(Journal of Monetary Economics, 2022)
We show theoretically that, in the presence of persistent productivity shocks, the reliance on self-enforcing contracts due to limited legal enforcement may provide a possible rationale why countries with the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersion of firm-level productivity, and (iii) greater wage inequality. We also provide suggestive empirical evidence consistent with the model's aggregate implications. Finally, we relate the model's firm-level implications to existing empirical findings.
Korea University, Universidad Carlos III de Madrid (*), University of Minnesota (*), UT Austin (*), Vienna Graduate School of Finance (*), 2021 Greater Bay Area Finance Conference, Utah Winter Business Economics Conference(*), the 4th Relational Contracts Workshop at University of Chicago (*), the Society for the Advancement of Economic Theory Conference 2019 at Ischia, the 4th FTG European Summer Meeting at Madrid, and Virtual Finance Theory Seminar (*)
(*indicates co-author presentation)
I analyze a dynamic model of concurrent bargaining in which multiple prospective buyers compete to trade with an informed seller. When the seller maintains confidentiality over buyers' past offers, buyers may engage in competitive ``price experimentation'': buyers risk early losses to subsequently acquire informational advantages over competitors and expect to earn future information rents. Due to price experimentation, the seller may benefit from maintaining confidentiality over past offers and restricting buyer entry. The model has implications for the strategic choice between auctions and negotiations, and for the common use of ``pre-qualification'' in asset sales.
WFA (scheduled), Annual Conference of the EALE, Stony Brook International Conference on Game Theory, AEFIN Finance Forum, Barcelona GSE Workshop, CICF, Durham Economic Theory Conference, Econometric Society Meetings, FTG Summer School, Hong Kong Joint Finance Workshop, Stanford SITE - Dynamic Games, Contracts and Markets, World Congress of the Game Theory Society, McCombs School of Business, CUHK, and Korea University
We study optimal contracting for innovation projects involving initial exploration followed by exploitation upon success, integrating the experimentation literature with dynamic corporate finance. The shape of the exploitation payoff frontier — not just its level — determines the optimal contract for experimentation and its duration. When the exploitation stage involves moral hazard and limited liability, the principal's continuation profit is inverted U-shaped in the agent's continuation utility. This weakens the principal’s rent-extraction motive and may induce more efficient experimentation, even when the exploitation payoff frontier is always lower. Applications to corporate governance and innovation subsidy design yield sharp policy prescriptions.
Arizona State University, CAFM, Chung-Ang University, CUHK, UT Austin, FMA, Econometric Society Australian Meeting, Organizational Economics Asian Conference, Financial Intermediation Research Society, Finance Theory Workshop in Hong Kong, FTG Meetings, SITE - Dynamic Games, Contracts and Market, Relational Contracting Workshop*, World Congress of Econometric Society