nep-gth New Economics Papers
on Game Theory
Issue of 2021‒04‒19
24 papers chosen by
Sylvain Béal
Université de Franche-Comté

  1. Characterization of Nash equilibria in Cournotian oligopolies with interdependent preferences By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  2. Socio-legal Systems and Implementation of the Nash Solution in Debreu-Hurwicz Equilibrium By Haake, Claus-Jochen; Trockel, Walter
  3. Too Big to Prevail: The Paradox of Power in Coalition Formation By Changxia Ke; Florian Morath; Anthony Newell; Lionel Page
  4. Attack and Interception in Networks By Francis Bloch; Kalyan Chatterjee; Bhaskar Dutta
  5. Uncovering seeds By Ballester, Coralio; Vorsatz, Marc; Ponti, Giovanni
  6. Myopic Oligopoly Pricing By Iwan Bos; Marco A. Marini; Riccardo D. Saulle
  7. The team allocator game: Allocation power in public goods games By Karakostas, Alexandros; Kocher, Martin; Matzat, Dominik; Rau, Holger A.; Riewe, Gerhard
  8. A Network Solution to Robust Implementation: The Case of Identical but Unknown Distributions By Mariann Ollar; Antonio Penta
  9. Comparative statics and centrality measures in oligopolies with interdependent preferences By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  10. A Maximum Principle approach to deterministic Mean Field Games of Control with Absorption By Paulwin Graewe; Ulrich Horst; Ronnie Sircar
  11. Preemption contests between groups By Stefano Barbieri; Kai A. Konrad; David A. Malueg
  12. The Volunteer's Dilemma in Finite Populations By Kai A. Konrad; Florian Morath
  13. Attacking and Defending Multiple Valuable Secrets in a Big Data World By Kai A. Konrad
  14. Conflict Prevention by Bayesian Persuasion By Raphaela Hennigs
  15. Incentives for Cooperation in Teams: Sociality Meets Decision Rights By Butz, Britta; Guillen Alvarez, Pablo; Harbring, Christine
  16. Belief Convergence under Misspecified Learning: A Martingale Approach By Mira Frick; Ryota Iijima; Yuhta Ishii
  17. On the detrimental effects of concave emission charges in a dynamic Cournot duopoly model By Ahmad Naimzada; Marina Pireddu
  18. Integration and Diversity By Sanjeev Goyal; Penélope Hernández; Guillem Martínez-Cánovas; Frederic Moisan; Manuel Muñoz-Herrera; Angel Sánchez
  19. Portfolio Performance Attribution via Shapley Value By Nicholas Moehle; Stephen Boyd; Andrew Ang
  20. Optimal Epidemic Control in Equilibrium with Imperfect Testing and Enforcement By Thomas Phelan; Alexis Akira Toda
  21. Trade and bank credit in a non-cooperative chain with a price-sensitive demand By Vincent Hovelaque; Jean-Laurent Viviani; Mohamed Ait Mansour
  22. Double Marginalization and Vertical Integration By Philippe Choné; Laurent Linnemer; Thibaud Vergé
  23. I win it's fair, you win it's not. Selective heeding of merit in ambiguous settings By Serhiy Kandul; Olexandr Nikolaychuk
  24. Optimal Design of Limited Partnership Agreements By Mohammad Abbas Rezaei

  1. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: We study the effects on the Nash equilibrium of the presence of a structure of social interdependent preferences in a Cournot oligopoly, described in terms of a game in which the network of interactions reflects on the utility functions of firms through a combination of weighted profits of their competitors as in [7]. Taking into account the channels of social and market interactions, we detail the consequence of preference interdependence on the best response of a firm, focusing on both direct and high degree of interdependence effects between two given firms. We characterize the Nash equilibrium in terms of social and market interactions among firms, through a Bonacich-like centrality measure and a scalar index describing the degree of competitiveness that characterizes an oligopoly with interdependent preferences. Finally, we study the equilibrium of some scenarios described by regular structures of interaction.
    Keywords: Cournot Game, Preference interdependence, Nash Equilibrium
    JEL: D43 C62 C70
    Date: 2021–03
  2. By: Haake, Claus-Jochen (Center for Mathematical Economics, Bielefeld University); Trockel, Walter (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this article we combine Debreu’s (1952) social system with Hurwicz’s (1994, 2008) ideas of embedding a “desired” game form into a “natural” game form that includes all feasible behavior, even if it is “illegal” according to the desired form. For the resulting socio-legal system we extend Debreu’s concepts of a social system and its social equilibria to a socio-legal system with its Debreu-Hurwicz equilibria.We build on a more general version of social equilibrium due to Shafer and Sonnenschein (1975) that also generalizes the dc-mechanism of Koray and Yildiz (2018) which relates implementation via mechanisms with implementation via rights structures as introduced by Sertel (2001). In the second part we apply and illustrate these new concepts via an application in the narrow welfarist framework of two person cooperative bargaining. There we provide in a socio-legal system based on Nash’s demand game an implementation of the Nash bargaining solution in Debreu-Hurwicz equilibrium.
    Keywords: socio-legal systems, implementation, social systems, generalized games, Nash demand game
    Date: 2021–04–06
  3. By: Changxia Ke; Florian Morath; Anthony Newell; Lionel Page
    Abstract: In standard coalition games, players try to form a coalition to secure a prize and a coalition agreement specifies how the prize is to be split among its members. However, in practical situations where coalitions are formed, the actual split of the prize often takes place after the coalition formation stage. This creates the possibility for some players to ask for a renegotiation of the initial split. We predict that, in such situations, a player can suffer from being “too strong”. Our experimental results confirm that, when the actual split of the prize is delayed, a player’s strength can turn into a strategic disadvantage: a greater voting power in forming a winning coalition is undermined by the threat of being overly powerful at the stage when a split is determined. This result is relevant to many real world situations where “too strong” players find it paradoxically hard to partner with weaker players to win the game.
    Keywords: Shapley Value, (non) binding agreement, balance of power, communication
    JEL: C71 C92 D72 D74
    Date: 2021
  4. By: Francis Bloch (Paris School of Economics); Kalyan Chatterjee (Pennsylvania State University); Bhaskar Dutta (Ashoka University)
    Abstract: This paper studies a game of attack and interception in a network, where a single attacker chooses a target and a path, and each node chooses a level of protection. We show that the Nash equilibrium of the game exists and is unique. It involves a mixed strategy of the attacker except when one target has a very high value relative to others. We characterize equilibrium attack paths and attack distributions as a function of the underlying network and target values. We also show that adding a link or increasing the value of a target may harm the attacker - a comparative statics effect which is reminiscent of Braess's paradox in transportation economics. Finally, we contrast the Nash equilibrium with the equilibria of two variations of the model: one where nodes make sequential protection decisions upon observing the arrival of a suspicious object, and one where all nodes cooperate in defense.
    Keywords: Network interdiction, Networks, Attack and defense, Inspection
    Date: 2021–04
  5. By: Ballester, Coralio; Vorsatz, Marc; Ponti, Giovanni
    Abstract: We provide the theoretical foundations for a new estimation algorithm that non-parametrically infers level-k beliefs from laboratory choices in generalized guessing games with heterogeneous interactions. The algorithm takes the strategic dependencies of the game and subjects' choices as an input and returns a detailed histogram (a ``pseudo-spectrogram'' of seeds) that represents population beliefs about the behavior of level-0 players. As a by-product, the algorithm also returns the estimated population composition of reasoning levels. The main contributions are as follows. First, we study the equilibrium properties of generalized guessing games and provide an ordinal (visual) characterization for uniqueness. Second, within the level-k model, our key theoretical results establish conditions on the subjective beliefs or the game structure so that the population distributions of level-k choices and the population distribution of beliefs are alike. These results are obtained without any distributional assumptions. We also present a central limit result that supports the use of parametric gaussian approaches often used in the literature. Third, on the basis of the theoretical results, we construct a new a non-parametric maximum likelihood estimation algorithm that fully identifies the belief pattern. Fourth, we apply the algorithm to experimental data. It is found that beliefs cluster around a few focal points and that a few seeds are able to explain a high percentage of observed behavior. Finally, our theoretical results can also be useful in the design of laboratory guessing games with good estimation properties.
    Keywords: beliefs, estimation, level-k, network, mixture model.
    JEL: C13 C72 C87 C90 C92 D01
    Date: 2021–04–11
  6. By: Iwan Bos (Department of Organisation, Strategy and Entrepreneurship, Maastricht University); Marco A. Marini (Department of Social and Economic Sciences, Sapienza University of Rome); Riccardo D. Saulle (Department of Economics and Management, University of Padova)
    Abstract: This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set stability concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. In particular, it provides a behavioral rationale for different types of pricing dynamics, including real-world economic phenomena such as Edgeworth-like price cycles, price dispersion and supply shortages.
    Keywords: Behavioral IO, Bounded Rationality, Capacity Constraints, Oligopoly Pricing, Myopic Stable Set
    JEL: C72 D43 L13
    Date: 2021–04
  7. By: Karakostas, Alexandros; Kocher, Martin; Matzat, Dominik; Rau, Holger A.; Riewe, Gerhard
    Abstract: We analyze linear, weakest-link and best-shot public goods games in which a distinguished team member, the team allocator, has property rights over the benefits from the public good and can distribute them among team members. These team allocator games are intended to capture natural asymmetries in hierarchical teams facing social dilemmas, such as those that exist in work teams. Our results show that the introduction of a team allocator leads to pronounced cooperation in both linear and best-shot public-good games, while it has no effect in the weakest-link public good. The team allocator uses her allocation power to distribute benefits from the public good in a way that motivates people to contribute. Re-allocating team payoffs allows the team allocator to reward cooperating team members and to sanction non-cooperating members at no efficiency losses from explicit sanctioning costs. As a result, team profits are higher in the linear team allocator game but not in the best-shot case, where the lack of coordination leads to a welfare decrease for the remaining team members.
    Keywords: public goods provision,experiment,institutions,cooperation,allocation power,teams
    JEL: C72 C91 C92
    Date: 2021
  8. By: Mariann Ollar; Antonio Penta
    Abstract: We consider mechanism design environments in which agents commonly know that others’ types are identically distributed, but without assuming that the actual distribution is common knowledge, nor that it is known to the designer (common knowledge of identicality, CKI). Under these assumptions, we study problems of partial and full implementation, as well as robustness. First, we characterize the transfers which are incentive compatible under the CKI assumption, and provide necessary and sufficient conditions for partial implementation. Second, we characterize the conditions under which full implementation is possible via direct mechanisms, as well as the transfer schemes which achieve full implementation whenever it is possible. We do this by pursuing a network approach, which is based on the observation that the full implementation problem in our setting can be conveniently transformed into one of designing a network of strategic externalities, subject to suitable constraints which are dictated by the incentive compatibility requirements entailed by the CKI assumption. This approach enables us to uncover a fairly surprising result: the possibility of full implementation is characterized by the strength of the preference interdependence of the two agents with the least amount of preference interdependence, regardless of the total number of agents, and of their preferences. Finally, we study the robustness properties of the implementing transfers with respect to both misspecifications of agents’ preferences and with respect to lower orders beliefs in rationality.
    Keywords: moment conditions, robust full implementation, Rationalizability, interdependent values, identical but unknown distributions, uniqueness, strategic externalities, spectral radius, canonical transfers, loading transfers, equal-externality transfers
    JEL: D62 D82 D83
    Date: 2021–04
  9. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: Considering the Cournot oligopoly with interdependent preferences proposed in [5], we analyze the effects of a change in the network of social interactions. Reconsidering some of the main centrality measures proposed in the literature, we show how intercentrality, Bonacich and Friedkin-Johnsen centrality measures can be related in a network described by a general matrix of interaction. This allows showing under what conditions a firm can benefit, in terms of equilibrium performance, from a change in the weight of interaction with respect to one of its competitors. Extending the approach to the study of a uniform change in the behavior of all the firms, we show that it is collectively beneficial only if the structure of social interaction is characterized by a sufficient degree of homogeneity in terms of weight distributions.
    Keywords: Cournot Game, Preference interdependence, Network, Centrality measures, Comparative statics.
    JEL: D43 C62 C70
    Date: 2021–03
  10. By: Paulwin Graewe; Ulrich Horst; Ronnie Sircar
    Abstract: We study a class of deterministic mean field games on finite and infinite time horizons arising in models of optimal exploitation of exhaustible resources. The main characteristic of our game is an absorption constraint on the players' state process. As a result of the state constraint the optimal time of absorption becomes part of the equilibrium. This requires a novel approach when applying Pontyagin's maximum principle. We prove the existence and uniqueness of equilibria and solve the infinite horizon models in closed form. As players may drop out of the game over time, equilibrium production rates need not be monotone nor smooth.
    Date: 2021–04
  11. By: Stefano Barbieri; Kai A. Konrad; David A. Malueg
    Abstract: We consider a preemption game between groups where the ï¬ rst agent to take a costly action wins the prize on behalf of his group. We describe the equilibrium solution of this problem when players differ in their own costs of action and these costs are private information. The equilibrium is typically characterized by delay. The nature of the equilibrium depends on key parameters such as the number of groups and their size. More competition between groups reduces delay, whereas in larger groups members of a given cost type are more reluctant to act but may yield an earlier resolution of the conflict. We analyze asymmetries across groups, focusing on group size and strength of the externalities within groups.
    Keywords: preemption, free riding, dynamic conflict, inter-group conflict, dynamic conflict, incomplete information, waiting
    JEL: D74 H41 L13
    Date: 2019–05
  12. By: Kai A. Konrad; Florian Morath
    Abstract: We study the long-run stochastic stability properties of volunteering strategies in finite populations. We allow for mixed strategies, characterized by the probability that a player may not volunteer. A pairwise comparison of evolutionary strategies shows that the strategy with a lower probability of volunteering is advantaged. However, in the long run there are also groups of volunteering types. Homomorphisms with the more volunteering types are more frequent if the groups have fewer members, and if the benefits from volunteering are larger. Such homomorphisms with volunteering cease to exist if the group becomes infinitely large. In contrast, the disadvantage of volunteering disappears if the ratio of individual benefits and costs of volunteering becomes infinitely large.
    Keywords: Volunteering, stochastic stability, finite populations, mixed strategies, collective action
    JEL: C73 D62 H41
    Date: 2020–12
  13. By: Kai A. Konrad
    Abstract: This paper studies the attack-and-defence game between a web user and a whole set of players over this user’s ‘valuable secrets.’ The number and type of these valuable secrets are the user’s private information. Attempts to tap information as well as privacy protection are costly. The multiplicity of secrets is of strategic value for the holders of these secrets. Users with few secrets keep their secrets private with some probability, even though they do not protect them. Users with many secrets protect their secrets at a cost that is smaller than the value of the secrets protected. The analysis also accounts for multiple redundant information channels with cost asymmetries, relating the analysis to attack-and-defence games with a weakest link.
    Keywords: OR in societal problem analysis, big-data, privacy, web user, conflict, information rents, valuable secrets, attack-and-defence, multiple attackers, multiple defence items, multi-front contest.
    JEL: D18 D72 D74 D82
    Date: 2019–05
  14. By: Raphaela Hennigs
    Abstract: Drawing upon the Bayesian persuasion literature, I show that a mediator can provide conflicting parties strategically with information to decrease the ex-ante war probability. In a conflict between two parties with private information about military strength, the mediator generates information about each conflicting party’s strength and commits to sharing the obtained information with the respective opponent. The conflicting parties can be convinced not to ï¬ ght each other. The conflicting parties beneï¬ t from mediation, as the ex-ante war probability is reduced. The beneï¬ t is taken up by weak conflicting parties. This beneï¬ t is larger when war is costlier and when the war probability absent mediation is higher.
    Keywords: mediation, conflict, information design, Bayesian persuasion
    JEL: C72 D82 D83
    Date: 2019–09
  15. By: Butz, Britta (RWTH Aachen University); Guillen Alvarez, Pablo (University of Sydney); Harbring, Christine (RWTH Aachen University)
    Abstract: We investigate the effect of a donation incentive tied to contributions to a public good when group members can decide on the size of the donation to be made. An up to 20 % donation of the public good was implemented either exogenously or endogenously by group members. In the Vote treatment, groups could either decide in favor of or against a donation of 20 % of the public good; in the Vote Share treatment, subjects could decide on a donation share of between 0 % and 20 %. Results show that a large percentage of the participants vote in favor of implementing a donation share in both treatments. Voting in favor of a 20 % donation share or endogenously implementing a high donation share in the Vote Share treatment has positive effects on contributions to the public good compared to an exogenously implemented donation share.
    Keywords: donations, decision right, public good game, team incentives, laboratory experiment, charitable giving
    JEL: C72 C92 D64 D70 J33 M52
    Date: 2021–04
  16. By: Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Yuhta Ishii (Department of Economics at Pennsylvania State University)
    Abstract: We present an approach to analyze learning outcomes in a broad class of misspecified environments, spanning both single-agent and social learning. We introduce a novel "prediction accuracy" order over subjective models, and observe that this makes it possible to partially restore standard martingale convergence arguments that apply under correctly specified learning. Based on this, we derive general conditions to determine when beliefs in a given environment converge to some long-run belief either locally or globally (i.e., from some or all initial beliefs). We show that these conditions can be applied, first, to unify and generalize various convergence results in previously studied settings. Second, they enable us to analyze environments where learning is "slow," such as costly information acquisition and sequential social learning. In such environments, we illustrate that even if agents learn the truth when they are correctly specified, vanishingly small amounts of misspecification can generate extreme failures of learning.
    Keywords: Misspecified learning, Stability, Robustness, Berk-Nash equilibrium
    Date: 2020–05
  17. By: Ahmad Naimzada; Marina Pireddu
    Abstract: We reconsider the dynamic Cournot duopoly framework with homogeneous goods by Mamada and Perrings (2020), in order to highlight the richness in its outcomes. In the model each firm is taxed proportionally to its own emission only and charge functions are quadratic. While Mamada and Perrings (2020) focus on the case of convex, and partially on the case of concave, charge functions, we show that completing the analysis for concave functions it may happen that, with the raise in the emission charges, the equilibrium production levels for the two firms, which are directly proportional to their emissions, increase, both with homogeneous and with differentiated products. This highlights that, even in the absence of free riding possibilities, too soft environmental policies can produce detrimental effects on the pollution level, and thus the choice of the mechanism to implement has to be carefully pondered.
    Keywords: dynamic Cournot duopoly, differentiated products, emission charges, pollution control, comparative statics, stability analysis.
    JEL: C62 D43 Q51 Q58
    Date: 2021–04
  18. By: Sanjeev Goyal (emlyon business school); Penélope Hernández; Guillem Martínez-Cánovas; Frederic Moisan; Manuel Muñoz-Herrera; Angel Sánchez
    Abstract: We study a setting where individuals prefer to coordinate with others but they differ on their preferred action. Our interest is in understanding the role of link formation with others in shaping behavior. So we consider the situation in which interactions are exogenous and a situation where individuals choose links that determine the interactions. Theory is permissive in both settings: conformity (on either of the actions) and diversity (with different groups choosing their preferred actions) are both sustainable in equilibrium. We conduct an experiment to understand how link formation affects equilibrium selection. Our experiment reveals the powerful effect of linking on equilibrium selection: with an exogenous complete network, subjects choose to conform on the majority's preferred action. By contrast, with endogenous linking—irrespective of the costs of linking—subjects always opt for diversity of actions.
    Keywords: networks,equilibrium selection,Social coordination,experiment
    Date: 2020–09–10
  19. By: Nicholas Moehle; Stephen Boyd; Andrew Ang
    Abstract: We consider an investment process that includes a number of features, each of which can be active or inactive. Our goal is to attribute or decompose an achieved performance to each of these features, plus a baseline value. There are many ways to do this, which lead to potentially different attributions in any specific case. We argue that a specific attribution method due to Shapley is the preferred method, and discuss methods that can be used to compute this attribution exactly, or when that is not practical, approximately.
    Date: 2021–02
  20. By: Thomas Phelan; Alexis Akira Toda
    Abstract: We analyze equilibrium behavior and optimal policy within a Susceptible-Infected-Recovered epidemic model augmented with potentially undiagnosed agents who infer their health status and a social planner with imperfect enforcement of social distancing. We define and prove the existence of a perfect Bayesian Markov competitive equilibrium and contrast it with the efficient allocation subject to the same informational constraints. We identify two externalities, static (individual actions affect current risk of infection) and dynamic (individual actions affect future disease prevalence), and study how they are affected by limitations on testing and enforcement. We prove that a planner with imperfect enforcement will always wish to curtail activity, but that its incentives vanish as testing becomes perfect. When a vaccine arrives far into the future, the planner with perfect enforcement may encourage activity before herd immunity. We find that lockdown policies have modest welfare gains, whereas quarantine policies are effective even with imperfect testing.
    Date: 2021–04
  21. By: Vincent Hovelaque (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Jean-Laurent Viviani (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Mohamed Ait Mansour (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this article is to examine the impact of the working capital in the borrowing decision of a retailer. The proposed analysis is based on a model with a retailer, a supplier and a bank in a non-cooperative game with price-sensitive demand. The retailer, the supplier and the bank (if concerned) determine, respectively, the ordering quantity, the wholesale price and the interest rate. A Stackelberg game-theoretic approach is employed where the retailer is a follower and either the supplier or the bank is the leader. Some structural properties are first derived from the mathematical models. Then, some numerical simulations show that: (i) a trade credit guarantees the same profits for the retailer and the supplier as in the case where the retailer has sufficient cash holdings, (ii) there exist some situations where the retailer has a better profit with a borrow than with sufficient cash holdings, and (iii) borrowing decision depends on both retailer's and supplier's discount rate and the retailer's cash holdings.
    Keywords: Trade credit,bank credit,Bank credit,Game theory,Supply chain finance,Inventory
    Date: 2021
  22. By: Philippe Choné; Laurent Linnemer; Thibaud Vergé
    Abstract: Asymmetric information in procurement entails double marginalization. The phenomenon is most severe when the buyer has all the bargaining power at the production stage, while it vanishes when the buyer and suppliers’ weights are balanced. Vertical integration eliminates double marginalization and reduces the likelihood that the buyer purchases from independent suppliers. Conditional on market foreclosure, the probability that final consumers are harmed is positive only if the buyer has more bargaining power when selecting suppliers than when negotiating over quantities and intermediate prices. The buyer’s and consumers’ interests are otherwise aligned.
    Keywords: antitrust policy, vertical merger, asymmetric information, bargaining, double marginalization, procurement mechanism
    JEL: L10 L40 D40 D80
    Date: 2021
  23. By: Serhiy Kandul (Digital Society Initiative, University of Zurich, Switzerland); Olexandr Nikolaychuk (Faculty of Economics and Business Administration, Friedrich Schiller University Jena, Germany)
    Abstract: One's willingness to accept an outcome or even to correct it depends on whether or not the underlying procedure is deemed legitimate. We manipulate the role allocation procedure in the dictator game to illustrate that this belief is not independent of the outcome and is self-serving in its nature. Our findings suggest that there may be some positive level of dissatisfaction with virtually any social outcome in the populace without there being anything wrong as far as the underlying procedure. We also discuss the perceptions of fairness and merit as potential drivers of the observed behavioral phenomenon.
    Keywords: fairness, entitlement, merit, redistribution, procedural preferences, dictator game
    JEL: D63 D91
    Date: 2021–01–25
  24. By: Mohammad Abbas Rezaei
    Abstract: General partners (GP) are sometimes paid on a deal-by-deal basis and other times on a whole-portfolio basis. When is one method of payment better than the other? I show that when assets (projects or firms) are highly correlated or when GPs have low reputation, whole-portfolio contracting is superior to deal-by-deal contracting. In this case, by bundling payouts together, whole-portfolio contracting enhances incentives for GPs to exert effort. Therefore, it is better suited to alleviate the moral hazard problem which is stronger than the adverse selection problem in the case of high correlation of assets or low reputation of GPs. In contrast, for low correlation of assets or high reputation of GPs, information asymmetry concerns dominate and deal-by-deal contracts become optimal, as they can efficiently weed out bad projects one by one. These results shed light on recent empirical findings on the relationship between investors and venture capitalists.
    Date: 2021–04

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