Experimental evidence and a host of recent theoretical ideas take aim at the common economic assumption that individuals are selfish. The arguments made suggest that intrinsic “social preferences” of one kind or another are at the heart of unselfish, pro-social behavior that is often observed. I suggest an alternative motive based on “shame” that is imposed by the extrinsic beliefs of others, which is distinct from the more common approaches to social preferences such as altruism, a taste for fairness, reciprocity, or self-identity perception. The motives from shame are consistent with observed behavior in previously studied experiments, but more importantly, they imply new testable predictions. A new set of experiments confirm both that shame is a motivator, and that trusting players are strategically rational in that they anticipate the power of shame. Some implications for policy and strategy are discussed. JEL classifications C72, C91, D82

Contracts are an economic tool used to arrange transactions which are not tradable in simple spot markets. This thesis focuses on the implications of different kinds of contracts to understand behavior in complicated interactions. The first part of this thesis focuses on explicit formal contracts that provide non-linear payoffs and examines theoretically and empirically the implications for effort and risk-taking. The second part of this thesis focuses in contrast on implicit contracts. Starting from a theoretical perspective about how implicit contracts for influence buying might work in a setting that precludes explicit contracts. This helps explains empirical puzzles as well as has new predictions. I then show empirical evidence consistent with the predictions.

In the first part, I explore managerial incentive contracts. Managerial incentives induce risk-taking as well as effort. Theoretical research has long considered risk-taking a potential side effect of incentives, but empirical investigation is limited. This thesis first develops nuanced predictions about how contracts in use in many industries induce risk-taking and effort. The contracts considered match closely those used in real-world contracts. The thesis then uses exogenous variation in hedge fund manager's incentives, one of the settings where these contracts are used, to examine both performance and risk-taking. I find that, consistent with theory, being farther below a key incentive threshold increases risk-taking and decreases performance. On average, a manager's risk-taking increases 50 percent and their performance falls 2.1 percentage points when he is below the incentive threshold. I also show, consistent with the theoretical predictions, risk-taking behavior is non-monotonic; very distant managers take less risk and perform better than less distant managers. Further, I examine the role of organizational features in impacting the responsiveness to explicit incentives and the mechanisms managers use to increase risk. My results highlight the importance of risk-taking in response to incentives designed to induce effort and inform empirical research, contract design, practitioners, and policy makers. The results also show that moral hazard, not just selection, is an important determination of manager performance.

In the second part, I explore contracts for influence buying. Existing empirical evidence that finds very high actual or potential return to some campaign contributions and wonders, if contributions buy influence, why more exchange does not occur. Other empirical work has found consistent long-term relationships of contributions from interest groups to politicians. Yet, models of influence buying have treated the exchange as a simple spot transaction. This paper develops a formal model of relational influence buying between a firm and a politician where campaign contributions are exchanged for policy favors in a self-enforcing contract. This contract provides several insights. First, not all favors that have positive joint surplus to the firm and politician are contractible. Second, the model predicts that horizons of politicians will reduce the ability to raise funds. Third, the model provides empirical predictions for when firms should lobby themselves or outsource and on the structure of legislation. The first can explain why more, apparently valuable, trade does not occur. I find evidence consistent with the horizon effects from US Congress people's age and term limits in US state legislatures. The third insight speaks both to potential regulatory implications and implications for managers' influence activities. Finally, the insights from the model suggest empirical tools to detect influence buying without directly observing the favors.

This dissertation studies how agents and firms interplay under different market institutions. In the first two chapters, co-authored with Rodrigo Carril and Michael Walker, we study the implications of policies oriented to intensify competition for procurement contracts. Conceptually, opening contracts up to bids by more participants leads to lower acquisition costs. However, expanding the set of bidders hinders buyers' control over the quality of prospective contractors, potentially exacerbating adverse selection on non-contractible quality dimensions. We study this trade-off in the context of procurement by the U.S. Department of Defense. Our empirical strategy leverages regulation that mandates agencies to publicize contract opportunities whose value is expected to exceed a certain threshold. We find that advertising contract solicitations increases competition and leads to a different pool of selected vendors who, on average, offer lower prices. However, it also worsens post-award performance, resulting in more cost overruns and delays. This negative effect on post-award performance is driven by goods and services that are relatively complex, highlighting the role of contract incompleteness. To further study the scope of this tension, we develop and estimate a model in which the buyer chooses the extent of competition, and the invited sellers decide on auction participation and bidding. We estimate sellers' cost and ex-post quality distributions, as well as buyers' preference parameters over contract outcomes. Simulating equilibrium conditions under counterfactual settings, we benchmark the current regulation design with complexity-tailored publicity requirements, and find that adjustments to publicity requirements could provide savings of 2 percent of spending, or $104 million annually.

One of the main roles of the government involves enacting and enforcing regulation aimed at curbing the undesired behavior of agents. In the third chapter, co-authored with Mushfiq Mobarak, we study the consequences of deploying enforcement activities over illegal activities in local markets in Chile. The paper grapples with a key real-world feature that is that regulated agents adapt to circumvent enforcement. We present and test a model of enforcement with learning and adaptation by auditing vendors selling illegal fish in Chile in a randomized controlled trial and tracking them daily using mystery shoppers. Leveraging experimental variation on the frequency and predictability of enforcement, we can test the model's predictions and find that conducting audits on a predictable schedule and (counter-intuitively) at high frequency is less effective, as agents learn to take advantage of loopholes. A consumer information campaign proves to be almost as cost-effective and curbing illegal sales and obviates the need for complex monitoring and policing. The Chilean government subsequently chooses to scale up this campaign.

This dissertation is comprised of three studies that investigate the implications and determinants of firms' choice of organizational form.

In the first study, I present a model of a negotiated sales production process with two variations, whether the firm has a parallel or serial allocation of tasks, and whether they have a process for accounting for customers' return to the system. I predict, first, that a hierarchal sales process allows firms to capture profitable low valuation sales that are ignored by firms with a parallel process. Second, I predict that an information tracking process will allow firms to capture additional value from transactions that would have been completed anyway. I find support for these predictions in a dataset combining data on organizational details collected from a survey I conducted of 500 US auto dealers and transaction-level data on auto sales at those dealerships.

The second study investigates the allocation of control rights by firms. I present a model of a multidivisional firm faced with a choice relating to its divisions. The managers of those divisions have more information about the most productive choice for their division, but there is value to coordinating the choices. I predict that tasks with high coordination values will be more likely to be centralized and that for tasks with lower coordination values, delegation is more likely when the manager has a greater information advantage, which manifests in the volatility of the environment.

The third study proposes that vertical integration between manufacturers and lessors can generate externalities that improve the competitiveness of competing independent lessors. Often, manufacturers provide warranties in the sales market to inspire confidence in their customers. Because they are unable to observe the identity of customers, however, these same warranties can be used to recondition cars returned to independent lessors from leases shorter than the warranty. The ability to free-ride on maintenance cost in this segment of the market allows independent lessors to overcome some of the captives' informational advantage. I find support for this proposal in a dataset of 200,000 leases from 1997-2002.

This dissertation is comprised of three studies investigating how the provision of public information facilitates matching in online marketplaces.

The first study examines how employers on oDesk.com, the world’s largest online marketplace, use public information in hiring. I show that when employers are searching for someone low-skilled the provision of coarse information is sufficient. When employers are looking for someone high-skilled they will pay fixed screening costs to acquire information beyond what is provided by the platform. When information is not provided by the market- place all employers will pay to acquire more information. This leads to more matches and hiring quality workers at a lower price. However, the cost savings from hiring these low-cost, but high-quality workers does not outweigh the upfront cost of information acquisition.

The second study investigates how employers on oDesk.com alter their hiring behavior when some applicants, who were selected to be of higher quality by a machine learning algorithm, are covered by a money-back guarantee (MBG). The MBG increases the probability of transacting for employers looking for high-expertise talent. However, conditional on hir- ing, these employers do not substitute to observably different employees. Employers that are looking for lower expertise applicants substitute to higher quality applicants who are backed by the money-back guarantee. A follow-up experiment found that, given some reasonable assumptions, employers found the MBG to be more useful as a signal of applicant quality than as a risk-shifting mechanism.

The third study uses a series of empirical tests to isolate the mechanism through which the weather affects bidders’ willingness to pay (WTP) on eBay. I find that some variation in bidders’ WTP across multiple auctions can be explained by weather affecting mood. Changes in mood can alter WTP through two channels. Mood can directly alter the perceived value of the item or mood can influence cognitive processes, changing bidding strategies and indirectly changing the bid amount. I concluded that rain alters mood, which alters bidders’ perceived value of an item on eBay leading to bidders increasing their bids.

Abstract for first essay: Micro-costs, inertia in television viewing. Inertia, defined as the persistent choice for the default option, affects outcomes from organ donations to enrollment in retirement plans. A leading explanation for inertia is the cost of switching to an alternative option. Can consumers display inertia in a setting where this cost is negligible? If so, is this behavior systematic and significant enough to affect the profit- maximizing strategies of firms? This paper finds inertia in a setting in which the switching cost is extremely small: a click of the remote in the choice of television programs. In the absence of a significant switching cost, the audience of a program should not depend on the audience of the prior show on the same channel, controlling for the non-random assignment of programs. I find, however, that despite the negligible cost of switching: (i) male and female viewership of the news depends on whether the preceding show appealed to men or women, (ii) a 10% increase in the demand for the prior show increases the demand for the current program by 2%-4%. The leading explanation, among the several considered for this and other findings, is procrastination: consumers continuously postponing switching channels. Inertia in program choice affects channels' optimal program schedule and may influence as much as 20-40% of their profits. The broader implications of these findings are discussed.

Abstract for second essay: The gender earnings gap for physicians and its increase over time. Studies comparing earnings of male and female physicians have traditionally shown that male physicians earn more than female physicians with similar characteristics. Recent research using data from 1990 (Baker, 1996, in the New England Journal of Medicine) has suggested, however, that the gap in earnings between male and female physicians at the onset of their careers has disappeared, hailing a new era of equal gender pay. This paper analyzes four rounds of the Community Tracking Study Physician Survey from 1997 to 2005. Contrary to recent research, the evidence suggests that even at the onset of their careers male physicians earn at least 13% more than their female counterparts. Moreover, as physicians age from their thirties into their forties, the gap in pay between male and female physicians more than doubles to at least 28%, stabilizing thereafter. The difference in our findings versus those of recent research lies in the latter use of a restrictive estimation equation which leads to flawed conclusions.

This dissertation comprises three studies on competition, digitization, and innovation. The first study investigates the impact of entry of new competitors on incumbent firms in platform markets, focusing on the heterogeneous effects of firm quality and platform maturity.,The second study examines the causal impact of pricing on firm reputation.

In particular, online consumer review systems have gained prominence in recent decades, and this study focuses on how these ratings are generated and which factors influence consumer reviews. The third paper focuses on innovation and the impact of individual-level decision-making and characteristics on which patents are issued and the direction of innovation.

In Chapter 1, I study the effect of entry on incumbent firms in platform markets. The entry of firms into a platform has an ambiguous effect on the profitability of incumbent firms operating on the platform: While entry increases competitive pressure on incumbents, supply-side expansion may attract new consumers---effectively increasing total platform size and presumably benefiting all firms. The paper develops a simple model and explores how firm entry affects incumbents’ outcomes in a two-sided market.

I focus on Yelp Transactions Platform, an online platform that connects consumers with local services. I study a quasi-exogenous increase in firms on the platform and exploit geographic variation to employ a difference-in-differences research design. I find that, on average, market expansion favors incumbents, though the average effect masks substantial heterogeneities: High-quality incumbent firms experience a positive effect, whereas low-quality firms perform unambiguously worse. Using a structural model, my analysis finds a non-monotonic relationship between market expansion and firm performance. Lastly, I use YTP’s granular data on consumer and incumbent behavior to explore other market outcomes, main mechanisms, and firms' strategic responses.

The results of Chapter 1 highlight the growing importance of perceived firm quality and standardized ratings on firms’ performance. In Chapter 2, I (along with Mike Luca) explore the causal impact of pricing on firm reputation as measured by online ratings. We again use data from YTP on prices, orders, and ratings. Looking at narrow windows around the timing of menu price changes, we find that online reviews are influenced by price changes and that increasing prices tends to harm a firm’s reputation;

a 1\% increase in the price of an item leads to a decrease of approximately 5\% in the ratings left by users. Consistent with this, the distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. We also find that these effects are not driven by consumer retaliation against price changes, but rather by changes in absolute price levels. Finally, we derive implications to consumers, firms' strategies, and the design of reputation systems.

In Chapter 3, I (along with Abhay Aneja and Gauri Subramani) study how differences in persistence contribute to the gender ``innovation gap,'' i.e. that women are much less likely to receive patents than men. To provide causal evidence of a persistence channel, we use exogenous variation in the likelihood of early-stage adverse decisions about patentability claims that arises from the random assignment of applications to patent examiners. We find that majority-female innovator teams are less likely than majority-male teams to either appeal or amend applications that receive rejections within the patent prosecution process. Roughly 1/2 of the overall gender gap in awarded patents can be accounted for by the differential propensity of women to exit the application process after a rejection of patent claims at the first stage of the prosecution process. We also provide evidence that firms and other organizations can mediate the gender gap in persistence: The persistence gap is reduced for women-led applications that have the backing of firms. We find that examiner identity has little to do with differential persistence across genders.

This dissertation comprises three studies that examine competition, public policy, and innovation. The first study investigates how product market competition affects the intensity and breadth of innovation activities of firms, using the formation and breakup of price fixing cartels to proxy for competition or lack thereof. The second and third studies investigate how public policy on restrictive covenants, namely non-compete agreement, affects business dynamism/concentration and strategic knowledge management of firms, respectively.

For the first study, I assembled a unique dataset comprising 461 prosecuted cartel cases in the U.S. from 1975-2016, where I match 1,818 collusive firms to firm-level data on patenting, R&D investment, and other measures of innovation. I then use a difference-in-difference methodology, matching colluding firms to various counterfactual firms. Empirical results show a negative causal relationship between competition and innovation in the cartel context. When collusion suppressed market competition, colluding firms increased R&D investment by 12%, patenting by 51%, and top-quality patents by 20%. Furthermore, firms also broadened their areas of innovation when competition was suppressed by collusion, with the number of patented technology fields increasing by 33%. The increased and broadened innovation activities reverted back, close to previous levels, when competition was restored by collusion breakup. Further tests suggest that financial constraint (“ability to innovate”) and the industry’s growth rate (“incentive to innovate”) are important economic mechanisms behind the trade-off between price competition in the product market and innovation growth.

I then turn to labor market competition and study the effects of legal enforcement of non-competition agreements on business activities, including entrepreneurship and innovation. The second study, co-authored with Lee Fleming, isolates the impact of non-compete enforcement on regional business dynamism and concentration by focusing on Florida’s 1996 legislative change that eased restrictions on the enforcement of non-competes. We first establish the contrast between legal regimes and note that wage trends did not change when comparing wages before and after the passage of the legislation. Difference-in-differences models show that following the change, establishments of large firms were more likely to enter Florida; these firms also created a greater proportion of jobs and increased their share of employment in the state. Entrepreneurs or establishments of small firms, in contrast, were less likely to enter Florida following the law change; they also created a smaller proportion of new jobs and decreased their share of employment. Consistent with these location and job creation dynamics, a variety of business concentration measures increased significantly following the law change in Florida. Nationwide cross-sections demonstrate consistent correlations between state-level non-compete enforcement and business dynamism/concentration dynamics illustrated in Florida.

Expanding the questions on the impact of labor market competition and worker mobility, the third study examines how firms strategically manage innovation processes and outcomes against mobility of workers (this work is co-authored with Wyatt Lee). In 1998, a California Court of Appeal ruled that non-compete agreements (“non-competes”) signed by an employer and an employee outside of California are not enforceable in California. This court decision created a loophole for employees of non-California firms, as these firms could no longer enforce non-competes by which their employees were previously bound, and the employees could now move freely to California firms. We use a difference-in-difference methodology comparing firms in states that have been enforcing non-competes with firms in states that have not been enforcing non-competes. We find that this California-driven loophole significantly affected knowledge management and innovation processes of non-California firms that are affected. These firms decreased R&D investments (an important input for innovation) because such R&D activities became more costly and risky. On the other hand, these firms increased patent filings (without compromising their quality) despite the decrease in innovation input. In other words, firms increased their propensity to patent, suggesting that firms rely more on strategic patenting than on secrecy when facing higher mobility of and competition for workers.

Chapter 1: In the last two decades, public agencies have started to include performance pay into their compensation structure. Using a survey data of all law enforcement agencies in the Unites States, this chapter investigates: (1) if the adoption of performance pay by agencies affected their ability to fight crime and (2) whether agencies responded to performance pay adoption by shifting their policing strategies to game the change? We find that despite increases in the pay gap, performance pay adoption resulted in no change in the police's ability to fight crime. We find little evidence that adopting agencies attempted to game the incentive structure by shifting efforts away from less profitable tasks.

Chapter 2: There has been much debate over whether interest groups act as ideologues or investor when they contribute to candidates. In a seminal work, Snyder (1990) finds that economic interest groups behave as investors and there is a one to one correlation between candidates' share of contribution from economic interest groups and their probability of winning. This chapter expands on Snyder's work by proposing a new strategy to empirically identify investor interest groups, that is, by examining whether an interest group has ever given to competing parties in a race, we call this group "diversifiers". We find that there is indeed a significant correlation between diversifier contribution share and election outcome. Furthermore, the correlation between diversifiers contribution share to date and election outcome remains significant as early as approximately 48 weeks before election day.

Chapter 3: Participation of interest groups in public policy making is ubiquitous and unavoidable. In this final chapter, we try to understand the mechanisms through which interest groups attempt to influence the implementation of public policies from an Institutional Economics perspective. We recognize that while it is legislatures that enact and supervise statures, it is often bureaucracies that implement policies. We survey a collection of papers that analyze how the vast power invested in bureaucracies influence the strategic choice of interest group in means to exert influence - buying, lobbying and suing. We further generalize our analysis to understand how differences in the institutional environment impact the role of interest groups in public policy making.