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on Contract Theory and Applications |
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Issue of 2008‒06‒21
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Leonidas Enrique de la Rosa (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | In this paper, I study the effects of overconfidence on incentive contracts in a moral-hazard framework in which principal and agent knowingly hold asymmetric beliefs regarding the prob- ability of success of their enterprise. Agent overconfidence can have conflicting effects on the equilibrium contract. On the one hand, an overconfident agent disproportionately values success- contingent payments, and thus prefers higher-powered incentives. On the other hand, if the agent is overconfident in particular about the extent to which his actions affect the likelihood of success, lower-powered incentives are sufficient to induce any given effort level. If the agent is overall moderately overconfident, the latter effect dominates; because the agent bears less risk in this case, he actually benefits from his overconfidence. If the agent is significantly overcon- fident, the former effect dominates; the agent is then exposed to an excessive amount of risk, which is harmful to him. An increase in overconfidence - either about the base probability of success or the extent to which effort affects it - makes it more likely that high levels of effort are implemented in equilibrium. |
| Keywords: | overconfidence, heterogeneous beliefs, moral hazard |
| JEL: | A12 D81 D82 |
| Date: | 2007–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2007-08&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | A social choice function is robustly implemented if every equilibrium on every type space achieves outcomes consistent with it. We identify a robust monotonicity condition that is necessary and (with mild extra assumptions) sufficient for robust implementation. Robust monotonicity is strictly stronger than both Maskin monotonicity (necessary and almost sufficient for complete information implementation) and ex post monotonicity (necessary and almost sufficient for ex post implementation). It is equivalent to Bayesian monotonicity on all type spaces. |
| Keywords: | Mechanism design, Implementation, Robustness, Common knowledge, Interim equilibrium, Dominant strategies |
| JEL: | C79 D82 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1666&r=cta |
| By: | Shmuel Zamir |
| Date: | 2008–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002215&r=cta |
| By: | Reiche, S. |
| Abstract: | This paper considers a sequential screening problem. A seller sells an object to a buyer who is privately informed about the object's value. The value has two components. The buyer knows the first component when he contracts with the seller and learns the second component only later. The optimal contract when there is no commitment problem is a sequential mechanism in form of a menu of fee-price pairs. Paying the initial fee gives the buyer the right to purchase the good later at the corresponding price. High initial buyer types pay a high fee for a low price later. Each buyer chooses a different fee-price pair. If commitment is not feasible, the structure of the optimal contract is simpler. The optimal contract is either no contract, a simple forcing contract, or a contract in which high types buy for sure and low types pay an initial fee to buy the good at a price later. The di¤erence to the setting with commitment is that all low buyer types obtain the same fee-price pair and all high buyer types buy for sure. There is no fine-tuning to specific buyer types. This might explain some simple real life sales agreements and why firms might find it optimal to group consumers into specific customer groups. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0820&r=cta |
| By: | Marinucci, Marco |
| Abstract: | This paper faces two questions concerning Joint Ventures (JV) agreements. First, we study how the partners contribution affect the creation and the profit sharing of a JV when partners' effort is not observable. Then, we see whether such agreements are easier to enforce when the decision on JV profit sharing among partners is either delegated to the independent JV management (Management Sharing) or jointly taken by partners (Coordinated Sharing). We find that the firm whose effort has a higher impact on the JV's profits should have a larger profit shares. Moreover, a Management sharing ensures, at least in some cases, a wider range of self-enforceable JV agreements. |
| Keywords: | D43; L13; L14; L22 |
| JEL: | L14 L13 D43 L22 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9058&r=cta |
| By: | Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece) |
| Abstract: | The present paper examines the conditions under which the regulator can complement the provision of Corporate Social Responsibility (CSR) activities by private firms in an oligopolistic market. Our main finding is that if there is no credible information disclosure about SR characteristics of the firms' products to consumers, no firm will have incentives to undertake CSR effort in equilibrium. However, if the necessary information about the CSR aspects of each firm's product, otherwise unobservable, is made available to consumers through certification provided either by a profit-maximizing certifier or by the regulator, then both firms will have incentives to engage in CSR activities. Hence in equilibrium, consumers' surplus, firms profits and total welfare increase comparing to the benchmark case without CSR activities. |
| Keywords: | Corporate Social Responsibility, Oligopoly, Vertical Differentiation, Certification. |
| JEL: | M14 L13 L5 |
| Date: | 2008–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0816&r=cta |
| By: | Karavaev, Andrei |
| Abstract: | This paper considers information trading in fixed networks of economic agents who can only observe and trade with other agents with whom they are directly connected. We study the nature of price competition for information in this environment. The linear network, when the agents are located at the integer points of the real line, is a specific example I completely characterize. For the linear network there always exists a stationary equilibrium, where the strategies do not depend on time. I show that there is an equilibrium where any agent has a nonzero probability of staying uninformed forever. Under certain initial conditions this equilibrium is a limit of equilibria of finite-horizon games. The role of a transversality condition is emphasized, namely that the price in the transaction should not exceed the expected utility of all the agents who get the information due to the transaction. I show that the price offered does not converge to zero with time. |
| Keywords: | Networks; information trading; information diffusion |
| JEL: | Z13 D83 O33 D85 |
| Date: | 2008–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9110&r=cta |
| By: | Antoni Cunyat (University of Valencia); Randolph Sloof (University of Amsterdam) |
| Abstract: | When managers are sufficiently guided by social preferences, incentive provision through an organizational mode based on informal implicit contracts may provide a cost-effective alternative to a more formal mode based on explicit contracts and monitoring. This paper reports the results from a laboratory experiment designed to test whether organizations make <I>full</I> effective use of the available preference types within their work force when drafting their organizational design. Our main finding is that they do not do so; although the importance of social preferences is recognized by those choosing the organizational mode, the significant impact managers' preferences have on the behavior of workers in the organization seems to be overlooked. |
| Keywords: | Organizational design; social preference types; experiments |
| JEL: | C91 J40 M50 |
| Date: | 2008–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080019&r=cta |
| By: | Ichiro Obara; David Rahman |
| Date: | 2008–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:122247000000002236&r=cta |
| By: | Liliane Karlinger |
| Abstract: | This paper studies a symmetric Bertrand duopoly with imperfect mon- itoring where rms receive noisy public signals about the state of demand. These signals have two opposite eects on the incentive to collude: avoid- ing punishment after a low-demand period increases collusive prots, mak- ing collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter eect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These ndings are related to the Sugar Institute Case studied by Genesove and Mullin (2001). |
| JEL: | L13 L41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0803&r=cta |
| By: | Gerard van der Laan (VU University Amsterdam); Zaifu Yang (Yokohama National University) |
| Abstract: | A number of heterogeneous items are to be sold to a group of potential bidders. Every bidder knows his own values over the items and his own budget privately. Due to budget constraint, bidders may not be able to pay up to their values. In such a market, a Walrasian equilibrium usually fails to exist and also the existing auctions might fail to allocate the items among the bidders. In this paper we first introduce a rationed equilibrium for a market situation with financially constrained bidders. Succeedingly we propose an ascending auction mechanism that always results in an equilibrium allocation and price system. By starting with the reservation price of each item, the auctioneer announces the current prices of the items in each step and the bidders respond with their demand sets at these prices. As long as there is overdemand, the auctioneer adjusts prices upwards for overdemanded items until a price system is reached at which either there is an underdemanded set, or there is neither overdemand nor underdemand anymore. In the latter case the auction stops. In the former case, precisely one item will be sold, the bidder buying the item leaves the auction and the auction continues with the remaining items and the remaining bidders. We prove that the auction finds a rationed equilibrium in a finite number of steps. In addition, we derive various properties of the allocation and price system obtained by the auction. |
| Keywords: | Ascending auction; multi-item auction; financial constraint |
| JEL: | D44 |
| Date: | 2008–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080017&r=cta |
| By: | Meuleman,M.; Amess, K.; Wright, M.; Scholes, L. (Vlerick Leuven Gent Management School) |
| Abstract: | Agency theory has focused on buyouts as a governance and control device to increase profitability, organizational efficiency and limited attention to growth. A strategic entrepreneurship view of buyouts incorporates upside incentives for value creation associated with growth as well as efficiency gains. In this paper, we develop the complementarity between agency theory and strategic entrepreneurship perspectives to examine the performance implications for different types of buyouts. Further, we study how the involvement of private equity firms is related to the performance of the post-buyout firm. These issues are examined for a sample of 238 private equity backed buyouts in the UK between 1993 and 2003. Implications for theory and practice are suggested. |
| Date: | 2008–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2008-05&r=cta |
| By: | Christian Growitsch; Nicole Nulsch; Margarethe Rammerstorfer |
| Abstract: | In 2004, European competition law had been faced with considerable changes due to the introduction of the new Council Regulation No. 1/2003. One of the major renewals was the replacement of the centralized notification system for inter-company cooperations in favor of a so-called legal exemption system. We analyze the implications of this reform on the agreements firms implement. In contrast to previous research we focus on the reform’s impact on especially welfare enhancing, namely innovative agreements. We show that the law’s intention to reduce the incentive to establish illegal cartels will be reached. However, by the same mechanism, also highly innovative cooperations might be prevented. To avoid this unintended effect, we conclude that only fines but not the monitoring activities should be increased in order to deter illegal but not innovative agreements. |
| Keywords: | Competition policy, competition law enforcement, legal exemption system |
| JEL: | K42 L40 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:6-08&r=cta |
| By: | Andriy Zapechelnyuk; Ro'i Zultan |
| Date: | 2008–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002199&r=cta |