A Theory of Self-Prospection (joint with Polina Borisova)

A present-biased decision maker (DM) faces a two-armed bandit problem whose risky arm generates random payoffs at exponentially distributed times. The DM cannot perfectly observe payoffs but receives informative feedback. Our main finding is that, in the unique stationary Markov perfect equilibrium of the multi-self game, positive feedback supports greater equilibrium welfare than both negative and transparent feedback. It does so by encouraging the DM to self-prospect --- imagine one's future goals and outcomes when evaluating the present. We relate our results to findings in psychology promoting the motivational effects of positive feedback, as well as more recent findings regarding self-prospection theory.

In this paper we develop a new rationale for the existence of business groups (BGs) and conglomerates that operate in multiple locations within the same country: They arbitrage local labor markets. We show that BG firms g row l ess i f fi rms of th e same group in other locations can offer more attractive access to employees in their local labor market. On the flip side BG firms grow faster if they offer such access to other firms in the group. Attractiveness is measured as labor costs, labor supply, and labor fit between the firm and the local labor f orce. Local labor conditions are of similar importance for location decisions of business group firms as general agglomeration e conomies. Internal flows of employees b etween BG firms ac count for only a small portion of th e variation in employment growth rates. We conclude that business groups predominantly move jobs, but not employees, between their locations. As such, they arbitrage local labor markets

Racing with a rearview mirror: innovation lag and investment dynamics (with Nicolas Klein and  Lucie Ménager)

We analyze a dynamic investment model in which short-lived agents sequentially decide how much to invest in a project of uncertain feasibility. The outcome of the project (success/failure) is observed after a fixed lag. We characterize the equilibrium and show that, in contrast with the case without lag, the unique equilibrium profile is not in threshold. If the initial belief is relatively high, investment decreases continuously as agents become more pessimistic about the feasibility of the innovation. Otherwise, investment is not monotonic in the public belief: players alternate periods of no investment and periods of positive, decreasing investment. The reason is that the outcome lag creates competition between a player and her immediate predecessors. A player whose predecessors did not invest may find investment attractive even if she is more pessimistic about the technology that her predecessors.