We investigate input price discrimination under secret contracting between a manufacturer and competing retailers, whose investment activities exhibit retail effort spillovers. We show that the economic effects of input price discrimination vary with the sign and magnitude of retail effort spillovers according to the contractual structure, namely, linear or two-part tariffs. Retail effort spillovers and product differentiation affect the pass-through of input price to retail quantity, which is defined under each contractual structure. Our analysis provides novel insights into the role of retail effort spillovers and into the evaluation of quantity pass-through in the antitrust scrutiny of input price discrimination.
Policymakers increasingly auction upstream inputs to promote downstream competition in network industries, including rail slots, airport slots, spectrum, and transmission rights. We study how selling capacity as a single package versus in sequential tranches affects entry when an incumbent holds an initial endowment. In a two-stage model with Cournot competition downstream, one-shot auctions allow unrestricted incumbents block entry, whereas sequential auctions may incentivize accommodation. Simulations calibrated to the Paris-Lyon route illustrate the sensitivity of entry to tranche design and demand.
Off-label use regulation has the potential to change pharmaceutical firms' behavior and-consequently-affect patient welfare. We investigate the impact of changes in off-label regulation on pharmaceutical firms' behavior in seeking formal marketing approval for supplemental uses. In 2012, a US court decision protected truthful off-label promotion, providing pharmaceutical companies more leeway to promote off-label uses of their drug. Using a unique data set of pharmaceutical firms' research and development projects, we exploit this regulatory change to understand how firms react to government policies. Results demonstrate that the hazard of approval declined for supplemental uses, relative to original uses, after the policy change. Patent protection, potential market size, and competition are also important determinants of the hazard of approval. These results have implications not only for innovation policy but for the creation of high-quality data for certain indications.
In this paper, we investigate the contracts offered by a large healthcare purchaser to health service providers. Contracts are based on the DRG principle that all hospitalizations in a diagnosis group are reimbursed at the same rate. This principle is relaxed in practice, as in several cases, the amount reimbursed within each DRG exhibits considerable variability. We build a theoretical model which explains this variability as the attempt of the health authority to ensure appropriate matching between hospitals and patients. We test the model using a very large and detailed administrative data set for the largest region in Italy. In line with our theoretical results, we show that the state funded purchaser offers providers a system of incentives such that, as required by optimality, that providers which treat more patients receive a higher average reimbursement per treatment, suggesting therefore that they treat on average more difficult patients and are compensated for doing so.
This paper presents a model of vertical market structure that integrates multiple determinants previously studied in isolation. It shows how the nature of market growth, whether through existing or new applications of an input, and the type of fixed costs, whether exogenous or endogenous, affect the emergence of external suppliers for the input. The role of such suppliers depends on the input's technological generalizability, its potential for improvement, and the breadth and differentiation among downstream applications. Together, these factors shape whether a vertical market structure persists and can potentially drive multiple transitions between vertical integration and outsourcing.
Using staggered state-level changes in noncompete enforceability, we document that reduced enforcement increases profitability, valuation, productivity, and plant-level growth in knowledge-worker-intensive firms relative to other firms. Critically, these gains are concentrated among the most productive knowledge-worker firms, consistent with an assortative matching mechanism in which top firms attract the most productive workers when noncompetes no longer bind. Using inventor-level data, we find direct evidence of this sorting: more productive inventors migrate toward more productive firms following reductions in enforceability. Consequently, performance dispersion widens across knowledge-worker-intensive industries, as the most productive firms pull further ahead of their less productive peers.
This paper investigates the impact of robot adoption on firm-level inefficiency gaps, defined as the wedge between the value of the marginal product of labor and the market wage. We develop a theoretical framework where firms endogenously assign robots and labors to different production tasks based on comparative advantage. Because robots incur lower adjustment costs than human labor, a higher robot-to-labor ratio enhances operational flexibility. This flexibility allows firms to respond to exogenous demand shocks through more frequent, incremental adjustments, thereby maintaining labor inputs at their optimal levels and narrowing the inefficiency gap. Testing this model with a comprehensive survey of Chinese manufacturing firms (2000-2013), we find a increase in the robot-to-labor ratio results in a reduction in the inefficiency gap. Mechanism analysis confirms that automated firms are significantly more likely to execute continuous, small-scale operational adjustments, validating the role of enhanced operational flexibility in reducing resource misallocation.
Recent debates regarding the relative efficiency of hybrid and pure platform modes have become central in platform economics. This paper investigates the effect of the platform mode in a setting where downstream sellers on the platform purchase products from an upstream manufacturer before competing in quantities. The choice between the hybrid and pure platform modes alters the upstream manufacturer's pricing incentives and, in turn, affects total market quantity and welfare. I derive the conditions under which the hybrid platform mode yields a higher, lower, or equal total quantity compared to the pure platform mode. The key determinant is the modularity of demand, which depends on the elasticity of marginal revenue. These results highlight that platform regulation should jointly consider demand structure, upstream pricing behavior, and market structure.
We experimentally examine the effects of cheap talk communication and information structure on trust and reciprocity in an infinitely repeated favor exchange game without immediate reciprocity. Theory predicts that full trust is not incentive compatible under private information, in contrast to the public information setting. Yet, our results show that while public information yields better outcomes, subjects under private information still exhibit substantial trust and reciprocity, achieving average payoff efficiency exceeding 80% of the maximum possible. Allowing subjects to communicate freely through unrestricted text chat reinforces this outcome, whereas structured communication using pre-formulated messages has no significant effect. Content analysis suggests that free-form communication is effective in enabling subjects to develop a better understanding of one another's messages. Strategy analysis indicates that subjects predominantly adopt the strategy that achieves the socially optimal outcome, even when it is not an equilibrium under private information. This provides a strategic rationale for the observed levels of trust and reciprocity and suggests that subjects are not always beholden to incentive-compatibility. A sophisticated class of strategies explains a significant proportion of the data only under private information. This explains the lower frequency of trusting and reciprocal behaviors in this setting, as these strategies constrain such actions.
We analyze a setting in which physicians, who differ in their degree of altruism, first exert diagnostic effort before deciding whether to administer a test to determine the most appropriate treatment. Diagnostic effort yields an imperfect private signal of the patient's type, whereas the test provides a more accurate assessment. Absent corrective transfers, physicians exert too little diagnostic effort and may rely excessively on testing. When altruism is either homogeneous or observable, the first-best allocation can be decentralized through a payment scheme consisting of (i) a pay-for-performance (P4P) component, based on the proportion of correctly treated patients, to induce the optimal diagnostic effort and (ii) a fixed component to ensure both the optimal testing decision and physician participation. When altruism is heterogeneous and privately known to physicians, the two-part tariff that decentralizes the first-best is no longer incentive compatible. The optimal contract is pooling rather than separating, an instance of nonresponsiveness. Its uniform P4P component induces more altruistic physicians to exert higher diagnostic effort, while the fixed component must be conditioned on diagnostic test costs to promote optimal testing decisions.
The literature on learning-by-exporting has largely overlooked the role of information and communication technology (ICT). Given the growing importance of this issue, this study examines whether firms' entry into export markets induces additional ICT investments and how such investments influence performance. Using firm-level data from India for 2002-2019, the analysis applies a two-step method: propensity score matching (PSM) to identify export-driven ICT spending, followed by production function estimation to evaluate its effects. The results show that exporting leads firms to raise their ICT spending, and that this export-driven component is associated with larger gains in value-added than the counterfactual ICT spending. Further evidence indicates that export-driven ICT expenditures support capital formation, and the resulting ICT capital stocks yield higher gains than their counterfactuals. At the sectoral level, less ICT-intensive industries benefit more from ICT expenditure flows, whereas highly ICT-intensive industries gain more from ICT capital stocks. Robustness checks based on direct productivity analysis and the PSM difference-in-differences approach confirm these findings. Taken together, the evidence highlights the importance of integrated policies that align digital investment strategies with export support initiatives.
This paper uses a quasi-experimental design, a unique dataset of physical books, and a sample of vintage former bestsellers to examine copyright's impact on price, sales, and availability in the book market. We find that copyright increases sales, raises price, especially for top-selling titles, and increases the number of old titles being sold in the market. These findings challenge the traditional access/incentive tradeoff and the view that society benefits when titles enter the public domain. Policy implications include reconsideration of uniform copyright terms and exploration of renewal-based systems that allow rights holders to self-select into extended protection.
In a two-period model of behaviour-based price discrimination, we consider the strategic incentives of competing oligopolistic firms in creating false expectations about the horizontal attributes of the products. In the case of exogenous real locations, we show that misleading advertising is profitable for firms as long as the equilibrium advertised product differentiation is greater than the real one. We also show that when firms adopt misleading advertising, behaviour-based price discrimination might increase the profits with respect to uniform pricing. When the real locations are endogenously chosen by firms, misleading advertising yields lower real product differentiation in equilibrium, but, due to the increase of the expected product differentiation, the final impact on the equilibrium profits is always positive. We also illustrate the implications of misleading advertising for consumer surplus and welfare, and we outline some policy prescriptions.
This paper analyzes the impact of external demand shocks from the 2008 to 2009 Great Trade Collapse on the performance of Chinese exporters and examines how export diversification mitigates these effects. Using Chinese Customs data merged with financial data from all listed Chinese firms, we construct firm-specific demand shocks based on pre-shock export destinations. These firm-specific demand shocks serve as instrumental variables to assess the effects of export activity on firm productivity and profitability. Our findings show that firms exporting to countries with steeper GDP declines experienced slower export growth, resulting in reduced productivity and profitability. However, export diversification mitigates these adverse impacts, underscoring its role in stabilizing firm performance amid global economic shocks.
Reward schemes may affect not only agents' effort but also their incentives to gather information in order to reduce the riskiness of the productive activity. In a laboratory experiment using a novel task, we find that the relationship between incentives and evidence gathering depends critically on the availability of information about peers' strategies and outcomes. When no peer information is available, competitive rewards are associated with more evidence gathering than noncompetitive rewards. In contrast, when decision-makers know what or how their peers are doing, competitive rewards schemes are associated with less active evidence gathering than noncompetitive schemes. The nature of the feedback-whether subjects receive information about peers' strategies, outcomes, or both-also affects subjects' incentives to engage in evidence gathering. Specifically, only combined feedback about peers' strategies and performance-from which subjects may assess the overall relationship between evidence gathering, riskiness, and success-is associated with less evidence gathering when rewards are based on relative performance; we find no similar effect for noncompetitive rewards.
I study a game in which universities compete by making unobservable investments in education quality. Subsequently, the graduates are considered for a single placement by an organization. A merit-based evaluator compares the realized skill of each graduate. A prestige-based evaluator only observes a noisy signal of the universities’ relative education quality. Though a prestige-based evaluator ignores valuable information, I derive conditions under which an increase in the probability of the prestige-based evaluator incentivizes higher investment and benefits the organization.
Economists and management scholars have argued that the scope of incentives to increase cooperation in organizations is limited as their use signals the prevalence of free-riding among employees. This paper tests this hypothesis experimentally, using a sample of managers and employees from a large company. We exogenously vary whether managers are informed about prevailing cooperation levels among employees before they can set incentives to promote cooperation. In addition, employees matched to informed managers learn that the manager could base their incentive choice on cooperation levels. We find no evidence for the hypothesized signaling effect. Having an informed manager set the incentive does not change employees’ be-liefs about the cooperativeness of others. Incentives hence have strong positive effects on cooperative beliefs, irrespective of information. The absence of the signaling effect seems related to the perception of managers’ intentions, a mitigating but understudied factor.
For privately held startups, restructuring ownership is challenging due to diverse and uncertain valuations among owners. Traditional approaches, including the BMBY mechanism for equal partnerships, fail to address the complexities of multi‐owner settings and do not elicit true valuations. We propose a novel mechanism that extends the BMBY rationale to accommodate these complex scenarios. Our mechanism ensures truthful valuation elicitation while offering several advantages: it is easy to implement, budget balanced, resistant to collusion, individually rational, and allocates shares to those who value them most. Crucially, it preserves proportionality among the remaining owners, maintaining the existing power dynamics. The mechanism allows for adaptive control of the eventual number of owners, addressing unique startup needs such as incentivizing employee ownership. This paper contributes to the field of ownership restructuring by providing a practical, theoretically grounded solution for the complex dynamics of startup recapitalization, potentially improving decision‐making processes and stakeholder relationships in these pivotal business transitions.
Online platforms that implement reputation mechanisms typically prevent the transfer of ratings to other platforms, leading to lock-in effects and high switching costs for users. Platforms are able to capitalize on this arrangement, for example, by charging their users higher fees. In this paper, we theoretically and experimentally investigate the effects of platform pricing on workers' switching behavior in online labor markets and analyze whether a policy regime with reputation portability could mitigate lock-in effects and reduce the likelihood of worker capitalization by the platform. We examine switching motives in depth, differentiating between monetary motives and fairness preferences. We provide theoretical evidence for the existence of switching costs if reputation mechanisms are platform-specific. Our model predicts that reputation portability lowers switching costs, eliminating the possibility for platforms to capitalize on lock-in effects. We test our predictions using an online lab-in-the-field experiment. The results are in line with our theoretical model and show that platforms can capitalize on lock-in effects more effectively in a policy regime without reputation portability. We also find that reputation portability has a positive impact on worker mobility and the wages of highly rated workers. The data further show that the switching of workers is primarily driven by monetary motives, but perceiving the platform fee as unfair also plays a significant role for workers.
We study the substitution between fixed and mobile broadband services in South Africa using survey data on 134,000 individuals collected between 2009 and 2014. In our discrete-choice model, individuals choose fixed or mobile voice and data services in a framework that allows these services to be considered substitutes or complements. We find that there is substantial heterogeneity in the perception of these services as substitutes/complements. We use our model to simulate the uptake of fixed and mobile broadband across various demographic groups under different policy interventions, including (i) a reduction in mobile data prices, (ii) an expansion in fixed-line coverage, (iii) a widespread distribution of computers, and (iv) broader Internet access in schools and workplaces. Our results suggest that, when applied in isolation, these interventions do not significantly increase Internet access among poorer households. In particular, the uptake of fixed broadband would remain limited, even if accessible to all households. This is because many households prefer mobile Internet access, perceiving it as a substitute for fixed broadband.
