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on Contract Theory and Applications |
| By: | Yusuke Kamishiro; Roberto Serrano |
| 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 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2008-5&r=cta |
| By: | Cheng-Zhong Qin (University of California, Santa Barbara); Xiaojuan Hu (University of California, Santa Barbara) |
| Abstract: | Traders' expected utilities in fully revealing rational expectations equilibrium (REE) are shown to decrease as the number of informed traders is increased for an asset market model with diverse information as in Grossman (1976). It follows that no trader has any incentive to acquire information even if no other traders do. Consequently, when information acquisition is endogenous, there exists unique overall equilibrium with no trader acquiring information that has the fully revealing REE as an integral part, so that prices would fully reveal private information were it to be acquired by traders. This result provides a strengthening of the fundamental conflict between the efficiency with which markets spread information through the prices and the incentive to acquire information. Both the existence and the no information acquisition feature of the overall equilibrium do not depend on whether traders are endowed with the risky asset or not. |
| Keywords: | asymmetric information, Grossman Paradox, Hirshleifer Effect, rational expectations equilibrium, |
| Date: | 2006–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsbec:wp5-06&r=cta |
| By: | Joon Song |
| Abstract: | Perks are a commodity bundle offered by an employer to an employee. They are used to directly control an employee's consumption. Consuming certain goods increases the marginal disutility of non-contractible effort. Lower consumption of such goods will make it less costly to induce an employee to put in high effort. To compensate for the decrease in such goods, an employer gives luxurious perks. By "luxurious" I mean that per-dollar marginal utilities of these perks are lower than those of other goods. This model explains the existence of perks such as box seat tickets and club memberships, which neither save tax nor enter the production function. Also, perks can be more luxurious at an unsuccessful outcome than at a successful outcome, and an employee with a more successful history receives more perks. |
| Date: | 2008–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:650&r=cta |
| By: | Rousseau Sandra (K.U.Leuven-Center for Economic Studies) |
| Abstract: | This model explicitly incorporates the dynamic aspects of conservation programs with incomplete compliance and it allows landholders’ behavior to change over time. A distinction is made between initial and continuing compliance. We find that incomplete and instrument-specific enforcement can have a significant impact on the choice between subsidy schemes and reserves for conservation policies. The results suggest that it is useless to design a conservation scheme for landholders, if the regulator is not prepared to explicitly back the program with a monitoring and enforcement policy. In general, the regulator will prefer to use compensation payments, if the cost of using government revenues is sufficiently low, the environmental benefits are equal, and the cost efficiency benefits exceed the (possible) increase in inspection costs. If the use of government funds is too costly, the reserve-type instruments will be socially beneficial. |
| Keywords: | Monitoring and enforcement; Policy instruments; Conservation policy |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ete:etewps:ete0801&r=cta |
| By: | Rousseau Sandra (K.U.Leuven-Center for Economic Studies); Arguedasa Carmen (Departamento de Análisis Económico: Teoría Económica e Historia Económica, Universidad Autónoma de Madrid) |
| Abstract: | TOver time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms’ past performance relative to other competitors in the market. If a firm is less successful than its peers in reducing the externality, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked. We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving. |
| Keywords: | Monitoring and enforcement; externalities; learning; mimicking |
| JEL: | D82 H83 K42 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ete:etewps:ete0802&r=cta |
| By: | Günter Franke (University of Konstanz); Markus Herrmann; Thomas Weber (University of Konstanz) |
| Abstract: | The strong growth in collateralized debt obligation transactions raises the question how these transactions are designed. The originator designs the transaction so as to maximize her benefit subject to requirements imposed by investors and rating agencies. An important issue in these transactions is the information asymmetry between the originator and the investors. First Loss Positions are the most important instrument to mitigate conflicts due to information asymmetry. We analyse the optimal size of the First Loss Position in a model and the actual size in a set of European collateralized debt obligation transactions. We find that the asset pool quality, measured by the weighted average default probability and the diversity score of the pool, plays a predominant role for the transaction design. Characteristics of the originator play a small role. A lower asset pool quality induces the originator to take a higher First Loss Position and, in a synthetic transaction, a smaller Third Loss Position. The First Loss Position bears on average 86 % of the expected default losses, independent of the asset pool quality. This loss share and the asset pool quality strongly affect the rating and the credit spread of the lowest rated tranche. |
| Keywords: | Securitization, collateralized debt obligations, asset pool quality, First Loss Position, synthetic transactions, tranching |
| JEL: | G10 G21 G24 |
| Date: | 2007–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:knz:cofedp:0710&r=cta |
| By: | Elie Appelbaum (York University, Canada) |
| Abstract: | This paper considers the effects multilateral opportunistic behaviour on the firm’s capital structure. We show that multiple parties introduce greater incompleteness, because the firm cannot control future contracts in potential opportunistic coalitions. A higher debt-equity ratio increases the probability of opportunistic coalitions, hence increasing the costs of opportunistic behaviour. By choosing equity financing, the firm can avoid the costs of opportunistic behaviour altogether. Thus, in the absence of all other motives for using debt, the firm will be equity financed. Since, in general, there are other motives for holding debt, this implies that under these conditions, the debt-equity ratio will tend to be lower. We also show that if the firm can be franchised, equity financing yields a first best outcome. On the other hand, if debt is used (for other motives), or if the firm cannot be franchised, the first best solution cannot be achieved. The results in this paper suggest that, in general, the firm’s debt equity ratio will decrease with the number of interdependent contracts, the difficulty in writing contracts with the provider of the non-contractible input and his importance in an opportunistic coalition. |
| Keywords: | Incomplete Contracts, Opportunistic Behaviour, Bankruptcy, Capital Structure |
| JEL: | D0 C7 G3 L2 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:yca:wpaper:2008_01&r=cta |
| By: | Bourjade, Sylvain |
| Abstract: | In most Initial Public Offerings (IPO) in the world, the underwriter selects syndicate members and uses the information of their investors' clientele to set the offering price. The objective of this paper is to develop a model of the "book building" process in which the formation of the syndicate is an endogenous decision variable. More specifically, I will examine in which cases the lead underwriter will benefit from selecting syndicate members with different investors clientele characterized by a specific line of expertise. I model the fact that different investors have different lines of expertise in assuming that the uncertainty about the value of the shares has two dimensions. One may think about those two dimensions as information elicited from retail and institutional investors. Another interpretation may be that the first dimension is an industry-specific information and the second one, information from a local underwriter. A lead underwriter may also value both particular information about the issuer and indications of interest from key institutional investors coming from previous relationships of a syndicate member. In previous IPO's models with one dimensional uncertainty about the value of the shares, the underwriter must underprice shares to extract information from investors. Informational rents are therefore concealed to these investors in order to induce them to reveal their information and this results in underpricing. In this multi-dimensional context, I prove that it is not always optimal for the decision-maker to acquire all available information about the value of the shares. When deciding which syndicate's organization she wants to implement, the underwriter faces a trade off between the cost of extracting information and the informational efficiency. I show that it is optimal for the lead underwriter to select syndicate members having investors' clienteles with different lines of expertise when she faces a great informational problem, when she values more price accuracy, when the firm going public is more transparent, riskier, and when the capacity of the retail investors increases, which is consistent with the empirical evidence. |
| Keywords: | Initial Public Offerings; Expertise; Asymmetric Information; Value of Information. |
| JEL: | G2 D82 |
| Date: | 2002–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7259&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:7260&r=cta |
| By: | Andolfatto, David |
| Abstract: | The business of money creation is conceptually distinct from that of intermediation. Yet, these two activities are frequently---but not always---combined together in the form of a banking system. We develop a simple model to examine the question: When is banking essential? There is a role for money due to a lack of record-keeping and a role for intermediation due to the existence of private information: both money and intermediation are essential. When monitoring costs associated with intermediation are sufficiently low, the two activities can be separated from one another. However, when monitoring costs are sufficiently high, a banking system that combines these two activities is essential. |
| Keywords: | Money; Record-keeping; Private Information; Delegated Monitoring |
| JEL: | E42 |
| Date: | 2008–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7321&r=cta |
| By: | Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur) |
| Abstract: | We investigate the influence of loan and syndicate characteristics and information disclosure and legal environment factors on the arrangement timetable of bank loan syndications (measured as the time elapsed from the launching until the completion of the deal) from 68 countries over the 1992-2006 period. Employing accelerated failure time models from survival analysis methodology, we find that loan, syndicate, legal environment and information disclosure characteristics which reduce agency problems related to syndication reduce the arrangement timetable. Among the country level characteristics, information disclosure which reduces moral hazard due to informational frictions between syndicate members appears to be the most important driver of a faster deal arrangement timetable, while better creditor rights protection increase the arrangement timetable, consistently with recontracting risk issues. |
| Keywords: | Syndicated loans arrangement timetable, Agency problems, Information disclosure, Legal risk, Survival analysis, Accelerated failure time models. |
| JEL: | G21 C41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2008-02&r=cta |