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Acquiring Information Through Peers

American Economic Review, July 2020

joint with Bernard Herskovic

Link to Paper (SSRN)

We study how networks of informational flows are formed. We develop an endogenous network formation model, in which agents form connections to acquire information. Our model features complementarity in actions as agents care not only about accuracy of their decision making but also about the actions of other agents. In equilibrium, the information structure is a hierarchical network, and, under weakly convex cost of forming links, the equilibrium network is core-periphery. Even if agents are ex-ante identical, there is ex-post heterogeneity in payoffs and actions. Finally, we study how individual characteristics determine agents' roles in the network.

Repeated Delegation

Journal of Economic Theory, July 2020

joint with Elliot Lipnowski

Link to Paper (SSRN)

In an ongoing relationship of delegated decision making, a principal consults a biased agent to assess projects’ returns. In equilibrium, the principal allows future bad projects to reward fiscal restraint, but cannot commit to indefinite rewards. We characterize equilibrium payoffs (at fixed discounting), showing that Pareto optimal equilibria are implemented via a two-regime `Dynamic Capital Budget’. Rather than facing backloaded rewards—as in dynamic agency models with commitment power—the agent loses autonomy as time progresses.

A Road to Efficiency Through Communication and Commitment

Revise and Resubmit at AER

joint with Ala Avoyan

Link to Paper (SSRN)

We examine the efficiency gains of introducing a pre-play phase—allowing agents to communicate while incrementally committing to their words—in coordination environments. We consider a particular pre-play institution for which the efficient equilibrium is unique in the extended game, and we test the environment in the lab. We focus on weaklink games, a coordination game with multiple Pareto ranked equilibria, in which an inferior equilibrium is often observed in experimental settings. We first show that the institution intertwining communication and incremental commitment significantly increases subjects' payoffs, even when compared to rich pure communication protocols. Aligned with theoretical predictions, commitment changes the way players communicate—affecting what is a player says and, moreover, how others interpret it. Finally, we focus on the road to efficiency; we analyze agents’ dynamic behavior as they try to coordinate, and we show that this behavior is closely aligned with theoretical predictions. The results shed new light on how pre-play institutions can mitigate coordination failures and highlight communication and incremental commitment as key features.

Partnership with Persistence

Revise and Resubmit at ReStud

joint with  Tomasz Sadzik

Link to Paper (SSRN)

We study a continuous-time model of partnership, with persistence and imperfect state monitoring. Partners exert private efforts to shape the stock of fundamentals, which drives the pro ts of the partnership, and the profits are the only signal they observe. The near-optimal strongly symmetric equilibria are non-Markovian and are characterized by a novel differential equation that describes the supremum of equilibrium incentives for any level of relational capital. Imperfect monitoring of the fundamentals helps sustain incentives, due to deferred incentives, and increases the partnership's value (Sand in the wheels). Good profit outcomes rally the partners to further increase effort when relational capital is low, but lead them to coast and decrease effort when relational capital is high. Even partnerships with high fundamentals may unravel after a short spell of terrible signals (Beatles' break-up).

An agent decides whether to approve a project based on his information, some of which is verifiable in a court. An honest agent wants to implement projects that are likely to succeed; a dishonest agent wants to implement any project. If the project fails, the court examines the verifiable information and decides the punishment. The court seeks to deter ill-intentioned agents from implementing projects likely to fail while incentivizing the use of unverifiable information. We show how information of different kinds affects welfare. Improving the verifiable information can reduce welfare, while improving the unverifiable information always increases welfare.

Optimal Political Career Dynamics

joint with Avidit Acharya and Elliot Lipnowski

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We examine politicians’ career dynamics generated by political accountability, characterizing voter-optimal equilibrium play under repeated moral hazard. When moral hazard binds, equilibrium play is non-stationary: Re-election prospects improve with good performance and deteriorate with bad. First-term politicians are among the most electorally vulnerable and the hardest-working, and effort and electoral vulnerability both tend to decline with tenure. These dynamics enable a detailed analysis of limited voter commitment, voluntary retirement from politics, and adverse selection with politicians’ ability and effort being complementary. Our analysis highlights how a politician’s career is shaped by voters’ evolving “goodwill” toward her.

Goodwill in Communication

Revise and Resubmit at JET

joint with Elliot Lipnowski and Aditya Kuvalekar

Link to Paper (SSRN)

An expert advises a decision maker over time. With both the quality of advice and the extent to which it is followed remaining private, the players have limited information with which to discipline each other. Even so, communication in and of itself facilitates cooperation, the relationship evolving based on the expert’s advice. We show a formal equivalence between our setting and one of cheap talk with capped money burning. This enables an exact characterization (at fixed discounting) of the expert’s attainable payoffs. While an ongoing relationship often helps, our characterization implies that relational incentives alone can never restore commitment power.

Should college admissions favor low-income applicants?

Revise and Resubmit at The Economic Journal

joint with Bernard Herskovic

Link to Paper (SSRN)

Popular Press (Daily Bruin)

Popular Press (Anderson Review)

This paper investigates the implications of affirmative action in college admissions for welfare, aggregate output, educational investment decisions and intergenerational persistence of earnings. We construct an overlapping-generations model in which parents choose how much to invest in their child's education, thereby increasing both human capital and likelihood of college admission. Motivated by a recent policy implemented in Brazil, we calibrate the model to quantify affirmative action long-run effects. We find that affirmative action targeting the bottom quintile of the income distribution is a powerful policy to reduce intergenerational persistence of earnings and improve welfare and aggregate output.