We introduce non-homothetic preferences into an R&D based growth model to study how demand forces hape the impact of inequality on innovation and growth. Inequality affects the incentive to innovate via a price effect and a market size effect. When innovators have a large productivity advantage over traditional producers a higher extent of inequality tends to increase innovators’prices and mark...

An appropriate (interim) notion of the core for an economy with incomplete information depends on the amount of information that coalitions can share. The coarse and fine core, as originally defined by Wilson (1978), correspond to two polar cases, involving no information sharing and arbitrary information sharing, respectively. We propose a new core notion, the credible core, which incorporates...

This paper projects the future of knowledge economy (KE) in SSA and MENA countries using the four components of the World Bank’s Knowledge Economy Index (KEI): economic incentive, education, ICTs and innovation. The empirical evidence provides the speeds of integration as well as the time necessary to achieve full integration. Findings broadly indicate SSA and MENA countries with low levels in ...

Partnerships are the prevalent organizational form in many industries. Most partnerships share profits equally among the partners. Following Kandel and Lazear (1992) it is often argued that “peer pressure” mitigates the arising free-rider problem. This line of reasoning takes the equal sharing rule as exogenously given. The purpose of our paper is to show that with inequity averse partners – a ...

High Compensation Creates a Ratchet Effect We consider a firm which pays a worker for his effort over several periods. The more the firm pays in one period, the wealthier the worker is in the following periods, and so the more he must be paid for a given effort. This wealth effect can induce an employer to pay little initially and more later on. For related reasons, the worker may work harder t...

Most systems of health care financing in EU member states currently include elements of income redistribution. The paper analyzes the effects of shifting this kind of redistribution to the tax system and argues that this reform could create two types of efficiency gains. On the expenditure side, it would facilitate the adoption of more incentive-compatible insurance contracts, for example throu...

Information asymmetry between sellers and buyers often impedes socially desirable trade. This paper presents a new mechanism that mitigates the inefficiencies caused by information asymmetry. It is shown that markets under severe adverse selection can be endogenously segmented and such segmentation improves social welfare. Endogenous segmentation is driven by low-quality sellers’ incentive to a...

We consider a dynamic version of sender–receiver games, where the sequence of states follows an irreducible Markov chain observed by the sender. Under mild assumptions, we provide a simple characterization of the limit set of equilibrium payoffs, as players become very patient. Under these assumptions, the limit set depends on the Markov chain only through its invariant measure. The (limit) equ...

This paper examines the influence that product market competition has on the use of incentive payment schemes. We use data from a large representative cross-section survey which allows us to control for other influences. We show that the degree of product market competition that an establishment faces has a significantly positive effect on the likelihood that it will use a performance-related p...

The paper studies an incentive contract in a monopolistic and duopolistic credit market where borrowers are different in risk. One lender is in an advantaged position with respect to the other due to past relations with the borrowers. The features of the equilibrium contract are investigated. It is shown that the equilibrium contract drastically changes between the monopolistic and the duopolis...