In this experiment I use a semi-unstructured bargaining approach to study the effects of liquidity constraints on the determination of terms of trade. This setting is specially relevant for monetary theory: trade surplus and its division are endogenously and simultaneously determined, with participants facing possible liquidity constraints due to buyer’s endogenous ex-ante choice of costly money holdings.
My aim is to test the empirical relevance of two widely used axiomatic bargaining solutions: generalized Nash bargaining and Kalai's proportional bargaining. Each bargaining solution predicts different outcomes and buyer's anticipating their decision's effect on the bargaining outcome may choose to additionally restrict their money holdings, which can prevent efficient outcomes from being achieved, even when money is costless to hold. A most relevant issue, since the protocol to determine terms of trade in monetary economies is critical for normative results, optimal monetary policy, and the welfare cost of inflation. By imposing different costs to holding money, I find strong evidence that costlier holdings do incentivize participants to economize on money holdings leading to a more constrained bargaining set resulting in less production and surplus, but find only mixed evidence in favor of any of the two bargaining solutions. Finally, I introduce two possible variations to the model that help better understand the data: myopic buyers and a sunk cost fallacy.
I develop an experimental framework to investigate price, output and welfare consequences of implementing the optimal monetary policy in the Lagos and Wright (2005) model: The Friedman Rule. I aim to further understand previous experimental results by Duffy and Puzzello(2020) which are somewhat at odds with the standard theory and contrary to the optimality of the rule \textit{vis-à-vis} an inflationary scheme, which they suggest could be rationalized on the basis of liquidity constraints and/or precautionary motives due to future price uncertainty. For this, I request subjects to make predictions about market prices and include a novel treatment for the decentralized goods market to try and mitigate price uncertainty: prices are exogenously imposed on consumers so they can only select from a fixed menu of quantities (and prices) when making an offer. My results tend to be consistent with previous experimental findings with evidence in favor of the monetary equilibrium as the norm, price stability when the money supply is unchanged, but no clear evidence for the Friedman Rule. Even when prices are fixed exogenously in pairwise meetings, evidence in favor is still only mixed and high volatility of prices in the centralized market persists. When using subjects own predictions about the centralized market price to look at how they expected to rebalance their holdings conditional on their beliefs there seems to be a clear bias: subjects mostly want to increase their token holdings regardless of previous trades.
In this paper I show that in a general labor search model with linear utility and no borrowing constraints, severance payments may still be relevant as part of the optimal contract when firms can search on-the-job. Firms and workers would bargain over both the wage and a payment conditional on the worker being replaced so that firms take into account the total surplus effect of their replacement hire decisions. Since, given the optimal contract, firms would only search on-the-job if the flow cost of doing so is lower than the one faced by vacant firms, it should be expected that a lower on-the-job search cost would be welfare enhancing (at least in terms of net output). To explore this issue in the presence of ex-ante ability heterogeneity which makes the pairwise optimal contract insufficient to achieve the constrained-efficient result (even under the Hosios condition), I use a calibrated version of the model and illustrate that a lower on-the-job search can in fact reduce welfare.
Working as Graduate Student Researcher for John Duffy on an NSF financed project where it is proposed to replace the simulated, hard-wired agents of evolutionary game theory with incentivized human subjects facing the same type of selection pressure.
Collaborating with Radhika Lunawat, faculty at UCI's Business School, and other authors in a paper titled Can Investors Back Out Equilibrium Reporting Bias? Experimental Evidence where we examine a sender-receiver game such that the sender is interested in maximizing prices but bears misreporting costs.
In a second project with Radhika Lunawat we explore how speculative trading influences prices in financial markets. For this we conduct a laboratory market experiment wit an Overlapping Generations framework where there are speculating investors (who do not collect dividends and trade only for capital gains since they won't be "alive" when dividends realize) and dividend-collecting investors (who will be "alive" when dividends are paid).