Associate Professor of Business Economics, Kelley School of Business, Indiana University
Robert James Waller Professor in Economics and Personal Freedom
Adjunct faculty of Economics and of East Asian Languages and Culture
Email: Phone: 812 855-2777 Fax: 812 855-3354 Room: BU 450
BA, University of Pennsylvania; MA, National Taiwan University; PhD, University of Pittsburgh;
Post-Doc, Yale SOM
Coarse Grades, with Eric Rasmusen, AEJ - Microeconomics, forthcoming.
Persuasive Puffery, with Archishman Chakraborty, Marketing Science, 2014.
Opportunistic Discrimination, with Ted To, European Economic Review, 2014.
Label Confusion: The Groucho Effect of Uncertain Standards with John Maxwell and Beatrice Roussillon, Management Science, 2011.
Persuasion by Cheap Talk, with Archishman Chakraborty, American Economic Review, 2010.
Does Copyright Enforcement Encourage Piracy?, with Rahul Khemka, Journal of Industrial Economics, 2010.
Comparative Cheap Talk, with Archishman Chakraborty, Journal of Economic Theory, 2007.
Best Foot Forward or Best for Last in a Sequential Auction?, with Archishman Chakraborty and Nandini Gupta, RAND Journal of Economics, 2006.
The Effect of Employee Stock Ownership on Wage and Employment Bargaining, Journal of Comparative Economics, 2005.
Early Round Upsets and Championship Blowouts, with Tilman Klumpp, Economic Inquiry, 2005.
Cheap Talk Comparisons in Multi-Issue Bargaining, with Archishman Chakraborty, Economics Letters, 2003.
Too Cool for School? Signaling and Countersignaling, with Nick Feltovich and Ted To, RAND Journal of Economics, 2002.
Chinese Characters: A Genealogy and Dictionary, self-published by Zhongwen.com, 1998. Publication assumed by Yale University Press, 2009.
Falling Behind the Joneses: Relative Consumption and the Growth-Savings Paradox, Economics Letters, 1996.
Most of my research analyzes how firms and individuals can credibly convey information -- how a firm can prove that its products are high quality, how an advertisement can successfully persuade a consumer, how a stock analyst can credibly rate a stock, or how a manager can prove her ability. My coauthors and I show that costless, unverifiable "cheap talk" is a more powerful communication tool than one might think (Cheap Talk Comparisons, Best Foot Forward, Comparative Cheap Talk, Persuasion by Cheap Talk, Biased Recommendations, Persuasive Puffery) and that costly "signaling" and verifiable "persuasion" are less reliable communication tools than one might think (Countersignaling, False Modesty, Label Confusion, Coarse Grades).
Working Papers and Published Papers with Abstracts:
Consistent Good News and Inconsistent Bad News. Rick Harbaugh, John W. Maxwell, and Kelly Shue, working paper.
Good news is more persuasive when it is more consistent, and bad news is less damaging
when it is less consistent. We formalize this idea and apply it to distortion of performance
news by a manager of multiple projects. If the news is generally good, boosting relatively bad
projects increases consistency across projects and provides a stronger signal that the manager
is skilled. But if the news is generally bad, instead boosting relatively good projects reduces
consistency and offers some hope that the manager is unlucky rather than incompetent. We
test for evidence of such “contrarian news distortion” by examining the consistency of reported
segment earnings across different units in firms. As predicted by the model, managers appear to
shift discretionary cost allocations to help underperforming segments when overall earnings are
above expectations and overperforming segments when overall earnings are below expectations.
The “mean-variance news preferences” that we identify extend to other situations including
media bias and p-value hacking, and differ from standard preferences in that more variance
sometimes helps while a higher mean sometimes hurts.
Biased Recommendations from Biased and Unbiased Experts (Slides). Wonsuk Chung and Rick Harbaugh, working paper.
When can an expert be trusted to provide useful advice? We develop and experimentally
test a simplified recommendation game where an expert recommends one of two actions to a
decision maker who can take one of the actions or neither. Consistent with predictions from
the cheap talk literature, we find that recommendations are persuasive in that they induce
actions benefiting the expert, but decision makers partially discount recommendations for
the action a biased expert favors. If the decision maker is uncertain over whether the
expert is biased toward an action, unbiased experts follow a political correctness strategy
of recommending the opposite action in order to be more persuasive, which decision makers
do not sufficiently discount. Even if experts are known to be unbiased, experts pander by
recommending the action that the decision maker already favors, and decision makers
discount the recommendation. The results highlight that transparency of expert incentives
can improve communication, but need not ensure unbiased advice.
Prospect Theory or Skill Signaling? (Slides) Rick Harbaugh, working paper.
Failure is embarrassing. In gambles involving both skill and chance, we show that a strategic desire to avoid appearing unskilled generates behavioral anomalies that are typically explained by prospect theory's concepts of loss aversion, probability weighting, and framing effects. Loss aversion arises because losing any gamble, even a friendly bet with little or no money at stake, reflects poorly on the decision maker's skill. Probability weighting emerges because winning a gamble with a low probability of success is a strong signal of skill, while losing a gamble with a high probability of success is a strong signal of incompetence. Framing matters when there are multiple equilibria and the framing of a gamble affects beliefs, e.g., when someone takes a "dare" rather than admit a lack of skill. The analysis is based on models from the career concerns literature and is closely related to early social psychology models of risk taking. The results provide an alternative approach to the widespread application of prospect theory to managerial and financial decisions where both skill and chance are important. We show that in specific situations skill signaling makes opposite predictions than prospect theory, allowing for tests between the strategic and behavioral approaches to understanding risk.
False Modesty: When Disclosing Good News Looks Bad (Slides). Dr. Richmond Harbaugh and Ted To, working paper.
Is it always wise to disclose good news? We find that the worst sender with good news has the most incentive to disclose it, so reporting good news can paradoxically make the sender look bad. If the good news is attainable by sufficiently mediocre types, or if the sender is already expected to be of a relatively high type, withholding good news is an equilibrium. Since the sender has a legitimate fear of looking too anxious to reveal good news, having a third party disclose the news, or mandating that the sender disclose the news, can help the sender. The predictions are tested by examining when economics faculty at different institutions use titles such as "Dr" and "Professor" in voicemail greetings and course syllabi.
Coarse Grades. Rick Harbaugh and Eric Rasmusen, American Economic Journal - Microeconomics, forthcoming.
Certifiers of quality often report only coarse grades to the public despite having measured quality more finely, e.g., "Pass" or "Certified" instead of "73 out of 100". Why? We show that coarse grades result in more information being provided to the public because the coarseness encourages those of middling quality to apply for certification. Dropping exact grading in favor of the best coarse grading scheme always reduces public uncertainty because the extra participation outweighs the coarser reporting. In some circumstances, the coarsest meaningful grading scheme, pass-fail grading, is the most informative.
Persuasive Puffery (Slides). Archishman Chakraborty and Rick Harbaugh, Marketing Science, 2014.
Sellers often make claims about product strengths without providing evidence. Even though such claims are mere puffery, we show that they can be credible because talking up any one strength comes at the implicit tradeoff of not talking up another potential strength. Puffery pulls in buyers who value product attributes that are talked up or emphasized, while pushing away other buyers who infer that the attributes they value are not the product's strengths. When the initial probability of a sale is low there are more potential buyers to pull in than to push away so puffery is persuasive. This persuasiveness requires some buyer privacy about their preferences so that the seller does not completely pander to them. More generally the results show how cheap talk by an expert to a decision maker can be credible and persuasive in standard discrete choice models used throughout marketing and economics.
Opportunistic Discrimination. Rick Harbaugh and Ted To, European Economic Review, 2014
When can you cheat some people without damaging your reputation among others? In a trust game between a firm and a series of individuals from two groups of different sizes, the firm has more incentive to cheat minority individuals because trade with the minority is less frequent and the long-term benefits of a reputation for fairness toward the minority are correspondingly smaller. If the majority is sufficiently large it gains nothing from a solidarity strategy of punishing opportunism against the minority, so the firm can continue doing business with the majority even if it cheats the minority. When some firms have a preference-based bias against the minority, the interaction with reputation effects gives all firms a stronger incentive to cheat the minority, and discrimination is the unique equilibrium for firms of intermediate patience.
Label Confusion: The Groucho Effect of Uncertain Standards (Slides). Rick Harbaugh, John Maxwell, and Beatrice Roussillon, Management Science, 2011.
When consumers are unsure of the exact standard that a quality certificate or label represents, they must infer the difficulty of the standard in part from observing which firms adopt the label. Key results from the certification and disclosure literatures are thereby altered. First, consumers are more suspicious of a label if a firm with a bad reputation adopts it, so certification can be less appealing to bad firms than average firms or good firms. Second, as the number of available labels increases, the informativeness of certification decreases rather than increases. Third, adoption of a label by one firm need not increase pressure on other firms to also adopt it. Instead, a label can be either "legitimitized" or "spoiled" for use by other products depending on whether a product with a favorable or unfavorable reputation is certified first. These problems are mitigated if certification is mandatory or if some standards are "focal", even if standards remain uncertain. The model is applied to eco-labels and is also revelant for nutrition labels, academic journals, club memberships, diplomas, and related environments.
Persuasion by Cheap Talk (with Online Robustness Appendix) (Slides). Archishman Chakraborty and Rick Harbaugh, American Economic Review, 2010.
We consider the credibility, persuasiveness, and informativeness of multidimensional cheap talk by an expert to a decision maker. We find that an expert with state-independent preferences can always make credible comparative statements that trade off the expert's incentive to exaggerate on each dimension. Such communication benefits the expert -- cheap talk is "persuasive" -- if her preferences are quasiconvex. Communication benefits a decision maker by allowing for a more informed decision, but strategic interactions between multiple decision makers can reverse this gain. We apply these results to topics including media bias, advertising, product recommendations, voting, and auction disclosure.
Does Copyright Enforcement Encourage Piracy? Rick Harbaugh and Rahul Khemka, Journal of Industrial Economics, 2010.
More intensive copyright enforcement reduces piracy, raises prices, and lowers consumer
surplus. We show that these results do not hold regarding the extent rather than intensity
of enforcement. When enforcement is targeted at high-value buyers such as corporate and
government users, the copyright holder charges super-monopoly prices, thereby encouraging
low-value buyers to switch to inferior pirated copies. Extending enforcement down the
demand curve broadens the copyright holder’s captive market, reduces prices toward the
monopoly level, and increases sales of legitimate copies. Since more extensive enforcement
increases both profits and consumer surplus over some range, the standard tradeoff between
the incentive to generate intellectual property and the welfare cost of monopoly power is
avoided. Technologies such as digital rights management which allow for more extensive
copyright enforcement can sometimes benefit consumers even apart from their effects on
the incentive to generate intellectual property.
Comparative Cheap Talk (Slides). Archishman Chakraborty and Rick Harbaugh, Journal of Economic Theory 132 (2007), 70-94.
When are comparative statements credible? We show that simple complementarity conditions ensure that an expert with private information about multiple issues can credibly rank the issues for a decision maker. By restricting the expert’s ability to exaggerate, multidimensional cheap talk of this form permits communication when it would not be credible in a single dimension. The communication
gains can be substantial with even a couple of dimensions, and the complete ranking is asymptotically
equivalent to full revelation as the number of issues becomes large. Nevertheless, partial rankings are
sometimes more credible and/or more profitable for the expert than the complete ranking. Comparative cheap talk is robust to asymmetries that are not too large. Consequently, for sufficiently many
independent issues, there are always some issues sufficiently symmetric to permit comparative cheap
talk. (Formerly titled "Ordinal Cheap Talk".)
Best Foot Forward or Best for Last in a Sequential Auction? Archishman Chakraborty, Nandini Gupta, and Rick Harbaugh, RAND Journal of Economics 37 (2006), 176-194.
Should a seller with private information sell the best or worst goods first? Considering the sequential auction of two stochastically equivalent goods, we find that the seller has an incentive to impress buyers by selling the better good first because the seller's sequencing strategy endogenously generates correlation in the values of the goods across periods. When this impression effect is strong enough, selling the better good first is the unique pure-strategy equilibrium. By credibly revealing to all buyers the seller's ranking of the goods, an equilibrium strategy of sequencing the goods reduces buyer information rents and increases expected revenues in accordance with the linkage principle.
Early Round Upsets and Championship Blowouts. Rick Harbaugh and Tilman Klumpp, Economic Inquiry 43 (2005), 316-329.
In equilibrium play of a two-round tournament we find that underdogs exert more effort in the opening round while favorites save more effort for the final. Ability differences between players are therefore compressed in the opening round so upsets are more likely, and amplified in the final so blowouts are more likely. Measures that reduce the need to strategically allocate effort across games make for a more exciting final but a less exciting opening round. Consistent with the model, introduction of a one-day rest period between regional semi-final and final matches in the NCAA men's basketball tournament was found to increase the favorite's victory margin in the semi-finals by about five points. Non-sports applications of the model include the allocation of resources across primaries and general elections by candidates and the allocation of resources across a career ladder by managers.
The Effect of Employee Stock Ownership on Wage and Employment Bargaining. Rick Harbaugh, Journal of Comparative Economics 33 (2005), 565-583.
When workers can bargain over wages and employment, standard insider-outsider models predict underemployment if the number of insiders is small and overemployment if the number of insiders is large. For instance, a union will restrict employment growth in an expanding firm and oppose layoffs in a contracting firm. This paper shows that employee stock ownership can solve both problems and that the necessary ownership share is often relatively small. The results are compared with related results in the literatures on profit-sharing and labor-managed firms.
Cheap Talk Comparisons in Multi-Issue Bargaining. Archishman Chakraborty and Rick Harbaugh, Economics Letters 78 (2003), 357-363.
Bargaining over two issues as a bundle permits credible cheap talk about their relative importance even when
interests are directly opposed on each issue. The resulting communication gains can exceed the gains from
bundling previously identified in the monopoly pricing literature.
Too Cool for School? Signaling and Countersignaling. Nick Feltovich, Richmond Harbaugh, and Ted To, RAND Journal of Economics 33 (2002), 630-649. (Economist write-up)
In signaling environments ranging from consumption to education, high quality senders often shun the standard signals that should separate them from lower quality senders. We find that allowing for additional, noisy information on sender quality [i.e., two-sided private information] permits equilibria where medium types signal to separate themselves from low types, but high types then choose to not signal or "countersignal". High types not only save costs by relying on the additional information to stochastically separate them from low types, but countersignaling itself is a signal of confidence which separates high types from medium types. Experimental results confirm that subjects can learn to countersignal. [Unedited version with counterculture, advertising, donation behavior, fashion cycles, and other fun but insufficiently convincing examples.]
Falling Behind the Joneses: Relative Consumption and the Growth-Savings Paradox. Richmond Harbaugh, Economics Letters 50 (1996), 297-304.
Concern for individual consumption relative to per capita consumption can induce a fear of falling behind, which increases precautionary savings.
This fear increases as societal income growth increases, allowing for a positive effect of growth on savings.
Seller Cheap Talk in Common Value Auctions. Archishman Chakraborty, Nandini Gupta, and Rick Harbaugh, working paper.
Sellers benefit on average from revealing information about their goods to buyers, but the incentive to exaggerate undermines the credibility of seller statements. When multiple goods are being auctioned, we show that revealing a complete or partial ordering of the different goods by value can be credible. Ordinal cheap talk of this form is not susceptible to exaggeration because it simultaneously reveals favorable information about some goods and unfavorable information about other goods. Any informative ordering increases revenues in accordance with the linkage principle, and the complete ordering is asymptotically revenue-equivalent to full revelation as the number of goods becomes large. These results provide a new explanation in addition to bundling, complementarities, and versioning for how a seller benefits from the sale of multiple goods.
Local Status and Prospect Theory. Rick Harbaugh and Tatiana Kornienko, working paper.
People are sometimes risk-averse in gains but risk-loving in losses. Such behavior and other anomalies underlying prospect theory arise from a model of local status maximization in which consumers compare their wealth with other consumers of similar wealth. This social explanation shares key features with the psychological explanation offered by Kahneman and Tversky.
Equity Stakes and Hold-up Problems. Rick Harbaugh, working paper.
Equity ties between businesses change the division of the firms' joint profits, thereby affecting incentives for relation-specific investments and other strategic actions. Depending on which side owns the equity and how readily the equity can be resold, we find that the changed incentives can resolve all four types of holdup-related problems: underinvestment, overinvestment, undercooperation, and sabotage. Equity stakes indirectly affect bargaining over the joint profits by making the bargaining positions of the firms dependent on each other. For instance, if one firm is made unprofitable by a breakdown in negotiations, the other firm loses as well. Since bargaining positions are linked, each firm benefits less from attempts to grab a larger share of the joint profits by strengthening its relative bargaining position, and benefits more from actions that increase joint profits. While both firms can gain from increased efficiency due to the equity stake, firms in many cases should only acquire an equity
stake if they can bargain for a discounted price.
China's High Savings Rates, , Rick Harbaugh (), conference volume, The Rise of China Revisited: Perception and Reality, 2004.
Since the early 1980s China has witnessed a rapid increase in its national savings rate to one of the highest rates in the world. Unlike the socialist period when consumption was repressed in order to redirect resources to investment, most of these savings are voluntary. This paper addresses why China's savings rates are so high and the implications for China's economy.
(Chinese Characters: A Genealogy and Dictionary), , 1998. Published by Zhongwen.com and Yale University Press.
If you take Xu Shen's etymological dictionary from 2000 years ago, put all the connections into a computer, and generate
trees showing the connections, what do you find? That every part of every character can be traced back to less
than 200 root characters (wen). This is not the bushou system (literally "section-heading" but often mistranslated as "radical") which only connects one part of each character with 214 characters.
Rather, this new zipu system shows how every part of every character is itself a character.
As a method for organizing a dictionary, it generalizes the bushou system by allowing any character to be found if the reader knows any component of the character or knows any character which shares the same component.
Students can quickly locate characters while also better remembering the relations between characters.
, , Master's Thesis, National Taiwan University, 1992.