Loyalty Incentives in Criminal Organizations

Abstract : Even among themselves, criminals are not seen as trustworthy. However, criminal organizations can use violence to keep criminals loyal. However, such violence is costly if the police investigates. In this paper we study how the choice of loyalty incentives by a criminal organization affects the amount of organized crime and independent crime. Moreover, we study what this implies for optimal police priorities regarding intra-gang violence. We consider an indefinitely repeated labor market, where 'peripheral crime' can be a stepping stone towards organized crime. We study which incentives the organization will provide to its members. If punishment is either not credible or not sufficient, then the boss needs to reward loyalty. This has three effects. First, organized crime is lower because hiring criminals is more costly. Second, peripheral crime tends to increase because peripheral criminals hope to be recruited. Third, organized criminals are relatively well off, while peripheral criminals have to scrape by. The police may raise the costs of punishments. This can only be beneficial if it affects the credibility of punishment, which (i) is not always possible, depending on which resources are reallocated, but (ii) can reduce organized crime, albeit typically at the expense of more peripheral crime.

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Inputs, Asymmetric Information, and Incentives at the Workplace

Abstract : This paper studies how information asymmetries over inputs between workers and managers affect the response to incentives and selection at the workplace. We develop a principal-agent model with heterogeneity and asymmetric information over input quality and worker type, and test the model predictions using personnel data from a Peruvian egg production plant. Exploiting a sudden change in the worker salary structure, we show that heterogeneity along both margins of input quality and worker type significantly affects workers’ effort choice, firm profits, and worker participation differentially after the implementation of the new incentive regime. Our study reveals how information asymmetries shape the response to incentives and selection at the workplace, with implications for the design of incentive contracts.

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Double-sided Opportunism in Infrastructure Investment

Abstract : Opportunism---either the government’s by changes in regulation and expropriation, or investor’s by deviations from expected investment, output quality, and price---is a powerful deterrent from potentially successful public-private partnerships with substantial sunk investments and welfare externalities. We show that the agents can overcome this double-sided hold-up by exchanging an exit (put) option for the investor and a bail-out (call) option for the government on the investor’s present value of outlays. The exit/bail-out options mechanism increases payoffs by countervailing deviations, and thus facilitates cooperation. We validate the model’s predictions in a laboratory experiment, and further show concurrent exit and bail-out options induce higher rates of partnership formation and sustainability.

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Equilibrium Contracts and Boundedly Rational Expectations

Abstract : We study a principal-agent framework in which the agent has a misspecified model of the principal's project. She fits this model to the objective probability distribution in order to predict outcomes under alternative actions. Under mild restrictions, the agent has correct beliefs on the equilibrium path, but may incorrectly extrapolate how off-equilibrium actions map into outcomes. The agent's misspecification may relax incentive compatibility or even eliminate the incentive problem. We examine optimal workplace design when the principal has discretion over the agent's subjective model, and obtain new results on technology choice, transparency, narcissistic leadership, and relative performance evaluation.

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