WORKING PAPERS (under review)

"Maximal fines under announced and surprise inspections," with Emmanuel Dechenaux (Under review)
ABSTRACT: This paper examines the trade-off between the frequency and severity of punishment in a Principal-Supervisor-Agent model. The agent is a firm that chooses whether or not to comply with some regulation. The principal is the regulator who must hire a supervisor in order to monitor the firm and impose a fine if the firm is not compliant. The supervisor's monitoring effort is not observable and the firm may invest in avoidance. In this environment with imperfect information, we examine the regulator's optimal policy under two alternative inspection regimes: unannounced and announced inspections. Given the inspection regime, the regulator chooses the fine, the supervisor's reward and the frequency of inspections in order to maximize expected welfare. We show that when inspections are unannounced, the optimal fine is the maximal fine. However, when inspections are announced, the fine is not always maximal. Finally, we also derive a sufficient condition for choosing unannounced inspections over announced inspections.

"The Effect of De-Hubbing on Airfares," with Kerry Tan (Under review)
ABSTRACT: This paper studies the price effect of de-hubbing, which occurs when an airline ceases hub operations at an airport. By definition, legacy carriers dramatically decrease both the frequency of flights and the number of seats offered once it de-hubs an airport in the United States. We perform an event study using seven cases of de-hubbing between 1993 and 2009 to analyze how average airfares change following de-hubbing. The empirical results suggest that airfares decrease when there is a low-cost carrier presence at the de-hubbed airport, whereas airfares increase when the de-hubbed airport is not serviced by a low-cost carrier. A theoretical model of de-hubbing is presented with testable hypotheses that are consistent with these empirical findings.

"Gaming the system: Decision Making by Interdependent Critical Infrastructure," with Allison Reilly and Seth Guikema (Under review)
ABSTRACT: Supporting strong, resilient, and integrated critical infrastructure is vital to upholding the US economy and its national security. Arguably, no sector of the economy could exist without the reliable, and predictable networks on which they depend. To date, the research on interdependent infrastructure has concentrated on describing the sources of the dependencies and developing models for predicting performance and cascading disruptions after a hazardous event. However, these models fail to capture the perspective of the operators of these networks and how competing, independent objectives lead to suboptimal investment decisions and hence suboptimal network performance. Rather than focus on how interdependent infrastructures operate and possibly fail, we take the perspective of their operators and ask why they make the decisions that they do. The goal of this paper is to demonstrate how strategic interdependencies may impact performance of coupled systems by shifting investments away from what is collectively best toward decisions that are more myopic and optimal from the perspective of a single infrastructure. Through our model, we make inferences on the level of investments networks make, relate this to performance, and provide policy recommendations on how to promote reliable infrastructure.

"Regulatory inspection regimes and oligopoly competition," with Emmanuel Dechenaux
ABSTRACT: Regulatory agencies help ensure that firms invest in measures that make their products safe for consumption. Regulators define quality or safety standards, conduct inspections, and assess fines for non-compliance with the standards. We model the relationship between market structure and the effectiveness of various inspection regimes in a quantity-setting oligopoly where the firms also choose product safety. Safety is only verifiable as a result of a successful costly inspection by the regulator and a firm can invest in avoidance in order to reduce the probability of detection for non-compliance. The regulator seeks to ensure compliance with a given safety standard and it can implement either an announced or an unannounced inspection. We find that if demand is sufficiently high, an unannounced regime always yields a higher level of safety, regardless of the level of competition. If both demand and the cost of safety provision are low, then an unannounced inspection regime yields a higher level of safety only if the number of firms is sufficiently low. Otherwise, announced inspections are preferred. The impact on safety of increasing the fine, the supervisor's reward for a successful inspection or the frequency of inspections also depend on the level of demand, the number of firms and the cost of safety. Finally, we find that increasing the number of firms decreases safety, but reduces the incentives for collusion between the firm and the inspector.

"Bribery, hold-up, and the role of middlemen," with Ajit Mishra (Under Review)
ABSTRACT: Corrupt contracts are illegal and, therefore, vulnerable to hold-up. That is, a bureaucrat who has accepted a bribe from a firm in exchange for a license may still choose not to grant the firm that license (hold-up). This paper develops a model to study the role that intermediaries play in preventing hold-up. There are two types of firms, good firms that are legally entitled to receive a license, and harmful firms that are not. Without intermediaries only good firms enter the market, and harmful firms do not enter because of hold-up. Intermediaries are legally permitted to help firms reduce their navigation costs of obtaining licenses. Thus, intermediaries increase entry of good firms. However, by utilizing the legal aspects of their transaction with good firms as leverage against the bureaucrat, intermediaries can prevent hold-up among harmful firms. Thus, intermediaries increase participation by both good and harmful firms and their welfare costs are ambiguous. Data obtained from occurrences of violations of the Foreign Corrupt Practices Act are broadly consistent with our model.

"Bribery, incomplete information, and the knowledge criterion," with Ajit Mishra (Under Review)
ABSTRACT: This paper studies bribery between a firm and a supervisor who monitors the firm for compliance. Bribery occurs preemptively, that is before the supervisor exerts costly effort to discover the firm's level of non-compliance and collect evidence for successful prosecution. In contrast to previous papers, preemptive bribery is modeled as a Bayesian signaling game because the supervisor is uninformed about the firm's level of non-compliance. We show that when the collection of evidence is independent of the supervsior's knowledge of the firm's level of non-compliance, some (possibly all) firms always engage in preemptive bribery. However, if knowledge of the firm's level of non-compliance can improve the supervisor's ability to collect evidenceand prosecute, preemptive bribery can be completely eliminated. Prior results which apply to preemptive bribery under complete information do not apply here.


"Privatized inpsections in oligopolistic markets" (with Emmanuel Dechenaux)

"Cognitive dissonance, ethical behavior, and bribery"

"An empirical analysis of FCPA violations" (with Bryan McCannon)

"Incumbent Response to Entry by Low-Cost Carriers in the U.S. Airline Industry" (with Kerry Tan)

"Announced versus suprise inspections with tipping-off," (with Emmanuel Dechenaux)

"Fair trade, market failures, and (the absence of) institutions," (with Charles Scott and Fred Derrick)

"Bribery in subsidised credit markets: evidence from Bangladesh," (with Emmanuel Dechenaux and Aaron Lowen)


"Resource allocatin for homeland defense: dealing with the team effect," (with Seth Guikema)

"Preemptive corruption hold-up and repeated interactions," (with Emmanuel Dechenaux)


"Bribery and endogeneous monitoring effort: an experimental study," (with Aaron Lowen)

"Motivating morality (old title: Game theory and moral motivation ," (with Kelly Clark)


"Corruption and monitoring technology," (with Aaron Lowen)


"Preemptive collusion among corruptible law enforcers," (with Aaron Lowen)

Contact Information

Department of Economics
Loyola University Maryland
4501 N Charles St
Baltimore, MD 21210

Office: Sellinger Hall 327
Office Phone: (410)617-5328