Self-reported actions, signaling, and auditing


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Actions that affect the value of a service are often self-reported rather than publicly observable. The diligence of a contractor, the education level of job applicant, or the true mileage of a used car are typically reported by the seller. This opens the door for lying and misrepresentation.

In “Self-Reported Actions, Signaling, and Auditing,” my co-author Mike Waldman and I present a model in which multiple receivers bid for the service of a sender, the value of which depends on a action taken by the sender. Instead of the action itself, receivers only observe a message reported by the sender indicating which action was taken. Receivers may opt for costly auditing to verify that the message matches the action.

We find that lying may increase social welfare when the action serves as a signal of a desirable trait of the sender. A positive likelihood of misrepresentation lowers the value of the action as a signal, and therefore counteracts the well-known over-investment result in the signaling literature. Therefore, factors that promote misrepresentation, such as a lower disutility of lying or a higher auditing fee, may increase social welfare.

This result stands in stark contrast to cases in which the action does not signal the sender’s type. We also find that the level of auditing is inverse U-shaped in the probability of the sender being dishonest, and that receivers may audit more often if the action does not serve as a signal, despite gaining less information when auditing. We apply our insights to education signaling, college applications, and odometer fraud in the used car market.

Find the full text paper HERE . I will present it at this year’s virtual editions of the EEA and the ESWC.

It’s not about flattening the curve. Let’s get rid of it!


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By now you have surely heard about “flattening the curve” and seen the pretty picture that typically comes with it. A variation even made it into the New York Times last week.


The original argument/idea behind this picture crudely goes as follows. The COVID-19 pandemic will be over once a critical fraction (“the point of herd-immunity”, estimations vary but converge typically around two thirds) of the population develops immunity against the virus. Comparing death rates from regions that were surprised and thus overwhelmed by the virus (e.g. the Wuhan region in China or Lombardy in Italy) with those who were well prepared and hence faced a smaller amount of cases per capita (e.g. South Korea or the remainder of China) teaches us that pushing the number of serious cases below the capacity of the local healthcare system saves a ton of lives.

In order to achieve herd-immunity, however, the fraction of the overall population that gets infected with the virus does not change. This is depicted by the fact that the areas below the curves above are approximately equal. While this sounds like an intriguing argument, it is not realistic. Crude calculations show that it could take years to decades until we reach that point.

What we are (or should be) after, is, in fact, a reduction of the area under the curve itself, not stretching the curve over years. Instead of achieving herd-immunity, our goal should be to eradicate the virus as quickly as possible. While we may hope that summer, a vaccination or medications will put an abrupt end to the pandemic, these are hypotheticals that are far from certain to manifest. China with its rigorous policy of social distancing is the prime example after which other countries should model their response to the virus. The Washington Post published a neat little simulation, misleadingly also referring to flattening of the curve , that exemplifies the argument and generates these neat gifs:

covid_sim Not only does the curve get stretched by means of social distancing but the area under the curve, i.e. the number of overall infected people, diminishes. Since I trust that you neither want to see exorbitant numbers of older people and the odd younger ones die, nor that you want to sit at home for the next fifteen years, let’s give it some effort for a change and stop spreading dubious conspiracy theories.

Waiting for a vaccination or effective medications is a dangerous game.  Social distancing does not only save lives, it also allows to get back to our lives significantly faster. If we want to eradicate the curve, however, governments need to take more decisive (and also painful) action than if we wanted to stretch the curve. In particular, it is insufficient to just provide recommendations and it is certainly counter-productive to propagate herd-immunity. No country should witness world-war like scenes in its hospitals due to the indecisiveness of world leaders.


Why Audi is slimming down


The car industry and personal mobility is currently subject to more change than it has been over the last century. While the technology underlying cars has constantly evolved, the concept of ownership, fuel and the human’s control over the machine did not. As was true a 100 years ago, a car is till mainly a privately owned vehicle steered by a human being and powered by fossil fuel. We are at the brink of a period, however, that puts the status quo across all these three dimension in question at the same time. Alternative fuel, ride sharing and autonomous vehicles, despite at different stages in their respective development, challenge the very nature of the car industry.

Successfully navigating strategic change requires a firm to deeply understand not only market forces, but above all its own competitive advantage and how its resources and capabilities differ from its current as well as potential future competitors. It is its current strengths that will determine the firm’s optimal strategy when responding to disruptive market events. And this, in fact, is what Audi is attempting to do. If the predominant ownership model changes in response to ride-sharing and results in a relative increase in corporate ownership, Audi is not well-positioned to satisfy the likely nature of such a demand. Neither are they  efficient enough nor is their scale of operations sufficient.

On the other hand, Audi is well known for its craftsmanship and the power of its engines. The company has been a frontrunner in the world of motor sports and when it comes to new trends, be it about style or technology. Its corporate slogan “Vorsprung durch Technik” translates as “Being ahead by means of technology” (and embodies the company’s culture much better than its alternative used in the US until 2016 “Truth in engineering.”) Audi has to focus on next generation’s upscale car customer as opposed to the masses. These customers are likely to demand an electric car that combines an elegant interior with the engine power and overall product quality the company is known for.

This is where employees enter the equation. In order to be a benefit leader focusing on an upscale niche market segment, especially in times of increased automation, does not necessarily require many but the right employees. In a fundamentally changing car industry that quite likely may lead to less car sales for Audi in general, and struggling to keep up with their rivals BMW and Mercedes, it is of utmost importance for Audi to gain market share in this segment by developing the car for tomorrow’s upscale customer. Audi needs engineers that are trained in automation and electrically powered engines and a lean company to be able to offer exceptional cars at competitive prices.

Firing up to 10,000 employees, however, clearly leaves a bad taste, especially in Audi’s home country, Germany, a market that is enormously important for the company, not only in terms of direct sales but also as an indicator or accelerator for other markets. Overall, there is no question that this move represents a gamble for Audi as a company. It appears to be a bet, however, that Audi needs to take. From a loyalty viewpoint one can question the move of firing 10,000 employees while hiring 3,000 new ones and whether employee (re-)training would have been an alternative viable option.

Amazon announces new split headquarters



After a lengthy selection process Amazon has picked Long Island City in Queens, New York City as well as Arlington, Virginia, a Washington suburb, as its second headquarter locations.

The move makes sense from several perspectives. Locating on the East Coast, Amazon will be able to attract the highly educated not interested in moving to the Northwest. Both NYC and Washington are natural targets due to both their existing workforce as well as general preferences of top university graduates to move into the area. However, both locations are sufficiently far away from busy locations to provide the company with opportunities to grow at these locations.

Besides the locations, splitting their co-headquarters could likely entirely be explained by local governments’ incentives. Undoubtedly, tax breaks and general goodwill towards the company from two different entities for half a headquarter each exceeds what Amazon could have attracted from a single location. Moreover, the split likely dampens the negative effect on housing affordability in the chosen locations.

The reportedly 50.000 new employees, many with graduate degrees, would promise a boost to each local economy. What is more, there is hope and speculation that Amazon would attract other business to settle in the area. This led more than 200 US communities to pitch to Amazon.

In the end, the company’s leaders chose to locate close to the main circles of power in the nation. A move that potentially also signals that Amazon is seeking physical proximity to political decision makers.

Lastly, the enormous recent growth of Amazon and similar companies, who bet on consumer data to optimize targeted advertising as well as pricing, creates an enormous demand for highly skilled graduates from quantitative sciences with data analytics capabilities. The reported average salary of $150,000 makes Amazon (among others) a more and more serious competitor to academia as well. The Chronicle of Higher Education quotes me briefly on this last point.

The effect of Google re-entering Chinese cyberspace


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My fellow interviewee and former Google employee Brendan Downey made some very good points when speaking on BBC Newsnight yesterday. Btw shout out to the BBC for promoting me to Associate Professor. While it is challenging to make a deeper coherent argument in less than 90 seconds, I felt it was a good conversation.

A Western tech powerhouse such as Google legitimizing China’s “Great Firewall” by introducing a censored search engine is most certainly reason for concern. Predicting the long-term effects of a potential re-entry of Google in the Chinese market, however, appears challenging.

Since Google exited in 2010, Chinese authorities have critically upped their level of censorship all by themselves, without the support of any Western company. Thus, it is unclear why the presence of a Google search engine would make matters worse than the status quo.

Contrary, disclaimers as constant reminders of censorship and supervision could potentially contribute to a desire for change of a critical mass. Moreover, the observation which topics provoke disclaimers could foster the gain of additional information within the country. From a more general perspective, market presence of strong global brands in a country in which most companies are state-run seems desirable.

It seems naive to believe that when Google exited China in 2010 under co-founder Sergey Brin, they did so mainly due the forced censorship of content. Many believe that Chinese-led cyber-attacks on its customers, specifically human-rights activists, and Google itself were the primary reason for Google’s backtracking.

In a letter Google’s employees demand to participate in ethical reviews of the company’s practices. This seems to be a brilliant idea going forward. But let’s recall that we are talking about a censored search engine as well as a news aggregation app. Neither of these likely would increase censorship when compared to the status quo but potentially offer upside. If Google though were to offer products such as email accounts or cloud services and allow Chinese authorities to access private customer information, this would turn the tides dramatically for the worse.


Is Google doing evil in China?


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Google’s motivations to move back into the Chinese cyberspace–as first reported by The Intercept–with its censoring Mandarin search engine, internally called project “Dragonfly,” are clearly motivated by business considerations. The number of Chinese internet users has been growing by about 70% since 2010 while the growth rate over the same time period in the US did not exceed 20%. As a result, a fifth of today’s daily worldwide four billion internet users call China their home.

In a world where a company’s success and even more so its leaders is frequently measured in growth rates rather than volume, to forfeit a share of the pie in the single most important market by size seems an insurmountable challenge for a profit-driven company. Since the news broke, Google has been heavily criticized for “supporting” and “legitimizing” the Censorship of the ruling Communist party.

Read my opinion in the Washington Post to get a glimpse of an angle how democracy could perhaps benefit from Google’s re-entry into China.

What are the consequences of Google’s $5bn fine?


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The European commission dishing out a record fine to Google for anti-competitive behavior appears among other t

hings to be a sign that the EU plans to crack down hard on anti-competitive behavior in the digital economy, an area that historically has been hard to govern due to its fast-paced nature. One deeper question arising from the ruling than the direct impact on Google is how will the EU treat bundling of digital services in the future. If forced bundling itself is interpreted as anti-competitive, then companies like Facebook, Intel and even Apple could be under threat. As of now, the EC fined Google for forcing handheld manufacturers into contracts via their market power that limit competition. While the same cannot be said Apple because of its closed ecosystem, if the EU’s claim would carry over from contracts to forced bundling in general, even Apple would be under threat.

The recent history would suggest that neither the DOJ nor the FTC will follow suit. The US, however, faces a problem or the danger to lose face in this particular case due to its reminiscence of the DOJ against Microsoft case in 1999, where Microsoft was fined heavily for forced bundling of the internet explorer with Windows. Also political forces could see Google as an easier target after the EU’s ruling to boost their reputation in the light of the DOJ’s failed case against the AT&T/Time Warner merger.

The stock market presumably did not react strongly since, even if Google were to change its business plan slightly, the lack of competition in search does not seem to be a major threat to Google. Furthermore, Google is well-positioned also with their own handheld device, the Pixel to respond. Also, I assume that most analysts share my sentiment that the US is unlikely to follow suit. See parts of my AP interview above.

Poets & Quants 2018 Best 40 Under 40 Professors


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Dear students, dear colleagues,

a big thank thanks to all of you for the overwhelming appreciation. I was truly surprised to see myself listed under POETS & QUANTS’ 2018 Best 40 Under 40 Professors.

Full time 2-yr MBAs in the fall as well AMBAs & NYC-Tech MBAs in the summer, it was truly a fun and exciting year of teaching!!!

Fake news in sports and how to filter real-world information


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When obtaining a post-secondary education in Economics and/or Business related fields, one typically spends a considerable amount of time studying various models of decision-making. Arguably two prominent reasons for teaching those models to students not targeting an academic career—most notably the majority of undergraduate students as well budding MBAs—are a) to provide them with frameworks to forecast and foresee the decisions of others and b) to sharpen their ability in making decisions themselves (which, in turn, is closely related to a)).

For their lack of opportunities to make significant decisions themselves while still in training, we typically resort to (real-world) examples featured in the business press or to (fictitious) business cases. In order to provide them with practice, we jointly tackle questions as in “how would you decide in this situation” or “what do you predict as the likely outcome of that scenario” in class. To put it bluntly, we teach them how to read, analyze and understand subject-specific articles. In the age of “fake news” and ubiquitous news coverage, I truly hope we also teach them how not to.

I typically challenge the class to feed each other with interesting and currently published information related to course content. Recently, a student of mine sent me this article published in the Economist linking the National Football League (NFL) with game theory. This student conceivably made a brilliant choice. The major sports leagues in the United States constitute an arena of decision-making commonly beloved by students, game theory is exciting as it adds the strategic component and The Economist is a highly reputable media outlet of business and politics. On the surface, I could not have chosen better myself.

In short, the article describes the contract situation between the (in recent decades) chronically unsuccessful Buffalo Bills and Tyrod Taylor, their current starting quarterback (the one who throws the ball), in early 2017. The Buffalo Bills benched Taylor for their last regular season game on New Year’s eve. At this point, Buffalo had no chance of reaching the playoffs anymore, i.e. it was de facto the last game of their season. After Taylor had played through a groin injury for several weeks, he opted for surgery at the very beginning of the offseason, i.e. 3 days after the last game (in which he did not feature).

The Economist argues that both actions, the Bills benching Taylor for their last game as well as Tyrod opting for surgery were direct consequences of the incentive structure inherent to their contractual situation. While, as claimed in the article, Taylor was an above average (top third) quarterback at an average quarterback salary, the Bills had the option to cut Taylor for negligible expenses until the beginning of March. However, if Mr. Taylor was rendered not fit to perform football services, the Bills would owe him close to $30M if they fired him.

This, for the Economist, constituted a so-called prisoner’s dilemma, a strategic stand-off between multiple parties in which each party has an unequivocally optimal action, which, if employed by everyone relevant to the game results in the socially worst scenario. In other words, the Bills had an incentive to bench Taylor for the last game whereas he should try everything possible not to be fit to play during the offseason (at least until March). What is more, it was stipulated that the Bills overlooked that they were in fact caught in a repeated prisoner’s dilemma with varying actors, that is other players with who they would have to deal in the future.

The main predictions based on their analysis were that, while not explicitly claimed, it was likely that the Bills were either going to fire Tyrod Taylor while injured (a costly endeavor) or opt not to due to the financial penalty of doing so although they would prefer to part ways. In any case, acting according to their best option would somehow sever the bond between the Bills and their quarterback. Moreover, by not realizing the more general implications of crossing a star player, the Bills would significantly reduce their chances of hiring popular players in the future. All of these implications taken together would even prolong and worsen the Buffalo Bills drought and their absence from the playoffs (17 years and counting). Lastly, it was argued that Rex Ryan, the coach of the Bills until their last season game was fired by the club’s owners since he disagreed with benching Taylor for the last season game.

In fact, the Buffalo Bills and Tyrod Taylor did not part way in the offseason of 2017. Instead, they renegotiated Taylor’s contract to keep him as a quarterback on a significantly lower salary. During the season the Bills took Kelvin Benjamin, a highly rated wide receiver (the one who catches the ball) from the Carolina Panthers, under contract. While the Bills traded assets (future draft picks) for the receiver and the trade was not directly Benjamin’s decision, it seems unlikely that the Bills would part with valuable options for today’s college players for an athlete who was not eager to play for the franchise. As of week 15 of the current season (two more games to follow), the Bills show a record of 8 wins and 6 losses and are at the brink of qualifying for the playoffs for the first time in 18 years.

While one time negative results do most certainly not refute the validity of predictions in the first place, a strategic analysis delivers similar results. A football player who opts for surgery only 3 days after the end of the season, a surgery which has an average recovery time of 7 weeks for non-athletes, does not seem to try everything possible to be deemed unfit when March comes around. If Taylor was above average in quality but paid below peers of his level, would it not be optimal for the team if he took care of his injuries as quickly as possible (to ensure his availability for team as long as possible before the start of the next season)? Many teams in various sports bench their star players in games that are inessential to their season goals. Why was this such a particular move in the case of the Buffalo Bills and Tyrod Taylor and why does this move necessarily carry negative consequences for an already injured player? Why, if Tyrod Taylor was overpaid against the league’s standards, did he agree to continue on the team for a substantially lower salary? Is it more likely that the Bills fired their head coach over a singular disagreement regarding the line-up or due the fact that Mr. Ryan did repeatedly not manage to lead a talented team to the playoffs and that he had an abysmal record in close games?

The model-theoretic analysis of the quoted article is as little capable of answering those questions as its predictions coincide with what unraveled after its publication. Bar a very few superstars, the National Football League (NFL) and its teams have tremendous power over their players as most NFL players would be expected to earn only a tiny fraction of their actual salaries if they were not to make it into or would have to exit the league. This fact paired with a salary cap, which ensures talent to the distributed across teams, guarantees teams significant bargaining power.

Dazzled by the institution of a reputable magazine and by the connection of buzz words and sports, I initially forwarded the article to the remainder of my students without any specific comments. After thoroughly reading and reflecting, however, I decided to scrutinize the article in class. In addition to teaching students how to filter business press articles and other relevant outlets for information and conducting an analysis based on these premises, I believe we ought to realize that, in a world characterized by the ubiquity of unfiltered content, teaching them to challenge this very information is the first crucial step towards a successful analytical contribution. While this sounds trivial, it clearly has to begin with questioning the intentions of author and publisher when reading an article. Whether the creators of an article intend to push a dogma, support a particular political view or simply myopically attempt to maximize readership, abstracting from those intentions should be the very first step in the process of filtering information.