We propose a network model of firm volatility in which the customers’ growth rate shocks influence the growth rates of their suppliers, larger suppliers have more customers, and the strength of a customer-supplier link depends on the size of the customer firm. Even though all shocks are i.i.d., the network model produces firm-level volatility and size distribution dynamics that are consistent w...

This study explores the importance of cross-border social networks for entrepreneurship in developing countries by examining ties between the Indian expatriate community and local entrepreneurs in India’s software industry. We find that local entrepreneurs who are based in cities with weaker formal institutions rely significantly more on diaspora networks for business leads and financing. Relyi...

We compare the post-merger financial performance of acquiring firms that have wellconnected (central) boards with the performance of less-connected (non-central) boards and find that central boards are associated with better performing acquisitions as evidenced by larger post-merger buy-and-hold abnormal returns, stronger improvements in the ROA, and a 7-12% annual abnormal return based on cale...

Flexibility – the possibility to react swiftly to others’ choices – facilitates cooperation by reducing the gains from defection. With imperfect monitoring, however, flexibility may also hinder cooperation by inducing punishment after too few noisy signals. In theory, the interplay of these forces should generate an inverse U-shaped effect of flexibility on cooperation. To test this subtle pred...

We consider a principal-agent model of adverse selection where, in order to trade with the principal, the agent must undertake a relationship-speci...c investment which a¤ects his outside option to trade, i.e. the payo¤ that he can obtain by trading with an alternative principal. This creates a distinction between the agent’s ex ante (before investment) and ex post (after investment) outside op...

This paper explores the consequences of using supplier trade credit within a vertical relational contract. The downstream firm operates in an environment where shocks may make it unable to repay. The shocks are unobservable to the supplier, which creates an asymmetric information problem. Trade credit limits the supplier’s possibilities to punish the downstream firm and termination is used in e...

This paper studies the provision of incentives in a large U.S. training organization which is divided in about 50 independent pools of training agencies. The number and the size of the agencies within each pool vary greatly. Each pool distributes performance incentive awards to the training agencies it supervises, subject to two constraints: the awards cannot be negative and the sum of the awar...

The amount of institutional intervention necessary to secure efficiency-enhancing cooperation in markets and organizations, in circumstances where interactions take place among essentially strangers, depends critically on the amount of information informal reputation mechanisms need transmit. Models based on subgame perfection find that the information necessary to support cooperation is recurs...

We consider a setting in which the buyer’s ability to hold up a seller’s investment is so severe that there is no investment in equilibrium of the static game typically analyzed. We show that there exists an equilibrium of a related dynamic game generating positive investment. The seller makes a sequence of gradually smaller investments, each repaid by the buyer under the threat of losing furth...

This paper studies manufacturer incentives to invest in the improvement of reliability and security of a software system when (i) reliability and security failures are caused by the same errors in the development of the software components and (ii) naive users find it too costly to distinguish between these two classes of system failures. We trace the effects of these informational imperfection...