We examine the role of collateral in a dynamic model of optimal credit contracts in which a borro... more We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and non-housing consumption. The borrower’s private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower’s net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role collateral as a deterrent to manipulation. Some assets, those that generate consumable services will necessarily be collateralized while others may not be. Endogenous default arises when the borrower’s initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable.
When time preferences are heterogeneous and bounded away from one, how "much" cooperation can be ... more When time preferences are heterogeneous and bounded away from one, how "much" cooperation can be achieved by an ongoing group? How does group cooperation vary with the group's size and structure? This paper examines characteristics of cooperative behavior in the class of symmetric, repeated games of collective action. These are games characterized by "free rider problems" in the level of cooperation achieved. Repeated Prisoner's Dilemma games are a special case. We characterize the level of maximal average cooperation (MAC), the highest average level of cooperation, over all stationary subgame perfect equilibrium paths, that the group can achieve. The MAC is shown to be increasing in monotone shifts, and decreasing in mean preserving spreads of the distribution of discount factors. The latter suggests that more heterogeneous groups are less cooperative on average. Finally, in a class of Prisoner's Dilemma games, we show under weak conditions that the MAC exhibits increasing returns to scale in a range of heterogeneous discount factors. That is, larger groups are more cooperative, on average, than smaller ones. By contrast, when the group has a common discount factor, the MAC is invariant to group size.
This paper examines the issue of multiplicity of Markov Perfect equilibria in alternating move re... more This paper examines the issue of multiplicity of Markov Perfect equilibria in alternating move repeated games. Such games are canonical models of environments with repeated, asynchronous choices due to inertia or replacement. Our main result is that the number of Markov Perfect equilibria is generically finite with respect to stage game payoffs. This holds despite the fact that the stochastic game representation of the alternating move repeated game is "non-generic" in the larger space of state dependent payoffs. We further obtain that the set of completely mixed Markov Perfect equilibria is generically empty with respect to stage game payoffs.
The Dynamics of Property Rights in Modern Autocracies
RePEc: Research Papers in Economics, 2021
We study a dynamic model of property appropriation in autocracies. To maintain the appearance of ... more We study a dynamic model of property appropriation in autocracies. To maintain the appearance of the rule of law, an autocrat reassigns property only when the reassignment is acceptable to all affected citizens. Nevertheless, the autocrat can appropriate public and private property by exploiting enforcement gaps. After an adjustment period, wealth shares of public property and the private property of out-groups decline. The model rationalizes the connection between wealth inequality and privatization in many autocracies. Calibrating to Russian and Chinese data, simulations to mid-twenty-first century display widening wealth gaps between elites and the populace. Anocracies mitigate this outcome. (JEL D31, D72, K11, L33, O17, P26, P36)
We study strategic information transmission in an organization consisting of an infinite sequence... more We study strategic information transmission in an organization consisting of an infinite sequence of individual decision makers. Each decision maker chooses an action and receives an informative but imperfect signal of the once-andfor-all realization of an unobserved state. The state affects all individuals' preferences over present and future decisions. Decision makers do not directly observe the realized signals or actions of their predecessors. Instead, they must rely on cheap-talk messages in order to accumulate information about the state. Each decision maker is therefore both a receiver of information with respect to his decision, and a sender with respect to all future decisions. We show that if preferences are not perfectly aligned "full learning" equilibriaones in which the individuals' posterior beliefs eventually place full weight on the true state-do not exist. This is so both in the case of private communication, in which each individual only hears the message of his immediate predecessor, and in the case of public communication, in which a decision maker hears the message of all his predecessors. Surprisingly, in the latter case full learning may be impossible even in the limit as all members of the organization become perfectly patient. We also consider the case where all individuals have access to a mediator who can work across time periods arbitrarily far apart. In this case full learning equilibria exist.
The Dynamics of Property Rights and Consent in Autocracies
Social Science Research Network, 2020
This paper studies a dynamic model of property ownership and appropriation in modern autocracies.... more This paper studies a dynamic model of property ownership and appropriation in modern autocracies. An autocrat represents the interests of an elite ``in-group." It chooses whether and how much to appropriate from public assets and from private assets of an ``out-group" at each date. To obtain apparent consent the autocrat implements an ownership assignment only if it is accepted by the affected citizens. However, because its enforcement of property rights is tied to the duration of its commitment, the autocrat's enforcement is conditional and temporary. Consequently, the autocrat systematically appropriates property from the out-group and from public assets. Under some initial conditions, the autocrat initially implements popular land reform only to reverse course later on. More generally, wealth shares of both public property and private property of the out-group decline monotonically after an initial adjustment period. The model rationalizes the connection between increasing wealth concentration and privatization in autocracies such as Russia and China. Simulations of these countries' wealth distributions to mid 21st century display widening gaps in wealth between elites and the rest of the populace. <br> Finally, we show that the ruling group under anocracy, an autocratic system that admits civil society groups, will generally be better off than under a traditional autocracy. The dilemma is that the anocratic system might enable the growth of an opposition party that eventually displaces the ruling group.
This paper presents a two-period optimal contracting model of collateral. A borrower values a cap... more This paper presents a two-period optimal contracting model of collateral. A borrower values a capital good and a composite non-capital good. He privately observes an income shock in the composite good in the second period. Collateralization of both goods occurs in the optimal contract, whereas it does not under full information. Relative to full information, the capital good in the optimal contract is over-consumed in the initial loan period and under-consumed in the repayment period. The relation between forfeiture of assets and contractual distortion is summarized by a formula showing higher distortions associated with larger increases in forfeited collateral. Forfeiture is decreasing in income at the tails of the income distribution, and low income types forfeit more than high income types. In some parametric cases, forfeited collateral is globally decreasing in income with pooling at the bottom when the borrower's initial wealth is low, or when income shock is sufficiently diffuse, resembling defaults to real world collateralized contracts.
Why would an enfranchised elite voluntarily dilute its power by expanding the franchise? The cent... more Why would an enfranchised elite voluntarily dilute its power by expanding the franchise? The central intuition behind our analysis is that the dilution of power by an enfranchised elite is equivalent to the delegation of power by one member of the elite-a pivotal voter-to another citizen, who in turn becomes the pivotal voter in the new (expanded) elite. Such delegation might be useful if it allows the current pivotal voter to credibly commit to future policy choices. The current pivotal voter realizes that the agent to whom authority is delegated will face similar incentives to subsequently transfer power, and this effect tempers the extent to which the franchise is extended. We develop a recursive, infinite horizon model that generates the possibility of gradual franchise expansion. We show that, in equilibrium, expansion occurs if and only if the private decisions of the citizenry have a net positive spillover to the dynamic payoff of the current pivotal voter. The class of games we study can accommodate a number of proposed explanations for franchise extension, including the threat of insurrection, and ideological or class conflict within the elite.
American Economic Journal: Microeconomics, Nov 1, 2020
We examine the role of collateral in a dynamic model of optimal credit contracts in which a borro... more We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and nonhousing consumption. The borrower’s private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower’s net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role of collateral as a deterrent to manipulation. Some assets—those that generate consumable services—will necessarily be collateralized, while others may not be. Endogenous default arises when the borrower’s initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable. (JEL D82, D86, G21, G51)
This paper examines characteristics of cooperative behavior in a repeated, n-person, continuous a... more This paper examines characteristics of cooperative behavior in a repeated, n-person, continuous action generalization of a Prisoner's Dilemma game. When time preferences are heterogeneous and bounded away from one, how "much" cooperation can be achieved by an ongoing group? How does group cooperation vary with the group's size and structure? For an arbitrary distribution of discount factors, we characterize the maximal average cooperation (MAC) likelihood of this game. The MAC likelihood is the highest average level of cooperation, over all stationary subgame perfect equilibrium paths, that the group can achieve. The MAC likelihood is shown to be increasing in monotone shifts, and decreasing in mean preserving spreads, of the distribution of discount factors. The latter suggests that more heterogeneous groups are less cooperative on average. Finally, we establish weak conditions under which the MAC likelihood exhibits increasing returns to scale when discounting is heterogeneous. That is, larger groups are more cooperative, on average, than smaller ones. By contrast, when the group has a common discount factor, the MAC likelihood is invariant to group size.
I characterize the asymptotic behavior of a society facing a repeated-commoninterest game. In thi... more I characterize the asymptotic behavior of a society facing a repeated-commoninterest game. In this society, new individuals enter to replace their "parents" at random times. Each entrant has possibly different beliefs about others' behavior than his or her predecessor. A self-confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self-confirming equilibrium of the repeated game. The main result shows that for any commoninterest game, the Pareto-dominant equilibrium is a globally absorbing state of the behavioral dynamics when the SCE beliefs of new entrants satisfy certain independence and full-support properties. This result does not involve either of the usual assumptions of myopia or large inertia common in evolutionary models, nor is this result possible if only Nash rather than self-confirming equilibria are considered.
This paper examines alternative ways to prevent losses from bank insolvencies. We develop a model... more This paper examines alternative ways to prevent losses from bank insolvencies. We develop a model that compares two alternative institutions for bank auditing. The first is a system of central bank auditing of national banks. The second is carried out by an international agency that collects and disseminates risk information on banks in all countries. The international auditor is shown to perform at least as well, and sometimes better than, auditing by either central banks or voluntary disclosure by the banks themselves in preventing losses. The international auditor's credibility comes from the fact that its incentives are not distorted by a sovereignty bias.
We present a model of coalitional property rights (CPR) regimes ± regimes in which ownership of a... more We present a model of coalitional property rights (CPR) regimes ± regimes in which ownership of a good is attributable to coalitions of various sizes. Speci®cally, for each good, we de®ne a legal structure that speci®es the legal coalitions of individuals that share a communal claim to that good. Generally, each legal coalition may use exclusionary rules to allocate its holdings internally. These rules allow eligible subcoalitions to recontract by expropriating some fraction of the legal coalition's endowment. We then ask: what types of CPR regimes are socially stable in the sense of having a nonempty core? We give conditions on the legal structure and the primitives of the economy that achieve social stability in this sense. We emphasize two cases of particular interest. (I) Unanimity. Unanimity is required for a legal coalition to recontract against (block) the status quo. In this case, the core is nonempty under standard assumptions. Each agent's ability to veto an alternative allocation allows a partial characterization in terms of the economies that are privatized by dividing up the communal endowment among the members of each legal coalition. We show that in some economies' collective vs private ownership matters in terms of social stability. (II) Exclusion. Many eligible subcoalitions can expropriate the legal coalition's entire endowment. An example is the collection of simple majorities. The presence of cycles can easily lead to social instability. We show
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Papers by Roger Lagunoff