Research

Publications

Agency in Hierarchies: Middle Managers and Performance Evaluations -Journal of the European Economic Association, Volume 12, Issue 5, October 2024

This paper studies the optimal joint design of incentives and performance rating scales in a principal-manager-worker hierarchy. The principal wants to motivate the worker to exert unobservable effort at the minimum feasible cost. Given the worker's effort, two signals are realized: public and verifiable output and a private non-verifiable signal known only to the manager. The principal may try to elicit the manager's private information by requiring her to evaluate the worker's performance. Payments may depend on output and the manager's evaluation. I show that the principal can achieve no more than what is feasible with a binary rating scale. I also identify scenarios where subjective evaluations are valuable (non-valuable), reduced transparency is advantageous, and forced ranking outperforms individual evaluations.  

Disentangling Moral Hazard and Adverse Selection - American Economic Review, Vol. 114, NO. 1,  January 2024 (lead article)

(joint with Hector Chade and Jeroen Swinkels)

While many real-world principal-agent problems have both moral hazard and adverse selection, existing tools largely analyze only one at a time. Do the insights from the separate analyses survive when the frictions are combined? We develop a simple method decoupling to study both problems at once. When decoupling works, everything we know from the separate analyses carries over, but interesting interactions also arise. We provide simple tests for whether decoupling is valid. We develop and numerically implement an algorithm to calculate the decoupled solution and check its validity. We also provide primitives for decoupling to work, and analyze several extensions.

Limited Liability and Non-responsiveness in Agency Models- Games and Economic Behavior, Volume 128, July 2021

(joint with Humberto Moreira)

This paper analyzes the optimal menu of contracts offered by a risk-neutral principal to a risk-averse agent under moral hazard, adverse selection, and limited liability. We show that a limited liability constraint causes pooling of the most efficient agent types. We also find sufficient conditions under which full pooling is optimal, regardless of the agent’s risk aversion or type distribution. Our model suggests that offering a single contract is often optimal in environments with moral hazard, adverse selection, and in which the principal faces a limited liability constraint.

Preprint version

Working papers

Monitoring, Performance Reviews, and Retaliation- Accepted at Management Science

We analyze the effects of retaliation on optimal contracts in a hierarchy consisting of a principal, a monitor, and an agent. With probability m, the monitor observes a signal about the agent's effort and decides what to report to the principal. With probability (1-m), the monitor only observes an uninformative default signal realization. The agent retaliates against the monitor and the principal whenever the monitor's report reduces the agent's payment from a default level. We show that the principal's optimal contracting problem can be divided into two steps: first, an information acquisition stage. The principal chooses how much retaliation to tolerate, and more retaliation generates more informative signals (in the Blackwell sense) about the agent's effort. Second, given the information acquired, the principal designs the optimal payment schemes, which pool moderately (potentially all) bad agent performances with the uninformative signal realization. The empirical literature documents that supervisors are reluctant to provide poor ratings and that performance reports are often inflated and compressed. We show that such a pattern in performance appraisals can arise as firms' optimal responses to retaliation concerns.

Incentives and Selection

(joint with George Georgiadis) 

Performance pay schemes influence not only workers' incentives to exert effort but also the composition of the workforce in terms of skill. Conventional wisdom suggests that steepening incentives should attract higher-skilled workers. However, we show that this is not universally true: under certain conditions, steeper incentives reduce the average skill level of the workforce. We identify sufficient conditions on observables such that a marginal adjustment to the pay scheme improves the skill composition of the workforce. Building on these insights, we determine the optimal adjustment to incentives that enhances performance without compromising worker selection.

The Effect of Exit Rights on Cost-based Procurement Contracts  R&R at Games and Economic Behavior

(joint with Rodrigo Andrade and Humberto Moreira) 

A principal designs a procurement contract for a firm that receives information over time and has exit rights. In period 1, the firm receives a private signal about the project’s cost. In period 2, the firm learns the cost and decides whether to leave the contract. We show that for high ex-post outside option values, the optimal mechanism takes the form of a cost-plus contract. Our proof provides a cost-overrun interpretation of the result: any non-cost-plus contract that at face value is strictly cheaper than the optimal cost-plus contract generates incentives for the firm to under-report its ex-ante expected cost.

Non-monetary Interventions, Workforce Retention and Hospital Quality: Evidence from the English NHS  

(joint with Giuseppe Moscelli, Melisa Sayli, Jo Blanden, and Marco Mello)

Excessive turnover can significantly impair an organization’s performance. Using high-quality linked administrative data and staggered difference-in-differences empirical strategies, we evaluate the impact of a programme that encouraged public hospital organizations to increase staff retention by providing data and guidelines to improve the non-pecuniary aspects of nursing jobs. We find that the programme has decreased the nurse turnover rate by 5.29%, decreased exits from the public hospital sector by 5.68%, and reduced mortality rates within 30 days from hospital admission by 3.40%, preventing about 7,813 deaths. Our results are consistent with a theoretical model in which information is provided to managers of multi-unit organizations, who trade off coordinating decisions across units and adapting them to local conditions.

Immigration, Workforce Composition, and Organizational Performance: The Effect of Brexit on NHS Hospital Quality R&R at Economic Journal

(joint with Kai Fischer, Giuseppe Moscelli, and Marco Mello)

Restrictive immigration policies may force firms to abruptly change their workforce composition. But how does this impact the performance of these organizations? 

We study the effects of the 2016 Brexit referendum,  which led to a drop in the share of EU nationality nurses in English hospitals.  Using high-quality administrative patient-level data and a continuous difference-in-differences design which exploits the different pre-referendum hospital exposure to the shock, we estimate the causal effect of the workforce composition changes on hospital quality of care.  We find that, in the post-referendum period, emergency patients admitted to NHS hospitals with a mean pre-referendum share of EU nurses faced an increase in mortality risk, equivalent to about 1,485 additional deaths per year.  These findings are consistent with a theory model that predicts a decrease in the quality of newly hired hospital workers to avert labour shortages. We provide empirical evidence in support of this mechanism by showing that the foreign joiner nurses hired in the post-referendum period were assigned to lower salary grades than those hired prior to the referendum, indicating lower levels of skills and job experience. 

Large Strategy-Proof Mechanisms

(joint with Guilherme Carmona, Krittanai Laohakunakorn, and Konrad Podczeck)

We introduce a distributional approach to mechanism design that proves to be useful for the analysis of large anonymous mechanisms in a private values setting. We use this setting to relate the classic notions of strategy-proofness and envy-freeness for anonymous mechanisms to approximate versions of these notions. We show that, in a generic sense, there is no difference between the exact and approximate versions of these notions.