Research

Publications

“Discretionary Rewards as a Feedback Mechanism” with Jeroen van de Ven (Univesity of Amsterdam), Games and Economic Behavior, 67(2), 2009, 665-681.

http://www.sciencedirect.com/science/article/pii/S0899825609000347

Abstract. This paper studies the use of discretionary rewards in a finitely repeated principal–agent relationship with moral hazard. The key aspect is that rewards have informational content. When the principal obtains a private subjective signal about the agent's performance, she may pay discretionary bonuses to provide credible feedback to the agent. In accordance with the often observed compression of ratings, we show that in equilibrium the principal communicates the agent's interim performance imperfectly, i.e., she does not fully differentiate good and bad performance. Furthermore, we show that small rewards can have a large impact on the agent's effort, provided that the principal's stake in the project is small.

“Advice by an Informed Intermediary: Can You Trust Your Broker?” with Natalia Tsybuleva (ANE and CEFIR), The B.E. Journal of Theoretical Economics, 10(1, Topics), 2010, Article 50.

http://www.bepress.com/bejte/vol10/iss1/art50/

Abstract. The paper investigates the credibility of an intermediary's advice in a bilateral trade model. A seller and a buyer with private and independent valuations exchange a unit of good. Trade is mediated by an intermediary, who observes a coarse signal about the buyer's valuation and may reveal it to the seller before bargaining. We show that if the broker gets a fixed per-transaction fee, he can fully transmit information via cheap talk. This information transmission increases ex ante welfare of the seller and the broker but has an ambiguous impact on the buyer. We show that limits to informative communication may arise if the intermediary observes signals about valuations of both participants or because of competition between intermediaries. Finally, using mechanism design approach, we show that choosing an appropriate system of two-part tariffs allows the intermediary to secure the same expected profit as in the optimal direct mechanism.

“Bad news: an experimental study on the informational effect of rewards” (joint with A. Bremzen (NES), E. Khokhlova (NES) and J. van de Ven (Amsterdam University)), Review of Economics and Statistics, 2015, Vol. 97, No. 1, Pages 55-70.

http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00424#.Vz1nM7iLTjE

Abstract. Both psychologists and economists have argued that rewards often have hidden costs. One possible reason is that the principal may have incentives to offer higher rewards when she knows the task to be difficult. Our experiment tests if high rewards embody such bad news and if this is perceived by their recipients. Our design allows us to decompose the overall effect of rewards on effort into a direct incentive and an informational effect. The results show that most participants correctly interpret high rewards as bad news. In accordance with theory, the negative informational effect co-exists with the direct positive effect.

“Discretionary acquisition of firm-specific human capital under non-verifiable performance” (joint with A. Akhmedov (Sberbank)), The B.E. Journal of Theoretical Economics, 14 (1, Contributions), 2014, 1-34.

http://www.degruyter.com/view/j/bejte.2014.14.issue-1/bejte-2012-0007/bejte-2012-0007.xml?format=INT

Abstract. In this paper we develop a model of discretionary employee investment in firm-specific human capital (HC). When a firm has full bargaining power, the non-contractibility of this investment completely undermines the employee's incentives. However, the incumbent firm's inability to observe competing wage offers at the interim stage prevents it from completely expropriating the surplus, thereby creating incentives for the employee to invest. We demonstrate that commitment to a wage floor for the second period destroys the worker's incentives to acquire HC, but makes turnover efficient. Therefore, such a commitment has value only if the return on the employee's deliberate investment in HC acquisition is sufficiently low. When firms are privately informed about the productivity of their HC acquisition technology, more productive firms offer higher entry wages to separate themselves from less productive firms. Furthermore, in contrast to the case of symmetric information about HC acquisition technology, the commitment opportunity now has value for firms with higher return on investment: commitment to a wage floor acts as a substitute for raising the entry wage.

“Self Rewards and Personal Motivation”, with Alex Koch and Julia Nafziger (both Aarhus University) and Jeroen van de Ven (Univesity of Amsterdam), European Economic Review, 68, 2014, 151-167.

http://www.sciencedirect.com/science/article/pii/S0014292114000439

Abstract. : Self-administered rewards are ubiquitous. They serve as incentives for personal accomplishments and are widely recommended to increase personal motivation. We show that in a model with time-inconsistent and reference-dependent preferences, self-rewards can be a credible and effective tool to overcome self-control problems. We also discuss the different types of self-rewards the individual can use, such as vice goods and virtue goods, and analyze which types of goods the individual prefers.

“Observe or Violate: Intrinsic Motivation of Academic Ethics”, with Ekaterina Borisova and Leonid Polischuk (both from National Research University Higher School of Economics), Journal of New Economic Association, 2014, 2(22), 41-72 [in Russian].

http://journal.econorus.org/pdf/NEA-22.pdf

Abstract. : We study intrinsic motivation for university students' compliance with the requirements of academic ethics. A theoretical model presented in the paper suggests that such motivation is predicated on students' moral norms, on their expectations of rule compliance among their peers, and on their academic performance. We present an empirical analysis which corroborates these hypotheses and measures the strength of the above factors of ethical behavior. Empirical data are generated by an experiment held at the National Research University Higher School of Economics and at the New Economic School, whereby some exams were offered in the "take home" format.

“Agency Problem and Ownership Structure: OutsideBlockholder As a Signal” (with Sergey Stepanov), Journal of Economic Behavior and Organization, 2017, 133, 87-107.

http://www.sciencedirect.com/science/article/pii/S0167268116302530

Abstract. Conventional wisdom suggests that large outside shareholders help to restrict insider opportunism and, hence, are more beneficial when the agency problem is more severe. Thus, if a firm chooses its ownership structure so as to minimize the agency cost, firms with more potential for expropriation of shareholders by insiders, are more likely to have an outside blockholder. Our model predicts that under asymmetric information about the entrepreneur's ability/propensity to extract private benefits the outcome may be the opposite: ownership structures with an outside blockholder are chosen by the entrepreneurs that are less capable/willing to extract private benefits. Selling a large stake to an outside blockholder who would monitor the entrepreneur allows a "good" entrepreneur to separate himself from a "bad" one. Thus, our work provides an equilibrium explanation to the empirical observations that the presence of an outside blockholder is positively correlated with firm value and, thereby, contributes to the endogeneity debate in the owership-performance empirical literature. Our model suggests that the documented positive relationship may arise not due to a direct effect of blockholder monitoring on firm value, but because entrepreneurs with low propensity to self-deal choose to attract an outside blockholder.

“Doing Bad to Look Good: Negative Consequences of Image Concerns on Prosocial Behavior” (with Ivan Soraperra, Jeroen van de Ven and Marie Claire Villeval), Revue Economique, 2019, 70(6), forthcoming.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450365

Abstract. Several studies show that social image concerns stimulate pro-social behavior. We study a setting in which there is uncertainty about which action is pro-social. Then, the quest for a better social image can potentially conflict with genuinely pro-social behavior. This conflict can induce ``bad'' behavior, where people lower both their own and others' material payoffs to preserve a good image. This setting is relevant for various types of credence goods. For example, recommending an inexpensive treatment reduces the expert’s profits and may not satisfy the true needs of the client, but is generally good for the expert's image (as it signals the lack of greed). We test experimentally if people start to act bad in order to look good. We find that people care about their social image, but social image concerns alone do not induce them to act bad. That is, without future interactions, social image concerns do not lead to bad behavior. However, with future interactions, where building up a good image has instrumental value (reputational concerns), we do find evidence of bad behavior in the short run to secure higher earnings in the long run.

Papers

“Why Less Informed Managers May be Better Leaders?” (with Sergei Guriev (NES)), 2010

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1596673

Abstract.Unlike the textbook model of a top manager being an omniscient planner, coordinator and monitor, the real life managers suffer from discontinuity, lack of systematic information collection and limited time for analysis and reflection. Why do not business leaders set up their organizations in the way that would allow themselves to make informed choices based on thorough analysis? We argue that in some situations top managers may benefit from being less informed. In our model, additional information raises ex post flexibility of the decision-makers which may undermine the ex ante incentives of their subordinates to make specific investments. The subordinates expect less informed leaders to be more committed to the original strategy which increases the returns to the strategy-specific investments. We show that this effect is more likely to take place in more predictable environments. We also show that less informed leaders attract stronger subordinates. Finally, we discuss how the effect of information depends on the structure of the labor market.

“Goal setting as a Self-Regulation Mechanism”, with Jeroen van de Ven (Univesity of Amsterdam), CEFIR working paper, 2008

(see above a new, revised and significantly extended version of this paper, “Self Rewards and Personal Motivation” joint with Alex Koch and Julia Nafziger, Aarhus University, published at European Economic Review)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1286029

Abstract. We develop a theory of self-regulation based on goal setting for an agent with present-biased preferences. Preferences are assumed to be reference-dependent and exhibit loss aversion, as in prospect theory. The reference point is determined endogenously as an optimal self-sustaining goal. The interaction between hyperbolic discounting and loss aversion makes goals a credible and effective instrument for self-regulation. This is an entirely internal commitment device that does not rely on reputation building. We show that in some cases it is optimal to engage in indulgent behavior, and sometimes it is optimal to set seemingly dysfunctional goals. Finally, we derive a condition under which proximal (short term) goals are better than distal (long term) goals. Our results provide an implicit evolutionary rationale for the existence of loss aversion as a means of self-control.

“Addiction to rewards”, 2003 (under revision in Games and Economic Behavior)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2308624

Abstract. The paper explores the "hidden costs of rewards" in a dynamic principal-agent framework, in which an informed principal selects in each period a reward for an agent. It shows that rewards are often addictive in that once offered, a contingent reward makes the agent expect it whenever a similar task is faced. This expectation develops because rewards bring bad news: a higher reward is more likely to be offered when the task is difficult or the agent is weak. This, in turn, compels the principal to use rewards over and over again. Furthermore, in a long-term principal-agent relationship there is a two-sided ratchet effect: the principal is concerned about creating addiction for the agent, whereas the agent does not want to appear too enthusiastic. On the principal's side, the ratchet effect implies that there are fewer rewards in a long-term principal-agent relationship than in a situation where the agent faces transient principals while implementing a series of similar tasks. On the agent's side, ratcheting conflicts with a desire to work in order to acquire valuable information about the task attractiveness. If doing the task once allows the agent to fully learn its characteristics, addiction may not develop. In contrast, the principal may first promise a bonus when the task is easy, rather than difficult (or the agent is strong) so as to induce the agent to acquire the good news "by doing". Then, bonuses become redundant thereafter.