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319. Successive incentives

Invited abstract in session TD-43: Market Design 1, stream Market Design.

Tuesday, 14:30-16:00
Room: 99 (building: 306)

Authors (first author is the speaker)

1. Jens Leth Hougaard
University of Copenhagen
2. Lars Ă˜sterdal
Copenhagen Business School
3. Juan D. Moreno-Ternero
Economics, Universidad Pablo de Olavide
4. Jens Gudmundsson
University of Copenhagen

Abstract

We study the design of optimal incentives in sequential processes. An agent initiates a value-creating sequential process through costly investment with random success. If unsuccessful, the process stops. If successful, a new agent thereafter faces a similar investment decision, and so forth. For any realization of the process, the total value is distributed among the agents using a reward rule. Such rules induce a game among the agents. The domain of the rules is very rich, yet we are able to show equilibrium existence. We characterize rules that yield the highest welfare created in equilibrium. We also characterize rules that yield the highest possible payoff for the initiator in equilibrium.
A canonical class of rules are those in which an agent's reward (apart from the initiator) is affected by her own success but not the success or failures of others. Our findings show that such simple reward rules invoking short-run individual incentives are sufficient to meet our long-run systemic objectives.

Keywords

Status: accepted


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