with Steve Callander and Takuo Sugaya
The operation of markets and of politics are in practice deeply intertwined. Political decisions set the rules of the game for market competition and, conversely, market
competitors participate in and influence political decisions. We develop an integrated model to capture the circularity between the two domains. We show that a positive
feedback loop emerges such that market power begets political power in a positive feedback loop, but that this feedback loop is bounded. With too much market power,
the balance between politics and markets itself becomes lopsided and this drives a wedge between the interests of a policymaker and the dominant firm. Although such
a wedge would seem pro-competitive, we show how it can exacerbate the static and dynamic inefficiency of market outcomes. More generally, our model demonstrates
that intuitions about market competition can be upended when competition is intermediated by a strategic policymaker.
American Journal of Political Science, forthcoming
The organizational structure of the bureaucracy is a key determinant of policy outcomes. Bureaucratic agencies exhibit wide variation in their organizational capacity, which allows politicians to strategically shape policy implementation. This paper examines what bureaucratic structure implies for the ability of voters to hold politicians electorally accountable. It explicitly models differences in organizational capacity across bureaucratic agencies and considers a problem where a politician must decide not only which policy to choose but which agency, or combination of agencies, will implement it. The choice of implementation feeds back into the choice of policy and this, in turn, affects how voters perceive the performance of the incumbent. This creates a chain of interdependence from agency structure to policy choice and political accountability. The formal model shows that the variation in organizational capacity serves the interests of voters by improving electoral control of politicians.
AEJ: Microeconomics, forthcoming
with Vladimir Asriyan and Victoria Vanasco
We study the joint determination of product quality and complexity in a rational setting. We introduce a novel notion of complexity, which affects how costly it is for an agent to acquire information about product quality. In our model, an agent can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. Examples include banks that design financial products that they offer to retail investors, or policymakers who propose policies for approval by voters. We find that complexity is not necessarily a feature of low quality products. While an increase in alignment between the agent and the designer leads to more complex but better quality products, higher product demand or lower competition among designers leads to more complex and lower quality products. Our findings produce novel empirical implications on the relationship between quality and complexity, which we relate to evidence within the context of financial products and regulatory policies.
AEJ: Microeconomics, 2021
with Takuo Sugaya
The RAND Journal of Economics, 2021
with Takuo Sugaya
Optimally reallocating human capital to tasks is key for an organization to successfully navigate a transition. We study how to design employment contracts to allocate employees to different valuable projects within an organization given two simultaneous challenges: The employees have private information about their own cost of effort, and they exert unobservable effort. The organization has two types of valuable projects, high and low impact, only the former of which requires effort. It would like to assign only an employee with low effort cost to the high-impact project. We characterize the optimal contract and show how it separates the employee types. The optimal contract menu pairs a higher probability of assignment to the high-impact project with a lower bonus in case of success. A fixed salary may also be used for the employees with high cost of effort, but only in limited cases. We link our results to job design features encountered in practice.
Journal of Public Economics, 2020
with Jessica Leight, Rohini Pande, and Laura Ralston
The prevalence of vote-buying is widely identified as a cause of poor governance in the developing world; potential mechanisms for this relationship include the selection of lower quality politicians, and the reduced accountability experienced by politicians once elected. In this paper, we present the first experimental evidence in support of the second channel of reduced accountability. Using data from laboratory experiments conducted in the U.S. and Kenya, we find that vote payments reduce voters’ willingness to hold politicians accountable: holding fixed politician identity, voters who receive payments are less willing to punish the politician for rent-seeking, and this reduction in punishment is larger in magnitude when payments are widely targeted. Unsurprisingly, the politician then engages in a higher level of rent-seeking. A simple model of multi-faceted social preferences encompassing reciprocity and inequality aversion is consistent with these findings.
American Economic Review, 2018
This paper studies the welfare effects of a “partial banking union” in which cross-country transfers for bailouts are set at the supranational level, but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers compared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.
Revise and Resubmit, American Journal of Political Science
with Steve Callander and Takuo Sugaya
Policy outcomes are determined not by the words in a statute but by the actions of private citizens in response. Whether a policy succeeds or fails depends on how policy shapes behavior and how that behavior, in turn, shapes the future course of policy. To understand this process, we develop a model that explicitly combines the political and non-political domains, focusing on competition policy and the regulation of markets. We show how the outcome of a change in policy develops over time as firms respond in the market and interact with bureaucratic enforcement. We identify a critical threshold in market structure that determines whether a policy succeeds or fails, and discuss how the design of political institutions can affect this level. The threshold represents a balancing of the path-dependence of politics with the self-correcting nature of markets. It establishes when political forces dominate those in markets and, thus, when a policy change will have a lasting effect on society.
with Massimo Morelli
Legislative and regulatory reforms often contain various forms of complexity — multiple contingencies, exemptions and alike. Complexity may be desirable if it better satisfies the needs of political constituencies, and if these benefits are higher than the potential increase in administrative costs. Both benefits and costs are better understood by a reform drafter than by the other players involved in the reform process. This asymmetric information on the costs and benefits of complexity creates incentives for inefficiently complex policies. We show that reform drafters use complexity to pander to persuade their political principals to adopt reforms, when the latter are less informed about the costs consequences of the proposed complexity. Nevertheless, institutional contexts where reform drafters are overseen by political principals are not always leading to greater complexity than in systems without overseers, as long as the drafters face informational constraints regarding the costs and benefits of complexity.