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on Contract Theory and Applications |
| By: | Eduard Alonso-Paulí |
| Abstract: | We study firms' corporate governance in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers. A firm, formed by a shareholder and a manager, can sign either an incentive contract or a contract including a Code of Best Practice. A Code allows for a better manager's control but makes manager's decisions hard to react when market conditions change. It tends to be adopted in markets with low volatility and in low-competitive environments. The firms with the best projects tend to adopt the Code when managers are not too heterogeneous while the best managers tend to be hired through incentive contracts when the projects are similar. Although the matching between shareholders and managers is often positively assortative, the shareholders with the best projects might be willing to renounce to hire the best managers, signing contracts including Codes with lower-ability managers. |
| Keywords: | Corporate Governance, Incentives, Moral Hazard, Matching model |
| Date: | 2008–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:726.08&r=cta |
| By: | De Waegenaere, A.M.B.; Wielhouwer, J.L. (Tilburg University, Center for Economic Research) |
| Abstract: | We consider a principal-agent setting in which a manager?s compensation de- pends on a noisy performance signal, and the manager is granted the right to choose an (accounting) method to determine the value of the performance signal. We study the effect of the degree of such reporting discretion, measured by the number of acceptable methods, on the optimal contract, the expected cost of com- pensation and the manager?s expected utility. We find that while an increase in reporting discretion never harms the manager, the effect on the expected cost of compensation is more subtle. We identify three main effects of increased report- ing discretion and characterize the conditions under which the aggregate of these three effects will lead to a higher or lower cost of compensation. |
| Keywords: | managerial compensation;reporting flexibility. |
| JEL: | D82 D86 M41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200821&r=cta |
| By: | Maarten C.W. Janssen (Erasmus University Rotterdam); Santanu Roy (Southern Methodist University, Dallas, Texas) |
| Abstract: | Firms signal high quality through high prices even if the market structure is highly competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality, production cost is increasing in quality and the quality of each firm’s product is private information (not known to consumers or to other firms), we show that there exist fully revealing equilibria in mixed strategies. In such equilibria, low quality firms enjoy market power when other firms are of high quality. High quality firms charge higher prices than low quality firms but lose business to rival firms with higher probability. Some of the revealing equilibria involve high degree of market power (price close to full information monopoly level) while others are more “competitive”. Under certain conditions, if the number of firms is large enough, information is revealed in every equilibrium. |
| Keywords: | Signaling; Quality; Oligopoly; Incomplete Information |
| JEL: | L13 L15 D82 D43 |
| Date: | 2007–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20070081&r=cta |
| By: | Said, Maher |
| Abstract: | We examine a model in which multiple buyers with single-unit demand are faced with an infinite sequence of auctions. New buyers arrive on the market probabilistically, and are each endowed with a constant private value. Moreover, objects also arrive on the market at random times, so the number of competitors and the degree of informational asymmetry among them may vary across from one auction to the next. We demonstrate by way of a simple example the inefficiency of the second-price sealed-bid auction in this setting, and therefore assume that each object is sold via ascending auction. We then characterize an efficient and fully revealing equilibrium for the game in which the objects are sold via ascending auctions. We show that each buyer's bids and payoffs depend only upon their rank amongst their competitors and the (revealed) values of those with lower values. Furthermore, strategies are memoryless---bids depend only upon the information revealed in the current auction, and not on any information that may have been revealed in earlier periods. We then demonstrate that the sequential ascending auction serves as an indirect mechanism that is equivalent---in our setting---to the dynamic marginal contribution mechanism introduced by Bergemann and Välimäki (2007) and generalized in Cavallo et al. (2007). |
| Keywords: | Sequential auctions; Ascending auctions; Random arrivals; Information revelation; Dynamic Vickrey-Clarke-Groves mechanism; Marginal contribution |
| JEL: | D44 D83 C73 |
| Date: | 2008–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7160&r=cta |
| By: | Bourjade, Sylvain |
| Abstract: | Uniform price auctions admit a continuum of collusive seeming equilibria due to bidders' market power. In this paper, I modify the auction rules in allowing the seller to ration strategic bidders in order to ensure small bidders' participation. I show that many of these "bad" equilibria disappear when strategic bidders do not know small bidders' willingness to pay. Moreover, when the seller is unconstrained in the quantity she can allocate to small bidders, the unique equilibrium price is the highest that the seller could get. |
| Keywords: | Uniform price Auctions, Treasury Auctions, IPO, Rationing |
| JEL: | D44 G32 |
| Date: | 2003–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7250&r=cta |
| By: | Bourjade, Sylvain; Jullien, Bruno |
| Abstract: | In this paper, we develop a model of a decision maker using an expert to obtain information. The expert is biased toward some favoured decision but cares also about its reputation on the market for experts. We then analyse the corresponding decision game depending on the nature of the informational linkage with the market. In the case where the expert is biased in favour of the status quo, the final decision is always biased in the same direction. Moreover, it is better to rely on experts biased against the status quo. We also show that it is optimal to publically disclose the expert report. Finally, we prove that the intuitive results that hiring an honest inside expert raises the outside expert's incentives to report truthfully holds when reports are public but not when they are secret. |
| Keywords: | Experts; Bias; Reputation; Merger Control |
| JEL: | D82 L40 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7251&r=cta |
| By: | Eric S. Maskin (School of Social Science,) |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0081&r=cta |