In many principal-agent relations, objective measures of the agents' performance are not available. In those cases, the principals have to rely on subjective performance measures for designing incentive schemes. Incentive schemes based on subjective performance measures open the possibilities...

This paper considers a credit mechanism for selecting a unique competitive equilibrium (CE). It is shown that in general there exists a “price-normalizing†bundle, with which the enlargement of the general-equilibrium structure to allow for default subject to appropriate penalties...

Traders' expected utilities in fully revealing rational expectations equilibrium (REE) are shown to decrease as the number of informed traders is increased for an asset market model with diverse information as in Grossman (1976). It follows that no trader has any incentive to acquire information...

The Walras core of an economy is the set of allocations that are attainable for the consumers when their trades are constrained to be based on some agreed set of prices, and such that no alternative price system exists for any sub-coalition that allows all members to trade to something better....

This paper offers an explanation for the rationality of why successful businesses sometimes maintain excess demand. The explanation is motivated from the signaling role of excess demand for firms. Considering a monopolistic market for a good whose quality is not known to the consumers, a firm...

Trade policies such as tariffs are often featured by the prisoner's dilemma. One country's trade liberalization is vulnerable to the opportunism of another country. This problem is more serious in cases where a country behaving opportunistically can only be punished by the victims. In a trade...

This paper considers self-stipulated penalties for defection and rewards for cooperation as inducements to cooperate in the prisoner's dilemma. The paper explicitly characterizes penalties and rewards that are necessary and suffcient to induce the players to cooperate. The characterization...

This paper considers a model of endogenous bilateral cross-holdings. A notion of pairwise stability is applied to analyze firms' incentives for cross-holdings. Under certain conditions and Cournot competition on the output market, it is shown that monopoly is the only outcome of pairwise stable...

In this paper we propose a mechanism to resolve King Solomon’s dilemma about allocating an indivisible good at no cost to the participating agents. A distinctive feature of our mechanism is the design of a two-part contest that makes the agents guess each other’s bids in a...