Delegation and R&D Incentives: Theory and Evidence from Italy, with David Martimort and Salvatore Piccolo - last version October 2009 (submitted)

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 (forthcoming in Cliometrica)

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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Do Bidders in Canadian Treasury Bill Auctions Have Private Values?, with Ali Hortacsu, 2008  (R&R at ECMA)

We develop a test for common values in auctions in which some bidders possess information about rivals' bids. Information about a rival's bid causes a bidder to bid differently when she has a private value than when her value depends on rivals' information. In a divisible good setting, such as treasury bill auctions, bidders with private values who obtain information about rivals' bids use this information only to update their prior about the distribution of residual supply. In the model with a common value component, they also update their prior about the value of the good being auctioned. We use these differential updating effects to construct our test. The proposed test displays good performance in Monte Carlo studies. We then apply it to data from Canadian treasury bill market, where some bidders have to route their bids through dealers who also submit bids on their own. We cannot reject the null hypothesis of private values in our data for 3-months treasury bills, but we reject private values for 12-months treasury bills. Furthermore, we use the structural model to estimate the value of customer order flow to a dealer. We find that the extra information contained in customers' bids leads on average to an increase in payoff equal to about 0.5 of a basis point, or 32% of the expected surplus of dealers from participating in these auctions.

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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 (submitted)  

This paper studies European banks' demand for short-term funds 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. Through a model of bidding, we show that banks' bidding behavior reflects their cost of obtaining short-term funds elsewhere (i.e., in the interbank market) as well as a strategic response to other bidders. We find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions. Accounting for the strategic component is important: while a naive interpretation of the raw bidding data may suggest that virtually all banks suffered a dramatic increase in the cost of obtaining funds in the interbank market, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. Using a complementary data set, we also find that banks' pre-turmoil liquidity costs, as estimated by our model, are predictive of their post-turmoil liquidity costs and that there is considerable heterogeneity in these costs with respect to the country-of-origin. Finally, among the publicly traded banks, the willingness to pay for short term funds in the second half of 2007 are predictive of stock prices in late 2008.

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