Kellogg School of Management
Management & Strategy Department
Northwestern Economics Department
Management & Strategy Department
Kellogg School of Management
Leverone Hall, 6th Floor
2001 Sheridan Road
Evanston, IL 60208-2001
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."
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.
- “Managing Conflicts in Relational Contracts” joint with Niko Matouschek (December 2012) American Economic Review, Vol 103, No. 6, (Oct 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 managers ability
to manage conflicts but may also induce the worker to respond to a conflict by providing more
effort rather than less.
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.
This paper studies the optimal dynamic provision of incentives in employment relationships with rents for the worker. In a model of relational contracts with limited liability, we
show that the optimal relational contract generates definitive and joint implications on how
job security, the pay level, and the sensitivity of pay to performance change over time as the
employment relationship progresses. Our results also shed light on how turnover and pay
dynamics change as job and firm characteristics vary.
This paper shows that the efficiency of relational contracting can be increased by reducing the public information through a novel intertemporal-garbling process of signals. A distinctive and essential feature of our intertemporal-garbling process is that past outputs have enduring effects on future signals. This process reduces the principal’s maximal reneging temptation by linking together the principal’s non-reneging constraints both across states and over time.
This paper develops a model of wage distribution and wage dynamics based on assignment and Pareto learning. The model matches a large number of key facts about wage distribution and wage dynamics. The tractability of Pareto learning allows us to derive joint implications on the wage distribution and wage dynamics as assignment becomes more important. Our model also provides a natural framework for decomposing the earning variance into a permanent component and a transitory one, and it helps explain why the growing importance in assignment can lead to both higher wage inequality and higher wage instability.
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.
In an uncertain environment, 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 collaboration can be approximately sustained in a sufficiently
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.
A firm's organizational structure imposes constraints on its ability to use promotion-based incentive systems. The main contribution of this paper is to develop a framework for identifying these constraints and exploring their consequences. We show that firms manage workers' careers by putting in place personnel policies that optimally resemble an internal labor market. Firms may adopt forced-turnover policies in order to keep lines of advancement open. In addition, 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 implications that connect firm-level characteristics with workers' careers in ways that are consistent with a rich set of empirical findings. .
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.
In order to be incentivized to produce high quality products, the firm’s key decision maker must suffer following failure to maintain high quality. When the firm is run by a dominant controlling shareholder, the punishment on him imposes a negative externality on shareholders without control rights, as the firm’s reputation is damaged and its profit drops. We employ a dynamic model of experience-goods firm to show how ownership turnover can mitigate this negative externality. We identify equilibria in which consumers forgive the firm’s bad outcomes as soon as its control rights change hands. Buyers’ differential treatment of the existing and new controlling shareholders following poor outcomes gives rise to an equilibrium trade of ownership of firms with damaged reputations. Voluntary turnover of control rights enhances firm profit and shareholder value even though it does not make punishment on the existing controlling shareholder harsher and the new controlling shareholder is not better at running the company. Our analysis identifies an endogenous cost of corporate control and provides a novel explanation to the negative control premium puzzle. In a different governance structure with a fully delegated management, the possibility of collusion with managers gives rise to a negative externality of punishment on the firm owner. We solve for the optimal stationary relational contract and show that manager turnover improves the firm’s profit by making collusion difficult to sustain.
We develop a model of turnover and wage dynamics. The main ingredients of the model are insurance, match-specific productivity, and long-term contracting. The model predicts that wages are downward rigid within firms and termination occurs. 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.
Work in Progress
- “Implementing Change in Organizations” joint with Niko Matouschek, Mike Powell, and Xi Weng
- “A Theory of Player Turnover in Games” joint with Yuk-Fai Fong
- “Going for it: The Adoption of Risky Strategies in Tournament” joint with Jen Brown