The first chapter studies the strategic timing of irreversible investments when returns depend on an uncertain state of the world. Agents learn about the state through privately observed signals, as well as from each other's actions and experience. In this environment there is the possibility of learning feedback in which an agent's present action affects how much she can learn from the other agent's experience in the future. I characterize symmetric mixed-strategy equilibria, and show that private information mitigates free-riding and increases efficiency if the prior belief about the state is not too low, but that it may lead to inefficient over-investment otherwise. The second chapter examines the effect of trade opportunities on a seller's incentive to acquire information through experimentation. I characterize the unique equilibrium outcome, and discuss the effects of variations in the information structure on the probability of trade. The main result is that more accurate information for the buyer can reduce social welfare. Efficiency requires that the buyer offers a price that the seller always accepts and that the seller experiments when it is socially optimal to do so. When the buyer receives an informative signal about positive experimentation outcomes, the absence of such a signal can induce the buyer to purchase the good with low but known quality at a low price. If the buyer receives an informative signal about negative experimentation outcomes, the seller might not experiment so as to avoid the risk of generating an outcome that could trigger the buyer to reduce her offer. The third chapter analyzes the contracting problem of a principal who delegates research to two independently experimenting agents. The features of the optimal contract depend on the principal's preferences over the agents' successes. If successes are substitutes, the first agent to produce a success receives the greatest reward. The competition for the first success benefits the principal because it reduces the agents' incentive to delay their effort. In contrast, when successes are complements, the reward for the second success is greater which results in a second mover advantage that encourages agents to delay effort.

The first chapter studies the strategic timing of irreversible investments when returns depend on an uncertain state of the world. Agents learn about the state through privately observed signals, as well as from each other's actions and experience. In this environment there is the possibility of learning feedback in which an agent's present action affects how much she can learn from the other agent's experience in the future. I characterize symmetric mixed-strategy equilibria, and show that private information mitigates free-riding and increases efficiency if the prior belief about the state is not too low, but that it may lead to inefficient over-investment otherwise. The second chapter examines the effect of trade opportunities on a seller's incentive to acquire information through experimentation. I characterize the unique equilibrium outcome, and discuss the effects of variations in the information structure on the probability of trade. The main result is that more accurate information for the buyer can reduce social welfare. Efficiency requires that the buyer offers a price that the seller always accepts and that the seller experiments when it is socially optimal to do so. When the buyer receives an informative signal about positive experimentation outcomes, the absence of such a signal can induce the buyer to purchase the good with low but known quality at a low price. If the buyer receives an informative signal about negative experimentation outcomes, the seller might not experiment so as to avoid the risk of generating an outcome that could trigger the buyer to reduce her offer. The third chapter analyzes the contracting problem of a principal who delegates research to two independently experimenting agents. The features of the optimal contract depend on the principal's preferences over the agents' successes. If successes are substitutes, the first agent to produce a success receives the greatest reward. The competition for the first success benefits the principal because it reduces the agents' incentive to delay their effort. In contrast, when successes are complements, the reward for the second success is greater which results in a second mover advantage that encourages agents to delay effort.

This thesis groups three papers in applied microeconomic theory that focus on political economy and the economics of organisations. The first chapter studies the equilibrium outcomes of a dynamic game of electoral competition between two policy-motivated parties. I model incumbent policy persistence: parties commit to implement a policy for their full tenure in office, and hence in any election only the opposition party is free to choose a new platform. The model gives rise to novel equilibrium policy dynamics: governments alternate in power; parties compromise, that is, starting from differentiated ideological positions, they gradually move towards proposing platforms which resemble one another; however, they never capitulate, that is, party labels matter and parties maintain distinct policy goals. The second chapter studies a directed search model of competition between sellers that control the quality of buyers' private information about goods. As better informed buyers extract more informational rents from trade, sellers may try to attract buyers by offering better information. First, I establish how the characteristics of exogenously fixed sale mechanisms determine equilibrium information provision. Information provision is higher under competition than under monopoly, yet partial information is provided for many sale mechanisms. Second, when sellers commit to both information provision and mechanisms, I identify simple conditions under which every equilibrium has full information. In these equilibria, sellers capture the efficiency gains of information provision and compete only over non-distortionary rents offered to buyers. Retaining the option to develop a currently inactive project often requires maintaining specialised stocks of knowledge. However, standard models of experimentation treat the choice of one project over another as entailing only an implicit opportunity cost. In the third chapter, I characterise the optimal experimentation policy in a model in which undeveloped projects have explicit maintenance costs and can be irreversibly discarded. Projects which in the absence of maintenance costs would be developed only after more promising projects fail are sometimes developed first and then discarded early. Maintenance costs alter optimal project development by providing incentives to bring the option value of less promising projects forward.

This thesis groups three papers in applied microeconomic theory that focus on political economy and the economics of organisations. The first chapter studies the equilibrium outcomes of a dynamic game of electoral competition between two policy-motivated parties. I model incumbent policy persistence: parties commit to implement a policy for their full tenure in office, and hence in any election only the opposition party is free to choose a new platform. The model gives rise to novel equilibrium policy dynamics: governments alternate in power; parties compromise, that is, starting from differentiated ideological positions, they gradually move towards proposing platforms which resemble one another; however, they never capitulate, that is, party labels matter and parties maintain distinct policy goals. The second chapter studies a directed search model of competition between sellers that control the quality of buyers' private information about goods. As better informed buyers extract more informational rents from trade, sellers may try to attract buyers by offering better information. First, I establish how the characteristics of exogenously fixed sale mechanisms determine equilibrium information provision. Information provision is higher under competition than under monopoly, yet partial information is provided for many sale mechanisms. Second, when sellers commit to both information provision and mechanisms, I identify simple conditions under which every equilibrium has full information. In these equilibria, sellers capture the efficiency gains of information provision and compete only over non-distortionary rents offered to buyers. Retaining the option to develop a currently inactive project often requires maintaining specialised stocks of knowledge. However, standard models of experimentation treat the choice of one project over another as entailing only an implicit opportunity cost. In the third chapter, I characterise the optimal experimentation policy in a model in which undeveloped projects have explicit maintenance costs and can be irreversibly discarded. Projects which in the absence of maintenance costs would be developed only after more promising projects fail are sometimes developed first and then discarded early. Maintenance costs alter optimal project development by providing incentives to bring the option value of less promising projects forward.

Master of Arts / Department of Economics / Lloyd B. Thomas Jr / Can stimulative monetary policy be effective when there is a “liquidity trap”? This question surfaced during the Great Depression and is raising its head again today due to the current financial crisis. A definitive answer never materialized for the 1930’s, as differences of opinion between non-monetarist and monetarist economists arose about this issue. This need not be the case today. In this thesis I will first enumerate several different meanings of the term “liquidity trap” and their implications for monetary policy. Then, with data from the Federal Reserve, I will attempt to validate the likelihood of a liquidity trap. I do this for the demand for money and bank liquidity traps. I use regression analysis over a fifteen year period with varying interest rates to determine if the elasticities of demand increase as interest rates fall, indicating a liquidity trap. My use of log linear regressions for both demand for money and bank liquidity traps, using data from the present financial crisis, adds to the evidence supporting the liquidity hypothesis, but does not empirically establish the existence of a liquidity trap. Following my findings, I detail actions taken by the Federal Reserve and show the subsequent results through the summer and into the fall of 2009. From this, I make a conclusion that the United States is most likely in a liquidity trap and it does matter.

This thesis consists of three chapters pertaining to issues of long-term relationships in labour markets. In Chapter 1, I analyze a model of a two-period advice game. The decision maker chooses to retain or replace the advisor after the first period depending on the first period events. Even though the decision maker and the advisor have identical preferences, this potential replacement creates incentive for the advisor to avoid telling the truth. I show the condition under which the decision maker can find a random retention rule that induces a truthful report from the advisor, and I characterize an optimal retention rule that maximizes the decision maker's expected payoff. In Chapter 2, I propose a search theoretic model of optimal employment contract under repeated moral hazard. The model integrates two important attributes of the labour market: workers' work incentive on the job and their mobility in the labour market. Even though all workers and firms are ex ante homogeneous, these two factors jointly generate (1) wages and productivity that increase with worker's tenure and (2) endogenous dynamic heterogeneity of the labour productivity of the match. The interaction of these factors provides novel implications for wage dispersion, labour mobility, and the business cycle behaviour of macroeconomic variables. Lastly, in Chapter 3, I quantitatively assess wage dispersion and business cycle implications of the model developed in Chapter 2. In terms of wage dispersion, the model with on-the-job search with wage-tenure contracts seems to accommodate sizable frictional wage dispersion. The model, however, generates very small productivity difference among workers, and shows weak evidence that the productivity difference generated by the endogenous variations in incentives is responsible for frictional wage dispersion. In terms of business cycle implications, workers' endogenous effort choice first amplifies the effect of productivity shock on unemployment rate. Second, responses of workers to productivity shocks generate marked difference between the effects of temporary productivity shock and that of permanent shock. Third, the analysis shows the importance of the distributional effect on macroeconomic variables during the transitory periods after a shock.

This thesis investigates the role of institutions in shaping macroeconomic phenomena. The first two chapters focus on financial institutions, formalizing interactions between information and competition in frictional credit markets and providing novel predictions for output and efficiency. The third chapter then presents a new approach for empirically assessing the relationship between political institutions and growth. In Chapter 1, I construct a credit-based model of production to analyze how learning through lending relationships affects the monetary transmission mechanism. I examine how monetary policy changes the incentives of borrowers and lenders to engage in relationship lending and how these changes then shape the response of aggregate output. A central finding is that relationship lending induces a smoother steady state output profile and a less volatile response to certain monetary shocks. This result provides a theoretical basis for cross-country transmission differences via a relationship lending channel. In Chapter 2, I investigate financial sector inefficiency when banks divide resources between attracting clients and learning about them via screening. I show that banks do not fully internalize the effects that their allocation decisions have on the beliefs and outside options of other lenders. These externalities result in an inefficiently high amount of low-quality credit and thus motivate a tax on activities designed to attract rather than screen borrowers. Steady state results suggest that production exhibits a hump-shaped response to increases in this tax and the model's dynamics indicate that a mild tax can also attenuate business cycle fluctuations. Chapter 3 then turns to the interaction between political institutions and economic outcomes. In collaboration with Gordon Anderson, I use a notion of distributional dominance to evaluate intertemporal dependence between polity and growth without hindrance from the mix of discrete and continuous variables in our data set. We also use this notion to measure the joint contribution of polity and growth to wellbeing. The results support the view that institutions promote growth more than growth promotes institutions. They also suggest that polity has dominated growth in determining the evolution of wellbeing over the past few decades.

This thesis consists of three chapters pertaining to issues of long-term relationships in labour markets. In Chapter 1, I analyze a model of a two-period advice game. The decision maker chooses to retain or replace the advisor after the first period depending on the first period events. Even though the decision maker and the advisor have identical preferences, this potential replacement creates incentive for the advisor to avoid telling the truth. I show the condition under which the decision maker can find a random retention rule that induces a truthful report from the advisor, and I characterize an optimal retention rule that maximizes the decision maker's expected payoff. In Chapter 2, I propose a search theoretic model of optimal employment contract under repeated moral hazard. The model integrates two important attributes of the labour market: workers' work incentive on the job and their mobility in the labour market. Even though all workers and firms are ex ante homogeneous, these two factors jointly generate (1) wages and productivity that increase with worker's tenure and (2) endogenous dynamic heterogeneity of the labour productivity of the match. The interaction of these factors provides novel implications for wage dispersion, labour mobility, and the business cycle behaviour of macroeconomic variables. Lastly, in Chapter 3, I quantitatively assess wage dispersion and business cycle implications of the model developed in Chapter 2. In terms of wage dispersion, the model with on-the-job search with wage-tenure contracts seems to accommodate sizable frictional wage dispersion. The model, however, generates very small productivity difference among workers, and shows weak evidence that the productivity difference generated by the endogenous variations in incentives is responsible for frictional wage dispersion. In terms of business cycle implications, workers' endogenous effort choice first amplifies the effect of productivity shock on unemployment rate. Second, responses of workers to productivity shocks generate marked difference between the effects of temporary productivity shock and that of permanent shock. Third, the analysis shows the importance of the distributional effect on macroeconomic variables during the transitory periods after a shock.

This thesis investigates the role of institutions in shaping macroeconomic phenomena. The first two chapters focus on financial institutions, formalizing interactions between information and competition in frictional credit markets and providing novel predictions for output and efficiency. The third chapter then presents a new approach for empirically assessing the relationship between political institutions and growth. In Chapter 1, I construct a credit-based model of production to analyze how learning through lending relationships affects the monetary transmission mechanism. I examine how monetary policy changes the incentives of borrowers and lenders to engage in relationship lending and how these changes then shape the response of aggregate output. A central finding is that relationship lending induces a smoother steady state output profile and a less volatile response to certain monetary shocks. This result provides a theoretical basis for cross-country transmission differences via a relationship lending channel. In Chapter 2, I investigate financial sector inefficiency when banks divide resources between attracting clients and learning about them via screening. I show that banks do not fully internalize the effects that their allocation decisions have on the beliefs and outside options of other lenders. These externalities result in an inefficiently high amount of low-quality credit and thus motivate a tax on activities designed to attract rather than screen borrowers. Steady state results suggest that production exhibits a hump-shaped response to increases in this tax and the model's dynamics indicate that a mild tax can also attenuate business cycle fluctuations. Chapter 3 then turns to the interaction between political institutions and economic outcomes. In collaboration with Gordon Anderson, I use a notion of distributional dominance to evaluate intertemporal dependence between polity and growth without hindrance from the mix of discrete and continuous variables in our data set. We also use this notion to measure the joint contribution of polity and growth to wellbeing. The results support the view that institutions promote growth more than growth promotes institutions. They also suggest that polity has dominated growth in determining the evolution of wellbeing over the past few decades.

Doctor of Philosophy / Department of Economics / Yang M. Chang / The first essay is on TRIPS (trade related intellectual property rights), biodiversity and North-South trade. This essay explores how true North-South trade and different IPR (intellectual property rights) regimes affect the level of biodiversity that is maintained by a Southern government. The results show that protecting farmers’ rights only is the regime that will be chosen by the Southern government and that will lead to the maximum level of biodiversity. This is important for policymakers as provisions for protecting farmers’ rights do not currently exist. This finding confirms previous results that did not include true North-South trade. Another result, and one that departs from existing literature, is that positive levels of biodiversity will be maintained by the Southern government if only international patent protection is implemented. The second essay focuses on factors that affect attendance at MLS soccer matches, in particular David Beckham. The primary results in the study are that David Beckham has a very large, statistically significant effect on attendance at MLS matches. This effect is estimated as at least a sixty-five percent increase in attendance in games Beckham plays in. Other results from this study are that there are no significant effects from the months matches are played and that the only day of the week with a significant effect is Saturday (its effect is positive). The results from this study provides insight to MLS as it faces upcoming decisions about designated players, such as Beckham, and about the calendar upon which the MLS season is played. The final essay is on moral hazard, market power and the demand for health insurance. The issue of health insurance is one of the main questions facing the U.S. government and its citizens. This essay explores the particular interaction of moral hazard and market power in the form of a duopoly in a pharmaceutical market. The results from this essay show that there are notable differences in the effects on the welfare of market participants under duopoly as compared to monopoly, such as the importance of cross-price effects that do not show up in a monopoly market.