This project will apply the theory of incentives and mechanism design to various models in micro credit, conflict, and multi-community models. 1. Micro credit. The Grameen Bank in Bangladesh has achieved high repayment rates from small uncollateralized loans. The Grarneen Bank's lending has two distinctive features: joint liability and cross reporting. The microfinance literature has largely neglected the cross reporting aspect, although it appears to be crucial to Grameen's success. The project tries to understand the role of both joint liability and cross reporting. It, is commonly assumed that the villagers share information not available to the bank, and that the villagers can enforce cooperative behavior using social sanctions. The mechanism design approach makes it possible to make precise assumptions about the agents' ability to side contract with each other, their shared and their private information, etc. Ashok Rai (Harvard University) is a collaborator on this part of the project.
2. Conflict. The Mechanism Design literature usually makes strong assumptions regarding the existence of a third party (such as a court) which enforces the "rules of the game"". In contrast, this project is interested in models where there is no such pow-erful third party and in particular institutions for the prevention of conflict. Suppose there are two nations, and each has private information about its own propensity to arm. The Bayesian Nash equilibrium may be very inefficient, since each state may arm itself in self defense, even though the probability that any state actually desires a conflict is vanishingly small. What kind of institution will solve this dilemma ? One particular institution world be an arms control agreement, which in the absence of a third party is essentially cheap talk. Other institutions might involve a mediator. Sandeep Baliga (Northwestern University) is a collaborator on this part, of the project.
3. Multi-district models. The Mechanism Design literature usually assumes that there is one monopolistic mechanism designer. In contrast, this project is interested in models with competing mechanism designers. For example, in a Tiebout type model, many communities decide on local taxes and local public goods production. These decisions will in general have externalities on members of other districts. What kind of institutions will be efficient? This project addresses such issues as the equilibrium selection of a voting mechanism or a tax system. It, is particularly interesting to allow migration among different districts, as in the original Tiebout model, since it amounts to a very direct competition between the "local mechanism designers". Christian Schultz (University of Copenhagen) is a collaborator on this part of the project.
