MEAN–VARIANCE INSURANCE DESIGN WITH COUNTERPARTY RISK AND INCENTIVE COMPATIBILITY

This paper studies the optimal insurance design from the perspective of an insured when there is possibility for the insurer to default on its promised indemnity. Default of the insurer leads to limited liability, and the promised indemnity is only partially recovered in case of a default. To alleviate the potential ex post moral hazard, an incentive compatibility condition is added to restrict the permissible indemnity function. Assuming that the premium is determined as a function of the expected coverage and under the mean–variance preference of the insured, we derive the explicit structure of the optimal indemnity function through the marginal indemnity function formulation of the problem. It is shown that the optimal indemnity function depends on the first and second order expectations of the random recovery rate conditioned on the realized insurable loss. The methodology and results in this article complement the literature regarding the optimal insurance subject to the default risk and provide new insights on problems of similar types.

Optimal Reciprocal Reinsurance under VaR or TVaR Constraint

Most existing researches on optimal reinsurance contract are based on an insurer’s viewpoint. However, the optimal reinsurance contract for an insurer is not necessarily to be optimal for a reinsurer. Hence, this study aims to develop the optimal reciprocal reinsurance which satisfies the benefits of both the insurer and reinsurer. Additionally, due to legislative restriction or risk management requirement, the wealth of insurer and reinsurer are frequently imposed upon a VaR (Value-at-Risk) or TVaR (Tail Value-at-Risk) constraint. Therefore, this study develops an optimal reciprocal reinsurance contract which maximizes the common benefits (evaluated by weighted addition of expected utilities) of the insurer and reinsurer subject to their VaR or TVaR constraints. Furthermore, for avoiding moral hazard problem, the developed contract is additionally restricted to a regular form or incentive compatibility (both indemnity schedule and retained loss schedule are continuously nondecreasing).

Epsilon-Efficiency in a Dynamic Partnership with Adverse Selection and Moral Hazard

For a dynamic partnership with adverse selection and moral hazard, we design a direct profit division mechanism that satisfies ϵ-efficiency, periodic Bayesian incentive compatibility, interim individual rationality, and ex-post budget balance. In addition, we design a voting mechanism that implements the profit division rule associated with this direct mechanism in perfect Bayesian equilibrium. For establishing these possibility results, we assume that the partnership exhibits intertemporal complementarities instead of contemporaneous complementarities; equivalently, an agent’s current effort affects other agents’ future optimal efforts instead of current optimal efforts. This modelling assumption fits a wide range of economic settings.

A Game-Based Scheme for Resource Purchasing and Pricing in MEC for Internet of Things

Mobile edge computing (MEC) is emerging as a promising paradigm to support the applications of Internet of Things (IoT). The edge servers bring computing resources to the edge of the network, so as to meet the delay requirements of the IoT devices’ service requests. At the same time, the edge servers can gain profit by leasing computing resources to IoT users and realize the allocation of computing resources. How to determine a reasonable resource leasing price for the edge servers and how to determine the number of resource purchased by users with different needs is a challenging problem. In order to solve the problem, this paper proposes a game-based scheme for resource purchasing and pricing aiming at maximizing user utility and server profit. The interaction between users and the edge servers is modeled based on Stackelberg game theory. The properties of incentive compatibility and envy freeness are theoretically proved, and the existence of Stackelberg equilibrium is also proved. A game-based user resource purchasing algorithm called GURP and a game-based server resource pricing algorithm called GSRP are proposed. It is theoretically proven that solutions of the proposed algorithms satisfy the individual rationality property. Finally, simulation experiments are carried out, and the experimental results show that the GURP algorithm and the GSRP algorithm can quickly converge to the optimal solutions. Comparison experiments with the benchmark algorithms are also carried out, and the experimental results show that the GURP algorithm and the GSRP algorithm can maximize user utility and server profit.

Rationality in games and institutions

Against the orthodox view of the Nash equilibrium as “the embodiment of the idea that economic agents are rational” (Aumann, 1985, p 43), some theorists have proposed ‘non-classical’ concepts of rationality in games, arguing that rational agents should be capable of improving upon inefficient equilibrium outcomes. This paper considers some implications of these proposals for economic theory, by focusing on institutional design. I argue that revisionist concepts of rationality conflict with the constraint that institutions should be designed to be incentive-compatible, that is, that they should implement social goals in equilibrium. To resolve this conflict, proponents of revisionist concepts face a choice between three options: (1) reject incentive compatibility as a general constraint, (2) deny that individuals interacting through the designed institutions are rational, or (3) accept that their concepts do not cover institutional design. I critically discuss these options and I argue that a more inclusive concept of rationality, e.g. the one provided by Robert Sugden’s version of team reasoning, holds the most promise for the non-classical project, yielding a novel argument for incentive compatibility as a general constraint.

Oligopolistic Price Leadership and Mergers: The United States Beer Industry

We study a repeated game of price leadership in which a firm proposes supermarkups over Bertrand prices to a coalition of rivals. Supermarkups and marginal costs are recoverable from data on prices and quantities using the model’s structure. In an application to the beer industry, we find that price leadership increases profit relative to Bertrand competition by 17 percent in fiscal years 2006 and 2007, and by 22 percent in 2010 and 2011, with the change mostly due to consolidation. We simulate two mergers, which relax binding incentive compatibility constraints and increase supermarkups. These coordinated effects arise even with efficiencies that offset price increases under Bertrand competition. (JEL G34, K21, L13, L14, L41, L66)

Government subsidy, asymmetric information and green innovation

PurposeThe presence of asymmetric information exists between firms and the government about the firms' green innovation; this may lead to the firm's moral hazard problem of misusing the government subsidy on the green innovation. Such a problem is not fully considered by the existing literature. The purpose of this study is to explore how government subsidy affects green innovation when the information of firms' innovation cannot be completed observed, and figure out the mechanisms that can alleviate the negative impact of information asymmetry, which helps to explain the factors that motivate the firms to actively engage into the green innovation with the government subsidy.Design/methodology/approachIn a theoretical model under imperfect information in which the firm's activity on green innovation may not be fully observed, the firm could be either altruistic or not; an altruistic firm has stronger incentive to engage into corporate social responsibility (CSR) activities such as green innovation. With the presence of asymmetric information, the authors analyze the possibility of a firm's moral hazard and try to find out the condition on the information quality that can avoid such problem. To examine the results of theoretical analysis, the authors use the data of Chinese listed companies in a corresponding empirical analysis. On the basis of both theoretical and empirical the authors try to figure out the effect of the government subsidy on the green innovation by enterprise and the role of firm's characteristics of social responsibility and information quality in the green innovation with the government subsidy.FindingsThe results show that the government subsidy can promote the firm's green innovation, especially for those that are more socially responsible. The asymmetric information, however, leads to inefficiency on the green innovation. This is because that the low-quality information about the firm's behavior raises the possibility of a moral hazard. Moreover, the analyst coverage could be an efficient way to improve the quality of information, alleviating the moral hazard problem of the firm's green innovation. The main contribution is to fill the gap in the study of the government subsidy on green innovation under asymmetric information and to provide the mechanism to improve the efficiency of the subsidy to motivate green innovation by enterprise.Practical implicationsA crucial implication to policymakers is to complete and improve the system of information in the market, which can form an efficient incentive compatibility between the enterprises and the public. Such incentive compatibility can attract the enterprises to better use the government subsidy into green innovation and receive a long-run return from the public's positive feedback for their contribution on the social good.Originality/valueExisting studies are concerned about antecedents of green innovation do not completely focus on the relationship between government subsidy and green innovation. The present paper considers that information asymmetry between the government and firms may affect the impact of government subsidy on the firms' green innovation. This conjecture is studied by the theoretical model and verified by an empirical analysis using the data of Chinese listed companies. Additionally, the empirical analysis explores the moderating effect of CSR characteristics of firms, and the analyst coverage can positively affect the promotion of the government subsidy on the firms' green innovation.

Proof of Engagement: A Flexible Blockchain Consensus Mechanism

Consensus mechanism plays an important role in blockchain. At present, mainstream consensus mechanisms include proof of work (PoW), proof of stake (PoS), and delegated proof of stake (DPoS). PoW, as is widely used in virtual currency, results in significant energy consumption; PoS and DPoS are proposed to reduce energy waste caused by PoW, but their disadvantage is that they tend to create Matthew Effect (ME): “the rich get richer.” In order to balance the discourse power of new nodes and elder ones, this paper proposes a flexible consensus mechanism called proof of engagement (PoE), based on the activity and contribution of network nodes. We analyze the incentive compatibility of PoE from the perspective of mechanism design. In our simulation experiments, we tested the profit changes under PoW, PoS, and PoE. The results illustrate it is easier for new nodes to accumulate their profits under PoE than under PoW or PoS, so as to reduce the negative impacts of ME.