Decision Making & Negotiations

Despite the popularity of prediction, markets among economists, businesses, and policymakers have been slow to adopt them in decision-making. Most studies of prediction markets outside the lab are from public markets with large trading populations. Corporate prediction markets face additional issues, such as thinness, weak incentives, limited entry, and the potential for traders with biases or ulterior motives — raising questions about how well these markets will perform.

We investigate the welfare implications of operating alternative market structures known as electronic crossing networks or "dark pools" alongside traditional "lit" markets. We study equilibria of a market where intrinsic traders and speculators, endowed with heterogeneous fine-grained information, endogenously choose between dark and lit venues. We establish that while the dark pool attracts relatively uninformed investors, the orders therein experience adverse selection.

The authors explore how firms can enhance consumer performance in online idea generation platforms. Most, if not all, online idea generation platforms offer all consumers identical tasks in which (1) participants are granted access to ideas from other participants and (2) ideas are classified into categories, but consumers can navigate freely across idea categories. The former is linked to stimulus ideas, and the latter may be viewed as a first step toward problem decomposition.

We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedge funds have a detrimental effect on the long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data.

Fraud occurs when there is an incentive and the opportunity to commit fraud and the fraudster can rationalize his behavior. Academic literature in financial economics has investigated incentives and opportunities to commit fraud but has largely ignored the fraudsters' ability to rationalize fraud. We address this gap by positing that economic actors, whose earnings are restricted by regulations, cheat more and rationalize such behavior as an effort to get "out of the hole" that regulations have forced them into.

We develop and test hypotheses regarding the role of social contagion in customer adoption of new sales channels. We examine two aspects of social contagion (local contagion and homophily) and two channels (Internet and bricks-and-mortar store). Drawing on diffusion theory, we propose a conceptual framework that identifies the factors associated with new channel adoption.

We model an electronic limit order book as a multi-class queueing system under fluid dynamics, and formulate and solve a problem of limit and market order placement to optimally buy a block of shares over a short, predetermined time horizon. Using the structure of the optimal execution policy, we identify microstructure variables that affect trading costs over short time horizons and propose a resulting microstructure-based model of market impact costs.

Contingent capital (CC), which intends to internalize the costs of too-big-to-fail in the capital structure of large banks, has been under intense debate by policy makers and academics. We show that CC with a market trigger, in which direct stake-holders are unable to choose optimal conversion policies, does not lead to a unique competitive equilibrium, unless value transfer at conversion is not expected ex-ante. The "no value transfer" restriction precludes penalizing bank managers for taking excessive risk.

This paper studies the competition between Web 2.0 communities in a game theoretic framework. We model three important features of these institutions: (i) firms' content is usually user-generated; (ii) consumers' content preferences are governed by local network effects, and (iii) consumers have strong tendencies to multi-home. Our analyses reveal that ex-ante identical community sites can acquire differentiated market positions that spontaneously emerge from user-generated content.