Research Papers
Delegation Principle for Multi-agency Games under Ex Post Implementation, Journal of Dynamics and Games, 2018, vol. 5, no. 4
We explore the strategic equivalence between the delegated menu contracting procedure and the centralized mechanism contracting procedure in general pure strategy multi-agency games under ex post equilibrium. We allow information externalities, contract externality, correlated types, and primitive constraints across the contracts for different agents. Our delegation principle identifies that even under this general setting ex post menu design is strategically equivalent to bilateral ex post mechanism design, which simplifies collective ex post mechanism design by ignoring relative information reference. Moreover, one can restrict attention to product menu design problems out of general menu design problems if the contract constraint sets have product structures. We provide conditions for when the principal can do strictly better by using the collective mechanism. Our results still hold if we include individual rationality or any degenerated form of our general model.Monotonicity in Optimal Mechanisms in General Quasi-linear Environments with a Continuum of Types, Economic Theory Bulletin, 2018, S. 1-14.
This paper provides conditions for the existence of optimal mechanism, in which the assignment rule takes the monotonic form and is determined independently of the transfer rule, in a principal-agent problem with a general quasi-linear environment. It is based on a complete characterization result of incentive-compatible mechanisms by monotonicity, envelope, and lower boundary individual rationality conditions. In particular, we present a general result for such an existence, which is also applicable to the scenarios without linear payoffs or regularity (lattice-related) conditions.Push or Pull?Performance Pay, Incentives, and Information, minor (2nd round) revision at Rand Journal of Economics (with David Rietzke, Lancaster University, UK)
We study a principal-agent model wherein the agent is better informed of the prospects of the project, and the project requires both an observable and unobservable input. We characterize the optimal contracts, and explore the trade-offs between high and low-powered incentive schemes. We discuss the implications for push and pull programs used to encourage R&D activity, but our results are relevant in other contexts.Simple Contracts under Observable and Hidden Actions, minor revision at Economic Theory (with Bo Chen, Southern Methodist University, USA, and David Rietzke, Lancaster University, UK)
We consider a general framework for multitask moral hazard problems with observable and hidden actions. Ideally, the principal in our framework can design optimal contracts that depend on both observable (and verifiable) actions and realized outcomes. Given a mild assumption on the existence of a punishment scheme, we identify a general equivalence result, dubbed the forcing principle, which states that every optimal contract in our framework is strategically equivalent to a simple forcing contract, which only specifies an outcome-contingent reward scheme and an action profile, and the agent receives the outcome-contingent reward only if he follows the recommended observable actions (and is otherwise punished severely). The forcing principle has useful implications: It confers analytic advantage for the existence and computation of optimal contracts in our setting. It also highlights and makes explicit the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems.Valuing the Urban Hukou in China: Evidence from a Regression Discontinuity Design in Housing Price, revision at Journal of Development Economics (with Shaobin Shi and Yugang Tang, Shandong University, China)
This paper explores the demand side of hukou (household registration) acquisition in China by estimating the market valuation of urban hukou. According to the provisions in Jinan City’s “Acquiring Hukou by Purchasing Houses” policy, this paper uses houses slightly larger than the minimum required floor area as the treatment group, and houses slightly smaller than the minimum required floor area as the control group to perform regression discontinuity design. Empirical results show that residents’ willingness to pay for urban hukou in Jinan City was between approximately 90,000 and 126,000 yuan (RMB) in 2017. Our finding is robust to both parametric and nonparametric estimates and different model specifications. We also perform falsification tests by assuming a false policy introduction date and placebo tests based on rental data. Our analysis also offers insights for reform of the hukou system and designs for the provision of public services or welfare.Delegated Project Search (with Xi Chen, Nanjing University, China, and Xuhu Wan, Hong Kong University of Science and Technology )
This paper explores a new continuous-time principal-agent problem for a firm with both moral hazard and adverse selection. Adverse selection appears at random times. The agent finds projects sequentially by exerting costly effort. Each project brings output to the firm, subject to the agent’s private shocks. These serial shocks are i.i.d and independent of the arrival time of new projects and the agent’s efforts. The shocks and efforts constitute the agent’s asymmetric information. We provide a full characterization of optimal contracts in which moral hazard effect and adverse selection effects interact. The second-best contract with moral hazard can achieve first-best efficiency, and third-best contract with the moral hazard and adverse selection can achieve second-best efficiency under pure adverse selection, if the agent is expectably rich enough. The payment is front-loaded under pure moral hazard. When moral hazard is combined with adverse selection, the payment can be backloaded or front-loaded, depending on the level of expectable wealth.Open Source and Competition Strategy under Network Externalities (with Bonwoo Koo, University of Waterloo, Canada, and Yu Wang, Nanjing University, China)
This study analyzes a firm’s decision to adopt an open source strategy in the development of a primary system product that has an indirect network effect on complementary accessory products, and evaluates its impact on market competition and social welfare. It shows that firms are likely to switch from a proprietary development strategy to an open source strategy as the network effect decreases, and a firm’s strategy also depends on consumers’ attitude toward future utility. This result implies that the presence of open source systems can benefit proprietary firms due to consumers’ higher willingness-to-pay for accessory products, and can lead to greater industry profit and social welfare. This study also shows that when the system development cost is non-negligible, firms prefer an open source strategy due to the cost-saving effect, but society is worse off due to a fragmented market with multiple system products.Government Intervention, Innovation, and Entrepreneurship (with Meng-Wei Chen, Nanjing Audit University, China, Zhenhua Wu, Nanjing University, China, and Ningru Zhao, Nanjing Audit University, China)
We study how government intervention affects innovation and entrepreneurship, using a model in which two agents (e.g., one entrepreneur and one venture capitalist) engage in teamwork to launch a new business in which a moral hazard problem may persist for both parties. One feature of our model is that the government’s financial support (grant) may have (positive) externalities on the teamwork of both parties, but is also constrained by budget costs. We compare two major forms of government intervention: indirect intervention and direct intervention. In the former, government intervention always raises the efforts of both parties and promotes social surplus (welfare). In the latter, government intervention may not always raise the efforts of both parties or promote social surplus relative to the case without government intervention. It may, however, deliver even higher social surplus than indirect financing when the government’s share in the enterprise is dominant and its marginal contribution to the project is sufficiently high.Contracting in a Continuous-Time Model with Three-sided Moral Hazard and Cost Synergies (with Nian Yang, Nanjing University, China, and Jun Yang, Indiana University)
This paper studies optimal contracting in a continuous-time model with three-sided moral hazard and cost synergies. One agent exerts initial effort to start the project; the other two agents exert ongoing effort to manage it. All three agents’ efforts jointly determine the probability of the project’s survival and its expected cash flows. We model cost synergies between the latter two agents as one’s effort reduces the other’s cost of effort. In the optimal contract, the timing of payments reflects the timing of efforts as well as cost synergies across agents. The agent exerting upfront effort claims all cash flows prior to a predetermined cutoff date. The two agents exerting ongoing effort divide all subsequent cash flows according to their moral hazard and cost synergies. This study sheds lights on a broad set of contracting problems, such as compensation plans in startups and profit sharing among business partners.Intellectual Property Rights Protection and Imitation under Asymmetric Information (with Zonglai Kou, Fudan University, China, and Yuchen Shao, Nanjing University, China)
As for international technology transfer, the conventional wisdom argues that a southern country will lose from strengthening intellectual property rights (IPR) protection due to higher imitation cost. However, this paper shows that tighter IPR protection can also be beneficial for the southern country when north-south technology transfer involves asymmetric information. In our model, the northern firm has private information about whether it only has a vintage technology or also has a novel technology applicable in the southern country. Our insight shows that by adopting IPR protection strong enough to immediately induce northern firm to introduce novel technology, if any, the southern country can benefit from imitating vintage technology profitably and safely regardless of replacement threat. More specifically, the optimal IPR policy has a quasi inverted-U shape relationship with the southern country's imitation ability, and this theoretical prediction is supported by our cross-country empirical study.On the Equivalence of Bilateral and Collective Mechanism Design
We explore the theoretical justification of adopting bilateral mechanism design, which is a simplification of canonical collective mechanism design, in general multi-agency contracting games under Bayesian Nash equilibrium. We establish interim payoff equivalence between collective and bilateral mechanism design in the quasi-separable environment, in which interdependent valuations and correlated types are allowed. We employ interim payoff equivalence to further show the equivalence between optimal bilateral and collective mechanism design, when the principal's payoff exhibits certain relations with separate agent's payoffs. Our analysis can also incorporate individual rationality and budget balance constraints and the asymptotic equivalence.
Work in Progress
Mechanism Design with Noisy Signals among Agents (with Christoph Kuzmics, University of Graz, Austria, and Jan-Henrik Steg, Bielefeld University, Germany)
Peer-review Mechanism Design (with Christoph Kuzmics, University of Graz, Austria, and Jan-Henrik Steg, Bielefeld University, Germany)
Bilateral Trade, Intermediary, and Informational Opportunism (with David Martimort, Paris School of Economics)
Cournot and Bertrand Competition in a Networked Oligopolistic Market (with Jin Xu, Shandong University, China)
Pay for Performance?
Simple Contracts without Revelation
Price-Rent Ratios in the Shanghai Housing Market and their Implications for Market Efficiency (with Jie Chen, Shanghai Jiaotong University, China, Robert Hill, University of Graz, Austria, and Pei Hu, Shanghai University of Finance and Economics, China)
Existence of Optimal Bayesian Menu (with Frank Page, Indiana University)
A Network Analysis of Diversified Status Concerns (with Yao-Yu Chih, Texas State University)
Political Connection and Environmental Enforcement: A Case Study of Pollution Levy Policy (with Bing Zhang, Nanjing University, China)