Sandro Brusco

Optimal Secession Rules

Should the constitution of a federation allow for peaceful secession? Constitutionally defined secession rules are optimal ex post if the federation breaks down. However, they may be suboptimal ex ante if the member countries receive a benefit from the perceived long-term stability of the federation and constitutionally defined secession rules increase the probability of a break-up. The optimal social contract trades off ex ante benefits and ex post losses, and it may avoid explicit secession rules. If transfers are costly, the trade off is present even if ex post renegotiation is allowed. Finally, we show that under asymmetric information it is more difficult to keep the federation together and that a secession war may occur.

EFFICIENT MECHANISMS FOR MERGERS AND ACQUISITIONS

We characterize incentive-efficient merger outcomes when payments can be made both in cash and stock. Each firm has private information about both its stand-alone value and a component of the (possibly negative) potential synergies. We study two cases: when transfers can, and cannot, be made contingent on the value of any new firm. When they can, we show that redistributing shares of any nonmerging firm generates information rents and provides necessary and sufficient conditions for the implementability of efficient merger rules. When they cannot, private information undermines efficiency more when it concerns stand-alone values than synergies. Here, acquisitions emerge as optimal mechanisms. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data

In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include split-award outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions under asymmetric information. In equilibrium, both award outcomes can occur--the split-award outcome arises only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. Equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winner-take-all unit auction format. Model predictions are assessed with data on submitted ‘step-ladder’ bid prices for a US defense split-award procurement.

The Hotelling-Downs Model with Runoff Voting

We consider the Hotelling–Downs model with n⩾3 office-seeking candidates and runoff voting. We show that Nash equilibria in pure strategies always exist and that there are typically multiple equilibria, both convergent (all candidates are located at the median) and divergent (candidates locate at distinct positions), though only divergent equilibria are robust to free entry. Moreover, two-policy equilibria exist under any distribution of votersʼ ideal policies, while equilibria with more than two policies exist generically but under restrictive conditions that we characterize.

Perfect Bayesian implementation

SummaryWe study Social Choice Sets (SCS) implementable as perfect Bayesian equilibria of some incomplete information extensive form game. We provide a necessary condition which we callcondition β. The condition is analogous tocondition C that Moore and Repullo [1988] show to be necessary for subgame perfect implementation in games of complete information, and it is weaker than the Bayesian Monotonicity condition stated in Jackson [1991]. Our first theorem establishes that Incentive Compatibility, Closure and Conditionβ are necessary for implementation.Our second theorem establishes sufficient conditions. We show that any SCS which satisfies Incentive Compatibility, Closure and a condition called Sequential Monotonicity No Veto (SMNV) is implementable. SMNV is similar in spirit but weaker than the Monotonicity No Veto condition stated in Jackson [1991]. It is also similar to a combination of condition α and No Veto Power, which Abreau and Sen show to be sufficient for implementation in subgame perfect equilibrium.

The ‘Google effect’ in the FCC’s 700 MHz auction

We describe and interpret bidding behavior in FCC Auction 73 for the C-block licenses. These licenses were initially offered subject to an open platform restriction, which was highly valued by firms such as Google. Google entered bids until its bids reached the C-block reserve price, thereby ensuring that the open platform restriction would be applied to the licenses. Later in the auction, other bidders outbid Google, so Google was able to trigger the open platform restriction without having to purchase any of the licenses.

Perfect Bayesian implementation in economic environments

Abstract We study social choice functions implementable as perfect Bayesian equilibria (PBE) of incomplete information extensive form games. We restrict attention to two-stage mechanisms in which agents observe a common public signal after the first stage, and fully characterize the set of implementable social choice functions in economic environments. The key condition for implementation, called Extended Bayesian Monotonicity, provides for some kind of preference reversal either at the first or the second stage. The condition is satisfied by social choice functions that satisfy Bayesian Monotonicity (a necessary and sufficient condition for Bayesian implementation in economic environments) or the Posterior Reversal condition proposed by Bergin and Sen (J. Econ Theory 80 (1998) 222–256), a sufficient condition for implementation with extensive form games. The analysis is limited to two-stage games, but the techniques adopted can be applied more in general to k -stage games, with k > 2 .

Tax differentiation, lobbying, and welfare

To what extent a taxing authority should be granted the power to impose different tax schedules to different groups of taxpayers? Although the policy maker aims at maximizing social welfare, her tax policy may be distorted by the lobbying activity of taxpayers. In this political environment we characterize the conditions under which social welfare can be increased by restricting the set of tax instruments available to the policy maker; i.e., the scope of tax differentiation. We show that full differentiation is more costly, in terms of welfare distortions, when the lobbies are asymmetric in size, while minimal differentiation is more costly when the tax bases are asymmetric across different groups.

Cost minimization and regulation in general equilibrium: an example

Abstract We present a general equilibrium example in which cost minimizing behavior prevents the economy from reaching the Pareto optimal allocation. In the example a firm with non-convex technology can use two different inputs to produce a single output. Pareto optimality requires that the firm use the more costly input, and it is therefore impossible to achieve the optimum when the firm minimizes costs.