" Credit, Bankruptcy, and Intermediary Market Structure " (with Andrea Buraschi)
We use a model of costly monitoring to study the determinants of
savings mobilization, capital allocation and entrepreneur bankruptcy
rates under different market structures of financial
intermediation. Borrower-entrepreneurs have access to the same
investment project but differ in the value of their collateralizable
assets. The main finding is that monopolistic intermediation
mobilizes less savings and induces higher entrepreneur bankruptcy rates
than competitive intermediation. These two types of monopoly
distortions are due to the monopoly power with lenders and with
borrowers respectively. Under both market structures, an increase
in available credits or a reduction in monitoring costs imply that more
collateral-constrained entrepreneurs obtain funds, but bankruptcy rates
are reduced only under competitive intermediation. Implications
to financial market liberalization are derived.
" Do Irrational Investors Destabilize? "
In a financial market where all investors have valuable private
information, full rationality requires that investors have unlimited
ability of figuring out the equilibrium model. Instead, I assume
that due to lack of knowledge or experience, some investors do not know
the equilibrium model and use
only their private information in forming their demand. By
investigating the investment behavior of these "boundedly
rational'' investors contrasting it with that of the rational ones, I
find that in a market where the two kinds of investors coexist, it is
the boundedly rational investors who contribute to price
stability. The welfare implication is that, although each
investor benefits from conditioning his asset demand on the information
carried by the equilibrium price, it can happen that all investors lose
by doing so because the equilibrium price becomes
Accepted Papers and Publications
in Village or Second in Rome " (with Ettore Damiano and Wing
Though individuals prefer to join groups with high quality peers, there are also advantages from being high up in the pecking order within the group. We show that sorting of agents in this environment results in an overlapping interval structure in the type space. Segregation and mixing coexist in a stable equilibrium. A greater degree of egalitarianism within organizations leads to greater segregation across organizations. Policies that are effective for lower-quality organizations to attract talent may be counterproductive for higher-quality organizations to retain talent. The degree and the pattern of segregation are shown to depend also on whether higher types are less concerned with relative ranking within the organization, on relative size of organizations, and on the extent of idiosyncratic preferences for other organizational attributes.
" (with William Chan and Pascal Courty)
accepted for publication, Economic
Matchmaking " (with Ettore Damiano)
We study how matchmakers use prices to sort heterogeneous
participants into competing matching markets, and how equilibrium
outcomes compare with monopoly in terms of prices, matching market
structure and sorting efficiency under the assumption of
complementarity in the match value function. The role of prices
to facilitate sorting is compromised by the need to survive price
competition. We show that price competition leads to a high
quality market that is insufficiently exclusive. As a result, the
duopolistic outcome can be less efficient in sorting than the monopoly
outcome in terms of total match value in spite of servicing more
Economic Theory 30, February 2007, pp. 243-263.This paper considers the problem of a monopoly matchmaker that uses a schedule of entrance fees to sort different types of agents on the two sides of a matching market into different markets, where agents randomly form pairwise matches. We make the standard assumption that the match value function exhibits complementarities, so that matching types at equal percentiles maximizes total match value. We provide necessary and sufficient conditions for the revenue-maximizing market structure to be efficient. These conditions require complementarities in the match value function to be sufficiently strong along the efficient matching path.
of Dynamic Sorting " (with Ettore Damiano
and Wing Suen)
Review of Economic Studies 72, October 2005, pp. 1057-1076
"Self-fulfilling Early Contracting Rush " (with Wing Suen)
International Economics Review 45, February 2004, pp. 301-324
In labor markets for entry-level professionals and in other related markets, job applicants' concern for availability of positions and employers' concern for availability of qualified applicants can drive some participants on the two sides to sign early job contracts. The rush to early contracting can be self-fulfilling, as both its effect on expectations about demand-supply balance in the subsequent spot market and the effect on it from changes in the demand-supply balance can be non-monotone. Matching markets with more risk-averse participants, a greater uncertainty regarding relative supply of positions, or a more polarized distribution of applicant qualities can be more vulnerable to self-fulfilling early contracting rushes. Employers can have a collective interest in preventing early offers to a few promising applicants from starting the rushes.
"Delegating Decisions to Experts " (with Wing Suen)
Journal of Political Economy 112, Part 2, February 2004, pp. S311-335
A model of delegation and expertise is presented, with self-interested and privately-informed decisionmakers and experts. Conflict of interests exists both between the decisionmakers and the experts, and between experts within a team. A balanced team of experts with extreme and opposite biases is shown to be acceptable to decisionmakers with a wide range of preferences, but the value of expertise from such a team is low. We also find that a decisionmaker wants to appoint experts who are less partisan than himself, in order to facilitate the pooling of information and thereby increase the quality of decisions by the expert team. Selective delegation, either by controlling the decisionmaking process or by conditioning the delegation decision on his own information, is another effective way for the decisionmaker to safeguard own interests while making use of expert information.
"Conflicts and Common Interests in Committees " (with Sherwin Rosen
and Wing Suen)
American Economic Review 91(5), December 2001, pp. 1478-1497
Committees improve decisions by pooling independent information of members, but promote manipulation, obfuscation, and exaggeration of private evidence when members have conflicting preferences. We study how self-interest mediates these conflicting forces. When members' preferences differ, no person ever submits a report that allows perfect inference of his private information. Instead, equilibrium strategies are many-to-one mappings that transform continuous data into ordered ranks: voting procedures are the equilibrium methods of achieving a consensus in committees. Voting necessarily coarsens the transmission of information among members, but is necessary to control conflicts of interest. The degree of coarseness of the equilibrium voting procedure is determined by the extent of conflicting preferences. Though self-interests necessarily reduce the efficient use of information in committees, real information sharing occurs nonetheless. Committees make better decisions for each member than would any individual on the basis of own information. Committees are viable, though imperfect ways of making decisions when information is dispersed among members.
"A Theory of Conservatism "
Journal of Political Economy 109, June 2001, pp. 617-636
A free-rider problem arises in a group when a public decision between two alternatives must be made based on privately collected evidence, leading to insufficient effort in gathering evidence and ex ante welfare loss for the group. To alleviate the free-rider problem, the group can commit to a "conservative'' rule whereby the decision is made against the alternative favored by the group's preference or prior when evidence supports the alternative but is not preponderant. For example, if a recruitment committee is biased toward making an offer to a job candidate, either because the committee is more concerned with wrongful rejection than with wrongful hiring or because it has high prior that the candidate is qualified, then a conservative rule with a hiring standard higher than what is ex post optimal given the evidence can induce committee members to examine the candidate's record more carefully and improve the quality of the hiring decision. This result that a conservative decision rule induces greater individual effort in collecting evidence explains why sometimes groups appear overly cautious toward favored alternatives. It is further extended to heterogeneous groups and private evidence.
" Sequential Screening " (with Pascal Courty)
Review of Economic Studies 67, October 2000, pp. 697-717
We present a model of price discrimination where a monopolist faces consumers with unitary demands who learn their valuations over time. Consumers are privately informed at the time of contracting about valuation distribution, but they privately learn their actual valuations after contracting. The monopolist sequentially screens consumers with a menu of contracts: they first choose a contract and then choose the level of consumption according to the terms specified in the contract. A deterministic sequential mechanism is a menu of refund contracts, each consisting of an advance payment and a refund amount in case of no consumption, but general sequential mechanisms may also involve randomization. We characterize the optimal sequential mechanism both when some consumers are more eager than others in the sense of first-order stochastic dominance, and when some face greater valuation uncertainty than others in the sense of mean-preserving-spread. We show that it can be optimal to subsidize consumers with smaller valuation uncertainty through low refund in order to reduce the rent to those with greater uncertainty, who purchase more ``flexible'' contracts with greater refund. The size of distortion depends on how informative consumers' initial private knowledge is about their valuations from the monopolist's point of view, but not on the size of valuation uncertainty if it affects all consumers.
"Risk-sharing, Sorting, and Early Contracting " (with Wing Suen)
Journal of Political Economy 108(5), October 2000 , pp. 1058-1091
In an assignment market with uncertainty regarding productive ability of participants, early contracting can occur before the uncertainty is resolved as participants balance the trade-off between insurance provided by early bilateral contracts and the gains from more efficient sorting by remaining in the market. We apply competitive equilibrium analysis to determine the patterns of early contracting, the terms of early contracts, and the distribution of benefits of early contracting. Early contracts can be signed between more promising agents (who are more likely to have higher abilities) because the gains from insurance outweigh the loss of inefficient sorting, while less promising agents wait because the loss outweighs the gains. We establish conditions under which other patterns of early contracting are possible. We show that more promising agents on one side of the market (job applicants) can be driven to sign early contracts with the less promising agents of the other side (firms), because applicants are more risk-averse than firms, have greater uncertainty regarding their qualities, or face a tighter market. Early contracting in this case unambiguously hurts the more promising firms which choose to wait.
"Timing of Seasonal Sales " (with Pascal Courty)
Journal of Business 72(4), October 1999, pp.545-572
We present a model of timing of seasonal sales where stores choose several designs at the beginning of the season without knowing which one, if any, will be fashionable. Fashionable designs have a chance to fetch high prices in fashion markets while non-fashionable ones must be sold in a discount market. In the beginning of the season, stores charge high prices in the hope of capturing their fashion market. As the end of the season approaches with goods still on the shelves, stores adjust downward their expectations that they are carrying a fashionable design, and may have sales to capture the discount market. Having a greater number of designs induces a store to put one of them on sales earlier to test the market. Moreover, price competition in the discount market induces stores to start sales earlier because of a greater perceived first-mover advantage in capturing the discount market. More competition, perhaps due to decreases in the cost of product innovation, makes sales occur even earlier. These results are consistent with the observation that the trend toward earlier sales since mid-1970's coincides with increasing product varieties in fashion good markets and increasing store competition.
" Hierarchies and Information-Processing Organizations "
Review of Economic Design 4(2),July 1999, pp.101-126
This paper analyzes organizational structures that minimize information processing costs for a specific organizational task. Organizations consist of agents of limited ability connected in a network. These agents collect and process information, and make decisions. Organizations implement strategies---mappings from environmental circumstances to decisions. The strategies are exogenously given from a class of "pie"' problems to be defined in this paper. The notion of efficiency is lexicographic: the primary criterion is minimizing the number of agents, and the secondary criterion is minimizing the number of connections between the agents. In this modeling framework, efficient organizations are not hierarchical for a large number of problems. Hierarchies often fail to exploit fully the information processing capabilities of the agents because in a hierarchy, subordinates have a single superior.
"How Complex Are Networks Playing Repeated Games? " (with In-Koo
Economic Theory 13(1), January 1999, pp.93-123
This paper examines implications of complexity cost in implementing
repeated game strategies through networks with finitely
many classifiers. A network consists of individual classifiers
that summarize history of repeated play
according to a weighted sum of empirical frequency of the outcomes of
the stage game, and a decision unit that chooses an action in each
period based on the summaries of the classifiers. Each player
maximizes his long run average payoff, while minimizing the complexity
cost of implementing his strategy through a network, measured by
its number of classifiers. We examine locally stable equilibria
where the selected networks are robust against small
perturbations. In any locally stable equilibrium, no player uses
a network with more than a single classifier. Moreover, the set
of locally stable equilibrium payoff vectors lies on two line segments
in the payoff space of the stage game.
" Unraveling in Matching Markets " (with Sherwin Rosen)
American Economic Review 88(3), June 1998, pp.371-387
We use a two-period matching model with initial uncertainty about productivities of participants to analyze incentives for early contracting or unraveling. Unraveling provides insurance in the absence of complete markets, but causes inefficient assignments. Unraveling is more likely, the smaller the applicant pool, the smaller the proportion of more promising applicants, and the greater the heterogeneity in the pool. Banning early contracts hurts firms and benefits less promising applicants; the effects on more promising applicants depend on how the gains from early contracts are shared. Ex post buyouts eliminate inefficient assignments, and more promising applicants always unravel.