Boundedly Rational Demand, with Jakub Steiner and Colin Stewart
Evidence suggests that consumers do not perfectly optimize, contrary to a critical assumption of classical consumer theory. We propose a model in which consumer types can vary in both their preferences and their choice behavior. Given data on demand and the distribution of prices, we identify the set of possible values of the consumer surplus based on minimal rationality conditions: every type of consumer must be no worse off than if they either always bought the good or never did. We develop a procedure to narrow the set of surplus values using richer datasets and provide bounds on counterfactual demands.
Endogenous Risk Attitudes, with Nick Netzer, Arthur Robson and Jakub Steiner
In a model inspired by neuroscience, we show that constrained optimal perception encodes lottery rewards using an S-shaped encoding function and over-samples low-probability events. The implications of this perception strategy for behavior depend on the decision-maker's understanding of the risk. The strategy does not distort choice in the limit as perception frictions vanish when the DM fully understands the decision problem. If, however, the DM underrates the complexity of the decision problem, then risk attitudes reflect properties of the perception strategy even for vanishing perception frictions. The model explains adaptive risk attitudes and probability weighting, as in prospect theory and, additionally, predicts that risk attitudes are strengthened by time pressure and attenuated by anticipation of large risks.
Revealing Private Information in a Patent Race (Slides)
In this paper I study dynamic and strategic aspects of R&D rivalry. I consider a patent race in which the first firm to make two consecutive breakthroughs wins the prize. A breakthrough arrives with instantaneous probability equal to the firm's R&D effort level, and its arrival is observed privately. A firm varies its effort as it updates its belief about the rival's progress. I find that a firm drops its effort over time until its first breakthrough arrives, in which case the effort jumps up and keeps increasing until one of the players patents. Further, I investigate whether a firm would want to reveal success in order to discourage its rival. I find that a firm never reveals if its rival has, and is first to reveal when a breakthrough is hard to achieve. When breakthroughs arrive quickly the firm prefers secrecy to revelation. For intermediate levels of research difficulty firm's revelation behavior entails randomization or delay. Interestingly, when there are more than two players, equilibrium always entails revelation.
Multi-Player Discrete All-pay Auctions
In this paper I study all-pay common-value auctions in which bids are restricted to non-negative integers. I prove that the game has unique symmetric Nash equilibrium in mixed strategies given that there are three or more players. Although players bid on average lower as more players are present, they always randomize on the whole set of bids smaller than the value of the prize, so long as there is sufficiently enough players. Players always receive a positive expected payoff which is bounded by a constant regardless of how large the value of the prize is. Finally, I prove that in limit the equilibrium converges to the equilibrium of a continuous all-pay auction.
Optimal Stopping in Patent Race Games
In their study Optimal Stopping with Private Information, Kruse and Strack (2013) analyze a single-agent optimal stopping mechanism design problem with transfers. I extend their framework to a general class of problems in which termination can occur exogenously prior to the agent's stopping time. I provide a simple condition under which all cut-off rules are implementable by a posted-price mechanism. As an application, I consider patent race in which each agent has private information about the arrival rate of a discovery, and stopping represents giving up the research efforts.