Essays in microeconomic theory



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My dissertation uses game theoretic techniques to explain the existence of two economic institutions which are ignored by the Arrow-Debreu-McKenzie general equilibrium model of an economy. The first institution that I consider is the gated structure of some professional service industries. Two very similar explanations for the existence of such a structure are provided in Chapter 2 and Chapter 3 of this dissertation. The second institution that I consider is the presence of self-enforcing social conventions that can allow a small, isolated village to successfully manage common property resources in the absence of private property rights or some other form of explicit regulation. An explanation for the existence of this institution is provided in Chapter 4 of this dissertation. Many service industries, including the medical and legal professions in some countries, display a gated structure. Rather than approaching a final producer directly, a consumer will first seek a referral from an intermediary. Chapter 2 provides one possible explanation for such an industry structure. If the outcome of a transaction depends on producer effort, which is unobservable and unverifiable, then the market may fail to generate a Pareto optimal outcome. This is the standard moral hazard problem. If consumers had a long-run relationship with producers, this type of market failure might be avoided. However, in some industries, consumers will only have a short-run relationship with producers. A gatekeeping intermediary may provide an opportunity for reputation effects to apply in such a setting. By aggregating many potential consumers, gatekeeping intermediaries can create an artificial long-run relationship between a consumer and a producer. This long-run relationship reduces the incidence of shirking on the part of the producer. Chapter 3 provides another possible explanation for the gated structure of some professional service industries. Such an industry structure might help to alleviate adverse selection problems between parties that interact infrequently. Intermediaries aggregate many short-run transactions between various consumers and a particular producer. As such, they might be able to learn a producer's level of proficiency more rapidly than an individual consumer. However, the presence of a positive information externality means that too few consumers will seek a referral. As such, some form of regulation to encourage consumers to seek a referral might be warranted. Chapter 4 provides a model in which small and relatively isolated communities can successfully manage local commons informally in circumstances where larger or less isolated communities could not do so. The reason for this is the non-anonymous nature of many interactions between the members of a small and isolated community. Such communities may be able to use these multiple interactions to enforce informal restrictions on the usage of local commons. To the extent that the process of economic development reduces the number of non-anonymous interactions among community members, it will reduce the ability of the community to successfully manage the local commons informally. The resulting need for either explicit regulation or the introduction of private property rights represents a hidden cost of development.