“Intermediation as Rent Extraction,” with Maryam Farboodi, Gregor Jarosch and Ursula Wiriadinata. NBER Working Paper 24171 (December 2018).
The paper shows that intermediation in asset markets may emerge exclusively because of rent extraction motives. Among traders with heterogeneous bargaining skills, those with superior skills become intermediaries and those with inferior skills become final users. Intermediation is privately profitable because agents with superior bargaining skills can take positions and unwind them in the future at a better price than final users could. Intermediation, though, is socially worthless and the resources invested in bargaining skills are wasted. Using a dataset on the Indonesian interbank market, we document that prices vary with the centrality of buyers and sellers in a way that is uniquely consistent with our theory.
“Rolodex Game in Networks,” with Bjoern Brugemann and Pieter Gautier, Manuscript (August 2017).
The paper studies the Rolodex bargaining game in networks. We first revisit the Rolodex game originally proposed in the context of intra firm bargaining, in which a central player bargains sequentially with multiple peripheral players. We show that the unique no-delay SPE of this game yields the Myerson-Shapley value for the star graph in which the central player is linked to all peripheral players. Second, we propose a Rolodex game for a general graph. Links in the graph negotiate sequentially, with one of the linked players making an offer to the other. If the respondent rejects, the link moves to the end of the line and the direction of the offer is reversed for the next negotiation of this link. As in the original Rolodex game, all agreements are renegotiated in the event of a breakdown. We show that the unique no-delay SPE of this game yields the Myerson-Shapley value for the corresponding graph.
“Intra Firm Bargaining and Shapley Values” with Bjoern Brugemann and Pieter Gautier, Review of Economic Studies, Forthcoming.
We study two wage bargaining games between a firm and multiple workers. We revisit the bargaining game proposed by Stole and Zwiebel (1996a). We show that, in the unique Subgame Perfect Equilibrium, the gains from trade captured by workers who bargain earlier with the firm are larger than those captured by workers who bargain later, as well as larger than those captured by the firm. The resulting equilibrium payoffs are different from those reported in Stole and Zwiebel (1996a) as they are not the Shapley values. We propose a novel bargaining game, the Rolodex game, which follows a simple and realistic protocol. In the unique no-delay Subgame Perfect Equilibrium of this game, the payoffs to the firm and to the workers are their Shapley values.
Equilibrium Price Dispersion with Sequential Search,” with Nicholas Trachter, Journal of Economic Theory, 2015, 160 (6), 188-215.
The paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers. Buyers search sequentially for sellers, but do not meet every sellers with the same probability. Specifically, a fraction of the buyers’ meetings lead to one particular large seller, while the remaining meetings lead to one of a continuum of small sellers. In this environment, the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller. The large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers. These incentives give rise to a game of cat and mouse, whose only equilibrium involves mixed strategies for both the large and the small sellers. The fact that the small sellers play mixed strategies implies that there is price dispersion. The fact that the large seller plays mixed strategies implies that prices and allocations vary over time. We show that the fraction of the gains from trade accruing to the buyers is positive and non-monotonic in the degree of market power of the large seller. As long as the large seller has some positive but incomplete market power, the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions.
“Job Search with Bidder Memories,” with Carlos Carrillo-Tudela and Eric Smith, International Economic Review, 2011, 52 (3), 639-655.
This paper revisits the no-recall assumption in job search models with take-it-or-leave-it offers. Workers who can recall previously encountered potential employers in order to engage them in Bertrand bidding have a distinct advantage over workers without such attachments. Firms account for this difference when hiring a worker. When a worker first meets a firm, the firm offers the worker a sufficient share of the match rents to avoid a bidding war in the future. The pair share the gains to trade. In this case, the Diamond paradox no longer holds.
“Block Recursive Equilibria for Stochastic Models of Search on the Job,” with Shouyong Shi, Journal of Economic Theory, 2010, 145 (4), 1453-1494.
We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents’ value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers’ preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.
“A Theory of Partially Directed Search,” Journal of Political Economy, 2007, 115 (5), 748-769.
This paper studies a search model of the labor market where firms have private information about the quality of their vacancies, they can costlessly communicate with unemployed workers before the beginning of the application process, but the content of the communication does not constitute a contractual obligation. At the end of the application process, wages are determined as the outcome of an alternating offer bargaining game. The model is used to show that vague non-contractual announcements about compensation—such as those one is likely to find in help-wanted ads—can be correlated with actual wages and can partially direct the search strategy of workers.
“A Search Theory of Rigid Prices,” PIER Working Paper 07-031 (2007).
This paper studies price dynamics in a product markets characterized by: (a) search frictions—in the sense that it takes time for a buyer to find a seller that produces a version of the good he likes; (b) anonymity—in the sense that sellers cannot price discriminate between first-time buyers and returning costumers; (c) asymmetric information—in the sense that sellers are subject to idiosyncratic shocks to their marginal cost of production and privately observe the shocks’ realizations. I find that the joint dynamics of costs and prices may be very different than in a standard Walrasian market. When shocks are i.i.d., the price remains constant in the face of fluctuations in a seller’s marginal cost. When shocks are moderately persistent, the price adjusts slowly and imperfectly in response to changes in a seller’s cost. Finally, when shocks are sufficiently persistent, the price adjusts instantaneously and efficiently as soon as a seller’s production cost varies.
“A Cheap-Talk Theory of Random and Directed Search,” Revised for the Journal of Political Economy as “A Theory of Partially Directed Search” (2006).
This paper studies a search model of the labor market where firms have private information about the gains from trade and post cheap-talk messages to advertise their vacancies before workers decide which location to visit. The surplus of a match is divided ex-post according to the outcome of an alternating-offer bargaining game of asymmetric information. When this bargaining game is fast, I show that the maximum amount of information that can be transmitted through the cheap-talk depends non-monotonically on the tightness of the labor market. In particular, if the ratio of unemployed workers to vacancies is either sufficiently high or sufficiently low, the unique equilibrium has the firms babbling and search is random. If the tightness of the labor market takes on intermediate values, there is also an equilibrium where the cheap-talk is informative, high and low productivity firms post different messages and the search process of the workers is directed.