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on Contract Theory and Applications |
| By: | Yeon-Koo Che (Department of Economics, Columbia University); Jinwoo Kim (Yonsei University) |
| Abstract: | We study an optimal collusion-proof auction in an environment where subsets of bidders may collude not just on their bids but also on their participation. Despite their ability to collude on participation, informational asymmetry facing the potential colluders can be exploited significantly to weaken their collusive power. The second-best auction ¿ i.e., the optimal auction in a collusion-free environment ¿ can be made collusion-proof, if at least one bidder is not collusive, or there are multiple bidding cartels, or the second-best outcome involves a nontrivial probability of the object not being sold. In case the second-best outcome is not weak collusion-proof implementable, we characterize an optimal collusion-proof auction. This auction involves nontrivial exclusion of collusive bidders ¿ i.e., the object is not sold to any collusive bidder with positive probability. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:0708-05&r=cta |
| By: | Martin Brown; Christian Zehnder |
| Abstract: | We examine how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones, because borrowers may exogenously switch locations. Lenders, however, are also engaged in spatial competition, and lose market power by sharing information with close competitors. Our results suggest that more asymmetric information in the credit market increases information sharing behavior significantly. Stronger competition between lenders reduces information sharing, but its impact seems to be only of second order importance. |
| Keywords: | Credit Market, Information Sharing, Spatial Competition, Adverse Selection |
| JEL: | C92 G21 D82 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:317&r=cta |
| By: | Christian Ewerhart |
| Abstract: | Concerns for relative performance are integrated into a model of contractual renegotiation in bilateral trade. It is shown that concerns for relative performance do never impede efficient trade. Moreover, conditional on renegotiation to occur, concerns for relative performance tend to mitigate material rent expropriation. However, concerns for relative performance make the occurrence of renegotiation more likely, and may thereby lead to underinvestment even in very optimistic environments. The analysis suggests an explanation for the occurrence of the Druzhba pipeline conflict between Russia and Belarus in January 2007. |
| Keywords: | Bilateral trade, incomplete contracting, relative performance, renegotiation, Druzhba pipeline. |
| JEL: | D86 L95 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:327&r=cta |
| By: | Alberto Bennardo (Università di Salerno, CSEF and CEPR) |
| Abstract: | The paper studies the determinants of information gathering in insurance and credit markets. In our set-up, information may have either operational or strategic value, e.g. it may improve allocative decisions or allow agents to appropriate a larger share of gains from trade at the contracting stage. The timing of information gathering is endogenous and agents can gather information either before or after contracting. Access to precontractual information generates a negative contracting externality, which was first identified in Hirshleifer.s (1971) seminal contribution. In contrast with a well established conventional wisdom and a substantial literature, we prove that, if the operational value of information is positive and not "too small", private returns of information fall short of its social returns, and pre-contractual access to information leads to under-investment . On the contrary, agents over-invest in information gathering activities, when the operational value of the available signals is sufficiently low. Consistently with contractual arrangements observed in the real world, we also show that equilibrium contracts have also a very simple shape when private information can be voluntarily disclosed. |
| Keywords: | private information, information gathering, value of information |
| Date: | 2008–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:190&r=cta |
| By: | MIKLOS-THAL, Jeanine; REY, Patrick; VERGÉ, Thibaud |
| JEL: | L14 L42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:8661&r=cta |
| By: | S. D. Flåm.; L. Koutsougeras |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0703&r=cta |
| By: | Piero Gottardi (Dipartimento di Scienze Economiche, Università di Venezia); Alberto Bisin (Department of Economics, New York University); Adriano Rampini (Fuqua School of Business, Duke University) |
| Abstract: | Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between shareholders and a manager when the manager can hedge his compensation using financial markets and shareholders can monitor the manager’s portfolio in order to keep him from hedging, but monitoring is costly. We find that the optimal incentive compensation and governance provisions have the following properties: (i) the manager’s portfolio is monitored only when the firm performs poorly, (ii) the manager’s compensation is more sensitive to firm performance when the cost of monitoring is higher or when hedging markets are more developed, and (iii) conditional on the firm’s performance, the manager’s compensation is lower when his portfolio is monitored, even if no hedging is revealed by monitoring. Moreover, the model suggests that the optimal level of portfolio monitoring is higher for managers of firms whose performance can be hedged more easily, such as larger firms and firms in more developed financial markets. |
| Keywords: | Executive Compensation, Incentives, Monitoring, Corporate Governance |
| JEL: | G30 D82 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_24&r=cta |
| By: | Joana Pais; Agnes Pinter; Robert F. Veszteg |
| Abstract: | We analyze two well-known matching mechanisms—the Gale-Shapley, and the Top Trading Cycles (TTC) mechanisms—in the experimental lab in three different informational settings, and study the role of information in individual decision making. Our results suggest that—in line with the theory—in the college admissions model the Gale-Shapley mechanism outperforms the TTC mechanisms in terms of efficiency and stability, and it is as successful as the TTC mechanism regarding the proportion of truthful preference revelation. In addition, we find that information has an important effect on truthful behavior and stability. Nevertheless, regarding efficiency, the Gale-Shapley mechanism is less sensitive to the amount of information participants hold. |
| Keywords: | Experiments, Information, Matching |
| JEL: | C78 C91 D82 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we080302&r=cta |
| By: | Martimort, David; Semenov, Aggey |
| Abstract: | Polarized interest groups (principals) compete to influence a decision-maker (agent) through monetary contributions. This decision-maker chooses a one-dimensional policy and has private information about his ideal point. Competition between interest groups under asymmetric information yields a rich pattern of equilibrium strategies and payoffs. Policies are systematically biased towards the decision-maker's ideal point and it may sometimes lead to a "laissez-faire" equilibrium. Either the most extreme decision-makers or the most moderate ones may get information rent depending on the importance of their ideological bias. The market for influence may exhibit segmentation with interest groups keeping an unchallenged influence on ideologically close-by decision-makers. Indeed, interest groups stop contributing when there is too much uncertainty on the decision-maker's ideology and when the latter is ideologically too far away. |
| Keywords: | Lobbying Competition; Common Agency; Asymmetric Information; Contributions. |
| JEL: | D7 D8 |
| Date: | 2008–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6992&r=cta |
| By: | Sergio Currarini (Department of Economics, University Of Venice Cà Foscari and School for Advanced Studies in Venice); Francesco Feri (University of Innsbruck) |
| Abstract: | We study the problem of information sharing in oligopoly, when sharing decisions are taken before the realization of private signals. Using the general model developed by Raith (1996), we show that if firms are allowed to make bilateral exclusive sharing agreements, then some degree of information sharing is consistent with equilibrium, and is a constant feature of equilibrium when the number of firms is not too small. Our result is to be contrasted with the traditional conclusion that no information is shared in common values situations with strategic substitutes - such as Cournot competition with demand shocks - when firms can only make industry-wide sharing contracts (e.g., a trade association). |
| Keywords: | Networks, Information sharing, oligopoly, networks, Bayesian equilibrium |
| JEL: | D43 D82 D85 L13 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_21&r=cta |
| By: | Semenov, Aggey |
| Abstract: | The President and the Senate bargain over the appointment of the Head of a key government department. The operating unit of the department has private information about its operating environment. We model the appointment process as a constrained delegation of policymaking to the operating unit (agency). When the Senate is sufficiently close to the agency the President has to give the agency more authority. On the other hand, given the Senate's ideal point, when the information is more precise the President can tighten delegation bounds. |
| Keywords: | Appointments; bargaining; veto-based delegation; constrained delegation. |
| JEL: | H11 D8 D82 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6988&r=cta |
| By: | BOURJADE, Sylvain; REY, Patrick; SEABRIGHT, Paul |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:7815&r=cta |
| By: | ALARY David; BIEN F. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ler:wpaper:08.06.250&r=cta |
| By: | Andreas Park |
| Abstract: | I formulate a stylized Glosten-Milgrom model of financial market trading in which people are allowed to time their trading decision. The focus of the analysis is to understand people’s timing behavior and how it affects bid- and offer-prices and volume. Assuming heterogeneous quality of information, not all informed traders choose to trade immediately but some chose to delay, although they expect public expectations to move against them. Compared to a myopic, no-timing setting, first movers with timing have better quality information. Contrary to casual intuition this behavior lowers bid-ask spreads early on and increases them in later periods. Price-variability and total volume in both periods combined decrease. A numerical analysis shows that with timing the spreads are very stable (though decreasing), and that volume is increasing over time. Moreover, with timing the probability of informed trading (PIN) increases between periods. |
| Keywords: | Microstructure, Sequential Trade, Trade timing. |
| JEL: | C70 D80 D82 D84 G14 |
| Date: | 2008–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-309&r=cta |
| By: | Daron Acemoglu; Philippe Aghion; Rachel Griffith; Fabrizio Zilibotti |
| Abstract: | This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both these effects are stronger when the supplying industry accounts for a large fraction of the producer’s costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics. |
| Keywords: | Hold-up, incomplete contracts, internal organization of the firm, investment, residual rights of control, R&D, technology, UK manufacturing, vertical integration. |
| JEL: | L22 L23 L24 L60 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:342&r=cta |
| By: | Michael Kosfeld; Ferdinand von Siemens |
| Abstract: | Teamwork and cooperation between workers can be of substantial value to a firm, yet the level of worker cooperation often varies between individual firms. We show that these differences can be the result of labor market competition if workers have heterogeneous preferences and preferences are private information. In our model there are two types of workers: selfish workers who only respond to monetary incentives, and conditionally cooperative workers who might voluntarily provide team work if their co-workers do the same. We show that there is no pooling in equilibrium, and that workers self-select into firms that differ in their incentives as well as their resulting level of team work. Our model can explain why firms develop different corporate cultures in an ex-ante symmetric environment. Moreover, the results show that, contrary to first intuition, labor market competition does not destroy but may indeed foster within-firm cooperation. |
| Keywords: | Competition, conditional cooperation, asymmetric information, self-selection, corporate culture |
| JEL: | D23 D82 L23 M54 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:328&r=cta |
| By: | Antonio Cabrales; Piero Gottardi |
| Abstract: | In this paper we build a formal model to study market environments where information is costly to acquire and is of use also to potential competitors. In such situations a market for information may form, where reports - of unverifiable quality - over the information acquired are sold. A complete characterization of the equilibria of the game is provided. We find that information is acquired when its costs are not too high and in that case it is also sold, though reports are typically noisy. Also, the market for information tends to be a monopoly, and there is typically inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to third parties, uninterested in trading the underlying object, only make the inefficiency worse. On the other hand, efficiency can be attained with a monopolist selling differentiated information, provided entry is blocked. The above findings hold when information has a prevalent horizontal differentiation component. When that is not the case, and the vertical differentiation element is more important, firewalls can in fact be beneficial. |
| Keywords: | Information sale, Cheap talk, Conflicts of interest, Information acquisition, Chinese walls, Market efficiency |
| JEL: | D83 C72 G14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we080201&r=cta |
| By: | Jakub Kastl (Stanford University); David Martimort (Toulouse School of Economics); Salvatore Piccolo (Toulouse School of Economics, University of Naples and CSEF) |
| Abstract: | We use data from the Italian manufacturing industry to document the positive relationship between delegation of decisions within organizations and innovation incentives. In order to obtain the causal effect, we build a contract theory model with asymmetric information and moral hazard which predicts that awarding autonomy to the manager spurs innovation incentives relative to arrangements based on vertical control. We use the model to guide our search for suitable instruments. Using several alternative instrumental variables and different specifications we find a strong positive effect of delegation on R&D spending. |
| Keywords: | Asymmetric Information, Delegation, Hold-up, R&D and Vertical Control |
| Date: | 2008–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:192&r=cta |
| By: | Piero Gottardi (Dipartimento di Scienze Economiche, Università di Venezia); Ronel Elul (Federal Reserve Bank of Philadelphia) |
| Abstract: | In many countries, lenders are not permitted to use information about past defaults after a specified period of time has elapsed. We model this provision and determine conditions under which it is optimal. We develop a model in which entrepreneurs must repeatedly seek external funds to finance a sequence of risky projects under conditions of both adverse selection and moral hazard. We show that forgetting a default makes incentives worse, ex-ante, because it reduces the punishment for failure. However, following a default it is generally good to forget, because by improving an entrepreneur’s reputation, forgetting increases the incentive to exert effort to preserve this reputation. Our key result is that if agents are sufficiently patient, and low effort is not too inefficient, then the optimal law would prescribe some amount of forgetting — that is, it would not permit lenders to fully utilize past information. We also argue that forgetting must be the outcome of a regulatory intervention by the government — no lender would willingly agree to ignore information available to him. |
| Keywords: | Bankruptcy, Information, Incentives, Fresh Start |
| JEL: | D86 G33 K35 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_23&r=cta |
| By: | Martimort, David; Semenov, Aggey |
| Abstract: | We use a mechanism design approach to study the organization of interest groups in an informational model of lobbying. Interest groups influence the legislature only by communicating private information on their preferences and not by means of monetary transfers. Interest groups have private information on their ideal points in a one-dimensional policy space and may either compete or adopt more collusive behaviors. Optimal policies result from a trade-off between imposing rules which are non-responsive to the groups' preferences and flexibility that pleases groups better. Within a strong coalition, interest groups credibly share information which facilitates communication of their joint interests, helps screening by the legislature and induces flexible policies responsive to the groups' joint interests (an informativeness effect). Competing interest groups better transmit information on their individual preferences (a screening effect). The socially and privately optimal organization of lobbying favors competition between groups only when their preferences are not too congruent with those of the legislature. With more congruence, a strong coalition is preferred. Finally, within a weak coalition, interest groups must design incentive compatible collusive mechanisms to share information. Such weak coalitions are always inefficient. |
| Keywords: | Communication Mechanisms; Lobbying; Competition; Coalition; Legislative Politics. |
| JEL: | D72 D8 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6989&r=cta |
| By: | Yusuke Kamishiro (Brown University); Roberto Serrano (Brown University & IMDEA, Madrid) |
| Abstract: | We study core convergence in interim quasilinear economies with asymmetric information, concentrating on core notions in which information is transmitted endogenously within coalitions and the incentive constraints are relevant. Specifically, we shall focus on the credible core and randomized mediated core concepts. We consider independent replicas of the basic economy: independent copies of the economy in which each individual\'s utility only depends on the information of the individuals who belong to the same copy. We provide an example in which core convergence does not obtain for the Dutta-Vohra credible core and for Myerson\'s randomized mediated core. On the other hand, we establish a positive convergence result for a refinement of Myerson\'s core for which information disseminates across coalitions within a given random blocking mechanism. Under some conditions, this core converges to the set of incentive compatible ex-post Walrasian allocations. |
| Keywords: | core convergence; information transmission; coalitional voting mechanisms; mediation; rational expectations equilibrium |
| JEL: | C71 C72 D51 D82 |
| Date: | 2008–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2008-01&r=cta |
| By: | Luca Anderlini; Dino Gerardi; Roger Lagunoff (Department of Economics, Georgetown University) |
| Abstract: | We study the intergenerational accumulation of knowledge in an infinite-horizon model of communication. Each in a sequence of players receives an informative but imperfect signal of the once-and-for-all realization of an unobserved state. The state affects all players’ preferences over present and future decisions. Each player observes his own signal but does not directly observe the realized signals or actions of his predecessors. Instead, he must rely on cheap-talk messages from the previous players to fathom the past. Each player is therefore both a receiver of information with respect to his decision, and a sender with respect to all future decisions. Senders’ preferences are misaligned with those of future decision makers. We ask whether there exist “full learning” equilibria — ones in which the players’ posterior beliefs eventually place full weight on the true state. We show that, regardless of how small the misalignment in preferences is, such equilibria do not exist. This is so both in the case of private communication in which each player only hears the message of his immediate predecessor, and in the case of public communication, in which each player hears the message of all previous players. Surprisingly, in the latter case full learning may be impossible even in the limit as all players become infinitely patient. We also consider the case where all players have access to a mediator who can work across time periods arbitrarily far apart. In this case full learning equilibria exist. Classification-JEL Codes: C70, C72, C73, D80, D83 |
| Keywords: | Communication, Learning, Dynamic Strategic Information Transmission |
| Date: | 2008–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~08-08-01&r=cta |
| By: | Francesca Stroffolini (University of Napoli “Federico II” and CSEF) |
| Abstract: | This paper considers a network industry characterized by an upstream natural monopoly with cost uncertainty, regulated through an access price mechanism, and an unregulated downstream market with Cournot competition. The upstream monopolist can acquire information on the upstream cost while the information acquisition is prohibitively costly for the regulator and downstream firms. The information acquisition is also unobservable. I investigate how the presence of costly and socially valuable information on the upstream cost affects the desirability of allowing the upstream monopolist to produce in the downstream market (integration) rather than excluding it (separation). I show that when the upstream monopolist is regulated only through an access price cap, the information acquisition problem provides an argument in favour of vertical integration. However, when the regulator also obliges the upstream monopolist to share her access profits with consumers, a bias emerges in favour of separation via the impact of the access-profit sharing plan on the upstream monopolist's incentives to transmit information to her rival in the downstream market. Classification-JEL, D82, D83, L5 |
| Keywords: | access price cap mechanisms, integration, separation, information acquisition. |
| Date: | 2008–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:193&r=cta |