Research
December, 2011
Dissertation
Theoretical and Empirical Analysis of Bargaining Institutions. Dissertation Committee Co-Chairs: Professor Linda Babcock (Carnegie Mellon University) and Professor John Duffy (University of Pittsburgh), 2002.Publications
Book Chapters Requested
[1] Contracts and Markets, in Kathryn Zeiler and Joshua Teitelbaum, eds., The Research Handbook on Behavioral Law and Economics, Edward Elgar Publishing, forthcoming. [2] Litigation and Tort Reform, in Kathryn Zeiler and Joshua Teitelbaum, eds., The Research Handbook on Behavioral Law and Economics, Edward Elgar Publishing, forthcoming.Journal Articles
Abstract
This paper reports further experimental results on exclusive dealing contracts. We extend Landeo and Spier's [2009] work by studying Naked Exclusion in a strategic environment that involves a four-player, two-stage game. In addition to the roles of seller and buyers, our experimental environment includes the role of a potential entrant (a fourth passive player). Our findings are as follows. First, payoff endogeneity increases the likelihood of exclusion. Second, communication between the potential entrant and the buyers increases buyers' coordination on their preferred equilibrium (equilibrium with entry) and hence, reduces the likelihood of exclusion. Entrant-buyers communication also induces more generous offers.
Abstract
Principal-agent problems are pervasive in economic settings. CEOs and shareholders, lawyers and clients, manufacturers and retailers, lenders and borrowers are all examples of settings in which moral hazard problems might arise. Incentive contracts in both individual and team environments have been studied by economists (see Shavell (1979) and Holmstrom (1982, 1979) for seminal theoretical work, and Prendergast (1999) for a survey of empirical literature). Contracts that tie an agent's compensation to performance, such as conditional bonus schemes, have been proposed as a way to align the interests of agents and principals. Experimental literature from economics and social psychology suggests that the way choices are framed can affect decisions as well. Hence, contract frames might influence the effectiveness of incentive schemes. This comment first outlines seminal experimental work on frames and describes a recent study that relates the incentive contract literature with the experimental work on frames. Second, it discusses the experimental design and findings of Brooks, Stremitzer, and Tontrup's (2011) work on individual incentives and contract frames.
Abstract
The operating agreements of many business ventures include clauses to facilitate the exit of joint owners. In so-called Texas Shootouts, one owner names a single buy-sell price and the other owner is compelled to either buy or sell shares at that named price. Despite their prevalence in real-world contracts, Texas Shootouts are rarely triggered. In our theoretical framework, sole ownership is more efficient than joint ownership. Negotiations are frustrated, however, by the presence of asymmetric information. In equilibrium, owners eschew buy-sell offers in favor of simple offers to buy or to sell shares and bargaining failures arise. Experimental data support these findings.
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This paper presents a strategic model of liability and litigation under court errors. Our framework allows for endogenous choice of level of care and endogenous likelihood of filing and disputes. We derive sufficient conditions for a unique universally-divine mixed-strategy perfect Bayesian equilibrium under low court errors. In this equilibrium, some defendants choose to be grossly negligent; some cases are filed; and, some lawsuits are dropped, some are resolved out-of-court and some go to trial. We find that court errors in the size of the award, as well as damage caps and split-awards, reduce the likelihood of trial but increase filing and reduce the deterrence effect of punitive damages. We derive conditions under which the adoption of the English rule for allocating legal costs reduces filing.Abstract
This paper studies experimentally the impact of the split-award statute, where the state takes a share of the plaintiff's punitive damage award, on litigation outcomes. Our findings indicate that dispute rates are significantly lower when bargaining is performed under the split-award institution. Defendants' litigation losses and plaintiffs' net compensation are significantly lower under the split-award statute. [11]Abstract
This paper analyzes the relationship among inflation, dollarization, financial intermediation, and real activity. Empirical evidence suggests non-linearity in the effects of inflation on financial intermediation and real activity, i.e., the existence of an inflation threshold. Evidence also suggests that one way in which inflation affects financial intermediation in highly inflationary economies is through the substitution of dollars ``under the mattress" for savings in domestic banks. Our model captures these empirical regularities. Inflation and real activity are positively related at low levels of inflation. When the inflation rate exceeds certain threshold, however, agents substitute in their portfolios dollars (a non-productive liquid asset of constant value) for deposits issued by domestic banks. This substitution reduces the scale of financial intermediation and the capital investment in the economy. As a consequence, at high levels of inflation the levels of capital stock and output become negatively related to the inflation rate.Abstract
We investigate the effect of the split-award tort reform, where the state takes a share of the plaintiff's punitive damage award, on the firm's level of care, the likelihood of trial and the social costs of accidents. A decrease in the plaintiff's share of the punitive damage award reduces the firm's level of care and therefore, increases the probability of accidents. The effects of split-awards on the likelihood of trial and social costs of accidents are ambiguous. Conditions under which a decrease in the plaintiff's share of the punitive damage award reduces the probability of trial and the social cost of accidents are derived.Abstract
This paper reports the results of a bargaining experiment. We follow the pretrial bargaining model of Gertner and Miller (1995) under uncertainty and examine the effect of a litigation institution, called a settlement escrow and uncertainty on the timing and quality of settlement outcomes. Our findings indicate that settlement rates are significantly higher when a settlement escrow is added to the bargaining process where there is asymmetric information. Quality of outcomes, measured as the percentage of the true damage that the outcome represents, is positively and significantly influenced by the addition of a settlement escrow. Settlement rates are higher when certainty is provided, under the no escrow institution. Quality of outcomes is negatively and significantly influenced by the addition of certainty. The escrow institution has no effect on bargaining outcomes, under the certainty condition; and, the provision of certainty has no effect on bargaining outcomes, under the escrow institution. These findings suggest first that the escrow is a useful device for improving efficiency when bargaining is conducted under uncertainty and second, that the escrow fully compensates the negative effect of uncertainty on bargaining processes.[18] Moral Hazard in Teams: An Experimental Study of Contracts under Frame Manipulations (with Kathryn E. Spier, Harvard Law School and NBER).
[19] An Experimental Study of Incentive Schemes in Lab and Field Organizations (with Ian Ayres, Yale Law School and NBER).
[20] Theory, Experiments, and the Law (with Kathryn Zeiler, Georgetown University Law Center).
[22] Mergers, Efficiency and Market Power in the Legal Service Industry (with Layla Dotson, Northwestern University School of Law).
[23] The Evolution of the Legal Firm Business Model (with Jennifer Keber, Northwestern University School of Law).