Dosis, Anastasios (2014) Essays on markets with asymmetries of information and strategic experimentation. PhD thesis, University of Warwick.

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Abstract

0.1 Competitive Markets with Adverse Selection

Part 1 of the thesis is a theoretical investigation of (strategic) competitive markets with adverse selection. In this part, I propose possible optimal policies to correct inefficiencies that may be caused in competitive markets because of asymmetries of information among agents. Specifically Part 1 contains two distinct chapters.

In Chapter 1, the impact of redistributive taxation in a credit market with adverse selection is examined. The market consists of different types of entrepreneurs who need to borrow from banks to invest in stochastic technologies. Adverse selection leads to credit rationing, and the economy is characterised by low aggregate investment and constrained suboptimal allocations. It is shown that an anonymous, redistributive budget-balanced tax system can increase aggregate investment and lead to Pareto improvements. Unlike what is usually believed, it is shown that every entrepreneur benefits from the tax system, even if, in expectation, high-productivity entrepreneurs pay in taxes more than they receive in subsidies.

In Chapter 2, I model a competitive insurance market with adverse selection as an "informed-principal game". The informed buyer offers a set of contracts to all uninformed sellers, who accept or reject. If all sellers reject, then there is no trade. Otherwise, each one of the sellers who accepted has the right to add more contracts to the already existing offer if he wishes so. The buyer can choose one contract from one seller at the last stage of the game. I characterise the set perfect Bayesian equilibria of this game. I show that the well-known Rothschild-Stiglitz-Wilson (RSW) allocation places a lower bound in the equilibrium payoff of each type and is the unique equilibrium allocation (or a "strong solution") when it is not Pareto dominated. Every interim incentive efficient allocation, that weakly Pareto dominates the RSW allocation, is an equilibrium allocation. Bertrand-type competition among sellers drives expected profits to zero and demands every equilibrium allocation to be interim incentive efficient. The approach extends to any finite number of types and states, and to other similar markets like credit, labour or informed seller markets.

0.2 Strategic Experimentation in R&D Races

Part 2 of the thesis is a joint work with Abhinay Muthoo, Alex Gershkov and Motty Perry with equal shares in all aspects of the paper.

In this part, we study a patent race between two firms as a two-armed bandit model. The first firm that successfully completes two phases (R&D) acquires a patent license. Each firm can learn from its rival's actions and outcomes. We show that two possible inefficiencies can be observed in equilibrium. On the one hand, spill-overs of information reduce the expected profitability of the patent and therefore firms may invest inadequately in R&D, in the fear of releasing good news to the market. On the other hand, an opposite, "tragedy-of-the-commons", effect may prevail, according to which R&D investment is socially excessive.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory
Library of Congress Subject Headings (LCSH):	Markets, Information asymmetry, Patents -- Econometric models, Research and development projects -- Econometric models
Official Date:	July 2014
Dates:	Date Event July 2014 Submitted
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Polemarchakis, H. M. (Heraklis M.) ; Perry, Motty
Extent:	vi, 69 leaves
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/63678

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