Research
 

My main interests are in problems related to coordination and/or asymmetric information. My approach to these problems draws heavily on game theory and dynamic contracts. Although I mainly apply these tools I’m also interested in their theoretical development.


Some of my work is very preliminary and under revision so you won’t find a link to a paper. Please feel free to contact me if you would like more information on any of these (to be) papers.


Completed Work: (Links to working paper versions of these papers)

 Monetary Union with Voluntary Participation (with Francesco Lippi)

Review of Economic Studies No.2, Volume: 73, April 2006 

CEPR/ESI Prize 2004 for the Best Central Bank Research Paper. 

A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents incentives to leave the union by tilting both current and future policy in their favor. This yields a non-linear rule according to which each country’s weight in policy decisions is time-varying and depends on the incentives to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability and disruption of a Monetary Union.

 

Contracting with Repeated Moral Hazard and Private Evaluations

American Economic Review  Volume  97, Number  4  September  2007 

Landau Prize for Best Student Working Paper. 

A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. It is shown that there is no loss from restricting the attention to contracts in which the Agent is supposed to exert effort every period, receives a constant wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (δ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as δ→1. The optimal contract when δ<<1 is partially characterized. Incentives are optimally provided with a combination of efficiency wages and the threat of termination, which will exhibit memory over the whole history of realizations. Finally, Tournaments are shown to provide an alternative solution to the problem.

Bargaining with Arrival of New Traders (with Andy Skrzypacz)

 American Economic Review (2010) 100 (3), pp. 802–36. ONLINE APPENDIX

We study a general model of dynamic bargaining between a seller and a privately informed buyer, with arrival of exogenous events. Events can represent arrival of competing buyers (or sellers) or release of information. We characterize a unique limit of stationary equilibria of these games as the time between offers goes to zero. We show that the possibility of arrivals leads to equilibrium dynamics that violate the Coase conjecture. Even in the limit, there is considerable delay of trade in equilibrium, the seller slowly screens out buyers with higher valuations. The limit equilibria are very tractable, allowing us to establish many comparative statics and utilize the model to answer many applied questions. For example, we show that in some applications when buyer valuations fall, average transaction prices drop and the time on the market gets longer. If the arrival rate is high enough, then the division of surplus and equilibrium dynamics are driven more by the relative chances of a competing trader arriving on either side of the market than on the relative discount factors. Finally, even when multiple buyers can arrive, the expected time to trade is a non-monotonic function of the arrival rate.

Matching Problems with Expertise in Firms and Markets (With Luis Garicano)  Journal of the European Economic Association. April-May (2010) 

When should expertise be shared in markets and when in …firms? Knowl-
edge exchanges in the market involve less information about the quality of
the provider’s expertise, but facilitate good utilization of experts knowledge.
In a …rm, management holds soft information about individuals expertise
and thus improves on the matching of experts to problems; however, the
usage of experts is not smooth and thus …firms experience over or under-
utilization of experts’time. Thus the trade-off between …firms and markets
is between utilization (the market allows for better, smoother, utilization
of knowledge than …firms) and the quality of matching between problems
and problem solvers (the market provides less information about experts’
quality).

Bridging the Gap: Bargaining with Interdependent Values. (with AndySkrzypacz)

Journal of Economic Theory (2013)

We study dynamic bargaining with asymmetric information and correlated
values. We show that as the gap between the cost and value of the weakest
type shrinks to zero the continuous time limit of equilibria changes dramat-
ically from rare bursts of trade with long periods of inactivity to a smooth
screening down of the demand function, independent of the distribution. If we interpret the model as a durable goods problem with experience curve effects that reduce marginal costs as a function of the cumulative industry sales, then the monopoly problem is consistent with perfect competition. In other words, even though the outcome is inefficient, the Coase conjecture holds as the gap disappears.

Bargaining with Deadlines and Private Information. (with Andy Skrzypacz)

 American Economic Journal: Microeconomics (2013)

We study dynamic bargaining with private information in the presence of a deadline. We show that as commitment power disappears, there is a clear “deadline effect” that is trade takes place smoothly before the deadline and with an atom at right at the deadline. The overall pattern of trade and the deadline effect responds to the inneficiency of not reaching an agreement and the parties best alternative to an agreement. Bleaker disagreement options lead to more trade and proportionaly more of the agreements taking place in the verge of the deadline.

 Subjective evaluations: Discretionary Bonuses and Feedback Credibility.          Forthcoming American Economic Journal: Microeconomics

A setup in which the quality of a job match is not known and the principal privately observes the stochastic product of agent’s effort is analyzed. It is shown that there can exist two types of equilibria depending on the parameters. The first is a separating equilibrium in which the Principal gives the agent truthful feedback about the agent’s performance. To make sure the Principal does not lie, positive feedback must be accompanied by a bonus. The other type of equilibria is a pooling equilibrium in which the principal gives no feedback to the agent.


 

 Work in Progress:

Government Interventions in a Dynamic Market with Adverse Selection

(Andy Skrzypacz)  NEW Feb 2014

We study optimal government interventions in a dynamic market with asymmetric information. We show that if the government can only carry out budget-neutral policies, introducing a short tax-exempt trading window followed by short-lived positive taxes creates a Pareto improvement in the market. Under a sufficient condition on the shape of the gains from trade and the distribution of asset values, we show that, even when not requiring budget-neutrality, it is optimal to subsidize trades only initially while imposing prohibitively high taxes afterwards. Subsidies can greatly enhance welfare but they can also be detrimental if they are provided with delay.


Optimal Contracting and the Organization of Knowledge (with Luis Garicano and Luis Rayo) New Jan 2014

We study contractual arrangements that support efficient production in a knowledge-intensive economy. Such production is plagued by informational problems, since both the difficulty of the questions posed to experts and the skill of those experts are hard to assess. We show that spot markets are, in general, not efficient since lemons (in this market, self-employed agents with intermediate skills) cannot be appropriately excluded. However, an ex-ante, firm-like contractual arrangement, involving hierarchies in which experts are full residual claimants of output and compensate non-experts via incentive contracts, is guaranteed to deliver the first best (uniquely so whenever some agents are self-employed). This simple characterization of the optimal ex-ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors.

Adverse Selection, Slow Moving Capital and Misallocation  

(with Brett Green and Dimitris Papanikolaou) NEW April 2014

Adverse selection is commonly used to explain inefficiencies in specific markets. In this paper,we incorporate an informational asymmetry into a decentralized dynamic economy and study its implications for aggregate and sector level dynamics. We show that it leads to slow moving capital, lagged investment and persistent misallocation of resources. The mechanism can help explain why economies recover slowly, even when the shock does not affect the overall productivity or potential output. The model generates a rich set of dynamics and provides a micro-foundation for convex adjustment costs.

Transparency and Distressed Sales under Asymmetric Information 

(with Aniko Oery and Andy Skrzypacz) 

We analyze a dynamic market with short lived adverse selection and correlated values. Uninformed buyers compete inter- and intra-temporarily for a good that is sold by an informed seller who is suffering a liquidity shock. We contrast a transparent (public price offers) with an opaque (private price offers) information structure. First, we show that with private offers a pure strategy equilibrium is not sustainable if the seller is patient enough. Moreover, we can fully characterize the equilibrium in both information structures in a three period model if the buyers' valuations are a linear function of the seller's costs and costs are uniformly distributed. Finally, we derive that in this setting, any equilibrium with private off.ers is weakly more efficient than the unique pure strategy equilibrium with public offers.

Costs and Benefits of Dynamic Trading in a Lemons Market

 

(with Andy Skrzypacz)

We study a dynamic market with asymmetric information that induces the lemons problem. We compare efficiency of the market under different assumptions about the timing of trade. We show when efficiency can be improved by temporarily closing the market as compared to continuous trading opportunities.

Dividing and Discarding: A Procedure for Taking Decisions with Non-transferable Utility(with Vinicius Carrasco

We consider a setting in which two players must take a single action. The analysis is done within a private values model in which (i) the players' preferences over actions are private information, (ii) utility is non-transferable, (iii) implementation is Bayesian and (iv) the welfare criterion is utilitarian. We characterize an optimal allocation rule. Instead of asking the agents to directly report their types, this allocation can be implemented dynamically. The agents are asked if they are to the left or to the right of a given cutoff, if both reports agree, the section of the interval which none preferred is discarded and the process continues until one agent chooses left and the other right. In that case, this last cutoff is implemented. When types are uniformly distributed, this implementation can be carried out by a Principal who lacks commitment, implying this process is an optimal communication protocol.


From Equals to Despots: The Dynamics of Repeated Group Decision Taking with Private Information (with  Vinicius Carrasco 

This paper considers the problem faced by two agents who repeatedly have to take a joint action, cannot resort to side payments, and each period are  privately informed about their favorite actions. We study the properties of the optimal contract in this environment. We establish that …first best values can be arbitrarily approximated (but not achieved) when the players are extremely patient. Also, we show that the provision of intertemporal incentives necessarily leads to a dictatorial mechanism: in the long run the optimal scheme converges to the adoption of one player’'s favorite action.


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 Old Stuff:

Rules vs Discretion: The Role of Dollarization

The full set of sequential equilibria of the Barro-Gordon (1983) setup where a government of known type plays an infinite horizon monetary policy game is characterized. The effect of introducing currency substitution as a policy choice for the government is then analyzed. We observe that the set of sustainable equilibria is reduced dramatically and that for low discount factors governments resort to immediate dollarization

Dynamic Signaling and Reputation in a Monetary Policy Game

The optimal path for monetary policy by the non-inflationary type in an asymmetric information environment with two types of central bankers, inflationary and non-inflationary is studied. The analysis leads to an interesting and complex dynamic signaling game. The objective is to characterize the optimal policy followed by the independent central banker to signal its type. The resulting dynamics for inflation will be compared to those observed in developing countries where successful stabilization programs have been implemented.