Side Payments Research Articles

Greece’s 2015 Eurozone Bailout “Renegotiation”: Beware of Greeks Bearing “Unpolitics”?

In January 2015, Greece witnessed a political earthquake with the election of the populist anti-austerity/EU bailout coalition of the left-wing party SYRIZA and the far-right party ANEL. It is argued that during January–July 2015, the SYRIZA–ANEL coalition engaged in a protracted process of renegotiation of Greece’s bailout terms that were agreed between previous Greek governments and the so-called Troika (European Commission, European Central Bank, and International Monetary Fund) adopting a behaviour ruled by “unpolitics.” First, the SYRIZA–ANEL government immediately rejected formal and informal rules of EU decision-making. Second, the SYRIZA–ANEL government rejected traditional means of compromise, such as package deals and side payments. Third, when Greece’s creditors presented their last-minute bailout offer in June 2015 to avoid Greece leaving the eurozone (Grexit), the SYRIZA–ANEL government rejected the suggested solution and tried to exploit the ensuing deadlock by calling a rashly organised referendum asking Greeks to vote against the suggested deal. This period of “unpolitics” ended almost immediately after the referendum when, in a sudden and unexpected volte-face, Tsipras interpreted the referendum result as a call for compromise with the Troika and accepted the previously intolerable bailout deal.

Pricing Optimal Outcomes in Coupled and Non-convex Markets: Theory and Applications to Electricity Markets

The clearing of nonconvex markets poses unique challenges. The canonical market clearing, a Walrasian equilibrium, needs not exist when participants’ preferences display nonconvexities, for example, due to technical constraints. Then market clearing prices might not exist, and side payments may be required to compensate losses. Electricity markets are a prime example. Market operators in the United States use heuristic pricing rules to compute market prices; the magnitude of the side payments, potential lost opportunity costs, and the quality of network congestion signals in prices have all become a concern. In “Pricing Optimal Outcomes in Coupled and Non-Convex Markets: Theory and Applications to Electricity Markets,” Ahunbay, Bichler, and Knörr propose a multiobjective framework for pricing such markets. The design goals are shown to be inherently conflicting but may be balanced against each other through traditional methods in multiobjective optimization. Pricing rules used in practice are identified as prices for a suitably convexified market, which motivates a novel pricing method that drastically reduces side payments while maintaining congestion signals in realistic test cases.

Coalitional Pareto optimal solution of one differential game

This paper is devoted to the differential positional coalitional games with non-transferable payoffs (games without side payments). We believe that the researches of the objection and counter-objection equilibrium for non-cooperative differential games that have been carried out over the last years allow to cover some aspects of non-transferable payoff coalitional games. In this paper we consider the issues of the internal and external stability of coalitions in the class of positional differential games. For a differential positional linear-quadratic six-player game with a two-coalitional structure, the coefficient constraints are obtained which provide an internal and external stability of the coalitional structure.

Demand information sharing in Cournot-Bertrand model

We consider a Cournot-Bertrand competition with uncertain demand where firms receive private information about it. We prove that sharing information is a dominant strategy for the quantity-setting firm and not sharing is a dominant strategy for the price-setting firm. We uncover that the quantity-setting firm enjoys higher expected profits with more precise information and pools the information, whereas the price-setting firm's decision to pool the information depends on competition levels and a side payment. Consumers benefit from higher accuracy and pooling of information.

Improving efficiency in supply chains with a capital-constrained app developer under the agency contract

We investigate a supply-chain model with a capital-constrained app developer. The developer interacts with a distribution platform via an agency contract, and the demand is uncertain and dependent on the app’s quality level and selling price. Given the amount of capital that the developer commits to investing in the creation of quality, the platform offers the developer a loan at a certain interest rate, based on which the developer determines the app’s quality level and subsequently also the selling price. We analytically prove that: (i) the interest rate offered by the platform decreases in the developer’s capital and, interestingly, the platform subsidizes the developer’s efforts either when the platform’s share of the revenue or the developer’s capital are sufficiently large; (ii) there is an amount of capital assigned to the creation of quality that is optimal in terms of maximizing the developer’s expected profit; and (iii) the total channel’s expected profit increases in the developer’s capital, which enables us to propose an improved contract leading to Pareto improvement and full coordination by using a side payment that compensates the developer for his loss of profit. In addition, we compare the supply-chain measures of the platform-financing model with those of four common benchmark models: a self-financing developer, a centralized system, no financing, and bank financing. Finally, we extend the analysis in three directions: setting price under demand uncertainty; analyzing a multiplicative demand form with regard to price and quality; and exploring the case of bank financing in addition to platform financing.

Free Trade Agreements Under Asymmetric Information and the Negotiating Role of Side Payments

Free Trade Agreements Under Asymmetric Information and the Negotiating Role of Side Payments

Product Quality and Product Compatibility in Network Industries

Abstract Using an appropriate game-theoretic approach, this article develops a non-cooperative two-stage game in a Cournot duopolistic network industry in which firms strategically choose whether to produce compatible goods in the first decision-making stage. Quality differentiation affects the sub-game perfect Nash equilibrium (SPNE): (i) the network effect acts differently between low- and high-quality firms, depending on their compatibility choice; (ii) if the network externality is positive (resp. negative), to produce compatible (resp. incompatible) goods is the unique SPNE; however, this equilibrium configuration leads the high-quality firm to be worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate toward incompatibility (resp. compatibility) under positive (resp. negative) network externality. This payment represents a Pareto improvement on the firm side but not from a societal perspective, as consumers would be worse off. The article also pinpoints the social welfare outcomes corresponding to the SPNE.

Individual Stability of Pareto Equilibrium of Threats and Counterthreats in a Coalition Differential Game without Side Payments

Individual Stability of Pareto Equilibrium of Threats and Counterthreats in a Coalition Differential Game without Side Payments

When ignorance is bliss: The retailer’s intelligence hazard under information sharing and exchanging

When a manufacturer possesses demand information, there is an opportunity for the retailer to infer the manufacturer’s demand information based on the wholesale price. This paper explores the impact of such inference on the retailer’s unilateral information sharing and bilateral information exchanging strategies in a supply chain with one retailer and two competing manufacturers. Two scenarios were studied under information sharing and exchanging schemes: an intelligent retailer who infers the manufacturers’ demand information from the wholesale prices and an unintelligent retailer who does not infer the information. Our analysis reveals that, regardless of whether the retailer infers or not, the retailer does not want to unilaterally share his information upward with the manufacturers. However, an unintelligent retailer is willing to exchange information with the manufacturers, and the inference does not fully undermine the retailer’s incentives to exchange information. Furthermore, we find that, although the retailer’s inference can help him cope with demand uncertainty, it can actually turn into a hazard (i.e., the retailer’s intelligence hazard) under both information sharing scheme and information exchanging scheme; that is, being ignorant to the manufacturers’ demand information may be a bliss to everyone. We finally observe that side payment transfer may help eliminate the intelligence hazard under bilateral information exchanging but cannot resolve the intelligence hazard under unilateral information sharing.

Political Feasibility and a Global Climate Treaty

ABSTRACT I contend that to be politically feasible a global climate treaty must satisfy the International Paretian principle (IP). I begin by defending IP as a principle of instrumental rationality that reflects the fact of extremely limited altruism vis-à-vis foreigners. I then address two objections to my thesis. One holds that an IP treaty is either economically infeasible or, contrary to its proponents’ claim, does not require side payments from poor states to rich ones. The other holds poor states will reject any climate treaty that requires such side payments because it ignores or exacerbates their unjust treatment by rich states.

Optimal contract design for a supply chain with information asymmetry under dual environmental responsibility constraints

Under dual constraints of green production responsibility and recycling responsibility, the optimal contract between upstream and downstream firms is crucial to achieve low-carbon development, but information asymmetry poses a great challenge to the above contract design. Based on Stackelberg game theory, this paper develops a contract model in a supply chain with information asymmetry under dual environmental responsibility constraints, in which the producer invests in green technology while the retailer exerts green marketing efforts. The paper aims to explore how the producer designs optimal contracts under the different information structures to improve environmental performance while ensuring profitability. Results indicate that: (i) in the full information scenario, the two-part optimal contract makes the decentralized supply chain to achieve the same channel profit and carbon emissions as the centralized scenario. (ii) In the information asymmetry scenario, the producer should design differentiated contract configurations for different types of retailers to eliminate double marginalization. That is, the producer designs low wholesale price and high side payment for the high-type retailer, which enables the producer to earn high profit with low carbon emissions and makes the retailer to obtain additional information profit. While under some conditions, the producer considers the possibility of terminating cooperation with the retailer of low-type, as such a cutoff policy not only guarantees the profitability of the channel members but also improves environmental performance. Furthermore, the impact of some key factors on firms’ decisions, profits, and equilibrium carbon emissions is summarized to guide management decisions.

Collection cooperation breakdown and repair in a closed-loop supply chain during supply disruption and price shock

This paper studies a collection channel selection issue in a closed-loop supply chain (CLSC) consisting of a manufacturer, an e-commerce platform and a third-party collector. Three collection modes are available to the manufacturer who lacks collection capability, that is, platform collection (mode P), collector collection (mode C) and dual-channel collection (mode D). After collection, the manufacturer remanufactures and sells remanufactured products through the platform. We formulate a two-echelon Stackelberg game in which the manufacturer is the leader, the platform and collector are both the followers. We analytically drive the optimal collection price of manufacturer and the optimal collection prices of the platform and collector. Then, we characterize the equilibrium evolution of channel selection under supply disruption and remanufactured product price shock. Notably, during the high price stage, the manufacturer may terminate cooperation with the collector if the manufacturer’s disassembling cost is low. Therefore, we propose two re-entry strategies to assist the collector to rejoin the CLSC, namely, side payment and vertical shareholding. Our results show that, although the two re-entry strategies can both enable the collector return to CLSC, the vertical shareholding is superior to the side payment when the competition intensity is weak enough.

Self-evident events and the value of linking

We study a T-period contracting game between a group of players without access to external financing. We show that the long-term efficiency loss is bounded from below by the need to vary incentives across self-evident events. When T is large, the efficiency bound can be approached by a contract that involves side payments between players. Our results apply to all monitoring structures and strategy profiles. They encompass the inefficiency result in Abreu et al. (1991), as well as the approximate-efficiency results in Compte (1998), Obara (2009), and Chan and Zhang (2016).

Explaining Russia’s Inertia in the Azerbaijan–Armenia Dispute: Reward and Punishment in an Asymmetric Alliance

Russia has been conventionally portrayed in the area studies literature as a close ally of Armenia, although the latter is a subordinate rather than an equal partner. More recent scholarship has focused on Armenia’s dilemma as to whether to align itself with the liberal West or to enhance ties with its former patron. The Armenian foreign policy establishment has demonstrated in political action and discourse a marked preference for Europe’s institutions and political vision. Russia’s neutrality in the recent escalation of tension between Armenia and Azerbaijan, despite bilateral security arrangements with Armenia, showed the inherent fragilities of this asymmetric alliance. Drawing on asymmetric alliance literature, this article seeks to explain Russia’s reluctance to involve itself in the Nagorno-Karabakh dispute in favour of Armenia and identifies how Russia rewards or punishes its ally, based on its assessment of whether the ‘side payments’ attached to the alliance have been honoured.

Decarbonizing contending industries: policy design and the EU’s CBAM

ABSTRACT As part of its ‘Fit for 55’ package to realize a previously agreed upon 55% reduction in greenhouse gas emissions by 2030 (as compared to 1990 levels) along with a net-zero by 2050 target, the European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM) that phases out free allowances by 2035. Although most initial commentary has focused on potential conflict with the EU’s international trading partners from this renewed effort to price carbon while managing ‘carbon leakage’, policymakers may face greater challenges in their efforts to withdraw the highly visible benefit of free permits from domestic industry. This Perspective analyzes key policy dynamics relating to the imposition of burdens on powerful producer interests, and identifies where obstacles to policy change in the issue-area of carbon border adjustments (CBAs) are most likely to arise. Key policy insights: Policy conflict over CBAM appears likely to follow unfamiliar geopolitical or sectoral lines. Internationally, several major trading partners have signaled a willingness to align their own emissions trading policies more closely with those of the EU and may even end up ‘racing to the top’ in harmonization efforts. Domestically, EU industries have expressed relatively undivided reservations about the CBAM proposal. Targeted domestic sectors will likely be privately assured that burdens are minimal, or compensated by new subsidies or side payments, despite potential violations of international trade law principles of non-discrimination and national treatment. Nonetheless, if CBAM simply disregards exporting countries’ carbon prices, or effectively subsidizes domestic heavy industry by providing them with free allowances at the same time that importers are charged with the adjustment, then international conflict is more likely.

Information sharing for competing manufacturers: The strategic analysis of environmental innovation

This paper aims to study the strategic effects of manufacturers' environmental innovation on supply chain information sharing. We develop a game-theoretic model including two manufacturers and one retailer who possesses superior demand information, and mainly investigate two cases that one or both of the manufacturers conduct environmental innovation (i.e., cases O or T). Our analysis shows that after the manufacturers conduct environmental innovation, the retailer may fully or partially share demand information for free. Moreover, the retailer is more willing to share information voluntarily in case T, comparing to case O. If manufacturers' competition is more intense, the retailer is more (less) likely to share information fully in case O (case T). Under certain conditions, the retailer can be incentivized to share information through designing a side payment from manufacturers. In addition, the side payment from one of the manufacturers can benefit the rival and supply chain in most cases, but there are exceptions. After providing incentives, non-information sharing is less likely to occur in case T, comparing to case O. Besides, the retailer's preferred modes of information sharing cannot benefit both manufacturers simultaneously in case O, but it can in case T. Our main conclusions are still valid when considering carbon tax which can facilitate information sharing.

Judgment-Contingent Penalties: Signaling in Negative-Expected-Value Suits

This paper explores judgment-contingent commitments as a signaling device in settings that implicate negative-expected-value (NEV) cases. We present two signaling options in which the informed party promises, in case of a loss at trial, to incur some loss in addition to the judgment. In the first, the additional amount is not transferred to the rival litigant (for example, commitment to pay a charity conditional on losing at trial). In the second, the informed party commits to transfer the additional amount to the rival party. The first variation reduces the rate of trials, whereas the second achieves a fully separating equilibrium. We conclude that, in contrast to the positive-expected-value (PEV) setting, informed defendants in NEV cases can always signal by committing to a self-penalty, conditional on losing at trial, without demanding a side payment. We therefore predict that signaling should be more common in NEV settings than in PEV settings.

Malaysia’s path to the Strategic Trade Act

ABSTRACT In 2010, six years after news broke that the A. Q. Khan nuclear smuggling ring was making components for Libya’s nuclear program a short distance from Kuala Lumpur, Malaysia adopted comprehensive export controls. Because Malaysia, like many developing and middle-income countries, had little to gain in security terms from such controls and potentially much to lose economically, its decision to introduce them seems puzzling. Drawing on a series of interviews with Malaysian officials and civil society, this article contributes to a growing literature on states’ nonproliferation policies by exploring that puzzle. The article considers the existing literature that purports to explain why states impose export controls and identifies three plausible factors behind Malaysia’s decision to do so: international norms, side payments, and political leadership. The article then details Kuala Lumpur’s development of export controls and assesses the role of each factor. Consistent with recent studies of the international nonproliferation order, the article concludes that Malaysia’s decision to introduce export controls was driven mainly by the promise of political and economic side payments from external actors, especially the United States, and by domestic changes in political leadership.

“Yes-Man” Firms: Government Campaign and Policy Positioning of Businesses in China

Abstract We demonstrate material origin of strategic preference expression in authoritarian systems, where firms express dissent against or conform to the government's position based on what they seek to obtain from the government: politically powerful firms are more likely to dissent to negotiate policy concessions while politically weak firms are more likely to conform to the government's position to obtain side payments or to avoid punishment. We test this argument using survey experiments with firm executives in China. A treatment that signals the government's commitment to liberalize inward foreign direct investment increases the percentage of firms that report to “benefit” from the policy between 14 and 36 percentage points. Powerful firms (state- and foreign-owned) conform the least to the government and politically vulnerable firms and the recipients of government contracts conform the most. Our results suggest that political standing is a key driver of business position-taking in China.

A Cooperative Merging Strategy for Connected and Automated Vehicles Based on Game Theory With Transferable Utility

Traffic congestion is a serious social problem in modern society, while vehicle merging is one of the main causes of congestion since human driver has to decelerate to avoid collision when merging. Connected and automated vehicles (CAVs) can realize the coordinated merging which will improve the traffic efficiency, reduce the fuel consumption and improve the driving comfort. In this paper, a cooperative merging strategy for CAVs is proposed based on cooperative game theory with transferable utility (TU) and optimal control. By introducing the value of time (VOT), an economic payoff function including time benefit, fuel consumption and driving comfort is constructed. The cooperative game determines the merging sequence (MS) of vehicles and the side payment among them, and can achieve a win-win situation, while the coordinated merging trajectory of each vehicle is computed based on optimal control. The effectiveness and feasibility of the proposed framework are verified though simulation in different cases, and the comparison of simulation results indicates that the proposed framework can improve the economic benefit of vehicles and have the potential for practical application.