Contributions published at Information Economics and Contract Theory (Christian Ewerhart)

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When investments are specific to a relationship and contracting possibilities are incomplete, the efficiency of a joint venture may be severely impaired by ex-post opportunistic and hold-up type behavior. How is the logic of this argument affected by inequity aversion? In this paper I show that incentives to invest are stronger with inequity aversion because a higher investment by an individual agent increases not only the total surplus to be divided, but also, generally, the relative share of the surplus obtained by this agent in the ex-post negotiation. In fact, when production is sufficiently profitable and agents are sufficiently patient, then first-best investment levels may be approximated without any contract.

It is well known that ex-ante randomization can improve uponnsecond best contracts in principal-agent problems. In this note, we show that even the first-best can be dominated by a random contract. Our example isncast in a standard textbook set-up with two effort levels and two states of nature.

The paper analyzes the infinite-horizon alternating-offers bargaining game between agents with inequity-averse preferences. Without prior investments,nthe model predicts a shift of the outcome towards equal division. Asymmetricninvestments affect the ex-post bargaining outcome, giving an advantage to the party that contributed more. Under suitable circumstances, this effectnmay significantly mitigate the hold-up problem. In fact, in a symmetric setup, if production is sufficiently profitable, and parties are sufficiently patient, then the first-best investment levels can be approximated without a con

"This paper derives a central bank’s optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect ofnliquidity on market rates is not too small, and the monetary authority cares for both interest rates and liquidity conditions, then the optimal allotment policy may entail a discontinuous reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central banknwill not bail out the banking system. An estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem’s tight response to occurrences of underbidding during the period June 2000 through March 2004."

A global signaling game is a sender-receiver game in which the sender is only imperfectly informed about the receiver's preferences. The paper considers an economically relevant class of signaling games that possess more than one Perfect Bayesian equilibrium. For this class of games, it is shown that a Perfect Bayesian equilibrium is unaffected by a small perturbation of the information structure if and only if it is consistent with a criterion suggested by Cho and Kreps (1987). Moreover, the equilibrium in the global signaling game is essentially unique.

We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank justntrades to compensate its liquidity imbalance, while a sophisticated bank willnexploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generatenan overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.

In competitive procurement auctions, bids often have the form of unit-price contracts (UPCs). We show that optimal bidding behavior in UPC auctions is typically non-monotonic, and therefore may lead to inefficient allocations. However, UPC auctions may still be desirable for the buyer when compared to efficient mechanisms such as the first-price auction. In a UPC auction, low types are subsidized, and the resulting stronger competition reduces the winning bidder's informational rent, which overcompensates the efficiency loss.

When the price of an input factor to a production process increases, then the optimal output level declines and the input is substituted by other factors. Marshall's rule is a formula that determines the own-price elasticity for one factor as a weighted sum of the elasticities of output market demand and factor substitution. This note offers a proof for Marshall's rule that is significantly shorter and somewhat more intuitive than existing derivations.

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We prove that any strictly competitive perfect-information two-person game with n outcomes is solvable in n−1 steps of elimination of weakly dominated strategies— regardless of the length of the game tree. The given bound is shown to be tight using a variant of Rosenthal's centipede game.

The paper scrutinizes various stylized facts related to the minmax theorem for chess. We first point out that, in contrast to the prevalent understanding, chess is actually an infinite game, so that backward induction does not apply in the strict sense. Second, we recall the original argument for the minmax theorem of chess – which is forward rather than backward looking. Then it is shown that, alternatively, the minmax theorem for the infinite version of chess can be reduced to the minmax theorem of the usually employed finite version. The paper concludes with a comment on Zermelo’s (1913) non-repetition theorem.

In a pioneering approach towards the explanation of the phenomenon of “yes man” behavior in organizations, Prendergast [American Economic Review 83 (1993) 757–770] argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and hence the first best can be achieved.

We show that strictly competitive, finite games of perfect information that may end in one of three possible ways can be solved by applying only two rounds of elimination of dominated strategies.

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