Robert J. Reilly

Do too many cooks always spoil the stew? An experimental analysis of rent-seeking and the role of a strategic buyer

Laboratory methods are used to evaluate the effects of institutional arrangements and rent-defending activity on rent-seeking auction outcomes. In part, Nash equilibrium predictions are a useful behavioral guide: As predicted, more rents are dissipated in perfectly-discriminating auctions, where the high-bidder wins, than in lotteries, where relative bids determine the chance of winning. Also as predicted, the introduction of a rent-defending buyer reduces social costs. Nevertheless, the social costs of rent-seeking consistently exceed predicted levels. Moreover, individual bidding, especially by buyers, deviates markedly from Nash predictions.

The Impact of Product Recalls on the Wealth of Sellers: A Reexamination

In a recent article in this Journal, Jarrell and Peltzman (1985) opened an important new area to event study research when they analyzed the effect of automobile and drug product recalls on the shareholders of firms within these industries. Earlier, Crafton, Hoffer, and Reilly (1981) and Reilly and Hoffer (1983) found that severe automobile recalls have a significant short-term impact on demand, but neither study investigated the effect of recalls on industry shareholders. In their work, Jarrell and Peltzman found that for manufacturers of automobiles and ethical drugs, capital markets penalized shareholders far more than the direct costs of the recall campaign. Further, they concluded that in both industries, shareholders of competitor firms to the firm with the recalled product(s) also suffered wealth losses. Interestingly, they concluded that over the 1975-81 period shareholders of General Motors bore greater wealth losses from the recall of a Ford or Chrysler product than they did from the recall of a GM product. This paper presents several modifications to the Jarrell-Peltzman study, as it applies to the automobile industry, for the purpose of

Rent-seeking with non-identical sharing rules: An equilibrium rescued

Nitzans (1991) analysis of differential sharing rules in a collective rent-seeking setting is reconsidered. Two groups, each with more than one member, are presumed to use different linear combinations of two sharing rules, one based on an equal-division of the prize, and the other on each members relative effort. We show that an equilibrium always exists for this type of game, and then characterize the equilibrium. Our result is contrary to Nitzans claims that (a) in the general case an equilibrium often does not exist, and (b) an equilibrium never exists when the groups use the polar extreme rules.

Raising Revenues for Charity: Auctions Versus Lotteries

We report an experiment conducted to gain insight into factors that may affect revenues in English auctions and lotteries, two commonly used charity fund-raising formats. In particular, we examine how changes in the marginal per capita return (MPCR) from the public component of bidding, and how changes in the distribution of values affect the revenue properties of each format. Although we observe some predicted comparative static effects, the dominant result is that lottery revenues uniformly exceed English auction revenues. The similarity of lottery and English auction bids across sales formats appears to drive the excess lottery revenues.

The effect of media presentation on the formation of economic expectations: Some initial evidence

Abstract This paper provides some initial evidence on the sensitivity of economic expectations to differences in media reporting. It reports the results of an experiment in which 120 undergraduate students were selectively exposed to different media reports of identical U.S. Department of Labor economic news releases and then asked for their projections concerning future states of the economy. A total of 36 different media stories were used from three media sources - The CBS Evening News, The Wall Street Journal and the Washington Post . The subjects monetary rewards were a function of the accuracy of their economic predictions. The authors found that differences in presentation of the same economic data can have a significant effect on expectations, as the CBS television and the Wall Street Journal presentations resulted in significantly less accurate sets of expectations regarding short-term future unemployment than did the Washington Post presentations.

Contestability in Real-Time Experimental Flow Markets

This article reports the results from laboratory markets using a new trading institution in which sellers post offers to sell flows of output in real time. We use the new institution to examine the outcomes in natural monopoly experimental markets. No. stable price outcomes were observed in markets contestable by two firms, a finding that is consistent with the contestable markets hypothesis, but in conflict with assertions commonly made by those advancing the theorys role in policy formation. The average efficiency of markets contestable by two firms, while greater than that of monopoly markets protected from entry, was significantly less than that associated with the sustainable equilibrium.

Cost Structures and Nash Play in Repeated Cournot Games

This paper reports an experiment designed to assess the effects of a rotation in the marginal cost curve on convergence in a repeated Cournot triopoly. Increasing the cost curves slope both reduces the serially-undominated set to the Nash prediction, and increases the peakedness of earnings. We observe higher rates of Nash equilibrium play in the design with the steeper marginal cost schedule, but only when participants are also rematched after each decision. Examination of response patterns suggests that the treatment with a steeper marginal cost curve and with a re-matching of participants across periods induces the selection of Nash Consistent responses.

Multiple Buyers, Rent-Defending and the Observed Social Costs of Monopoly

This paper uses analytical and experimental methods to assess the effects of fracturing the interests of agents seeking to maintain the competitive status quo in a rent-seeking contest for a monopoly franchise. Theoretically, it is shown that while “rent-defending” can ameliorate the social costs of rent-seeking, these beneficial effects deteriorate quickly as the interests of those seeking to maintain the status quo become fractured. Experimental results indicate that overbidding is persistent when bidders have different sharing rules. In fact, the observed social costs of rent-seeking often increase just when rent-defending has the greatest predicted ameliorative effect.

Market responses to publicly-provided information: the case of automative safety

Over the last 25 years the federal government has become increasingly involved in the provision of information on automobile quality and safety. Its release of National Highway Traffic Safety Administration data on occupant crash survivablity is a prominent example. This paper examines the impact of the agencys crash test results on the sales growth of tested automobile lines. Finding no impact, the crash data is then compared to privately collected insurance industry data on actual bodily injury claims by car line. these data sets show little consistency. based on these findings, we conclude that consumerss apparent disregard of government crash test data may well be rational.

The rationality of expectations: the blomqvist experiment reconsidered

Abstract This paper raises some methodological and empirical criticisms of a recent experimental study of the Rational Expectations Hypothesis (REH) by Blomqvist (1989, published in this journal). With respect to experimental methodology, the reward structure employed leaves open the question of subject motivation. With regard to the empirical findings we conclude the following: (1) Tests of unbiasedness may yield biased estimators due to the distribution of the forecasting objective. (2) Using aggregated data is potentially confounding in that individual rationality may be obscured. (3) Contrary to Blomqvists conclusions, we find strong support for the REH based upon the estimates of a rational learning model.