Browsing by Author "Ambrus, Attila"

This dissertation analyzes three dynamic models of innovation. The primary focus of the analysis of each model is to highlight the role of endogenous mechanisms---such as observational learning and product market competition---in determining firms' R&D incentives, the speed of innovation, and the efficiency of equilibrium investment.

In Chapter 2 of this dissertation, entitled "Learning and the Timing of New Technology Adoption," I develop a continuous-time model in which two asymmetric firms (incumbent and challenger) decide whether to adopt an innovation of uncertain quality; and if so, when. Early adoption is valuable, as it comes with the possibility of generating a first-mover advantage. However, early adoption comes at the price of greater uncertainty because the innovation’s true quality can be learned only by observing market performance. In particular, firms learn through a process of market experimentation by which the innovation’s true quality is revealed at a rate proportional to first-mover sales. Through this endogenous learning channel, the flow of information becomes inextricably linked to market structure, which I show has significant implications for equilibrium pricing incentives and the dynamics of innovation diffusion. In particular, my results provides an information-theoretic explanation for why established incumbents, despite possessing substantial innovative ability, are disproportionately slow to respond to disruptive innovation—commonly referred to as the Innovator’s Dilemma.

In Chapter 3 of this dissertation, entitled "The Role of Market Structure in Competitive Experimentation," analyzes the strategic incentives of firms to trade-off investment into new versus existing technology. Specifically, I develop a continuous-time model in which two firms choose how to allocate a stock of resources toward either R&D (to develop an possible innovation) or current production (to maximize short-term competitiveness). From a technical standpoint, this is the first model of strategic experimentation in which direct payoff externalities arise through endogenous product market interaction. In terms of empirical contribution, my model provides an explanation for (1) the sensitivity of results in empirical work on R&D competition to industry specification and (2) the seemingly paradoxical decisions of historically innovative companies (e.g. Polaroid, RCA, Xerox) to abandon R&D highly-promising new technologies. Finally, the model be used for policy analysis—namely, to evaluate the effect of horizontal mergers on innovation and welfare. Specifically, my results provide a micro-foundation for conceptual arguments made in recent high-profile merger cases (e.g. Dow/DuPont) based on an “innovation theory of harm," by which a statically pro-competitive merger may be viewed as dynamically anti-competitive due to its negative effects on dynamic innovation incentives.

In Chapter 4 of this dissertation, entitled ``Leadership and the Value of Persistence,'' which is co-authored with James Anton and Dennis Yao, Co-authored work with James Anton (Duke Fuqua) and Dennis Yao (Harvard Business School) expands the scope of my existing research to include organizational incentives for innovation and the economics of leadership. In a project called ``Leadership and the Value of Persistence,'' we seek to answer the following question: "What is the value of having a persistent leader in an organization?" To make this question precise, we develop and analyze a dynamic model of organizational innovation. In the model, a leader faces a sequence of projects and wants to motivate self-interested managers to work on them so that they can succeed and generate value for the organization. The key strategic tension is that individual managers only internalize the portion of project returns they receive, but the leader internalizes the project’s value to the entire organization. In equilibrium, leaders use persistence (i.e. the refusal to give up on failed projects) for several reasons. First, persistence helps overcome the problem of moral hazard in teams by creating dynamic incentives for self-interested managers to work on projects of low individual value but high organizational value. Second, we show that persistence can be used to credibly communicate private information about high value projects. Intuitively, a leader’s decision to persist after failure provides good news to managers about the project’s value which, in turn, motivates effort. However, persistence can also exacerbate the problem of moral hazard by creating strategic incentives for managers to "experiment with failure" by shirking on current projects in order to learn about the project’s value through the leader’s persistence decision.

This dissertation consists of three theoretical essays on delegation and mechanism design.

Chapter 2 is co-authored with Attila Ambrus and Aaron Kolb. We investigate competition in a delegation framework. An uninformed

principal is unable to perform a task herself and must solicit proposals from two biased and imperfectly informed experts.

In the focal equilibrium, the principal seeks to offset the bias of the experts, but when the experts are motivated more by ideology

than career concerns, they increase the bias of their proposals in anticipation. Despite this ideological winner's curse, we show that having a second expert can benefit the principal, even if the two experts have the same biases or if the first expert is known to be unbiased. In contrast with other models of expertise, in our setting the principal prefers experts with equal rather than opposite biases.

The principal may also benefit from commitment to an ``element of surprise," making an ex post suboptimal choice with positive probability.

Chapter 3 is co-authored with Sergii Golovko. We study an auction environment in which after the sale, the seller has the opportunity to verify the winner's ex-post value and impose a limited punishment for "underbidding." Investigating how the seller should approach this opportunity, we show that even small penalties allow the seller to significantly increase her revenue. In our environment, the first-price auction with an optimally chosen penalty rule is optimal among all winner-pay auctions. Before the auction begins, the seller recommends a bidding strategy to the bidders. If the auction winner bids at least as much as the seller has suggested, the winner is not punished; if, on the other hand, the winner does not bid as much as has been recommended, he is punished, with the penalty increasing as the buyer deviates more and more from the recommendation. Our results indicate several qualitative differences from standard (without ex-post punishments) auctions. In equilibrium, buyers bid more aggressively; the optimal reserve price is lower; and the revenue-equivalence principle does not hold---we state conditions under which a first-price auction is superior to a second-price auction. Our results also lead us to suggest the following recommendation for policymakers: A government may increase its revenue when auctioning publicly owned assets by providing tax concessions to buyers who submit sufficiently high bids.

Chapter 4 is co-authored with Attila Ambrus. As in Chapter 2, principal is trying to solicit information from multiple, incompletely informed experts. However, here we allow for action choice (policy) and monetary transfers to be conditional on reports. Additionally, we investigate an environment in which monetary transfers may be conditioned on realized state (ex post state verification). In this context we can also allow for only one expert. With multiple experts, we investigate the case with no ex post state verification - monetary transfers are conditional on reports only. Under certain assumptions we show that expert can solicit all information from experts, extracting all surplus.

This thesis contains essays on the economics of information. In particular it focuses on specific environments where groups of individuals are faced with both uncertainty and having their main source of information on the underlying state of the world being controlled by outside parties with their own agenda. The goal of this thesis is to characterize the equilibrium behavior and examine the welfare implications of having outside parties controlling the group's information structure. The first chapter studies the coordination and free-riding problem commonly found in the private provision of a public good and how a fundraiser can help alleviate the issues by designing information structures that determine the donors' behavior. And the second chapter studies a duopoly model where the firms invest in advertising to divert the consumers into adopting their product. The group's welfare can be improved even if their interests are not closely aligned with the outside parties' interests as long the information gains are high enough.

This dissertation consists of two essays about macroeconomic theory of monetary policy. The first essay derives a general algorithm for finding optimal commitment policy when the policymaker's decision stabilizes the economy as well as informing the private sector about fundamental shocks. The paper describes three equivalent formulations of the problem facing the policymaker. The last formulation is recursive, facilitating the finding of the steady state. This paper finds the steady state for a New Keynesian central bank who has both a transitory and a persistent preference shock. Under discretion, the private sector's expected inflation is positive and persistent, limiting the ability of the central bank to achieve its output target. In contrast, under commitment, for both persistent and transient shocks, the central bank achieves negative expected inflation, allowing lower realized inflation and realized output closer to target.

The second essay introduces a new model for intermediate behavior between discretion and commitment. Instead of commitment as the ability bind a future self, this essay reframes it as how much does the current policymaker incorporate the perspective of its past self. In a monetary New Keynesian context, I define Scaled Commitment, where prior Lagrange multipliers are discounted, nesting both discretion and commitment. It also allows different degrees of commitment for the always-binding Phillips curve and occasionally-binding zero lower bound.

This dissertation studies private information and learning in games. Chapter 1 considers a dynamic game of strategic adoption, in which a patient buyer faces a seller of privately known quality. The buyer learns about the seller gradually through an exogenous news process, and the seller is able to exit the market or privately upgrade its quality at any time. I discover two novel kinds of reputational dynamics in equilibrium: a resetting barrier, where low types upgrade at low states inducing discrete upward jumps in reputation, and skew Brownian motion, where low types exit continuously at intermediate states, creating a permeable barrier for reputation. Contrary to the classic lemons result, the VC prefers this private information environment to one with symmetric information. The rich strategic interaction between the startup and VC implies, somewhat surprisingly, that players may benefit from increases in their own cost parameters.

Chapter 2 applies a similar information structure to an adversarial setting of optimal market entry timing. A player of privately known strength chooses when to enter a market, and an incumbent chooses whether to compete or concede. Information about the potential entrant's type is revealed publicly according to an exogenous news process and the timing of entry. I analyze stationary equilibria using the public belief as a state variable. No equilibria in pure strategies exist, and smooth-pasting conditions need not hold. Under both D1 and a novel refinement, the informed player has nondecreasing value functions and her strategy has the following structure: for high states, both types enter with certainty; for a possibly empty interval of intermediate states, no type enters; and for low states, the high type enters while the low type mixes. I obtain closed form solutions and analyze comparative statics for such equilibria. The welfare effects of the presence of news, relative to no news, depend on the starting belief; however, for a fixed equilibrium, a marginal increase in news quality always helps the informed player regardless of her type and always hurts total welfare.

Chapter 3 explores private information in a delegation setting. We investigate competition in a delegation framework, with a coarsely

informed principal. Two imperfectly informed and biased experts

simultaneously propose action choices. A principal with a diffuse prior, and

only able to ordinally compare the two proposals, has to choose one of

them. In equilibrium, experts may exaggerate their biases, and moreover, such an equilibrium may maximize the principal's welfare. We show that having a second expert can benefit the principal, even if the two experts have the same biases or if one expert is known to be unbiased. In contrast with other models of expertise, in our setting the principal prefers experts with equal rather than opposite biases. The principal may also benefit from commitment to an ``element of surprise," making an ex post suboptimal choice with positive probability. A methodological contribution of our paper is characterizing restrictions on the set of strategies which allows a formal generalization of ex ante expected payoffs to games with diffuse prior.