Homophily in Peer Groups

The focus of this paper is the endogenous formation of peer groups. In our model agents choose peers before making contributions to public projects, and they differ in how much they value one project relative to another. Thus, the group's preference composition affects the type of contributions made. We characterize stable groups and find that they must be sufficiently homogeneous. We also provide conditions for some heterogeneity to persist as the group size grows large. In an application in which the projects entail information collection and sharing within the group, stability requires more similarity among extremists than among moderate individuals

From Thought to Practice: Appropriation and Endogenous Market Structure with Imperfect Intellectual Property Rights

We address the problem faced by innovators who have an idea for a marketable product but must hire employees to bring the product to the market. Information leakage implies that newly hired employees become informed of the idea and may attempt to bring the product to the market themselves. We develop a bargaining model to analyze this situation. In this model, employees rents endogenously reflect the bargaining power vis-a-vis the firm which is due to the knowledge of the information. The model has a unique symmetric equilibrium in which the innovator appropriates a sizable share of the surplus despite the absence of property rights for ideas. We show that this share stays bounded away from zero even as the number of agents required in the development grows to infinity. We also derive the conditions under which monopoly or competition arise on the product market. We find that when the degree of potential competition on the product market is high enough, a monopoly is generated by hiring all potential competitors within the same firm. Finally, the link between intellectual property rights enforcement and industry performance is explored, and normative implications are derived

Industry Size and the Distribution of R&D Investment

We analyze the link between industry size and R&D spending distribution. We consider a monopolistically competitive market in which firms can invest in cost-cutting R&D by paying a fixed cost first. For an intermediate level of fixed cost, there is a unique equilibrium in which the market segments into investing and non-investing firms. Using this equilibrium, we study how the distribution and level of R&D expenditure changes as industry size increases. In particular, we show that, as the market size increases, R&D spending can become more concentrated. Data motivating these results are drawn from the Taiwanese and Korean semiconductor industries

Similarity and polarization in groups

"The focus of this paper is the endogenous formation of peer groups. We study a model in which agents choose their peers prior to making decisions on multiple issues. Agents differ in how much they value the decision outcomes on one issue relative to another. While each individual can collect information on at most one issue, all information is shared within the group. Thus, the group's preference composition affects the type of information that gets collected. We characterize stable groups, groups that are optimal for all their members. When information costs are low, stable groups must be sufficiently homogeneous. Furthermore, stability requires more similarity among extremists than among moderate individuals. When information costs are substantial, a free rider problem arises, and makes extreme peers more desirable, as they are more willing to invest in information acquisition. We show that, as information costs grow, polarization appears and becomes increasingly pronounced in stable groups." (author's abstract

Outsourcing, Information Leakage and Consulting Firms

This paper offers a general equilibrium model to analyze the problem of R&D investment of firms that also face the decision between outsourcing and in-house production in the presence of R&D information leakage. A contractor hired by a firm learns the firm’s technology and can diffuse the information to other firms, either by selling it or by “spilling” it involuntarily. I find that information leakage concerns tend to concentrate the outsourcing market with respect to a situation in which information leakage is not present. In particular, despite the fact that the original outsourcing market is perfectly competitive, I find that when a market for information arises in equilibrium, such a market is always monopolistic. I show that a market for information arises when contractors have a positive but low degree of control on the information they hold. If contractors do not have any control on the information they hold, the market splits into a positive measure of technologically advanced firms that never outsource and a positive measure of low-tech firms that always outsource. If contractors have full information control, all firms invest in technology and outsource, and a market for information never arises. The structure of the equilibria of the model captures several features observable in the management consulting industry

Interrogation Methods and Terror Networks

We examine how the structure of terror networks varies with legal limits on interrogation and the ability of authorities to extract information from detainees. We assume that terrorist networks are designed to respond optimally to a trade-off caused by information exchange: Diffusing information widely leads to greater internal efficiency, but it leaves the organization more vulnerable to law enforcement. The extent of this vulnerability depends on the law enforcement authority’s resources, strategy and interrogation methods. Recognizing that the structure of a terrorist network responds to the policies of law enforcement authorities allows us to begin to explore the most effective policies from the authorities’ point of view

Curb Your Innovation: On the Relationship Between Innovation and Governance Structure

In this paper, we analyze the relationship between innovation and firms’ governance structure. We present and analyze a simple model in which the firm’s governance struc- ture influences the behavior of innovative employees and, in turn, innovation brings about changes to the firm’s governance structure. Central to our analysis is the notion that power and rent sharing are reassessed when new ideas are implemented. The new rent allocation is determined by the ex-post bargaining power of all players involved in the new project. We highlight two problems that the owners of firms face in these situations. First, the tendency of owners to expropriate the rents of innovators often leads innovators to leave firms before revealing their ideas internally. Second, the fear of intra-firm rent redistribution brought about by innovation often results in conserva-tive attitudes among the firm owners. After illustrating how our model captures these two problems, we disscuss how alternative decision-making protocols, such as delegat-ing authority to a CEO or decentralizing the decision-making process of the firm, can help to mitigate them. These results are consistent with patterns of innovation and governance observed in the high-tech industry