http://hdl.handle.net/1721.1/7598 http://hdl.handle.net/1721.1/49716 Essays on optimal insurance design Spinnewijn, Johannes This dissertation consists of three chapters analyzing the optimal design of insurance contracts. I consider three relevant contexts that change the central trade-off between the provision of insurance and the provision of incentives. The first chapter analyzes the role of biased beliefs for the optimal design of static and dynamic insurance contracts. Biased risk perceptions change the perceived value of insurance and the perceived returns to avoiding these risks. I show empirically that unemployed workers overestimate how quickly they will find work, but underestimate the return to their search efforts. I analyze how these biases drive a wedge between social and private insurance, and between naive and optimal policy implementation. The second chapter analyzes the role of training for the design of unemployment insurance. A worker's human capital falls upon displacement and depreciates during unemployment. Training counters the decrease in human capital, but also changes the willingness of the unemployed to search. I characterize the optimal unemployment insurance contract and analyze the optimal timing of unemployment benefits and training programs during unemployment. The third chapter analyzes the role of heterogeneity in risk perceptions for the optimal design of screening contracts in a model with moral hazard and adverse selection. I show how optimists receive less insurance than pessimists and I contrast the distortions in insurance coverage that arise with competing and monopolistic insurers. (cont.) Heterogeneity in beliefs strengthens the case for government intervention in insurance markets and can explain the negative correlation between risk occurrence and insurance coverage found in empirical studies. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. Includes bibliographical references (p. 157-166). Wed, 29 Oct 2008 22:58:59 GMT http://hdl.handle.net/1721.1/49715 Essays on dynamic sales mechanisms Chen, Chia-Hui, Ph. D. Massachusetts Institute of Technology This thesis is a collection of three essays on dynamic sales mechanisms. The first chapter analyzes the Name Your Own Price (NYOP) mechanism adopted by Priceline.com. Priceline.com, a website helping travelers obtain discount rates for travel-related items, gained prominence for its Name Your Own Price system. Under Name Your Own Price, a traveler names his price for airline tickets, hotel rooms, or car rentals. Priceline then checks if there is any seller willing to accept the offer. If no one accepts, the buyer has to wait for a certain period of time (the lockout period) before rebidding. This paper builds a one-to-many dynamic model without commitment to examine the buyer's and the sellers' equilibrium strategies. I show that without a lockout period, in equilibrium, the sellers with different costs are either almost fully discriminated or pooled in intervals except the one with the lowest possible cost. In the latter case, the buyer does not raise the bids much until the very end, so the price pattern is convexly increasing, consistent with the empirical finding, and most transactions occur just before the day of the trip, which illustrates the deadline effect that is observed in many negotiation processes. The lockout period restriction, which limits the buyer's bidding chances and seems to hurt the buyer, thus moves the transactions forward and can actually benefit a buyer in some circumstances. The second chapter studies a one-to-many negotiation process in which a seller with an indivisible object negotiates with two asymmetric buyers to determine who gets the object and at what price. (cont.) The seller repeatedly submits take-it-or-leave-it offers to the two buyers until one of them accepts. Unlike a Dutch auction, the seller has the discretion to offer two different prices to the two buyers. I show that when committing to some price paths is possible, the optimal outcome for the seller stated by Myerson (1981) is achievable. When commitment is impossible, the optimal outcome is no longer attainable. Instead, there exists an equilibrium in which the seller's equilibrium payoff is the same as that in a second-price auction, which implies that the seller's payoff might be lower than in a Dutch auction. The result thus illustrates the value of a simple institution like a Dutch auction, which seems to restrict a player's freedom but actually benefits the player by providing a commitment tool. The analysis also sheds light on the procurement literature. The third chapter provides a rationale for why a seller may package goods in bundles that are too large for a consumer to consume all by himself. I show that selling in bulk packages is an alternative way for the seller to discriminate buyers when resale cannot be excluded among buyers. When bulk packages are offered, buyers who value the product more usually have stronger incentive to buy the package, and buyers who value the product less tend to buy from resale. Moreover, the seller can make more profit by selling bulk packages than by selling single-unit packages when the buyers' values of the product are more negatively correlated. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. Includes bibliographical references. Wed, 29 Oct 2008 22:58:59 GMT http://hdl.handle.net/1721.1/49714 Social networks in industrial organization Campbell, Arthur (Arthur Donald) Chapter 1 studies the optimal strategies of a monopolist selling a good to consumers who engage in word of mouth communication. The monopolist uses the price it charges to influence both the proportion of the population that is willing to purchase the good and the pattern of communication that takes place within the social network. I find a number of results: (i) demand is more elastic in the presence of word of mouth; (ii) the monopolist reduces the price to induce additional word of mouth for regular goods, however for goods whose valuation is greater for well connected individuals the price may, in fact, be greater; (iii) the optimal pattern of diffusion involves introductory prices which vary up and down; and (iv) exclusive (high priced) products will optimally target advertising towards individuals with many friends whereas common (low priced) products will target individuals with fewer friends. Chapter 2 presents a model of friendship formation in a social network. During each period a new player enters the social network, this player searches for and forms friendships with the existing population and all individuals play a prisoner's dilemma game with each of their friends. The set of friendships a player forms reveals some information to a friend about how likely she is to subsequently cooperate. Cooperative types are able to separate themselves from uncooperative types by becoming friends with people who know one another. (cont.) The threat of communication amongst people who know one another prevents an uncooperative type mimicking a cooperative type. Chapter 3 analyzes the effects of policies which support electricity generation from intermittent technologies (wind, solar). I find that intermittent generation is a substitute for baseload technologies but may be complementary or substitutable for peaking/intermediate technologies. I characterize the long run implications of this for carbon emissions. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. Includes bibliographical references (p. 141-145). Wed, 29 Oct 2008 22:58:59 GMT http://hdl.handle.net/1721.1/49713 Three essays on the impacts of income taxes Powell, David Matthew, Ph. D. Massachusetts Institute of Technology This dissertation consists of three essays studying the impacts of income and wage taxes. Chapter One examines how income tax changes differentially affect the pre-tax wages of different industries based on the injury and fatality rates of those industries. This chapter recognizes that compensating differentials are a function of the income tax rate and uses this observation to introduce a new methodology for estimating compensating differentials with a specific application to the estimation of the Value of a Statistical Life (VSL) parameter. When taxes change, the pre-tax wages of risky jobs should shift relative to the pre-tax wages of safe jobs in a manner proportional to the VSL. This strategy yields VSL estimates between $50 million and $75 million, an order of magnitude higher than the previous literature. Chapter Two studies the link between taxes and occupational choices. Just as taxes distort the labor-leisure decision, they also distort the wage-amenity decision. Few papers have isolated this effect. This chapter introduces a two-step estimation strategy to isolate the elasticity of occupation choice with respect to tax rates, testing whether workers select higher (lower) wage jobs when tax rates decrease (increase). The final estimates find a statistically significant overall compensated elasticity of 0.05, implying that a 10% increase in the net-of-tax rate causes workers to change to a job with a 0.5% higher wage. Chapter Three focuses on the tax elasticity of labor income. (cont.) Because governments can tax labor income separately from capital income, it is critical to isolate the tax elasticity of labor income. Furthermore, governments can use non-linear taxes so the mean elasticity :is not the relevant statistic. In this chapter, I introduce a new quantile estimator useful for panel data and applicable in an IV context. I find evidence of significant heterogeneity in the compensated elasticity. The importance of this heterogeneity is most evident for men as the elasticity is much larger at the top quantiles. The elasticity also appears to be larger at lower quantiles for both men and women. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. Includes bibliographical references. Wed, 29 Oct 2008 22:58:59 GMT