Essays in microeconomic theory

Abstract

Three essays are presented which explore how strategic decision-making on a micro level translates into macro effects. Careful attention is paid to how asymmetric information and free-riding exert strong influences on t.he behavior of individuals. In the first chapter, a simple model of open-source software development is presented. It is found that either too little development or redundant development effort can occur. While any redundant research effort grows slowly with the size of the community, projects for which user valuations arc sufficiently extreme, such as solutions to the Year 2000 Computer Problem (Y2K), will result in significant waste relative to a traditional closed-source environment. Correlations between value and cost are shown to resolve the empirical puzzle as to why some extremely useful and fairly simple software docs not get written while more complex software sometimes docs. It is shown that a modular design can improve or worsen the performance of an open-source community. In the second chapter, an industry is considered in which new firms require time to learn whether they have the "right stuff" to grow in size and profitability in the long run. The critical input market ( that for skilled labor) is imperfectly competitive. By extending the literate on nonstationary dynamic bargaining, analysis is performed on a set of intertemporal externalities exerted by future parties on today's parties, and vice versa. The results suggest why, even if firms are able to write detailed contingent contracts with their current employees, inefficient levels of firm entry will generally exist. The theory also sheds some light on the continuing debate over the contribution of small firms to economic growth. In the third and final chapter, players in a. war of attrition care about the identity of the winner, even when they lose. In particular, a three player war of attrition is considered . Two "team" players enjoy a. fraction of their valuation when their partner wins. The remaining, ''solo" player benefits only by winning the war. Imposing team symmetry, the solo player drops out more quickly then either team player. The incentive to avoid fighting costs by free riding on a teammate is outweighed by a strategic commitment effect. Team players thus continue to fight even when they have no chance of winning a subsequent two-player subgame with the solo player. Examining limiting results, when the "caring coefficient" between t.he team players is small, a selection result obtains: The solo player drops out immediately, allowing the team players to then compete in a standard two-player war of attrition.