Publications
Designing Incentives in Startup Teams: Form and Timing of Equity Contracting
(with Evgeny Kagan and William Lovejoy) Management Science (forthcoming)
Abstract: Entrepreneurial teams assign equity positions in their startups using a term sheet that details equity splits and conditions for being granted those splits. It is conventional wisdom in the entrepreneurial press that equal splits are poor choices. The conventional logic is that by not connecting rewards to contribution level equal split contracts can encourage free-riding behaviors. We experimentally test this conventional wisdom, among other entrepreneurial contracting hypotheses. Our results confirm the relationship between equal splits and depressed effort and contribution, but suggest a different causal sequence relative to conventional wisdom. Rather than the contract form being the primitive and the behavior the derived consequence, our results suggest the reverse. The differences in contract performance are driven primarily by the sorting of high contributors into non-equal contracts and of low contributors into equal contracts. However, delaying the contracting mitigates these sorting effects, reducing the effort gap between contracts. Taken together, our results suggest that both investors and founders should pay as much (or more) attention to personality type as they do to contract form, but if one is stuck with a given set of personalities delayed contracting (more so than contract form) can improve performance.
Temptation in Vote-Selling: Evidence from a Field Experiment in the Philippines
(with Allen Hicken, Nico Ravanilla and Dean Yang) Journal of Development Economics (2018)
Abstract: We report the results of a randomized field experiment in the Philippines on the effects of two common anti-vote-selling strategies involving eliciting promises from voters. An invitation to promise not to vote-sell is taken up by most respondents, reduces vote-selling, and has a larger effect in races with smaller vote-buying payments. The treatment reduces vote-selling in the smallest-stakes election by 10.9 percentage points. Inviting voters to promise to “vote your conscience” despite accepting money is significantly less effective. The results are consistent with a behavioral model in which voters are only partially sophisticated about their vote-selling temptation.
Contracts and Capacity Investment in Supply Chains
(with Andrew Davis) Manufacturing & Service Operations Management (2018)
Abstract:Suppliers are often reluctant to invest in capacity if they believe that they will be unable to recover their investment costs in subsequent transactions with buyers. In theory, a number of different contracts can solve this issue and induce first-best investment levels by the supplier. In this study, we investigate the performance of these contracts in a two-tier supply chain. We develop an experimental design where retailers and suppliers bargain over contract terms, and have the ability to make multiple back-and-forth offers, while also providing feedback on the offers they receive. One key result from our study is that an option contract and a service-level agreement are best at increasing first-best investment levels and overall supply chain profits. However, these same contracts also generate the largest inequity in expected profits between the two parties. We find that both of these results are driven by the bargaining tendencies of retailers and suppliers, which we refer to as ``superficial fairness.'' In particular, (1) retailers and suppliers place more emphasis on negotiating the wholesale price, while partially overlooking any secondary parameter, and (2) they make concessions over time, such that final wholesale prices end up roughly halfway between the retailer's selling price and the supplier's production cost. We show that this bargaining behavior contributes to higher investment levels in the option contract and service-level agreement, but also highly inequitable payoffs.
Can Trustworthiness in a Supply Chain Be Signaled?
(with Hyun-Soo Ahn and Ruth Beer) Management Science (2017)
Abstract: The relationship between a buyer and its suppliers is important and often relies on factors beyond the terms of a contractual agreement. Buyers can therefore benefit from identifying trustworthy suppliers. We argue that pre-contractual actions by the supplier, for example making costly buyer-specific investments without a long-term contract, can signal a supplier’s trustworthiness. We develop a theoretical model to reflect supplier trustworthiness, and identify when a buyer can benefit from identifying trustworthy suppliers. We show that costly relationship-specific investments can serve as a signal of trustworthiness, and that supply chain profits increase when trustworthy suppliers are able to identify themselves in this fashion. We demonstrate the importance of the signaling mechanism using laboratory experiments. The experimental results show that relationship-specific investments lead to more collaborative transactions, with buyers offering higher prices and suppliers reciprocating with higher quality goods. This results in increased profits for both buyers and suppliers. Additionally, we show that the benefit of the relationship-specific investment depends directly on the signaling mechanism. Finally, we show that the benefits of buyer-specific investments for both suppliers and buyers are strengthened when firms interact repeatedly.
Ideation-Execution Transition in Product Development: An Experimental Analysis
(with Evgeny Kagan and William Lovejoy) Management Science (2017)
Abstract: Bringing a new product to market involves both a creative ideation stage, and an execution stage. When time-to-market constraints are binding it is an important question how to divide limited time between the two stages and who should make this decision. We introduce a laboratory experiment that closely resembles this setting: it features a product development task with an open design space, a downstream cost increase and two development stages. We show that performance is signi cantly worse when designers choose for themselves when to transition from ideation to execution and that decision control explains a large share of performance variation even after controlling for individual di erences. How the time is allocated between ideation and execution does not a ect mean performance, but later transition increases risk. One driver of poor design outcomes in the designer-initiated transition regime are delays in physical construction and testing of designs. We show that such delays can be prevented by nudging designers towards early prototyping. However, the most important performance driver is the lack of task structure in endogenous regimes, which can be remedied by demanding a concrete, performance-oriented deliverable prior to a transition.
A Meeting of the Minds: Contracts and Social Norms
(with Erin Krupka and Ming Jiang) Management Science (2016)
Online Appendix
Abstract: Using coordination games we elicit social norms directly for two different games where either an agreement to take the first best action has been reached or where no such agreement exists. We combine the norms and choice data to predict changes in behavior and demonstrate that including social norms as a utility component significantly improves predictive performance. We estimate that honoring an agreement in the Double Dictator Game is worth giving up approximately 20% of their earnings, and more than 300% in the Bertrand Game. We show that informal agreements affect behaviour through their effect on social norms.
Procedural Fairness and the Cost of Control
(with Judd Kessler) Journal of Law, Economics and Organization (2016)
Abstract: A large and growing literature has demonstrated that imposing control on agents has the potential to backfire, leading agents to withhold effort. Consistent with principles of procedural fairness, we find that the way in which control is imposed — in particular whether control is imposed symmetrically on both principals and agents and whether both parties have a say in whether control is imposed — affects how agents respond to control. In our setting, control leads agents to withhold effort only when control is imposed unilaterally with an asymmetric affect on the agent.
Bargaining in Supply Chains
(with William Lovejoy) Management Science (2016)
Long Version Working Paper
Abstract: We study experimentally bargaining in a multiple-tier supply chain with horizontal competition and sequential bargaining between tiers. Our treatments vary the cost differences between firms in tiers 1 and 2. We measure how these underlying costs in uence the efficiency, negotiated prices and profit distribution across the supply chain, and the consistency of these outcomes with existing theory. We find that the structural issue of cost differentials dominates personal characteristics in explaining outcomes, with profits in a tier generally increasing with decreased competition in the tier and increasing with decreased competition in alternate tiers. The Balanced Principal model of supply chain bargaining does a good job explaining our data, and outperforms the common assumption of leader-follower negotiations. We find a significant anchoring effect from a firm's first bid but no effect of the sequence of those bids, no evidence of failure to close via escalation of commitment, and mixed results for a deadline effect. We also find an interesting asymmetry between the buy and sell sides in employed bidding strategy. All firms make predominantly concessionary offers after the initial anchor, however sell side firms that engage in aggressive anti-concessionary bidding successfully increase prices while not compromising closure rates. Buy side firms achieve much smaller price changes from anti-concessionary tactics, and risk reduced closure, yielding no net benefit.
Reciprocity in Organizations: Evidence from the UK
(with Florian Englmaier and Thomas Kolaska) CESifo Economic Studies (2016)
Abstract: Recent laboratory evidence suggests that social preferences may affect contractual outcomes under moral hazard. In accordance with previous research, this paper uses written personality tests for job candidates as a proxy for whether firms care about personality traits of employees, in particular whether these employees are inclined towards reciprocity. Using the British Workplace Employment Relations Survey 2004 (WERS) we find that behaviour of employers and employees is consistent with the presence of gift-exchange motives: firms that screen applicants for personality are less likely to pay low wages and more likely to provide (non-pecuniary) benefits like employer pension, on-the-job training, or job security. Firms likewise benefit from reciprocal employees as they can implement more team-working and are generally more successful. Other human resource management (HRM) practises like competency tests or incentive pay only poorly predict these patterns. Moreover, there is no association between dismissals and personality tests, indicating that personality tests do not merely improve the fit between applicant and employer. Hence, we conclude that motivation based on gift-exchange motives is a plausible explanation for our results.
Measuring Vote-Selling: Field Evidence from the Philippines
(with Allen Hicken, Nico Ravanilla and Dean Yang) AER P&P (2015)
Abstract: We conducted a field experiment during the 2013 Philippine elections to test the effectiveness of interventions against vote-selling. A central challenge in assessing the impact of any anti-vote-selling effort, including ours, is creating a valid measure of vote-selling. Measuring vote-selling is clearly not a trivial endeavor, particularly in contexts (including the Philippines) where individual votes are not publicly observed. In this paper, we describe a proxy measure that we constructed out of self-reports of Philippine voters participating in our experiment, and present empirical patterns of correlation that we argue help validate it as a measure of vote-selling. This measure is the key outcome variable in the experiment, whose results are described in full in Hicken et al (2014).
Contracts, Biases and Consumption of Access Services
(with Ozge Sahin) MS (2014)
Online Appendix
Abstract: We study theoretically and empirically the consumption of access services. We demonstrate that consumption is affected by contract structure (pay-per-use vs. three part tariffs) even if the optimal consumption plans are identical. We find that a majority of individuals correctly use a threshold policy that is similar to a nearly optimal heuristic, however they use the free units too quickly leading to overconsumption and lost surplus. These errors are partially driven by mistaken beliefs about the value distribution. We also measure subjects' willingness to pay for a contract with free access units, and we find that nearly half of subjects are willing to pay at least the full per-unit price, with a substantial fraction willing to overpay. In response, the optimal firm strategy offers a three-part tariff at a very small discount, which increases revenue by 8-15% compared to only offering a pay-per-use contract.
Why Do Firms Use Non-Linear Incentive Schemes? Experimental Evidence on Sorting and Overconfidence
(with Ian Larkin) AEJ-Micro (2012)
Abstract: Non-linear incentive schemes are commonly used to determine employee pay, despite their distortionary impact. We investigate possible reasons for their widespread use by examining the relationship between convex pay schemes and overconfidence. In a laboratory experiment, subjects chose between a piece rate and a convex pay scheme. We find that overconfident subjects are more likely than others to choose the convex scheme, even when it leads to lower pay. Overconfident subjects also persist in making the mistake despite clear feedback. These results suggest non-linear pay schemes may help companies select and retain overconfident workers, and may reduce the wage bill.
Contractual and Organizational Structure with Reciprocal Agents
(with Florian Englmaier) AEJ-Micro (2012)
Abstract: Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model.
Norms and Contracting
(with Judd Kessler) MS (2012)
Abstract: We argue that very incomplete contracts do more than their enforceable components imply, they can also induce relationship-specific norms. We find experimentally, across four games, that the most effective contract always includes an unenforceable "handshake" agreement to take the first best action. In three games, a totally unenforceable contract consisting of only a handshake agreement is (at least weakly) optimal. These results are particularly strong in games with strategic complements, where even selfish subjects increase their actions. Our results highlight an alternative explanation for contractual incompleteness: establishing a norm can effectively substitute for weak enforceable restrictions.
Kidneys For Sale: Who Finds That Repugnant, and Why?
(with Alvin E. Roth) AJT (2010)
Abstract: The shortage of transplant kidneys has spurred debate about legalizing monetary payments to donors to increase the number of available kidneys. However, buying and selling organs faces widespread disapproval. We survey a representative sample of Americans to assess disapproval for several forms of kidney market, and to understand why individuals disapprove by identifying factors that predict disapproval, including disapproval of markets for other body parts, dislike of increased scope for markets and distrust of markets generally. Our results suggest that while the public is potentially receptive to compensating kidney donors, among those who oppose it, general disapproval toward certain kinds of transactions is at least as important as concern about specific policy details. Between 51% and 63% of respondents approve of the various potential kidney markets we investigate, and between 42% and 58% want such markets to be legal. A total of 38% of respondents disapprove of at least one market. Respondents who distrust markets generally are not more disapproving of kidneymarkets; howeverwe find significant correlations between kidney market disapproval and attitudes reflecting disapproval toward certain transactions - including both other body markets andmarket encroachment into traditionally nonmarket exchanges, such as food preparation.
The Role of Experience in the Gambler's Fallacy
(with Greg Barron) JBDM (2010)
Abstract: Recent papers have demonstrated that the way people acquire information about a decision problem, by experience or by abstract description, can affect their behavior. We examined the role of experience over time in the emergence of the Gambler's Fallacy in binary prediction tasks. Theories of the Gambler's Fallacy and models of binary prediction suggest that recency bias, elicited by experience over time, may play a significant role. An experiment compared a condition where participants sequentially predicted the colored outcomes of a virtual roulette wheel spin with a condition where the wheel's past outcomes were presented all at once. In a third condition outcomes were presented sequentially in an automatic fashion without intervening predictions. Subjects were yoked so that the same history of outcomes was observed in all conditions. The results revealed the Gambler's Fallacy when outcomes were experienced (with or without predictions). However, the Gambler's Fallacy was attenuated when the same outcomes were presented all at once. Observing the Gambler's Fallacy in the third condition suggests that the presentation of information over time is a significant antecedent of the bias. A second experiment demonstrated that, while the bias can emerge with an all-at-once presentation that makes recent outcomes salient (Burns and Corpus, 2004), the bias did not emerge when the presentation did not draw attention to recent outcomes.
What Do We Expect From Our Friends?
(with Markus Mobius, Tanya Rosenblat and Q.A. Do) JEEA (2010)
Abstract: We conduct a field experiment in a large real-world social network to examine how subjects expect to be treated by their friends and by strangers who make allocation decisions in modified dictator games. While recipients' beliefs accurately account for the extent to which friends will choose more generous allocations than strangers (i.e. directed altruism), recipients are not able to anticipate individual differences in the baseline altruism of allocators (measured by giving to an unnamed recipient, which is predictive of generosity towards named recipients). Recipients who are direct friends with the allocator, or even recipients with many common friends, are no more accurate in recognizing intrinsically altruistic allocators. Recipient beliefs are significantly less accurate than the predictions of an econometrician who knows the allocator's demographic characteristics and social distance, suggesting recipients do not have information on unobservable characteristics of the allocator.
Directed Altruism and Enforced Reciprocity in Social Networks
(with Markus Mobius, Tanya Rosenblat and Q.A. Do) QJE (2009)
Abstract: We conduct online field experiments in large real-world social networks in order to decompose prosocial giving into three components: (1) baseline altruism toward randomly selected strangers, (2) directed altruism that favors friends over random strangers, and (3) giving motivated by the prospect of future interaction. Directed altruism increases giving to friends by 52 percent relative to random strangers, while future interaction effects increase giving by an additional 24 percent when giving is socially efficient. This finding suggests that future interaction affects giving through a repeated game mechanism where agents can be rewarded for granting efficiency enhancing favors. We also find that subjects with higher baseline altruism have friends with higher baseline altruism.
The Effect of Safe Experience on a Warning's Impact: Sex, Drugs and Rock-n-Roll
(with Greg Barron and Jennifer Stack) OBHDP (2008)
Abstract: In many contexts we are warned against engaging in risky behavior only after having past safe experience. We examine the effect of safe experience on a warning's impact by comparing warnings received after having safe personal experience with those received before people start making choices. A series of five experiments studies this question with a paradigm that combines both descriptive information (i.e. the warning) and experiential information (safe outcomes). The results demonstrate two separate advantages to an early warning that go beyond the warning's mere informational content. When an early warning coincides with the beginning of a decision-making process, the warning is both weighted more heavily in future decisions (the Primacy Effect) and induces safer behavior that becomes the status quo for future choices (the Initial History Effect). While both effects operate indirectly through choice inertia, the primacy effect also operates directly on choices. This pattern of behavior is inconsistent with the "ideal" Bayesian for whom the order of information revelation does not influence subsequent behavior. The effect was robust across settings with and without forgone payoffs and when the consequences for risk taking are delayed until the end of the experiment. The results imply that, even after being adequately warned, some people may continue to take risks simply because they incurred good outcomes from the same choice in the past. Implications for policy and theory are discussed.