Vladimir Smirnov

Hold-up and Sequential Specific Investments

We explore the hold-up problem when trading parties can make specific investments simultaneously or sequentially. As previously emphasized in the literature, sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. This is not always the case, however. A cost of sequencing investment is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can be detrimental to welfare; it can even prevent trade from occurring. This is a new result: it allows the choice about the timing of investment to be interpreted as a new form of hold-up. We also examine an investment game in which both parties would prefer to invest second (follow) rather than lead. This game displays some interesting dynamics. As the the number of potential investment periods is increased, the subgame perfect equilibrium can switch between a prisoners’ dilemma and a coordination game.

Ownership, access and sequential investment

We extend the property-rights framework to allow for: a separation of the ownership rights of access and veto; and sequential investment. Parties investing first (ex ante) do so before contracting is possible. Parties that invest second (ex post) can contract on (at least some) of their investment costs. Along with this cost-sharing effect, the incentive to invest is affected by a strategic effect generated by sequential investment. Together these effects can overturn some of the predictions of the property-rights literature. For example, the most inclusive ownership structure might not be optimal, even if all investments are complementary.

Staged Financing with a Variable Return

This paper explores the hold-up problem between two parties (an entrepreneur and an investor) when one of the parties (the entrepreneur) is unable to commit not to repudiate the initial contract. To mitigate hold-up we allow the parties to stage investments over time and derive the optimal investment path in a model that places no restrictions on the growth of collateral. Our model predicts that neither positive wealth of the entrepreneur nor the lack of discounting ensures that all profitable projects proceed. We also derive necessary and sufficient conditions for the project to be financeable when there are no costs of delay.

Communication Breakdown: Consultation or Delegation from an Expert with Uncertain Bias

When communicating with an uninformed decision maker, the motives behind an experts message are often unclear. To explore this and investigate its impact on organizational design, we extend the cheap-talk model of Crawford and Sobel (1982) to allow for uncertainty over the experts bias. We find that, in contrast to Dessein (2002), it is possible that the decision maker prefers communication to delegation; that is, it can be optimal for a decision maker to retain control and to solicit advice from the expert.

Market Niche, Flexibility and Commitment

We study a market-entry game in which the potential entrants wish to coordinate their actions (i.e. enter different market segments rather than compete directly). If (i) the firms have an option to wait, and (ii) each firm has a different reaction time after they have decided to wait, the unique outcome that survives the iterated elimination of weakly dominated strategies favors the less flexible firms.

Market Entry Dynamics with a Second-Mover Advantage

We study a market-entry game with a second-mover advantage. In the symmetric equilibrium, there can be a non-monotonic relationship between the probability with which a player will invest (entry) and the length of time until the deadline. Moreover, the probability of investment can move chaotically as the horizon is extended. In the limit when the period length goes to zero chaotic trajectories arise when the efficiency effect does not hold -- that is, when the one-period monopoly profit is less than the total of the one-period duopoly profits. We also show that the presence of chaotic trajectories is associated with a smaller expected delay in entry.

Collusion with Intertemporal Price Dispersion

We develop a theory of optimal collusive intertemporal price dispersion. Dispersion clouds consumer price awareness, encouraging firms to coordinate on dispersed prices. Our theory generates a collusive rationale for price cycles and sales. Patient firms can support optimal collusion at the monopoly price. For less patient firms, monopoly prices must be punctuated with fleeting sales. The most robust structure involves asymmetric price cycles resembling Edgeworth cycles. Low consumer attentiveness enhances the effectiveness of price dispersion by reducing the payoff to deviations involving price reductions. However, for sufficiently low attentiveness, price rises are also a concern, limiting the power of obfuscation.

BUNDLING IN AUCTIONS WITH NON‐LINEAR VALUATIONS

We examine when a revenue-maximising auctioneer prefers to auction a homogenous product in one bundle (a single-object auction) than to sell the item in two or more shares. When the items are super-additive the auctioneer always prefers a single-object auction. When the product valuations are sub-additive, the auctioneer is more likely to choose a share auction when there are a large number of potential bidders. When there are a small number of bidders the auctioneer will tend to prefer a single-object auction.

Contracts, Incentives and Organizations: Hart and Holmstrom Nobel Laureates

This article reviews the contribution of Hart and Holmstrom, the 2016 Nobel Laureates in economics. Holmstroms work on the principal-agent problem answered questions as to what should (and should not) be included in an incentive contract. His work helped explain the simple structure of incentive contracts we typically observe in the real world. The models he developed have been used to address questions of CEO compensation, organizational design and optimal regulation. A key element of Harts research focused on the question of what are the optimal boundaries of a firm (and indeed, what a firm actually is). In doing so he developed the incomplete-contracts framework, which has subsequently been used to explain many economic phenomena whenever renegotiation is important, including authority and decision-making structures in firms, why financial contracts look the way they do, and various questions in international trade and public policy.

Contracts, incentives and organizations: Hart and Holmström Nobel Laureates

ABSTRACT This article reviews the contribution of Hart and Holmström, the 2016 Nobel Laureates in economics. Holmströms work on the principal-agent problem answered questions as to what should (and should not) be included in an incentive contract. His work helped explain the simple structure of incentive contracts we typically observe in the real world. The models he developed have been used to address questions of CEO compensation, organizational design and optimal regulation. A key element of Harts research focused on the question of what are the optimal boundaries of a firm (and indeed, what a firm actually is). In doing so he developed the incomplete-contracts framework, which has subsequently been used to explain many economic phenomena whenever renegotiation is important, including authority and decision-making structures in firms, why financial contracts look the way they do, and various questions in international trade and public policy.