IN PROGRESS

Monetizing Steering (with Sandro Shelegia)

Better-placed products enjoy greater sales. Sellers on marketplace platforms prefer that the marketplace steers customers in their direction. A monopoly marketplace can earn profits through an ad-valorem fee: how should the marketplace set it? It can choose to determine to steer through the design of an algorithm or through an auction that raises further revenues. We examine which it prefers. In a single competitive retail market, the platform can extract monopoly profits fully through an algorithm or through auction with appropriate fees. More generally, there are trade-offs. The marketplace (and consumers) might prefer either scheme. Specifically, we consider these model variants: retail markets with market power; markets heterogeneous (or uncertain) in demand conditions; and markets heterogeneous in the extent to which consumers are susceptible to steering. In this way, the model can rationalize the use of auctions to determine steering in some markets and algorithms in others. It highlights that marketplaces enjoy several means of raising revenue. The approach also speaks to discussion of self-steering and highlights that assessing impacts on consumers requires a holistic view.

Acquihiring for Monopsony Power with Justin Johnson and Volker Nocke 

It is often argued that startups are acquired for the sole purpose of hiring specialized talent. We show that the goal of such acquihires might be to shut down the most relevant labor market competitor. This grants the acquirer monopsony power over specialized talent. As a consequence, acquihiring may harm employees and be socially inefficient. We explore the robustness of these effects, allowing for private benefits associated with working at a startup, varying bargaining protocols, multiple employees with and without complementarities, and private information. 

and projects with Shelegia; Baccara, Silveira and Watkins; Levy; Shapiro; ...

PUBLISHED/FORTHCOMING PAPERS

Targeted Product Design (with Guillermo Caruana and Vicente Cuñat) American Economic Journal: Microeconomics, , 2023, 15(2), 157-86.

We present a model of product design. In our framework, there is an inherent trade-off associated with choosing between broad or niche designs. More-targeted designs are able to excite specific types of consumers but at the cost of alienating others. We adapt the familiar Salop (1979) circle by allowing firms to locate on the interior. We provide conditions that ensure extreme or intermediate designs in monopoly, monopolistic competition, and duopoly and conduct comparative statics exercises that provide further characterization and intuition. 

Search, Showrooming and Retailer Variety (with Sandro Shelegia) Marketing Science, 2023, Vol 42(2), 251-270. 

Pricing depends on the selection of consumers and the way that they search. Diamond (1971) highlights that consumers who search for prices, paradoxically, impose no discipline on prices. Instead, searching for match information does. Showrooming disciplines prices at deep stores (where consumers can learn about many goods in a category). It also leads shallow stores, where showroomers buy, to face a larger fraction of consumers who are insensitive to price. The overall effect of more showrooming can be to raise or lower prices. It depends on the kinds of consumers who showroom. Similarly, a price-only channel can have ambiguous effects.

Training, Recruitment, and Outplacement as Endogenous Asymmetric Information (with Clare Leaver), Economica, 2022,  89, 849–861.

This paper presents a model of a competitive labour market where workers vary in firm-specific and general skills, and firms choose the kind of information to disclose. We show that provision of general training, recruitment, and outplacement are linked. Disclosing general human capital information on bad matches but revealing nothing about good matches (information disclosure that resembles outplacement support in professional service firms), leads to an efficient allocation of workers and creates adverse selection that enables workers to pay for general training. It also implies that wages of released workers can be higher than wages of those who are retained.

Motivating Employees through Career Paths (with Raphaël Lévy) Journal of Labor Economics,  Vol 40 (1), 2022, 95-131.

Firms have discretion over task allocations, which may dampen employees’ career prospects, and, hence, motivation. Task assignments and worker motivation interact through the extent of labor market competition; that is, the possibility of moving to another firm. More competition enhances motivation but decreases firms’ incentives to assign workers to informative tasks. One consequence is that competitive firms sometimes choose strategies that lead to intermediate competition. When the employee pool is heterogeneous, firms might choose different human resources practices that attract different kinds of workers, and differentiate themselves through the career opportunities within and beyond the firms that they offer. We discuss our results in the context of professional service firms.

Adverse Selection, Efficiency, and the Structure of Information (with Ian Jewitt and Clare Leaver) Economic Theory, 72, 2021, 579-614.

This paper explores how the structure of asymmetric information impacts on economic outcomes in Akerlof's (1970) Lemons model applied to the labor market and extended to admit a matching component between worker and firm. We characterize the nature of equilibrium and define measures of adverse selection and efficiency. We then characterize the joint distribution of outcomes—adverse selection, probability of trade, efficiency, profits, and wages—for the class of Gaussian basic games and information, and perform comparative statics with respect to a parsimonious parameterization of the information structure. Next, we ask: what divisions of expected total surplus between worker and firm can be achieved as information varies? We show that, if the distribution of worker types is non-singular, any point in the set of possible surplus divisions can be achieved as a limit of a PBE for some information structure with asymmetric information. We conclude by using these results to revisit classic issues in the labour market context.

Reputation with Opportunities for Coasting (with Joyee Deb) Journal of the European Economic Association, 19(1), Feb 2021, 200-236.

Reputation concerns can discipline agents and generate good outcomes. But what if outcomes are not always observed? Infrequent observation can strengthen reputation incentives and encourage effort. By exerting effort when outcomes are more likely observed, the agent can improve her reputation, and gain by "coasting" on this reputation-shirking when the audience is less likely to be observing her actions. Opportunities to coast can, in fact, lead to greater overall effort than constant observation. We characterize the optimal observability structure to maximize efficient effort. This has implications for the design of review systems of performance feedback systems.

Blockholder voting (with Joel Shapiro) Journal of Financial Economics, June 2020, Vol 136 (3), 695-717. Final version here.

By introducing a shareholder with many votes (a blockholder) to a standard model of voting, we uncover several striking results. First, if a blockholder is unbiased, she may not vote with all of her shares. This is efficient, as it prevents her vote from drowning out the information provided by other votes. Second, if this blockholder can announce her vote before the vote takes place, other shareholders may ignore their information and vote with the blockholder to support her superior information. Third, if the blockholder is biased, some shareholders will try to counter the blockholder's vote. The results are robust to allowing for information acquisition and trade. This suggests that regulations discouraging or prohibiting abstention, strategic behavior, and/or coordination may reduce efficiency.

Vertical Information Restraints: Pro- and Anti-Competitive Impacts of Minimum Advertised Price Restrictions  (with John Asker) Journal of Law and Economics, February 2020, 63 (1), 111-148.

We consider vertical contracts where the final goods market may involve search frictions. Minimum advertised price restrictions (MAP) can increase search frictions in the retail sector and thereby soften retail competition in a way similar to resale price maintenance (RPM). However, by accommodating (consumer or retailer) heterogeneity, MAP can allow for higher manufacturer pro.ts than RPM. We show that it can do so through facilitating price discrimination among consumers; encouraging service provision; and facilitating manufacturer collusion. Thus, welfare effects may be positive or negative compared to RPM or the absence of such restrictions.

Brokers' Contractual Arrangements in Manhattan Rental Markets (with Alessandro Gavazza) Journal of Urban Economics, Vol 86, 2015, 73-82.

We bring new evidence to bear on the role of intermediaries in frictional matching markets and on how parties design contracts with them. Specifically, we examine two features of contracts between landlords and agents in the Manhattan residential rental market. In our data, 72 percent of listings involve exclusive relationships between landlords and agents (the remaining 28 percent are non-exclusive); and in 21 percent of listings, the landlord commits to pay the agent’s fee (in the other 79 percent, the tenant pays the agent’s the fee). Our analysis highlights that these contractual features reflect landlords’ concerns about providing agents with incentives to exert effort specific to their rental units and to screen among heterogeneous tenants.

(Good and Bad) Reputation for a Servant of Two Masters (with Joyee Deb) American Economic Journal: Microeconomics, Vol 6(4), 2014, 293-325.

We consider a model where an agent takes actions to affect her reputation with two heterogeneous audiences with diverse preferences. This framework contrasts with standard models of reputation which treat the audience as homogeneous. A new aspect that arises with heterogeneous audiences is that different audiences may observe outcomes commonly or separately. In our baseline model, if all audiences commonly observe outcomes, reputation concerns are necessarily efficient—the agent’s per-period payoff is higher than in the one-shot play. Instead, when the audiences separately observe different outcomes the opposite result arises—the agent’s per period payoff is lower than in one-shot play. The model involves two strategic types of player: we discuss extending the model to allow for commitment types, the impact of the horizon, and normative implications. 

Long-term debt and hidden borrowing (with Vicente Cuñat) The Review of Corporate Finance Studies Vol 3 (1-2), 2014, 87-122. 

We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, as well as from other, hidden lenders. The presence of hidden lenders allows borrowers to conceal poor results from their banks and, thus, restricts the contracts that can be obtained from the banking sector. In equilibrium, borrowers obtain funds from both the banking sector and inefficient hidden lenders simultaneously, so that different types of borrowers cannot be distinguished by banks. This generates cross-subsidies between different borrowers that are observationally equivalent to the banking sector. We show that the cheaper the cost of hidden borrowing, the lower is welfare and the lower is the variety of funding arrangements in the banking sector. In particular, while high costs of hidden borrowing allow each different (viable) type of borrower to access different terms from the banking sector, as the cost of hidden borrowing falls, more and more borrowers face identical terms up to the point where all borrowers who access the banking sector (which may include inefficient ones) face identical terms. We generalize the model to allow for partially-hidden lenders and obtain qualitatively similar results.

Specialized Careers (with Johannes Hörner), Journal of Economics and Management Strategy, Vol 23(4), 2014, Fall 2014, 601–627. 

An agent has different abilities in two types of tasks, which are revealed through his performance over time. He initially decides whether to engage in only one task (specialize) or to take on any task that arises (be a generalist). This decision trades off the cost of being idle against staying available for relatively lucrative tasks. We compare specializing with acting as a generalist in an infinite-horizon model and provide complete characterizations of efforts. We show how specializing acts as a means of committing to exert more effort. In a two-period version of the model, this implies that positive fees for switching strategies are desirable.

What is a Good Reputation? Career Concerns with Heterogeneous Audiences (with Joyee Deb) International Journal of Industrial Organization (Papers and Proceedings of the EARIE Conference 2013), Volume 34, May 2014, 44-50. 

When an agent faces audiences with heterogeneous preferences, it is non-trivial to determine what a "good" reputation means, and the  return to reputation can be a non-monotonic function. We illustrate this through standard IO examples, and discuss some implications for reputation-building in a simple two-period career concerns framework. We conclude by discussing other observations concerning the impact of heterogeneous audiences on reputation-building.

Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals (with John Asker), American Economic Review, February 2014, Vol 104(2): 672-86. Erratum  Appendix

Resale price maintenance (RPM), slotting fees, loyalty rebates and other related vertical practices can allow an incumbent manufacturer to transfer profits to retailers. If retailers accommodate entry, upstream competition leads to fierce downstream competition, and the breakdown of these profit transfers. Thus, in equilibrium, retailers can internalize the effect of accommodating entry on the incumbent’s profits. Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred. We discuss the empirical and policy implications of this aspect of vertical contracting practices.

Ratings Quality over the Business Cycle (with Joel Shapiro) (Additional materials: Technicial Appendix) Journal of Financial Economics, April 2013, 108(1), 62-78.

The reduced accuracy of credit ratings on structured finance products in the boom just preceding the financial crisis has prompted investigation into the business of Credit Rating Agencies (CRAs). While CRAs have long held that reputational concerns discipline their behavior, the value of reputation depends on economic fundamentals that vary over the business cycle. We analyze a dynamic model of ratings where reputation is endogenous and the market environment may vary over time. We find that ratings accuracy is countercyclical. Specifically, a CRA is more likely to issue lessaccurate ratings when income from fees is high, competition in the labor market for analysts is tough, and default probabilities for the securities rated are low. Persistence in economic conditions can diminish our results, while mean reversion exacerbates them. The presence of naive investors reduces overall accuracy, but ratings accuracy remains countercyclical. Finally, we demonstrate that competition among CRAs yields similar qualitative results. 

Search, Design, and Market Structure (with Guillermo Caruana and Vicente Cuñat), American Economic Review, April 2012, 102(2): 1140–1160.

The Internet has made consumer search easier, with consequences for prices, industry structure and the kinds of products o§ered. We provide an industry model with strategic design choices that explores these issues. A polarized market structure results: some firms choose designs aimed at broad-based audiences, while others target narrow niches. We analyze the effect of reduced search costs, finding results consistent with the reported prevalence of niche goods and long-tail and superstar phenomena. In particular, the model suggests that long-tail effects arise when there is a wide range of potential designs, relative to vertical heterogeneity among firms

Information gathering externalities in product markets (with Guillermo Caruana and Vicente Cuñat), Journal of Industrial Economics,, March 2012, Vol. LX, No. 1, 162–185.

Most goods and services vary in numerous dimensions. Customers choose to acquire information to assess some characteristics and not others. Their choices affect firms’ incentives to invest in quality and so lead to indirect externalities in consumers’ choices. We illustrate these ideas by characterizing a model in which a monopolist invests in the quality of a product with two characteristics, and consumers are heterogeneous ex-ante. Indirect externalities in information gathering arise because consumers do not consider the effects on the firm’s investment incentives when choosing which information to acquire. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers’ information gathering and thereby the firm’s investment, can paradoxically reduce consumer surplus, profits, and welfare.

Transparency, Career Concerns, and Incentives for Acquiring Expertise, The B. E. Journal of Theoretical Economics, Vol. 12: Iss. 1, Article 4, 2012. 

An agent, who cares about signaling his ability, chooses among different projects that generate observable outcomes. The agent’s information about which project delivers a good outcome depends on both his ability and his effort. This paper examines how the agent’s incentives for effort change depending on whether or not the agent’s project choice is observed. If this choice is publicly observed, the agent’s project choice is distorted towards particular types of projects. When the outcomes of these advantaged projects are particularly sensitive to the agent’s information, such transparency boosts the agent’s information-gathering incentives. However, when public observation of project choice leads the agent to choose information-insensitive projects, then such transparency dampens incentives. This provides a more nuanced view of the implications of action transparency in the literature on career concerns for experts.

Credit Ratings Accuracy and Analyst Incentives (with Joel Shapiro), American Economic Review (Papers and Proceedings), May 2011, Volume 101:3, 120–124.

The financial crisis has brought a new focus on the accuracy of credit rating agencies (CRAs). In this paper, we highlight the incentives of analysts at the CRAs to provide accurate ratings. We construct a model in which analysts initially work at a CRA and can then either remain or move to a bank. The CRA uses incentive contracts to motivate analysts, but does not capture the benefits if the analyst moves. We find that rating agency accuracy increases with CRA monitoring, bank profitability (a positive "revolving door" effect), and can be non-monotonic in the probability of an analyst leaving.

Information gathering and marketing (with Guillermo Caruana and Vicente Cuñat), Journal of Economics and Management Strategy, Volume 19, Number 2, Summer 2010, 375–401.

Consumers have only partial knowledge before making a purchase decision but can choose to acquire more detailed information. A firm can make it easier or harder for consumers to obtain information. We explore consumers’ information gathering and the firm’s integrated strategies for marketing, pricing and investment in quality. There are two key effects. First, a trade-off between targeting a broad, but ill-informed, audience and catering to a well-interested niche. Second, when the firm cannot commit to its investment in quality, the firm pricing and marketing policy needs to induce some consumers to actively gather information about product characteristics to convince all consumers that it has invested in product quality.

Interrogation Methods and Terror Networks (with Mariagiovanna Baccara) (2009) Mathematical Methods in Counterterrorism eds N. Memon, J. D. Farley, D. L Hicks, and T. Rosenorn, Springer,  271-290. 

We examine how the structure of terror networks varies with legal limits on interrogation and the ability of authorities to extract information from detainees. We assume that terrorist networks are designed to respond optimally to a trade-off caused by information exchange: Diffusing information widely leads to greater internal efficiency, but it leaves the organization more vulnerable to law enforcement. The extent of this vulnerability depends on the law enforcement authority’s resources, strategy and interrogation methods. Recognizing that the structure of a terrorist network responds to the policies of law enforcement authorities allows us to begin to explore the most effective policies from the authorities’ point of view.

Breadth, Depth, and Competition, Economics Letters, (May 2009), Volume 103(2), 110-112.

We consider the trade-offs in the choice between depth (a narrow high quality position) and breadth (a wide low quality range). In particular, the extent of depth or breadth in a market can be non-monotonic in the strength of competition.

How to organize crime (with Mariagiovanna Baccara) Review of Economic Studies, 2008, Volume 75(4), 1039–1067. 

In criminal organizations, diffusing information widely throughout the organization might lead to greater internal efficiency (in particular, since these organizations are self-sustaining, through facilitating cooperation). However, this may come at a cost of leaving the organization more vulnerable to external threats such as law enforcement. We consider the implications of this trade-off and we characterize the optimal information structure, rationalizing both hierarchical and cell-based forms. Then, we focus on the role of the external authority, characterize optimal detection strategies and discuss the implications of different forms of enforcement on the internal structure of the organization. Finally, we discuss a number of applications and extensions.

Recruitment, training, and career concerns (with Juanjo Ganuza) Journal of Economics and Management Strategy, 2008, Volume 17 (4). 839-864. (Additional materials: Computational Model) 

We examine training and recruitment policies in a two-period model that nests two forms of production, "routine" work where ability and effort are substitutes and "creative" work where they are complements. Alternative ways of improving average ability have opposite implications for agents’ career concerns. While teaching to the top (training complementary to ability) or identifying star performers increases agents’ career concerns, teaching to the bottom has the opposite effect. The paper also makes more general comments relating to models of reputation.

Seller Reputation (with Steve Tadelis), Foundations and Trends in Microeconomics, 2008, Volume 4:4, 273-351.

Seller reputation is an important asset because buyers often choose sellers on the basis of their reputation. This is particularly true when the quality of the good or service transacted are hard to measure and the parties cannot perfectly contract on the outcome of the transaction. As a consequence, the seller will be mindful of building and maintaining a good reputation through the information that buyers have about the seller, including previous transactions and the reports of other buyers. We introduce a unifying framework that embeds a number of different approaches to seller reputation, incorporating both hidden information and hidden action. We use this framework to stress that the way in which consumers learn affects both behavior and outcomes. In particular, the extent to which information is generated and socially aggregated determines the efficiency of markets. After reviewing these theoretical building blocks we discuss several applications and empirical concerns. We highlight that the environment in which a transaction is embedded can help determine whether the transaction will occur and how parties will behave. Institutions, ranging from the design of online markets to norms in a community, can be understood as ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire to affect consumer beliefs regarding the firm’s incentives can help us understand strategic firm decisions that seem unrelated to the particular transactions they wish to promote. We conclude by considering slightly different models of reputation that lie beyond the scope our framework, briefly reviewing the somewhat sparse empirical literature and highlighting and suggesting future directions for research.

Something to prove: Reputation in teams RAND Journal of Economics, (Summer 2007), Volume 38(2), 495-511. 

Agents work for their own reputations when young but for their firms when old. An individual with an established reputation cannot credibly commit to exerting effort when working alone. However, by hiring and working with juniors of uncertain reputation, seniors will have incentives to exert effort. Incentives for young agents arise from a concern for their own reputation (and the opportunity to take over the firm) but older agents work for the reputation of their firms (and the opportunity to sell out to juniors). An important theoretical contribution is an example of a mechanism that endogenously introduces type uncertainty.

Imperfect Competition and Reputational Commitment, Economics Letters, (November 2005), Volume 89(2), 167-173. 

Competition can both aid and hinder reputational commitments for quality. These are self-sustaining depending on future profits after maintaining or deviating from the commitment, and on current costs of sustaining it. Competition can affect these three elements at different rates

Reputation and Survival: learning in a dynamic signalling model, Review of Economic Studies, (April 2003), Volume 70(2), 231-251.

We consider the impact of reputation on the survival of a monopolist selling single units in discrete time periods, whose quality is learned slowly. If the seller learns her own quality at the same rate as customers, a sufficiently bad run of luck could induce her to stop selling. When she knows her quality, a good seller never stops selling though at low reputations a bad seller does with some probability. Furthermore, a seller with positive, though imperfect, information sells for the same number of periods whether her information is private or public. We further consider the robustness of the central result when the seller’s opportunities for strategic behaviour are limited. An earlier version is available as as Self-Confidence and Survival, STICERD Theoretical Economics DP 428 or in my thesis. In addition to a better title, the chief difference with respect to the published version is a finite period version of the model that allows the firm to choose equilibrium prices. The equilibrium might see the firm choose a low price (that is below the consumers willingness to pay) when its reputation is bad. The intuition here is that making life tough in bad states is worse for a bad seller than a good one and so flushes out bad sellers quickly allowing the good to capture higher value.