Michael Rauh

Areas of Expertise

Microeconomics, Industrial Organization, and Game Theory

Academic Degrees

• PhD, Economics, John Hopkins University, 1997
• MA, Economics, University of Chicago, 1992
• BS, Business Administration, University of Missouri-Columbia, 1990

Professional Experience

• Associate Professor, Indiana University, 2009-present
• Assistant Professor, Indiana University, 2005-2009
• Assistant Professor, University of North Dakota, 2003-2005
• Lecturer, University of Liverpool, 2001-2003
• Lecturer, Brunel University, 1997-2001

Selected Publications

• Rauh, Michael T. (2014) "Incentives, wages, employment, and the division of labor in teams," The RAND Journal of Economics, 45(3): 533-552.

Abstract We develop a theory of incentives, wages, and employment in the context of team production. A central insight is that specialization and division of labor not only improve productivity but also increase effort and the sensitivity of effort to incentives under moral hazard. We show that employment and incentives are complements for the principal when the positive effects of specialization and division of labor outweigh the increase in risk associated with additional employment and are substitutes otherwise. We provide new characterizations of the partnership, the firm, and the role of the budget-breaker that are quite different from the classical literature.

• Ramalingam, Abhijit and Michael T. Rauh, "The Firm as a Socialization Device," Management Science, 56(12): 2191-2206.

Abstract Why do firms exist? What is their function? What do managers do? What is the role, if any, of social motivation in the market? In this paper, we address these questions with a new theory of the firm, which unites some major themes in management, principal-agent theory, and economic sociology. We show that although the market is a superior incentive mechanism, the firm has a comparative advantage with respect to social motivation. We then show that the market is efficient in environments that favor the provision of incentives, such as when subjective risk is low and performance is easy to measure. The firm is efficient in other environments where incentives are costly and/or ineffective. We compare our model and results with the views of Durkheim (Durkheim, E. 1984. The Division of Labor in Society. Free Press, New York) and Granovetter (Granovetter, M. 1985. Economic action and social structure: The problem of embeddedness. Amer. J. Soc. 91(3) 481–510).

• Rauh, Michael T. and G. Seccia (2010), "Agency and Anxiety'''' Journal of Economics and Management Strategy, 19(1): 87-116.

Abstract In this paper, we introduce the psychological concept of anxiety into agency theory. An important benchmark in the anxiety literature is the inverted-U hypothesis which states that an increase in anxiety improves performance when anxiety is low but reduces it when anxiety is high. We consider a version of the Holmstrom-Milgrom linear principal-agent model where the agent conforms to the inverted-U hypothesis and investigate the nature of the optimal linear contract. We find that although high-powered incentives can be demotivational, a profit-maximizing principal never offers them. In contrast, the principal may optimally engage in a demotivational level of monitoring. Moreover, since risk can be motivational, the principal may refrain from eliminating it even when monitoring is costless. Indeed, the principal may even add pure noise to the contract in order to motivate the agent, contradicting the informativeness principle. Finally, incentives and monitoring can be strategic substitutes or complements in our model.

• Rauh, Michael T. (2009), "Strategic Complementarities and Search Market Equilibrium,'''' Games and Economic Behavior, 66(2): 959-978.

Abstract In this paper, we apply supermodular game theory to the equilibrium search literature with sequential search. We identify necessary and sufficient conditions for the pricing game to exhibit strategic complementarities and prove existence of equilibrium. We then show that price dispersion is inherently incompatible with strategic complementarities in the sense that the Diamond Paradox obtains when firms are identical and is robust within the class of search cost densities that are small near zero and support strategic complementarities. We also show that a major criticism of the literature, that agents act as if they know the distribution of prices, can be justified in the sense of convergent best response dynamics.