Jan 16, 2012 Filed in:
Working papersWith Kareen Rozen
Abstract: We study optimal contracting in teams with peer monitoring and moral hazard, featuring stylized aspects of production environments with complex tasks. Agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and because it is difficult to write individual performance into formal contracts, incentives are provided informally, using wasteful sanctions like guilt and shame, or slowed promotion.
These features give rise to optimal contracts with “empty promises” and endogenous supervision structures. Agents optimally make more promises than they intend to keep, leading to the concentration of supervisory responsibility in the hands of one or two agents.
Working paper 1/16/2012
PermalinkTags: Contracts, Moral hazard, Mechanism design, Peer monitoring, Partnership, Teams, Principal-Agent, Bounded memory, Cooperation
May 20, 2011 Filed in:
PublicationsPublished in The Review of Economic Studies, 2011.
Abstract: The game-theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars, without resorting to either impatience, symmetry restrictions, inability to communicate, or failure to optimize. This paper introduces a new explanation that relies on none of these assumptions: if the cartel's member firms have private information about their costs, price wars can be optimal in the face of complexity. Specifically, equilibria that are robust to payoff-irrelevant disruptions of the information environment generically cannot attain or approximate efficiency. An optimal robust equilibrium must allocate market shares inefficiently, and may call for price wars under certain conditions. For a two-firm cartel, cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium. That optimal equilibria are inefficient generically applies not only to collusion games, but also to the entire separable payoff environment (Chung & Ely 2006)—a class that includes most typical economic models.
Note: This is a major update of the paper formerly titled "Optimal ex post incentive compatible equilibria in repeated games of private information” and “The dynamic cost of ex post incentive compatibility in repeated games of private information."
Free-access link to published version
PermalinkTags: Collusion, Price wars, Repeated games, Private information, Mechanism design, Ex post incentive compatibility, Folk theorem
Jan 13, 2009 Filed in:
Working papersNote: Satoru Takahashi discovered an error in a previous version of this paper. I am working on figuring out how to correct it. For now, I am posting a shorter version that contains only the correct results. Please do not cite, circulate, or refer to any version of the paper dated prior to 2009.
Abstract: This paper proves folk theorems for repeated games with private information, communication, and monetary transfers, in which signal spaces may be arbitrary, signals may be statistically interdependent, and payoffs for each player may depend on the signals of other players.
Working paper 1/13/2009
PermalinkTags: Repeated games, Private information, Mechanism design, Folk theorem
Sep 01, 2007 Filed in:
PublicationsWith Susan Athey
Published in Theoretical Economics, 2(3):299-354, September 2007
Abstract: We analyze the extent to which efficient trade is possible in an ongoing relationship between impatient agents with hidden valuations (i.i.d. over time), restricting attention to equilibria that satisfy ex post incentive constraints in each period. With ex ante budget balance, efficient trade can be supported in each period if the discount factor is at least one half. In contrast, when the budget must balance ex post, efficiency is not attainable, and furthermore for a wide range of probability distributions over their valuations, the traders can do no better than employing a posted price mechanism in each period. Between these extremes, we consider a "bank" that allows the traders to accumulate budget imbalances over time, but only within a bounded range. We construct non-stationary equilibria that allow traders to receive payoffs that approach efficiency as their discount factor approaches one, while the bank earns exactly zero expected profits. For some probability distributions there exist equilibria that yield exactly efficient payoffs for the players and zero profits for the bank, but such equilibria require high discount factors.
Published paper
PermalinkTags: Private information, Mechanism design, Budget balance, Repeated games, Ex post incentive compatibility, Trade
