Essays in applied microeconomic theory

Essay 1. Endogenous market thickness and honesty: A quality trap model. I use a dynamic framework to study the problems facing economies in which reputation cannot be transmitted. Investment in quality is costly and a seller's choice is based on expected present and future demand, while demand itself depends on expected quality. Hence, multiple steady states may emerge. A sufficient number of sellers need to be patient or profits from investing in high quality must exceed a cutoff value for multiple steady states to exist. Importantly, expectations about market thickness in determining quality matter only if sellers believe that market thickness will be less than one.;Essay 2. Party formation and coalitional bargaining in a model of proportional representation. (with Mandar P.Oak). We present a game theoretic model of multiparty democracy under proportional representation (PR). In equilibrium, coalitions can be minimal winning, minority or surplus. The equilibrium coalitions formed are functions of the relative importance of power to ideology and the relative seat shares of parties. We look at how the coalition formation game give rise to incentives for groups to strategically form parties. In general, we get multiplicity but for specific parameter values we are able to compare the results of party formation under PR with that under plurality rule.;Essay 3. When neighbours report crime: Effects of incentives for crime reporting on crime rates. We examine the incentives for people to report crime in their immediate vicinity using a framework where only immediate neighbours can observe crime, and reporting crime is a costly activity. Hence, each citizen would rather have her neighbour do the reporting. Ceteris paribus, an increase in the number of complaints erodes the effectiveness of the police force. Being investigated is also costly to the non-criminals since they have to put up with unpleasant police interrogation. Police choose (costly) effort which determines, for a given number of reports, its success in apprehending criminals and also affects the crime rate. If the cost of interrogation is not too high, multiple equilibria are possible. Moreover, increasing the incentives to report could increase crime rates.