Mehmet Bac

The Old-Boy Network and the Quality of Entrepreneurs

We study a model of network formation and start-up financing with endogenous entrepreneurial type distribution. A hub firm admits members to its network based on signals about entrepreneurs’ types. Network membership is observable, which allows lenders to offer different interest rates to network and stand-alone entrepreneurs. We show that a network outcome can display a smaller number of high-type entrepreneurs even though the network is neither nepotistic nor informationally disadvantaged. While a welfare-improving network can emerge as a technically stable or unstable equilibrium, one that decreases welfare is always formed by a technically unstable equilibrium. However, the adverse welfare effects of a network and its corresponding type configuration may persist because ex-post high type entrepreneurs prefer to stay high type whereas those who wish to become high-type may need some time to react.

The Scope, Timing, and Type of Corruption

This paper provides an analysis of the corruption problem in public organizations. It distinguishes between two types of corruption (individual/organized) and crime (bribe for a legal/illegal application), and between two occasions (before/after detection) for partial and full collusion. The integrated supervision procedure, where monitoring and review are centralized, displays higher individual corruption but a lower risk of organized corruption than the alternative, separated supervision procedure. Higher penalties and bribes, and lower rewards to supervisors, increase the risk of all types of collusion under both procedures. A trade-off is involved in the choice of the supervision procedure and penalties: Reducing individual corruption brings about a higher risk of organized corruption.

Strategic information revelation in fundraising

Abstract We consider a model of voluntary contributions for a public project with random number of potential contributors. The fundraiser, who observes this number, has to decide whether to reveal or suppress the information before contributions are given. The fundraiser’s objective is to collect maximal contributions. We show that whether the public project is convex or non-convex can be the key to the fundraiser’s announcement decision. In the convex case, this number is always revealed. In the non-convex case the number may not be revealed at all or sometimes revealed only when it is in an intermediate range. In the presence of multiple equilibria, total contributions increase with the extent of concealment.

On‐the-Job Specific Training and Efficient Screening

Employment relationships are governed by short‐term incomplete contracts and typically involve on‐the-job screening and firm‐specific training. This article studies a dynamic employment relationship with these features and identifies a potential conflict between the employers twin objectives to screen and train the worker: when the training technology is quite productive, the employer may have to sacrifice from worker performance during the screening process. The article thus offers an explanation for why firms may invest suboptimally on training, which complements the standard “inappropriable rents” explanation based on ex post mobility of young employees.

A theory of trade concessions

Abstract We present a model of tariff disputes and concessions consisting of an infinitely repeated game under bilateral incomplete information. Given potential agreements to be reached through unilateral or reciprocal concessions, we find that an agreement involving reciprocal concessions is reached immediately if the discount factor is large and/or the volume of trade is small. Otherwise prior beliefs about country type matter: when both countries hold pessimistic priors, immediate reciprocal concessions still occur. Very different prior beliefs lead to an immediate unilateral concession of the pessimistic country, whereas optimistic priors coupled with low discount factors may generate delayed agreements.

Incomplete information and incentives to free ride

We study private provision of a continuous public good in an incomplete information repeated game. The analysis generates the following predictions in the form of Perfect Bayesian equilibria. When the discount factor is low, the game played by increasingly optimistic players may collapse into a war of attrition: delay may occur and one player may bear the burden of providing the public good while the other free rides forever. On the other hand, if the discount factor is high, or low but prior beliefs are “pessimistic”, the inclusion of incomplete information has no impact on the pattern of contributions.

On Creating and Claiming Value in Negotiations

This paper presents a negotiation model that includes value creation. It shows that creative negotiation efforts tend to intensify toward the deadline, and that the deadline is determined endogenously by the tension between two motives, creating more value and claiming from existing value. When the parties can present “misleading” offers in order to claim rather than create value, the outcome in early negotiation rounds may display an impasse where any proposal is rejected without inspection, while negotiation activities such as value creation through “sincere” offers and inspection of clauses intensify toward the deadline.

Switching costs and screening efficiency of incomplete contracts

We study the role of switching costs in a dynamic buyer-seller relationship where quality is not contractible and the sellers retain private information about their quality-relevant abilities. In this environment buyer switching costs increase the sellers bargaining power in negotiations for the second contract, but they also induce the seller to improve quality during the first contract, in signalling his type. The overall effect is to enhance efficiency and increase the buyers welfare. This beneficial effect stems from the link between quality, the buyers posterior beliefs, and ex post distribution of bargaining power as a function of the switching cost.

To invest or screen efficiently: a potential conflict in relationships governed by incomplete contracts

Abstract We consider a dynamic trade relationship where quality is not contractible and potential sellers retain quality-relevant private information. We show that the presence of an investment technology to improve the incumbent seller’s innate quality may impair the efficiency of the screening process. If the conflict is effective, the buyer has to induce an inefficient screening process or reduce the productivity of the investment technology. This conflict suggests that the hold-up problem may be more severe than predicted by models of incomplete contracts that assume complete information.

A note on efficient signaling of bargaining power

Abstract. Strategic delay and restricted offers are two modes of signaling bargaining power in alternating offers bargaining games. This paper shows that when both modes are available, the best signaling strategy of the “strong” type of the informed player consists of a pure strategic delay followed by an offer on the whole pie. There is no signaling motivation for issue-by-issue bargaining when the issues are perfectly substitutable.