Knowledge that Transforms

We analyse a version of Spence's job market signalling model in which firms can make job offers before workers complete their education. Workers cannot commit to turning down such offers. Offers are private, so that workers are unable to use one firm's offer in an attempt to elicit better offers from other firms. In the unique sequential equilibrium outcome of the model with unproductive education, there is no wasteful education. When education is productive, the standard model predicts that more able individuals become overeducated to separate themselves from less able workers. In our model, less able workers become overeducated to (partially) pool with more able workers. The pooling mutes the incentives of high ability workers, who in consequence actually choose to become undereducated. We examine the robustness of our result to modifications to the basic model.

The Suppes-Sen dominance relation is a weak criterion of impartiality in distributive justice. I propose its application to Nash bargaining theory. The Nash Bargaining Solution (NBS) is characterized by replacing the controversial Independence of Irrelevant Alternatives axiom with an axiom embodying the Suppes-Sen principle. This allows a clear interpretation of the NBS as a fair arbitration scheme. In addition, the proposed characterization is more robust than the standard one with respect to variations in the domain of bargaining problems.

This paper studies optimal experimentation by a monopolist who faces an unknown demand curve subject to random changes, and who maximizes profits over an infinite horizon in continuous time. We show that there are two qualitatively very different regimes, determined by the discount rate and the intensities of demand curve switching, and the dependence of the optimal policy on these parameters is discontinuous. One regime is characterized by extreme experimentation and good tracking of the prevailing demand curve, the other by moderate experimentation and poor tracking. Moreover, in the latter regime the agent eventually becomes “trapped” into taking actions in a strict subset of the feasible set.

This paper investigates the structure of outside investment in a profitable entrepreneurial venture. Though efficient, financing the venture up front may be infeasible because the entrepreneur cannot commit to not renegotiate down the outside investor's claim once she's sunk her investment. Staging the investment over time helps to mitigate this commitment problem. The early rounds of investment create collateral that support the later rounds. The author characterizes the optimal staged investment path and shows how it is affected by various features of the venture. The predictions of the model are consistent with observations on staged financing in venture capital. Copyright 1999 by The Review of Economic Studies Limited.