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, 2008, 29, 739-746
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.
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.
This paper analyzes the problem of designing securities backed by the proceeds of bargaining games. We consider a firm that raises capital for multiple projects. The proceeds of each project will be determined in later negotiations with a buyer of the output. Thus, a security backed by the proceeds of the sales affects the feasible payoffs in the bargaining game and thereby the outcomes. 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.
(with Daniel Garcia)(Revise and Resubmit to JET) [+] Abstract
This paper characterizes the optimal information structure in competitive insurance markets with adverse selection. A regulator assigns ratings to individuals according to their risk characteristics, insurers offer fixed insurance contracts to each rating group, and the market clears as in Akerlof (1970). The optimal rating system minimizes ex-ante risk subject to participation constraints. We prove that in any such market there exists a unique optimal system under which all individuals trade and the ratings match low risk types with high risk types negative assortatively. A simple algorithm yields the optimal system. We examine implications for government regulations of insurance markets.
Efficient Investment and Search in Matching Markets
(with Michael Richter)[+] Abstract
This paper studies a model of matching markets where agents make pre-match investments and must search for compatible partners. If matching is frictionless, there exists a competitive equilibrium with efficient investment and matches. However, the first-best outcome is not attainable in the presence of search costs. We characterize the steady states of a search and bargaining process under the assumptions of transferable utility and fixed per-period search costs. If the production function is supermodular, there exists a unique steady state in which the matches and investments are constrained efficient. If the production function is submodular, there are multiple steady states some of which are not constrained efficient. The tradeoff between investment costs ex-ante identical populations of men and women optimally adopt an asymmetric distribution of skills.
Dynamic Insurance Contracts Under Adverse Selection and Limited Commitment
(with Tomasz Sadzik)