Durable goods monopoly with stochastic costs

I study the problem of a durable goods monopolist who lacks commitment power and whose marginal cost of production varies stochastically over time. I show that a monopolist with stochastic costs usually serves the different types of consumers at different times and charges them different prices. When the distribution of consumer valuations is discrete, the monopolist exercises market power and there is inefficient delay. When there is a continuum of types, the monopolist cannot extract rents and the market outcome is efficient

A theory of political gridlock

This paper studies how electoral incentives influence the outcomes of political negotiations. It considers a game between two political parties that have to bargain over which policy to implement. While bargaining, the parties' popularity varies over time. Changes in popularity are partly exogenous and partly driven by the parties' actions. There is an election scheduled at a future date and the party with more popularity at the election date wins the vote. Electoral incentives can have substantial effects on bargaining outcomes. Periods of gridlock may arise when the election is close and parties have similar levels of popularity

A continuous time model of bilateral bargaining

This paper constructs a continuous-time model of bilateral bargaining to study how fluctuations in bargaining power affect the outcomes of negotiations. The paper deals with the technical complexities that arise when modeling games in continuous time by building strategy restrictions into the equilibrium definition. These restrictions select a unique equilibrium, which is characterized by a system of ordinary differential equations. This unique equilibrium corresponds to the limiting subgame perfect equilibrium of discrete-time bargaining games with frequent offers

Making corruption harder: asymmetric information, collusion, and crime

We model criminal investigation as a principal-agent-monitor problem in which the agent can bribe the monitor to destroy evidence. Building on insights from Laffont and Martimort (1997) we study whether the principal can profitably introduce asymmetric information between agent and monitor by randomizing the monitor’s incentives. We show it can be the case, but the optimality of random incentives depends on unobserved pre-existing patterns of private information. We provide a data-driven framework for policy evaluation requiring only unverified reports. A potential local policy change is an improvement if, everything else equal, it is associated with greater reports of crime

Searching for policy reforms

We construct a model of policy reform in which two players continually search for Pareto improving policies. The players have imperfect control over the proposals that are considered. Inefficient gridlock takes place due to the difficulty in finding moderate policies. The reform process is path dependent, with early agreements determining long-run outcomes. The process may also be cyclical, as players alternate between being more and less accommodating. Our model provides a noncooperative foundation for the “Raiffa path”, by which bargainers gradually approach the Pareto frontier

Progressive learning

We study a dynamic principal–agent relationship with adverse selection and limited commitment. We show that when the relationship is subject to productivity shocks, the principal may be able to improve her value over time by progressively learning the agent's private information. She may even achieve her first‐best payoff in the long run. The relationship may also exhibit path dependence, with early shocks determining the principal's long‐run value. These findings contrast sharply with the results of the ratchet effect literature, in which the principal persistently obtains low payoffs, giving up substantial informational rents to the agent

Disagreement and security design

We study optimal security design when the issuer and market participants agree to disagree about the characteristics of the asset to be securitized. We show that pooling assets can be optimal because it mitigates the effects of disagreement between issuer and investors, whereas tranching a cash-flow stream allows the issuer to exploit disagreement between investors. Interestingly, pooling and tranching can be complements. The optimality of debt with or without call provisions can be derived as a special case. In a model with multiple financing rounds, convertible securities naturally emerge to finance highly skewed ventures

Bargaining with persistent private information

I study how the arrival of new private information affects bargaining outcomes. A seller makes offers to a buyer. The buyer is privately informed about her valuation, and the seller privately observes her stochastically changing cost of delivering the good. The seller's time-varying private information gives rise to new dynamics. Prices fall gradually at the early stages of negotiations, and trade is inefficiently delayed. Inefficiencies persist even when gains from trade are common knowledge. Privately observed costs lead to lower welfare, higher seller revenue and lower buyer surplus (especially for high value buyers) relative to a setting with publicly observed costs.First author draf

Data-driven regulation: theory and application to missing bids

We document a novel bidding pattern observed in procurement auctions from Japan: winning bids tend to be isolated. There is a missing mass of close losing bids. This pattern is suspicious in the following sense: it is inconsistent with competitive behavior under arbitrary information structures. Building on this observation, we develop a theory of data-driven regulation based on “safe tests,” i.e. tests that are passed with probability one by competitive bidders, but need not be passed by non-competitive ones. We provide a general class of safe tests exploiting weak equilibrium conditions, and show that such tests reduce the set of equilibrium strategies that cartels can use to sustain collusion. We provide an empirical exploration of various safe tests in our data, as well as discuss collusive rationales for missing bids.First author draf

Dynamic contracting with limited liability constraints

We study a dynamic mechanism design problem in which a buyer seeks to procure an item from a single seller in multiple periods. The seller is privately informed about her procurement cost at each period, and this cost may be serially correlated over time. We restrict the buyer to use mechanisms satisfying a limited liability constraint: the seller’s flow payoffs must be non-negative at each period. Limited liability constraints give rise to new dynamic distortions and inefficiencies.The optimal mechanism is path dependent, favoring sellers who had low cost realizations in the past.First author draf