PUBLICATIONS
Organizational Economics |
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“What Makes Agility Fragile? A Dynamic Theory of Organizational Rigidity” joint with Arijit Mukherjee and Luis Vasconcelos (April, 2022). Accepted, Management Science.
”Optimal Subjective Contracting with Revision" joint with Xinhao He and Zhaoneng Yuan (March, 2022). Accepted, Management Science.
”Morale and Debt Dynamics" joint with Dan Barron and Michal Zator, Management Science. Vol 68, No.6 (June, 2022) pp. 4496-4516.
“Learning to Game the System” joint with Arijit Mukherjee and Luis Vasconcelos, Review of Economic Studies, Vol 88, No. 4, (July 2021) pp.2014-2041.
“Relational Contracts, Limited Liability, and Employment Dynamics” joint with Yuk-Fai Fong, Journal of Economic Theory, Vol. 169, (May 2017) pp.270-293
“Power Dynamics in Organizations” joint with Niko Matouschek and Mike Powell, AEJ Micro, Vol 9, No. 1, (February 2017) pp.217-241
“Information Revelation in Relational Contracts” joint with Yuk-Fai Fong, Review of Economic Studies, Vol 84, No. 1, (January 2017) pp.277-299
“Relational Contracts with Private Subjective Evaluations” joint with Joyee Deb and Arijit Mukherjee, Rand Journal of Economics, Vol 47, No. 1, (Spring 2016) pp.3-28.
“Managing Conflicts in Relational Contracts” joint with Niko Matouschek, American Economic Review, Vol 103, No. 6, (October 2013) pp.2328-51.
- We present a novel explanation of why organizations tend to lose their agility over time despite their efforts to foster worker initiative in adapting to local information. Worker initiative ensures efficiency but requires strong incentives. When incentives are relational and the firm faces shocks to its credibility, it may adopt standardized work processes that ignore local information but yield satisfactory (though suboptimal) performance. The adoption of such standardized processes helps the firm survive the current shock but inflicts inefficiencies in the future. While the firm may recover, it becomes more vulnerable to future shocks, and consequently, more reliant on the standardized work procedures.
”Optimal Subjective Contracting with Revision" joint with Xinhao He and Zhaoneng Yuan (March, 2022). Accepted, Management Science.
- We study the optimal contracting problem with subjective evaluation when the principal can ask the agent to revise his work. The possibility of revision benefits the principal by providing the option value of making another attempt at the work. But it also introduces a new type of incentive problem for the principal: She may ask for revision even if it is inefficient to do so. This new incentive issue for the principal also affects the incentive of the agent: He may procrastinate his effort in anticipation of excessive revision. This results in a trilemma: The optimal contract cannot simultaneously provide for efficient revision, efficient effort, and minimal ex-post surplus destruction. The optimal contract will of necessity contain at least one of the following problems: revision--the principal asks for excessive revision; procrastination-—the agent shirks in the early stage; or punishment—excessive surplus destruction at low-quality final output.
”Morale and Debt Dynamics" joint with Dan Barron and Michal Zator, Management Science. Vol 68, No.6 (June, 2022) pp. 4496-4516.
- This paper shows that debt undermines relational incentives and harms worker morale. We build a dynamic model of a manager who uses limited financial resources to simultaneously repay a creditor and motivate a worker. If the manager can divert or misuse revenue, then debt makes managers less willing to follow through on promised rewards, leading to low worker effort. In profit-maximizing equilibria, the firm prioritises repaying its debts, leading to gradual increases in effort and wages. These dynamics can persist even after debts have been fully repaid. Consistent with this analysis, we document that a firm's financial leverage is negatively related to measures of employee morale, wages, and productivity.
“Learning to Game the System” joint with Arijit Mukherjee and Luis Vasconcelos, Review of Economic Studies, Vol 88, No. 4, (July 2021) pp.2014-2041.
- An agent may privately learn which aspects of his job are more important by shirking on some of them, and use that information to shirk more effectively in the future. In a model of long-term employment relationship, we characterize the optimal relational contract in the presence of such learning-by-shirking, and highlight how the performance measurement system can be managed to sharpen incentives. Two related policies are studied: intermittent replacement of existing measures, and adoption of new ones. In spite of the learning-by-shirking effect, the optimal contract is stationary, and may involve stochastic replacement/adoption policies that dilute the agent's information rents from learning how to game the system.
- Firms value customer’s trust highly, yet the impact of corporate governance of trust-reliant firms is underexplored. This paper investigates how a firm’s brand image in the product market responds to a change in its controlling shareholder, and derives the optimal firm ownership and control structure. We consider a dynamic model of an experience-goods firm, in which a controlling shareholder actively engages in management, and the controlling share block can be traded through private negotiation. In the optimal equilibrium, customers’ level of trust in the firm is linked to its behavior in the market for corporate control, so that the controlling shareholder has proper incentives to ensure high-quality products are produced. Turnover of controlling share block enhances both firm profit and total shareholder value. Our analysis also identifies an endogenous cost of corporate control, and provides a rationale for the separation of ownership and control. We derive the optimal ownership structure and draw implications on the dynamics of control premium.
“Relational Contracts, Limited Liability, and Employment Dynamics” joint with Yuk-Fai Fong, Journal of Economic Theory, Vol. 169, (May 2017) pp.270-293
- This paper studies a relational contracting model in which the agent is protected by a limited liability constraint. The agent's effort is his private information and affects the output stochastically. We characterize the optimal relational contract and compare the dynamics of the relationship with that under the optimal long-term contract. Under the optimal relational contract, the relationship is less likely to survive, and the surviving relationship is less efficient. In addition, relationships always converge under the optimal long-term contract, but they can cycle under the optimal relational contract.
“Power Dynamics in Organizations” joint with Niko Matouschek and Mike Powell, AEJ Micro, Vol 9, No. 1, (February 2017) pp.217-241
- We explore the evolution of power within organizations. To this end, we examine an infinitely repeated game in which a principal can empower an agent by letting him choose a project. The principal, however, does not know what projects are available to the agent. We characterize the optimal relational contract and explore its implications. Our results speak to how power is earned, lost, and retained. They show that entrenched power structures are consistent with managers who are managing power optimally. And they provide a new perspective on two long-standing issues in organizational economics.
“Information Revelation in Relational Contracts” joint with Yuk-Fai Fong, Review of Economic Studies, Vol 84, No. 1, (January 2017) pp.277-299
- We explore subjective performance reviews in long-term employment relationships. We show that firms benefit from separating the task of evaluating the worker from the task of paying him. The separation allows the reviewer to better manage the review process, and can therefore reward the worker for his good performance with not only a good review contemporaneously, but also a promise of better review in the future. Such reviews spread the reward for the worker's good performance across time and lower the firm's maximal temptation to renege on the reward. The manner in which information is managed exhibits patterns consistent with a number of well-documented behavioral biases in performance reviews.
“Relational Contracts with Private Subjective Evaluations” joint with Joyee Deb and Arijit Mukherjee, Rand Journal of Economics, Vol 47, No. 1, (Spring 2016) pp.3-28.
- This article analyzes the optimal use of peer evaluations in the provision of incentives within a team, and its interplay with relational contracts. We consider an environment in which the firm pays a discretionary bonus based on a publicly observed team output but may further sharpen incentives by using privately reported peer evaluations. We characterize the optimal contract, and show that peer evaluations can help sustain relational contracts. Peer evaluations are used when the firm is less patient and the associated level of surplus destruction is small. Moreover, peer evaluation affects a worker's pay only when the public output is at its lowest level and the co-worker sends the worst report. Noticeably, a worker's report does not affect his own pay, as the provision of effort incentives cannot be decoupled from the incentive for truthful reporting of peer performance. To induce the workers both to put in effort and to report truthfully, the firm may find it optimal to neglect signals that are informative of the worker's effort.
“Managing Conflicts in Relational Contracts” joint with Niko Matouschek, American Economic Review, Vol 103, No. 6, (October 2013) pp.2328-51.
- A worker interacts repeatedly with a manager who is privately informed about the opportunity costs of paying him. The worker therefore cannot distinguish non-payments that are efficiency enhancing from those that are rent extracting. The optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously. To manage a conflict, the manager uses a mix of informal promises and formal commitments that evolves with the duration of the conflict. Liquidity constraints limit the manager’s ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less.
Labor Economics |
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“Career Spillovers in Internal Labor Markets” joint with Nicola Bianchi, Giulia Bovini, Matteo Paradisi, and Michael Powell (April, 2022). Accepted, Review of Economic Studies.
“A Theory of Turnover and Wage Dynamics” joint with Jun Yu, Economic Inquiry, Vol 55, No. 1 (January 2017) pp.223-236
“Job Mobility, Wage Dispersion, and Technological Change: An Asymmetric Information Perspective” European Economic Review, Vol 60, (May 2013) pp.105-26.
- This paper studies career spillovers across workers, which arise in firms with limited promotion opportunities. We exploit a 2011 Italian pension reform that unexpectedly tightened eligibility criteria for the public pension, leading to sudden, substantial, and heterogeneous retirement delays. Using administrative data on Italian private-sector workers, the analysis leverages cross-firm variation to isolate the effect of retirement delays among soon-to-retire workers on the wage growth and promotions of their colleagues. We find evidence of spillover patterns consistent with older workers blocking the careers of their younger colleagues, but only in firms with limited promotion opportunities.
- Firms' organizational structures impose constraints on their ability to use promotion-based incentives. We develop a framework for identifying these constraints and exploring their consequences. We show that firms manage workers careers by choosing personnel policies that resemble an internal labor market. Firms may adopt forced-turnover policies to keep lines of advancement open, and they may alter their organizational structures to relax these constraints. This gives rise to a trade-off between incentive provision at the worker level and productive efficiency at the firm level. Our framework generates novel testable that connect firm-level characteristics with workers' careers.
“A Theory of Turnover and Wage Dynamics” joint with Jun Yu, Economic Inquiry, Vol 55, No. 1 (January 2017) pp.223-236
- We develop a model of turnover and wage dynamics with insurance, match-specific productivity, and long-term contracting. The model predicts that wages are downward rigid within firms but can decrease when workers are fired. We apply the model to study the impact of business cycles on subsequent wages and job mobility. Workers hired during a boom have persistent higher future wages if staying with the same firm. However, these boom hires are more likely to be terminated and have shorter employment spells.
“Job Mobility, Wage Dispersion, and Technological Change: An Asymmetric Information Perspective” European Economic Review, Vol 60, (May 2013) pp.105-26.
- This paper develops a model of job mobility and wage dispersion with asymmetric information. Contrary to the existing models in which the superior information of current employers lead to market collapse, this model generates a unique equilibrium outcome in which a) positive turnover exists and b) identical workers can be paid differently. The model implies that, in the presence of technological change that is skill-biased and also favors general skills over firm-specific skills, the wage distribution will become more spread out (corresponding to greater inequality) and job mobility will increase.
Industrial Organization |
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"Marketplace Scalability and Strategic Use of Platform Investment” joint with Gary Pisano, Richard Xu, and Feng Zhu, Accepted, Management Science.
“Corporate Capture of Blockchain Governance” joint with Daniel Ferreira and Radoslawa Nikolowa, Accepted, Review of Financial Studies.
“When Does Aftermarket Monopolization Soften Foremarket Competition?” joint with Yuk-Fai Fong and Ke Liu, Journal of Economics and Management Strategy, Vol 25, No. 4, (Winter 2016) pp.852-879
“Tacit Collusion in Auctions and Conditions for Its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets” joint with Charles Plott, Economic Inquiry, Vol 47, No. 3, (July 2009) pp.425-448.
- The scalability of a marketplace depends on the operations of the marketplace platform as well as its sellers' cost structures and capacities. In this study, we explore one strategy that a marketplace platform can use to enhance its scalability: providing an ancillary service to sellers. In our model, a platform can choose whether and when to provide this service to sellers and, if so, what prices to charge and which types of sellers to serve. While such a service helps small sellers, we highlight that the provision of such a service can diminish large sellers' incentives to make their own investment, thus reducing their potential output. When the output reduction by large sellers is substantial, the platform may not want to provide the ancillary service and, even if it does, it may choose to set a price higher than its marginal cost to motivate large sellers to scale. The platform may also choose to strategically delay providing the service.
“Corporate Capture of Blockchain Governance” joint with Daniel Ferreira and Radoslawa Nikolowa, Accepted, Review of Financial Studies.
- We develop a theory of blockchain governance. In our model, the proof-of-work system, which is the most common set of rules for validating transactions in blockchains, creates an industrial ecosystem with specialized suppliers of goods and services. We analyze the interactions between blockchain governance and the market structure of the industries in the blockchain ecosystem. We show that the proof-of-work system may lead to a situation where some large firms in the blockchain industrial ecosystem – blockchain conglomerates – capture the governance of the blockchain.
- In an environment subject to random fluctuations, when does an increase in the breadth of activities in which individuals interact together help foster collaboration on each activity? We show that when players, on average, prefer to stick to a cooperative agreement rather than reneging by taking their privately optimal action, then such an agreement can be approximated as equilibrium play in a suffciently broad relationship. This is in contrast to existing results showing that a cooperative agreement can be sustained only if players prefer to adhere to it in every state of the world. We consider applications to favor exchange, multimarket contact, and relational contracts.
“When Does Aftermarket Monopolization Soften Foremarket Competition?” joint with Yuk-Fai Fong and Ke Liu, Journal of Economics and Management Strategy, Vol 25, No. 4, (Winter 2016) pp.852-879
- This paper investigates firms’ abilities to tacitly collude when these firms each monopolize a proprietary aftermarket. When firms’ aftermarkets are isolated from foremarket competition, they cannot tacitly collude more easily than single-product firms do. However, when their aftermarket power is contested by foremarket competition as equipment owners view new equipment as a substitute for their incumbent firm’s aftermarket product, the monopoly profit is sustainable among a larger number of firms. These results hold regardless of whether consumers are sophisticated enough to anticipate a price war upon observing a deviation. Conditions under which introduction of aftermarket competition hinders firms’ ability to tacitly collude are characterized.
“Tacit Collusion in Auctions and Conditions for Its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets” joint with Charles Plott, Economic Inquiry, Vol 47, No. 3, (July 2009) pp.425-448.
- This paper studies bidder behavior in simultaneous, continuous, ascending price auctions. We design and implement a "collusion incubator" environment based on a type of public, symmetrically "folded" and "item-aligned" preferences. Tacit collusion develops quickly and reliably within the environment. Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of a game-theoretic model. The only succcessful remedy was a non-public change in the preference of participants that destroyed the symmetrically, "folded" and "item aligned" patterns of preferences, creating head-to-head competition between two agents reminiscent of the concept of a "maverick."