Research

Working Papers

1. • “Contracting Timely Delivery  with Hard to Verify Quality” (Job Market Paper)
   

I study a continuous-time principal-agent model with hidden effort and imperfect monitoring about project quality. I consider a situation in which the agent can manipulate output so as to improve observed performance at the expense of project quality. The principal can either monitor quality at some cost or can make payments contingent on the subsequent performance of the project. The principal balances the provision of incentives to exert effort and the cost of monitoring quality. The optimal contract requires unpredictable termination, as otherwise the agent would manipulate performance when he is close to being fired. I analyze the case in which the principal can commit to a mixed strategy of termination, and also where the principal cannot commit to terminate the agent. In the latter case, the mixed strategy of termination has to be incentive compatible for the principal. In the optimal contract, cash compensation is deferred longer than in the absence of manipulation. I find that manipulation causes the optimal contract to lower the rate of termination of the agent compared to the case with pure hidden effort.

1. • "Trading Dynamics in the Market for Lemons"
   

In markets with asymmetric information, an informed seller can use inefficient delay in trade as a signal of quality. When assets are divisible, the seller can also signal his private information by retaining  partial ownership of the asset. However, retention of ownership is a credible signal only if the seller can commit not to trade again in the near future. I analyze the dynamics of trade in a signaling model in which such commitment is not possible. In equilibrium, the seller holdings and the length of delay in trade are related. The cost of inefficient delay is higher when the seller owns a higher fraction of the asset. As a consequence, the expected delay between trades is a decreasing function of the fraction of the asset owned by the seller.  The predicted patterns of trade are driven by the incentives of the low type to build a reputation of owning a high quality asset.

Work in Progress

1. •  Contingent Capital Requirements (with Peter DeMarzo and Darrell Duffie)