This paper identifies a new reason for giving preferences to the disadvantaged using a model of contests. There are two forces at work: the e§ort e§ect working against giving preferences and the selection e§ect working for them. When education is costly and easy to obtain (as in the U.S.), the selection e§ect dominates. When education is heavily subsidized and limited in supply (as in India), preferences are welfare reducing. The model also shows that unequal treatment of identical agents can be welfare improving, providing insights into when the counterintuitive policy of rationing educational access to some subgroups is welfare improving.
Sellers often have the power to censor the reviews of their products. We explore the effect of these censorship policies in markets where some consumers are unaware of possible censorship. We find that if the share of such "naive" consumers is not too large, then rational consumers treat any bad review that is revealed in equilibrium as good news about product quality. This makes bad reviews worth revealing and allows the seller to use them to signal his product's quality to rational consumers.
We model how student choices to rush a fraternity, and fraternity admission choices, interact with signals firms receive about student productivities to determine labormarket outcomes. The fraternity and students value wages and fraternity socializing values. We provide sufficient conditions under which, in equilibrium, most members have intermediate abilities: weak students apply, but are rejected unless they have high socializing values, while most able students do not apply to avoid taint from association with weaker members. We show this equilibrium reconciles the ability distribution of fraternity members at the University of Illinois, and estimate the fraternity’s welfare impact on different students.
Since Telser (1960), there is a well-established argument that a competitive market will not provide service due to free-riding. We show that with search frictions, the market may well provide service if the cost of doing so is not too large. Any market equilibrium with service provision has two or more firms providing service, implying over-provision of service as the social optimum mandates at most one service provider. Firms that provide service and those that do not can co-exist, where consumers direct their search to service providers first to obtain service, and to non-service providers later to enjoy lower prices.
In this paper, we study bidding behavior by firms in beauty-contest auctions, i.e. auctions in which the winning bid is the one which gets closest to some function (average) of all submitted bids. Using a dataset on public procurement beauty-contest auctions in Italy and exploiting a change in the auction format, we show that firms' observed bidding behavior departs from equilibrium and can be predicted by an index of sophistication, which captures the firms' accumulated capacity of bidding well (i.e., close to optimality) in the past. We show that our empirical evidence is consistent with a Cognitive Hierarchy model of bidders' behavior. We also investigate whether and how firms learn to think and bid strategically through experience.
We study vertical relations in markets with consumer and retailer search. We obtain three important new results. First, we provide a novel explanation for price dispersion that does not depend on some form of heterogeneity among consumers. Price dispersion takes on the form of a bimodal distribution. Second, under competitive conditions (many retailers or small consumer search cost), social welfare is significantly smaller than in the double marginalization outcome. Manufacturers' regular price is significantly above the monopoly price, squeezing retailers' markups and providing an alternative explanation for incomplete cost pass-through. Third, firms' prices are decreasing in consumer search cost.
With fast-track authority (FTA), the US Congress delegates tradepolicy authority to the president by committing not to amend a trade agreement. Why would it cede such power? We suggest an interpretation in which Congress uses FTA to forestall destructive competition between its members for protectionist rents. In our model: (i) FTA is never granted if an industry operates in the majority of districts; (ii) The more symmetric the industrial pattern, the more likely is FTA, since competition for protectionist rents is most punishing when bargaining power is symmetrically distributed; (iii) Widely disparate initial tariffs prevent free trade even with FTA.