This award funds work in economic theory that develops new models of the structure of economic transactions and relationships. The award funds research on two distinct projects. The first project considers questions about agents' incentives to invest in productive characteristics. In many markets, a pair of agents (individuals or organizations) transacts, and the value of the transaction depends on investments the agents have made prior to their match. The value of a match between a teacher and a school depends on the human capital investments made by the teacher and the physical capital investment of the schook, which are made prior to the parties meeting. There is a potential holdup problem, which is ameliroated by the competition on both sides of the market: there are potential substitutes on both sides of the market (albeit imperfect) that limit the degree to which either side can expropriate returns that can be attributed to investment by the other side.
The project focuses on many-to-one matching (an example of this situation is schools that hire multiple teachers) and on the nature of investment inefficiencies under uniform pricing when the conditions for efficiency do not hold.
The second project focuses on game theoretic modeling of cooperation. Most real world repeated relationships include some private monitoring -- the partners in the economic relationship have some private information about the actions each takes. The goal is to characterize the kinds of behavior that can support cooperation and to demonstrate intuitively plausible constraints on behavior that lead to plausible cooperation. This includes work on what determines the magnitude of possible cooperation in a specific situation.
Because the project will provide a better understanding of investment incentives in markets where participants must invest before matching, the results will yield broader impact through insights into possible interventions that will ameliorate inefficient investments.
We have worked on analyzing markets in which individuals make investments prior to meeting with participants on the other side of the market. When there is no opportunity to contract prior to the time when investments must be made, there is a "hold-up" possibility which diminishes the parties’ incentives to invest. In one paper, "Premuneration Values and Investments in Matching Markets", puts additional structure on the investment cost functions and obtains sharper characterization of the effects of asymmetric information on investment inefficiencies. That paper is under review by the Economic Journal. A second paper, "Matching with Incomplete Information", (joint with Samuelson and Qingmin Liu). There is a large literature on matching problems similar to that in the work above, but with complete information. That is, when agents on the two sides of the market match, both sides know the benefit of matching with the other. This is clearly a strong assumption that is not satisfied in most of the problems that the model is used to analyze. There is a difficulty in extending the analysis in those models to the case of asymmetric information as the solution concept employed in those models, the core, is not defined for asymmetric information problems. Furthermore, it is not at all obvious how the concept should be defined for asymmetric information problems. With Liu and Samuelson we have definitions of stable outcomes for these problems, and more interestingly, we show that under the standard assumption of supermodularity of the matching values, the only stable matching outcomes are efficient. This paper appeared in the March 2014 issue of Econometrica.
