Working Papers

[1] Equilibrium Contracts and Boundedly Rational Expectations, joint with Heidi Christina Thysen [draft upon request]

We study a principal-agent framework in which the agent forms beliefs based on a misspecified model of the principal’s project. She fits this model to the objective probability distribution to predict output under alternative actions. Misspecifications may lead to biased beliefs. However, under mild restrictions, the agent has correct beliefs on the equilibrium path so that the optimal contract is non-exploitative. We derive a behavioral version of the informativeness principle, and characterize when misspecifications affect the optimal contract. One implication of this is that the scope for belief biases depends on the agent’s job, e.g., her position in the hierarchy.

[2] Measuring the Indirect Effects of Adverse Employer Behavior on Worker Productivity – A Field Experiment, joint with Matthias Heinz, Sabrina Jeworrek, Vanessa Mertins and Matthias Sutter, CEPR Discussion Paper 12429 [pdf] [Online Appendix] [voxeu column]

We conduct a field experiment to study how workers’ productivity is affected if employers act adversely towards their co-workers. Our employees work for two shifts in a call-center. In our main treatment, we lay off some workers before the second shift. Compared to two control treatments, we find that the layoff reduces the productivity of unaffected workers by 12 percent. We find suggestive evidence that this result is not driven by altered beliefs about the job or the management’s competence, but caused by the workers’ perception of unfair employer behavior. The latter interpretation is confirmed in a prediction experiment with professional HR managers. Our results suggest that the price for adverse employer behavior goes well beyond the potential tit-for-tat of directly affected workers.

[3] The Agency Costs of On-the-Job Search, joint with Daniel Herbold [pdf]

This paper studies how workers‘ on-the-job search influences optimal incentives in organizations. We analyze a principal-agent model in which the agent multitasks between working for the principal and searching for other job opportunities. The agent partly uses on-the-job search to improve his bargaining position within the relationship. We show that the optimal contract may feature both excessive (larger than first-best) performance bonuses as well as efficiency wages. Both measures reduce the agent’s search incentives, but do not completely eliminate rent-seeking under the optimal contract. On-the-job search therefore generates agency costs. The model suggests a new rational for excessive incentive pay and efficiency wages.

[4] Market Size and Competition: A “Hump-Shaped” Result, joint with Iris Grant, Iris Kesternich and Johannes Van Biesebroeck [pdf]

An active empirical literature estimates entry threshold ratios (ETRs), introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on competition. We show that in the standard homogenous goods oligopoly model, there is no monotonic relationship with the price-cost margin, one measure for the strength of competition. Regardless of the shape of demand, the ETR is hump-shaped in the number of active firms. It can also increase with entry in the Salop model of product differentiation or in a game of repeated interactions where collusion is possible. Empirical applications should use caution and only interpret changes in the ratio as indicative of a change in competition when the number of firms is sufficiently large.