Erik Madsen

PhD Program, Economics
PhD Program Office
Graduate School of Business
Stanford University
655 Knight Way
Stanford, CA 94305
Erik Madsen
Research Interests
Microeconomic theory
Dynamic contracting
Industrial organization

Job Market Paper

Optimal project termination with an informed agent PDF
Economic decision-makers must commonly decide when to terminate temporary projects which are monitored imperfectly over time. I analyze the provision of dynamic incentives in an agent-assisted version of this problem. A firm must decide when to halt a project which yields a stochastic profit flow but eventually becomes unprofitable; the firm is aided by an agent with private information about the project's state, limited liability, and incentives for delayed project termination. I develop techniques for solving the resulting novel mechanism design problem, which features noisy verification of reports and limited transfers. The firm's optimal contract involves occasional inefficient early project termination but no late termination, a golden parachute which declines with proximity to termination, and soft deadlines exhibiting asymmetric sensitivity to news close to and far from termination. Central to my analysis is a duality result linking payment and termination variables in an optimal contract, closely analogous to the equivalence of price and quantity as control variables in monopoly theory. I analyze both the “price” and “quantity” approaches to optimization, which yield complementary insights into features of the optimal contract.
Working Papers
Price cutting and business stealing in imperfect cartels (with B. Douglas Bernheim) PDF
Though economists have made substantial progress toward formulating theories of collusion in industrial cartels that account for a variety of fact patterns, important puzzles remain. Standard models of repeated interaction formalize the observation that cartels keep participants in line through the threat of punishment, but they fail to explain two important factual observations: first, apparently deliberate cheating actually occurs; second, it frequently goes unpunished even when it is detected. We propose a theory of “equilibrium price cutting and business stealing” in cartels to bridge this gap between theory and observation.
Last Updated 16 Nov 2016