nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒03‒15
seven papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Optimal Taxation and Asymmetric Information in an Economy with Second-Hand Trade By Aronsson, Thomas; Sjögren, Tomas; Witterblad, Mikael
  2. Social Preferences and Strategic Uncertainty: An Experiment on Markets and Contracts By Antonio Cabrales; Raffaele Miniaci; Marco Piovesan; Giovanni Ponti
  3. Incentive Contracts and Efficient Unemployment Benefits By Dominique Demougin; Carsten Helm
  4. A Maximum Principle for Control Problems with Monotonicity Constraints By Martin Hellwig
  5. Knowledge Spillovers, Competition, and R&D Incentive Contracts By N. Lacetera; L. Zirulia
  6. Optimal Multi-Object Auctions with Risk Averse Buyers By Kumru, Cagri; Yektas, Hadi
  7. A minority-proof cheap-talk protocol By Heller, Yuval

  1. By: Aronsson, Thomas (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University); Witterblad, Mikael (Department of Economics, Umeå University)
    Abstract: This paper concerns optimal income and commodity taxation in a two-type overlapping generations model, where used durable goods are traded in a second-hand market. As second-hand transactions are difficult to observe, we assume that the government is unable to directly control second-hand transactions via commodity taxation. A basic question is how the government in this case may use the second-hand market as a channel for relaxation of the self-selection constraint. We show how the appearance of a second-hand market for used durable goods affects the optimal use of labor income and capital income taxation as well as the optimal use of commodity taxation on new durable goods.
    Keywords: Optimal taxation; Intertemporal Choice; Durable Goods
    JEL: D91 H21 H23
    Date: 2008–03–10
  2. By: Antonio Cabrales (Universidad Carlos III de Madrid); Raffaele Miniaci (Università di Brescia); Marco Piovesan (Department of Economics, University of Copenhagen); Giovanni Ponti (Universidad de Alicante)
    Abstract: This paper reports experimental evidence on a stylized labor market. The experiment is designed as a sequence of three phases. In the first two phases, P1 and P2; agents face simple games, which we use to estimate subjects' social and reciprocity concerns, together with their beliefs. In the last phase, P3; four principals, who face four teams of two agents, compete by offering agents a contract from a fixed menu. Then, each agent selects one of the available contracts (i.e. he "chooses to work" for a principal). Production is determined by the outcome of a simple effort game induced by the chosen contract. We find that (heterogeneous) social preferences are significant determinants of choices in all phases of the experiment. Since the available contracts display a trade-off between fairness and strategic uncertainty, we observe that the latter is a much stronger determinant of choices, for both principals and agents. Finally, we also see that social preferences explain, to a large extent, matching between principals and agents, since agents display a marked propensity to work for principals with similar social preferences.
    Keywords: social preferences; team incentives; mechanism design; experimental economics
    JEL: C90 D86
    Date: 2008–03
  3. By: Dominique Demougin (European Business School, Wiesbaden); Carsten Helm (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the workers' position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.
    Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalisation.
    JEL: J65 D82 J41 E24
    Date: 2008–03
  4. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The paper develops a version of Pontryagin's maximum principle for optimal control problems with monotonicity constraints on control variables. Whereas the literature handles such constraints by imposing an assumption of piecewise smoothness on the control variable and treating the slope of this variable as a new control variable subject to a nonnegativity constraint, the paper obtains the maximum principle without such an additional assumption. The result is useful for studying incentive problems with hidden characteristics when the type set is a continuum and preferences satisfy a single-crossing constraint.
    Keywords: Maximum Principle, Optimal Control, Monotonicity Constraints, Incentive Problems with Hidden Characteristics
    JEL: C61
    Date: 2008–01
  5. By: N. Lacetera; L. Zirulia
    Date: 2008–01
  6. By: Kumru, Cagri; Yektas, Hadi
    Abstract: We analyze the optimal auction of multiple non-identical objects when buyers are risk averse. We show that the auction formats that yield the maximum revenue in the risk neutral case are no longer optimal. In particular, selling the goods independently does not maximize the seller's revenue. We observe that seller's incentive for bundling arises solely due to the risk aversion of the buyers. The optimal auction which remains weakly efficient has the following properties: The seller perfectly insures all buyers against the risk of losing the object(s) for which they have high valuation. While the buyers who have high valuation for both objects are compensated if they do not win either object, the buyers who have low valuation for both objects incur a positive payment to the seller in the same event.
    Keywords: Multi-object Auctions; Optimal Auctions; Multi-dimensional Screening; Risk Averse Buyers; Bundling
    JEL: D81 D44
    Date: 2008–03–09
  7. By: Heller, Yuval
    Abstract: This paper analyzes the implementation of correlated equilibria that are immune to joint deviations of coalitions by cheap-talk protocols. We construct a universal cheap-talk protocol (a polite protocol that uses only 2-player private channels) that is resistant to deviations of fewer than half the players, and using it, we show that a large set of correlated equilibria can be implemented as Nash equilibria in the extended game with cheap-talk. Furthermore, we demonstrate that in general there is no cheap-talk protocol that is resistant for deviations of half the players.
    Keywords: non-cooperative games; cheap-talk; correlated equilibrium; strong equilibrium; coalition-proof equilibrium; fault-tolerant distributed computation
    JEL: C72
    Date: 2005–08–19

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