Creator: Hopenhayn, Hugo Andres, Llobet, Gerard, and Mitchell, Matt Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 273 Abstract:
This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract.
Keyword: Policy, Mechanism Design, Sequential Innovation, Innovation, Compulsory Licensing, Patents, and Asymmetric Information Subject (JEL): K23 - Regulated Industries and Administrative Law, D82 - Asymmetric and Private Information; Mechanism Design, D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, O31 - Innovation and Invention: Processes and Incentives, H41 - Public Goods, L51 - Economics of Regulation, and L50 - Regulation and Industrial Policy: General
Creator: Fernandes, Ana and Phelan, Christopher Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 259 Abstract:
There is now an extensive literature regarding the efficient design of incentive mechanisms in dynamic environments. In this literature, there are no exogenous links across time periods because either privately observed shocks are assumed time independent or past private actions have no influence on the realizations of current variables. The absence of exogenous links across time periods ensures that preferences over continuation contracts are common knowledge, making the definition of incentive compatible contracts at a point in time a simple matter. In this paper, we present general recursive methods to handle environments where privately observed variables are linked over time. We show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility conditions.
Keyword: Repeated agency and Mechanism design Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, D30 - Distribution: General, D80 - Information, Knowledge, and Uncertainty: General, and D31 - Personal Income, Wealth, and Their Distributions
Creator: Allen, Beth Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 226 Abstract:
This paper surveys implementation theory when players have incomplete or asymmetric information, especially in economic environments. After the basic problem is introduced, the theory of implementation is summarized. Some coalitional considerations for implementation problems are discussed. For economies with asymmetric information, cooperative games based on incentive compatibility constraints or Bayesian incentive compatible mechanisms are derived and examined.
Keyword: Incomplete Information, Incentive Compatibility, Cooperative Games, Core, Nontransferable Utility, Asymmetric Information, Mechanisms, Bayesian-Nash Revelation Principle, and Implementation Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, D51 - Exchange and Production Economies, D71 - Social Choice; Clubs; Committees; Associations, C72 - Noncooperative Games, and C71 - Cooperative Games
Creator: Allen, Beth Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 225 Abstract:
This paper surveys cooperative game theory when players have incomplete or asymmetric information, especially when the TU and NTU games are derived from economic models. First some results relating balanced games and markets are summarized, including theorems guaranteeing that the core is nonempty. Then the basic pure exchange economy is extended to include asymmetric information. The possibilities for such models to generate cooperative games are examined. Here the core is emphasized as a solution, and criteria are given for its nonemptiness. Finally, an alternative approach is explored based on Harsanyi’s formulation of games with incomplete information.
Keyword: Incomplete Information, Market Games, NT Games, Core, TU Games, and Asymmetric Information Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, D51 - Exchange and Production Economies, and C71 - Cooperative Games
Creator: Kocherlakota, Narayana Rao, 1963- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 218 Abstract:
This paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible (the standard definition of feasibility is adapted to take account of the lack of commitment). The environments feature either memory or money. Memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past. Money is defined as an object that does not enter preferences or production and is available in fixed supply. The main proposition proves that any allocation that is feasible in an environment with money is also feasible in the same environment with memory. Depending on the environment, the converse may or may not be true. Hence, from a technological point of view, money is equivalent to a primitive form of memory.
Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games, and E40 - Money and Interest Rates: General