Mar 14, 2013 Filed in:
PublicationsWith Joel Watson
Forthcoming in Econometrica.
Abstract: This paper proposes a new approach to equilibrium selection in repeated games with transfers, supposing that in each period the players bargain over how to play. Although the bargaining phase is cheap talk (following a generalized alternating-offer protocol), sharp predictions arise from three axioms. Two axioms allow the players to meaningfully discuss whether to deviate from their plan; the third embodies a “theory of disagreement”—that play under disagreement should not vary with the manner in which bargaining broke down. Equilibria satisfying these axioms exist for all discount factors and are simple to construct; all equilibria generate the same welfare. Optimal play under agreement generally requires suboptimal play under disagreement. Whether patient players attain efficiency depends on both the stage game and the bargaining protocol. The theory extends naturally to games with imperfect public monitoring and heterogeneous discount factors, and yields new insights into classic relational contracting questions.
Working paper 3/6/2013
Tags: Repeated games, Bargaining, Negotiation, Renegotiation, Relational contracts, Principal-Agent, Cooperation
Feb 06, 2013 Filed in:
NewsI am leaving UCSD to join the
Economics Department at the
University of Michigan, effective July 1, 2013. I will miss my San Diego colleagues very much, but I’m excited to work with the faculty and students at Michigan.
Tags: University of Michigan
Jan 25, 2013 Filed in:
Working papersWith S. Nageeb Ali
Abstract: Which social norms and networks maximize cooperation in bilateral relationships? We study a network of players in which each link is a repeated bilateral partnership with two-sided moral hazard. The obstacle to community enforcement is that each player observes the behavior of her partners in their partnerships with her, but not how they behave in other partnerships. We introduce a new metric for the rate at which information diffuses in a network, which we call viscosity, and show that it provides an operational measure for how conducive a network is to cooperation. We prove that clique networks have the lowest viscosity and that the optimal equilibrium of the clique generates more cooperation and higher average utility than any other equilibrium of any other network. This result offers a strategic foundation for the perspective that tightly knit groups foster the most cooperation. We apply this framework to analyze favor exchange arrangements, decentralized trade in networked markets, and social collateral.
Working paper 10/31/2012
Tags: Repeated games, Social Networks, Community enforcement, Cooperation, Contagion, Cliques
Jul 10, 2012 Filed in:
NewsFor the 2012–2013 school year, I am visiting
Microsoft Research New England. I’m looking forward to lots of productive interactions with the permanent researchers, postdocs, and other visitors!
Tags: Microsoft
Apr 01, 2012 Filed in:
PublicationsPublished in The Review of Economic Studies, 79(2):778–811, April 2012.
Abstract: The game-theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars, without resorting to either impatience, symmetry restrictions, inability to communicate, or failure to optimize. This paper introduces a new explanation that relies on none of these assumptions: if the cartel's member firms have private information about their costs, price wars can be optimal in the face of complexity. Specifically, equilibria that are robust to payoff-irrelevant disruptions of the information environment generically cannot attain or approximate efficiency. An optimal robust equilibrium must allocate market shares inefficiently, and may call for price wars under certain conditions. For a two-firm cartel, cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium. That optimal equilibria are inefficient generically applies not only to collusion games, but also to the entire separable payoff environment (Chung & Ely 2006)—a class that includes most typical economic models.Free-access link to published version
Tags: Collusion, Price wars, Repeated games, Private information, Mechanism design, Ex post incentive compatibility, Folk theorem
Jan 16, 2012 Filed in:
Working papersWith Kareen Rozen
Abstract: We study optimal contracting in teams with peer monitoring and moral hazard, featuring stylized aspects of production environments with complex tasks. Agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and because it is difficult to write individual performance into formal contracts, incentives are provided informally, using wasteful sanctions like guilt and shame, or slowed promotion.
These features give rise to optimal contracts with “empty promises” and endogenous supervision structures. Agents optimally make more promises than they intend to keep, leading to the concentration of supervisory responsibility in the hands of one or two agents.
Working paper 1/16/2012
Tags: Contracts, Moral hazard, Mechanism design, Peer monitoring, Partnership, Teams, Principal-Agent, Bounded memory, Cooperation
Sep 11, 2011 Filed in:
Working papersWith Heidi Gjertsen, Theodore Groves, Eduard Niesten, Dale Squires, and Joel Watson
Abstract: We model conservation agreements using contractual equilibrium, a concept introduced by Miller and Watson (2010) to model dynamic relationships with renegotiation. The setting takes the form of a repeated principal-agent problem, where the principal must pay to observe a noisy signal of the agent's effort. Lacking a strong external enforcement system, the parties rely on self-enforcement for their relational contract. We characterize equilibrium play (including how punishments and rewards are structured) and we show how the parties' relative bargaining powers affect their ability to sustain cooperation over time. We argue that the model captures important features of real conservation agreements and reveals the ingredients required for successful agreements.
Working paper 9/23/2010 (stay tuned for an updated version in fall 2012)
Tags: Repeated games, Community enforcement, Conservation Agreements, Monitoring, Bargaining, Negotiation, Renegotiation, Principal-Agent, Cooperation, Forest Protection, Cambodia, Coral Reefs, Fiji, Sea Turtles, Solomon Islands, Grey Whales, Baja California
Jul 29, 2011 Filed in:
NewsNageeb Ali and I have been awarded a three-year grant from the National Science Foundation Economics Program, entitled “Enforcing Cooperation in Networked Societies.” Stay tuned for our first working paper soon (Update: now available), and lots of great projects to follow after that.
Abstract excerpt: The foundation of economic activity and growth is in the ability of individuals to trust and trade with each other over time. Throughout human history, much of economic activity occurs in realms where formal legal institutions are unwilling or unsuited to enforce cooperative behavior. A growing literature on informal enforcement suggests that the networked pattern of social relationships plays a key role in supporting cooperation: as information about past behavior diffuses through the network, an individual who deviates in a partnership is punished not only by her partner but also by those who come to learn about it. Our research program studies how communities enforce cooperation through their social networks. Tags: Social Networks, Cooperation, Community enforcement
