Essays on the Impact of Social Influence in Industrial Organization and Political Economy

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Dalmia, Prateik
Filiz-Ozbay, Emel
This dissertation theoretically and experimentally investigates the impact of social pressures in markets and politics. In the first chapter, I provide a micro-foundation for persuasive advertising of conspicuous goods that can either be made more attractive by greater popularity ("conformist markets") or by greater exclusivity ("snobbish markets"). Consumers are endowed with a latent attribute measuring some aspect of their identity, and a social status implied by this attribute. Consumers wish to signal a high status, and the function of advertising is to render brands a signaling device by linking products with social identity. In a conformist market, I find that advertising increases demand elasticity, inducing firms to converge on low prices, and can be used by a first mover to deter entry and gain monopoly rents. In this setting, advertising creates a cutthroat environment in which only one product can survive. In a snobbish market, advertising reduces demand elasticity, dampens price competition and promotes firm entry. In this setting, advertising can act as a public good to firms, increasing all firms' prices and profits. Additionally, it can lead to asymmetric equilibria where a firm appealing to high status consumers advertises more heavily, capturing a greater market share and charging a higher price. In the second chapter, Emel-Filiz-Ozbay and I consider a moral hazard problem where workers decide how much effort to put into individual projects that can succeed or fail. In our setting, workers may receive feedback about a partner's outcome, and such pay comparisons might influence their effort. We perform a laboratory experiment and find that subjects who failed increase their effort the next round. Moreover, subjects who failed while their partner succeeded increase their effort more than those whose partner also failed -- consistent with an aversion to being behind. We find that this effect is more pronounced for female subjects than male subjects. In the third chapter, Allan Drazen, Erkut Ozbay and I study the potential tension between between intrinsic reciprocity and forward-looking, instrumental motives. We perform an experiment in a political economy context where incumbent officials may have two competing desires. The first is the intrinsic desire to reciprocate to the kind actions of past voters by investing in policies favorable to them; and the second is the selfish desire to be reelected by investing in policies favorable to future voters to signal policy preference congruence with the latter. Our key finding, both theoretically and experimentally, is that when future and past voters do not perfectly overlap, reelection motives may constrain the intrinsic reciprocity of an elected leader to the voters who put her in office, but do not eliminate it entirely.