New Working Papers
"Dynamic Mechanism Design for a Global Commons," with R. Harrison, November 2014.
Abstract: We model dynamic mechanisms for a global commons. Countries benefit from both consumption and aggregate conservation of an open access resource. A country's relative value of consumption-to-conservation is privately observed and evolves stochastically. An optimal quota maximizes world welfare subject to being implementable by Perfect Bayesian equilibria. With complete information, the optimal quota is first best; it allocates more of the resource each period to countries with high consumption value. Under incomplete information, the optimal quota is fully compressed --- initially identical countries always receive the same quota even as environmental costs and resource needs differ later on. We show that this is true even when private information is negligible.
"Do Actions Speak Louder Than Words? Auditing, Disclosure, and Verification in Organizations" with L. Anderlini and D. Gerardi, September, 2014.
Abstract: We study the relative performance of disclosure and auditing in organizations. We consider the information transmission problem between two decision makers who take actions at dates 1 and 2 respectively. The first decision maker has private information about a state of nature that is relevant for both decisions, and sends a cheap-talk message to the second. The second decision maker can commit to only observe the message (disclosure), or can retain the option to observe the action of the first decision maker (auditing) or, at some cost, to verify the state.
In equilibrium, state verification will never occur and the second decision maker effectively chooses between auditing and disclosure. When the misalignment in preferences reflects a bias in a decision maker’s own action relative to that of the other — we call this an agency bias — then, in equilibrium, the second decision maker chooses to audit. Actions speak louder than words in this case. When one decision maker prefers all actions to be biased relative to the other decision maker — we call this an ideological bias — then, if the misalignment is large enough, in equilibrium the second decision maker chooses disclosure. In this case words speak louder than actions.
While firms are usually characterized by agency bias, ideological bias is more common in political systems. Our results indicate that the ability to commit not to audit has value in the latter case. However such commitment is rarely feasible in the political sphere.
"Tipping Points and Business-as-Usual in a Global Carbon Commons," with R. Harrison, January, 2015.
Abstract: This paper formulates a dynamic model of global carbon consumption in the absence of an effective international agreement. Each period, countries extract carbon from the global ecosystem. A country's output depends both on its carbon usage and on the ecosystem ("stored carbon"). The desired mix of extracted versus stored carbon by each country is determined by its stochastically evolving factor elasticities.
We characterize Business-as-usual (BAU) equilibria as smooth, Markov Perfect equilibrium profiles of carbon usage across countries. A BAU equilibrium is shown to generate lower aggregate output and higher carbon use each period than the socially efficient path, although some countries might actually use less carbon under BAU. We characterize properties of tipping points, i.e., threshold levels of stored carbon stocks below which the global commons collapses, spiraling downward toward a steady state of marginal sustainability. We show that if the profile of carbon factor elasticities reaches a high enough threshold, a tipping point will be breached. Even in this case, there remains a time span (a "negotiation window") in which a collapse may be averted if the countries agree to implement the efficient profile of carbon usage.
"Revealed Political Power," with J. Bai, International Economic Review, 54: 1085–1115 (2013).
"Communication and Learning," with L. Anderlini and D. Gerardi, Review of Economic Studies, 79(2): 419-450 (2012).
"On the Faustian Dynamics of Policy and Political Power, with J. Bai, Review of Economic Studies, 78: 17-48 (2011).
"Social Memory, Evidence, and Conflict," with L. Anderlini and D. Gerardi, Review of Economic Dynamics, 13: 559-574 (2010).
"Markov Perfect Equilibria in Repeated Asynchronous Choice Games" with H. Haller, Journal of Mathematical Economics, 46: 1103-1114 (2010).
"The Dynamic Stability and Reform of Political Institutions , Games and Economic Behavior, 67: 569-583 (2009).