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Informational smallness and the scope for limiting information rents
Abstract
For an incomplete-information model of public-good provision with interim participation constraints, we show that efficient outcomes can be approximated, with approximately full surplus extraction, when there are many agents and each agent is informationally small. The result holds even if agents' payoffs cannot be unambiguously inferred from their beliefs, i.e., even if the so-called BDP property (Beliefs Determine Preferences) of Neeman (2004) does not hold. The contrary result of Neeman (2004) rests on an implicit uniformity requirement that is incompatible with the notion that agents are informationally small because there are many other agents who have information about them.
We consider general social choice environments with private values and correlated types. Each agent's matrix of conditional probabilities satisfies the full rank condition. We show that for any Bayesian incentive compatible mechanism there exists a dominant strategy incentive compatible mechanism that delivers the same interim expected utilities to all agents and generates at least the same social surplus. In addition, if there is a social alternative that is inferior to the other alternatives for all agents the dominant strategy incentive compatible mechanism matches exactly the social surplus. These results extend to environments with interdependent values satisfying the single crossing condition.
Neeman (2004) and Heifetz and Neeman (2006) have shown that, in auctions with incomplete information about payoffs, full surplus extraction is only possible if agents’ beliefs about other agents are fully informative about their own payoff parameters. They argue that the set of incomplete-information models satisfying this so-called BDP property ("beliefs determine preferences") is negligible, in a geometric and a measure-theoretic sense. In contrast, we show that, in models with finite-dimensional type spaces, this property is topologically generic if the set of objects about which beliefs are formed is sufficiently rich and beliefs are derived by conditioning on the available information; for any agent, this information includes his own payoff parameters.
This essay is the introduction for a collection of papers by the two of us on "Robust Mechanism Design" to be published by World Scientific Publishing. The appendix of this essay lists the chapters of the book.The objective of this introductory essay is to provide the reader with an overview of the research agenda pursued in the collected papers. The introduction selectively presents the main results of the papers, and attempts to illustrate many of them in terms of a common and canonical example, the single unit auction with interdependent values.In addition, we include an extended discussion about the role of alternative assumptions about type spaces in our work and the literature, in order to explain the common logic of the informational robustness approach that unifies the work in this volume.
We use a public-good experiment to analyze behavior in a decentralized asymmetric punishment institution. The institution is asymmetric in the sense that players differ in the effectiveness of their punishment.
At the aggregate level, we observe remarkable similarities
between outcomes in asymmetric and symmetric punishment institutions.
Controlling for the average punishment effectiveness of the
institutions, we find that asymmetric punishment institutions are as effective in fostering cooperation and as efficient as symmetric institutions.
At the individual level, we find that players with higher
punishment effectiveness contribute similar amounts to the public account, but have higher earnings and punish more than their weak counterparts.
In recent years, numerous studies comparing intuition and deliberation have been published. However, relatively little is known about the cognitive processes underlying the two decision modes. In two studies, we analyzed the effects of decision mode instructions on processes of information search and integration, using eye-tracking technology in a between-participants (Study 1) and a within-participants (Study 2) design. Our findings indicate that the instruction to deliberate does not necessarily lead to qualitatively different information processing compared to the instruction to decide intuitively. We found no difference in mean fixation duration and the distribution of short, medium and long fixations. Short fixations in particular prevailed under both decision mode instructions, while long fixations indicating a conscious and calculation-based information processing were rarely observed. Instruction-induced deliberation led to a higher number of fixations, a more complete information search and more repeated information inspections. We interpret our findings as support for the hypothesis that intuitive and deliberate decision modes share the same basic processes which are supplemented by additional operations in the deliberate decision mode.
The paper analyses the causes of the current crisis of the global financial system, with particular emphasis on the systemic elements that turned the crisis of subprime mortgage-backed securities in the United States, a small part of the overall system, into a worldwide crisis. The first half of the paper explains the role of mortgage securitization as a mechanism for allocating risks from real estate investments and discusses what has gone wrong and why in the implementation of this mechanism in the United States. The second half of the paper discusses the incidence of systemic risk in the crisis. Two elements of systemic risk are identified. First, there was excessive maturity transformation through conduits and structured-investment vehicles (SIVs); when this broke down in August 2007, the overhang of asset-backed securities that had been held by these vehicles put significant additional downward pressure on securities prices. Second, as the financial system adjusted to the recognition of delinquencies and defaults in US mortgages and to the breakdown of maturity transformation of conduits and SIVs, the interplay of market malfunctioning or even breakdown, fair value accounting and the insufficiency of equity capital at financial institutions, and, finally, systemic effects of prudential regulation created a detrimental downward spiral in the overall financial system. The paper argues that these developments have not only been caused by identifiably faulty decisions, but also by flaws in financial system architecture. In thinking about regulatory reform, one must therefore go beyond considerations of individual incentives and supervision and pay attention to issues of systemic interdependence and transparency.
We examine a general equilibrium model with asymmetrically informed agents. The presence of asymmetric information generally presents a conflict between incentive compatibility and Pareto efficiency. We present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size.
J. Crémer and R. P. McLean (Econometrica56, 1988, 1247–1257) have shown that the auctioneer can extract all the surplus when the private valuations of bidders are not statistically independent. The paper shows that this result does not necessarily arise under limited liability or risk aversion. Under limited liability and/or risk aversion, we prove that the functions corresponding to the auctionner's optimal expected gain and to the maximum total surplus are continuous in the space of possible information distributions. Thus by continuity, the auctioneer wil not be able to extract all the rents when bidders' private valuations are approximately independent.
We consider the mechanism design problem when agents’ types are multidimensional and continuous, and their valuations are interdependent. If there are at least three agents whose types satisfy a weak correlation condition, then for any decision rule and any ɛ>0 there exist balanced transfers that render truthful revelation a Bayesian ɛ-equilibrium. A slightly stronger correlation condition ensures that there exist balanced transfers that induce a Bayesian Nash equilibrium in which agents’ strategies are nearly truthful.
We consider the problem of implementation of social choice correspondences in differential information economies. We provide necessary conditions for implementation and slightly stronger conditions which are sufficient to guarantee implementation
Recent results in mechanism design show that as long as agents have correlated private information and are sufficiently risk neutral, it is possible to design mechanisms that leave agents with arbitrarily small information rents. We show that these full-rent-extraction results hinge on the implicit assumption that the agents’ beliefs uniquely determine their preferences. We present an example of the voluntary provision of a public good in which this assumption is relaxed, and consequently, even in highly correlated environments, if agents’ beliefs do not uniquely determine their preferences, then the extraction of the agents’ entire information rents is impossible.
The paper provides an extension and a new proof of Deaton's theorem on the undesirability of nonuniform excise taxation when income taxes are affine and preferences over consumption goods are separable from labour-leisure choices, homothetic, and identical across agents.
The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free-rider effect in the competition for the innovation that countervails the familiar business-stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms.profits and the probability of innovation.
We study the provision of an excludable public good to discuss whether the imposition of participation constraints is desirable. It is shown that this question may equivalently be cast as follows: should a firm that produces a public good receive tax revenues, or face a self-financing requirement. The main result is that the desirability of participation constraints is shaped by an equity-efficiency tradeoff: While first-best is out of reach with participation constraints, their imposition yields a more equitable distribution of the surplus. This result relies on an incomplete contracts perspective. With a benevolent mechanism designer, participation constraints are never desirable.
Although intuitive-automatic processes sometimes lead to systematic biases in judgment and choice, in many situations especially this kind of processes enables people to approximate rational choices. In complex base-rate tasks with repeated outcome feedback we observed choices which were in line with the Bayes’ solution in 86% of the cases and which were made within a relatively short time (i.e., 2.2 seconds). The results indicate reliance on extremely well-calibrated intuition. This view is supported by the findings that choice proportions are almost perfectly predicted by posterior probabilities (r = .93), and that error rates, response times and confidence ratings are highly correlated with inconsistency in the provided information. Our results support the hypothesis that parallel constraint satisfaction models may account for the processes underlying intuition and make the application of simple heuristics and deliberate strategies very unlikely. Taking an interdisciplinary perspective, implications for economic and psychological modeling are outlined.
Cartels are inherently instable. Each cartelist is best off if it breaks the cartel, while the remain-ing firms remain loyal. If firms interact only once, if products are homogenous, if firms compete in price, and if marginal cost is constant, theory even predicts that strategic interaction forces firms to set the market clearing price. For society, this would be welcome news. Without antitrust intervention, the market outcome maximises welfare. The argument becomes even stronger if the opposite market side has a chance to defend itself; if imposing harm on the opposite market side is salient; if it is clear that cartels are at variance with normative expectations prevalent in society. There is an equally long list of reasons, though, why such optimism might be unwarranted: capacity is limited; interaction is repeated, and the end is uncertain; firms might be willing to run a limited risk of being exploited by their competitors, hoping that the investment pays. This paper explores the question both theoretically and experimentally. In the interest of capitalising on a rich body of experimental findings, and on the concept of conditional cooperation in particular, the paper offers a formal model that interprets oligopoly as a linear public good.
The structure of a social dilemma lies behind many environmental problems. Mingling temporal aspects of resources with the structure of the social dilemma often leads to wrong conclusions. Therefore, it is worth analytically separating temporal aspects from structural aspects of the dilemma. This article concentrates solely on the structural aspects of the dilemma and the grades of complexity with respect to the number and stakes of the people involved, as well as the asymmetry of endowments and the salience of the optimal use of the resource in order to come close to the welfare optimum. Dilemmas with sufficient complexity are extremely vulnerable to individual defectors, and therefore institutions are necessary for the solution of the dilemma. Consequently, research in environmental psychology should not only target the individuals, but focus on institutional design with respect to (1) the structural diagnosis of environmental dilemmas; (2) methods that provide an insight into the structural problem of environmental dilemmas; (3) the impact of institutions on internalizing norms; and (4) the impact of structural knowledge about the dilemma of accepting institutions that help to solve the environmental dilemma. In analogy to software-ergonomics, psychology should initiate research in institutional ergonomics that helps to create addressee-friendly institutions.
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.
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.
We examine the effect of one of the presumably most powerful cartels ever on the profitability of its members. More precisely, we consider the Rhenish-Westphalian Coal Syndicate, a coal cartel that operated in Imperial Germany in the late 19th and early 20th century, using a newly constructed dataset and two different methodological approaches. At first, we employ event study methodology to asses the reaction of the stock market to the foundation of the cartel and two major revisions of its original contract. Furthermore, we look at different performance measures calculated from accounting and financial data in a dynamic panel data framework. Overall, our results suggest that the investigated cartel had no significant effect on the profitabil-ity of its members. However, we also find that it was able to stabilise coal prices and powerful enough to ensure that on average, prices were set high enough to avert negative repercussions on company performance.
Many everyday decisions have to be made under risk and can be interpreted as choices between gambles with different outcomes that are realized with specific probabilities. The underlying cognitive processes were investigated by testing six sets of hypotheses concerning choices, decision times, and information search derived from cumulative prospect theory, decision field theory, priority heuristic and parallel constraint satisfaction models. Our participants completed forty decision tasks of two gambles with two non-negative outcomes each. Information search was recorded using eye-tracking technology. Results for all dependent measures conflict with the prediction of the non-compensatory priority heuristic and indicate that individuals use compensatory strategies. Choice proportions are well predicted by a cumulative prospect theory. Process measures, however, indicate that individuals do not rely on deliberate calculations of weighted sums. Information integration processes seem to be better explained by models that partially rely on automatic processes such as decision field theory or parallel constraint satisfaction models.
A competitive economy is studied in which sellers offer alternative direct mechanisms to buyers who have correlated private
information about their valuations. In contrast to the monopoly case where sellers charge entry fees and extract all buyers'
surplus, it is shown that in the unique symmetric equilibrium with competition, sellers hold second price auctions with reserve prices set equal to their cost. Most
important, it is a best reply for sellers not to charge entry fees of the kind normally used to extract surplus, even though
it is feasible for them to do so.
A yes or no decision must be made about some issue. All agents must agree. The “Coase Theorem” asserts that the efficient
outcome will always result. Suppose the value (positive or negative) that an individual attaches to an affirmative decision
is privately known to that individual. It is proved, under very mild conditions, that with independent types, as the number
of agents increases, the probability of an affirmative efficient decision goes to zero. An example in which it is common knowledge
that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given.
This paper examines the effect of private information in large economies. We show that in a model with stochastic information structures, the restrictions imposed on allocations by the presence of private information disappear in large economies. We also show that for a large class of direct mechanisms, the incentive for any agent to falsely report private information goes to zero as the number of agents becomes large. These results provide an “informational smallness” analog to existing “quantity smallness” limiting results in the literature.
A number of studies, most notably Crémer and McLean (1985, 1988), have shown that in generic type spaces that admit a common prior and are of a fixed finite size, an uninformed seller can design mechanisms that extract all the surplus from privately informed bidders. We show that this result hinges on the nonconvexity of such a family of priors. When the ambient family of priors is convex, generic priors do not allow for full surplus extraction provided that for at least one prior in this family, players' beliefs about other players' types do not pin down the players' own preferences. In particular, full surplus extraction is generically impossible in finite type spaces with a common prior. Similarly, generic priors on the universal type space do not allow for full surplus extraction. Copyright The Econometric Society 2006.
The authors consider auctions for a single indivisible object when bidders have information about each other that is unavailable to the seller. They show that the seller can use this information to his own benefit, and they characterize th e environments in which a well-chosen auction gives him the same expected payoff as that obtainable were he able to see the object und er full information. This hinges on the possibility of constructing lotteries with the correct properties. The authors study the problem for auctions where the bidders have dominant strategies and those where the relevant equilibrium concept is Bayesian-Nash. Copyright 1988 by The Econometric Society.
In models of asymmetric information, possession of private information leads to rents for the possessors. This induces mechanism designers to distort away from efficiency. The authors show that this is an artifact of the presumption that information is independently distributed. Rent extraction in a large class of mechanism design games is analyzed, and a necessary and sufficient condition for arbitrarily small rents to private information is provided. Additionally, the two-person bargaining game is shown to have an efficient solution under first-order stochastic dominance and a hazard rate condition. Similar conditions allow full rent extraction in Milgrom-Weber auctions. Copyright 1992 by The Econometric Society.
On the legitimacy of coercion for the financing of public goods Efficiency Gains from Team-Based Coordination – Large-Scale Experimental Evidence On Competition and the Strategic Management of Intellectual Property in Oligopoly
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2009/15: Bierbrauer F., On the legitimacy of coercion for the financing of public goods 2009/14: Feri F., Irlenbusch B., Sutter M., Efficiency Gains from Team-Based Coordination – Large-Scale Experimental Evidence 2009/13: Jansen J., On Competition and the Strategic Management of Intellectual Property in Oligopoly 2009/12: Hellwig M., Utilitarian Mechanism Design for an Excludable Public Good published in: Economic Theory, vol. 2009, no. July 14, Berlin/Heidelberg, Springer, 2009
Real Wages and Labour Productivity in Britain and Germany, 1871-1938: A Unified Approach to the International Comparison of Living Standards Parallel Constraint Satisfaction in Memory-Based Decisions Review Essay: How Rational is International Law? forthcoming in
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2009/19: Magen S., Rechtliche und ökonomische Rationalität im Emissionshandelsrecht 2009/18: Broadberry S.N., Burhop C., Real Wages and Labour Productivity in Britain and Germany, 1871-1938: A Unified Approach to the International Comparison of Living Standards 2009/17: Glöckner A., Hodges S.D., Parallel Constraint Satisfaction in Memory-Based Decisions 2009/16: Petersen N., Review Essay: How Rational is International Law? forthcoming in: European Journal of International Law, vol. 20, In Press
Real Wages and Labour Productivity in Britain and Germany, 1871-1938: A Unified Approach to the International Comparison of Living Standards Parallel Constraint Satisfaction in Memory-Based Decisions
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2009/18: Broadberry S.N., Burhop C., Real Wages and Labour Productivity in Britain and Germany, 1871-1938: A Unified
Approach to the International Comparison of Living Standards
2009/17: Glöckner A., Hodges S.D., Parallel Constraint Satisfaction in Memory-Based Decisions
2009/16: Petersen N., Review Essay: How Rational is International Law?
forthcoming in: European Journal of International Law, vol. 20, In Press.
Theorem on the Undesirability of Nonuniform Excise Taxation The Underpricing of Initial Public Offerings in Imperial Germany
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Hellwig M., A Generalization of the Atkinson-Stiglitz (1976) Theorem on the Undesirability of Nonuniform Excise
Taxation
2008/46: Burhop C., The Underpricing of Initial Public Offerings in Imperial Germany, 1870-1896
forthcoming in: German Economic Review, In Press.
A unified approach to the revelation of public goods preferences and to optimal income taxation Incentives and Innovation? R&D Management in Germany's High-Tech Industries During the Second Industrial Revolution forthcoming in: Explorations in Economic History
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Engel C., Die Bedeutung der Verhaltensökonomie für das Kartellrecht
2008/39: Bierbrauer F., A unified approach to the revelation of public goods preferences and to optimal income taxation
2008/38: Burhop C., Lübbers T., Incentives and Innovation? R&D Management in Germany's High-Tech Industries During the
Second Industrial Revolution
forthcoming in: Explorations in Economic History, In Press.
On Competition and the Strategic Management of Intellectual Property in Oligopoly Utilitarian Mechanism Design for an Excludable Public Good published in: Economic Theory
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Jansen J., On Competition and the Strategic Management of Intellectual Property in Oligopoly
2009/12: Hellwig M., Utilitarian Mechanism Design for an Excludable Public Good
published in: Economic Theory, vol. 2009, no. July 14, Berlin/Heidelberg, Springer, 2009.
Payo¤s could be inferred from beliefs, generically, when beliefs are conditioned on information
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Majority Voting and the Welfare Implications of Tax Avoidance
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Traxler C., Majority Voting and the Welfare Implications of Tax Avoidance
2009/21: Beckenkamp M., Engel C., Glöckner A., Irlenbusch B., Hennig-Schmidt H., Kube S., Kurschilgen M., Morell A.,
Nicklisch A., Normann H., Towfigh E., Beware of Broken Windows! First Impressions in Public-good Experiments