Research

Working Papers

"Dynamic Regulation with Stochastic Costs: Signal Dampening, Experimentation, and the Ratchet Effect" Job-market paper, with Thomas Jeitschko.

Abstract: Regulators and the firms they regulate interact repeatedly. Over the course of these interactions, the regulator collects data that contains information about the firm's invariant private characteristics. This paper studies the case in which the regulator uses information gleaned from past cost observations when designing the current period's contract (that is, contracts are short-term). When costs are stochastic, the regulator's learning process is slowed compared to a deterministic setting. In the absence of additional messages, a separating contract no longer gives her complete information about the firm's type as soon as the first period cost is observed; thus, the second period game is one of asymmetric information.

Second period beliefs depend on the first period contract. In particular, the first period contract determines how much the regulator updates her prior beliefs for any given cost realization. By increasing the distance between first period cost targets, the regulator increases expected second period welfare; by decreasing the distance between first period cost targets, she preserves the good firm's expected second period rent, thus reducing the first period transfer. Given reasonable assumptions on the distribution of noise, the overall effect of the first period contract is to reduce the flow of information; thus, the good agent's efforts are ratcheted up over time.

"The Effects of Correlated Types on Stochastic Contracting"

The agency literature on learning in stochastic environments shows that principals have incentives to manipulate contracts away from the commitment optimum in order to affect the information content of a publicly observable signal. These contract manipulations allow the principal to learn more or less about the agent's private characteristics, depending on the economic environment.

One assumption this literature makes is that the agent's private characteristics are fixed; in the context of regulation, for example, a firm that is efficient today will also be efficient in the future. In reality, this may not always be the case; a firm with an efficient technology today could in the future have an inefficient technology if a rival makes a cost-reducing innovation. This paper examines a principal's informational incentives when the agent's type is only positively correlated over time, rather than fixed.

"Task Assignment Under Moral Hazard, with Effort-Dependent Human Capital and Outcome-Dependent Outside Options"

Consider a two period contracting problem between one principal, one agent, and an outside labor market. In the first period, the principal hires the agent to exert unverifiable effort on a project that may either succeed or fail. If effort is high, the agent gains valuable human capital, but if effort is low, he gains none. In the second period, the labor market makes the agent a wage offer if the project is successful. The principal has the opportunity to match the outside offer, or let the agent leave the firm. When the agent leaves the firm, the principal incurs a cost of replacing the agent.

The contracting problem studies the case in which the agent is "self-motivated," that is, when the expected value of the outside offer is high enough that the agent prefers high effort to low effort in the absence of an incentive wage. When the cost of replacing the agent exceeds a certain threshold, and when the difference in the probability of success conditional on high and low effort is "large enough," the principal will prefer low effort, and gain no human capital, even though the agent is self-motivated.