Abstract: Is more novelty in research desirable? We develop a model in which knowledge shapes society's policies and guides the search for discoveries. Researchers select which question to study and to what extent. The novelty of the question determines both the value and the difficulty of discovering its answer. We show that the benefits of discoveries are non-monotone in novelty. Nevertheless, due to a dynamic externality, it can be optimal to incentivize research on distant discoveries to improve the evolution of knowledge. One reason is that the probability of a discovery and the novelty of the question are endogenously linked. They can be complements or substitutes depending on existing knowledge. We analyze cost reductions and research awards as instruments to incentivize research. While a benefit-maximizing funder's optimal funding mix depends on her budget in general, distant discoveries can only be incentivized through awards.
Abstract: We study the tradeoff between fundamental risk and time. A time-constrained agent has to solve a problem. The agent dynamically allocates effort to implementing a known yet risky method or developing a new, less risky method. The time remaining to implement a new method determines the value of the agent's discovery. Under the optimal policy, the agent may switch from implementing the old to developing a new and back to implementing the old method. Successful development of new methods is most likely if the time horizon is intermediate. The results differ qualitatively if new approaches are developed through lean techniques.
Abstract: I study a continuous-time moral hazard problem with learning about a two-stage project of unknown quality. The first-stage arrival time is informative but not conclusive about the project’s quality. Due to the informativeness, the optimal contract features a combination of continuation value and intermediate bonus payments as a reward. There is a negative correlation between the first success time and the share of bonus payments in the reward. Second-stage deadlines adjust to the first-stage success time: early successes are rewarded with longer deadlines in the second stage. When agent replacement between stages is possible, the principal will replace the agent if the first success arrives late.
Abstract: We consider dynamic price-setting in the presence of rating systems and asymmetric information about product quality. A long-lived monopolist sells a product of privately known and fixed quality to a sequence of short-lived consumers. In each period, the price charged determines the taste characteristics of purchasing consumers who leave reviews after purchase. Individual reviews are aggregated into ratings observable to future consumers. The price has two effects on future ratings: (i) a direct price effect on reviews, and (ii) an indirect selection effect by determining the tastes of reviewing consumers. Inference is conducted by looking for the inferred quality and cutoff taste such that purchase decisions are individually rational and the current aggregate rating is matched. We show that rating systems are effective as consumers correctly infer the quality of the product in the long run. However, the design of the rating system affects long-run prices, profits and consumer surplus. If the direct price effect dominates the selection effect, consumers benefit from a rating system which is more sensitive to newly arriving reviews. In contrast, they prefer a more persistent system if the selection effect dominates. Firms are unambiguously better off the more sensitive the rating system.
Abstract: We investigate the impact of prices on seller ratings. In a stylized model, we illustrate two opposing channels through which pricing affects overall ratings and rating subcategories. First, higher prices reduce the perceived value for money which worsens ratings. Second, higher prices increase the taste-based valuation of the average traveler which improves ratings. Using data from Airbnb, we document a negative relationship between prices and ratings for most rating subcategories indicating that the value-for-money effect dominates the selection effect. In line with our model, we find that hosts of low-rating listings exert more effort than those of high-rating listings. Finally, an empirical assessment of the dynamics in the market suggests that taking the effect of prices on future ratings into account pays off: entrants who set low entry prices obtain better ratings and higher revenues in the medium run. A median entry discount of 8.5 percentage points increases medium-run monthly revenues by approximately 50 euros.
Abstract: A seller serving two generations of short lived heterogeneous consumers sells a product under uncertain demand. We characterize the seller's optimal pricing, taking into account that the current period's price affects the information transmission to the next period consumers via consumer ratings. While the seller always prefers to generate more information, it is not necessarily in the consumers' interest. We characterize situations in which consumer surplus and welfare are decreasing in additional information. We provide conditions under which aggregate consumer surplus and welfare are lower with than without a rating system.
Abstract: We study equilibrium distancing during epidemics. Distancing reduces the individual’s probability of getting infected but comes at a cost. It creates a single peaked epidemic, flattens the curve and decreases the size of the epidemic. We examine more closely the effects of distancing on the outset, the peak and the final size of the epidemic. First, we define a behavioral basic reproduction number and show that it is concave in the transmission rate. The infection, therefore, spreads only if the transmission rate is in the intermediate region. Second, the peak of the epidemic is non-monotonic in the transmission rate. A reduction in the transmission rate can lead to an increase of the peak. On the other hand, a decrease in the cost of distancing always flattens the curve. Third, both an increase in the infection rate as well as an increase in the cost of distancing increase the size of the epidemic. Our results have important implications on the modeling of interventions. Imposing restrictions on the infection rate has qualitatively different effects on the trajectory of the epidemics than imposing assumptions on the cost of distancing. The interventions that affect interactions rather than the transmission rate should, therefore, be modeled as changes in the cost of distancing.
Abstract: We develop a structural empirical model of procurement auctions with private and common value components and bidder asymmetries in both dimensions. While each asymmetry can explain the dominance of a firm, they have opposite welfare implications. We propose a novel empirical strategy to quantify the two asymmetries using detailed contract-level data on the German market for railway passenger services. Our results indicate that the incumbent is slightly more cost-efficient and has substantially more information about future ticket revenues than its competitors. If bidders’ common value asymmetry was eliminated, the median probability of selecting the efficient firm would increase by 61%-points.