Essays in Limited Commitment

Open Access
- Author:
- Mallick, Vasundhara
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- May 24, 2024
- Committee Members:
- Marc Henry, Professor in Charge/Director of Graduate Studies
Chloe Tergiman, Outside Unit & Field Member
Nageeb Ali, Chair & Dissertation Advisor
Nima Haghpanah, Major Field Member
Miaomiao Dong, Major Field Member - Keywords:
- Delegation
Mechanism Design
Organizational Economics
Intermediation
Adverse Selection - Abstract:
- This dissertation comprises two chapters. The first chapter, "The Art of Waiting", co-authored with Ece Teoman, studies delegated project choice without commitment: a principal and an agent have conflicting preferences over which project to implement, and the agent is privately informed about the availability of projects. We consider a dynamic setting in which, until a project is selected, the agent can propose a project, and the principal can accept or reject a proposed project. Importantly, the principal cannot commit to his responses, and cannot implement a project unless it is proposed. In this setting, the agent has an incentive to hold back on proposing projects that the principal favors so that the principal approves a project favored by the agent. Nevertheless, the principal achieves his commitment payoff in an equilibrium of the game in the frequent-offer limit. This high payoff equilibrium showcases the art of waiting and contrasts with Coasian logic: by giving proposer power to the agent, the principal makes it credible to reject his dispreferred projects until later in the game giving the agent an incentive to propose principal-preferred projects earlier on. We apply these results to the economics of organization. In particular, these results suggest that to curb a manager's \textit{empire building} plans, eliciting proposals from her "bottom-up" might be better than issuing "top-down" commands. The second chapter, "How Markets Disrupt Mediated Trade", studies markets with adverse selection and the degree to which intermediaries can foster efficient trade. I consider a setting in which a seller and buyer have interdependent values. Without any intermediation, the Lemons Problem guarantees that only the lowest type trades in any equilibrium. I consider an intermediary who brokers trade between the seller and the buyer by using a screening mechanism. When this is the \textit{only} channel for trade, more efficient outcomes are possible in equilibrium, where higher types trade with positive probability. My main result, however, concludes that once the seller can \emph{also} sell her asset without going through the intermediary, market failures re-emerge: trade of assets above the lowest quality shuts down in \textit{both} the decentralized and mediated market. This paper shows that intermediation might be rendered completely ineffective when assets cannot be exclusively traded through the intermediary.