| This collection of papers studies forward looking strategies by economic agents and the implications for equilibrium. The focus is on situations in which a dynamic aspect of the decision has traditionally been simplified or even ignored, yet has a significant effect on outcomes. The first paper considers optimal contracts for the dynamic allocation of unobservable effort by an agent. A fundamental assumption in the related literature, dating back to the seminal work of Rogerson (1985) and Spear and Srivastava (1987), is that the agent's productivity in any period is independent of past actions. While technically useful, this assumption significantly limits domain in which existing results can be applied. The paper removes this assumption, develops a novel formulation for representing the problem and characterizes the solution. Under the common assumption of increasing marginal cost of effort, the optimal contract's key features are consistent with features that are common in real world contracts yet so far lack theoretic foundation. The second paper considers the need of firms to consider consumers switching costs when competing with rivals. The paper shows that, contrary to the accepted economic wisdom, in a fully dynamic equilibrium such switching costs may in fact reduce prices and profits of all firms in an oligopoly. The third paper considers a simple dynamic aspect of the competition between firms that serve many markets. In such industries, each multi-market firm often first generates a capacity that can serve many markets and then competes with its rivals in specific markets. The paper shows that this simple capacity dynamic can generate competitive behavior that can be easily misinterpreted as anti-competitive. One industry in which multi-market capacity dynamics are important is the commercial air travel. The paper finds significant support in the US domestic air travel data for novel predictions of the model that cannot be easily explained by existing models. |
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