New Working Papers

 "Dynamic Mechanism Design for a Global Commons," with R. Harrison, revised January, 2016.  

AbstractWe 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, June, 2015.

AbstractWe study the relative performance of disclosure and auditing in organizations. An informed player chooses an action and sends a message to an uninformed player, who then chooses an action. We ask whether the uniformed player wants to commit to only observing the message (disclosure), or to keep the ability to observe the action of the informed player (auditing).

The answer depends on the nature of the misalignment in the players' preferences. If the misalignment is large enough and systematic, disclosure will emerge in equilibrium. When the players' preferences make them akin to being each other's agent, auditing will prevail. 

 "Tipping Points and Business-as-Usual in a Global Carbon Commons,"  with R. Harrison,  January, 2016.  

AbstractThis paper studies climate tipping in a dynamic strategic model of carbon consumption among nations. Each period, countries extract carbon from the global   ecosystem. A country's output depends both of its carbon usage and on "stored carbon" in the ecosystem. Its desired mix of extracted versus stored carbon is determined by its  output  elasticity with respect to carbon input. These elasticities vary across countries and evolve stochastically over time.  

We  analyze the countries'  strategic  incentives in the absence of an effective international agreement. We characterize Business-as-usual (BAU) equilibria:   continuous Markov Perfect equilibria in carbon extraction profiles. Under non-concave carbon dynamics, BAU equilibrium extraction profiles may deplete the carbon stock to the point that the global commons spirals downward toward a steady state of marginal sustainability. These thresholds, or tipping points, emerge endogenously in a BAU equilibrium. If the profiles of carbon factor elasticities become large enough, a tipping point is shown to be breached.  We find that countries will, in fact, accelerate their rates of carbon usage the closer they are to tipping. Even so, there remains a time span (a "negotiation  window") in which a collapse may be averted if the countries agree to implement the socially efficient profile of carbon usage.  

"The Design of Optimal Collateralized Contracts," with D. Cao, January, 2016. 

This paper adopts a mechanism design approach to examine the nature of optimal collateralized contracts (OCCs).  We study a multi-period contracting  problem in which a risk averse agent contracts with a risk neutral one to  obtain a loan. We place few restrictions on the  borrower's payoff over  collateralized  and non-collateralized goods. 

The borrower  observes a private income shock that cannot be independently verified by the lender. Collateral emerges as an endogenous feature of  the contract under asymmetric information. All OCCs are over-collateralized relative to the full-information optimum. OCCS are shown to be separating if the support of the borrower's income distribution is narrow, but may admit pooling at the bottom of the distribution if the support is broad enough. Significantly, consumption of the collateralized good in the  OCC is shown to be convex in realized income. Hence, the collateral requirement relative to one's income is larger for poorer borrowers. Finally, the paper describes  a relatively straightforward algorithm for computing OCCs. 


Recent Publications

   "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).