Jean Tirole's research while affiliated with Toulouse 1 Capitole University and other places

Publications (377)

Preprint
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The paper studies "cognitive games," that is, games in which the players can influence their understanding of a strategic situation before playing the primitive (normal-or extensive-form) game. The analysis covers both the case of self-directed cognition (as when a player controls her own information structure) and the case of manipulative cognitio...
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Undoubtedly one of the best economists of his generation, Emmanuel Farhi transformed the theories of taxation, macroeconomics, and international finance. This essay describes his itinerary and his research style and attempts to pay tribute to his immense contribution to economics. Expected final online publication date for the Annual Review of Econ...
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A ruler who does not identify with a social group, whether on religious, ethnic, cultural or socioeconomic grounds, is confronted with a trade-off between taking advantage of the out-group population's eagerness to maintain its identity and inducing it to "comply'' (conversion, quit, exodus or any other way of accommodating the ruler's own identity...
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Traditional banking is built on four pillars: SME lending, insured deposit taking, access to lender of last resort, and prudential supervision. This paper unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insuranc...
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We develop a model of pork-barrel politics in which a government official tries to improve her reelection chances by spending on targeted interest groups. The spending signals that she shares their concerns. We investigate the effect of such pandering on public spending. Pandering increases spending relative to a non-accountable official (one who d...
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Firms often sell a basic good as well as ancillary ones. Hold-up concerns have led to ancillary good regulations, such as transparency and price caps. The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (e.g., free shipping or limited card surcharging in countries where the...
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The proliferation of new payment methods on the Internet rekindles the old and unsettled debate about merchants’ incentive and ability to differentiate price according to payment choice. This paper develops an imperfect-information framework for the analysis of platform and social regulation of card surcharging and cash discounting. It makes three...
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Building on the idea that accounting matters for corporate governance, this paper studies the equilibrium interaction between the measurement rules that firms find privately optimal, firms' governance, and the liquidity in the secondary market for their assets. This equilibrium approach reveals an excessive use of market-value accounting: Corporate...
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The recent unravelling of the Eurozone's financial integration raised concerns about feedback loops between sovereign and banking insolvency. This article provides a theory of the feedback loop that allows for both domestic bailouts of the banking system and sovereign debt forgiveness by international creditors or solidarity by other countries. Our...
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In this paper, we provide a perspective into the main ideas and findings emerging from the growing literature on motivated beliefs and reasoning. This perspective emphasizes that beliefs often fulfill important psychological and functional needs of the individual. Economically relevant examples include confidence in ones' abilities, moral self-este...
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In a number of interesting environments, dynamic screening involves positive selection: in contrast with Coasian dynamics, only the most motivated remain over time. The paper provides conditions under which the principal's commitment optimum is time consistent and uses this result to derive testable predictions under permanent or transient shocks....
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To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single pr...
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When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the bo...
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A major policy issue in standard setting is that patents that are ex ante not that important, by being included into a standard, may become standard-essential patents. In an attempt to curb the monopoly power that they create, most standard-setting organizations require the owners of patents covered by the standard to make a loose commitment to gra...
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In environmental matters, the free riding generated by the lack of collective action is aggravated by concerns about leakages and by the desire to receive compensation in future negotiations. The dominant 'pledge and review" approach to mitigation will deliver appealing promises and renewed victory statements, only to prolong the waiting game. The...
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The joint understanding of the cross section of individuals' total and equity savings is crucial regarding various policy issues. In particular, it is important to understand why lower-income households do not participate in the stock market, which reflects the so-called stock market participation puzzle. As it is demonstrated in the first part of...
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The role of payment cards in modern economies can hardly be underrated. In 2013, debit and credit card transactions represented roughly half of all consumer payment transactions in Western Europe, and accounted for more than 45% of all payment transactions in the United States. 2 The payment card industry has faced intense antitrust scrutiny on bot...
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Parties in financial markets, industries, compensation design or politics may negotiate on either a piecemeal or a bundled basis. Little is known about the desirability of bundling when values are common and/or information endogenous. The paper shows that bundling encourages information-equalizing investments, thereby facilitating trade. It accordi...
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The Contours of Banking and the Future of its Regulation Aftermaths of banking, sovereign, and other crises often look alike : After years of neglect and quasi-laissez-faire leading to a crisis, policymakers and scholars work assiduously on new schemes that will prevent the next crisis. This process reflects political immediacy as much as a long-te...
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This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereb...
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What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property screens out projects generating low consumer surplus per unit sold. We build a model that formalizes this trade-off and develop tools for solving the resulting multidimensional screening problem. Optimal policy generally calls for some market power...
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The recent crisis has brought to the fore the cyclical properties of banking regulation. Countercyclical buffers and enhanced capital requirements meant to stabilize banks' balance sheets across the cycle are not costless, and a delicate balance needs to be reached between providing incentives to generate value and discouraging excessive risk takin...
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We consider the robustness of extensive form mechanisms to deviations from common knowledge about the state of nature, which we refer to as information perturbations. First, we show that even under arbitrarily small information perturbations the Moore-Repullo mechanism does not yield (even approximately) truthful revelation and that in addition the...
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This paper analyzes the self-identification process and its role in motivation. We build a model of self-con…dence where people have imperfect knowledge about their ability, which in most tasks is a complement to effort in determining performance. Higher self-confidence thus enhances motivation, and this creates incentives for the manipulation of s...
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What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property (IP) selects high social surplus projects. Optimal innovation policy thus trades off the ex ante screening benefit and the ex post distortion. It solves a multidimensional screening problem in the private information held by the innovator: research...
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This paper analyzes how private decisions and public policies are shaped by personal and societal preferences ("values"), material or other explicit incentives ("laws") and social sanctions or rewards ("norms"). It first examines how honor, stigma and social norms arise from individuals' behaviors and inferences, and how they interact with material...
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The paper provides a first analysis of market jump starting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy as...
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After recent disillusions, international climate change negotiations need to be jumpstarted. This paper first argues that countries' strategic positioning will increase the cost of delay beyond that associated with the classic free-riding problem. It then investigates the governance of an agreement and the design of negotiation and compensation, em...
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Abstract The paper analyzes the costs and benefits of tying in the payment card industry. When offered a choice among several platforms, end-users (merchants, cardholders) can pick a platform or “multi-home”. As in other industries, these decisions are sequential: First, merchants set their card acceptance policy; consumers get to choose which card...
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A large number of antitrust investigations in the US and in Europe concern various kinds of tying behavior by firms with market power. This primer analyses factors that make ties more likely either to hurt or to benefit consumers. It argues that: (1) The impact of tying on competition in the tied market ranges from “little impact on the rivals ’ ab...
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We develop a theory of moral behavior, individual and collective, based on a general model of identity in which people care about “who they are” and infer their own values from past choices. The model sheds light on many empirical puzzles inconsistent with earlier approaches. Identity investments respond nonmonotonically to acts or threats, and tab...
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This paper analyzes the determinants of the optimal scope of incorporation in the presence of bankruptcy costs. Bankruptcy costs alone generate a non-trivial tradeo¤ between the bene…t of coinsurance and the cost of risk contamination associated with …nancing projects jointly through debt. This tradeo¤ is characterized for projects with binary retu...
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Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore must accept excessively high merchant discounts. The paper attempts to shed light on this must-take cards view from two angles. First, the paper gives some operational content to the notion of must-take card through the avoided-cost test or tour...
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The Kyoto and Copenhagen Protocols on climate change mitigation postponed the specification of binding commitments to a future negotiation. This paper ana-lyzes the strategic implications of delayed negotiations. While, as is well-understood, the incentive to free ride leads to excessive emissions prior to a binding agreement, the cost of delay is...
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This paper analyses the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is...
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What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. Over the 1993-2007 period, the representative U.S. corporati...
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Akey input of our modern economies, payment cards are ubiquitous; debit and credit cards offer a wide range of alternatives to cash and checks to operate brick and mortar, e- and mobile phone, and P2P payments. The contours of the industry are rapidly changing. The payment card industry is also becoming one of the most heavily regulated industries...
Book
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Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center o...
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The paper offers an introduction and a road map to the burgeoning literature on two-sided markets. In many industries, platforms court two (or more) sides that use the platform to interact with each other. The platforms' usage or variable charges impact the two sides' willingness to trade, and thereby their net surpluses from potential interactions...
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This paper analyzes the role of biased perceptions for insurance design. The analysis focuses on unemployment insurance and the perceptions of job seekers about their employment prospects. Biased risk perceptions change the perceived value of insurance and the perceived returns to avoiding this risk. They make policies implementing standard reduced...
Book
The financial crisis that began in 2007 in the United States swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. Providing an international perspective, this book draws critical lessons from the causes of the crisis and proposes important regulatory reforms, including so...
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In this paper, I test the most basic prediction of Grossman and Hart (1986): Allocations of asset ownership that expose a party to ex-post ex-propriation reduce this party's ex-ante relationship specific investments. In the empirical context of the German housing market, I find that relationship specific investments, such as bathroom renovations, a...
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Pigovian taxation of externalities has limited appeal if the tortfeaser has insufficient resources to pay the damage when it occurs. To defend Pigovian taxation in the presence of judgement-proof agents, its proponents point at the many institutions extending liability to third parties. Yet little is known about the validity of Pigou's analysis in...
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Society's demands for individual and corporate social responsibility as an alternative response to market and distributive failures are becoming increasingly prominent. We first draw on recent developments in the 'psychology and economics' of prosocial behavior to shed light on this trend, which reflects a complex interplay of genuine altruism, soc...
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I propose a model in which consumers base their purchasing decisions upon their recollections of product quality, and in which firms can use persuasive advertising to change these recollections. Although consumers are aware that such advertising has occurred when updating their beliefs, they cannot prevent their memories from being affected. I show...
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We provide a simple model with a privately informed principal who provides nancing to a project in which an agent exerts eort that aects the probability of success. When restricting the space of contracts to debt contracts, we show that the equilibrium that gives the highest prot to the principal is a pooling equilibrium in which the allocation of...
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The financial crisis that began in 2007 in the United States swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. Bringing together three leading financial economists to provide an international perspective, Balancing the Banks draws critical lessons from the causes of th...
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The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should...
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This paper characterizes the optimal labor market policy within a dynamic search model which allows for workers' risk aversion. In a …rst-best allocation of resources, unemployment bene…ts should provide perfect insurance against the unemployment risk, layo¤ taxes are necessary to induce employers to internalize the cost of dismissing an employee b...
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This paper analyzes contract cancellation and product return policies in markets in which sellers advise buyers about the suitability of the products sold. By granting buyers the right to cancel or return on favorable terms, the seller's "cheap talk" at the point of sale becomes more credible. When all buyers are wary of the seller's incentives, eq...
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An informational role of policy arises in economies where large uctuations are triggered by self-ful…lling expectation switches between e¢ cient "optimism" and ine¢ cient "pessimism," a feature that is common in many dynamic economies with coordination failures. Policy a¤ects the information about underlying fundamentals contained in aggregate outc...
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The article shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profit...
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In many industries workers face a choice between high and low visi-bility jobs. The former let all potential employers observe performance, the latter only the current employer. This paper argues that workers getting a positive initial signal about their talent are willing to incur costs to work in high visibility jobs in order to avoid a hold up p...
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Individuals have di¤ering beliefs about risks they face and their ability to mit-igate these risks. Pro…t-maximizing …rms screen identical agents with di¤erent beliefs by providing less insurance to optimists than to pessimists. Optimists per-ceive the risk to be less likely than pessimists given their respective choices of precautionary e¤orts. De...
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Abstract The paper elicits a mechanism by which that private leverage choices exhibit strate- gic complementarities through the reaction of monetary policy. The key ingredient is that monetary policy is non-targeted. The ex-post bene�ts from a monetary bailout ac- crue in proportion to the number amount of leverage, while the distortion costs are t...
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We develop a theory of firm scope and structure in which merging two firms allows the integrated firm's top management to allocate resources that are costly to trade. However, information about their use resides with division managers. We show that establishing truthful upward communication raises the cost of inducing managerial effort compared wit...
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I study a dynamic economy featuring adverse selection in financial markets. Investment is undertaken by borrowing-constrained entrepreneurs. They sell their past projects to finance new ones, but asymmetric information about project quality creates a lemons problem. The magnitude of this friction responds to aggregate shocks, amplifying the respons...
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Intrinsic motivation, incentives and social norms This lecture, delivered by Jean Tirole at the 2008 Afse Congress and based on joint work with Roland Bénabou, revisits the old debate on the effectiveness of incentives, focusing on how the latter impact the perception and meaning of acts. It explains how a principal’s organizational choices can af...
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We explore the link between liquidity and investment in a an overlapping generation model with a standard asynchronicity between firms' access to and need for cash. Imperfect pledgeability hinders the capacity of capital markets to resolve this asynchronicity, resulting in credit rationing and a net demand for stores of value -- liquidity -- by the...
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Thinking about contingencies, designing covenants, and seeing through their implications is costly. Parties to a contract accordingly use heuristics and leave it incomplete. The paper develops a model of limited cognition and examines its consequences for contractual design. (JEL D23, D82, D86, L22).
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Unemployment insurance and employment protection are typically discussed and studied in isolation. In this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk-averse workers, risk-neutral firms, and random shocks to productivity. We show that, in the "first best," unemployment insura...
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Payment card associations offer both debit and credit cards and sometimes engage in a tie-in on the merchant side through the so-called honor-all-cards (HAC) rule. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions subject to different competitive pressures. In the no-HAC-rule benchmark model, the...
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We consider public-private partnerships, in which a public official selects a project that is then developed and operated by a private contractor. We derive optimal public accounting rules when the official's choice among projects is biased by ideology or social ties or because of pandering to special interests. We give particular emphasis to how t...
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Jean-Jacques Laffont was one of the great economists of the last quarter of the 20th century, with an encyclopedic mind in a time of intense specialization. He won widespread respect and recognition for his breakthroughs in both theory (including public goods, contract theory, and the regulation of natural monopoly) and econometrics. In addition, h...
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We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...
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This paper reflects on the economics and politics of an international climate policy agreement. The international community has so far failed to design institutions and a compensation scheme that would lead to an abatement effort commensurate with the IPCC recommendations that it attempts tofollow. The paper first lays out what could be a proper in...
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This chapter analyzes the private rationale and the social costs and benefits of market foreclosure, here defined as a firm's restriction of output in one market through the use of market power in another market. The chapter first focuses on vertical foreclosure (in which full access to a bottleneck input is denied to competitors) and provides an o...
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Cooperative undertakings account for a substantial share of developed market economies and that share is likely to grow with the advent of the new economy. The paper develops a dynamic investment framework that relates access policies, financing and growth of cooperatives. It shows how discriminating among users affects the viability of cooperative...
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A sender with private information often tries to influence the decisionmaker through well-informed intermediaries such as experts or critics. Both the sender and the intermediary may be independently objective or biased: the objective type passes on the most accurate information, while the biased type wants to push a particular agenda but also to a...
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We propose a static model of two-tier competition in which firms are either verti-cally integrated or pure downstream. First, integrated firms compete on an upstream market to provide an intermediate input to unintegrated downstream firms. Second, all firms compete in prices for customers. This framework is particularly relevant for the analysis of...
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This paper studies many-to-one matching problems such as between students and colleges, and workers and firms in the general case, in which both peer effects and complementarities are allowed. In a matching, an agent on one side, say a firm, employs a subset of agents from the other side (workers), thus forming a coalition. The paper interprets an...
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three anonymous referees for helpful comments. We would also like to thank conference and seminar participants at the AFA 2003, INSEAD, Goethe University in Frankfurt, SOAS, the Stockholm School of Economics, the CEPR workshop on The New Economy and the Oxford Finance Summer Symposium. We are responsible for any errors and omissions in the paper. A...
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We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own 'deep values' and infer them from their past choices, which then come to define 'who they are'. Identity investments increase when information is scarce or when a greate...
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Payment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card...
Article
Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore are forced to accept unacceptably high merchant discounts. The paper attempts to shed light on this “must-take cards” view from two angles. First, the paper gives some operational content to the notion of “must-take card” through the “tourist te...
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The paper explores strategies that the sponsor of a proposal may employ to convince a qualified majority of members in a group to approve the proposal. Adopting a mechanism design approach to communication, it emphasizes the need to distill information selectively to key group members and to engineer persuasion cascades in which members who are bro...