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on Contract Theory and Applications |
| By: | Mason, Robin; Välimäki, Juuso |
| Abstract: | We analyse a simple model of dynamic moral hazard in which there is a clear and tractable trade-off; between static and dynamic incentives. In our model, a principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. The principal pays only on completion of the project. We characterise the contracts that the principal sets, with and without commitment. We show that with full commitment, the contract involves the agent’s value and wage declining over time, in order to give the agent incentives to exert effort. |
| Keywords: | continuous time; moral hazard; Principal-agent model; project completion |
| JEL: | C73 D82 J31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6857&r=cta |
| By: | Blackorby, Charles (Department of Economics, University of Warwick); Szalay, Dezsö (Department of Economics, University of Warwick) |
| Abstract: | We study the regulation of a firm with unknown demand and cost information. In contrast to previous studies, we assume demand is influenced by a quality choice, and the firm has private information about its quality capacity in addition to its cost. Under natural conditions, asymmetric information about the quality capacity is irrelevant. The optimal pricing is weakly above marginal costs for all types and no type is excluded. |
| Keywords: | Asymmetric Information ; Multi-dimensional Screening ; Regulation |
| JEL: | D82 L21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:858&r=cta |
| By: | Beatriz Mariano |
| Abstract: | This paper examines to what extent reputational concerns give rating agencies incentives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private information and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a project is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp613&r=cta |
| By: | Thomas Buchmueller (University of Michigan); Denzil Fiebig (University of NSW); Glenn Jones (Macquarie University); Elizabeth Savage (CHERE, University of Technology, Sydney) |
| Abstract: | When consumers have private information about risk of suffering a loss, or equivalently, if insurers are prohibited from using observable information on risk in underwriting, theoretical models of insurance predict adverse selection. Yet the most common finding in empirical studies is that of no positive correlation between risk and insurance coverage. This is found for different types of insurance (e.g. car, health, life) and in different countries (e.g. France, US, UK, Israel) suggesting a fundamental relationship involving private information and consumer preferences. In this paper, we investigate the nature of risk selection in the Australian market for private health insurance in which community rated private health insurance complements a universal public health care system. We use National Health Survey data on hospital utilisation and individual characteristics to construct an empirical analogue for the risk variable in the Rothschild and Stiglitz model. Estimating the relationship between insurance and risk semi-parametrically, we find robust evidence of favourable selection. To explore the extent to which underlying risk preferences rather than risk drives the decision to purchase health insurance, we use Household Expenditure Survey data to model decisions to purchase a range of insurance products (health, life, accident, home, car) and to engage in risky behaviours (smoking and various forms of gambling). Correlations between residuals in the model suggest that advantageous selection is driven by risk aversion, which theoretical models do not typically capture. |
| Keywords: | health insurance, adverse selection, Australia |
| JEL: | I10 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:her:chewps:2008/2&r=cta |
| By: | B. LEYMAN; K. SCHOORS |
| Abstract: | We use a unique dataset to analyze the contract renegotiation between a debtor and its secured bank creditors during Belgian court-supervised reorganization. We find that secured banks with higher collateralization succeed in renegotiating higher debt repayments during the court-supervised post-confirmation stage. There is also mild evidence that secured bank creditors renegotiate higher loan repayments during the court-supervised post-confirmation stage if the debtor’s assets are more redeployable. The proceeds of asset sales are used to generously repay secured banks and there is some evidence that secured banks push for those sales. Our findings are consistent with theory suggesting that secured creditors prefer liquidation above court-supervised reorganization. |
| Keywords: | Bankruptcy, bank lending, collateral, liquidation rights |
| JEL: | G10 G20 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:08/508&r=cta |
| By: | Claudia M. Landeo; Kathryn E. Spier |
| Abstract: | This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude. |
| JEL: | C72 C90 K21 K41 L12 L40 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14115&r=cta |
| By: | Ricardo Lagos; Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity, persistence) under which dealers provide liquidity to investors following the crash. We also characterize the conditions under which dealers incentives to provide liquidity are consistent with market efficiency. |
| JEL: | C78 D83 E44 G1 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14119&r=cta |