Research Interests: Market and Mechanism Design, Regulation, Antitrust and Theoretical Industrial Organization

Papers (Note: I just post work that has been recently (2 years) revised. Older projects will be posted as newer versions become available):

“Dividing and Discarding: A Procedure to Take Decisions with Non-transferable Utility” (joint with Willie Fuchs and Humberto Moreira)

Abstract: We consider a setting in which two players must take a single action. The analysis is done within a private values model in which (i) the players' preferences over actions are private information, (ii) utility is quadratic (non-transferable), (iii) implementation is bayesian and (iv) the welfare criterion is utilitarian. We characterize an optimal monotonic allocation rule. Instead of asking the agents to directly report their types, this allocation can be implemented dynamically. The agents are asked if they are to the left or to the right of the midpoint of the interval of possible types (eg.1/2 for the initial interval [0,1]). If both reports agree, the section of the interval which none preferred is discarded and the remaining interval is divided in two parts and the process continued until one agent chooses left and the other right. In that case, the midpoint of this remaining interval is implemented. This implementation can be carried out by a Principal who lacks commitment, implying this process is an optimal communication protocol.

“From Equals to Despots: The Dynamics of Repeated Group Decision Taking with Private Information” (joint with Willie Fuchs)

Abstract: This paper considers the problem faced by n<∞ agents that repeatedly have to take a joint action, cannot resort to side payments, and each period are privately informed about their favorite actions. We study the properties of the optimal contract in this environment. We establish that first best values can be arbitrarily approximated (but not achieved) when the players are extremely patient. The dynamics of decision taking is fully determined by (i) a decision rule that, at each period, maximizes the weighted sum of the agents’ (instantaneous) virtual utilities, and (ii) a process that governs the evolution of the weights given to the agents’ virtual utilities on decisions. We show that the provision of intertemporal incentives necessarily leads to a dictatorial mechanism: in the long run the optimal scheme converges to the adoption of one player's favorite action.

“Coordination and the Provision of Incentives to a Common Regulated Firm” (joint with Johann Caro. Forthcoming at the International Journal of Industrial Organization)

Abstract: This paper considers the problem faced by two regulators in providing incentives to a common (privately informed) regulated firm under various degrees of coordination. In the model, the firm exerts effort toward cost reduction and self-dealing, and incentives can be input-based (monitoring) and output-based (demanded cost targets). Full coordination between the regulators leads to the second best allocation. A setting in which the regulators do not fully coordinate leads to (i) higher overall monitoring (more aggressive input-based incentives) and (ii) higher demanded cost targets (i.e., more lenience in terms of output-based incentives). As a consequence of (i), in all possible equilibria, effort toward cost reduction will be smaller when the agent reports to two regulators who do not coordinate. (i) and (ii) imply that the impact on effort toward self-dealing activities is ambiguous. In our leading example, self-dealing will be larger if the regulators coordinate on monitoring levels but smaller if they choose monitoring levels independently.

“Repeated Lending under Contractual Incompleteness” (joint with João M. P. De Mello. Annals of Finance, Vol. 3, N.1, 2010)

Abstract: We consider a model of repeated (relationship) lending in which some contingencies that are relevant for a bank's decision to finance a project cannot be described contractually. The hazards related to this lack of contractibility can be magnified by actions taken by an entrepreneur. The continuation value of a lending relationship induces borrowers to take actions that minimize the ex-post conflict of interests resulting from contractual incompleteness. The optimal lending relationship is stationary on the equilibrium path. A robust feature of an optimal lending relationship is that the action schedule (as a function of project types) adopted by the entrepreneur is either a constant or a step function. Hence, the bank imposes to the entrepreneur a finite set of decisions from which he can pick his action, bounding his discretion over decisions. This leads to lower interest rates charged by the bank and to efficient refinancing in a lending relationship when compared to arm's length financing.

“Common Agency, Organizational Desing and the Hold-Up Problem” (Economics Letters, Vol. 108, Issue 3, 2010).

Abstract: This paper shows that, in comparison to a single-regulator arrangement, when an agent reports to two regulators, he is confronted with more powerful ex-post incentives. This generates, from an ex-ante perspective, higher incentives for relationship-specific investment.

“Coordinated Strategic Defaults and Financial Fragility in a Costly State Verification Model” (joint with Pablo Salgado

Abstract: It is well know that diversification through a financial intermediary has the benefit of transforming loans that need costly monitoring into bank deposits that do not. We show that financial intermediation in a costly state verification model has a cost not yet analyzed: it allows for the existence of multiple equilibria, some of which are characterized by borrowers defaulting on their loans because they expect other borrowers to do the same (i.e.: bad equilibria arise due to the strategic complementarities among the entrepreneurs' decisions to default). We propose two mechanisms that fully implement the desired equilibrium allocation.

“Outside Options and the Limiting Distribution of Power in Repeated Decision Taking” (joint with Johann Caro. First Draft)

Abstract: We introduce ex-post participation constraints in a setting in which, repeatedly, two agents have to take a joint action, cannot resort to side payments, and each period are privately informed about their favorite actions. We derive a number of results. First, we show that, irrespective of how patient the agents are, any mechanism satisfying ex-post participation constraints delivers outcomes that are bounded away from efficiency. Second, for an agent whose outside option became tempting, the optimal mechanism (i) gives, relatively to a forced participation setting, less weight on current actions and, so to allow the agents to continue to trading decision rights in the future, (ii) always promises continuation values that are higher than the value of his outside option. Finally, we derive properties of the dynamics of relative bargain power, and prove that it leads to a unique limiting distribution of power. This limiting distribution is non-degenerate, memoryless and such that power continually changes hands in the limit, meaning that the weight agents have on decisions necessarily varies from period to period.

“A Sticky-Dispersed Information Phillips Curve: A model with partial and delayed information” (joint with Waldyr Areosa e Marta Areosa)

Abstract: This paper puts to test Morris and Shin´s (2006) conjecture that a small incidence of informational stickiness can lead to a large amount of persistence in aggregate prices in a world of differential information. We do so by assuming that firms receive private noisy signals about the state in an otherwise standard model of price setting with sticky-information. We prove there exists a unique equilibrium of the incomplete information game induced by the firms' pricing decisions and derive the resulting Sticky-Dispersed Information (SDI) Phillips curve. The main effect of dispersion is to substantially magnify the immediate impact of a given shock when the degree of stickiness is small. Its effect for persistence, however, is minor: even when information is largely dispersed, a substantial amount of informational stickiness is needed to generate persistence in aggregate prices and inflation.

Work in Portuguese:

“Inflationary Inertia, Evolutionary Learning, and Recessions”, Brazilian Review of Economics, vol.57(3): 663-681, 2003. (with Marco Bonomo, and Humberto Moreira)

Work in Progress (the same disclaimer as the one above applies):

“Optimal Dynamic Regulation when Investment is Non-Contractible” (joint with Paulo Daniel Salles Ramos)

“Robust Decision-Making” (joint with Humberto Moreira)

Brief Description: Decision taking without a unique prior.

“How do agents take joint actions? Experimental Evidence” (joint project with William Fuchs and Carmit Segal)

Brief Description: A trial to experimentally test some of the results of “Dividing and Discarding…”

“Competing to Provide Incentives to a Privately Informed Agent”

Brief Description: The effect on output-based and input-based incentives of competition by N principals that seek to incentivize a common agent”