In the context of a canonical agency model, we study the payoff implications of introducing optimally structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does know that the principal knows them. We provide, in particular, tight bounds on the principal's expected benefit from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive.
{"title":"Payoff Implications of Incentive Contracting","authors":"Daniel F. Garrett","doi":"10.3982/te4293","DOIUrl":"https://doi.org/10.3982/te4293","url":null,"abstract":"In the context of a canonical agency model, we study the payoff implications of introducing optimally structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does know that the principal knows them. We provide, in particular, tight bounds on the principal's expected benefit from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134413176","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We explore efficiency and optimal policy in decentralized transport markets, such as taxis, trucks, and bulk shipping. We show that in these markets, search frictions distort the transportation network and the dynamic allocation of carriers over space. We derive explicit and intuitive conditions for efficiency, and show how they translate into efficient pricing rules, or optimal taxes and subsidies for the planner who cannot set prices directly. The results imply that destination-based pricing is essential to attain efficiency. Then, using data from dry bulk shipping, we demonstrate that search frictions lead to a sizeable social loss and substantial misallocation of ships over space. Optimal policy can eliminate about half of the welfare loss. Can a centralizing platform, often arising as a market-based solution to search frictions, do better? Interestingly, the answer is no; although the platform eradicates frictions, it exerts market power thus eroding the welfare gains. Finally, we use two recent interventions in the industry (China’s Belt and Road Initiative and the environmental initiative IMO 2020) to demonstrate that taking into account the efficiency properties of transport markets is germane to any proposed policy.
{"title":"Search Frictions and Efficiency in Decentralized Transport Markets","authors":"Giulia Brancaccio, Myrto Kalouptsidi, Theodore Papageorgiou, Nicola Rosaia","doi":"10.1093/qje/qjad023","DOIUrl":"https://doi.org/10.1093/qje/qjad023","url":null,"abstract":"\u0000 We explore efficiency and optimal policy in decentralized transport markets, such as taxis, trucks, and bulk shipping. We show that in these markets, search frictions distort the transportation network and the dynamic allocation of carriers over space. We derive explicit and intuitive conditions for efficiency, and show how they translate into efficient pricing rules, or optimal taxes and subsidies for the planner who cannot set prices directly. The results imply that destination-based pricing is essential to attain efficiency. Then, using data from dry bulk shipping, we demonstrate that search frictions lead to a sizeable social loss and substantial misallocation of ships over space. Optimal policy can eliminate about half of the welfare loss. Can a centralizing platform, often arising as a market-based solution to search frictions, do better? Interestingly, the answer is no; although the platform eradicates frictions, it exerts market power thus eroding the welfare gains. Finally, we use two recent interventions in the industry (China’s Belt and Road Initiative and the environmental initiative IMO 2020) to demonstrate that taking into account the efficiency properties of transport markets is germane to any proposed policy.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121821668","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Existing literature has argued that firms benefit from confusing consumers of homogeneous goods. This paper shows that this insight generally breaks down with differentiated goods and heterogeneous preferences: With polarized taste distributions, firms fully educate consumers. In cases where firms nevertheless confuse consumers, the welfare consequences are worse than for homogeneous goods, as consumers choose dominated options. Similar insights are also obtained for political contests, in which candidates compete for voters with heterogeneous preferences: Parties choose ambiguous platforms only when preferences are ‘indecisive’, featuring a concentration of indifferent voters.
{"title":"Preferences, Confusion and Competition","authors":"A. Hefti, Shuo Liu, A. Schmutzler","doi":"10.2139/ssrn.3592445","DOIUrl":"https://doi.org/10.2139/ssrn.3592445","url":null,"abstract":"\u0000 Existing literature has argued that firms benefit from confusing consumers of homogeneous goods. This paper shows that this insight generally breaks down with differentiated goods and heterogeneous preferences: With polarized taste distributions, firms fully educate consumers. In cases where firms nevertheless confuse consumers, the welfare consequences are worse than for homogeneous goods, as consumers choose dominated options. Similar insights are also obtained for political contests, in which candidates compete for voters with heterogeneous preferences: Parties choose ambiguous platforms only when preferences are ‘indecisive’, featuring a concentration of indifferent voters.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121421572","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
An increase in quality shifts up the distribution of match utilities offered by firms and makes consumers pickier. The number of products that consumers inspect does not necessarily increase in quality. Higher search costs may lead to less quality investment, and the equilibrium price may decrease. If the equilibrium is inefficient, it is because of the inadequacy of quality investment. The market level of quality investment is excessive (insufficient) and consumers are too (little) picky from the point of view of welfare maximization if and only if a rise in quality results in consumers inspecting a higher (lower) number of products. (JEL D11, D21, D83, G31, L15)
{"title":"Product Quality and Consumer Search","authors":"J. Moraga-González, Ya-Chung Sun","doi":"10.1257/mic.20200300","DOIUrl":"https://doi.org/10.1257/mic.20200300","url":null,"abstract":"An increase in quality shifts up the distribution of match utilities offered by firms and makes consumers pickier. The number of products that consumers inspect does not necessarily increase in quality. Higher search costs may lead to less quality investment, and the equilibrium price may decrease. If the equilibrium is inefficient, it is because of the inadequacy of quality investment. The market level of quality investment is excessive (insufficient) and consumers are too (little) picky from the point of view of welfare maximization if and only if a rise in quality results in consumers inspecting a higher (lower) number of products. (JEL D11, D21, D83, G31, L15)","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"412 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114351849","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the effects on loan rates of a quasi-experimental change in the Italian legislation which forbids interlocking directorates between banks. We use a difference-in-differences approach and exploit multiple banking relationships to control for unobserved heterogeneity. We find that the reform decreased rates charged by previously interlocked banks to common customers by between 10-30 basis points. The effect is stronger if the firm had a weaker bargaining power vis-a-vis the interlocked banks. Consistent with the assumption that interlocking directorates facilitate collusion, interest rates on loans from interlocked banks become more dispersed after the reform.
{"title":"Interlocking Directorates and Competition in Banking","authors":"Guglielmo Barone, F. Schivardi, Enrico Sette","doi":"10.2139/ssrn.4153387","DOIUrl":"https://doi.org/10.2139/ssrn.4153387","url":null,"abstract":"We study the effects on loan rates of a quasi-experimental change in the Italian legislation which forbids interlocking directorates between banks. We use a difference-in-differences approach and exploit multiple banking relationships to control for unobserved heterogeneity. We find that the reform decreased rates charged by previously interlocked banks to common customers by between 10-30 basis points. The effect is stronger if the firm had a weaker bargaining power vis-a-vis the interlocked banks. Consistent with the assumption that interlocking directorates facilitate collusion, interest rates on loans from interlocked banks become more dispersed after the reform.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"303 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133225804","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The delayed response of law enforcement to calls for service has become a hot button issue when evaluating police department performance. While it is often assumed that faster response times could play an important role in quelling potentially violent incidents, there is no empirical evidence to support this claim. In this paper, we measure the effect of police response time on the likelihood that an incident will result in an injury. To overcome the endogeneity of more severe calls being assigned higher priority, which requires a faster response, we take several steps. First, we focus on the subset of calls for service categorized as ‘Major Disturbance—Violence’ that all receive the same priority level. Second, we instrument for police response time with the number of vehicles within a 2.5-mile radius of the incident at the time it is received by the call center. When controlling for beat, month, and time-of-day fixed effects, this instrumenting strategy allows us to take advantage of the geographical constraints faced by a dispatcher when assigning officers to an incident. In contrast to the OLS estimates, our two-stage least squares analysis establishes a strong causal relationship whereby increasing response time increases the likelihood that an incident results in an injury. The effect is concentrated among female victims, suggesting that faster response time could potentially play an important role in reducing injuries related to domestic violence.
{"title":"Police Response Times and Injury Outcomes","authors":"Sarit Weisburd, Gregory J. DeAngelo, Marina Toger","doi":"10.1093/ej/uead035","DOIUrl":"https://doi.org/10.1093/ej/uead035","url":null,"abstract":"\u0000 The delayed response of law enforcement to calls for service has become a hot button issue when evaluating police department performance. While it is often assumed that faster response times could play an important role in quelling potentially violent incidents, there is no empirical evidence to support this claim. In this paper, we measure the effect of police response time on the likelihood that an incident will result in an injury. To overcome the endogeneity of more severe calls being assigned higher priority, which requires a faster response, we take several steps. First, we focus on the subset of calls for service categorized as ‘Major Disturbance—Violence’ that all receive the same priority level. Second, we instrument for police response time with the number of vehicles within a 2.5-mile radius of the incident at the time it is received by the call center. When controlling for beat, month, and time-of-day fixed effects, this instrumenting strategy allows us to take advantage of the geographical constraints faced by a dispatcher when assigning officers to an incident. In contrast to the OLS estimates, our two-stage least squares analysis establishes a strong causal relationship whereby increasing response time increases the likelihood that an incident results in an injury. The effect is concentrated among female victims, suggesting that faster response time could potentially play an important role in reducing injuries related to domestic violence.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116081021","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Few would dispute that cyber risk is a very serious problem for the global economy and for society. But there is a "disconnect" between acknowledgement of the problem and action to address the problem. What is the relationship between vulnerabilities, preventive measures, and security incidents, like the leaking of sensitive data (say credit card information) to the web? To the best of our knowledge, little if anything is known about the relationship among these variables and no one has examined this issue empirically at the micro level, that is, at the level of the firm. In this paper, we put together a remarkable and unique cross-sectional data set at the firm level that includes information on vulnerabilities, attempted email attacks, incidents (breaches), precautions (security measures.) and firm characteristics. The data set contains slightly under 1000 small and medium firms in the U.K. We empirically examine the data and show that there are meaningful correlations among incidents and the other variables. Finally, we estimate a reduced form model with incidents as the dependent variable to illustrate the potential from employing such data.
{"title":"A New Approach to Quantifying, Reducing and Insuring Cyber Risk: Preliminary Analysis and Proposal for Further Research","authors":"Shalom Bublil, Neil Gandal, M. Riordan","doi":"10.2139/ssrn.3548380","DOIUrl":"https://doi.org/10.2139/ssrn.3548380","url":null,"abstract":"Few would dispute that cyber risk is a very serious problem for the global economy and for society. But there is a \"disconnect\" between acknowledgement of the problem and action to address the problem. What is the relationship between vulnerabilities, preventive measures, and security incidents, like the leaking of sensitive data (say credit card information) to the web? To the best of our knowledge, little if anything is known about the relationship among these variables and no one has examined this issue empirically at the micro level, that is, at the level of the firm. In this paper, we put together a remarkable and unique cross-sectional data set at the firm level that includes information on vulnerabilities, attempted email attacks, incidents (breaches), precautions (security measures.) and firm characteristics. The data set contains slightly under 1000 small and medium firms in the U.K. We empirically examine the data and show that there are meaningful correlations among incidents and the other variables. Finally, we estimate a reduced form model with incidents as the dependent variable to illustrate the potential from employing such data.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"325 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124586460","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Andrea Amelio, Liliane Giardino-Karlinger, T. Valletti
This paper studies the incentives to engage in exclusionary pricing in the context of two-sided markets. Platforms are horizontally differentiated, and seek to attract users of two groups who single-home and enjoy indirect network externalities from the size of the opposite user group active on the same platform. The entrant incurs a fixed cost of entry, and the incumbent can commit to its prices before the entry decision is taken. The incumbent has thus the option to either accommodate entry, or to exclude entry and enjoy monopolistic profits, albeit under the constraint that its price must be low enough to not leave any room for an entrant to cover its fixed cost of entry. We find that, in the spirit of the literature on limit pricing, under certain circumstances even platforms find it profitable to exclude entrants if the fixed entry cost lies above a certain threshold. By studying the properties of the threshold, we show that the stronger the network externality, the lower the thresholds for which incumbent platforms find it profitable to exclude. We also find that entry deterrence is more likely to harm consumers the weaker are network externalities, and the more differentiated are the two platforms.
{"title":"Exclusionary Pricing in Two-Sided Markets","authors":"Andrea Amelio, Liliane Giardino-Karlinger, T. Valletti","doi":"10.2139/ssrn.3541834","DOIUrl":"https://doi.org/10.2139/ssrn.3541834","url":null,"abstract":"This paper studies the incentives to engage in exclusionary pricing in the context of two-sided markets. Platforms are horizontally differentiated, and seek to attract users of two groups who single-home and enjoy indirect network externalities from the size of the opposite user group active on the same platform. The entrant incurs a fixed cost of entry, and the incumbent can commit to its prices before the entry decision is taken. The incumbent has thus the option to either accommodate entry, or to exclude entry and enjoy monopolistic profits, albeit under the constraint that its price must be low enough to not leave any room for an entrant to cover its fixed cost of entry. We find that, in the spirit of the literature on limit pricing, under certain circumstances even platforms find it profitable to exclude entrants if the fixed entry cost lies above a certain threshold. By studying the properties of the threshold, we show that the stronger the network externality, the lower the thresholds for which incumbent platforms find it profitable to exclude. We also find that entry deterrence is more likely to harm consumers the weaker are network externalities, and the more differentiated are the two platforms.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117263556","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Motivated by markets for “expertise,” we study a bandit model where a principal chooses between a safe and risky arm. A strategic agent controls the risky arm and privately knows whether its type is high or low. Irrespective of type, the agent wants to maximize duration of experimentation with the risky arm. However, only the high type arm can generate value for the principal. Our main insight is that reputational incentives can be exceedingly strong unless both players coordinate on maximally inefficient strategies on path. We discuss implications for online content markets, term limits for politicians, and experts in organizations.
{"title":"(Bad) Reputation in Relational Contracting","authors":"R. Deb, M. Mitchell, Mallesh M. Pai","doi":"10.3982/te4803","DOIUrl":"https://doi.org/10.3982/te4803","url":null,"abstract":"Motivated by markets for “expertise,” we study a bandit model where a principal chooses between a safe and risky arm. A strategic agent controls the risky arm and privately knows whether its type is high or low. Irrespective of type, the agent wants to maximize duration of experimentation with the risky arm. However, only the high type arm can generate value for the principal. Our main insight is that reputational incentives can be exceedingly strong unless both players coordinate on maximally inefficient strategies on path. We discuss implications for online content markets, term limits for politicians, and experts in organizations.","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121676476","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We introduce advertising congestion along with a time use model of consumer choice among media. Both consumers and advertisers multihome. Higher equilibrium advertising levels ensue on less popular media platforms because platforms treat consumer attention as a common property resource: smaller platforms internalize less of the congestion from advertising and so advertise more. Platform entry raises the ad nuisance price to consumers and diminishes the quality of the consumption experience on all platforms. For consumer welfare this price effect of entry dominates the positive effect of more variety in some settings; thus, consumers will then be worse off after entry. (JEL D11, D43, L13, L82, M37)
{"title":"Ad Clutter, Time Use, and Media Diversity","authors":"Simon P. Anderson, M. Peitz","doi":"10.1257/mic.20210139","DOIUrl":"https://doi.org/10.1257/mic.20210139","url":null,"abstract":"We introduce advertising congestion along with a time use model of consumer choice among media. Both consumers and advertisers multihome. Higher equilibrium advertising levels ensue on less popular media platforms because platforms treat consumer attention as a common property resource: smaller platforms internalize less of the congestion from advertising and so advertise more. Platform entry raises the ad nuisance price to consumers and diminishes the quality of the consumption experience on all platforms. For consumer welfare this price effect of entry dominates the positive effect of more variety in some settings; thus, consumers will then be worse off after entry. (JEL D11, D43, L13, L82, M37)","PeriodicalId":401540,"journal":{"name":"CEPR: Industrial Organization (Topic)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122253767","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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