Delegation and R&D Incentives: Theory and Evidence from Italy, with David Martimort and Salvatore Piccolo ( Journal of Industrial Economics , forthcoming)

We use data from the Italian manufacturing industry to document the positive relationship between delegation of decisions within organizations and innovation incentives. In order to obtain the causal effect, we build  a contract theory model with asymmetric information and moral hazard which predicts that awarding autonomy to the manager spurs innovation incentives relative to arrangements based on vertical control. We use the model to guide our search for suitable instruments. Using several alternative instrumental variables and different specifications we find a strong positive effect of delegation on R&D spending.

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Wily Welfare Capitalists: Werner von Siemens and the Pension Fund, with Lyndon Moore, last version July 2008 (Cliometrica, 4(3), pp. 321-348, 2010)

The German firm of Siemens and Halske introduced many enterprising features of what later came to be known as welfare capitalism in the mid 19th century. Profit sharing, annual bonuses, a pension fund, a reduction in work hours, and an annual party were all means to ensure a productive, trouble-free workforce. We investigate the reasons why Siemens and Halske introduced a pension fund in 1872, more than a decade before the nation-wide social security system was implemented in Germany. We find that the pension fund increased labor productivity, and in addition discouraged workers from striking. Our main finding is that the annual cost of running the pension fund was roughly equal to the profit that would have been lost in that year if Siemens had to face a strike of average duration. This suggests that (i) the introduction of a pension fund is consistent with simple profit maximizing behavior on the firm's side and (ii) increased labor unionization induced firms to introduce subjective components of workers' remuneration packages.

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Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions , with Ali Hortacsu, last version January 2012 ( Econometrica, 80(6), pp.2511-2542, 2012) (previous title: Do Bidders in Canadian Treasury Bill Auctions Have Private Values?)

Several important auction settings, including treasury auctions in Canada and the U.S., have the feature that some bidders (dealers) observe the bids of a subset of other bidders (customers). Quantifying the economic advantage that informationally advantaged bidders derive from this institutional feature requires that we empirically distinguish between private vs. interdependent values paradigms. Bidders with private values who obtain information about rivals' bids use this information to update their beliefs about the distribution of residual supply. With interdependent values, bidders also update their beliefs about the value of the good being auctioned. We use these differential updating effects to construct formal hypothesis tests of the presence of private vs. interdependent values. Using data from Canadian treasury auctions, we cannot reject the null hypothesis of private values in auctions of 3- and 12-month treasury bills. We also do not find evidence supporting the alternative hypothesis of interdependent values. We use the estimated model to quantify the value of observing customer bids to a dealer. We find that the extra information contained in customers' bids leads on average to an increase in payoff equal to 13-35% of the expected surplus of dealers.

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The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds, with Nuno Cassola and Ali Hortacsu, 2009 (forthcoming at Econometrica)  

We study European banks' demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank's auctions for one-week loans, their main channel of monetary policy implementation. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks' bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a na\"{i}ve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. Estimated funding costs of banks are also predictive of market- and accounting-based measures of bank performance, suggesting the external validity of our findings.

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Crisis Management: Analyzing Default Risk and Liquidity Demand during Financial Stress, with Jason Allen and Ali Hortacsu, 2011 (submitted)  

This paper shows that strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank are important indicators of distress of individual banks. We conclude that central banks can benefit from using high-frequency data on liquidity demand to obtain a better picture of the financial health of individual participants of the financial system. For the particular case of Canada, using unique features of the payments system and information from the liquidity facilities we find that the willingness-to-pay for liquidity during the financial crisis stayed at low levels throughout the Canadian financial system and that there was no increase in counterparty risk. This suggests that the central bank's overall policy response might have been less pronounced if they had used the methods employed in this paper to analyze the crisis than the actual response.

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