Creator: Blandin, Adam, Boyd, John H., and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 717 Abstract:
We develop an equilibrium concept in the Debreu (1954) theory of value tradition for a class of adverse selection economies which includes the Spence (1973) signaling and Rothschild-Stiglitz (1976) insurance environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
Keyword: The core, Adverse selection equilibrium, Theory of value, Mutual organization, Signaling, and Insurance Subject (JEL): C62 - Existence and Stability Conditions of Equilibrium, G29 - Financial Institutions and Services: Other, D46 - Value Theory, G22 - Insurance; Insurance Companies; Actuarial Studies, and D82 - Asymmetric and Private Information; Mechanism Design
Creator: Chari, V. V., Golosov, Mikhail, and Tsyvinski, Aleh Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 673 Abstract:
Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses–for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.
Keyword: Economic growth, Mechanism design, Prizes, Patents, and Innovations Subject (JEL): O40 - Economic Growth and Aggregate Productivity: General, O34 - Intellectual Property and Intellectual Capital, O31 - Innovation and Invention: Processes and Incentives, D86 - Economics of Contract: Theory, D04 - Microeconomic Policy: Formulation, Implementation, and Evaluation, and D82 - Asymmetric and Private Information; Mechanism Design
Creator: Katzman, Brett, 1966-, Kennan, John, and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 595 Abstract:
The effects on ex ante optima of a lag in seeing monetary realizations are studied using a matching model of money. The main new ingredient in the model is meetings in which producers have more information than consumers. A consequence is that increases in the amount of money that occur with small enough probability can have negative impact effects on output, because it is optimal to shut down trade in such low probability meetings rather than have lower output when high probability realizations occur. The information lag also produces prices that do not respond much to current monetary realizations.
Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, E40 - Money and Interest Rates: General, and E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Atkeson, Andrew, Hellwig, Christian, and Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 464 Abstract:
In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.
Keyword: Regulation, Reputation, Firm dynamics, Entry and exit, Creative destruction, and General equilibrium Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, L15 - Information and Product Quality; Standardization and Compatibility, L51 - Economics of Regulation, and D21 - Firm Behavior: Theory
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: Boyd, John H. and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 272 Description:
"Financial intermediary-coalitions" (WP 272) replaces "Financial intermediaries" (WP 231) and "Father of financial intermediary-coalitions" (WP 250).
Keyword: Asset transformers, Core equilibrium, Loan companies, Private information, Consumer finance companies, Commercial banks, Thrift institutions, and Financial intermediation Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, and D50 - General Equilibrium and Disequilibrium: General