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on Microeconomics |
| By: | Garrett, Daniel; Georgiadis, George; Smolin, Alex; Szentes, Balázs |
| Abstract: | This paper considers a moral hazard model with agent limited liability. Prior to interacting with the principal, the agent designs the production technology, which is a specification of his cost of generating each output distribution. After observing the production technology, the principal offers a payment scheme and then the agent chooses a distribution over outputs. We show that there is an optimal design involving only binary distributions (i.e., the cost of any other distribution is prohibitively high), and we characterize the equilibrium technology defined on the binary distributions. Notably, the equilibrium payoff of both players is 1/e. |
| Keywords: | moral hazard; limited liability; contract theory |
| JEL: | D86 D82 |
| Date: | 2023–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:118115 |
| By: | Frank Yang (University of Chicago); Kai Hao Yang (Yale University) |
| Abstract: | We characterize the extreme points of multidimensional monotone functions from [0, 1]^n to [0, 1], as well as the extreme points of the set of one-dimensional marginals of these functions. These characterizations lead to new results in various mechanism design and information design problems, including public good provision with interdependent values; interim efficient bilateral trade mechanisms; asymmetric reduced form auctions; and optimal private private information structure. As another application, we also present a mechanism anti-equivalence theorem for two-agent, two-alternative social choice problems: A mechanism is payoff-equivalent to a deterministic DIC mechanism if and only if they are ex-post equivalent. |
| Date: | 2025–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2428 |
| By: | Dirk Bergemann (Yale University); Rahul Deb (Boston College) |
| Abstract: | We study the robust sequential screening problem of a monopolist seller of multiple cloud computing services facing a buyer who has private information about his demand distribution for these services. At the time of contracting, the buyer knows the distribution of his demand of various services and the seller simply knows the mean of the buyerÕs total demand. We show that a simple Òcommitted spend mechanismÓ is robustly optimal: it provides the seller with the highest profit guarantee against all demand distributions that have the known total mean demand. This mechanism requires the buyer to commit to a minimum total usage and a corresponding base payment; the buyer can choose the individual quantities of each service and is free to consume additional units (over the committed total usage) at a fixed marginal price. This result provides theoretical support for prevalent cloud computing pricing practices while highlighting the robustness of simple pricing schemes in environments with complex uncertainty. |
| Date: | 2025–02–10 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2423 |
| By: | Andrew Rhodes (Toulouse School of Economics); Jidong Zhou (Yale University); Junjie Zhou (Tsinghua University) |
| Abstract: | This paper provides a framework in which a multiproduct ecosystem competes with many single-product firms in both price and innovation. The ecosystem is able to use data collected on one product to improve the quality of its other products. We study the impact of data regulation which either restricts the ecosystem's cross-product data usage, or which requires it to share data with small firms. Each policy induces small firms to innovate more and set higher prices; it also dampens data spillovers within the ecosystem, reduces the ecosystem's incentive to collect data and innovate, and potentially increases its prices. As a result, data regulation has an ambiguous impact on consumers, and is more likely to benefit consumers when small firms are relatively more efficient in innovation. A data cooperative among small firms, which helps them to share data with each other, does not necessarily benefit small firms and can even harm consumers. |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2426 |
| By: | Dirk Bergemann (Yale University); Michael C. Wang (Yale University) |
| Abstract: | We consider a seller who offers services to a buyer with multi unit demand. Prior to the realization of demand, the buyer receives a noisy signal of their future demand, and the seller can design contracts based on the reported value of this signal. Thus, the buyer can contract with the service provider for an unknown level of future consumption, such as in the market for cloud computing resources or software services. We characterize the optimal dynamic contract, extending the classic sequential screening framework to a nonlinear and multi-unit setting. The optimal mechanism gives discounts to buyers who report higher signals, but in exchange they must provide larger fixed payments. We then describe how the optimal mechanism can be implemented by two common forms of contracts observed in practice, the two-part tariff and the committed spend contract. Finally, we use extensions of our base model to shed light on policy-focused questions, such as analyzing how the optimal contract changes when the buyer faces commitment costs, or when there are liquid spot markets. |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2424 |
| By: | Yonggyun Kim; Francisco Poggi |
| Abstract: | We introduce a dynamic innovation game where participants race to develop a product using alternative technologies. Race participants dynamically allocate resources across (i) developing the product with the currently available technology and (ii) obtaining a faster technology for posterior development. When firm’s available technologies are publicly observable, there is a unique MPE in which firms react to a rivals’ technological discovery by increasing the share of resources allocated to development. However, without frictions, the firms file patents and license technologies to their rivals. When firm’s available technologies are private information, firms conceal their discoveries by forgoing patenting, even when patent holders retain all bargaining power in licensing negotiations. |
| Keywords: | Direction of Innovation, Patent, License, Trade Secret |
| JEL: | C73 D21 O30 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_648 |
| By: | Evan Piermon; Fernando Payró Chew |
| Abstract: | We consider an analyst whose goal is to identify a subject’s utility function through revealed preference analysis. We argue the analyst’s preference about which experiments to run should adhere to three normative principles: The first, Structural Invariance, requires that the value of a choice experiment only depends on what the experiment may potentially reveal. The second, Identification Separability, demands that the value of identification is independent of what would have been counterfactually identified had the subject had a different utility. Finally, Information Monotonicity asks that more in- formative experiments are preferred. We provide a representation theorem, showing that these three principles characterize Expected Identification Value maximization, a functional form that unifies several theories of experimental design. We also study several special cases and discuss potential applications. |
| Keywords: | choice experiments, experimental design, Revealed Preferences |
| JEL: | D81 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1471 |
| By: | Dirk Bergemann (Yale University); Alessandro Bonatti (Massachusetts Institute of Technology); Alex Smolin (Toulouse School of Economics) |
| Abstract: | We develop an economic framework to analyze the optimal pricing and product design of Large Language Models (LLM). Our framework captures several key features of LLMs: variable operational costs of processing input and output tokens; the ability to customize models through fine-tuning; and high-dimensional user heterogeneity in terms of task requirements and error sensitivity. In our model, a monopolistic seller offers multiple versions of LLMs through a menu of products. The optimal pricing structure depends on whether token allocation across tasks is contractible and whether users face scale constraints. Users with similar aggregate value-scale characteristics choose similar levels of fine-tuning and token consumption. The optimal mechanism can be implemented through menus of two-part tariffs, with higher markups for more intensive users. Our results rationalize observed industry practices such as tiered pricing based on model customization and usage levels. |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2425 |
| By: | Emmanuelle Auriol (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Anaïs Dahmani-Scuitti |
| Abstract: | In a model featuring two regions—one affluent and the other impoverished—the allocation of public spending is examined under an initially centralized and autocratic political process. In a stable autocracy, the decision to implement decentralization reforms hinges on a tradeoff: while centralization enables the autocrat to extract higher rents, it also results in reduced productivity in the poor region. The autocrat opts for decentralization when the negative impact on productivity outweighs the benefits of rent extraction. Moreover, under the pressure of democratic movements and growing instability, an authoritarian regime may also pursue decentralization reforms to preserve its wealth from the decisions of the poor median voter. |
| Keywords: | Autocracy, Decentralization, Democratization |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04923623 |