Fasheng Xu

Wei Chen, Yanbin Fang, Shuran Fu et al.

Large Language Models (LLMs) are increasingly embedded in enterprise workflows, yet their performance remains highly sensitive to prompt design. Automatic Prompt Optimization (APO) seeks to mitigate this instability, but existing approaches face two persistent challenges. First, commonly used prompt strategies rely on static instructions that perform well on average but fail to adapt to heterogeneous queries. Second, more dynamic approaches depend on offline reward models that are fundamentally correlational, confounding prompt effectiveness with query characteristics. We propose Causal Prompt Optimization (CPO), a framework that reframes prompt design as a problem of causal estimation. CPO operates in two stages. First, it learns an offline causal reward model by applying Double Machine Learning (DML) to semantic embeddings of prompts and queries, isolating the causal effect of prompt variations from confounding query attributes. Second, it utilizes this unbiased reward signal to guide a resource-efficient search for query-specific prompts without relying on costly online evaluation. We evaluate CPO across benchmarks in mathematical reasoning, visualization, and data analytics. CPO consistently outperforms human-engineered prompts and state-of-the-art automated optimizers. The gains are driven primarily by improved robustness on hard queries, where existing methods tend to deteriorate. Beyond performance, CPO fundamentally reshapes the economics of prompt optimization: by shifting evaluation from real-time model execution to an offline causal model, it enables high-precision, per-query customization at a fraction of the inference cost required by online methods. Together, these results establish causal inference as a scalable foundation for reliable and cost-efficient prompt optimization in enterprise LLM deployments.

Fasheng Xu, Xiaoyu Wang, Wei Chen et al.

The strategic choice of model "openness" has become a defining issue for the foundation model (FM) ecosystem. While this choice is intensely debated, its underlying economic drivers remain underexplored. We construct a two-period game-theoretic model to analyze how openness shapes competition in an AI value chain, featuring an incumbent developer, a downstream deployer, and an entrant developer. Openness exerts a dual effect: it amplifies knowledge spillovers to the entrant, but it also enhances the incumbent's advantage through a "data flywheel effect," whereby greater user engagement today further lowers the deployer's future fine-tuning cost. Our analysis reveals that the incumbent's optimal first-period openness is surprisingly non-monotonic in the strength of the data flywheel effect. When the data flywheel effect is either weak or very strong, the incumbent prefers a higher level of openness; however, for an intermediate range, it strategically restricts openness to impair the entrant's learning. This dynamic gives rise to an "openness trap," a critical policy paradox where transparency mandates can backfire by removing firms' strategic flexibility, reducing investment, and lowering welfare. We extend the model to show that other common interventions can be similarly ineffective. Vertical integration, for instance, only benefits the ecosystem when the data flywheel effect is strong enough to overcome the loss of a potentially more efficient competitor. Likewise, government subsidies intended to spur adoption can be captured entirely by the incumbent through strategic price and openness adjustments, leaving the rest of the value chain worse off. By modeling the developer's strategic response to competitive and regulatory pressures, we provide a robust framework for analyzing competition and designing effective policy in the complex and rapidly evolving FM ecosystem.