Does Competition Aggravate Moral Hazard? A Multi-Principal-Agent Experiment

This paper is forthcoming at the Journal of Financial Intermediation.

Abstract: We conduct an experiment to determine whether market structure affects financial intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that their clients (Principals) either proceed or discontinue a project. Intermediaries earn revenues only when they recommend proceeding with the transaction. Thus, our design captures some of the incentives faced by financial advisers in commercial banks, where compensation depends on sales performance, and also by money-managers, whose income depends on the size of their portfolios. We find that a monopolist intermediary protects the interest of clients better than when intermediaries compete. Our results are robust to a significant fee increase and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.

Authors: Olga Rud (Hamilton College), Jean Paul Rabanal (Colby College) and John Horowitz (BSU)


Pecuniary externalities in centralized and decentralized market formats: An experiment

Abstract: We use an experimental approach to determine whether a decentralized market can internalize the impact of trader choices better than in a centralized market. In our model, traders choose a production level on a production possibilities frontier prior to experiencing a random shock that makes only one type of good profitable. In a general equilibrium environment with incomplete markets, this leads to pecuniary externalities as traders increase production of the scarce good beyond what is socially optimal. We find that this behavior is exacerbated in centralized market as traders fail to internalize the impact of their actions on prices.

Authors: Olga Rud (Hamilton College), Jean Paul Rabanal (Colby College) and Manizha Sharifova (Pacific)


On the Dynamic Stability of a Price Dispersion Model using Gradient Dynamics

This paper is forthcoming at the Journal of Economic Dynamics and Control

This paper studies the evolutionary stability of a unique Nash equilibrium in a price dispersion model (Burdett and Judd, 1983) using gradient dynamics. The numerical solution to the partial differential equation that governs the evolution of prices shows that the stationary equilibrium is not a Nash Equilibrium and that it differs from the cyclical behavior predicted by another family of dynamics, such as replicator and logit, in a continuous action space.

Authors: Jean Paul Rabanal (Colby College) and Dongwook Lee (UC Santa Cruz)