Steve Tadelis - Published/Accepted Papers
How Individuals Respond to a Liquidity Shock:
Evidence from the 2013 Government Shutdown
(with Michael Gelman, Shachar Kariv, Matthew D. Shapiro and Dan Silverman), October 2015
Journal of Public Economics, (forthcoming)
Using comprehensive account records, this paper examines how individuals adjusted spending
and saving in response to a temporary drop in liquidity due to the 2013 U.S. government
shutdown. The shutdown cut paychecks by 40% for affected employees, which was recovered
within 2 weeks. Because the shutdown affected only the timing of payments, it provides a
distinctive experiment allowing estimates of the response to a liquidity shock holding
income constant. Spending dropped sharply, implying a naïve estimate of 58 cents less
spending for every dollar of lost liquidity. This estimate overstates the consumption
response. While many individuals had low liquid assets, they used multiple sources of
short-term liquidity to smooth consumption. Sources of short-term liquidity include
delaying recurring payments such as for mortgages and credit card balances.
JEL classifications: D12, D91, E21, H31
On the Empirical Content of Cheap-Talk Signaling: An Application to Bargaining
(with Matt Backus and Tom Blake)
Journal of Political Economy, (forthcoming)
We outline an empirical framework to guide the analyses of signaling games and focus on
three key features: sorting of senders, incentive compatibility of senders, and belief
updating of receivers. We apply the framework to answer the following question: Can
sellers credibly signal their private information to reduce frictions in negotiations?
We argue that some sellers use round numbers to signal their willingness to cut prices
in order to sell faster. Using millions of online bargaining interactions we show that
items listed at multiples of $100 receive offers that are 8%-12% lower but are 15%-25%
more likely to sell, demonstrating an incentive-compatibility trade-off. We then show
evidence consistent with sorting and belief updating inherent to cheap-talk models.
Patterns in real estate transactions suggest that round-number signaling plays a role
in negotiations more generally.
JEL classifications: C78, D82, D83, M21
view online appendix
Reputation and Feedback Systems in Online Platform Markets
Annual Review of Economics, Vol. 8, September 2016, pp. 321-340.
Online marketplaces have become ubiquitous as sites like eBay, Taobao, Uber and AirBnB
are frequented by billions of users regularly. The success of these marketplaces is
attributed not only to the ease in which buyers can find sellers, but also because they
provide reputation and feedback systems that help facilitate trust. I begin by briefly
describing the basic ideas of how reputation helps facilitate trust and trade, and offer
an overview of how feedback and reputation systems work in online marketplaces. I then
describe the literature that explores the effects of reputation and feedback systems on
online marketplaces, and highlight some of the problems of bias in feedback and reputation
systems as they appear today. I discuss ways to address these problems in order to improve
the practical design of online marketplaces and suggest some directions for future research.
Returns to Consumer Search: Evidence from eBay
(with Tom Blake and Chris Nosko)
17th ACM Conference on Electronic Commerce, (EC 2016), June 2016, pp. 531-545.
A growing body of empirical literature finds that consumers are relatively limited in how
much they search over product characteristics. We assemble a dataset of search and
purchase behavior from eBay to quantify the returns, and thus implied costs, to consumer
search on the internet. The extensive nature of the eBay data allows us to examine a rich
and detailed set of questions related to search in a way that previous structural models
cannot. In contrast to the literature, we find that consumers search a lot: on average 36
times per purchase over 3 (distinct) days, with most sessions ending in no purchase.
We find that search costs are relatively low, in the region of 25 cents per search page.
We pursue the analysis further by, i) examining how users refine their search, ii) how
search behavior spans multiple search sessions, and iii) how the amount of search relates
to finding lower prices.
JEL classifications: D43, D83, L13.
Two-Sided e-commerce Marketplaces and the Future of Retailing
in E. Baskar (Ed.) Handbook on the Economics of Retail and Distribution,
Edward Elgar Publishing, 2016, pp. 455-475.
This chapter describes the growth and proliferation of online two-sided marketplaces
starting with their emergence in the mid 1990s. I begin with a brief history of online
marketplaces, followed by some of the key strategic and economic considerations of online
marketplaces. Special emphasis is placed on price discovery and sales mechanisms, as
well as on the importance of reputation and feedback mechanisms in the success of online
marketplaces. I also discuss how online marketplaces have emerged as a laboratory to test
a variety of theories about buyer and seller behavior in the field.
Canary in the e-Commerce Coal Mine: Detecting and Predicting Poor Experiences Using Buyer-to-Seller Messages
(with Dimitriy V. Masterov and Uwe F. Mayer)
16th ACM Conference on Electronic Commerce, (EC 2015), June 2015, pp. xxx-yyy.
Reputation and feedback systems in online marketplaces are often biased, making it difficult to ascertain the quality
of sellers. We use post-transaction, buyer-to-seller message traffic to detect signals of unsatisfactory transactions on
eBay. We posit that a message sent after the item was paid for serves as a reliable indicator that the buyer may be unhappy with that
purchase, particularly when the message included words associated with a negative experience. The fraction of a seller's
message traffic that was negative predicts whether a buyer who transacts with this seller will stop purchasing on eBay,
implying that platforms can use these messages as an additional signal of seller quality.
Is Sniping A Problem For Online Auction Markets?
(with Matt Backus, Tom Blake, and Dimitriy V. Masterov)
Proceedings of the 24th ACM International World Wide Web Conference (WWW24),
May 2015, pp. 88-96.
A common complaint about online auctions for consumer goods is the presence of
"snipers," who place bids in the final seconds of sequential ascending auctions with
predetermined ending times. Roth and Ockenfels (2002) and Bajari and Hortacsu
(2003) conjecture that snipers are best-responding to the existence of "incremental"
bidders that bid up to their valuation only as they are outbid. Snipers aim to catch
these incremental bidders at a price below their reserve, with no time to respond.
As a consequence, these incremental bidders may experience regret when they are
outbid at the last moment at a price below their reservation value. We measure the
effect of this experience on a new buyer's propensity to participate in future auctions.
We also consider an alternative explanation, rooted in the behavioral literature on
the endowment effect. Bidders may gradually develop an attachment to the object
while they are the high bidder, implying that the regret should increase with time
spent in the lead. We show that the two narratives are econometrically separable,
and estimate them using a carefully selected subset of auctions from eBay.com.
Information Disclosure as a Matching Mechanism:
Theory and Evidence from a Field Experiment
(with Florian Zettelmeyer)
American Economic Review 2015, 105(2):886-905
Market outcomes depend on the quality of information available to the market's participants.
We measure the effect of information disclosure on market outcomes using a large-scale field
experiment that randomly discloses information about quality in wholesale automobile auctions.
We argue that buyers in this market are horizontally differentiated across cars that are
vertically ranked by quality. This implies that information disclosure helps match
heterogeneous buyers to cars of varying quality, causing both good and bad news to increase
competition and revenues. Our empirical analysis confirms these hypotheses. These findings
have implications for the design of other markets, including e-commerce, procurement auctions,
and labor markets.
JEL classications C93, D44, D82, L15
Consumer Heterogeneity and Paid Search Effectiveness: A Large Scale Field Experiment
(with Tom Blake and Chris Nosko)
Econometrica 2015, 83(1):155-174
Internet advertising has been the fastest growing advertising channel in recent years
with paid search ads comprising the bulk of this revenue. We present results from a series
of large-scale eld experiments done at eBay that were designed to measure the causal
eectiveness of paid search ads. Because search clicks and purchase intent are correlated,
we show that returns from paid search are a fraction of non-experimental estimates. As an
extreme case, we show that brand-keyword ads have no measurable short-term benets. For
non-brand keywords we nd that new and infrequent users are positively in
uenced by ads but that more frequent users whose purchasing behavior is not in
uenced by ads account for most of the advertising expenses, resulting in average returns
that are negative.
JEL classications C93, D44, D82, L15
Harnessing Naturally-Occurring Data to Measure the Response of Spending to Income
(with Michael Gelman, Shachar Kariv, Matthew D. Shapiro, and Dan Silverman)
Science 2014, 345(6193):212-215
This paper presents a new data infrastructure for measuring economic activity.
The infrastructure records transactions and account balances yielding
measurements with scope and accuracy that have little precedent in economics.
The data are drawn from a diverse population that overrepresents males and
younger adults, but contains large numbers of underrepresented groups. The
data infrastructure permits evaluation of a benchmark theory in economics
that predicts that individuals should use a combination of cash management,
saving, and borrowing to make the timing of income irrelevant for the timing
of spending. As with previous studies and in contrast with the predictions of
the theory, there is a response of spending to the arrival of anticipated income.
The data also show, however, that this apparent excess sensitivity of spending
results largely from the coincident timing of regular income and regular
spending. The remaining excess sensitivity is concentrated among individuals
with less liquidity.
Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs
(with Patrick Bajari and Stephanie Houghton),
American Economic Review 2014, 104(4):1288-1319
a PDF file
Procurement contracts are often renegotiated because of changes that are required after
their execution. Using highway paving contracts we show that renegotiation imposes significant
adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual
incompleteness and that adaptation costs are an important determinant of their bids. A structural
empirical model compares adaptation costs to bidder markups and shows that adaptation costs account
for 8-14 percent of the winning bid. Markups from private information and market power, the focus
of much of the auctions literature, are much smaller by comparison. Implications for government
procurement are discussed. JEL classifications: D23, D82, H57, L14, L22, L74.
Public Procurement Design: Lessons from the Private Sector
International Journal of Industrial Organization, 2012, 30(3):297-302
a PDF file
Public procurement regulations put constraints on the contracts and award mechanisms that public procurement
agencies can use. These constraints are not present in the private sector, and recent studies suggest that the added
flexibility in private sector procurement offers efficiency advantages. This paper offers a short progress report of
these recent studies, and argues for the need to enhance the tools that are currently at the disposal of public sector
A Theory of Moral Persistence: Crypto-Morality and Political Legitimacy
(with Avner Greif)
Journal of Comparative Economics 2010, 38(3):229-244 ,
Why, how, and under what conditions do moral beliefs persist despite institutional pressure for
change? Why do the powerful often fail to promote the morality of their authority? This paper addresses
these questions by presenting the role of crypto-morality in moral persistence. Crypto-morality is the
secret adherence to one morality while practicing another in public. A simple overlapping generations
model is developed to examine the conditions under which crypto-morality is practiced, decays and
influences the direction of moral change. We demonstrate the empirical relevance of crypto-morality by
discussing the moral foundations of political legitimacy in various historical episodes.
Contracting for Government Services: Theory and Evidence from U.S. Cities
(with Jonathan Levin)
Journal of Industrial Economics, 2010, 58(3):507-541
Local governments can provide services with their own employees or by contracting
with private or public sector providers. We develop a model of this “make-or-buy”
choice that highlights the trade-off between productive efficiency and the costs of contract
administration. We construct a dataset of service provision choices by U.S. cities
and identify a range of service and city characteristics as significant determinants of
contracting decisions. Our analysis suggests an important role for economic efficiency
concerns, as well as politics, in contracting for government services. JEL codes: D23,
D73, H11, L33.
Auctions versus Negotiations in Procurement: An Empirical Analysis
(joint with Patrick Bajari and Robert McMillan)
Journal of Law, Economics and Organization, 2009, 25(2):372-399
view a PDF file
Should the buyer of a customized good use competitive bidding or negotiation
to select a contractor? To shed light on this question, we consider several
possible determinants that may influence the choice of auctions versus negotiations.
We then examine a comprehensive data set of private sector building contracts awarded
in Northern California during the years 1995-2000. The analysis suggests a number of
possible limitations to the use of auctions. Auctions may perform poorly when projects
are complex, contractual design is incomplete and there are few available bidders.
Furthermore, auctions may stifle communication between buyers and sellers, preventing
the buyer from utilizing the contractor's expertise when designing the project. Some
implications of these results for procurement in the public sector are discussed.
JEL classifications: D23, D82, H57, L14, L22, L74.
(with Heski Bar-Isaac)
Foundations and Trends in Microeconomics, 2008, 4(4):273-351
Seller reputation is an important asset because buyers often chooses sellers on the basis
of their reputation. This is particularly true when the quality of the good or service transacted
are hard to measure and the parties cannot perfectly contract on the outcome of the
transaction. As a consequence, the seller will be mindful of building and maintaining a good
reputation through the information that buyers have about the seller, including previous
transactions and the reports of other buyers.
We introduce a unifying framework that embeds a number of different approaches to seller
reputation, incorporating both hidden information and hidden action. We use this framework
to stress that the way in which consumers learn affects both behavior and outcomes. In
particular, the extent to which information is generated and socially aggregated determines
the efficiency of markets.
After reviewing these theoretical building blocks we discuss several applications and empirical
concerns. We highlight that the environment in which a transaction is embedded can
help determine whether the transaction will occur and how parties will behave. Institutions,
ranging from the design of online markets to norms in a community, can be understood as
ensuring that concerns for reputation lead to more efficient outcomes. Similarly, the desire
to affect consumer beliefs regarding the firm’s incentives can help us understand strategic
firm decisions that seem unrelated to the particular transactions they wish to promote.
We conclude by considering slightly different models of reputation that lie beyond the
scope our framework, briefly reviewing the somewhat sparse empirical literature and highlighting
and suggesting future directions for research.
The Innovative Organization: Creating Value Through Outsourcing
California Management Review 2007, 50(1):261-277
Few recent business trends have received as much attention as the practices of
outsourcing and offshoring. Many cases of failed outsourcing contracts suggest
that the strategic use of outsourcing may not be as beneficial as some believed,
and hidden costs are often cited as a main source of failure. A business leader
can successfully innovate the sourcing practices of his organization by employing
strategic frameworks that will anticipate the hidden costs of outsourcing. This
article offers such a framework, and argues for its wide use.
Profit Sharing and the Role of Professional Partnerships
(with Jonathan Levin)
Quarterly Journal of Economics 2005, 120(1):132-172
working paper version
When it is hard to assess product quality, firms will sub-optimally hire
low ability workers. We show that organizing as a profit-sharing partnership
can alleviate these problems. Our theory explains the historical prevalence of
profit sharing in professional service industries such as law, accounting,
medicine, investment banking, architecture, advertising, and consulting, and
the relative scarcity of profit sharing in other industries. It also sheds
light on features of partnerships such as up-or-out promotion systems, and on
recent trends in professional service industries.( JEL codes: D20, D82,
J33, J44, J54, L22.
Firm Reputations with Hidden information
Economic Theory 2003, 21(2-3):635-651
An adverse selection model of firm reputation is developed in which
short-lived clients purchase services from firms operated by overlapping
generations of agents. A firm's only asset is its name, or reputation, and
trade of names is not observed by clients. As a result, names are traded in
all equilibria regardless of the economy's horizon, and the general
equilibrium analysis links the value of a name to the market for services.
This link causes a non-monotonicity that precludes higher types from sorting
themselves through the market for names and leads to "sensible" dynamics:
reputations, and name prices, increase after a success and decrease after a
failure. (JEL C70, D80, L14)
working paper version
The Market for Reputations as an Incentive Mechanism
Journal of Political Economy August 2002, 92(2):854-882
Reputational career concern provide incentive for short lived agent to work
hard, but it is well known that these incentive disappear as an agent reaches
retirement. This paper investigates the effect of a market for firm reputation
on the life-cycle incentives of firm owners to exert effort. A dynamic general
equilibrium model with moral hazard and adverse selection generates two main
results. First, incentives of young and old agents are quantitatively equal,
implying that incentives are "ageless" with a market for reputations. Second,
good reputations cannot act as effective sorting devices: in equilibrium, more
able agent cannot outbid lesser ones in the market for good reputations. In
addition, welfare analysis shows that social surplus can fall if clients
observe trade in firm reputation. (JELC70, D82, L14, L15)
working paper version
Complexity, Flexibility, and the Make-or-Buy Decision
American Economic Review Papers and Proceedings May 2002,
65 years ago, Ronald Coase (1937) asked what determines whether production
will be organized in a firm or through the market, later coined the
"make-or-buy" decision. This question was put center stage by Oliver
Williamson (1975, 1985) who further developed Transaction Costs
Economics(TCE), arguing that incomplete contracts and specific relationships
overshadowed by opportunism, asymmetric information and bounded rationality,
will lead vertical processes to integrate. Benjamin Klein et al. (1978)
enhanced TCE with the "hold-up" problem: in the face of incomplete contracts,
specificity and opportunistic behavior, integration can help promote ex ante
investment incentives. Sanford Grossman and Oliver Hart (1986) (followed by
Hart and John Moore (1990)) developed the Property Rights Theory (PRT) of the
firm (See Hart, 1995). PRT formally model the hold-up problem, offered a
precise definition of integration via ownership and residual control rights,
and analyzed the costs and benefits of integration in a unified manner.
However, PRT narrowed the focus of the make-or-buy question on one type of
transaction cost - the hold up problem. This paper focuses attention on a
different kind of transaction cost: haggling and friction due to ex post
changes and adaptations when contracts are incomplete. The level of a
transaction's complexity, which is associated with contractual incompleteness,
will be the shifting parameter that determines both incentive schemes and
integration decisions. This focus is motivated by a careful examination of
procurement decisions in industry, and has strong empirical content since the
exogenous shifter (complexity) seems easier to measure than specificity.
working paper version
view a typo correction
Incentives Versus Transaction Costs: A Theory of Procurement Contracts
(with Patrick Bajari)
RAND Journal of Economics Autumn 2001, 32(3):287-307
Inspired by facts from the private-sector construction industry, we develop
a model that explains many stylized facts of procurement contracts. The buyer
in our model incurs a cost of providing a comprehensive design and is faced
with a tradeoff between providing incentives and reducing ex post transaction
costs due to costly renegotiation. We show that cost-plus contracts are
preferred to fixed-price contracts when a project is more complex. We briefly
discuss how fixed-price or cost-plus contracts might be preferred to other
incentive contracts. Finally, our model provides some microfoundations for
ideas from Transaction Cost Economics.
working paper version
What's in a Name? Reputation as a Tradeable Asset
American Economic Review June 1999, 89(3):548-563
I develop a model in which a firm's only asset is its name, which
summarizes its reputation, and study the economic forces that cause names to
be valuable, tradeable assets. An adverse selection model in which shifts of
ownership are not observable guarantees an active market for names with either
finite or infinite horizons. No equilibrium exists in which only good types
buy good names. The reputational dynamics that emerge from the model are more
relistic than those in standard game-theoretic reputation models, and suggest
that adverse selection plays a crutial role in understanding firm reputation.
working paper version
Pareto Optimality and Optimistic Stability in Repeated Extensive Form Games
Journal of Economic Theory 1996, 69(2):270-289
This paper extends the applications of the theory of social situations. In
particular, we investigate characteristics of optimistic stable standards of
behavior (OSSBs) in repeated extensive form games. The OSSB is interesting for
two reasons: First, it refines subgame perfect equilibrium. Second, it
strongly relates to von Neumann-Morgenstern abstract stable sets. We
characterize the nondiscriminating OSSB, and derive a sufficient condition for
the existence of a unique nondiscriminating OSSB - a condition that is
independent of the discount factor, ë. Our main result shows that the
nondiscriminating OSSB selects Pareto optimal subgame perfect equilibrium
paths in a class of repeated games.