Contributions in Merlin

Any symmetric mixed-strategy equilibrium in a Tullock contest with intermediate values of the decisiveness parameter ("2 < R < ∞") has countably infinitely many mass points. All probability weight is concentrated on those mass points, which have the zero bid as their sole point of accumulation. With contestants randomizing over a non-convex set, there is a cost of being "halfhearted," which is absent from both the lottery contest and the all-pay auction. Numerical bid distributions are generally negatively skewed, and exhibit, for some parameter values, a higher probability of ex-post overdissipation than the all-pay auction.

This paper discusses and proposes random selection as a component in decision-making in society. Random procedures have played a significant role in history, especially in classical Greece and the medieval city-states of Italy. We examine the important positive features of decisions by random Mechanisms. Random processes allow representativeness with respect to individuals and groups. They significantly reduce opportunities to influence political decisions by means of bribery and corruption and decrease the large expenses associated with today’s democratic election campaigns. Random mechanisms can be applied fruitfully to a wide range of fields, including politics, the judiciary, the economy, science and the cultural sector. However, it is important that random selection processes are embedded in appropriately designed institutions.

Empirical evidence shows that workers care about the mission of their job in addition to their wage. This suggests that employers can use the job mission to incentivize and screen their workers. I study a model in which a principal selects an agent to develop a project and influences the agent's ex post level of effort not by outcome-contingent rewards, but by the choice of the project mission. The principal's and the agents' preferences about the mission are misaligned and the degree to which an agent cares about the mission is private information. I derive the optimal mechanism (allocation rule, project mission, payment) to select and motivate the agent. I show that under the optimal mechanism the project mission is distorted towards the principal's ideal mission compared to the full information optimum. As a consequence, effort is lower. If the mission must be chosen prior to the allocation of the project, competition brings the principal to align the mission more with the agent's preferences, which increases his effort. Finally, in the presence of budget constraints, the principal should offer the same mission and the same payment to all types of agents. Several applications and links to the empirical evidence are discussed.

Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debtequity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.

Social capital is often associated with desirable political and economic outcomes. This paper contributes to a growing literature on its "dark side". We examine the role of social capital in the downfall of democracy in interwar Germany. We analyze Nazi Party entry in a cross-section of cities, and show that dense networks of civic associations such as bowling clubs, choirs, and animal breeders went hand-in-hand with a rapid rise of the Nazi Party. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. Party membership, in turn, predicts electoral success. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital were more important in the starting phase of the Nazi movement, and in towns less sympathetic to its message.

We introduce a simple two-stage game of endogenous network formation and information sharing for reasoning about the optimal design of social networks like Facebook or Google+. We distinguish between unilateral and bilateral connections and between targeted and collective information sharing. Agents value being connected to other agents and sharing and receiving information. We consider multiple utility specifications. We show that the game always has an equilibrium in pure strategies and then we study how the network design and the utility specifications affect welfare. Surprisingly, we find that in general, targeted information sharing is not necessarily better than collective information sharing. However, if all agents are either "babblers" or "friends", irrespective of whether the network is unilateral or bilateral, in equilibrium, targeted information sharing yields higher welfare than collective information sharing.

Behavioral robustness is essential in mechanism design. Existing papers focus on robustness as captured by dominant strategies. This paper studies the novel concept of externality-robustness, which addresses players’ motives to affect other players’ monetary payoffs. One example is externalities due to spite, which has been used to explain overbidding in second-price auctions. We show theoretically and experimentally that a trade-off exists between dominant-strategy implementation and externality-robust implementation. In particular, we derive the externality-robust counterpart of the second-price auction. Our experiments replicate the earlier finding of overbidding in the second-price auction, but we find that average bids equal value in the externality-robust auction. Our data also reveal that both auctions produce the same level of efficiency, suggesting that both dimensions of robustness are equally important. Our results are relevant for mechanism design in general, because the concept of externality-robustness is applicable to arbitrary mechanism design problems.

Are competitive mechanisms perceived as just sources of economic inequality? Perceptions of fairness violations can have severe economic consequences, as they may cause counterproductive behavior such as rulebook slowdowns or quality shading. To analyze fairness perceptions associated with competitive mechanisms, we run laboratory experiments where a single powerful buyer can trade with one of several sellers—an environment that can lead to pronounced inequality among the interacting parties. Once the terms of trade are determined, sellers can engage in counterproductive behavior. We robustly find that low procurement prices, which allocate most of the surplus from trade to the buyer, trigger significantly less counterproductive behavior if the buyer uses a competitive auction to determine the terms of trade than if he uses his price setting power to dictate the same terms directly. Our data demonstrate that competitive mechanisms, in addition to their capability to produce efficient allocations, can reduce conflict and inefficient reactions by increasing justification for economic inequality.

Can infrastructure investment win "hearts and minds"? We analyze a famous case in the early stages of dictatorship - the building of the motorway network in Nazi Germany. The Autobahn was one of the most important projects of the Hitler government. It was intended to reduce unemployment, and was widely used for propaganda purposes. We examine its role in increasing support for the NS regime by analyzing new data on motorway construction and the 1934 plebiscite, which gave Hitler great powers as head of state. Our results suggest that road building was highly effective, reducing opposition to the nascent Nazi regime.

SBTC is a powerful mechanism in explaining the increasing gap between educated and uneducated wages. However, SBTC cannot mimic the US within-group wage inequality. This paper provides an explanation for the observed intra-college group inequality by showing that the top decile earners' significant wage growth is underpinned by the link between ex ante ability, math-heavy college majors and highly quantitative occupations. We develop a general equilibrium model with multiple education outcomes, where wages are driven by individuals' ex ante abilities and acquired math skills. A large portion of within-group and general wage inequality is explained by math-biased technical change (MBTC).