RESEARCH

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PUBLISHED AND FORTHCOMING PAPERS
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"A Model of Positive Self-Image in Subjective Assessments"
(with Joel Sobel)
American Economic Review, 2005, Vol. 95, No. 5, 1386-1402. Paper

This paper suggests a mechanism that describes individuals' positive self image in subjective assessments of their relative abilities. The mechanism assumes individuals have heterogeneous production functions that determine ability as a function of multiple skills, individuals make skill-enhancing investments with the goal of maximizing their ability, and make ability comparisons using their own production function. Within this framework, the paper provides conditions under which there is positive self image. Positive self image is increasing in the ease of the task, the number of different skills needed for the task, and the variability of production technologies in the population. JEL Codes: A12, D01; Keywords: Self-image; Behavioral economics; Psychology.
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"Positive Self-Image and Incentives in Organizations"
The Economic Journal, 2008, Vol. 118, 1315-1332. Paper

This paper investigates the implications of individuals' mistaken beliefs of their abilities on incentives in organizations using the principal-agent model of moral hazard. The paper shows that if effort is observable, then an agent's mistaken beliefs about own ability are always favorable to the principal. However, if effort is unobservable, then an agent's mistaken beliefs about own ability can be either favorable or unfavorable to the principal. The paper provides conditions under which an agent's over estimation about own ability is favorable to the principal when effort is unobservable. Finally, the paper shows that workers' mistaken beliefs about their coworkers' abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes. JEL Codes: A12; J41. Keywords: Self-Image; Optimism; Incentives, Behavioral Economics.
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"Making Sense of the Experimental Evidence on Endogenous Timing in Duopoly Markets."
Journal of Economic Behavior and Organization, 2008, Vol. 68, 657-666. Paper

The prediction of asymmetric equilibria with Stackelberg outcomes is clearly the most frequent result in the endogenous timing literature. Several experiments have tried to validate this prediction empirically, but failed to find support for it. By contrast, the experiments find that simultaneous-move outcomes are modal and that behavior in endogenous timing games is quite heterogeneous. This paper generalizes Hamilton and Slutsky's (1990) endogenous timing games by assuming that players are averse to inequality in payoffs. I explore the theoretical implications of inequity aversion and compare them to the empirical evidence. I find that this explanation is able to organize most of the experimental evidence on endogenous timing games. However, inequity aversion is not able to explain delay in Hamilton and Slutsky's endogenous timing games. JEL Codes: C72, D43, D63, L13. Keywords: Endogenous Timing; Cournot; Stackelberg; Inequity Aversion.
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"Asymmetries in Information Processing in a Decision Theory Framework"
Theory and Decision, 2009, Vol. 66, 317-343. Paper

Research in psychology suggests that some individuals are more sensitive to positive than to negative information while others are more sensitive to negative rather than positive information. I take these cognitive positive-negative asymmetries in information processing to a Bayesian decision-theory model and explore its consequences in terms of decisions and payoffs. I show that in monotone decision problems economic agents with more positive-responsive information structures are always better off, ex-ante, when they face problems where payoffs are relatively more sensitive to the action chosen when the state of nature is favorable. JEL Codes: A12, D81. Keywords: Information Processing; Decision Theory.
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"Positive Self-Image in Tournaments."
International Economic Review, 2010, Vol. 51, No. 2, 475-496.
Paper

This paper analyzes the implications of worker overestimation of productivity for firms in which incentives take the form of tournaments. Each worker overestimates his productivity but is aware of the bias in his opponent’s self-assessment. The manager of the firm, on the other hand, correctly assesses workers’ productivities and self-beliefs when setting tournament prizes. The paper shows that, under a variety of circumstances, firms can benefit from worker positive self-image. The paper also shows that worker positive self-image can improve welfare in tournaments.In contrast, workers’ utility declines due to their own misguided choices. JEL Codes: A12, J41; Keywords: Positive Self-image, Tournaments, Behavioral economics.

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"Overconfidence in Tournaments: Evidence from the Field"
(with Young-Joon Park)
Theory and Decision, 2010, Vol. 69, 143-166. Paper

This paper uses a field survey to investigate the quality of individuals’ beliefs of relative performance in tournaments. We consider two field settings, poker and chess, which differ in the degree to which luck is a factor and also in the information that players have about the ability of the competition. We find that poker players’ forecasts of relative performance are random guesses with an overestimation bias. Chess players also overestimate their relative performance but make informed guesses. We find support for the “unskilled and unaware hypothesis” in chess: high skilled chess players make better forecasts than low skilled chess players. Finally, we find that chess players’ forecasts of relativeperformance are not efficient.  JEL Codes: A12, C93, J41; Keywords: Tournaments; Rationality; Learning; Field Experiment.

"The Impact of Firm Cost and Market Size Asymmetries on National Mergers in a Three-Country Model"
International Journal of Industrial Organization, 2010, Vol. 28, 682-694. Paper     

This paper studies the impact of firm cost and market size asymmetries on merger decisions. I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones. JEL Codes: F13, H77,L11, L41. Keywords: Mergers; International Trade; Merger Policy; Size Asymmetry.

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"Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap"
Journal of Labor Economics, forthcoming.
This version: December 2011. Paper

I extend Spence’s (1973) signaling model by assuming some workers are overconfident—they underestimate their marginal cost of acquiring education—and some are underconfident. Firms cannot observe workers’ productive abilities and beliefs but know the fractions of high-ability, overconfident, and underconfident workers. I find that biased beliefs lower the wage spread and compress the wages of unbiased workers. I show that gender differences in self-confidence can contribute to the gender pay gap. If education raises productivity, men are overconfident, and women underconfident, then women will, on average, earn less than men. Finally, I show that biased beliefs can improve welfare. JEL Codes: D03; D82; J24; J31. Keywords: Signaling; Education; Self-Confidence; Wage Compression; Gender Pay Gap.

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WORKING PAPERS
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"Preference for Skew in Lotteries: Evidence from the Laboratory" 
(with Thomas Astebro and José Mata)  
This version: September 2011. Paper   Appendix

A laboratory experiment investigates how positive skew influences risky choices. A new non-parametric method classifies subjects according to risk and skew preferences and test whether choices are compatible with expected utility. Both students and executives make riskier choices when lotteries display positive skew. Approximately half of the subjects make skew seeking choices, and half violate expected utility axioms. Students and executives preferences for skew are similar. Combining structural estimation with the non-parametric method, we find that skew seeking (averse) choices are driven by an interaction between concave (convex) utility and inverse s-shape (s-shape) probability weighting. JEL Codes: D81, C91; Keywords: Decision Making under Risk, Skew, Heterogeneity, Laboratory Experiment.

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"Risk Taking in Mixed Gambles" 
(with Thomas Astebro and José Mata)
This version: December 2011. Paper

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"Overconfidence and Timing of Entry" (with Tiago Pires)
 This version: September 2010. Paper

We analyze the impact of overconfidence on the timing of entry in markets, profits, and welfare using Branco’s (2008) extension of Hamilton and Slutsky’s (1900) quantity commitment game. Players have private information about costs, one player is overconfident, and the other one rational. We find that for moderate levels of overconfidence there is a unique cost-dependent equilibrium where the overconfident player has a higher ex-ante probability of being the Stackelberg leader. Overconfidence lowers the profit of the rational player but can increase that of the overconfident player. Consumer rents increase with overconfidence while producer rents decrease which leads to an ambiguous welfare effect. JEL Codes: A12, C72, D43, D82, L10; Keywords: Endogenous Timing, Entry, Overconfidence.
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"Tacit Collusion under Fairness and Reciprocity" (with Doruk Iris) 
This version: May 2011. Paper

This paper departs from the standard profit-maximizing model of firm behavior by assuming that managers are motivated in part by personal animosity—or respect—towards their rivals. A reciprocal manager responds to unkind behavior of rivals with unkind actions (negative reciprocity), while at the same time, it responds to kind behavior of rivals with kind actions (positive reciprocity). We provide conditions on managers’ perceptions of fair actions of their rivals under which collusive action profiles (prices or quantities) are easier to sustain. Thus, fairness and reciprocity concerns among managers can have adverse welfare consequences for consumers. JEL Codes: D43, D63, L13, L21; Keywords: Fairness; Reciprocity; Collusion; Repeated Games.
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