Jun 03, 2016 Filed in: Projects in progress
With Alexandra Charbi
Abstract: In a repeated principal-agent problem in which the agent has private information about her i.i.d. cost of effort (à la Levin 2003), we analyze relational contracts that the parties can renegotiate in a way that respects their relative bargaining power. On the equilibrium path, the agent’s productive effort is decreasing in her effort cost; in many cases with pooling for low-cost types and separating for high-cost types. We show that if a disagreement arises in a state in which she was to be rewarded, then it is optimal for the agent to destroy surplus, exerting costly effort to hurt the principal. In such an event, her counter-productive effort is optimally constant regardless of her effort cost, the principal does not fire her, and both parties anticipate agreeing to reward the agent in the next period. The welfare of the parties is increasing in the agent’s bargaining power; the principal, if he could choose, would elect to give the agent some bargaining power, but less than would be jointly optimal.
Working paper coming in June 2016
Apr 21, 2016 Filed in: Working papers
With Heidi Gjertsen, Theodore Groves, Eduard Niesten, Dale Squires, and Joel Watson
Abstract: We examine the structure and performance of conservation agreements, which are used across the world to protect natural resources. Key elements of these agreements are: (1) they are ongoing arrangements between a local community and an outside party, typically a non-governmental organization (NGO); (2) they feature payments in exchange for conservation services; (3) the prospects for success depend on the NGO engaging in costly monitoring to detect whether the community is foregoing short-term gains to protect the resource; (4) lacking a strong external enforcement system, they rely on self-enforcement; and (5) the parties have the opportunity to renegotiate at any time. We provide a novel model that contains these ingredients and we apply the model to assess the workings of real conservation agreements, using three case studies as representative examples. 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. The model captures important features of real conservation agreements and identifies some of the features required for successful agreements.
Working paper 4/21/2016
Jan 10, 2015 Filed in: Publications
With Kareen Rozen
Published in The American Economic Journal: Microeconomics, 6(4):326–361, November 2014
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.
Published article (restricted access)
Published article and Supplementary Appendix (free access)
Nov 13, 2013 Filed in: Publications
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.
Oct 01, 2007 Filed in: Publications
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)