Bruno Jullien

Participation Constraints in Adverse Selection Models

Abstract This paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latters reservation utility depends on his type. The informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade. The paper identifies conditions for the optimal contract to be separating, to be nonstochastic, and to induce full participation. It also discusses the nature of the solution when bunching occurs. The results are applied to nonlinear pricing under price cap regulation and bypass competition and to competition in nonlinear pricing. Journal of Economic Literature Classification Numbers: D82, D42, D23, D78, L51, L15.

Scientific Progress and Irreversibility: An Economic Interpretation of the 'Precautionary Principle'

We consider the problem of the optimal use of a good whose consumption can produce damages in the future. Scientific progress is made over time that provides information on the distribution of the intensity of damages. We show that this progress induces earlier prevention effort only if prudence is larger than twice absolute risk aversion. This paper thus identifies the class of quite restrictive but plausible conditions such that scientific uncertainties justify an immediate reduction of the consumption of a potentially toxic substance.

Optimal learning by experimentation

This paper considers a problem of optimal learning by experimentation by a single decision maker. Most of the analysis is concerned with the characterisation of limit beliefs and actions. We take a two-stage approach to this problem: first, understand the case where the agents payoff function is deterministic; then, address the additional issues arising when noise is present. Our analysis indicates that local properties of the payoff function (such as smoothness) are crucial in determining whether the agent eventually attains the true maximum payoff or not. The paper also makes a limited attempt at characterising optimal experimentation strategies.

Estimating Preferences Under Risk: The Case of Racetrack Bettors

We investigate in this paper the attitudes toward risk of bettors in British horse races. The model we use allows us to go beyond the expected utility framework and to explore various alternative proposals by estimating a multinomial model on a 34443-race data set. We find that rank-dependent utility models do not fit the data better than expected utility models. On the other hand, cumulative prospect theory has higher explanatory power. Our preferred estimates suggest a pattern of local risk-aversion similar to that proposed by Friedman-Savage.

Should More Risk-Averse Agents Exert More Effort?

Consider an agent facing a risky distribution of losses who can change this distribution by exerting some effort. Should he exert more effort when he becomes more risk-averse? For instance, should we expect more risk-averse drivers to drive more cautiously? In this article, we give sufficient conditions under which the answer is positive, using results presented in Jewitt (1989). We first extend the standard models of self-insurance and self-protection and show that the comparative statics depends only on the effect of effort on the net loss. We then present conditions for the continuous case with applications.

Ordinal independence in nonlinear utility theory

Individual behavior under uncertainty is characterized using a new axiom, ordinal independence, which is a weakened form of the von Neumann-Morgenstern independence axiom It states that if two distributions share a tail in common, then this tail can be modified without altering the individuals preference between these distributions. Preference is determined by the tail on which the distributions differ. This axiom implies an appealing and simple functional form for a numerical representation of preferences. It generalizes the form of anticipated utility, and it explains some well-known forms of behavior, such as the Friedman-Savage paradox, that anticipated utility cannot.

Why Do Intermediaries Divert Search

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e. inducing consumers to search more than they would like): i) trading off higher total consumer traffic for higher revenues per consumer visit; ii) influencing stores’ choices of strategic variables (e.g. pricing) once they have decided to affiliate. We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to on-line and brick-and-mortar intermediaries.

Formal and Informal Risk Sharing in LDCs: Theory and Empirical Evidence

We develop and estimate a model of dynamic interactions in which commitment is limited and contracts are incomplete to explain the patterns of income and consumption growth in village economies of less developed countries. Households can insure each other through both formal contracts and informal agreements, that is, self-enforcing agreements specifying voluntary transfers. This theoretical setting nests the case of complete markets and the case where only informal agreements are available. We derive a system of non-linear equations for income and consumption growth. A key prediction of our model is that both variables are affected by lagged consumption as a consequence of the interplay of formal and informal contracting possibilities. In a semi-parametric setting, we prove identification, derive testable restrictions and estimate the model with the use of data from Pakistan villages. Empirical results are consistent with the economic arguments. Incentive constraints due to self-enforcement bind with positive probability and formal contracts are used to reduce this probability.

Auction and the informed seller problem

A seller possessing private information about the quality of a good attempts to sell it through a second-price auction with announced reserve price. The choice of a reserve price transmits information to the buyers. We characterize the equilibria with monotone beliefs of the resulting signalling game and show that they lead to a reduced probability of selling the good compared to the symmetric information situation. We compare the unique separating equilibrium of this signalling game to the equilibrium of a screening game in which an uninformed monopoly broker chooses the trading mechanism. We show that the ex-ante expected probability of trade may be larger with a monopoly broker, as well as the ex-ante total expected surplus.

Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry

Our paper is a first attempt to evaluate the long run impact of reference pricing on pharmaceutical innovation, health and expenditures. The model is based on a dynamic game involving three types of agents: pharmaceutical firms, consumers and a regulatory entity. Pharmaceutical firms choose the level of research investment and its innovative content, then negotiate introductory prices for new drugs with the regulator. Reference pricing affects negatively the intensity of research and it also modifies the types of innovations that are brought to the market, deterring small innovations. The model is calibrated with a small data on statins in France. Our results suggest that reference pricing typically generates a decline in health, whereas discounted expenditures may decrease or increase, depending on the degree of deterrence of cost reducing innovations.