Working papers:
1. Arbitrage Opportunities: Anatomy and Remediation with Peter Bossaerts and Jason Shachat. R&R at Journal of Finance.
We introduce an experimental design where arbitrage opportunities emerge reliably and repeatedly. We observe significantly higher sell-side than buy-side arbitrage opportunities. We study ways to mitigate them. Relaxing margin requirements, shortsale restrictions, or both have neither statistically nor economically significant effects. Increasing competition (more participants, each with small stakes) and more impactful stakes (unchanged number of participants but each with large exposures), generate large reductions in arbitrage opportunities. Hence, we advocate increased competition for small markets, and allowance for large stakes in large markets, rather than relaxation of rules on margin purchases or shortsales.
2. Ask Your Workers to Report Frequently, But Not Too Often (Job Market Paper)
Firms have long had employees report progress on tasks to supervisors. Asking employees to report their progress frequently is generally thought to increase productivity. If this occurs it is unclear if it is due to individuals possessing some sort of intrinsic motivation to work which is intensified by the reporting, or if individuals work more diligently when they believe their actions are observed or if they engage in more effort solely to avoid negative feedback. It is also unclear how frequently employees should report. We use controlled experiments to examine how reporting frequency may affect workers' effort decisions, including how much effort they spend on work versus leisure, and how they allocate effort across different tasks available within the firm. We also conduct treatments to identify what aspect of the reporting process is the driver of any performance increases. We find that increasing the frequency of reporting leads workers to spend more time on firm tasks, as opposed to leisure. However, when the frequency of reporting is set too high, workers shift to performing tasks that are more likely to generate positive returns in the short-term but that lead to lower returns overall. When we try to uncover what aspect of the reporting mechanism is responsible for the performance increase, we find weaker effects than predicted by prior literature.
3. Can Firm Competition Explain the Use of Executive Stock Options?
Stock options are widely used in executive incentive contracts, but the literature fails to provide a satisfactory explanation on why they are so popular. The expected and often researched effect of stock options is that they may make a manager more aggressive. When considering stock options in a competitive environment there is another potentially important but understudied effect on the behavior of rival managers which is that they might react by being less aggressive. We investigate this issue both theoretically and experimentally by examining how executive stock options would affect manager's investment decisions in a two-firm lottery contest. Our theoretical results suggest that owners have little incentive to grant executive stock options if managers are risk neutral, since granting stock options decreases their rival manager's investment by only a very small amount. Our experimental results, however, show that the behavior of the rival manager is impacted much more than theoretically anticipated leading to the use of stock options to be more profitable. Of particular interest is that while individually each firm benefits from their use, it turns out that if both firms use them they are worse off than if neither did.
4. Homeowner Associations and City Cohesion. with Ron Cheung and Tim Salmon
Homeowner Associations (HOAs) are an increasingly common form of attempts to provide localized public goods to members of the association. As HOAs have increased in size and scope, there have been substantial debates about whether they are beneficial to cities and in particular what is their effect on citizens who are not HOA members. One argument against HOAs has been a perception that they lessen city cohesion by setting some citizens off from others. We investigate one channel through which HOAs might improve city cohesion and that is the possibility that they lessen the desire for wealthy city residents to attempt to secede from a city. We also examine the degree to which poor residents might take the secession option of wealthy residents into account when they form their preferences regarding tax levels for the city. Due to the infrequency of actual city secession attempts we conduct an economic experiment aimed at eliciting preferences people may have under these different circumstances to try to understand this question. In the end, we do find that HOA-like options can reduce the desire of the wealthy to exit a city and that the presence or absence of an exit option and an HOA option can also impact the tax requests by the poorer residents in a city.
1. Arbitrage Opportunities: Anatomy and Remediation with Peter Bossaerts and Jason Shachat. R&R at Journal of Finance.
We introduce an experimental design where arbitrage opportunities emerge reliably and repeatedly. We observe significantly higher sell-side than buy-side arbitrage opportunities. We study ways to mitigate them. Relaxing margin requirements, shortsale restrictions, or both have neither statistically nor economically significant effects. Increasing competition (more participants, each with small stakes) and more impactful stakes (unchanged number of participants but each with large exposures), generate large reductions in arbitrage opportunities. Hence, we advocate increased competition for small markets, and allowance for large stakes in large markets, rather than relaxation of rules on margin purchases or shortsales.
2. Ask Your Workers to Report Frequently, But Not Too Often (Job Market Paper)
Firms have long had employees report progress on tasks to supervisors. Asking employees to report their progress frequently is generally thought to increase productivity. If this occurs it is unclear if it is due to individuals possessing some sort of intrinsic motivation to work which is intensified by the reporting, or if individuals work more diligently when they believe their actions are observed or if they engage in more effort solely to avoid negative feedback. It is also unclear how frequently employees should report. We use controlled experiments to examine how reporting frequency may affect workers' effort decisions, including how much effort they spend on work versus leisure, and how they allocate effort across different tasks available within the firm. We also conduct treatments to identify what aspect of the reporting process is the driver of any performance increases. We find that increasing the frequency of reporting leads workers to spend more time on firm tasks, as opposed to leisure. However, when the frequency of reporting is set too high, workers shift to performing tasks that are more likely to generate positive returns in the short-term but that lead to lower returns overall. When we try to uncover what aspect of the reporting mechanism is responsible for the performance increase, we find weaker effects than predicted by prior literature.
3. Can Firm Competition Explain the Use of Executive Stock Options?
Stock options are widely used in executive incentive contracts, but the literature fails to provide a satisfactory explanation on why they are so popular. The expected and often researched effect of stock options is that they may make a manager more aggressive. When considering stock options in a competitive environment there is another potentially important but understudied effect on the behavior of rival managers which is that they might react by being less aggressive. We investigate this issue both theoretically and experimentally by examining how executive stock options would affect manager's investment decisions in a two-firm lottery contest. Our theoretical results suggest that owners have little incentive to grant executive stock options if managers are risk neutral, since granting stock options decreases their rival manager's investment by only a very small amount. Our experimental results, however, show that the behavior of the rival manager is impacted much more than theoretically anticipated leading to the use of stock options to be more profitable. Of particular interest is that while individually each firm benefits from their use, it turns out that if both firms use them they are worse off than if neither did.
4. Homeowner Associations and City Cohesion. with Ron Cheung and Tim Salmon
Homeowner Associations (HOAs) are an increasingly common form of attempts to provide localized public goods to members of the association. As HOAs have increased in size and scope, there have been substantial debates about whether they are beneficial to cities and in particular what is their effect on citizens who are not HOA members. One argument against HOAs has been a perception that they lessen city cohesion by setting some citizens off from others. We investigate one channel through which HOAs might improve city cohesion and that is the possibility that they lessen the desire for wealthy city residents to attempt to secede from a city. We also examine the degree to which poor residents might take the secession option of wealthy residents into account when they form their preferences regarding tax levels for the city. Due to the infrequency of actual city secession attempts we conduct an economic experiment aimed at eliciting preferences people may have under these different circumstances to try to understand this question. In the end, we do find that HOA-like options can reduce the desire of the wealthy to exit a city and that the presence or absence of an exit option and an HOA option can also impact the tax requests by the poorer residents in a city.