Isabelle Brocas

The Brain as a Hierarchical Organization

Based on recent neuroscience evidence, we model the brain as a dual-system organization subject to three conflicts: asymmetric information, temporal horizon, and incentive salience. Under the first and second conflicts, we show that the uninformed system imposes a positive link between consumption and labor at every period. Furthermore, decreasing impatience endogenously emerges as a consequence of these two conflicts. Under the first and third conflicts, it becomes optimal to set a consumption cap. Finally, we discuss the behavioral implications of these rules for choice bracketing and expense tracking, and for consumption over the life cycle. (JEL D11, D74, D82, D87, D91)

Vertical integration and incentives to innovate

Abstract In this paper, two upstream innovators invest to improve process innovations used by two downstream producers. At the beginning of the game, each innovator licenses its technology to one producer and they can agree to integrate vertically. Then, investment takes place and successful innovators choose their licensees. When technologies are not costlessly substitutable, the prices of licenses rise with the size of the switching costs. This affects ex-ante incentives to invest, and efficient technologies with low switching costs may disappear. As a result, ex-ante vertical integration is privately beneficial.

Do the “Three-Point Victory” and “Golden Goal” Rules Make Soccer More Exciting?

This article argues that a rigorous application of simple game theory tools may provide unambiguous predictions about the behavior of teams in sports. As an illustration, the authors analyze the merits of two controversial changes in soccer rules, namely, the “three-point victory” and the “golden goal.” Building on well-accepted premises, the authors show that contrary to the common belief, the incentives of teams to play offensively may be lower under the three-point victory than under the traditional two-point victory. They also provide clear and simple recommendations for the improvement of these rules.

Rush and Procrastination Under Hyperbolic Discounting and Interdependent Activities

We analyze the decision of individuals with time-inconsistent preferences to invest in projects yielding either current costs and future benefits or current benefits and future costs. We show that competition between agents for the same project mitigates the tendency to procrastinate on the first type of activities (i.e. to undertake them “too late”) and to rush on the second one (i.e. to undertake them “too early”). Competition can therefore increase the expected welfare of each individual. On the contrary, complementarity of projects exacerbates the tendency to rush and to procrastinate and therefore it can decrease the expected welfare of each individual.

Regulation under Asymmetric Information in Water Utilities

Water utilities are reminiscent of network industries and are characterized by important fixed costs. These factors contribute to a single firm serving an area justifying public intervention on pricing. About one-fourth of U.S. water utilities are private and subject to regulation. Regulators are unlikely to be perfectly informed and regulation is unlikely to be costlessly implemented. These inherent imperfections have led economists to consider the incentive properties of regulatory procedures using the economics of information (see David Baron, 1989). The empirical literature on regulation has focused on evaluating the effects of regulation on prices, firms’ costs, efficiency, and innovation in such sectors as airlines, electricity, and energy, as surveyed by Paul L. Joskow and Nancy L. Rose (1989). Few of these empirical studies rely on the so-called theory of regulation. Regarding the water industry, there is an abundant literature on residential water demand, firms’ cost, and their efficiency, given their public-versusprivate nature. Relying on a model with asymmetric information and a sample of California water utilities, Frank A. Wolak (1994) assesses the consumer welfare loss due to asymmetric information and shows that the model with asymmetric information provides a superior description of the cost and demand data to the model under perfect information. Analyzing pricing for residential water is an important policy issue as the sector recently experienced price increases. The problem is even more acute in California because of a high residential demand for water along with population growth, water scarcity, and the probability of severe droughts. Relying on a new dataset of 32 districts in California over the 1995–2000 period, we analyze regulation of private water utilities. For every district, the California Public Utilities Commission (CPUC) chooses a price for water, an access fee per meter, and a rate of return on capital to satisfy firms’ revenue requirements. We assume that the CPUC is imperfectly informed about firms’ labor efficiency. Following David Besanko (1984) and Wolak (1994), we develop a model in which the firm’s capital is used as a screening variable. In particular, the model has the features of a rate-of-return regulation. We show how the rate of return and the access fee can be determined optimally to control firms’ rents. We then adopt a structural approach to analyze the data. A multistep estimator allows us to estimate the key parameters of the model. The empirical results show price inelasticity, an income effect, slightly decreasing returns to scale, and a concentration of efficient firms. The computation of the optimal rate of return and access fee shows that the CPUC would tend to be cautious by allowing a lower-than-optimal rate and access fee. Relying on the estimated parameters, a first experiment evaluates the cost of asymmetric information. The price would be significantly lower, resulting in a gain of consumer surplus. A second experiment consists of simulating the outcome of an optimal price cap following the Farid Gasmi et al. (2002) model. The price cap became a popular regulatory tool in the 1980s such as for electricity, though the incentives resulting in price cap regulation have been questioned by economists. The counterfactual simulations show a price increase, which results in a significant loss in consumer surplus. The increase in firms’ profit does not, however, counterbalance this loss supporting the relevance of the actual rate-of-return mechanism.

Endogenous entry in auctions with negative externalities

In this paper, we study the auction to allocate an indivisible good when each potential buyer has a private and independent valuation for the item and suffers a negative externality if a competitor acquires it. In that case, the outside option of each buyer is mechanism-dependent, which implies that participation is endogenous. As several works in the literature have shown, the optimal auction entails strong threats to induce full entry and maximal expected revenue. This results from the full commitment assumption, which ensures that threats are credible. We show that absent credible threats, the entry process does not lead to full participation: the equilibrium entails screening of agents in the entry stage and a trade-off between reserve prices and entry fees. Besides, we discuss the conditions under which the impossibility to use threats does not prevent the seller from ensuring a minimal screening and reaching a high expected revenue.

From perception to action: An economic model of brain processes

We build on research from neurobiology to model the process through which the brain maps outside evidence into decisions. The sensory system encodes information through cell-firing. Cell-firing is measured against a threshold, and an action is triggered depending on whether the threshold is surpassed. The decision system modulates the threshold. We show that the (constrained) optimal threshold is set in a way that existing beliefs are likely to be confirmed. We then derive behavioral implications. Our mechanism can explain in a unified framework a number of ‘anomalies’ noted in psychology and economics: (i) belief anchoring (the order in which evidence is received affects beliefs and choices); (ii) polarization (individuals with opposite priors may polarize their opinions after receiving identical evidence); (iii) payoff-dependence of beliefs and (iv) belief disagreement (individuals with identical priors who receive the same evidence may end up with different posterior beliefs).

Information Acquisition and Choice Under Uncertainty

This paper presents a model where individuals have imperfect information and there is an opportunity cost of learning. It shows that the endogenous decision to collect costly information before taking an action has a systematic effect on choices. More precisely, consider two alternatives with ex ante identical expected payoff but different variances. The model predicts that, after the learning process is stopped, a majority of individuals will select the alternative with largest payoff-variance. The result persists when agents have multiple sources of information. Applications to entrepreneurial investments, composition of advisory committees, and judicial decision-making are discussed.

Biases in Perceptions, Beliefs and Behavior

This paper presents a model where individuals have imperfect information about their preferences (or the environment) and there is an opportunity cost of learning. It shows that the endogenous decision to collect information before taking an action creates a systematic bias in the aggregate behavior of a population of rational, profit-maximizing agents. More precisely, individuals will favor actions with large payoff-variance, i.e., those which may potentially generate the highest benefits even if they may also generate the biggest losses. The paper thus concludes that systematically biased choices do not necessarily imply that agents have irrational, systematically biased beliefs. It also provides testable implications about the propensity of individuals to incur different types of errors. Some applications such as biases in judicial decision-making and career choices are discussed.

Optimal choice of characteristics for a nonexcludable good

I consider a model where a principal decides whether to produce one unit of an indivisible good (e.g. a private school) and which characteristics it will contain (emphasis on language or science). Agents (parents) are differentiated along two substitutable dimensions: a vertical parameter that captures their privately known valuation for the good (demand for private education), and an horizontal parameter that captures their observable differences in preferences for the characteristics. I analyze the optimal mechanism offered by the principal to allocate the good and show that the principal will produce a good with characteristics more on the lines of the preferences of the agent with the lowest valuation. Furthermore, if the principal has also a private valuation for the good, he will bias the choice of the characteristics against his own preferences.