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We consider a model of international trade with increasing returns in a non-traded input into industry, “infrastructure”, and show that the nature of equilibrium depends crucially on whether the infrastructure provider acts in a “naïve” manner – akin to a Level 1 agent in a cognitive...
We model an economy with two final goods, manufactures produced under IRS and food. The scale economies in manufacturing are external (therefore compatible with perfect competition) and traceable to internal economies in the provision of an infrastructural service (the third sector of the...
If the consumer’s risk aversion behavior varies intertemporally and if the risk aversion coefficient on future consumption becomes very large, the consumer tends to aim at a fixed future consumption target. A by-product is a reinterpretation of subsistence theories of consumption.
We examine a model in which the utility function has been engineered so that it is optimal for consumers to aim for a fixed target level of retirement resources. In this case consumption displays excess sensitivity to current income as well as perfect old age insurance. In an overlapping...
Firm insiders – a manager and a board – face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of...
Final goods producers, who may be intrinsically honest (a behavioral type) or opportunistic (strategic), play a repeated game of imperfect information with suppliers of an input of variable (and non-verifiable) quality. Returns to cheating are increasing in the proportion of intrinsically honest...
We pin down the optimal relational contract between an input supplier and a final goods producer given a framework of bilateral moral hazard with variable but non-verifiable input quality. Given the inability of third parties to verify input quality, each party has an incentive to cheat the...
We examine self-enforcing honesty in firm-investor relations in an imperfect public information game. Minimum firm size requirements and moral hazard limit ability to raise outside capital, yielding a floor on personal wealth required to enter entrepreneurship. Credible auditing could create...
We apply a game-theoretic model to the analysis of the recent spate of corporate scandals in which firms have cheated their investors, often with the aid of external auditors. We characterize the different types of equilibria that obtain for different parameter ranges in an auditor’s absence...