Essays in applied microeconomic theory
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This dissertation consists of three essays in applied microeconomic theory. The first chapter, “You Get What You Give: Theory and Evidence of Reciprocity in the Sharing Economy”, co-authored with Davide Proserpio and Georgios Zervas, develops an analytical framework to study reciprocity. A seller is said to be reciprocal if he increases his effort in response to an increase in the buyer’s effort. Our model predicts that sellers who are more reciprocal can charge higher prices. Data from Airbnb confirms this prediction. The second chapter, “Error Costs, Ratio Tests, and Patent Antitrust Law”, coauthored with Keith N. Hylton, examines the welfare tradeoff between patent and antitrust law. Patent laws encourage innovations by granting firms legal monopoly power, whereas antitrust laws limit it. We construct an index to quantify the conflict between partent and antitrust laws. This index is the error cost ratio, which is the social welfare under the monopoly divided by the deadweight loss. For a wide range of common demand functions, this error cost ratio ranges from about three to infinity. It suggests that the typical welfare under monopoly is usually much larger than the deadweight loss. Hence, antitrust should be more tolerant. The third chapter, “Optimal Contracts with Personal Agenda”, studies dynamic contracting problems between a principal and an agent. In each of the two periods, the agent chooses a project among three. The agent’s personal agenda conflicts with the principal’s objective. The optimal contract attenuates the incentive conflict while limiting the agent’s ability to build project experience. I show that the optimal contract can rationalize such empirical facts as short-termism and employee empowerment.