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on Contract Theory and Applications |
| By: | Brown, Martin (Swiss National Bank); Zehnder, Christian (Harvard Business School) |
| 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, ecause borrowers may exogenously switch locations. Lenders are, however, engaged in spatial competition, and thus may lose market power by sharing information with competitors. Our results suggest that asymmetric information in the credit market increases the frequency of information sharing between lenders significantly. Competition between lenders reduces information sharing, but the impact of competition seems to be only of second order importance. |
| Keywords: | information sharing; credit; competition; asymmetric information |
| JEL: | D82 G21 G28 |
| Date: | 2008–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_001&r=cta |
| By: | Mallesh Pai; Rakesh Vohra |
| Abstract: | We consider a dynamic auction problem motivated by the traditional single-leg, multi-period revenue management problem. A seller with C units to sell faces potential buyers with unit demand who arrive and depart over the course of T time periods. The time at which a buyer arrives, her value for a unit as well as the time by which she must make the purchase are private information. In this environment, we derive the revenue maximizing Bayesian incentive compatible selling mechanism. |
| Keywords: | dynamic mechanism design, optimal auctions, virtual valuation, revelation principle |
| JEL: | D44 C72 C73 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1461&r=cta |
| By: | Andolfatto, David |
| Abstract: | I consider a model of intertemporal trade where agents lack commitment, agent types are private information, there is an absence of recordkeeping, and societal penalties are infeasible. Despite these frictions, I demonstrate that policy can be designed to implement the first-best allocation as a (stationary) competitive monetary equilibrium. The optimal policy requires a strictly positive interest rate with the aggregate interest expenditure financed in part by an inflation tax and in part by an incentive-compatible lump-sum fee. An illiquid bond is essential only in the event that paying interest on money is prohibitively costly. |
| JEL: | E4 |
| Date: | 2008–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8565&r=cta |
| By: | Timothy N. Cason; Lata Gangadharan; Pushkar Maitra |
| Abstract: | Most problems with formal sector credit lending to the poor in developing countries can be attributed to the lack of information and inadequate collateral. One common feature of successful credit mechanisms is group-lending, where the loan is advanced to an individual if he/she is a part of a group and members of the borrowing group can monitor each other. Since group members have better information about each other compared to lenders, peer monitoring is often less expensive than lender monitoring. Theoretically this leads to greater monitoring and greater rates of loan repayments. This paper reports the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group sequentially and simultaneously, and individual lending with lender monitoring. The results depend on the relative cost of monitoring by the peer vis-à-vis the lender. In the more typical case where the cost of peer monitoring is lower than the cost of lender monitoring, our results suggest that peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, performance is mostly similar across group and individual lending schemes, although loan frequencies and monitoring rates are sometimes modestly greater with group lending. Within group lending, although the dynamic incentives provided by sequential leading generate the greatest equilibrium surplus, simultaneous group leading provides equivalent empirical performance. |
| Keywords: | Group Lending, Monitoring, Moral Hazard, Laboratory Experiment, Loans, Development |
| JEL: | G21 C92 O2 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1208&r=cta |
| By: | Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo |
| Abstract: | We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model’s predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring. |
| Keywords: | Corporate boards, Independent directors, Price informativeness |
| JEL: | G32 G34 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2008-4&r=cta |
| By: | David Dickinson (Department of Economics - Appalachian State University); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | Agency theory assumes that tighter monitoring by the principal should motivate agents to increase their effort, whereas the “crowding-out” literature suggests that the opposite may occur. These two assertions are not necessarily contradictory provided that the nature of the employment relationship is taken into account (Frey 1993). Results from controlled laboratory experiments show that many principals engage in costly monitoring, and most agents react to the disciplining effect of monitoring by increasing effort. However, we also find some evidence that effort is crowded out when monitoring is above a certain threshold. We identify that both interpersonal principal/agent links and concerns for the distribution of output payoff are important for the emergence of this crowding-out effect. |
| Keywords: | principal-agent theory ; monitoring ; crowding-out ; motivation ; real effort experiment |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00276284_v1&r=cta |
| By: | Li, Lixing |
| Abstract: | This paper examines a distinctive mechanism of providing incentives to local governments – upgrading counties to "cities". In China, awarding city status to existing counties is the dominant way of creating new urban administrative units, during which the local government gets many benefits. Using a large panel data set covering all counties in China during 1993-2004, I investigate the determinants of upgrading. I find that the official minimum requirements for upgrading are not enforced in practice. Instead, economic growth rate plays a key role in obtaining city status. An empirical test is then conducted to distinguish between a principal-agent incentive mechanism and political bargaining. The findings are consistent with the hypothesis that the central government uses upgrading to reward local officials for high growth, as well as aligning local interests with those of the center. This paper highlights the importance of both fiscal and political incentives facing the local government. The comparison between incentive mechanism and bargaining sheds light on an important question about China’s politics of governance: where does power lie in China? |
| Keywords: | economic growth; incentive mechanism; bargaining; political centralization; fiscal decentralization; county-to-city upgrading; central-local relationship |
| JEL: | H77 H11 O40 R11 P26 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8594&r=cta |
| By: | Nicola Gennaioli; Stefano Rossi |
| Abstract: | We study theoretically the possibility for the parties to efficiently resolve financial distress by contract as opposed to exclusively rely on state intervention. We characterize which financial contracts are optimal depending on investor protection against fraud, and how efficient is the resulting resolution of financial distress. We find that when investor protection is strong, issuing a convertible debt security to a large, secured creditor who has the exclusive right to reorganize or liquidate the firm yields the first best. Conversion of debt into equity upon default allows contracts to collateralize the whole firm to that creditor, not just certain physical assets, thereby inducing him to internalize the upside from efficient reorganization. Concentration of liquidation rights on such creditor avoids costly inter-creditor conflicts. When instead investor protection is weak, the only feasible debt structure has standard foreclosure rights, even if it induces over-liquidation. The normative implications are that lifting legal restrictions on floating charge financing, convertibles and concentration of liquidation rights, and increasing investor protection against fraud should improve the efficiency of resolutions of financial distress. |
| Keywords: | Corporate Bankruptcy, Creditor Protection, Financial Contracting |
| JEL: | G33 K22 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2008-6&r=cta |
| By: | Tor Eriksson (Department of economics - University of Aarhus); Anders Poulsen (School of economics - University of East Anglia); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper experimentally investigates the impact of different pay and relative performance information policies on employee effort. We explore three information policies: No feedback about relative performance, feedback given halfway through the production period, and continuously updated feedback. The pay schemes are a piece rate payment scheme and a winner-takes-all tournament. We find that, regardless of the pay scheme used, feedback does not improve performance. There are no significant peer effects in the piece-rate pay scheme. In contrast, in the tournament scheme we find some evidence of positive peer effects since the underdogs almost never quit the competition even when lagging significantly behind, and frontrunners do not slack off. Moreover, in both pay schemes information feedback reduces the quality of the low performers’ work. |
| Keywords: | evaluation ; feedback ; information ; laboratory experiments ; peer effects ; performance pay ; piece rate ; tournament |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00276396_v1&r=cta |
| By: | Oscar Bernal (DULBEA, Université Libre de Bruxelles, Brussels.); Kim Oosterlinck (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles) |
| Abstract: | The literature has not reached a consensus yet regarding the existence of sovereign creditor moral hazard. Exploiting an exceptional historical example, this paper proposes an original method to address this issue. As sunspots which are observable only during a total eclipse of the sun, market-specific prices of repudiated bonds are observable only when extreme conditions (a war, in this instance) segment the markets. Such events are very rare but insightful as they allow for isolating pure country-specific bailout expectations. The paper shows that bailouts do create creditor moral hazard. Based on an impulse response analysis, the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation. |
| Keywords: | bailout, bonds, moral hazard, repudiation, sovereign debt, Soviet, Russia. |
| JEL: | F33 F34 G1 N24 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:08-015&r=cta |