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Models of Experimentation and Reputation

Paper Session

Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: Econometric Society
  • Chair: Simon Board, University of California-Los Angeles

Reputation Building under Observational Learning

Harry Pei
,
Northwestern University

Abstract

A sequence of myopic buyers decide whether to trust a patient seller after observing previous buyers' actions and some private signals about the seller's current and past actions. With positive probability, the seller is a commitment type who plays his optimal commitment action in every period. When each buyer observes all previous buyers' actions and a bounded subset of the seller's past actions, there exist equilibria in which the patient seller receives his minmax payoff since the informativeness of buyers' actions goes to zero as the seller becomes patient. These low-payoff equilibria are robust as long as each buyer has bounded observation of the seller's past actions and can observe the buyer's action in the previous period. When each buyer can also observe an unboundedly informative private signal about the seller's current-period action, the informativeness of buyers' actions is bounded away from zero and a patient seller receives at least his optimal commitment payoff in all equilibria.

Early-Career Discrimination: Spiraling or Self-Correcting?

Arjada Bardhi
,
Duke University
Yingni Guo
,
Northwestern University
Bruno Strulovici
,
Northwestern University

Abstract

Do workers from social groups with comparable productivity distributions obtain comparable lifetime earnings? We study how a small amount of early-career discrimination propagates over time when workers’ productivity is revealed through employment. Breakdown learning environments that track on-the-job failures grant a disproportionately large advantage to marginally more favored groups, whereas breakthrough learning environments that track successes guarantee comparable earnings to groups of comparable productivity. This discrepancy persists with large labor markets, flexible wages, inconclusive signals, and misspecified employer beliefs. Allowing for investment in productivity exacerbates inequality between groups under breakdown learning.

Flows and Performance With Optimal Money Management Contracts

Stefano Pegoraro
,
University of Notre Dame

Abstract

Previous literature documents a convex flow-performance relationship in equity mutual funds. I show this pattern is consistent with a dynamic contracting model with learning about the fund manager's skill. The model provides novel empirical predictions. First, flows become more sensitive to current performance after a history of good past performance. Second, the history-dependence of the flow-performance relationship is weaker for managers with longer tenure. The model also explains common compensation practices in the industry, such as convex pay-for-performance schemes and deferred compensation. Methodologically, I provide a duality-based strategy to overcome the technical challenges of continuous-time contracting models with state variables.

Searching for Arms: Experimentation with Endogenous Consideration Sets

Daniel Fershtman
,
Tel Aviv University
Alessandro Pavan
,
Northwestern University

Abstract

We study the problem of a decision maker alternating between exploring existing alternatives in the consideration set and searching for new ones. We characterize the optimal policy and its key properties, and identify implications for search and exploration dynamics. When the search technology is stationary, or improves over time, search is equivalent to replacement. With deteriorating technologies, instead, alternatives are revisited after search is launched and each expansion is treated as if it were the last one. A key consequence of the endogeneity of the consideration set is that an improvement in the desirability of a category of alternatives may lead to a reduction in the exploration of the category as well as in the eventual selection of an alternative from that category. We apply the analysis to clinical trials, experimentation toward regulatory approval, and consumer search.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • L1 - Market Structure, Firm Strategy, and Market Performance