|
on Economic Design |
| By: | Nadia Gui\~naz\'u; Noelia Juarez; Paola Manasero; Pablo Neme; Jorge Oviedo |
| Abstract: | We study the existence of pairwise stable allocations in matching markets with contracts and propose a domain restriction that guarantees their existence. Specifically, we define pseudo-substitutable preferences, a domain that strictly extends the classical notion of substitutability while still preserving the existence of pairwise stable allocations. This domain accommodates limited complementarities among contracts while retaining enough structure to preserve the key stability properties of substitutable preferences. Moreover, we show that, among all preference domains that contain the classical substitutable domain and guarantee the existence of pairwise stable allocations, the pseudo-substitutable domain is maximal. Our results establish that pairwise stability extends well beyond the classical substitutable domain. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18299 |
| By: | Dazhong Wang; Ruqu Wang; Xinyi Xu |
| Abstract: | This paper studies optimal auction design when valuations depend endogenously on post-auction collaboration between the seller and the winning bidder. Both parties exert non-contractible efforts after the auction, generating a double moral hazard problem alongside adverse selection. We analyze two role structures -- winner-pivotal and seller-pivotal collaboration -- and characterize optimal direct mechanisms using linear payment schemes that combine cash transfers with proportional value sharing. The optimal mechanism allocates the asset to the bidder with the highest virtual surplus, employs a deterministic value-sharing rule, and achieves full type revelation through the signal realization rule. Comparing the two scenarios yields three main findings. First, regarding value sharing, the seller secures a strictly higher share under seller-pivotal collaboration: for sufficiently low-type winners, the seller extracts the entire value, whereas under winner-pivotal collaboration every winner must retain a positive share to sustain his critical effort. Second, regarding effort exertion, the pivotal party always exerts higher post-auction effort than the supporting party, and each party exerts greater effort when pivotal than when providing support. Third, seller-pivotal collaboration yields strictly higher seller revenue than winner-pivotal collaboration for any type distribution. Finally, these optimal mechanisms can be implemented through ascending auctions with endogenously determined linear contracts. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.17923 |
| By: | Yasushi Kawase; Warut Suksompong; Hanna Sumita; Yu Yokoi |
| Abstract: | In random assignment, fairness is often captured by stochastic-dominance envy-freeness (SD-EF). We observe that assignments satisfying SD-EF may admit decompositions that result in each agent envying another agent with high probability. To address this, we introduce decomposition envy-freeness (Dec-EF), which is a property of a decomposition rather than of an assignment matrix. We show that an SD-EF assignment matrix always admits a Dec-EF decomposition when there are at most three agents or the agents have at most two distinct preferences. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.16973 |
| By: | Juan Sebastián Ivars (University of Balearic Islands) |
| Abstract: | This paper investigates how market competition shapes the design and provision of incentive contracts for managers. We study a moral hazard setting where two principals each employ a risk neutral agent (manager). Each agent makes a decision on effort leading stochastically to an outcome. These outcomes are observable for each principal and used to design incentives based on their joint realizations. We isolate the effect of market competition in two channels: market information and market structure. First, market information captures the correlation between the outcomes generated by the agents. Second, market structure indicates the profits that each principal obtains from a given realization of agents’ outcomes. As a result, the incentive schemes that are optimal from an informational perspective need not be used in equilibrium when competition reduces the returns to effort. This framework provides a unified explanation for variation in incentive design across competitive environments and clarifies how competition affects managerial discipline through the profitability of incentive provision rather than through the design of performance measures. |
| Keywords: | Moral Hazard, Principal-Agent, Competition, Managerial Incentives |
| JEL: | D21 D43 D86 M12 L13 J33 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:392 |
| By: | R. Pablo Arribillaga; Juan D. Moreno-Ternero; Pablo Neme |
| Abstract: | We consider a setting in which a set of agents are hierarchically organized for a joint venture. They each generate revenues for the joint venture and have individual needs to cover. The aim is to distribute aggregate revenues appropriately. We characterize a family of need-adjusted geometric rules where the net revenue (after covering needs) "bubbles up" in the hierarchy, as well as a need-adjusted serial rule in which the net revenue is equally shared among each agent and his predecessors in the hierarchy. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.18108 |
| By: | Eric Gao; Daniel Luo |
| Abstract: | We study economies where consumers interact independently with many monopolists. When consumer valuations over goods are correlated, correlation can distort the induced distribution of consumer surplus (information rents). We identify which shifts in the correlation structure over values makes the induced distribution more or less fair, in the sense of second order stochastic dominance. We then investigate the role taxation can have on information rents, and show the tax authority never benefits from randomizing the allocation of goods. We characterize the set of mechanisms that are on the fairness-efficiency frontier under regularity conditions on the distribution of types. Furthermore, under these conditions all allocations on the fairness-efficiency frontier ration the good more than an unregulated monopolist. Finally, we discuss implications of our model for luxury commodity taxation. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.19044 |
| By: | David Martimort (Toulouse School of Economics, France); Aggey Simons (Department of Economics, University of Ottawa, Canada) |
| Abstract: | We characterize the optimal contract within the class of stationary mechanisms in a repeated buyer-seller relationship with persistent adverse selection and one-sided limited enforcement. A prepaid seller may breach after receiving the current transfer and terminate the relationship upon paying an enforceable penalty. In this stationary benchmark, the enforcement problem collapses to a bound on the transfer targeted to the most efficient type. This yields a three-regime characterization. With strong enforcement, the repeated static second-best contract is feasible. With weak (intermediate) enforcement, the top transfer is capped, inducing bunching among efficient types and additional downward distortions. With very weak enforcement, public penalties alone cannot sustain compliance, and the principal must leave strictly positive continuation rents, including for the least efficient type. We interpret the associated distortion as a virtual enforcement cost. |
| Keywords: | Adverse selection, Limited enforcement, Relational contracts, Contract breach. |
| JEL: | D82 D86 K12 C61 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ott:wpaper:2603e |
| By: | Pierre-Andre Chiappori; Dam Linh Nguyen; Bernard Salanie |
| Abstract: | Since Choo and Siow (2006), a burgeoning literature has analyzed matching markets when utility is perfectly transferable and the joint surplus is separable. We take stock of recent methodological developments in this area. Combining theoretical arguments and simulations, we show that the separable approach is reasonably robust to omitted variables and/or non-separabilities. We conclude with a caveat on data requirements and imbalanced datasets. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.16127 |
| By: | Isaiah Andrews; Harvey Barnhard; Jacob Carlson |
| Abstract: | Parameter estimates in misspecified models converge to pseudo-true parameter values, which minimize a population objective function. Pseudo-true values often differ from quantities of economic interest, raising questions of how, if at all, they are relevant for decision-making. To study this question we consider Bayesian decision-makers facing a linear population minimum distance problem. Within a class of priors motivated by the minimum distance objective, we characterize prior sequences under which posteriors concentrate on the pseudo-true value. This convergence is fragile to small changes in priors, implying that pseudo-true values are relevant for decision-making only in special cases. Constructive results are nevertheless possible in this setting, and we derive simple confidence intervals that guarantee correct average coverage for the true parameter under every prior in the class we study, with no bound on the magnitude of misspecification. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.15563 |
| By: | Sebastian Galiani; Franco Mettola La Giglia |
| Abstract: | This paper models double agents—individuals coerced into simultaneously serving two rival intelligence agencies—as a finite-horizon trilateral game between Agency A, Organization B, and the Mole M. The double agent persists within a corridor of survival: a set of bilateral beliefs under which both principals continue the relationship. Under a linear-quadratic-Gaussian benchmark, we obtain a closed-form characterization of the corridor geometry, analytical upper bounds on expected duration, and three main results: (i) existence of a double-agent equilibrium, (ii) structural transitoriness— belief updating, terminal unraveling, and compounding survival risk ensure inevitable collapse, and (iii) comparative statics linking monitoring technology, punishment severity, and protection costs to expected duration. The key mechanism is self-destructive experimentation: B learns about the mole’s type through both the type-dependence of effort and the traceability channel γ, which amplifies this learning. Extensions establish existence under general specifications and show that duration decays exponentially in the number of rival agencies. Predictions are consistent with historical patterns from Kim Philby to the Cold War mole hunts. The setting—bilateral coercion, existential participation constraints, and Bayesian learning in a finite-horizon trilateral structure— defines what we term antagonistic common agency. |
| JEL: | C70 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35085 |
| By: | Xia Han; Bin Li |
| Abstract: | This paper studies optimal insurance design under asymmetric information in a Stackelberg framework, where a monopolistic insurer faces uncertainty about both the insured's risk attitude, captured by a risk-aversion parameter, and the insured's risk type, characterized by the loss distribution. In particular, when the risk type is unobservable, we allow the risk-aversion parameter to depend on the risk type. We construct a menu of contracts that maximizes the mean-variance utilities of both parties under the expected-value premium principle, subject to a truth-telling constraint that ensures the truthful revelation of private information. We show that when risk attitude is private information, the optimal coverage takes the form of excess-of-loss insurance with linear pricing in terms of the risk loading (defined as the premium minus the expected loss), designed to screen risk preferences. In contrast, when risk type is unobserved, we restrict the coverage function to an excess-of-loss form and derive an ordinary differential equation that characterizes the optimal risk loading. Under mild conditions, we establish the existence and uniqueness of the solution. The results show that equilibrium contracts exhibit nonlinear pricing with decreasing risk loadings, implying that higher-risk individuals face lower risk loadings in order to induce self-selection. Finally, numerical illustrations demonstrate how parameter values and the distributions of unobserved heterogeneity affect the structure of optimal contracts and the resulting pricing schedule. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.15881 |
| By: | Jolian McHardy (School of Economics, University of Sheffield, Sheffield S10 2TU, UK) |
| Abstract: | Network oligopolies with sequential or multi-part consumption face double marginalisation across complementary components, motivating constraints on inter-firm pricing. Building on regulatory provisions permitting coordinated pricing for composite or multi-firm products, we study pricing rules that benchmark cross-firm prices against firms’ standalone or bundled prices. Coordination is not inherently welfare improving: discount-based benchmarks can generate equilibrium surcharges. By contrast, a no-discount rule, NDB, ties cross-firm pricing to own-firm bundles, internalising complementarities without propagating markups and raising welfare across a wide range of market sizes and demand parameterisations. However, private and social incentives need not align, so welfare-improving coordination need not arise endogenously. Whilst these results apply broadly to coordinated pricing in network industries, a calibration to the UK bus market illustrates quantitative relevance. NDB delivers substantial consumer-surplus gains (around 20%) and increases ridership, generating external benefits comparable in magnitude to current operating subsidies, up to £0.5 billion p.a. |
| Keywords: | network pricing; coordination regimes; complementary components; pricing benchmarks; competition policy; network industries. |
| JEL: | L13 L51 D43 D62 R48 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2026003 |
| By: | Dirk Bergemann; Soheil Ghili; Xinyang Hu; Chuanhao Li; Zhuoran Yang |
| Abstract: | Bilateral bargaining under incomplete information provides a controlled testbed for evaluating large language model (LLM) agent capabilities. Bilateral trade demands individual rationality, strategic surplus maximization, and cooperation to realize gains from trade. We develop a structured bargaining environment where LLMs negotiate via tool calls within an event-driven simulator, separating binding offers from natural-language messages to enable automated evaluation. The environment serves two purposes: as a benchmark for frontier models and as a training environment for open-weight models via reinforcement learning. In benchmark experiments, a round-robin tournament among five frontier models (15, 000 negotiations) reveals that effective strategies implement price discrimination through sequential offers. Aggressive anchoring, calibrated concession, and temporal patience correlate with the highest surplus share and deal rate. Accommodating strategies that concede quickly disable price discrimination in the buyer role, yielding the lowest surplus capture and deal completion. Stronger models scale their behavior proportionally to item value, maintaining performance across price tiers; weaker models perform well only when wide zones of possible agreement offset suboptimal strategies. In training experiments, we fine-tune Qwen3 (8B, 14B) via supervised fine-tuning (SFT) followed by Group Relative Policy Optimization (GRPO) against a fixed frontier opponent. These stages optimize competing objectives: SFT approximately doubles surplus share but reduces deal rates, while RL recovers deal rates but erodes surplus gains, reflecting the reward structure. SFT also compresses surplus variation across price tiers, which generalizes to unseen opponents, suggesting that behavioral cloning instills proportional strategies rather than memorized price points. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.16472 |
| By: | Shanglyu Deng; Qiang Fu; Junchi Li; Zenan Wu |
| Abstract: | We study dynamic multi-battle contests and examine how the contest structure shapes dynamic incentives and determines the extent of rent dissipation. A discouragement effect often arises -- such as in tug-of-war and best-of-$K$ contests -- preventing full rent dissipation even when the series can extend infinitely. We identify a structural property, exchangeability, that contributes to the effect. Leveraging this insight, we establish a necessary and sufficient condition for almost-full rent dissipation. As an application, we introduce the iterated incumbency contest, which illustrates how volatility in the surrounding environment sustains dynamic incentives and generates almost-full rent dissipation, and thus offers insights into various competitive phenomena. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.20192 |