Jerry R. Green

On the Division of Profit in Sequential Innovation

In markets with sequential innovation, inventors of derivative improvements might undermine the profit of initial innovators through competition. Profit erosion can be mitigated by broadening the first innovators patent protection and/or by permitting cooperative agreements between initial innovators and later innovators. We investigate the policy that is most effective at ensuring the first innovator earns a large share of profit from the second-generation products it facilitates. In general, not all the profit can be transferred to the first innovator, and therefore patents should last longer when a sequence of innovations is undertaken by different firms rather than being concentrated in one firm.

Partially Verifiable Information and Mechanism Design

In a principal-agent model with adverse selection, we study the implementation of social choice functions when the agents message space is a correspondence which depends on this true characteristic. We characterize such correspondence for which the Revelation Principle is valid.

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.

A Two-Person Game of Information Transmission ∗

We consider a statistical decision problem faced by a two player organization whose members may not agree on outcome evaluations and prior probabilities. One player is specialized in gathering information and transmitting it to the other, who takes the decision. This process is modeled as a game. Qualitative properties of the equilibria are analyzed. The impact of improving the quality of available information on the equilibrium welfares of the two individuals is studied. Better information generally may not improve welfare. We give conditions under which it will.

On the Optimal Structure of Liability Laws

We consider the control of two-party accidents through the use of liability rules that assign damages according to whether or not predetermined standards for care have been met. Particular emphasis is given to how the differential in the costs of accident avoidance activities affects the optimal legal rule and optimal care standards. It is shown that when the costs are close to uniform across individuals, an approximation to the first-best can be obtained. Moreover, alternative legal rules are equally efficient in achieving this situation. When the differential widens, legal rules will differ in their ability to reach the second-best. In contrast to previous models of liability law, it is shown that the courts must play an active adjudicatory role in the optimal solution.

“Making Book Against Oneself,” the Independence Axiom, and Nonlinear Utility Theory

An individual with known preferences over lotteries can be led to accept random wealth distributions different from his initial endowment by a sequential process in which some uncertainty is resolved and he is offered a new lottery in place of the remaining uncertainty. This paper examines the restrictions that can be placed on an individuals preferences by axioms that stipulate that such a process not be able to generate a new wealth distribution that is prima facie inferior to the original. The relationship of these axioms to the independence axiom of von Neumann and Morgenstern and to the quasi convexity of preferences in the wealth distribution are explored.

Direct Versus Indirect Remedies for Externalities

This paper is concerned with tax policies designed to obtain an improved competitive allocation in the presence of consumption externalities. It is known that the full optimum can, in general, be attained only through the imposition of excise taxes at different levels for different individuals. Since these may be ruled out (possibly because of implementation costs), one is confined to consider second-best taxes. The common interpretation of the Pigouvian principle has called for taxes on the externality-creating commodities. With no relationships between the consumption of different commodities the Pigouvian principle is obviously impeccable. But the existence of substitutes or complements for an externality-causing commodity raises the possibility of indirect policies: treating the externality through the markets for related goods. Obviously, if the direct policy is not feasible, the indirect treatment may provide some partial remedy. We show, however, that even when direct policies are available, the overall optimum may involve only indirect policies. An example with such a result is provided in the paper. We also list a number of cases in which the traditional prescription is confirmed, and the overall optimum involves only direct policies.

Let the Right One In: A Microeconomic Approach to Partner Choice in Mutualisms

One of the main problems impeding the evolution of cooperation is partner choice. When information is asymmetric (the quality of a potential partner is known only to himself), it may seem that partner choice is not possible without signaling. Many mutualisms, however, exist without signaling, and the mechanisms by which hosts might select the right partners are unclear. Here we propose a general mechanism of partner choice, “screening,” that is similar to the economic theory of mechanism design. Imposing the appropriate costs and rewards may induce the informed individuals to screen themselves according to their types and therefore allow a noninformed individual to establish associations with the correct partners in the absence of signaling. Several types of biological symbioses are good candidates for screening, including bobtail squid, ant‐plants, gut microbiomes, and many animal and plant species that produce reactive oxygen species. We describe a series of diagnostic tests for screening. Screening games can apply to the cases where by‐products, partner fidelity feedback, or host sanctions do not apply, therefore explaining the evolution of mutualism in systems where it is impossible for potential symbionts to signal their cooperativeness beforehand and where the host does not punish symbiont misbehavior.

Vertical Integration and Assurance of Markets

Four incentives for the vertical integration of firms have frequently been mentioned in the literature. Mergers may result from market power in either the primary-resource, intermediate-product or final- product markets.1 Technological advantages accruing to combination can arise through increasing returns,2 information advantages3 or decreased transactions costs, when firms place themselves in a cooperative rather than an adversarial relationship.4 Tax avoidance provides a third reason for integration.5 More generally, integration opens up a wider range of strategies in the face of regulation and more flexibility in implementing them. Finally, imperfections in the market for the intermediate product may lead firms to combine in order to bypass these problems by transferring goods internally.6 This chapter addresses the last of these issues. In particular, it studies the problem of price inflexibility in an intermediate-product market which is beset by stochastic demands, and the temporary shortages and gluts of this product that result. We hypothesise that firms choose to integrate if the expected profit from doing so exceeds that of the separate divisions acting independently. Both descriptive and normative conclusions regarding such an industry are drawn on the basis of the model presented.

Participation constraints in the vickrey auction

Abstract Economic agents are characterized by two privately observable parameters: their willingness to pay for an item being auctioned, and their reservation utility level which must be exceeded, in expectation, to induce them to participate in this auction. This creates a situation in which the distribution of willingness to pay among the bidders is endogenous. For the case in which the parameters are jointly uniformly distributed, the existence of an equilibrium is proven and characterized.