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on Contract Theory and Applications |
| By: | Zongxia Liang; Yi Xia; Bin Zou |
| Abstract: | We introduce a two-layer stochastic game model to study reinsurance contracting and competition in a market with one insurer and two competing reinsurers. The insurer negotiates with both reinsurers simultaneously for proportional reinsurance contracts that are priced using the variance premium principle; the reinsurance contracting between the insurer and each reinsurer is modeled as a Stackelberg game. The two reinsurers compete for business from the insurer and optimize the so-called relative performance, instead of their own surplus; the competition game between the two reinsurers is settled by a non-cooperative Nash game. We obtain a sufficient and necessary condition, related to the competition degrees of the two reinsurers, for the existence of an equilibrium. We show that the equilibrium, if exists, is unique, and the equilibrium strategy of each player is constant, fully characterized in semi-closed form. Additionally, we obtain interesting sensitivity results for the equilibrium strategies through both an analytical and numerical study. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.06235&r= |
| By: | Nicole Immorlica; Nicholas Wu; Brendan Lucier |
| Abstract: | We study the problem of a principal who wants to influence an agent's observable action, subject to an ex-post budget. The agent has a private type determining their cost function. This paper endogenizes the value of the resource driving incentives, which holds no inherent value but is restricted by finite availability. We characterize the optimal mechanism, showing the emergence of a pooling region where the budget constraint binds for low-cost types. We then introduce a linear value for the transferable resource; as the principal's value increases, the mechanism demands more from agents with binding budget constraint but less from others. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.15531&r= |
| By: | Sebastian Schweighofer-Kodritsch (HU Berlin); Roland Strausz (HU Berlin) |
| Abstract: | We cast mechanism design with evidence in the framework of Myerson (1982), whereby his generalized revelation principle directly applies and yields standard notions of incentive compatible direct mechanisms. Their specific nature depends on whether the agent's (verifiable) presentation of evidence is contractually controllable, however. For deterministic implementation, we show that, in general, such control has value, and we offer two independent conditions under which this value vanishes, one on evidence (WET) and another on preferences (TIWO). Allowing for fully stochastic mechanisms, we also show how randomization generally has value and clarify to what extent this value vanishes under the common assumption of evidentiary normality (NOR). While, in general, the value of control extends to stochastic implementation, neither control nor randomization have any value if NOR holds together with WET or TIWO. |
| Keywords: | mechanism design; revelation principle; evidence; verifiable information; value of control; value of randomization; |
| JEL: | D82 |
| Date: | 2024–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:504&r= |
| By: | Gautam Gowrisankaran; Philipp Schmidt-Dengler |
| Abstract: | This paper analyzes dynamic oligopoly models where investment is the principal strategic variable of interest, there are a large number of investment choices, and there are privately observed shocks to the marginal cost of investment. We show that simulation methods to compute these models can result in non-existence of pure strategy equilibrium. We provide a computationally efficient method to calculate optimal investment probabilities and show how to apply our methods to the recent dynamic empirical literature. The method iteratively finds the investment choices chosen with positive probability and cutoff values of the private information shocks across options in this set. |
| JEL: | C63 C73 L11 L13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32399&r= |
| By: | Ernest Aboagye; Vali Asimit; Tsz Chai Fung; Liang Peng; Qiuqi Wang |
| Abstract: | It is well-known that Excess-of-Loss reinsurance has more marketability than Stop-Loss reinsurance, though Stop-Loss reinsurance is the most prominent setting discussed in the optimal (re)insurance design literature. We point out that optimal reinsurance policy under Stop-Loss leads to a zero insolvency probability, which motivates our paper. We provide a remedy to this peculiar property of the optimal Stop-Loss reinsurance contract by investigating the optimal Excess-of-Loss reinsurance contract instead. We also provide estimators for the optimal Excess-of-Loss and Stop-Loss contracts and investigate their statistical properties under many premium principle assumptions and various risk preferences, which according to our knowledge, have never been investigated in the literature. Simulated data and real-life data are used to illustrate our main theoretical findings. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.00188&r= |
| By: | Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) |
| Abstract: | Compatibility and connectivity are essential elements in a network economy. Using the degree of network compatibility as a measure of market competitiveness, we consider the impact of compatibility on profit incentives to innovate in a network goods industry. That is, an increase in the degree of network compatibility possibly reduces market competitive pressure. In addition, we investigate the impact on consumer benefits (i.e., marginal consumer surplus) caused by the innovation. We demonstrate that as the degree of compatibility increases, the profit incentives to innovate first decrease, then increase (i.e., a U-shaped function of compatibility); but, conversely, the consumer benefits first increase, then decrease (i.e., an inverted U-shaped function of compatibility). |
| Keywords: | innovation; network compatibility; a fulfilled expectation; cost-reducing R&D; Cournot duopoly |
| JEL: | D43 L13 L15 O31 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:274&r= |