©2018 by Erik Madsen.




With Doug Bernheim

American Economic Review, 107(2), 2017

Although economists have made substantial progress toward formulating theories of collusion in industrial cartels that account for a variety of fact patterns, important puzzles remain. Standard models of repeated interaction formalize the observation that cartels keep participants in line through the threat of punishment, but they fail to explain two important factual observations: first, apparently deliberate cheating actually occurs; second, it frequently goes unpunished even when it is detected. We propose a theory of equilibrium price cutting and business stealing in cartels to bridge this gap between theory and observation.

With Annie Liang

Many organizations, such as banks and insurers, determine  what services to offer based on a perceived quality of the recipient, e.g. their creditworthiness.  Increasingly, organizations have access to new data about consumers, such as categorizations into demographic and lifestyle segments.  When organizations learn about a consumer's quality from the behavior of other consumers in the same segment --- creating data linkages --- what are the consequences for each consumer's incentives to exert effort, e.g. to maintain a good credit rating? We study a multiple-agent career concerns model in which agents choose whether to interact with a principal and how much costly effort to exert. Data linkages create informational externalities across consumers, shaping participation rates and effort provision in equilibrium. We show that whether these are welfare-improving depends crucially on whether linkages are about quality (revealing correlations in underlying types) or about a shared circumstance (helping the principal to de-bias shared shocks to observed outcomes).

With Aaron Kolb

We study how an organization dynamically screens an agent of uncertain loyalty whom it suspects of committing damaging acts of undermining, for instance leaking sensitive information or sabotaging production.  The organization's screening tool is the agent's access to sensitive information, i.e. the stakes of the relationship, governing both productivity and the harm from undermining.  A disloyal agent strategically chooses when and how intensively to undermine, with undermining stochastically detected at a rate proportional to its intensity.  When the organization can commit, it optimally guides stakes by holding them constant for a time, then gradually escalating them, and finally jumping them to their maximal level.  This stakes path is also the unique equilibrium outcome when the organization cannot commit, and the disloyal agent's unique equilibrium undermining path exhibits variable, non-monotonic intensity.  In an information design microfoundation, the optimal stakes path is implementable via an inconclusive contradictory news process.

With Rishabh Kirpalani

Motivated by stylized facts in the market for entrepreneurial fundraising, we build a tractable two-firm model of investment timing with endogenous information acquisition.  In the unique symmetric equilibrium, both firms investigate the project simultaneously for a time but eventually abandon it if no firm invests.  In the remaining asymmetric equilibria, one lead firm actively investigates the project at all times, while the other firm follows the leader by free-riding on its effort, or delaying investment after acquiring positive information, or both.  Either the symmetric or leader-follower equilibrium may maximize firm welfare depending on model parameters, implying testable predictions about how investor behavior varies with market conditions. 

I analyze how a firm should elicit advice from an expert on terminating a project with a stochastic lifespan.  The firm cannot directly observe the project's lifespan, but imperfectly monitors its state by observing incremental output.  The expert directly observes the state of the project, but collects on-the-job benefits and so prefers to prolong operation as much as possible.  He possesses no capital and enjoys limited liability, preventing efficient trade even in case the expert has no initial private information.  The optimal long-term contract involves a stochastic project deadline and a completion bonus to the expert which declines as the deadline approaches.  The deadline is responsive to good and bad runs of output, and exhibits variable output sensitivity over the lifetime of the project, in particular becoming more sensitive the closer the project is to termination.  Elicitation of expert advice increases the ex post operational efficiency of the project, but asymmetrically - late terminations are completely resolved, while early terminations are mitigated but not entirely eliminated.  These features are robust to extensions in which expert has limited initial capital, can be replaced, or can have his on-the-job benefits dissipated by busywork.