Game theoretic modeling of economic denial of sustainability (EDoS) attack in cloud computing

In this paper, we develop a novel game theoretic model of the interactions between an EDoS attacker and the defender based on a signaling game that is a dynamic game of incomplete information. We then derive the best defense strategies for the network defender to respond to the EDoS attacks. That is, we compute the perfect Bayesian Nash Equilibrium (PBE) of the proposed game model such as the pooling PBE, separating PBE and mixed strategy PBE. In the pooling equilibrium, each type of the attacker takes the same action and the attacker's type is not revealed to the defender, whereas in the separating equilibrium, each type of the attacker uses different actions and hence the attacker's type is completely revealed to the defender. On the other hand, in the mixed strategy PBE, both the attacker and the defender randomize their strategies to optimize their payoffs. Numerical illustration is also presented to show the efficacy of the proposed model.

Liability Insurance: Equilibrium Contracts under Monopoly and Competition

In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from a defendant, and the parties often negotiate a settlement to avoid a costly trial. Liability insurance creates bargaining leverage for the defendant in this settlement negotiation. We study the characteristics of monopoly and equilibrium contracts in settings where this leverage effect is a substantial source of value for insurance. Our results show that under adverse selection, a monopolist offers at most two contracts, which underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist. (JEL D41, D42, D82, D86, G22, K13, K41)

Optimal Financing and Disclosure

I study an entrepreneur who finances a project with uncertain cash flows and who jointly chooses the disclosure and financing policies. In the Bayesian persuasion framework, I show that it is optimal to truthfully reveal whether the project’s cash flows are above a threshold. This class of threshold policies is optimal for any prior belief, monotone security, and increasing utility function of the entrepreneur. I characterize how the disclosure threshold depends on the underlying security, the prior, and the cost of investment. The financing choice of the entrepreneur is determined by a new trade-off between the likelihood of persuading investors and relinquishing cash flow rights. Absent further frictions, the optimal security is indeterminate. If there is adverse selection after the entrepreneur has disclosed information, the unique outcome is a pooling equilibrium in which the entrepreneur pledges the entire cash flow. This paper was accepted by Tomasz Piskorski, finance.

A Safety Signaling Game for Small and Medium-sized Manufacturing Enterprises in the Supply Chain

Due to information asymmetry and a prevailing focus on production that ignores safety among small and medium-sized manufacturing enterprises (SMMEs), it is difficult for core enterprises in the supply chain (SC) to establish partnerships with SMMEs that have a high safe production level (SPL). We found that SMMEs would conceal their real SPL when being selected as core enterprise suppliers. This is known as adverse selection. According to the principal-agent theory, we built a signaling model to analyze the conditions of the pooling equilibrium and the separate equilibrium of the signaling game between core enterprises and SMMEs. The equilibrium results showed that adjusting the signal cost parameters of the SMMEs can guide the market to separate equilibrium and stop SMMEs from concealing or exaggerating their SPL. We also discuss corresponding suggestions. This research can reduce SC risks and promote the establishment of sustainable cooperative relationships between core enterprises and SMMEs with high SPLs. This study is applicable globally.

Imperfect certification and eco-labelling of products

Purpose This paper aims to investigate the role of certification in providing information and reducing market inefficiencies when the “certification process is imperfect”. In the setting, eco-labels imperfectly signal environmental product quality to consumers where the error in the process of certification could be either Type 1 or Type 2 error. The paper examines firms' incentive to get certified, equilibrium quantities and profits. The authors use perfect Bayesian equilibrium concept for the analysis. They then examine conditions for separating and pooling equilibrium to exist and welfare implications of certification process. Design/methodology/approach The paper uses a vertical product differentiated model where firms are competing in quantities. Consumers are unable to observe the environmental quality of the product. To signal the product quality to consumers, firms may adopt certification by a third party. Using a framework where certification process is imperfect, the paper derives conditions for Perfect Bayesian separating and pooling equilibrium to exist. Findings The paper shows that the existence of separating and pooling equilibrium depends on the certification fee. A separating equilibrium, where one firm seeks certification and other firm does not seek certification exists for an intermediate value of certification fee. A pooling equilibrium, where both firms seek certification, exists only when the certification fee is sufficiently small. The paper shows conditions for the certification fee for which welfare will be higher under separating equilibrium as compared to pooling equilibrium and analyses welfare implications for subsidy policy for the certification fee. Originality/value The paper contributes to the literature by examining the role of labelling under imperfect certification.

“The Bureaucracy” as an Interest Group

Rational choice theories of bureaucratic interests started simple and have become somewhat more sophisticated over time. Early, “classical” models stressed either budget maximization or rent seeking as dominant motivations and predicted chronically unbalanced or dysfunctional outcomes—respectively, bureaucratic oversupply or radical undersupply (to create artificial scarcity rents). They also assumed a woefully uninformed legislature or ministers. Revisionist models stress more complex pictures. Bureau-shaping theory argues that the diversity of agency structures creates differing motivations—so that some top officials may oversupply (e.g. in defense), while others create queues or overcut budgets (e.g. in welfare areas). Some agencies or nongovernmental organizations achieve particular “market” constructs, where a pooling equilibrium is successfully created, attracting only intrinsically motivated staff to work in a mission-specific organization. Bureaucracies’ use of hierarchy has also been defended in economic terms—for reasons analogous to those maintaining large firms, or as a rational response to delegation issues in “normal” democracies, where delegation is straightforward. In the United States, delegation to bureaucracies is more complex and directly contingent on political factors, in Congress especially.

Should First-Price Auctions Be Transparent?

We investigate the role of market transparency in repeated first-price auctions. We consider a setting with independent private and persistent values. We analyze three distinct disclosure regimes regarding the bid and award history. In the minimal disclosure regime, each bidder only learns privately whether he won or lost the auction. In equilibrium, the allocation is efficient, and the minimal disclosure regime does not give rise to pooling equilibria. In contrast, in disclosure settings where either all or only the winner’s bids are public, an inefficient pooling equilibrium with low revenues exists. (JEL D44, D82, D83)

A NOTE ON CREDIT RISK TRANSFER AND THE MACROECONOMY

The recent financial crisis highlighted the limits of the originate to distribute model of banking, but its nexus with the macroeconomy remains unexplored. I build a business cycle model with banks engaging in credit risk transfer (CRT) under informational externalities. Markets for CRT provide liquidity insurance to banks, but the emergence of a pooling equilibrium can also impair the banks' monitoring incentives. In normal times and in face of standard macro shocks the insurance benefits of CRT prevail and the business cycle is stabilized. In face of financial/liquidity shocks the extent of informational asymmetries is larger and the business cycle is amplified. The macro model with CRT can also reproduce well a number of macro and banking statistics over the period of rapid growth of this banks' business model.

Information, incentives, markets and policy

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] Chapter One: How low might be the resource costliness of making signals credible? Using a job market as an example, I build a signaling model to determine the extent to which a transfer from an applicant might replace a resource cost as an equilibrium method of achieving signal credibility. As long as a firm's claim to be hiring for an open position is credible, and profitability of the hiring process per se is limited to an application fee, the firm has an incentive to use the properly calibrated fee to implement a separating equilibrium. Applicant risk aversion does not necessarily discourage a monopsonist potential employer from using an application fee, but a firm hiring in a competitive labor market with risk-averse applicants may prefer a pooling equilibrium, hiring all applicants at their average productivity. Partial extension to a model with third-party assistance (a headhunter or a job board) is possible. Chapter Two: How costly is it to keep civilians from danger in a war? Issues previously unrelated are exposed by a new model. A government in a possibly protracted war provides health insurance to conscripts and civilians, possibly different plans. Incentives to engage in healthy behaviors before knowing whether one will be conscripted, as a conscript, and as an unconscripted civilian, are analyzed in relation to aspects of the government's conduct of the war. Surprisingly, killing random civilians can be welfareimproving relative to policies that limit likely lethal actions to cases when civilians face no danger. This may demonstrate reasonable arguments against strategic bombing, which rather than forcing an enemy out of a war, may lead to them battling longer. Chapter Three: Software producers, and possibly a broader range of firms possessing intellectual property, may have an option to rely on a community of volunteers to produce products and variants of products that utilizing the firm's intellectual property, rather than pay employees to do so. A model focusing on the computer gaming industry illustrates this new range of distribution options. In the base model, a company with a developed "game 1" may [a] sell game 1 and allow mods (i.e., a community of volunteer gamers/programmers will develop game 2 based on game 1), [b] develop game 2 itself and sell 2 separately, or [c] develop game 2 itself and sell it as a DLC to game 1 (a special case of mixed bundling). Conditions for each to be the preferred option are explored. An extension to endogenize level of modularity, by considering both a game 2 and a game 3 as mods, is considered.