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Aaron Bodoh-Creed
Job Market Candidate
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA 94305
650-804-5281
acreed@stanford.edu
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Research
The Simple Behavior of Large Mechanisms (Job Market Paper)
In this paper we analyze the relationship between a mechanism with a large, finite
number of participants and the analogous mechanism featuring a continuum of participants. Under mild technical
conditions, we show that the equilibrium strategies of the two forms of model will converge as the number of
participants in the large, finite mechanism diverges to infinity. Given that these sufficient conditions hold,
we can use tractable nonatomic models to analyze the large, market behavior of otherwise intractable game
theoretic models. We apply these results to show that the equilibrium of a uniform price auction approaches
the equilibrium of a properly specified exchange economy with a continuum of agents as the number of agents
and units for sale in the large, finite auction diverges. This implies the existence and approximate efficiency
of equilibria of the uniform price auction with sufficiently many agents even in the case where the agents
treat successive units of the good as complements. In a second application, we show that a subset of the
Markov perfect equilibria of a dynamic market competition model approaches stationary equilibria of a game
with a continuum of agents as the number of competitors approaches infinity. Finally, we use our theorems to
extend several prior results on large markets, mechanisms, and games and highlight the fundamental connection
between these works.
Mood, Associative Memory, and the Formation and Dynamics of Belief
The psychology literature on long-term memory has shown that mnemonic cues can significantly enhance the recall of
information associated with the cues. We provide a model of the economic impact of associative memory within the context of generic static decision
problems. We focus attention in our applications on mood-regulated memory, a phenomenon in which agent affective state serves as a cue for data in
associative memory with a similar valence to the agent's affect. We apply our model to demonstrate that the effect of employee morale on effort
choice depends crucially on the complementarity between agent beliefs and marginal productivity of effort. We also employ our model of decision
making with mood-regulated associative memory to study financial asset pricing in a dynamic context, which allows us to provide novel explanations
for phenomena such as excess volatility, short-run underreaction and long-run overreaction to news, and the influence of non-fundamental events.
The model of mood and memory developed within this work supplies microfoundations for the notion of sentiment within the finance literature and
generates predictions regarding how market sentiment is influenced by mnemonic cues..
Ambiguous Mechanisms
The principal contribution of this paper is to unify Gilboa and Schmeidler's (1989) multiple prior expected utility (MEU) representation of ambiguity
averse preferences with the payoff equivalence techniques of modern contract theory. We develop a payoff equivalence result across mechanisms
with the same outcome function for the case wherein agents have MEU preferences. We prove that the first order conditions inherent in this
equivalence are also sufficient for the mechanism to be globally interim incentive compatible. Applying our payoff equivalence result to auction
mechanisms, we show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion. Further,
we are able to develop the exact form of the revenue maximizing auction and show that it has close relations in form to the optimal auction for
ambiguity neutral agents. In the context of bargaining, we show that increased ambiguity can increase trade and lower the ex ante budget deficit.
Heightened ambiguity can also increase the incentive compatible revenues extracted in public goods problems, which offers a reason for public
figures to increase agent ambiguity through obfuscatory public messages.
A Simple Model of the Interaction of Public and Private Order Contract Enforcement
We develop a new model of the relationship between public and private order systems of contract enforcement and demonstrates that these institutions can serve as
either complements or substitutes at different levels of political and economic development. Private order markets with random matching
and relational contracts suffer an adverse selection problem wherein long-run firms can be matched with myopic firms tempted to cheat.
Through the analysis of a simple model of a market with random matchings of heterogeneous agents, it is shown that it is possible for public
order institutions to act as complements to private order relationships by alleviating the long-run firms' adverse selection problem.
However, for highly developed public order institutions, the common intuition that public order and private order enforcement act as substitutes is obtained.
Legal Competition in the Medieval World
We develop a model of competition between legal systems with overlapping jurisdictions based on Hotelling competition that suggests
that, absent institutional reform, courts with overlapping jurisdictions will be driven to adopt divergent legal doctrines in order to extract
rents from agents with heterogeneous preferences over which doctrine is applied to their case. This has the effect of weakening the
ability for relational contracting to be self-enforcing and lowers the volume of trade possible. This article provides an historical
overview of the source and nature of some of these overlapping jurisdictions in the medieval era and the variety of legal regimes
active across jurisdictions. Several institutional reforms, such as the system of merchant law that developed in continental Europe,
are discussed as potential solutions to the problem of legal competition.
Work In Progress
Simulating the Dynamic Effects of Horizontal Mergers: U.S. Airlines (with L. Benkard and J. Lazarev)
We propose a new method for studying the medium and long run dynamic effects of horizontal mergers.
Our method builds on the two-step estimator of Bajari, Benkard, and Levin (2007). Policy functions are estimated on historical pre-merger
data, and then future industry outcomes are simulated both with and without the proposed merger. Using data for 2003-2007, we apply
our model to two recently proposed airline mergers. In our airline entry model, an airline's entry/exit decisions are made jointly across
routes and depend on features of its own route network as well as the networks of the other airlines. The model allows for city-specific
profitability shocks that affect all routes out of a given city, as well as route-specific shocks. We find that the model fits the data well.
Heterogeneity in Economies with Ambiguity Aversion Preferences (with M. Miccoli)
We show that in economies where agents have heterogeneous preferences that can be represented with Hansen and Sargent's multiplier
preferences form, the representative agent will not have multiplier preferences. We consider the errors induced in model outcomes if an
econometrician assumes the representative agent has a multipler preferences form utility function in the context of exchange and
production general equilibrium economies. We quantify the impact of these errors in terms of predictions regarding economic outcomes,
asset pricing, and costs of the business cycle.
Base Rate Neglect
A formal model of the psychological phenomenon of base rate neglect is introduced and applied to inference problems of categorical
classification and numerical prediction. Ourpsychological model provides a basis for the adaptive expectations model of
belief formation and updating. Applications to insurance choice, projection bias, demand for information, representativeness in advertising,
and financial portfolio selection. An extended application to employment screening wherein firms suffer base rate neglect is also examined.
Political Parties and Informative Branding
Models of electoral competition capture the strategic interaction between independent candidates and the voting public, which neglects the political
parties that play a vital role in democratic electoral processes. In addition to providing campaign contributions and publicity for the
candidates nominated by the party, political party affiliation serves as a brand label that voters use as a source of information
regarding the candidate's policy preferences. Political party brands provide an explanation for party-line voting in elections as a
rational response by voters to a difficult information aggregation problem. This paper outlines a model of political party brands in
the context of the U.S. electoral system that allows for the derivation of comparative statics relating party brand, policy, and party
preferences robust to a range of model specifications. Extensions of the model are used to provide novel explanations of
platform choice, the effects of third party candidate entry, and negative advertising.
Royalty Negotiation with Downstream Competition
The effects of injunctive relief on royalty negotiations between a "patent-troll" and a
firm that has inadvertantly infringed a patent has been recently explored by C. Shapiro.
This paper extends Shapiro's model by
incorporating the case of downstream competition between the patent-holder and
the infringer. We examine the effects of
injunctive relief and limited liability on the royalty negotiations. Unlike Shapiro,
we find a role in the use of injunctive relief as a substitute for reverse payment
schemes. Finally, we discuss how these effects will
impact the entry process into an industry.
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