'Essays on Game Theory, Mechanism Design, and Financial Economics' .
This thesis develops and utilizes tools in game theory and mechanism design to study multiple applications in economics and ?nance. The ?rst chapter studies the problem of implementing communication equilibria of strategic games when players communicate with an impartial mediator through a network. I characterize necessary and su?cient conditions on the network structure such that any communication equilibrium of any game can be implemented on that network. The next chapter studies a model of supply chain congestion whereby capacity constraints lead to very ine?cient Nash equilibria and I show how the use of correlated equilibria can substantially resolve those ine?ciencies. The ?nal two chapters study related issues in the design of bank capital requirements. In Chapter 3, I characterize optimal bank capital requirements when banks have private information about the value of their existing assets. I show how the implementation of capital requirements can eliminate the bank’s cost of raising capital by revealing their information to the market and conditions under which doing so is optimal. In Chapter 4, I show how when the bank’s private information is about the riskiness of its assets instead, then any risk sensitive capital requirement will lead banks to optimally misreport their risk whenever investors are su?ciently risk averse, highlighting important robustness concerns.
Process innovation in pharmaceutical industry
Process innovation is commonly claimed to be a major source of competitive advantage for firms. Despite this perceived influence, it has received substantially less attention than product innovation and much uncertainty re-mains about its true association with firm performance. The main focus of this study is on the relationship between a pharmaceutical manufacturing firm’s process-innovation portfolio and its economic performance. Through a collaboration with expert patent attorneys, a unique longitudinal dataset was developed, that combines secondary data and evaluations of a firm’s portfolio of process patents along three key dimensions: novelty, scope, and locus. I find positive association between overall process innovation and firm performance. Econometric analyses of the large-scale longitudinal dataset suggest that ownership of a portfolio of patented process innovations for the production of a given drug is associated with a market share (for that drug) that is on average 5.4% higher relative to non-process-innovative competitors. When differentiating between dimensions of process innovation, results further suggest that high novelty is beneficial, and complemented by a broad scope, but only for patents applying to the later phase of the pharmaceutical manufacturing process. The results of this study reconcile differences in the organizational learning, strategy, and operations management literatures. The study identifies both advantages and disadvantages of the three types of technological experiences: focal, related, and unrelated. I find that technological experience with the focal product is positively associated with the ability of a firm to process innovate, resulting in the inventions of medium Novelty and broad Scope. By contrast, I find that technological experience with related products is negatively associated with the ability of a firm to process innovate, resulting in the inventions of low Novelty and broad Scope. Likewise, technological experience with unrelated products is also negatively associated with an ability of a firm to process innovate, though it results in the inventions of high Novelty and narrow Scope.
Essays on Value Creation in the Open Source Phenomenon: Understanding theInfluence of Work Structures, Team Composition, and Community Ideologies
This dissertation comprising three essays explores the value creation mechanisms associated with the work structures, team composition, and community ideologies of open source software projects. The first essay examines the unique nature of open source work which is dominated by the sequential layering of individual tasks. This essay theorizes the motivational mechanisms associated with the work structures of open source projects and examines their influence on project success. While the first essay establishes the importance of task-work organization in open source projects, the second essay expands the inquiry into the role of team composition in the project’s success. Building on the theories of coordination and network governance, this essay studies the influence of source code access restrictions imposed on team members in mitigating coordination challenges. The third essay pursues an overarching view of the open source community by examining the ideological foundations of the community and studies its influence on project success. The essay scrutinizes two ideological shifts seen in the open source community that have altered the beliefs of ‘openness’ and ‘prevention of commercial appropriation’, on which the open source phenomenon was founded.
The Effect of Consumer Identity on Marketing Strategy
In this dissertation, I examine the influence of consumer identity (e.g., materialism, self-construal) on marketing strategies of firms. The first essay explores how materialistic consumers can be nudged to behave prosocially by leveraging their status-seeking motivations in the context of luxury consumption. Firms are under increasing pressure to engage in cause-related marketing (CRM) campaigns that link the brand to a charitable cause. However, such campaigns may pose problems for luxury brands because the target market—materialistic consumers—are more extrinsically motivated, less generous, and less concerned with prosocial causes, than non-materialistic consumers. The first essay proposes that certain types of CRM campaigns will be more successful than others by leveraging the motivations of materialistic consumers for buying luxury products. I show that materialists’ willingness to engage in CRM depends on the type of campaign: product-linked (brand linked to a cause through limited-edition products) or donation-linked (direct donations to a charitable cause). Materialists are more willing to engage in product-linked than donation-linked campaigns, whereas non-materialists show the opposite pattern, and these effects are driven by the status-signaling qualities that luxury products convey for materialists: the effects are eliminated for value brands and when materialists’ need for status is momentarily satiated. The second essay investigates how and why individualistic consumers (vs. collectivistic consumers), prefer digitally mediated social interaction such as posting on social network platforms (e.g., Facebook), playing social network games (e.g., FarmVille), or watching live streaming video platforms (e.g., Twitch). Social interaction is a fundamental social behavior based on evolutionary underpinnings that fulfills one’s need to belong. However, desire for social interaction can differ based on individual characteristics. Individualists, who see themselves as independent, autonomous, and distinct from the group, are known to perceive higher costs for social interaction necessary for maintaining their relationships than are collectivists. In Essay 2, I show that individualistic consumers have a greater preference for digitally mediated social interaction than collectivistic consumers, but that this effect is moderated by social interaction costs. I further show that perceived face-to-face social interaction costs explain the underlying process of this effect. The two essays contribute to the literature on self-identity. Essay 1 and 3 focus on materialism and Essay 2 focuses on self-construal. The research findings inform marketing practice in the fields of luxury goods, social media, and gaming industries. This dissertation provides insights into how firms in these industries should consider consumers’ self-identity in adopting new marketing strategies.
ESSAYS ON HOUSEHOLD FINANCE AND ASSET PRICING
This doctoral thesis consists of three independent papers in household finance and empirical asset pricing. The first two papers are closedly related, use similar data, and investigate the role of labor income risk in portfolio choice. The third paper studies volatility model based on Markov switching multifractal.The first paper is “Countercyclical Income Risk and Portfolio Choices” (with Sylvain Catherine and Paolo Sodini). Using Swedish administrative panel data on individual's wages and portfolio holdings, we show that countercyclical labor income downside risk reduces households' willingness to invest in financial market. The second paper is “Seeking Skewness”. Using detailed disaggregated Swedish household administrative data on portfolio holdings and labor income, this paper investigates retail investors’ behavior of seeking skewness in their portfolio choice. The third paper is “Multifractal Volatility with Shot-noise Component” (with Laurent Calvet).Based on the Markov Switching Multifractal (MSM) model of Calvet and Fisher (2004), we develop in this paper a discrete-time multifractal volatility model to capture the jump and decay pattern in the volatility process along with other stylized facts.
Imagining Performance Measurement Systems: On the Field-Level Construction of a Compensation Algorithm in the Pharmaceutical Industry.
This thesis examines the field-level imagining of Performance Measurement Systems in the pharmaceutical sector. By means of anextended participant observation in a Big Pharma company and interviews in the pharmaceutical sector, the three articles of this thesis explore theintra- and extra-organizational influences that act upon the shape and rationales of the compensation systems pharmaceutical companies operate fortheir sales-force. The first article explores accounting systems as emerging from a set of dramatized inscriptions that stage, frame, andmediate interaction among the different actors,internal and external to the organization, that participate in the fabrication of a compensationalgorithm. The second article theorizes in what way moral imaginaries are constituted into accounting objects, and how accounting acts as amoral mediator. It shows emergent performance measurement systems as moral calculating devices that are shaped by, and engage with, thecontrasting moral imaginaries of heterogeneous designers. The third paper brings the concern with how performance measurement systemsemerge and stabilize in the context of markets,to explore the field-level accounting infrastructures that enable organizational actorsto visualize, account for, and act upon the market when the market is invisible to its participants. For performance measurementsystems to work in a market, it is suggested, they require field-level collaboration, constructed opacities, and processes ofmarketization and de-marketization of actors’ identities.
When is ambiguity favorable? An experimental and theoretical investigation of multiple categorization process in markets.
This dissertation studies the different categorization processes (prototype-based, goalbased and analogical-based categorization) and subsequent cognitive mechanisms (central tendency, conceptual combination and analogical processing, respectively) that audiences use in markets when they evaluate an ambiguous entity. Past research has shown that audiences discount product ambiguity because they are confused about what an ambiguous product offering does (cognitive ambiguity). Similarly, research has shown that audiences discount organizational ambiguity because they don’t know what these organizations with an ambiguous market positioning are (identity ambiguity) and how well they multi-task (competence ambiguity). This dissertation puts these results in perspective and studies how different categorization processes and cognitive mechanisms influence (i) the evaluation of ambiguous product offerings, (ii) the performance evaluation of organizations with an ambiguous market positioning, and (iii) firms’ differentiation strategies. More broadly, this work offers contributions to the literature in both organization theory and strategy. In the former, this work falls within the economic sociology, categorization processes and hybrid organizations topics. In the latter, my contributions are relevant to the topics of optimal distinctiveness, market agents’ cognitive ascription of value, and firms’ differentiation strategies.
Ecosystem strategy in the shadow of nonprofit actors
My thesis focuses on issues related to value creation and value capture in business ecosystems. I explore how nonprofit and for-profit actors shape these ecosystems and their evolution through the design of relationships with key complements. The first chapter uses a formal model to study how a nonprofit actor, by strategically interacting with firms, can facilitate value creation in vertical supply chains. The second chapter studies the strategies that firms employ to shape the ecosystem they compete in and maximize value capture.Specifically, I look at firms’ decision regarding whether to make their product compatible with multiple complements or keep them exclusive for a specific complement in the context of anti-HIV drug market.I use a proprietary individual-level dataset on drug consumption obtained from the national French healthcare insurance and hand-collected data on clinical trials of anti-HIV drugs. The third chapter bridges the first two chapters and explores how nonprofit actors actively shape the ecosystem by comparing firm-sponsored and nonprofit-sponsored clinical trials on anti-HIV drugs.To conclude, I seek to understand how firms can maximize value creation and value capture in the contexts where complementary products are important. I strive to include nonprofit actors as an integral part of the ecosystem and understand how the actions of actors who do not seek to maximize profit affect the strategies of for-profit actors towards their complements.
Essays in Finance
The three chapters of this thesis study households’ financial decisions over the lifecycle.The first chapter focuses on the decision to become an entrepreneur, the second on the choice to invest in stock market and the third on the value of pension entitlements.In the first chapter, I use French administrative data on job-creating entrepreneurs to estimate a life-cycle model in which risk-averse individuals can start businesses and return to paid employment. I find that unobserved benefits represent 6,100 euros per year, summing up to 67,000 over the average entrepreneurial spell. The option to return to paid employment is worth 82,000 euros to new entrepreneurs.In the second chapter, I estimate a life-cycle model of portfolio choices that incorporates the relationship between stock market returns and the skewness of idiosyncratic income shocks.The cyclicality of skewness can explain low stock market participation among young households with modest financial wealth and why the equity share of participants slightly increases until retirement. In the third chapter, I calibrate a life-cycle model in which the stock and labor markets are cointegrated and Social Security benefits are wage-indexed. I find that the certainty equivalent of Social Security for working households is 46% lower than the sum of future cash flows discounted at the risk-free rate and negative for young households. At the national scale, the risk-adjusted value of Social Security entitlements is 19.6 trillion dollars, which is 37% lower than the unadjusted value of 31 trillion dollars.
Channels of Interfirm Funding Provision: Trade Credit and M&A
The first chapter studies how refinancing risk impacts product market performance. I find that firms with a large fraction of short-term debt (i.e., debt maturing within three years) exhibit significantly lower growth in sales and market share.The second chapter asks how horizontal M&As affect peer stock market evaluation. Horizontal M&A announcements induce negative average industry peer revaluations in a large sample of public and private M&A transactions. The average peers’ revaluation is a strong predictor of future industry returns. The revaluation of peers also depends on the public status of the target (positive when the target is public and negative when the target is private) and varies systematically with proxies for overall market misvaluation. Our findings are consistent with the idea that investors incorporate new information about industry-wide misevaluation into the valuation of non-merging firms.The third chapter studies how labor laws affect payout policy. This paper shows that labor bargaining power affects both capital structure decisions and payout policy. I find that the adoption of the wrongful discharge law leads to an increase in dividends per share, dividend yield, and the dividend payout ratio whereas book leverage decreases.