Transactions and Economic Relationships

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

This award funds work in economic theory that develops new models of the structure of economic transactions and relationships. The award funds research on two distinct projects. The first project considers questions about agents' incentives to invest in productive characteristics. In many markets, a pair of agents (individuals or organizations) transacts, and the value of the transaction depends on investments the agents have made prior to their match. The value of a match between a teacher and a school depends on the human capital investments made by the teacher and the physical capital investment of the schook, which are made prior to the parties meeting. There is a potential holdup problem, which is ameliroated by the competition on both sides of the market: there are potential substitutes on both sides of the market (albeit imperfect) that limit the degree to which either side can expropriate returns that can be attributed to investment by the other side. The project focuses on many-to-one matching (an example of this situation is schools that hire multiple teachers) and on the nature of investment inefficiencies under uniform pricing when the conditions for efficiency do not hold. The second project focuses on game theoretic modeling of cooperation. Most real world repeated relationships include some private monitoring -- the partners in the economic relationship have some private information about the actions each takes. The goal is to characterize the kinds of behavior that can support cooperation and to demonstrate intuitively plausible constraints on behavior that lead to plausible cooperation. This includes work on what determines the magnitude of possible cooperation in a specific situation. Because the project will provide a better understanding of investment incentives in markets where participants must invest before matching, the results will yield broader impact through insights into possible interventions that will ameliorate inefficient investments.