Spoofing in Equilibrium (w/ Andy Skrzypacz) Revise and resubmit at Journal of Finance

We present a model of dynamic trading with exogenous and strategic cancellation of orders. We define spoofing as the strategic placing and canceling of orders in order to move prices and trade later in the opposite direction. We show that spoofing can occur in equilibrium. It slows price discovery, raises bid-ask spreads, and raises return volatility. The prevalence of equilibrium spoofing is single-peaked in the measure of informed traders, consistent with industry anecdotes that spoofers target markets of intermediate liquidity. We consider within-market and cross-market spoofing and discuss how regulators should allocate resources towards cross-market surveillance.

Incentivizing Autonomous Workers (w/ Erik Madsen and Andy Skrzypacz)

Workers in an important category of jobs select tasks autonomously. We study the tradeoff between monetary bonuses and non-monetary prizes as tools for guiding their choices. An optimal incentive scheme prioritizes workers for prizes in return for taking on underserved tasks, and this prioritization increases as incentives power up. Bonuses may additionally be used when incentives are sufficiently high-powered, but the optimal bonus is often non-monotone in the strength of incentives. Our results have important implications for the design of worker reward programs on freelancing platforms such as Uber and Airbnb.

Incentive Design for Talent Discovery (w/ Erik Madsen and Andy Skrzypacz)

We study how talent discovery within organizations distorts employee task choices. These choices are generally suboptimal when employees seek to earn promotions which are awarded based on perceived talent. They can be improved through incentive schemes which pay bonuses and/or reallocate promotions between employees. We show that the optimal incentive tool depends on the desired power of incentives, with low-powered incentives provisioned through bonuses and high-powered incentives achieved by reallocating promotions. Organizations can sometimes further benefit by dividing employees into groups with different promotion rates and bonuses, which we show eliminates the need to promote inefficiently within groups.

Stress Tests and Bank Portfolio Choice

How informative should bank stress tests be? I use Bayesian persuasion to formalize stress tests and show that regulators can reduce the likelihood of a bank run by performing tests which are only partially informative. Fully disclosing stress tests are never strictly optimal, and I find conditions under which full disclosure is worse than no disclosure. Optimal stress tests give just enough failing grades to keep passing grades credible enough to avoid runs. I find that optimal stress tests, by reducing the probability of runs, reduce the optimal level of banks' liquidity cushions. I also examine the impact of anticipated stress tests on banks' ex ante incentive to invest in risky versus safe assets.