Microeconomic Theory, Contract Theory, Financial Economics, Behavioral Economics
Accepted and Published Papers:
The selectivity effect of past experience on purchasing decisions: Implications for the WTA-WTP disparityJournal of Economic Psychology 29.5 (2008): 739-746 [+] Abstract
When consumers are not fully cognizant of the value of a good, they use their experience to estimate its value. Their past experience is selective if it only contains transactions that were carried out but not potential transactions that were not implemented. Failing to account for this selectivity may result in biased estimates of the post-purchase value. This paper presents a bounded rationality model of this process and investigates consequences vis-a-vis the abnormal disparity between willingness to pay (WTP) and willingness to accept (WTA). Implications for experimental findings concerning the dependence of the WTA to WTP ratio on a good's characteristics and the negative correlation between market experience and the endowment effect are discussed.
A Bargaining-Based Model of Security DesignPaper
This paper analyzes the problem of designing securities backed by the proceeds of bargaining games. Consider a firm that seeks to finance multiple projects. The projects' outputs will be sold to buyers at prices determined in later negotiations. Therefore, a security backed by the proceeds of the sales determines the feasible bargaining payoffs. We characterize the securities that achieve the firm's maximal equilibrium payoff in bilateral and multilateral negotiations. In a large class of securities, the optimal contract is remarkably simple: the firm finances each project with debt separately. This result rationalizes the use of deal-by-deal contracts in various markets.
Aspiration Based Choice
(resubmitted to JET) Paper [+] Abstract
Numerous studies and experiments suggest that aspirations for desired but perhaps unavailable alternatives influence decisions. A common finding is that an unavailable aspiration steers agents to choose similar available alternatives. We propose and axiomatically characterize a choice theory consistent with this aspirational effect. Similarity is modeled using a subjective metric derived from choice data. This model offers novel implications for (1) the effect of past consumption on current decisions, (2) social influence and conformity within a network, and (3) the distribution of welfare when firms compete for aspirational agents.
Information Design in Insurance Markets: Selling Peaches in a Market for Lemons
Paper [+] Abstract
This paper characterizes the optimal information structure in insurance markets in the presence of adverse selection. The optimal information structure minimizes ex-post risk subject to a participation constraint for insurees and a break-even constraint from insurers. In the unique optimal information structure, trade occurs with probability one and different risk-types are pooled together in the same signal. Surprisingly, these signals are not monotone so that low types are pooled with high types, while intermediate types are bundled together. We provide a simple algorithm that delivers the optimal information structure and derive comparative statics. We explore some applications and generalizations.
Work in Progress:
Dynamic Insurance Contracts With One Sided Commitment
(with Tomasz Sadzik)
Social Norms for Gender Specialization
(with Michael Richter)