Timo Hiller

Targeting in Adaptive Networks, resubmitted to Journal of Economic Theory.

This paper studies optimal targeting policies, consisting of eliminating (preserving) a set of agents in a network and aimed at minimizing (maximizing) aggregate effort levels. Different from the existing literature, we allow the equilibrium network to adapt after a network intervention and consider targeting of multiple agents. A simple and tractable adjustment process is introduced. We find that allowing the network to adapt may overturn optimal targeting results for a fixed network, not only in terms of which agents to target, but also regarding the optimal number of agents to be targeted. We show that congestion/competition effects are crucial for understanding differences between the two settings.

Monetary Policy Implementation and Endogenous Interbank Networks (with Luiz Carpizo), submitted.

This paper presents a model of endogenous credit lines in the overnight interbank market (hereafter "the interbank network") and analyzes implications for monetary policy. We first characterize the unique equilibrium
of banks' liquidity holdings for any fixed interbank network. We then endogenize the network and show that every equilibrium displays a complete core-periphery graph. Next, we solve a stylized optimization problem of a central bank that sets its policy rates and chooses between implementing a corridor and a floor regime. The central bank optimally chooses a floor regime when target interbank market rates are low and a corridor regime when target interbank market rates are high. We determine the optimal interest rate corridor, which involves the
following novel trade-off: a narrow corridor allows for more precise targeting of the interbank rate, but it may lead to higher central bank balance sheet cost due to a sparser equilibrium interbank network. Finally, we provide comparative statics results for the optimal corridor.

Why Are Near Misses Thrilling? (with Ken Binmore)

People go to casinos or racetracks not only because they hope to win money but because they enjoy gambling for its own sake. The fact that people experience a thrill when they miss winning or avoid losing only by a whisker is sufficiently well established that slot machines are rigged to increase the probability of such near misses so as to keep punters playing. But orthodox Bayesian decision theory endorses the principle that a miss is as good as a mile. So why did evolution wire us up to delight in the excitement of a near miss? This paper offers a possible explanation.

Structural Balance: A Laboratory Experiment (with Zeynep Gurguc)