Dhananjay (Dan) K. Gode

What Makes Markets Allocationally Efficient

What determines the allocative efficiency of markets? Why are double auctions, even with untrained human traders, allocationally efficient? We provide a simple explanation for these complex phenomena by showing how externally observable rules that define a market cause high allocative efficiency when individuals remain within the confines of these rules. We also show how the oft-ignored shape of extramarginal demand and supply affects efficiency by influencing the inverse relationship between the magnitude of efficiency loss and its probability.

The Impact of Verifiability on Contracts

We show how the verifiability of signals affects their use in mitigating adverse selection. With verifiable signals, the observed practice of investigating agents before contracting is inferior to writing contingent contracts. This holds regardless of the agents risk aversion, bounded penalties, or investigation costs. With risk-neutral agents, contingent contracts yield first-best outcomes. We further show that even unverifiable signals can be gainfully used in contingent contracts by removing a principals incentives to distort signals or by removing an agents incentives to demand verification.