View CV - European University Institute

PAPER ABSTRACTS
JOB MARKET PAPER
Strategic Competition and the Dynamics of Reputation: The Case of An Online Market
joint with Ema Iancu (EUI)
This paper analyzes how reputation building and strategic competition among sellers shape
their equilibrium behavior when there are different sources of asymmetric information, and
how these determine the dynamics of market outcomes. In the empirical context of on-line
markets, we use this analysis to show the bias that might arise in the reduced form
estimation of the impact of reputation / feedback on sales due to the unobserved nature of
effort, even when panel or randomized data is used. Such bias, however, decreases with the
number of buyers. We examine a market in which long-lived firms repeatedly auction off a
homogeneous object to a pool of short-lived buyers, and in which their competence and
effort is private information. We first investigate the incentives of a single seller (a
"monopolist") to build a reputation that generates higher future profits. We show that there is
a unique equilibrium in Markov strategies in which effort evolves non-monotonically with
reputation. Second, we characterize the impact of strategic competition for heterogeneous
buyers on sellers’ behaviour and observed outcomes: as the "intensity" of competition
increases in the unique equilibrium, sellers have less incentives to exert effort. By contrasting
the two scenarios, we theoretically disentangle the effects of reputation and strategic
competition as incentives mechanisms.
SECOND PAPER
Understanding Sovereign Bond Prices: Expectations, Information, and Self Fulfilling
Crises
joint with P. Benczur (National Bank of Hungary) and C. Ilut (Duke University)
Do market participants perceive the expected values of sovereign risks correctly? When
attempting to separate various determinants of sovereign bond prices, a major obstacle is
that the conditional expectations of various losses are not directly observable. We use data
on the realizations of the risk events (losses), and address the following four issues related to
the above question. First, whether foreign currency denominated sovereign bond price
differentials can be attributed entirely to differences in expected returns, consistent with
expected values (probabilities) predicted from default realizations. Second, what risks
(default risk alone, or default and illiquidity risks) are involved in the calculation of expected
returns, and what are their relative importance. Third, do global factors have an extra impact?
Finally, we test whether there are systematic expectational errors, leading to a strong
feedback from investor sentiment (manifesting in low or high refinancing costs) to future
default, raising the possibility of self-fulfilling debt crises, as in Cole and Kehoe (2000). In
order to do answer the questions, we estimate a structural form pricing equation for bonds,
and test for a role of additional factors and systematic expectational errors.