My main interests are in problems related to coordination and/or asymmetric information in Macroeconomics. My approach to these problems draws heavily on game theory and dynamic contracts. Although I mainly apply these tools to problems in Macro, I’m also interested in their theoretical development.
Disclaimer: I have been known to get carried away into others areas so don't be surprised if you find work that doesn't fit the description above.
Some of my work is very preliminary and under revision so you won’t find a link to a paper. Please feel free to contact me at wfuchs(“at”)uchicago.edu if you would like more information on any of these (to be) papers.
Completed
Work: (Links to working paper versions of these papers)
Monetary Union with Voluntary Participation (with Francesco Lippi)
Review of Economic Studies No.2, Volume: 73, April 2006
CEPR/ESI Prize 2004 for the Best Central Bank Research Paper.
A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents incentives to leave the union by tilting both current and future policy in their favor. This yields a non-linear rule according to which each country’s weight in policy decisions is time-varying and depends on the incentives to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability and disruption of a Monetary Union.
Contracting with Repeated Moral Hazard and Private Evaluations
American Economic Review Volume 97, Number 4 September 2007
Landau Prize for Best Student Working Paper.
A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. It is shown that there is no loss from restricting the attention to contracts in which the Agent is supposed to exert effort every period, receives a constant wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (δ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as δ→1. The optimal contract when δ<<1 is partially characterized. Incentives are optimally provided with a combination of efficiency wages and the threat of termination, which will exhibit memory over the whole history of realizations. Finally, Tournaments are shown to provide an alternative solution to the problem.
Bargaining with Arrival of New Traders (with Andy Skrzypacz) NEW VERSION!
Forthcoming in the American Economic Review
We study a general model of dynamic bargaining between a seller and a privately informed buyer, with arrival of exogenous events. Events can represent arrival of competing buyers (or sellers) or release of information. We characterize a unique limit of stationary equilibria of these games as the time between offers goes to zero. We show that the possibility of arrivals leads to equilibrium dynamics that violate the Coase conjecture. Even in the limit, there is considerable delay of trade in equilibrium, the seller slowly screens out buyers with higher valuations. The limit equilibria are very tractable, allowing us to establish many comparative statics and utilize the model to answer many applied questions. For example, we show that in some applications when buyer valuations fall, average transaction prices drop and the time on the market gets longer. If the arrival rate is high enough, then the division of surplus and equilibrium dynamics are driven more by the relative chances of a competing trader arriving on either side of the market than on the relative discount factors. Finally, even when multiple buyers can arrive, the expected time to trade is a non-monotonic function of the arrival rate.
Work in Progress:
Dividing and Discarding: A Procedure for Taking Decisions with Non-transferable Utility (with Vinicius Carrasco)
We consider a setting in which two players must
take a single action. The analysis is done within a private values
model in which (i) the players' preferences over actions are private
information, (ii) utility is quadratic (non-transferable), (iii)
implementation is bayesian and (iv) the welfare criterion is
utilitarian. We characterize an optimal monotonic allocation rule.
Instead of asking the agents to directly report their types, this
allocation can be implemented dynamically. The agents are asked if they
are to the left or to the right of the midpoint of the interval of
possible types (eg.1/2 for the initial interval [0,1]). If both reports
agree, the section of the interval which none preferred is discarded
and the remaining interval is divided in two parts and the process
continued until one agent chooses left and the other right. In that
case, the midpoint of this remaining interval is implemented. This
implementation can be carried out by a Principal who lacks commitment,
implying this process is an optimal communication protocol.
Repeated Common Action with Privately Observed Preferences
Shocks (with Vinicius Carrasco) (Coming soon!!)
This paper considers the problem faced by two agents that repeatedly have to take a joint action, cannot resort to side payments, and each period are privately informed about their favorite actions. We study the properties of the optimal contract in this environment. We establish that first best values can be arbitrarily approximated (but not achieved) when the players are extremely patient. Also, we show that the provision of intertemporal incentives necessarily leads to a dictatorial mechanism: in the long run the optimal scheme converges to the adoption of one players favorite action.
Subjective evaluations: The bonus as a signal of performance.
A setup in which the quality of a job match is not known and the principal privately observes the stochastic product of agent’s effort is analyzed. It is shown that there can exist two types of equilibria depending on the parameters. The first is a separating equilibrium in which the Principal gives the agent truthful feedback about the agent’s performance. To make sure the Principal does not lie, positive feedback must be accompanied by a bonus. The other type of equilibria is a pooling equilibrium in which the principal gives no feedback to the agent.
Rules vs Discretion: The Role of Dollarization
The full set of sequential equilibria of the Barro-Gordon (1983) setup where a government of known type plays an infinite horizon monetary policy game is characterized. The effect of introducing currency substitution as a policy choice for the government is then analyzed. We observe that the set of sustainable equilibria is reduced dramatically and that for low discount factors governments resort to immediate dollarization.
Dynamic Signaling and Reputation in a Monetary Policy Game
The optimal path for monetary policy by the non-inflationary type in an asymmetric information environment with two types of central bankers, inflationary and non-inflationary is studied. The analysis leads to an interesting and complex dynamic signaling game. The objective is to characterize the optimal policy followed by the independent central banker to signal its type. The resulting dynamics for inflation will be compared to those observed in developing countries where successful stabilization programs have been implemented.