5.6 million adult Australians aged 18 years and over were ‘digital workers’—that is, they use the internet to work away from the office (Di Gregorio Home is where the work is: Research snapshots, 2013). This represents 51 % of the total employed workforce in Australia. Telecommuting environments vary with regard to the life and work opportunities provided for telecommuters
(Shieh and Searle SOAC 2013: 6th State of Australian Cities Conference. State of Australian Cities Research Network, 2013), as well as the range of advantages and disadvantages telecommuting can provide for both workers and organizations. Consequently, this chapter reviews existing literature in order to explore how telecommuting can either contribute to, or detract from individual and
organizational flexibility. The emergence of co-working practices is also examined as a telecommuting environment that has the potential to overcome some of the issues that telecommuting poses both from the individual and organizational perspectives.
I investigate how teamwork may reduce moral hazard by joint monitoring and management. I study two organizational systems differing in the extent to which physicians may mutually manage work: Physicians are assigned patients in a “nurse-managed” system but divide patients between themselves in a “self-managed” system. The self-managed system increases throughput productivity by reducing a “foot-dragging” moral hazard, in which physicians prolong patient stays as expected future work increases. I find evidence that physicians in the same location have better information about each other and that, in the selfmanaged system, they use this information to assign patients.
We develop a model to show how agency conflicts, free-rider effects, and monitoring costs interact to affect optimal team size and workers’ incentive contracts. Team size increases with project risk, decreases with profitability, and decreases with monitoring costs as a proportion of output. Our predictions are consistent with empirical evidence that firm-specific risk has increased over time, average corporate earnings have declined, and firms’ organizational structures have also flattened. The predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams. Further, firms with relatively more intangible assets, where monitoring costs are likely to be higher, are smaller. Optimal incentive intensities decrease with risk and increase with profitability. The endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives.
This paper was accepted by Gustavo Manso, finance.
As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive data set for the "Audit Policy," a United States Environmental Protection Agency program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.
We used data from 45 production teams (626 individuals) and their supervisors to test hypotheses related to team structure. For teams engaged primarily in conceptual tasks, interdependence exhibited a boolean OR-shaped relationship with team performance, whereas team self-leadership exhibited a positive, linear relationship with performance. For teams engaged primarily in behavioral tasks, we found a boolean AND-shaped relationship between interdependence and performance and a negative, linear relationship between team self-leadership and performance. Intrateam process mediation was found for relationships with interdependence but not for relationships with team self-leadership. Overall, findings support a model of team structure and illustrate how relationships between structural characteristics and a team's performance can be moderated by its tasks.
Faster courts favor economic development in States with sufficiently constrained executive power, whereas they harm development in States where political power is relatively unconstrained. We document this novel pattern across developing countries, and build a simple model of the State as a self-enforcing social contract, which illustrates how power, and institutions that constrain or complement it, affect development. We show a tradeoff between the two facets of power—enforcement and expropriation. As the ruler’s power grows, his temptation to shirk on enforcement diminishes while the temptation to expropriate grows. Consequently, private enforcement optimally evolves into State enforcement. Moreover, faster courts relax the ruler’s incentive constraint on enforcement but tighten his non-expropriation incentive constraint; thus, the effect on development depends on which incentive constraint binds in equilibrium. Our results are consistent with the observed cross-country patterns and with historical evidence on transition from the “Law Merchant” enforcement system to the State.
We study infinitely repeated two-player games with perfect monitoring and assume that each period consists of two stages: one in which the players simultaneously choose an action and one in which they can transfer money to each other. In the first part of the paper, we derive simple conditions that allow a constructive characterization of all Pareto-optimal subgame perfect payoffs for all discount factors. In the second part, we examine different concepts of renegotiation-proofness and extend the characterization to renegotiation-proof payoffs.
In an effort to cut costs and improve worker morale, corporations are increasingly turning to telecommuting. Conflicting reports exist though on the effects that working outside the office has on productivity which directly affects a company's bottom line. This study explores these controversies using an experimental approach. Creative and dull individual tasks were used to mimic two extreme work climates. Results of this study indicate that the telecommuting environmental effects may have positive implications on productivity of creative tasks but negative implications on productivity of dull tasks.
A rising share of employees now regularly engage in working from home (WFH), but there are concerns this can lead to “shirking
from home.” We report the results of a WFH experiment at Ctrip, a 16,000-employee, NASDAQ-listed Chinese travel agency. Call
center employees who volunteered to WFH were randomly assigned either to work from home or in the office for nine months.
Home working led to a 13% performance increase, of which 9% was from working more minutes per shift (fewer breaks and sick
days) and 4% from more calls per minute (attributed to a quieter and more convenient working environment). Home workers also
reported improved work satisfaction, and their attrition rate halved, but their promotion rate conditional on performance
fell. Due to the success of the experiment, Ctrip rolled out the option to WFH to the whole firm and allowed the experimental
employees to reselect between the home and office. Interestingly, over half of them switched, which led to the gains from
WFH almost doubling to 22%. This highlights the benefits of learning and selection effects when adopting modern management
practices like WFH. JEL Codes: D24, L23, L84, M11, M54, O31.
The enforcement of contracts and property rights requires that violators are punished. However, punishments that are costly to administer may not be credible. In this paper we present a model where credible punishments depend on the social allocation of coercive power. We model society as a set of production ventures, whose members spend effort only if they can contract to share the receipts and if they are protected from external expropriation. Under decentralized enforcement, power is dispersed among the strong individuals in each venture, who are rewarded by a ruler for punishing violators. Under centralized enforcement, power is concentrated within the ruler, who directly punishes violators. By preventing violent expropriation across individuals, centralization allows to enforce the law through milder and hence more credible penalties. At the same time, centralization creates a temptation for the ruler to expropriate. Hence, centralized enforcement will be efficient when coercive power is more constrained and costly to use – for instance, due to the individuals’ ability to react or to the presence of moral constraints on the use of force.
As collaborative or team-based projects become more popular in both secondary and post-secondary classrooms, instructors are looking for ways for group mem bers to effectively evaluate one another. Constructing effective evaluation tools can be a daunting task. As shown by a review of literature, best practices include (1) building a foundation in the classroom that supports collaborative evaluation, (2) creating effective evaluation tools by articulating specific criteria and ensuring honest student participation (3) implementing formative feedback during the col laborative experience, (4) formulating summative feedback at the conclusion of the experience, and (5) assessing the collaborative evaluation process.
This study used a quasi-experimental design to assess the effectiveness of self-managing teams in a telecommunications company. These teams performed customer service, technical support, administrative support, and managerial functions in a variety of locations. The balance of evidence indicates that self-managing teams were more effective than comparable traditionally-managed groups that performed the same type of work. The study illustrates the value of a collaborative research project in which researchers and clients jointly define the research questions, study design, and methods.
Collusion under imperfect monitoring is explored when firms' prices are private information and their quantities are public information; such an information structure is consistent with several recent price-fixing cartels, such as those in lysine and vitamins. For a class of symmetric oligopoly games, it is shown that symmetric equilibrium punishments cannot sustain any collusion. An asymmetric punishment is characterized that does sustain collusion and it has firms whose sales exceed their quotas compensating those firms with sales below their quotas. In practice, cartels could have performed such transfers through sales among the cartel members.
Motivated by recent cartel practices, a stable collusive agreement is characterized when firms' prices and quantities are private information. Conditions are derived whereby an equilibrium exists in which firms truthfully report their sales and then make transfers within the cartel based on these reports. The properties of this equilibrium fit well with the cartel agreements in a number of markets including citric acid, lysine, and vitamins. (JEL D43, D82, K21, L12, L61, L65)
Many environmental laws encourage firms to self-report their violations to government regulators, rather than subject themselves to probabilistic enforcement. This paper studies self-reporting enforcement regimes when there are ex-post benefits of remediation or clean-up. Remediation benefits are shown to impart two advantages to the use of self-reporting beyond those identified elsewhere. Firstly, whereas non-reporting firms only engage in costly clean-up when they are caught by an enforcement authority, self-reporting firms always engage in efficient remediation. Secondly, with self-reporting, the government can costlessly impose stiffer non-reporter penalties that reduce the government enforcement effort required to achieve a given level of violation deterrence.
Contemporary political theory often assumes that individuals cannot make credible commitments where substantial temptations exist to break them unless such commitments are enforced by an external agent. One such situation may occur in relation to common pool resources, which are natural or man-made resources whose yield is subtractable and whose exclusion is nontrivial (but not necessarily impossible). Examples include fisheries, forests, grazing ranges, irrigation systems, and groundwater basins. Empirical evidence, however, suggests that appropriators in common pool resources develop credible commitments in many cases without relying on external authorities. We present findings from a series of experiments exploring (1) covenants alone (both one-shot and repeated communication opportunities); (2) swords alone (repeated opportunities to sanction each other); and (3) covenants combined with an internal sword (one-shot communication followed by repeated opportunities to sanction each other).
Self-reporting--the reporting by parties of their own behavior to an enforcement authority--is a commonly observed aspect of law enforcement, such as in the context of environmental and safety regulation. The authors add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement and they characterize the optimal scheme. Self-reporting offers two advantages over schemes without self-reporting: enforcement resources are saved because individuals who report their harmful acts need not be detected and risk is reduced because individuals who report their behavior bear certain rather than uncertain sanctions. Copyright 1994 by University of Chicago Press.
Laws often encourage violators to self-report their crimes rather than subject themselves to probabilistic law enforcement. This paper studies the merits of self-reporting when violators otherwise face heterogeneous probabilities of apprehension. In this setting, an optimal enforcement regime does not elicit self-reporting by all violators. However, even when self-reporting enjoys none of the advantages identified elsewhere, efficiency can often be enhanced by inducing some violators those with a sufficiently high risk of apprehension to self-report. By offering a lower sanction to violators who are excessively penalized, the self-reporting option provides more efficient incentives for these individuals to avoid criminal conduct. Copyright 2000 by the University of Chicago.
This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.
A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor. For the infinite horizon. it is shown that there is no loss from restricting the analysis to contracts in which the Agent receives a constant efficiency wage and no feedback until he is fired. Furthermore, optimal contracts cannot be replicated by short-term contracts. A family of fixed interval review contracts is characterized. Longer review intervals are preferable but harder to implement. Comparative statics on the review length are carried out. Finally, these contracts are shown approximate first best if players are very patient. (JEL D82, D86)
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
Economic theories of managing renewable resources, such as fisheries and forestry, traditionally assume that individual harvesters are perfectly rational and thus able to compute the harvesting strategy that maximizes their discounted profits. The current paper presents an alternative approach based on bounded rationality and evolutionary mechanisms. It is assumed that individual harvesters face a choice between two harvesting strategies. The evolution of the distribution of strategies in the population is modeled through a replicator dynamics equation. The latter captures the idea that strategies yielding above average profits are demanded more than strategies yielding below average profits, so that the first type ends up accounting for a larger part in the population. From a mathematical perspective, the combination of resource and evolutionary processes leads to complex dynamics. The paper presents the existence and stability conditions for each steady-state of the system and analyzes dynamic paths to the equilibrium. In addition, effects of changes in prices are analyzed. A main result of the paper is that under certain conditions both strategies can survive in the long-run.
This discussion paper has resulted in a publication in the Journal of Evolutionary Economics , 2003, 13(2), 183-200.
This paper estimates mortality and fertility rates prevailing in Ireland during the 25-year period before the Great Irish Famine of 1845-1849. A technique is developed to estimate the age-specific mortality level during the Famine and the number of Famine-related deaths. The paper concludes that fertility rates were declining during the period 1821-1845 and that the effects of the Famine were especially severe on the very young and the very old. Ignoring deaths among emigrants, it is estimated that one million individuals perished as a result of the Famine. The analysis permits year-by-year reconstruction of the Irish population age structure for the period 1821-1851.
In repeated games, subgame-perfect equilibria involving threats of punishment may be implausible if punishing one player hurts the other(s). If players can renegotiate after a defection, such a punishment may not be carried out. We explore a solution concept that recognizes this fact, and show that in many games the prospect of renegotiation strictly limits the cooperative outcomes that can be sustained. We characterize those outcomes in general, and in the prisoner's dilemma, Cournot and Bertrand duopolies, and an advertising game in particular.
Collusion under imperfect monitoring is explored when firms' prices are private information and their quantities are public information; an information structure consistent with several recent price-fixing cartels such as those in lysine and vitamins. For a class of symmetric duopoly games, it is shown that symmetric equilibrium punishments cannot sustain any collusion. An asymmetric punishment is characterized which does sustain collusion and it has the firm with sales exceeding its quota compensating the firm with sales below its quota. In practice, cartels have performed such transfers through sales among the cartel members.
In this note we present an example of a repeated partnership game with imperfect monitoring in which all supergame equilibria
with positive discount rates are bounded away from full efficiency uniformly in the discount rate, provided the latter is
strictly positive. On the other hand, if the players do not discount the future, then every efficient one-period payoff vector
that dominates the one-period equilibrium payoff vector can be attained by an equilibrium of the repeated game. Thus the correspondence
that maps the players' discount rate into the corresponding set of repeated-game equilibrium payoff vectors is discontinuous
at the point at which the discount rate is zero.