My main interests are in problems related to coordination and/or asymmetric information. My approach to these problems draws heavily on game theory and dynamic contracts. Although I mainly apply these tools I’m also interested in their theoretical development.
Disclaimer: I have been known to get carried away into others areas so don't be surprised if you find work that doesn't fit the description above.
Some of my work is very preliminary and under revision so you won’t find a link to a paper. Please feel free to contact me at wfuchs(“at”)haas.berkeley.edu if you would like more information on any of these (to be) papers.
Completed Work: (Links to working paper versions of these papers)
Monetary Union with Voluntary Participation (with Francesco Lippi)
Review of Economic Studies No.2, Volume: 73, April 2006
CEPR/ESI Prize 2004 for the Best Central Bank Research Paper.
A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents incentives to leave the union by tilting both current and future policy in their favor. This yields a non-linear rule according to which each country’s weight in policy decisions is time-varying and depends on the incentives to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability and disruption of a Monetary Union.
Contracting with Repeated Moral Hazard and Private Evaluations
American Economic Review Volume 97, Number 4 September 2007
Landau Prize for Best Student Working Paper.
A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. It is shown that there is no loss from restricting the attention to contracts in which the Agent is supposed to exert effort every period, receives a constant wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (δ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as δ→1. The optimal contract when δ<<1 is partially characterized. Incentives are optimally provided with a combination of efficiency wages and the threat of termination, which will exhibit memory over the whole history of realizations. Finally, Tournaments are shown to provide an alternative solution to the problem.
Bargaining with Arrival of New Traders (with Andy Skrzypacz)
American Economic Review (2010) 100 (3), pp. 802–36. ONLINE APPENDIX
We study a general model of dynamic bargaining between a seller and a privately informed buyer, with arrival of exogenous events. Events can represent arrival of competing buyers (or sellers) or release of information. We characterize a unique limit of stationary equilibria of these games as the time between offers goes to zero. We show that the possibility of arrivals leads to equilibrium dynamics that violate the Coase conjecture. Even in the limit, there is considerable delay of trade in equilibrium, the seller slowly screens out buyers with higher valuations. The limit equilibria are very tractable, allowing us to establish many comparative statics and utilize the model to answer many applied questions. For example, we show that in some applications when buyer valuations fall, average transaction prices drop and the time on the market gets longer. If the arrival rate is high enough, then the division of surplus and equilibrium dynamics are driven more by the relative chances of a competing trader arriving on either side of the market than on the relative discount factors. Finally, even when multiple buyers can arrive, the expected time to trade is a non-monotonic function of the arrival rate.
Matching Problems with Expertise in Firms and Markets (With Luis Garicano) Journal of the European Economic Association P&P
When should expertise be shared in markets and when in
firms? Knowl-
edge exchanges in the market involve less information about the quality of
the providers expertise, but facilitate good utilization of experts knowledge.
In a
rm, management holds soft information about individuals expertise
and thus improves on the matching of experts to problems; however, the
usage of experts is not smooth and thus
firms experience over or under-
utilization of expertstime. Thus the trade-off between
firms and markets
is between utilization (the market allows for better, smoother, utilization
of knowledge than
firms) and the quality of matching between problems
and problem solvers (the market provides less information about experts
quality).
Work in Progress:
Dividing and Discarding: A Procedure for Taking Decisions with Non-transferable Utility(with Vinicius Carrasco)
We consider a setting in which two players must take a single action. The analysis is done within a private values model in which (i) the players' preferences over actions are private information, (ii) utility is non-transferable, (iii) implementation is Bayesian and (iv) the welfare criterion is utilitarian. We characterize an optimal allocation rule. Instead of asking the agents to directly report their types, this allocation can be implemented dynamically. The agents are asked if they are to the left or to the right of a given cutoff, if both reports agree, the section of the interval which none preferred is discarded and the process continues until one agent chooses left and the other right. In that case, this last cutoff is implemented. When types are uniformly distributed, this implementation can be carried out by a Principal who lacks commitment, implying this process is an optimal communication protocol.
Bridging the Gap: Bargaining with Interdependent Values. (With Andy Skrzypacz) NEW 1/2012!!
We study dynamic bargaining with asymmetric information and correlated
values. We show that as the gap between the cost and value of the weakest
type shrinks to zero the continuous time limit of equilibria changes dramat-
ically from rare bursts of trade with long periods of inactivity to a smooth
screening down of the demand function, independent of the distribution. If we interpret the model as a durable goods problem with experience curve effects that reduce marginal costs as a function of the cumulative industry sales, then the monopoly problem is consistent with perfect competition. In other words, even though the outcome is inefficient, the Coase conjecture holds as the gap disappears.
Bargaining with Deadlines and Private Information. (With Andy Skrzypacz) NEW 7/2011!!
We study dynamic bargaining with private information in the presence of a deadline. We show that as commitment power disappears, there is a clear “deadline effect” that is trade takes place smoothly before the deadline and with an atom at right at the deadline. The overall pattern of trade and the deadline effect responds to the inneficiency of not reaching an agreement and the parties best alternative to an agreement. Bleaker disagreement options lead to more trade and proportionaly more of the agreements taking place in the verge of the deadline.
From Equals to Despots: The Dynamics of Repeated Group Decision Taking with Private Information (with Vinicius Carrasco)
This paper considers the problem faced by two agents who repeatedly have to take a joint action, cannot resort to side payments, and each period are privately informed about their favorite actions. We study the properties of the optimal contract in this environment. We establish that
first best values can be arbitrarily approximated (but not achieved) when the players are extremely patient. Also, we show that the provision of intertemporal incentives necessarily leads to a dictatorial mechanism: in the long run the optimal scheme converges to the adoption of one player's favorite action.
Subjective evaluations: The bonus as a signal of performance.
A setup in which the quality of a job match is not known and the principal privately observes the stochastic product of agent’s effort is analyzed. It is shown that there can exist two types of equilibria depending on the parameters. The first is a separating equilibrium in which the Principal gives the agent truthful feedback about the agent’s performance. To make sure the Principal does not lie, positive feedback must be accompanied by a bonus. The other type of equilibria is a pooling equilibrium in which the principal gives no feedback to the agent.
Trading Know-How (with Luis Garicano)
The markets for advice are plagued by informational problems. The difficulty of the question posed, the skill of those advising on its answer, and whether a real solution to the problem was actually provided are often hard to assess. We study these problems in a general equilibrium setting, where heterogeneous agents may decide whether to generate productive opportunities or become advisors. When all these circumstances are in place, the market completely breaks down and no advice is sought or given. Entry regulation, where an external exam sets a minimum quality requirement to become an advisor, does prevent the market breakdown. However, entry is (optimally) set too hard relatively to the first best. If, instead, output is transferable (a problem and the good associated with it may be sold for a fee), partial efficiency, this time with too much advice, may be achieved. Finally, if output (whether problems are solved) is verifiable, output contingent contracts are possible. Matching of advisors and advisees is improved, but these contracts may result in `too many advisors.' Even when the first best allocation is achieved, the informational asymmetries generate some income redistribution.
Rules vs Discretion: The Role of Dollarization
The full set of sequential equilibria of the Barro-Gordon (1983) setup where a government of known type plays an infinite horizon monetary policy game is characterized. The effect of introducing currency substitution as a policy choice for the government is then analyzed. We observe that the set of sustainable equilibria is reduced dramatically and that for low discount factors governments resort to immediate dollarization.
Dynamic Signaling and Reputation in a Monetary Policy Game
The optimal path for monetary policy by the non-inflationary type in an asymmetric information environment with two types of central bankers, inflationary and non-inflationary is studied. The analysis leads to an interesting and complex dynamic signaling game. The objective is to characterize the optimal policy followed by the independent central banker to signal its type. The resulting dynamics for inflation will be compared to those observed in developing countries where successful stabilization programs have been implemented.