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When trust fades...: Can optimal mechanisms for policy decisions always be designed?

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  • Major, Iván

Abstract

Governments must usually take policy decisions with an imperfect knowledge of the economic actors' type or the actors' effort level. These issues are addressed within the framework of classic adverse selection or moral hazard models. I discuss in this paper how would the government's and the economic actors' behavior change if relevant information is double asymmetric, that is, it is not just the government that has limited information about the agents' type or effort level, but the economic actors also lack perfect information about the government's trustworthiness. Using the modeling tools of mechanism design I prove in the paper, that government - as principal - is only capable of applying perverse incentives towards the economic agents: it punishes well-behaving agents while it rewards the badly behaving ones. I apply the theoretical models to the regulatory issues of network industries, and specifically to the ICT industry.

Suggested Citation

  • Major, Iván, 2013. "When trust fades...: Can optimal mechanisms for policy decisions always be designed?," 24th European Regional ITS Conference, Florence 2013 88522, International Telecommunications Society (ITS).
  • Handle: RePEc:zbw:itse13:88522
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    References listed on IDEAS

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    1. Juan D. Carrillo & Thomas R. Palfrey, 2009. "The Compromise Game: Two-Sided Adverse Selection in the Laboratory," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 151-181, February.
    2. Roger B. Myerson, 2008. "Perspectives on Mechanism Design in Economic Theory," American Economic Review, American Economic Association, vol. 98(3), pages 586-603, June.
    3. Dilip Mookherjee, 2008. "The 2007 Nobel Memorial Prize in Mechanism Design Theory," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 237-260, June.
    4. Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June.
    5. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
    6. Richard E. Romano, 1994. "Double Moral Hazard and Resale Price Maintenance," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 455-466, Autumn.
    7. Kim, Son Ku & Wang, Susheng, 1998. "Linear Contracts and the Double Moral-Hazard," Journal of Economic Theory, Elsevier, vol. 82(2), pages 342-378, October.
    8. Aggarwal, Rimjhim M. & Lichtenberg, Erik, 2005. "Pigouvian taxation under double moral hazard," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 301-310, March.
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    More about this item

    Keywords

    mechanism design; incentive theory; adverse selection; moral hazard; Bayesian games;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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