What determines the contracts, mechanisms, games, and other organizational forms that are used in an economy? What role does competition play in shaping incentives and institutional design? How does private information enter markets, and to what extent does competition mitigate or magnify the inefficiencies that arise from asymmetric information? This award funds research on generalized models of group formation in markets to provide a foundation for answering these questions.
Classical general equilibrium theory focuses on anonymous price-taking agents, typically ignoring any strategic effects or incentives. Modern theory of institutions, contracts, and mechanism design focuses on incentives and private information in isolation, typically ignoring market forces that might alter organizational design. As a consequence, neither can explain how incentives might influence markets or how competition might select among institutions.
This project focuses on these questions, and on asymmetric information in competitive markets more broadly. A central contribution of the project is the development of models that meld key aspects of contract theory, mechanism design and game theory with general equilibrium theory. Agents interact strategically in small groups, taking into account incentives and the effects of their actions on group outcomes, but trade anonymously in markets, taking prices as given. This allows the researchers to study the interplay between market forces, private information, the provision of incentives, and the structure of institutions, and to assess the role of markets in limiting inefficiencies that stem from asymmetric information. Applications include asymmetric information in financial markets, competition in matching markets, competitive foundations for large matching markets, and dynamic matching markets. The intellectual merit of this project is a deeper understanding of the functioning of competitive markets in the presence of asymmetric information. The broader impacts of this project include insights into labor markets and the dynamics of matching markets and other settings of market design.
