Knowledge that Transforms

A firm considers hiring an agent who may be competent for a potential project or not. The agent can prove her competence but faces a holdup problem. We propose a model of persuasion and show how gradualism helps mitigate the holdup problem. We show when it is optimal to give away part of the information at the beginning of the bargaining and sell the remainder in dribs and drabs. The agent can appropriate only part of the value of information. Introducing a third party allows her to extract the maximum surplus.

Relying on diversity measures computed at the apartment block level under conditions of exogenous allocation of public housing in France, this paper identifies the effects of ethnic diversity on social relationships and housing quality. Housing Survey data reveal that diversity induces social anomie. Through the channel of anomie, diversity accounts for the inability of residents to sanction others for vandalism and to act collectively to demand proper building maintenance. However, anomie also lowers opportunities for violent confrontations, which are not related to diversity.

We analyze a bargaining situation in which preferences evolve over time and the previous agreement becomes the next status quo. The endogeneity of the status quo exacerbates the players’ conflict of interest: Players disagree more often than under exogenous status quo. This leads to inefficiencies and status quo inertia. Under certain conditions, the negotiations can come to a complete gridlock: Players never reach an agreement. Gridlock can occur between players with arbitrarily similar preferences, provided they are sufficiently patient. In legislative settings, our model predicts polarization and explains why legislators may fail to react promptly to economic shocks.

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.

Referred workers are more likely than nonreferred workers to be hired, all else equal. In three field experiments in an online labor market, we examine why. We find that referrals contain positive information about worker performance and persistence that is not contained in workers’ observable characteristics. We also find that referrals perform particularly well when working directly with their referrers. However, we do not find evidence that referrals exert more effort because they believe their performance will affect their relationship with their referrer or their referrer’s position at the firm.

We analyze participation in international environmental agreements in a dynamic game in which countries pollute and invest in green technologies. If complete contracts are feasible, participants eliminate the holdup problem associated with their investments; however, most countries prefer to free ride rather than participate. If investments are noncontractible, countries face a holdup problem every time they negotiate; but the free-rider problem can be mitigated and significant participation is feasible. Participation becomes attractive because only large coalitions commit to long-term agreements that circumvent the holdup problem. Under well-specified conditions even the first-best outcome is possible when the contract is incomplete.

Banking crises are rare events that break out in the midst of credit-intensive booms and bring about deep and long-lasting recessions. This paper presents a textbook dynamic stochastic general equilibrium model to explain these phenomena. The model features a nontrivial banking sector, where bank heterogeneity gives rise to an interbank market. Moral hazard and asymmetric information in this market may lead to sudden market freezes, banking crises, credit crunches, and severe “financial” recessions. Those recessions follow credit booms and are not necessarily triggered by large exogenous adverse shocks.

Some booms in housing prices are followed by busts. Others are not. It is generally difficult to find observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of “social dynamics.” Agents with tighter priors are more likely to convert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.

A seller wishes to sell multiple goods by a deadline, for example, the end of a season. Potential buyers enter over time and can strategically time their purchases. Each period, the profit-maximizing mechanism awards units to the buyers with the highest valuations exceeding a sequence of cutoffs. We show that these cutoffs are deterministic, depending only on the inventory and time remaining; in the continuous-time limit, the optimal mechanism can be implemented by posting anonymous prices. When incoming demand decreases over time, the optimal cutoffs satisfy a one-period-look-ahead property and prices are defined by an intuitive differential equation.

Exploiting regression discontinuity designs in Brazilian, Indian, and Canadian first-past-the-post elections, we document that second-place candidates are substantially more likely than close third-place candidates to run in, and win, subsequent elections. Since both candidates lost the election and had similar electoral performance, this is the effect of being labeled the runner-up. Selection into candidacy is unlikely to explain the effect on winning subsequent elections, and we find no effect of finishing in third place versus fourth place. We develop a simple model of strategic coordination by voters that rationalizes the results and provides further predictions that are supported by the data.