Three essays on behavioral economics and mechanism design

My three essays on behavioral economics and mechanism design introduce two new microeconomic theoretical models.

In the first chapter, we develop an n-player theoretical model applying the concept of Virtual Bargaining to study cooperative behavior in public goods games characterizing team production. Virtual Bargaining is a modeling framework that characterizes how players may construct a tacit agreement to coordinate behavior in the absence of explicit communication. Players identify their worst-possible payoff outcome from any candidate agreement, and mutually best-respond with respect to maximization of their worst-payoff function. Players face uncertainties regarding whether other players will follow through on a candidate agreement or play their Nash best response to candidate agreement. The worst payoff function is the minimum over these possibilities. We show that, relative to the Nash equilibrium predictions, the virtual bargaining model predicts more effective coordination with higher contributions to the public good when individual contributions are strategically complementary and the public good production technology exhibits decreasing return to scale. This type of public good characterizes team production processes when each player receives a share of the total team output, and effort by each player increases the marginal product of every other player.

In the second chapter, based on the different theoretical predictions of the VB and standard Nash models, we propose an experimental design to test whether the VB or the standard Nash model predicts people’s behavior better. What's more, we also test the VB theory in a price-setting duopoly market environment.

In the third chapter, we show that hidden information regarding the quality of placements of online advertisements by publishers can lead to inefficiency in the market that is a form of moral hazard. We then characterize an incentive-compatible contract between the publisher and a traditional contract advertiser in the online display advertisements environment. This solves the inefficient impression allocation problem between the traditional contract market and the real-time bidding spot market. Unlike previous papers, which rely on including the reputation or long-term benefit consideration into the publisher’s objective function, our incentive-compatible contract characterizes a one-time profit maximization problem for the publisher.