Research Papers

 

“Identifying Contract Optimality Non-parametrically with Moral Hazard: First Order Approach and Statistical Inference” (Job Market Paper)Download.pdf

This paper develops a non-parametric methodology for identifying contract optimality in the presence of moral hazard. Following the first order approach, a standard method of computing optimal contracts, the paper first proves two theoretical properties of the solutions to the moral hazard problem. First, we show that the profit loss (relative to the optimal contract) for given effort level has a unique lower bound. The second property is an equivalence between the first order condition (Mirrlees-Holmstrom Condition) and the Cramer-Rao Lower Bound (CRLB). These two properties provide the foundations for (1) identifying optimality, and (2) performing statistical inference on the agent's primitives based on an observed sequence of pairs of outputs and payments. The paper shows that under some weak conditions, contract optimality is identified, as long as the output generating process is additive in effort and noise. Identification does not require the agent's effort to be observed by the principal or the econometrician, and requires no knowledge of (1) the details of the contract, (2) the agent's cost of effort, (3) the agent's monetary utility, or (4) the distribution of output. Based on the approach proposed in this paper, we test contract optimality for a piece-rate contract, and estimate bounds on the profit loss for cotton weavers in Zhejiang Province, China.

 

 

“The Insurance Role of Rosca in the Presence of Credit Markets: Theory and Evidence” (Joint with Hanming Fang and Li-an Zhou)

Rotating Savings and Credit Associations (Roscas) are an important informal financial institution in many parts of the world. Existing models of Roscas assume that their participants do not have access to formal financial markets and predict that the implicit interest rates in bidding Roscas should be declining over their lives. Evidence from survey and field data sets from Wenzhou of Zhejiang Province in Southeastern China shows instead that Roscas are prevalent even in the presence of formal financial markets and more interestingly a large fraction of Rosca participants reported borrowing from the formal credit market to fulfill their Rosca obligations and saving their extra Rosca earnings in the formal credit market. Moreover, we find that the implicit interest rates observed in a unique Rosca bidding data set are not monotonically declining over its life. We develop a sequential auction model of risk averse Rosca participants facing income risks to investigate the interaction between formal and informal financial institutions to provide a possible explanation of the above two phenomena in the Chinese data. In this model, a Rosca provides insurance to its participants even in the presence of formal credit markets. The intuition is that while the formal credit market allows individuals to smooth their intertemporal income risks by borrowing and saving, a Rosca provides an additional instrument for its participants to share contemporaneous income. We also show that in this model it is possible that the implicit interest rate in equilibrium may not be declining over the life of a Rosca.