| This dissertation studies policy tools meant to improve market performance. Chapter one studies grants and prizes as instruments for encouraging R&D Chapter two investigates price caps in oligopoly markets with endogenous entry. Chapter three studies the relationship between deposit insurance and risk taking, when a banker is motivated by reciprocity. Grants and prizes are commonly used by public and private research funders, and encourage R&D in different ways. Grants subsidize research inputs, while prizes reward output. A common rationale for prizes is moral hazard; if a funder cannot observe all relevant research inputs then prizes create a strong incentive for R&D activity. I study the interplay of a moral hazard and adverse selection problem. In such an environment, it is shown that grants are an important means of funding. When moral hazard problem is relevant, but weak, the optimal funding mechanism uses only a grant. When moral hazard is strong, the optimal funding mechanism uses a grant and a prize. Chapter two examines the impact of price caps in oligopoly markets with endogenous entry. When demand is deterministic, reducing a price cap increases total output, consumer welfare, and total welfare. This is in line with classic results on price caps in oligopoly markets with a fixed number of firms. These comparative static results for price caps need not hold when demand is stochastic and the number of firms is fixed, but recent results in the literature guarantee the existence of a welfare-improving cap. We show that when demand is stochastic and entry is endogenous, a welfare-improving cap need not exist. Chapter three investigates the relationship between deposit insurance, risk taking, and insolvency. Empirical evidence suggests a link between deposit insurance, bank risk taking, and insolvency. The common rationale for this connection is that deposit insurance decreases incentives for customers to monitor their banks, inviting excessive risk taking. We argue that this explanation is puzzling; if customers can monitor their bank's behavior, certainly the insurer has the same ability. We put forth an alternative explanation, and demonstrate that deposit insurance invites excessive risk taking when a banker is motivated by reciprocity. |
