Silvia Sonderegger

The role of the agent's outside options in principal-agent relationships

We consider a principal-agent model of adverse selection where, in order to trade with the principal, the agent must undertake a relationship-specific investment which affects his outside option to trade, i.e. the payoff that he can obtain by trading with an alternative principal. This creates a distinction between the agent’s ex ante (before investment) and ex post (after investment) outside options to trade. We investigate the consequences of this distinction, and show that whenever an agents ex ante and ex post outside options differ, this equips the principal with an additional tool for screening among different agent types, by randomizing over the probability with which trade occurs once the agent has undertaken the investment. In turn, this may enhance the e¢ciency of the optimal second-best contract.

Why Do Parents Socialize Their Children to Behave Pro-Socially? An Information-Based Theory

We present a model of intergenerational transmission of pro-social values in which parents have information about relevant characteristics of society that is not directly available to their children. Differently from existing models of cultural transmission of values (such as Bisin and Verdier, 2001, and Tabellini, 2008) we assume that parents are exclusively concerned with their childrens material welfare. If parents coordinate their educational choices, a child would look at her system of values to predict the values of her contemporaries, with whom she may interact. A parent may thus choose to instil pro-social values into his child in order to signal to her that others can generally be trusted. This implies that parents may optimally decide to endow their children with values that stand in contrast with maximization of material welfare, even if their childrens material welfare is all they care about.

Market Segmentation with Nonlinear Pricing

We study the benefits and drawbacks of allowing firms to offer different price-quality menus to captive consumers and to consumers more exposed to competition (market segmentation). We show that the effect of market segmentation depends on the relationship between the range of consumer preferences found in captive and competitive markets. When the range of consumer preferences in captive markets is wide, segmentation is quality and (aggregate) welfare reducing, while the opposite holds when the range of consumer preferences in captive markets is narrow. Segmentation always harms captive consumers, while it always benefits consumers located in competitive markets.

Signaling about norms: Socialization under strategic uncertainty

We consider a society with informed individuals (adults) and naive individuals (children). Adults are altruistic towards their own children and possess information that allows to better predict the behavior of other adults. Children benefit from adopting behaviors that conform to the social norm determined by aggregate adult behavior, but, lacking accurate information, have to rely on the observed behavior of their adult parent to infer the norm. We show that this causes a signaling distortion in adult behavior. Compared to the benchmark case of no signaling, parents have a higher propensity to adopt attitudes that encourage their children to behave in a socially safe way, i.e. the way which would be optimal under maximum uncertainty about the prevailing social norm. This distortion is different in nature from the typical distortion due to a conflict of interest between sender and receiver in standard signaling games. The norm-signaling bias is self-reinforcing and might lead both to (Pareto) superior and inferior outcomes relative to the case of no signaling. We discuss applications to sexual attitudes, collective reputation, and trust.

The costs and benefits of coordinating with a different group

We consider a setup where agents care about i) taking actions that are close to their preferences, and ii) coordinating with others. The preferences of agents in the same group are drawn from the same distribution. Each individual is exogenously matched with other agents randomly selected from the population. Starting from an environment where everyone belongs to the same group, we show that introducing agents from a different group (whose preferences are uncorrelated with those of each of the incumbents) generates costs but may also (surprisingly) generate benefits in the form of enhanced coordination.

Over-Signaling or Underpricing? The Role of Financial Intermediaries in Initial Public Offerings

We consider a model of Initial Public Offerings (IPOs) where issuing firms of better quality are more reluctant to go public. IPOs either generate or destroy value depending on the type of the issuing firm, which is only observed by the issuer. We show that, when the issuer directly offers the shares to the investors, market breakdown occurs. This is caused by the issuers attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which: 1) acts as an underwriter, 2) influences the offering price. Underwriting creates a wedge between the interests of the intermediary and those of the issuer. This allows trade with outside investors to be restored. A by-product of the conflict of interest between issuer and intermediary is that trade is characterized by underpricing. In the benchmark case where her profits are zero, the intermediary acts as a screening device: she underwrites the shares only upon receiving positive information about the issuer.