We consider the impact of history on the survival of a monopolist selling single units in discret... more We consider the impact of history on the survival of a monopolist selling single units in discrete time periods, whose quality is learned slowly. If the seller learns her own quality at the same rate as customers, a sufficiently bad run of luck could induce her to stop selling. When she knows her quality, a good seller never stops selling.
This paper explores how the structure of asymmetric information impacts on economic outcomes in A... more This paper explores how the structure of asymmetric information impacts on economic outcomes in Akerlof's (Q J Econ 84(3):488-500, 1970) Lemons model applied to the labour market and extended to admit a matching component between worker and firm. We characterize the nature of equilibrium and define measures of adverse selection and efficiency. We then characterize the joint distribution of outcomes-adverse selection, probability of trade, efficiency, profits, and wage-for the class of Gaussian basic games and information, and perform comparative statics with respect to a parsimonious parameterization of the information structure. We use this framework to revisit the classic issue, first addressed by Roy (Oxford Econ Pap 3(2):135-146, 1951), of selection into different sectors. We identify conditions under which an effect reversal-adverse selection at any realisation of public information but, overall, positive selection into the outside sector-can and cannot arise, and note the implications for empirical work. We also explore the divisions of expected total surplus between worker and firm that can be achieved as information varies. We show that, if the distribution of worker types is non-singular, any point in the set of possible surplus divisions can be achieved as a limit of a PBE for some information structure with asymmetric information. Finally, re-interpreting the model in an insurance context, where the matching component becomes consumer risk aversion, we use our framework to highlight sources of advantageous selection.
By introducing a shareholder with many votes (a blockholder) to a standard model of voting, we un... more By introducing a shareholder with many votes (a blockholder) to a standard model of voting, we uncover several striking results. First, if a blockholder is unbiased, she may not vote with all of her shares. This is efficient, as it prevents her vote from drowning out the information provided by other votes. Second, if this blockholder can announce her vote before the vote takes place, other shareholders may ignore their information and vote with the blockholder to support her superior information. Third, if the blockholder is biased, some shareholders will try to counter the blockholder's vote. The results are robust to allowing for information acquisition and trade. This suggests that regulations discouraging or prohibiting abstention, strategic behavior, and/or coordination may reduce efficiency.
Seller reputation is an important asset because buyers often chooses sellers on the basis of thei... more Seller reputation is an important asset because buyers often chooses sellers on the basis of their reputation. This is particularly true when the quality of the good or service transacted are hard to measure and the parties cannot perfectly contract on the outcome of the transaction. As a consequence, the seller will be mindful of building and maintaining a good reputation through the information that buyers have about the seller, including previous transactions and the reports of other buyers. We introduce a unifying framework that embeds a number of different approaches to seller reputation, incorporating both hidden information and hidden action. We use this framework to stress that the way in which consumers learn affects both behavior and outcomes. In particular, the extent to which information is generated and socially aggregated determines the efficiency of markets. After reviewing these theoretical building blocks we discuss several applications and empirical concerns. We highlight that the environment in which a transaction is embedded can help determine whether the transaction will occur and how parties will behave. Institutions, ranging from the design of online markets to norms in a community, can be understood as ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire to affect consumer beliefs regarding the firm's incentives can help us understand strategic firm decisions that seem unrelated to the particular transactions they wish to promote. We conclude by considering slightly different models of reputation that lie beyond the scope our framework, briefly reviewing the somewhat sparse empirical literature and highlighting and suggesting future directions for research.
Following the opening chapter, which surveys existing literature on the issue of the interaction ... more Following the opening chapter, which surveys existing literature on the issue of the interaction between individual and group reputation, the remaining chapters each address a simple question to better understand how reputation affects outcomes and incentives. Specifically: Even though good and bad luck might affect short term reputations, do agents end up with the reputations that they deserve, that is one that reflects their genuine underlying ability. The central result of Chapter 2 is that, if the agent knows her own ability (though customers can only make inferences by observing history) then eventually the truth will out. How can an agent, who has proven her ability, commit to working hard. Once an agent has established a reputation then it is a tautology to say that she has no reputational concern. However, if effort is efficient she may want to commit to exerting effort and get adequately rewarded. Chapter 3 shows that one way that she may be able to do this is by hiring and...
Abstract: We consider the impact of recruitment and training policies for the incentives of agent... more Abstract: We consider the impact of recruitment and training policies for the incentives of agents with career concerns. Training can be targeted, that is it has (or is chosen to have) more of an impact on particular types of agents and recruitment techniques can focus on ...
Most goods and services vary in numerous dimensions. Customers choose to acquire information to a... more Most goods and services vary in numerous dimensions. Customers choose to acquire information to assess some characteristics and not others. Their choices a¤ect …rms'incentives to invest in quality and so lead to indirect externalities in consumers'choices. We illustrate these ideas by characterizing a model in which a monopolist invests in the quality of a product with two characteristics, and consumers are heterogeneous ex-ante. Indirect externalities in information gathering arise because consumers do not consider the e¤ects on the …rm's investment incentives when choosing which information to acquire. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers'information gathering and thereby the …rm's investment, can paradoxically reduce consumer surplus, pro…ts, and welfare.
ABSTRACT We present a model in which an agent takes actions to affect her reputation with two aud... more ABSTRACT We present a model in which an agent takes actions to affect her reputation with two audiences with diverse preferences. This contrasts with standard reputation models that consider a homogeneous audience. A new aspect that arises is that different audiences may observe outcomes commonly or separately. We show that, if all audiences commonly observe outcomes, reputation concerns are necessarily efficient—the agent's per-period payoff in the long run is higher than in one-shot play. However, when audiences separately observe different outcomes, the result is the opposite. Therefore, the agent would prefer to deal with audiences commonly. If this is not possible, the second-best solution may be to forgo reputation with one audience and focus entirely on the other.
ABSTRACT We use new data from a rental brokers' multiple listings service to examine the ... more ABSTRACT We use new data from a rental brokers' multiple listings service to examine the contractual agreements between landlords and brokers. The data display two sources of variation in the way in which agents are compensated: 1) 69 percent of listings involve exclusive relationships between landlords and agents (the other 31 percent are non-exclusive); and 2) in 23 percent of listings, landlords commit to pay the agent's fee (in the other 77 percent, the agent collects the fee from the tenant). We show that contracts vary according to apartment characteristics and market conditions. Specifically, landlords are more likely to sign exclusive agreements with agents for more-atypical apartments and are more likely to pay brokers' fees when apartments are in rent-stabilized buildings and when local vacancy rates are higher.
An agent, who cares about signaling his ability, chooses among di¤erent projects that generate ob... more An agent, who cares about signaling his ability, chooses among di¤erent projects that generate observable outcomes. The agent's information about which project delivers a good outcome depends on both his ability and his e¤ort. This paper examines how the agent's incentives for e¤ort change depending on whether or not the agent's project choice is observed. If this choice is publicly observed, the agent's project choice is distorted towards particular types of projects. When the outcomes of these advantaged projects are particularly sensitive to the agent's information, such transparency boosts the agent's information-gathering incentives. However, when public observation of project choice leads the agent to choose information-insensitive projects, then such transparency dampens incentives. This provides a more nuanced view of the implications of action transparency in the literature on career concerns for experts.
Employees di¤er both in terms of general human capital and …rm-speci…c human capital (or match wi... more Employees di¤er both in terms of general human capital and …rm-speci…c human capital (or match with a particular …rm). Current employers typically have access to more information about their employees than rival employers. This information asymmetry a¤ects the distribution of wages, turnover rates, pro…ts, and the extent of allocative ine¢ ciency in the labour market. We begin by exploring the implications of di¤erent information structures and highlight that information a¤ects both the extent and distribution of adverse selection. We then suppose that …rms can a¤ect the information that they or their rivals observe, thereby endogenizing the extent and nature of asymmetric information between current and rival employers. In particular, we highlight that di¤erent information structures that lead to similar adverse selection can di¤er in their allocative e¢ ciency. Using this observation, we detail how optimal information management policies vary across …rms with di¤erent human capital management priorities, and how these decisions a¤ect aggregate labour market outcomes.
We consider the impact of recruitment and training policies on the incentives of agents with care... more We consider the impact of recruitment and training policies on the incentives of agents with career concerns. Training can be targeted-it can be chosen to have more of an impact on particular types of agents. Similarly, recruitment techniques can focus on …nding superstars or weeding out poor performers.
An upstream manufacturer can use minimum retail price maintenance (RPM) to exclude potential comp... more An upstream manufacturer can use minimum retail price maintenance (RPM) to exclude potential competitors. RPM lets the incumbent manufacturer transfer profits to retailers. If entry is accommodated, upstream competition leads to fierce down-stream competition and the breakdown of RPM. Hence, via RPM, retailers internalize the effect of accommodating entry on the incumbent's profits. Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred. We investigate when an incumbent would prefer to exclude, rather than collude with, the entrant and the effect of a retailer cartel. We also consider the effect of imperfect competition. Empirical and policy implications are discussed.
ABSTRACT Resale price maintenance (RPM), slotting fees, loyalty rebates and otherrelated vertical... more ABSTRACT Resale price maintenance (RPM), slotting fees, loyalty rebates and otherrelated vertical practices can allow an incumbent manufacturer totransfer profits to retailers. If these retailers were to accommodateentry, upstream competition could lead to lower industry profits and thebreakdown of these profit transfers. Thus, in equilibrium, retailers caninternalize the effect of accommodating entry on the incumbent’sprofits. Consequently, if entry requires downstream accommodation, entrycan be deterred. We discuss policy implications of this aspect ofvertical contracting practices.
We examine how the structure of terror networks varies with legal limits on interrogation and the... more 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. and [email protected]. 1 A similar debate took place, for example, at the beginning of the 1900s, during the engagement of the U.S. against the Spanish colony in the Philippines. The media reported cruelties against Filipino prisoners to gather information on the counter-insurgency (see "The Water Cure" by P. Kramer, The New Yorker, 2/25/2008).
We consider borrowers with the opportunity to raise funds from a competitive banking sector that ... more We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, and from an alternative hidden lender. The presence of the hidden lender restricts the contracts that can be obtained from the banking sector. In equilibrium some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously. We further show that as the cost of borrowing from the hidden lender increases, total welfare increases. We generalize the model to allow for a partially hidden lender and obtain qualitatively similar results.
We consider the impact of history on the survival of a monopolist selling single units in discret... more We consider the impact of history on the survival of a monopolist selling single units in discrete time periods, whose quality is learned slowly. If the seller learns her own quality at the same rate as customers, a sufficiently bad run of luck could induce her to stop selling. When she knows her quality, a good seller never stops selling.
This paper explores how the structure of asymmetric information impacts on economic outcomes in A... more This paper explores how the structure of asymmetric information impacts on economic outcomes in Akerlof's (Q J Econ 84(3):488-500, 1970) Lemons model applied to the labour market and extended to admit a matching component between worker and firm. We characterize the nature of equilibrium and define measures of adverse selection and efficiency. We then characterize the joint distribution of outcomes-adverse selection, probability of trade, efficiency, profits, and wage-for the class of Gaussian basic games and information, and perform comparative statics with respect to a parsimonious parameterization of the information structure. We use this framework to revisit the classic issue, first addressed by Roy (Oxford Econ Pap 3(2):135-146, 1951), of selection into different sectors. We identify conditions under which an effect reversal-adverse selection at any realisation of public information but, overall, positive selection into the outside sector-can and cannot arise, and note the implications for empirical work. We also explore the divisions of expected total surplus between worker and firm that can be achieved as information varies. We show that, if the distribution of worker types is non-singular, any point in the set of possible surplus divisions can be achieved as a limit of a PBE for some information structure with asymmetric information. Finally, re-interpreting the model in an insurance context, where the matching component becomes consumer risk aversion, we use our framework to highlight sources of advantageous selection.
By introducing a shareholder with many votes (a blockholder) to a standard model of voting, we un... more By introducing a shareholder with many votes (a blockholder) to a standard model of voting, we uncover several striking results. First, if a blockholder is unbiased, she may not vote with all of her shares. This is efficient, as it prevents her vote from drowning out the information provided by other votes. Second, if this blockholder can announce her vote before the vote takes place, other shareholders may ignore their information and vote with the blockholder to support her superior information. Third, if the blockholder is biased, some shareholders will try to counter the blockholder's vote. The results are robust to allowing for information acquisition and trade. This suggests that regulations discouraging or prohibiting abstention, strategic behavior, and/or coordination may reduce efficiency.
Seller reputation is an important asset because buyers often chooses sellers on the basis of thei... more Seller reputation is an important asset because buyers often chooses sellers on the basis of their reputation. This is particularly true when the quality of the good or service transacted are hard to measure and the parties cannot perfectly contract on the outcome of the transaction. As a consequence, the seller will be mindful of building and maintaining a good reputation through the information that buyers have about the seller, including previous transactions and the reports of other buyers. We introduce a unifying framework that embeds a number of different approaches to seller reputation, incorporating both hidden information and hidden action. We use this framework to stress that the way in which consumers learn affects both behavior and outcomes. In particular, the extent to which information is generated and socially aggregated determines the efficiency of markets. After reviewing these theoretical building blocks we discuss several applications and empirical concerns. We highlight that the environment in which a transaction is embedded can help determine whether the transaction will occur and how parties will behave. Institutions, ranging from the design of online markets to norms in a community, can be understood as ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire to affect consumer beliefs regarding the firm's incentives can help us understand strategic firm decisions that seem unrelated to the particular transactions they wish to promote. We conclude by considering slightly different models of reputation that lie beyond the scope our framework, briefly reviewing the somewhat sparse empirical literature and highlighting and suggesting future directions for research.
Following the opening chapter, which surveys existing literature on the issue of the interaction ... more Following the opening chapter, which surveys existing literature on the issue of the interaction between individual and group reputation, the remaining chapters each address a simple question to better understand how reputation affects outcomes and incentives. Specifically: Even though good and bad luck might affect short term reputations, do agents end up with the reputations that they deserve, that is one that reflects their genuine underlying ability. The central result of Chapter 2 is that, if the agent knows her own ability (though customers can only make inferences by observing history) then eventually the truth will out. How can an agent, who has proven her ability, commit to working hard. Once an agent has established a reputation then it is a tautology to say that she has no reputational concern. However, if effort is efficient she may want to commit to exerting effort and get adequately rewarded. Chapter 3 shows that one way that she may be able to do this is by hiring and...
Abstract: We consider the impact of recruitment and training policies for the incentives of agent... more Abstract: We consider the impact of recruitment and training policies for the incentives of agents with career concerns. Training can be targeted, that is it has (or is chosen to have) more of an impact on particular types of agents and recruitment techniques can focus on ...
Most goods and services vary in numerous dimensions. Customers choose to acquire information to a... more Most goods and services vary in numerous dimensions. Customers choose to acquire information to assess some characteristics and not others. Their choices a¤ect …rms'incentives to invest in quality and so lead to indirect externalities in consumers'choices. We illustrate these ideas by characterizing a model in which a monopolist invests in the quality of a product with two characteristics, and consumers are heterogeneous ex-ante. Indirect externalities in information gathering arise because consumers do not consider the e¤ects on the …rm's investment incentives when choosing which information to acquire. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers'information gathering and thereby the …rm's investment, can paradoxically reduce consumer surplus, pro…ts, and welfare.
ABSTRACT We present a model in which an agent takes actions to affect her reputation with two aud... more ABSTRACT We present a model in which an agent takes actions to affect her reputation with two audiences with diverse preferences. This contrasts with standard reputation models that consider a homogeneous audience. A new aspect that arises is that different audiences may observe outcomes commonly or separately. We show that, if all audiences commonly observe outcomes, reputation concerns are necessarily efficient—the agent's per-period payoff in the long run is higher than in one-shot play. However, when audiences separately observe different outcomes, the result is the opposite. Therefore, the agent would prefer to deal with audiences commonly. If this is not possible, the second-best solution may be to forgo reputation with one audience and focus entirely on the other.
ABSTRACT We use new data from a rental brokers' multiple listings service to examine the ... more ABSTRACT We use new data from a rental brokers' multiple listings service to examine the contractual agreements between landlords and brokers. The data display two sources of variation in the way in which agents are compensated: 1) 69 percent of listings involve exclusive relationships between landlords and agents (the other 31 percent are non-exclusive); and 2) in 23 percent of listings, landlords commit to pay the agent's fee (in the other 77 percent, the agent collects the fee from the tenant). We show that contracts vary according to apartment characteristics and market conditions. Specifically, landlords are more likely to sign exclusive agreements with agents for more-atypical apartments and are more likely to pay brokers' fees when apartments are in rent-stabilized buildings and when local vacancy rates are higher.
An agent, who cares about signaling his ability, chooses among di¤erent projects that generate ob... more An agent, who cares about signaling his ability, chooses among di¤erent projects that generate observable outcomes. The agent's information about which project delivers a good outcome depends on both his ability and his e¤ort. This paper examines how the agent's incentives for e¤ort change depending on whether or not the agent's project choice is observed. If this choice is publicly observed, the agent's project choice is distorted towards particular types of projects. When the outcomes of these advantaged projects are particularly sensitive to the agent's information, such transparency boosts the agent's information-gathering incentives. However, when public observation of project choice leads the agent to choose information-insensitive projects, then such transparency dampens incentives. This provides a more nuanced view of the implications of action transparency in the literature on career concerns for experts.
Employees di¤er both in terms of general human capital and …rm-speci…c human capital (or match wi... more Employees di¤er both in terms of general human capital and …rm-speci…c human capital (or match with a particular …rm). Current employers typically have access to more information about their employees than rival employers. This information asymmetry a¤ects the distribution of wages, turnover rates, pro…ts, and the extent of allocative ine¢ ciency in the labour market. We begin by exploring the implications of di¤erent information structures and highlight that information a¤ects both the extent and distribution of adverse selection. We then suppose that …rms can a¤ect the information that they or their rivals observe, thereby endogenizing the extent and nature of asymmetric information between current and rival employers. In particular, we highlight that di¤erent information structures that lead to similar adverse selection can di¤er in their allocative e¢ ciency. Using this observation, we detail how optimal information management policies vary across …rms with di¤erent human capital management priorities, and how these decisions a¤ect aggregate labour market outcomes.
We consider the impact of recruitment and training policies on the incentives of agents with care... more We consider the impact of recruitment and training policies on the incentives of agents with career concerns. Training can be targeted-it can be chosen to have more of an impact on particular types of agents. Similarly, recruitment techniques can focus on …nding superstars or weeding out poor performers.
An upstream manufacturer can use minimum retail price maintenance (RPM) to exclude potential comp... more An upstream manufacturer can use minimum retail price maintenance (RPM) to exclude potential competitors. RPM lets the incumbent manufacturer transfer profits to retailers. If entry is accommodated, upstream competition leads to fierce down-stream competition and the breakdown of RPM. Hence, via RPM, retailers internalize the effect of accommodating entry on the incumbent's profits. Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred. We investigate when an incumbent would prefer to exclude, rather than collude with, the entrant and the effect of a retailer cartel. We also consider the effect of imperfect competition. Empirical and policy implications are discussed.
ABSTRACT Resale price maintenance (RPM), slotting fees, loyalty rebates and otherrelated vertical... more ABSTRACT Resale price maintenance (RPM), slotting fees, loyalty rebates and otherrelated vertical practices can allow an incumbent manufacturer totransfer profits to retailers. If these retailers were to accommodateentry, upstream competition could lead to lower industry profits and thebreakdown of these profit transfers. Thus, in equilibrium, retailers caninternalize the effect of accommodating entry on the incumbent’sprofits. Consequently, if entry requires downstream accommodation, entrycan be deterred. We discuss policy implications of this aspect ofvertical contracting practices.
We examine how the structure of terror networks varies with legal limits on interrogation and the... more 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. and [email protected]. 1 A similar debate took place, for example, at the beginning of the 1900s, during the engagement of the U.S. against the Spanish colony in the Philippines. The media reported cruelties against Filipino prisoners to gather information on the counter-insurgency (see "The Water Cure" by P. Kramer, The New Yorker, 2/25/2008).
We consider borrowers with the opportunity to raise funds from a competitive banking sector that ... more We consider borrowers with the opportunity to raise funds from a competitive banking sector that shares information, and from an alternative hidden lender. The presence of the hidden lender restricts the contracts that can be obtained from the banking sector. In equilibrium some borrowers obtain funds from both the banking sector and the inefficient hidden lender simultaneously. We further show that as the cost of borrowing from the hidden lender increases, total welfare increases. We generalize the model to allow for a partially hidden lender and obtain qualitatively similar results.
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Papers by H. Bar-isaac