A contract-theoretic model of conservation agreements

With Heidi Gjertsen, Theodore Groves, Eduard Niesten, Dale Squires, and Joel Watson

Abstract: We model conservation agreements using contractual equilibrium, a concept introduced by Miller and Watson (2010) to model dynamic relationships with renegotiation. The setting takes the form of a repeated principal-agent problem, where the principal must pay to observe a noisy signal of the agent's effort. Lacking a strong external enforcement system, the parties rely on self-enforcement for their relational contract. We characterize equilibrium play (including how punishments and rewards are structured) and we show how the parties' relative bargaining powers affect their ability to sustain cooperation over time. We argue that the model captures important features of real conservation agreements and reveals the ingredients required for successful agreements.

Working paper 9/23/2010 (stay tuned for an updated version)

Wasteful sanctions, underperformance, and endogenous supervision

With Kareen Rozen

Forthcoming in The American Economic Journal: Microeconomics.

Abstract: We study optimal contracting in team settings where agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and it is difficult to write individual performance into formal contracts. Incentives are provided informally, using wasteful sanctions like guilt and shame, or slowed promotion. These features give rise to optimal contracts with underperformance, forgiving sanctioning schemes, and endogenous supervision structures. Agents optimally take on more assigned tasks than they intend to complete, leading to the concentration of supervisory responsibility in the hands of one or two agents.

Working paper 8/09/2013

A theory of disagreement in repeated games with bargaining

With Joel Watson

Published in Econometrica, 81(6):2303–2350, November 2013.

Abstract: This paper proposes a new approach to equilibrium selection in repeated games with transfers, supposing that in each period the players bargain over how to play. Although the bargaining phase is cheap talk (following a generalized alternating-offer protocol), sharp predictions arise from three axioms. Two axioms allow the players to meaningfully discuss whether to deviate from their plan; the third embodies a “theory of disagreement”—that play under disagreement should not vary with the manner in which bargaining broke down. Equilibria that satisfy these axioms exist for all discount factors and are simple to construct; all equilibria generate the same welfare. Optimal play under agreement generally requires suboptimal play under disagreement. Whether patient players attain efficiency depends on both the stage game and the bargaining protocol. The theory extends naturally to games with imperfect public monitoring and heterogeneous discount factors, and yields new insights into classic relational contracting questions.

Published article

Supplemental material

Was there too little entry during the Dot Com Era?

With Brent Goldfarb and David Kirsch

Published in the Journal of Financial Economics, 86(1):100-144, October 2007

Abstract: We present four stylized facts about the Dot Com Era: (1) there was a widespread belief in a "Get Big Fast" business strategy; (2) the increase and decrease in public and private equity investment was most prominent in the internet and information technology sectors; (3) the survival rate of dot com firms is on par or higher than other emerging industries; and (4) firm survival is independent of private equity funding. To connect these findings we offer a herding model that accommodates a divergence between the information and incentives of venture capitalists and their investors. A Get Big Fast belief cascade may have led to overly focused investment in too few internet startups and, as a result, too little entry.

Covered by The New York Times (Leslie Berlin, "Lessons of survival from the Dot-Com attic," p. BU4, 11/23/2008)

Covered by The Wall Street Journal (Lee Gomes, "The Dot-Com Bubble is reconsidered—and maybe relived," p. B1, 11/8/2006)

Covered by Inc.com (Leslie Taylor, "The dot-com bust? Not as bad as you think," 12/4/2006)

Published article (ScienceDirect subscribers only)

Working paper 12/13/2005 (older version but freely distributable)