Private Values Research Articles

Funding New Ventures with Digital Tokens: Due Diligence and Token Tradability

We study funding mechanisms for new ventures based on cryptographic tokens enabled by blockchain technology, such as initial coin offerings (ICOs). The infrastructure built around blockchain allows for efficient trading of these tokens. Thus the due diligence process can be crowdsourced beyond the potential early adopters, as favorable assessments of the venture can be leveraged with speculative token purchases exceeding the buyer's individual demand. We develop a model for an entrepreneur considering digital tokens to finance a new venture, focusing on token tradability and broader crowdsourcing of due diligence. We then compare funding via digital tokens with funding from traditional financing sources like venture capital as well as with pre-sale crowdfunding with non-tradable rewards. We find that tradable digital tokens are more attractive when there is higher uncertainty about market demand, which is frequently the case when developing applications of new technologies, such as blockchain-based platforms. In such cases crowdsourcing due diligence benefits from the information contained in the private valuations of the early potential adopters. Token tradability leverages that information and increases the amount that can be financed, thus enabling new ventures with higher development costs. The increased funding comes at the cost of a lower digital token price and lower total profit for the entrepreneur, but may still be preferable to the alternatives, if such alternatives are available at all. This work makes a contribution to the emerging literatures on digital cryptographic tokens and on crowdfunding new ventures.

How obvious is the dominant strategy in an English Auction? Experimental evidence

ABSTRACT Bidding one's value is a weakly dominant strategy (DS) in both English and second-price auctions (SPAs) with private values, but experimental studies find frequent and systematic deviations from the DS only in the latter. To explain the difference, Li (2017) proposes a stronger solution concept, obviously dominant strategies (ODS), that is present in English auctions but not SPAs. We introduce a treatment to English auctions that affects expected payoffs but not the DS. We observe little change in bidding in response to the manipulation in English auctions where the DS is also an ODS, whereas this manipulation has been shown to drastically affect bidding in SPAs (Georganas et al., 2017) where the DS is not an ODS.

The social value of information and the competition motive: price versus quantity games

We propose a unified framework bridging the gap between team and competition issues, in order to reconsider the social value of private and public information in price and quantity games under imperfect and dispersed information, and to compare the corresponding outcomes in terms of equilibrium and social welfare. The informational distortion associated with the competition motive may lead to a negative social value of private information and reverse the perfect information result in favor of strategic substitutability as the source of higher profit and social welfare. Abstract We propose a unified framework bridging the gap between team and competition issues, in order to reconsider the social value of private and public information in price and quantity games under imperfect and dispersed information, and to compare the corresponding outcomes in terms of equilibrium and social welfare. The informational distortion associated with the competition motive may lead to a negative social value of private information and reverse the perfect information result in favor of strategic substitutability as the source of higher profit and social welfare.

Mechanism design with budget constraints and a population of agents

This paper finds welfare- and revenue-maximizing mechanisms for assigning a divisible good to a population of budget-constrained agents who have independently distributed private valuations and budgets without unit-demand. Both optimal mechanisms feature a linear price for the good. The welfare-maximizing mechanism additionally has a uniform lump-sum transfer to all agents and a higher linear price than the revenue-maximizing mechanism. This transfer increases welfare because it ameliorates the key difficulty in the aforementioned setting: agents with high valuations cannot purchase an efficient amount of the good due to their budget constraints. Finally, in an extension, I relax the independence between valuations and budgets. In an online appendix, I consider production and large finite markets.

Mining for humanity in the deep sea and outer space: The role of small states and international law in the extraterritorial expansion of extraction

AbstractThis article explores how Luxembourg and Nauru put their sovereignty to use in order to become global players in what can be considered extraterritorial landgrabs – the turning of the deep seabed and outer space into realms of commercial exploitation. It shows how the international legal framework puts states, however small, into a position to facilitate private enterprises’ endeavours to obtain extraterritorial exploitation rights. The article further enquires into the public interest justifications put forward by governments to legitimate their support for the expansion of private resource extraction into the deep sea and outer space. It finds that these justifications are very tenuous; that governments refer to vague notions of economic growth and benefits that may accrue from extraction to an undefined humanity while it remains unclear whether their own populations will obtain any concrete gains. Both case studies illustrate how states, on the basis of international law, facilitate the expansion of private value extraction, thus perverting the redistributive ambitions that may once have motivated the negotiations of the United Nations Convention on the Law of the Sea and the Outer Space Treaty.

Information Disclosure in Contests: Private versus Public Signals

Two players compete for a prize in an all-pay auction where their private binary valuations are independent from each other. A contest organizer commits to disclose additional information about the opponent’s valuation to each player – privately or publicly – to maximize either players’ expected payoff or total expected effort. I characterize the unique equilibrium of the contest when the organizer discloses a public signal to all players and a symmetric equilibrium when he discloses a private signal to each. When the organizer discloses privately, I show that any partially informative private signals induce higher expected payoffs for players and lower total expected effort than when no signal is disclosed. When the organizer discloses publicly, I characterize a public disclosure policy that induces higher total expected effort than when no signal is disclosed. I also characterize optimal public signals that maximize players’ expected payoff. Finally, the ranking between private and public signals in terms of maximizing players’ expected payoff is indeterministic. In terms of revenue ranking, the all-pay auction with the public disclosure policy dominates the first- and the second-price auctions with binary independent private valuation regardless of whether private or public disclosure is used in these winner-pay auctions.

Characterization of fully coupled FBSDE in terms of portfolio optimization

We provide a verification and characterization result of optimal maximal sub-solutions of BSDEs in terms of fully coupled forward backward stochastic differential equations. We illustrate the application thereof in utility optimization with random endowment under probability and discounting uncertainty. We show with explicit examples how to quantify the costs of incompleteness when using utility indifference pricing, as well as a way to find optimal solutions for recursive utilities.

Competition in Treasury Auctions

We investigate the role of competition on the outcome of Austrian Treasury auctions. Austria’s EU accession led to an increase in the number of banks participating in treasury auctions. We use structural estimates of bidders’ private values to examine the effect of increased competition on auction performance. We find robust evidence that bidders’ surplus dropped sharply after EU accession, but less than reduced form estimates would suggest. The difference can be explained by reduced form estimates not taking into account the increase in valuations upon EU accession. (JEL D44, E63, G21, H63)

The bidder exclusion effect

AbstractWe introduce a new, simple‐to‐compute test of independence of valuations and the number of bidders for ascending button auctions with symmetric, conditionally independent private values. The test involves estimating the expected revenue drop from excluding a bidder at random, which can be computed as a scaled sample average of a difference of order statistics. This object also provides a bound on counterfactual revenue changes from optimal reserve pricing or bidder mergers. We illustrate the approach using data from timber auctions, where we find some evidence that bidder valuations and the number of participants are not independent.

Minimum Price Equilibrium in the Assignment Market

We investigate an assignment market where multiple objects are assigned, together with associated payments, to a group of agents with unit demand preferences. Preferences over bundles, pairs of (object, payment), accommodate income effects. Among all (Walrasian) equilibria in such a market, there is one supported by coordinate-wise minimum prices, minimum price equilibrium (MPE). We propose a price adjustment the Vickrey process, that finds an MPE in a finite number of steps. The Vickrey process introduces objects one by one, and on basis of structural properties of MPE, Serial Vickrey sub-process sequentially finds an MPE for k+1 objects by using an MPE for k objects. In Vickrey instead of revealing whole preference, each agent only reports finitely many indifference prices. We also discuss application of Vickrey process to calibrate agents' utility functions in quantitative analysis of housing market research in assignment model.

Attracting future civil servants with public values? An experimental study on employer branding

A frequently cited recommendation of public service motivation (PSM) research is to use PSM in the context of HR marketing. However, empirical evidence demonstrating the usefulness of addressing PSM in the recruitment process is limited. Moreover, we know little about the relative importance of PSM for public employers’ attractiveness. We address this gap using an experimental research design to investigate whether public service motivated individuals differ from extrinsically motivated individuals in terms of their attraction to organizations that emphasize either “traditional” public or private values in their employer branding. Our findings indicate that public service motivated individuals are attracted neither to public nor to private values in employer branding. Furthermore, individuals with very high levels of extrinsic motivation are more attracted to private values employer branding than to public values employer branding and to the control group.

Indifference Pricing of Pure Endowments Via BSDEs under Partial Information

In this paper we investigate the pricing problem of a pure endowment contract when the insurer has a limited information on the mortality intensity of the policyholder. The payoff of this kind of policies depends on the residual life time of the insured as well as the trend of a portfolio traded in the financial market, where investments in a riskless asset, a risky asset and a longevity bond are allowed. We propose a modeling framework that takes into account mutual dependence between the financial and the insurance markets via an observable stochastic process, which affects the risky asset and the mortality index dynamics. Since the market is incomplete due to the presence of basis risk, in alternative to arbitrage pricing we use expected utility maximization under exponential preferences as evaluation approach, which leads to the so-called indifference price. Under partial information this methodology requires filtering techniques that can reduce the original control problem to an equivalent problem in complete information. Using stochastic dynamics techniques, we characterize the indifference price of the insurance derivative via the solutions of suitable backward stochastic differential equations.

Perfect Bayesian Equilibria in repeated sales

A special case of Myerson's classic result describes the revenue-optimal equilibrium when a seller offers a single item to a buyer. We study a repeated sales extension of this model: a seller offers to sell a single fresh copy of an item to the same buyer every day via a posted price. The buyer's private value for the item is drawn initially from a publicly known distribution F and remains the same throughout. A key aspect of this game is that the seller might try to learn the buyer's private value to extract more revenue, while the buyer is motivated to hide it. We study the Perfect Bayesian Equilibria (PBE) in this setting with varying levels of commitment power to the seller. We find that the seller having the commitment power to not raise prices subsequent to a purchase significantly improves revenue in a PBE.

Optimal Investment and Contingent Claim Valuation With Exponential Disutility Under Proportional Transaction Costs

We consider indifference pricing of contingent claims consisting of payment flows in a discrete time model with proportional transaction costs and under exponential disutility. This setting covers utility maximisation as a special case. A dual representation is obtained for the associated disutility minimisation problem, together with a dynamic procedure for solving it. This leads to an efficient and convergent numerical procedure for indifference pricing which applies to a wide range of payoffs, a large range of time steps and all magnitudes of transaction costs.

Strategic Ignorance in Sequential Procurement

Should a buyer approach sellers of complementary goods informed or uninformed of her private valuations, and if informed, in which sequence? In this paper, we show that an informed buyer would start with the high-value seller to minimize future holdup. Informed (or careful) sequencing may, however, hurt the buyer as sellers “read” into it. The buyer may, therefore, commit to ignorance, perhaps, by overloading herself with unrelated tasks, delegating the sequencing decision, or letting sellers self-schedule. Absent such commitment, we show that ignorance is not time-consistent for the buyer, but it increases trade. Evidence on land assembly supports our findings. (JEL D11, D81, D82, D83)

How to Sell a Dataset? Pricing Policies for Data Monetization

The wide variety of pricing policies used in practice by data-sellers suggests that there are significant challenges in pricing datasets. In this paper, we develop a utility framework that is appropriate for data-buyers and the corresponding pricing of the data by the data-seller. A buyer interested in purchasing a dataset has private valuations in two aspects -- her ideal record that she values the most, and the rate at which her valuation for the records in the dataset decays as they differ from her ideal record. The seller allows individual buyers to filter the dataset and select the records that are of interest to them. The multi-dimensional private information of the buyers coupled with the endogenous selection of records makes the seller's problem of optimally pricing the dataset a challenging one. We formulate a tractable model and successfully exploit its special structure to obtain optimal and near-optimal data-selling mechanisms. Specifically, we provide insights into the conditions under which a commonly-used mechanism -- namely, a price-quantity schedule -- is optimal for the data-seller. When the conditions leading to the optimality of a price-quantity schedule do not hold, we show that the optimal price-quantity schedule offers an attractive worst-case guarantee relative to an optimal mechanism. Further, we numerically solve for the optimal mechanism and show that the actual performance of two simple and well-known price-quantity schedules -- namely, two-part tariff and two-block tariff -- is near-optimal. We also quantify the value to the seller from allowing buyers to filter the dataset.

Optimal bargaining mechanisms with refusal cost

We consider a bargaining situation between an arriving buyer and a seller, where the buyer and the seller have private valuations. The seller has an inventory, which has to be sold over the infinite horizon. It is assumed that the seller incurs a refusal cost, if the trade does not take place. Myerson (1985) discusses four bilateral bargaining mechanisms in static settings - price negotiation, splitting the difference between seller's and buyer's offer, buyer posted price and seller posted price. The objective of this research is to study these mechanisms in the dynamic setting, with consideration of the refusal cost. In this paper, we model the situation as a Markov decision process, which endogenises the seller's marginal inventory valuation. We find that the seller prefers posting prices when the refusal cost is low. Seller is indifferent between buyer posted price and negotiation for the high refusal cost.

Optimal bargaining mechanisms with refusal cost

We consider a bargaining situation between an arriving buyer and a seller, where the buyer and the seller have private valuations. The seller has an inventory, which has to be sold over the infinite horizon. It is assumed that the seller incurs a refusal cost, if the trade does not take place. Myerson (1985) discusses four bilateral bargaining mechanisms in static settings - price negotiation, splitting the difference between seller's and buyer's offer, buyer posted price and seller posted price. The objective of this research is to study these mechanisms in the dynamic setting, with consideration of the refusal cost. In this paper, we model the situation as a Markov decision process, which endogenises the seller's marginal inventory valuation. We find that the seller prefers posting prices when the refusal cost is low. Seller is indifferent between buyer posted price and negotiation for the high refusal cost.

Linear Voting Rules

How should a society choose between two social alternatives if participation in the decision process is voluntary and costly, and monetary transfers are not feasible? Assuming symmetric independent private values, we show that it is utilitarian‐optimal to use a linear voting rule: votes get alternative‐dependent weights, and a default obtains if the weighted sum of votes stays below some threshold. Any combination of weights and threshold can be optimal. A standard quorum rule can be optimal only when it yields the same outcome as a linear rule. A linear rule is called upper linear if the default is upset at every election result that meets the threshold exactly. We develop a perturbation method to characterize equilibria of voting rules in the case of small participation costs and show that leaving participation voluntary increases welfare for any two‐sided upper linear rule that is optimal under compulsory participation.

The Effects of Capital Requirements on Good and Bad Risk-Taking

We study optimal capital requirement regulation in a dynamic quantitative model in which deposits facilitate real economic activity and thus the value of deposits is microfounded. We identify a novel general equilibrium effect that drives a wedge between the private value of deposits (i.e., the value to price-taking agents, measured by the deposit premium) and the social value of deposits (i.e., the value that matters for regulation). The wedge reduces the social value of deposits, and as a result, the optimal capital requirement is substantially higher than in comparable models in the literature. Nonetheless, even when the marginal social value of deposits is very low, setting capital requirements too high is suboptimal.