Guy Arie

I'm a PhD Candidate in the Managerial Economics & Strategy Program at the Kellogg School of Management. I am interested in knowledge intensive industries and especially the design of policies and organizations that promote innovativeness and entrepreneurship. More generally, I am interested in dynamic analysis of organizational economics and industrial organization.

Here's a list of what's mostly keeping me busy these days. Some have a working paper available for download, for others please send me an email if you'd like a copy of a working paper. My CV is available in pdf and html

I do have a personal life. I have a wonderful wife and two boys and other interests. More on this is mentioned below.

Current Research Projects

• On-the-Task Learning and Moral Hazard

  Problem solving activities imply that solvers learn about the nature of the problem. Learning affects both the optimal action and the effectiveness of incentives. In a moral hazard setting, incorporating learning into the principal's problem changes the optimal mechanism and provides an important role for the dynamic elements of the mechanism agent multiplicity. We find that hierarchy and replacement play an important role in such settings as these allow dynamic updating of the contest rules by the principal.

• Fishing Out Productivity

  This paper applies the theory developed in the "On-the-Task Learning" (OTL) paper in a competitive context, using proprietary data from a market for software testing. Software testing is an important and interesting problem solving activity. Software industry studies typically assign testing activities at least a third of the developement cost. Moreover, the indirect costs of undetected errors are huge, and can destroy a product (as unnamed electronic voting machine makers learned). What makes things especially interesting is that the only way to know when to stop is if enough attempts to find bugs have failed. This gives rise to the exact dynamics and incentive issues identified in the OTL paper. I use the data, which spans about 1000 testers working on more than 100 projects, to find evidence of dynamic learning by the agents, estimate the main primitives and project the efficiency gains from using dynamic contest design.

• Who Pays For Switching Costs (with Paul Grieco)
  Switching costs refer to additional utility attained by consumers who purchase the same product as they did in the previous period relative to switching to another good. Conventional wisdom suggests that switching costs soften competition and increases prices and profits. Using an infinite horizon dynamic model that allows for consumer switching, we find that the effect of switching costs on equilibrium prices is more subtle: Whether switching costs raise or lower equilibrium prices depends on the magnitude of the switching cost as well as on the market structure. Furthermore, the change in price may be uninformative about the change in profits. We find that switching costs only provide firms' an incentive to raise prices if the market has a dominant player or if they are extremely high. On their own, moderate switching costs do not appear to be a compelling reason to regulate prices in an otherwise competitive industry. .
• Leader's Curse in the Airline Industry (with Sarit Markovich and Mauricio Varela)

  This paper studies the effect of the airline industry's operational time-line on multi-market competition and carrier network structure selection. Airline carriers typically commit to a rigid capacity of seats via the planned flights schedule long before market competition for selling these seats begins. While in regular markets such a two stage setting has no effect on competitive behavior, the airline industry has two important features that give rise to strategic interactions:

  First, while direct carriers' capacity decisions are on a route level, hub carriers capacity decisions are on a hub-spoke level, making hub carriers more flexible in the utilization of allocated capacity. This extra flexibility is a double-edged sword - while hub carriers are better able to adjust to market shocks, direct carriers enjoy a market leadership advantage, analogous to Stackelberg leadership. This effect is especially important when markets are asymmetric (e.g. of different sizes) as it allows the direct carriers to focus on the larger and more profitable routes.

  Second, the airline industry exhibits multi-market competition - a handful of carriers serve thousands of markets. Coupled with the timing of capacity choice, multi-market competition makes smaller firms more aggressive. Intuitively, a small carrier servicing only a handful of cities has no choice but to utilize his capacity in that small set of routes. If the small carrier places excessive capacity on his routes, a large hub carrier would use its flexibility and redirect his installed capacity to other, less aggressive routes. Small carriers allow themselves to be overly aggressive because they do not internalize the effect of the large carriers reaction on other markets.

  We cite empiric evidence from existing studies that support of our theoretic results. More specific empiric tests are in progress.
  

Life, not work

A picture of Miri (my wife) and Yuval (my younger son)

A picture of Noam (my older son)

Miri's web site - if you are in the chicago area and your kids need help developing their social skills, check her out

My most recent proud dad moment

I don't play bridge as often as I want to, but when I do, I am guyguy on bridgebase

I use linux (the latest ubuntu). If you have or need hints on using linux in Kellogg, feel free to email me.