Publication:
Endogenous Monitoring in a Partnership Game, American Economic Review, March 2020, 110(3): 776-796. Full text
I consider a repeated game in which, due to imperfect monitoring, no collusion can be sustained. I add a self-interested monitor who commits to generating an imperfect private signal of firms’ actions and sends a public message. The monitor makes an offer specifying the precision of the signal generated and the amount to be paid in return. I show that with low monitoring cost, collusive equilibria exist. In the monitor’s favorite collusive equilibrium, firms’ payoffs are decreasing in the discount factor. My model helps explain the cartel agreements between the mafia and firms in legal industries in Italy and America.
Working papers:
Optimally Stubborn (Revise and Resubmit, Theoretical Economics, 2nd round, Resubmitted) Cowles Foundation Discussion Papers. 2255. Models on reputational bargaining have introduced a perturbation with simple behavioral types as a way of refining payoff predictions. I show that this outcome refinement is not robust to the specification of the behavioral type. More specifically, I propose a relaxation of the strategy restriction on behavioral types relative to the literature, allowing behavioral types to choose their initial demands. With this relaxation any feasible payoff can be achieved in equilibrium for the rational type when the probability of facing a behavioral type is small. My results highlight the implications of different perturbations for economic applications.
On the Role of Outside Options in Buyer-Seller Relationships (Revise and Resubmit, Journal of Political Economy, Resubmitted), with Johannes Hörner (TSE, CNRS). Full text
We consider a buyer-seller relationship, in which due to private information and a lack of flexible transfers, cooperation cannot be sustained efficiently. In each round, the buyer either purchases from the seller or takes an outside option. The fluctuating outside option may be public or private information. The seller chooses what quality to supply. We find that the buyer initially forgoes mutually beneficial trades before then visiting more often than he would like to, myopically. Under private information, the relationship recurrently undergoes gradual self-reinforcing downturns when trust is broken and instantaneous recoveries when loyalty is shown. Transparency regarding the outside option benefits both buyer and seller.
Dynamic Screening: Why Weight isn’t Volume, (Revise and Resubmit, Econometrica), with Johannes Hörner (TSE, CNRS). Full text Online Appendix We consider a continuous-time game between a buyer and a seller. The buyer privately knows how often he needs to trade. When he does, he can choose to either engage with the seller, who chooses what utility to supply, or search for an alternative. Because time is informative, the seller learns and adjusts her behavior over time. Without commitment, in the Markov perfect equilibrium, the seller starts with a pooling offer, before experimenting with occasional separating offers. Her payoff is non-monotone –in fact, quasi-convex– in her belief about the buyer’s type. With commitment, the seller can take advantage of limited-time offers to extract all the buyer’s surplus.
Reputational Spillovers, (Submitted), with Aditya Kuvalekar (Essex University). Full text We analyze a reputational bargaining game in which a central player negotiates simultaneously with two peripheral players. Each player may be a rational type or a commitment type that insists on a fixed share, and concessions are publicly observed. Because a player’s type is global across negotiations, reputational spillovers arise: behavior in one negotiation updates beliefs in the other. We show that these spillovers overturn the bilateral benchmark of Abreu and Gul (2000). The central player may concede more and earn strictly less than a weaker partner. Peripheral players benefit most when the central player’s higher-stakes negotiation is elsewhere.
Work in Progress:
Competition and Consumer Search. With Jim Dana (Northeastern) and Johannes Hörner (TSE, CNRS). Draft available on request. We study dynamic buyer-seller interactions in an imperfectly competitive market with search frictions. Prices are publicly observable, but consumers must engage in costly search to discover their firm-specific match value. In equilibrium, firms initially sell for free to attract consumers, but as search frictions gradually weaken outside options, firms gain market power and randomly hike their prices. This process generates persistent price dispersion and firm size heterogeneity, even when firms and consumers are ex ante identical. Our model explains staggered price hikes, long-run price differences, and endogenous firm growth patterns.
Competition, Price Discrimination and the Returns to Search: A Theory of Frequent-Buyer Discounts. With Jim Dana (Northeastern) and Johannes Hörner (TSE, CNRS). Draft available on request. We show that customer loyalty programs, and more specifically, discounts for frequent buyers, are an outcome of price discrimination by firms in imperfectly competitive markets with costly consumer search. We analyze oligopoly models of both search goods and experience goods when consumers differ only in their purchase frequency. Consumers’ valuations are drawn from the same distribution and have identical search costs. However, because frequent buyers have greater incentives to search, in equilibrium they have better outside options, search more often, and have higher ex post expected valuations. Competing firms offer lower prices to frequent buyers, and when consumers’ purchase frequency is private information, they do so using loyalty programs or frequent buyer discounts. These consumers pay lower prices, even though in equilibrium they have greater gains from trade (higher valuations).
Bargaining with Multiple Partners. With Idione Meneghel (ANU). We analyze a model of bargaining with two sides, say buyers and sellers. Each agent wants to make exactly one deal. Each player can choose from multiple possible bargaining partners, and some may be a better match than others. We analyze how the presence of alternative bargaining partners affects the outcome of a bilateral bargaining agreement.
Necessary and Sufficient Conditions for Equilibrium Uniqueness in a Repeated Partnership Game. I consider a repeated partnership game with imperfect public monitoring, in which the standard sufficient conditions for the Folk Theorem fail. I provide necessary and sufficient conditions under which the only equilibrium in public strategies is perpetual defection, independent of the discount factor.
Archived:
The Incentive Effect of Prison on Criminal Asset Recovery (2016) Full text
This paper was previously circulated as "The Puzzle of Longer Prison Sentences."