Research

Listed in reverse chronological order

Wealth Dynamics in Communities (with Yingni Guo and Bryony Reich). 2023. Review of Economic Studies 90 (4): 1642-1668.

• Paper (March 2022)

• Online Appendices (March 2022)

Abstract: This paper develops a model to explore how favor exchange influences wealth dynamics. We identify a key obstacle to wealth accumulation: wealth crowds out favor exchange. Therefore, households must choose between growing their wealth and accessing favor exchange. We show that low-wealth households rely on favor exchange at the cost of having tightly limited long-term wealth. As a result, initial wealth disparities persist and can even grow worse. We then explore how communities and policymakers can overcome this obstacle. Using simulations, we show that community benefits and place-based policies can stimulate both saving and favor exchange, and in some cases, can even transform favor exchange into a force that accelerates wealth accumulation.

Morale and Debt Dynamics (with Jin Li and Michal Zator). 2022. Management Science 68 (6): 4496-4516.

• Previous titles: Financing Constraints and Relational Contracts; Managing Debt in Relational Contracts; Productivity and Debt in Relational Contracts

• Paper (March 2021) 

• Supplemental File (March 2021)

Abstract: This paper shows that debt undermines relational incentives and harms worker morale. We build a dynamic model of a manager who uses limited financial resources to simultaneously repay a creditor and motivate a worker. If the manager can divert or misuse revenue, then debt makes managers less willing to follow through on promised rewards, leading to low worker effort. In profit-maximizing equilibria, the firm prioritizes repaying its debts, leading to gradual increases in effort and wages. These dynamics can persist even after debts have been fully repaid. Consistent with this analysis, we document that a firm's financial leverage is negatively related to measures of employee morale, wages, and productivity. JEL Codes: C73, D21, D86, G32. Keywords: Relational Contract, Productivity, Debt

Barron, Daniel, and Yingni Guo. 2021. "The Use and Misuse of Coordinated Punishments." Quarterly Journal of Economics 136 (1): 471-504.

• Paper (September 2020)

• Slides (June 2019) - 60 minute version

Abstract: Communication facilitates cooperation by ensuring that deviators are collectively punished. We explore how players might misuse communication to threaten one another, and we identify ways that organizations can deter misuse and restore cooperation. In our model, a principal plays trust games with a sequence of short-run agents who communicate with one another. An agent can shirk and then extort pay by threatening to report that the principal deviated. We show that these threats can completely undermine cooperation. Investigations of agents' efforts, or dyadic relationships between the principal and each agent, can deter extortion and restore some cooperation. Investigations of the principal's action, on the other hand, typically don't help. Our analysis suggests that collective punishments are vulnerable to misuse unless they are designed with an eye towards discouraging it.

Barron, Daniel, George Georgiadis, and Jeroen Swinkels. 2020. "Optimal Contracts with a Risk-Taking Agent." Theoretical Economics 15 (2): 715-761.

• Paper (July 2019)

• Code for simulations: to calculate optimal contract and to solve for optimal effort

• Supplemental Results (July 2019)

• Slides (February 2018)

• Kellogg Insight article

Abstract: Consider an agent who can costlessly add mean-preserving noise to his output. To deter such risk-taking, the principal optimally  offers a contract that makes the agent's utility concave in output. If the agent is risk-neutral and protected by limited liability, this concavity constraint binds and so linear contracts maximize profit. If the agent is risk averse, the concavity constraint might bind for some outputs but not others. We characterize the unique profit-maximizing contract and show how deterring risk-taking affects the insurance-incentive tradeoff. Our logic extends to costly risk-taking and to dynamic settings where the agent can shift output over time.

Barron, Daniel, Robert Gibbons, Ricard Gil, and Kevin J. Murphy. 2020. "Relational Adaptation under Reel Authority."  Management Science 66 (5): 1868-1889.

• Winner: Deutsche Bahn Prize for Outstanding Research in Organisation and Management, 2015

• Paper (October 2018)

• Online Appendix (October 2018)

Abstract: We study relationships between parties who have different preferences about how to tailor decisions to changing circumstances. Our model suggests that relational contracts supported by formal contracts may achieve efficient relational adaptation. Our empirics consider revenue-sharing contracts between movie distributors and an exhibitor. The exhibitor has discretion about whether and when to show a movie, and the parties frequently renegotiate formal contracts after a movie has finished its run. We document that such ex post renegotiation is consistent with rewarding the exhibitor for making efficient adaptation decisions. JEL Codes: L14, L22, L23

Barron, Daniel, and Michael Powell. 2019. "Policies in Relational Contracts." American Economic Journal: Microeconomics 11 (2): 228-249.

• Paper (February 2018)

• Appendices (February 2018)

• Slides (December 2017)

• Kellogg Insight article

Abstract: We consider how a firm's policies constrain its relational contracts. A policy is a sequence of decisions made by a principal; each decision determines how agents' efforts affect their outputs. We consider surplus-maximizing policies in a flexible dynamic moral hazard problem between a principal and several agents with unrestricted vertical transfers and no commitment. If agents cannot coordinate to punish the principal following a deviation, then the principal might optimally implement dynamically inefficient, history-dependent policies to credibly reward high-performing agents. We develop conditions under which such backward-looking policies are surplus-maximizing and illustrate how they influence promotions, hiring, and performance.

Barron, Daniel. 2017. "Attaining Efficiency with Imperfect Public Monitoring and One-Sided Markov Adverse Selection." Theoretical Economics 12(3): 957-978.

• Paper (December 2016)

Abstract: I prove an efficiency result for repeated games with imperfect public monitoring in which one player's utility is privately known and evolves according to a Markov process. Under certain assumptions, patient players can attain approximately efficient payoffs in equilibrium. The public signal must satisfy a "pairwise full rank" condition that is somewhat stronger than the monitoring condition required in the Folk Theorem proved by Fudenberg, Levine, and Maskin (1994). Under stronger assumptions, the efficiency result partially extends to settings in which one player has private information that determines every player's payoff. The proof is partially constructive and uses an intuitive technique to mitigate the impact of private information on continuation payoffs. JEL Codes: C72, C73

Andrews, Isaiah, and Daniel Barron. 2016. "The Allocation of Future Business: Dynamic Relational Contracts with Multiple Agents." American Economic Review 106(9): 2742-2759.

• Winner: CESifo Distinguished Affiliate Award, Applied Microeconomics, 2017

• Paper (January 2016)

• Appendices (January 2016)

• Old Working Paper - Oct 2013

• Old Appendices - Oct 2013

Abstract: We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. This allocation rule performs strictly better than any rule that depends only on payoff-relevant information. JEL Codes: C73, D82, L14, L22

Listed in order of most recent update

Markets for Rhetorical Services (with Michael Powell)

• Paper (December 2021)

Abstract: We study markets for rhetorical services, which improve the purchaser's ability to make compelling arguments to a third party and include the services offered by public relations consultants, advertising agencies, and lawyers. An agency privately sells rhetorical servers to a sender, the purchase of which plays a “signal-jamming” role by secretly altering the distribution of a signal observed by a receiver. The receiver’s beliefs about purchase decisions therefore influence demand for rhetorical services, which in turn shapes profit-maximizing behavior and the welfare of both the sender and receiver. We use our framework to analyze optimal pricing, the effects of competition, and how regulation changes market outcomes.

"Putting the Relationship First: Relational Contracts and Market Structure," 2016.

"Relational Contracts, Unemployment Insurance, and Trade," 2014.