Korok Ray

Optimal Team Size and Monitoring in Organizations

We formulate and analyze a model of team structure and monitoring within a LEN agency framework. We incorporate three key instruments in the internal design of an organization involving team production: team size, monitoring activities, and incentive contracts. We show that the complex trade-offs among these instruments lead to surprisingly simple implications. One such result is that the equilibrium level of pay-for-performance for workers is attenuated, and is at times invariant to most environmental variables of interest. As such, our model helps explain the empirical puzzle of the lack of a tradeoff for risk/incentives shown in standard agency models. Our work also demonstrates the presence of complementarities between team size and monitoring, and between worker talent and managerial monitoring ability. Finally, we derive predictions about the impact of environmental variables on the choice of optimal team size, incentives and employee quality, even in the presence of an external marketplace for talent.

Staged Investments in Entrepreneurial Financing

Venture capitalists deliver investments to entrepreneurs in stages. This paper shows staged financing is efficient. Staging lets investors abandon ventures with low early returns, and thus sorts good projects from bad. The primary implication from staging is that it is efficient to invest more in later rounds. The model yields a number of predictions on how the ratio of early to late round financing varies with uncertainty, the outside options of both parties, the value of the venture, the costs of investment, and project difficulty. We test these predictions against data on venture capital financings and find significant empirical support for the theory.

Performance Evaluations and Efficient Sorting

Much of the production in firms takes place over time. This paper seeks to understand the value of interim performance information on long projects. In particular, the model explores the sorting effects of performance evaluations. Conducting an interim performance evaluation increases efficiency by providing the option to end projects with low early returns. The main result: It is efficient to allocate more resources towards the end of a project. This result holds under a variety of scenarios: when the worker has unknown ability, when the outside options vary with output, and even under an agency framework with a risk-averse agent.

Efficient Cost Allocation

Firms routinely allocate the costs of common corporate resources down to divisions. The main insight of this paper is that any efficient allocation rule must reflect the firms underlying cost structure. We propose a new allocation rule (the polynomial rule), which achieves efficiency and approximate budget balance. Welfare losses due to linear allocation rules increase with firm size, so polynomial allocation rules dominate linear rules for larger firms. This paper was accepted by Mary E. Barth, accounting.

Sorting Effects of Performance Pay

Compensation not only provides incentives to an existing manager but also affects the type of manager attracted to the firm. This paper examines the dual incentive and sorting effects of performance pay in a simple contracting model of endogenous participation. Unless the manager is highly risk averse, sorting dampens optimal pay-performance sensitivity PPS because PPS beyond a nominal amount transfers unnecessary information rent to the manager. This helps explain why empirical estimates of PPS are much lower than predictions from models of moral hazard alone. The model also predicts that sorting under asymmetric information causes the firm to turn away more candidates than would be efficient; PPS increases in the cost of hiring the manager and in the managers outside option, but decreases in output risk, information risk, and managerial risk aversion; and the firm becomes more selective in hiring as either the managers outside option, the cost of hiring, risk aversion, output risk, or information risk increases. This paper was accepted by Mary Barth, accounting.

Artificial Intelligence and Value Investing

Artificial intelligence (AI) has proved useful in high-frequency trading, but less so in classical value investing. This article speculates on how recent advances in AI may be profitably employed for long-term, buy-and-hold discretionary value investing. The core idea is relying on the ability of machines to reason and learn.

A Non-Monetary Mechanism for Optimal Rate Control Through Efficient Cost Allocation

This paper proposes a practical non-monetary mechanism that induces the efficient solution to the optimal rate control problem, where each client optimizes its request arrival rate to maximize its own net utility individually, and at the Nash Equilibrium the total net utility of the system is also maximized. Existing mechanisms typically rely on monetary exchange which requires additional infrastructure that is not always available. Instead, the proposed protocol is based on efficient delay allocation, where the server controls the delay experienced by each client through an intelligent scheduling policy. Specifically, we present an efficient delay allocation rule for the server to determine the target delay of each client. Then we propose a simple scheduling policy to achieve such delay allocation. Furthermore, we design a distributed rate control protocol for the system to converge to the Nash Equilibrium. The optimality of our mechanism is validated via extensive simulations on two representative systems against a baseline mechanism with FIFO scheduling and centralized rate control.

A non-monetary mechanism for optimal rate control through efficient delay allocation

This paper proposes a practical non-monetary mechanism that induces the efficient solution to the optimal rate control problem, where each client optimizes its request arrival rate to maximize its own net utility individually, and at the Nash Equilibrium the total net utility of the system is also maximized. Existing mechanisms typically rely on monetary exchange which requires additional infrastructure that is not always available. Instead, the proposed protocol is based on efficient delay allocation, where the server controls the delay experienced by each client through an intelligent scheduling policy. Specifically, we present an efficient delay allocation rule for the server to determine the target delay of each client. Then we propose a simple scheduling policy to achieve such delay allocation. Furthermore, we design a distributed rate control protocol for the system to converge to the Nash Equilibrium. The optimality of our mechanism is validated via extensive simulations on two representative systems against a baseline mechanism with FIFO scheduling and centralized rate control.

Online Outsourcing and the Future of Work

The push toward global connectivity and the worldwide expansion of the internet, combined with the ongoing decline in the cost of technology, will change global labor markets and the nature of employment. Future technology will coordinate the assignment, distribution, and measurement of tasks to a billion-person network across multiple countries and dozens of skill vectors. The fixed salary, full-time employee will be replaced with a virtual network of online contractors who receive and deliver their work through computer-mediated auctions, assignments, and other economic mechanisms. I document these trends, explain the underlying economics, investigate the current labor laws and benefits for independent contractors, and suggest policy proposals that can prepare for the transformation.

Risk and Volatility:A Differential View

Investors and economists disagree on a proper definition of risk. To a value investor, risk is a permanent loss of capital; to a financial economist, risk is volatility. The author builds a formal model of risk, based on the value investor’s definition, and provides conditions for when it aligns with volatility. In general, the value notion of risk combines the first and second moments of the distribution of returns, which is why the two definitions can differ. The original definition of risk from economic theory is closer to the value definition of risk. Instead, the main problems arise from the empirical measure of risk, which leans on volatility because of ease of measurement.