- "Information Control in the Hold-up Problem", Sep 2017, with Anh Nguyen.
(Anh is on the job market this year. Her website is here.)
Abstract: We study optimal information control in the hold-up problem with binary investment. A signal structure, which is publicly determined before investment, generates signals about the investment. We characterize the set of investment probability and social welfare that can be achieved in equilibrium, and the signal structure that implements them. The optimal signal structure is generically unique and takes a simple form which eliminates ex-post inefficiency arising from trade breakdown. Contrary to results suggested in the existing literature, there is no tradeoff between creating ex-ante investment incentive and eliminating ex-post inefficiency.
- "The Extrinsic Motivation of Freedom at Work", Aug 2017.
Abstract: Under incomplete contracts, a worker faces a ratchet effect of innovating when closely monitored: if he uncovers a process innovation, the firm raises the future performance requirement; anticipating this, the worker never innovates. With reduced oversight, the worker accrues private information about his innovation, which generates information rent that feeds back as the worker’s ex-ante innovation incentive. The firm’s strategic ignorance is complemented with an incentive scheme that simultaneously induces effort from the worker and endogenously generates asymmetric information against the firm. The resulting mechanism provides a novel rationale to weak incentives and low-scale production at early stages of relationships.
- "Training Provision under Adverse Selection on Learning Ability", Oct 2017.
Abstract: This paper studies how asymmetric information on worker learning ability affects the firm's training decision and the production by both trained and untrained workers in the presence of moral hazard. As the firm improves productivity by training workers, it causes adverse selection due to asymmetric information on worker productivity after training. Under the optimal contracts, (i) production by untrained workers is efficient; while (ii) the improved productivity of a trained worker is under-exploited; and (iii) there is under-provision of training. A shift in worker distribution towards more high learning ability types can worsen inefficiency, with the firm possibly training less workers than before.
- "Opportunism in Principal-Agent Relationships with Subjective Evaluation", Feb 2017, with W. Bentley MacLeod. (Supplementary Appendix) (Older version: NBER Working Paper 22156).
Abstract: We show in principal-agent model with subjective evaluation that the order of information revelation in such contracts has sharp predictions regarding both contract form and its efficiency. We explore two large classes of contracts – authority contracts where compensation is set by the Principal, and sales contracts where payment is set by the Agent. Sales contracts provide a way to model Williamson’s (1975) notion of opportunism (self-interest seeking with guile), where guile is interpreted as the combined risk of the agent shirking and lying. The approach also provides a way to precisely model “good faith” in contract.