Research

Directed Attention in Markets (Job Market Paper)

I study an equilibrium model in which endogenous wages direct both agents’ search behavior and their strategy of costly information acquisition after getting matched, but before accepting an offer. As in rational inattention theory, I assume that searchers pay a cost proportional to reduction of their uncertainty about match quality. Thus e.g. higher wages, while directly beneficial to workers, encourage accepting jobs after less consideration. Firms understand this: higher wages are associated with inferior non-wage characteristics, which workers’ prior beliefs reflect. As in directed search theory, insisting on better terms of trade makes it harder to find a match. Unlike in standard directed search, the presence of attentional frictions leads to a non-monotonic relationship between posted wages and market tightness. The model offers novel insights into cleansing and sullying effects of recessions.

Venture Capital - A Rational Inattention Approach

I modify a standard model of financial intermediation in which an entrepreneur can work or shirk and the intermediary chooses the extent of costly monitoring. I allowing the intermediary (the venture capitalist) to choose the probabilities of false detections of shirking and failures to detect it, more precise information being more costly. Furthermore, entrepreneurs understand that, and their propensity to shirk depends on the venture capitalist’s monitoring strategy. I then nest this game in a standard directed search framework to investigate how venture capitalists’ and entrepreneurs’ incentives to pay attention and to shirk affect the number of projects funded, market tightness, the amount of funding entrepreneurs apply for and welfare. The model implies that excessive downside protection for venture capitalists incentivizes entrepreneurs to shirk, leads to fewer projects being funded and decreased welfare. Increasing the upside (by lowering capital taxation) benefits all parties involved. Increasing the entrepreneurs’ payoff from shirking ceteris paribus decreases welfare and leads to fewer successful applications for funding, but the probability that a funded entrepreneur would work hard increases.

Due Diligence: Rational Inattention in Search (with Joseph Briggs, Andrew Caplin, Daniel Martin and Christopher Tonetti)

We modify a standard search and matching market to allow searchers to conduct due diligence about quality of a match before accepting an offer. We model due diligence as costly information acquisition, and in our baseline model, we assume searchers pay a cost proportional to their residual uncertainty about match quality (as in rational inattention theory). This approach generates tractable solutions for market outcomes, which we use to demonstrate that search with due diligence differs in substantive ways from search with other types of learning: fixed ex-ante learning (signals before accepting offers) and fixed ex-post learning (signals after accepting offers).