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 strategically placing and cancelling orders in order to move prices and trade later in the opposite direction. We show that spoofing can occur in equilibrium, slowing price discovery and raising spreads and volatility. A novel prediction is that the prevalence of equilibrium spoofing is single-peaked in the measure of informed traders, suggesting that spoofing should be more prevalent in markets of intermediate liquidity. Regulation which inhibits order cancellation not only discourages spoofing but also harms legitimate traders; we illustrate numerically how this tradeoff varies with market conditions and affects optimal regulation.

Reward Schemes for Autonomous Workers (w/ Erik Madsen and Andy Skrzypacz)

When workers enjoy autonomy over aspects of their work, their employers commonly use both monetary bonuses and tangible non-monetary prizes to guide their choices. We study the design of these reward schemes, which optimally utilize a mix of the two tools and balance the (linear) financial cost of bonuses against the (convex) allocative cost of prize incentives. As the employer's need to reshape employee choices grows, prize incentives increase while monetary incentives typically respond non-monotonically. We establish these results in a model flexible enough to encompass loyalty programs on Uber and Airbnb as well as return-to-office incentives for hybrid workers.

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.