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on Contract Theory and Applications |
| By: | Floriana Cerniglia; Laura Sabani |
| Abstract: | The combination of special interest politics (agency problems) and informational asymmetries presents serious problems as the implementation of Fund conditionality is concerned. In this paper we focus on the role that the transmission of information between the IMF and the borrowing government has for the design of the most e??cient "incentive contract." Specifically, we find that when agency problems are especially severe, and/or IMF information is very valuable, a centralized control is indeed optimal (conventional conditionality). To the contrary, when local knowledge is more important than the agency bias we expect delegation (ownership) to be the optimal incentive scheme. |
| Keywords: | IMF conditionality, delegation, communication |
| JEL: | D82 F33 N2 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:139&r=cta |
| By: | Sergio Currarni (Department of Economics, University Of Venice Cà Foscari); Francesco Feri (University of Innsbruck) |
| Abstract: | We study the incentives of oligopolistic firms to share private information on demand parameters. Differently from previous studies, we consider bilateral sharing agreements, by which firms commit at the ex-ante stage to truthfully share information. We show that if signals are i.i.d., then pairwise stable networks of sharing agreements are either empty or made of fully connected components of increasing size. When linking is costly, non complete components may emerge, and components with larger size are less densly connected than components with smaller size. When signals have different variances, incomplete and irregular network can be stable, with firms observing high variance signals acting as "critical nodes". Finally, when signals are correlated, the empty network may not be pairwise stable when the number of firms and/or correlation are large enough. |
| Keywords: | Information sharing, oligopoly, networks, Bayesian equilibrium |
| JEL: | D43 D82 D85 L13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2008_16&r=cta |
| By: | Alessia Isopi (Faculty of Economics, University of Rome "Tor Vergata"); Fabrizio Mattesini (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | In this paper, we focus on the determinants of the relationship between aid and corruption. We propose a static principal-agent model where a donor faces the problem of giving aid to a recipient country in which the phenomenon of corruption is widely spread. We distinguish among two different types of corruption: one, that we call endemic, that depends on the political and institutional environment of the recipient; the other, that we call aid related, is the consequence of moral hazard arising from the ability of corrupt burocracies to divert resources from their intended use. Through the design of appropriate contracts, donors can act only on the second type of corruption, contributing to reduce the entity of the phenomenon. We use the restrictions implied by our theoretical framework to test a model of aid allocation. For the majority of the donors (Germany, Italy, the Netherlands, Norway, Spain and the UK), we find some indication that efficiency considerations are taken into account in allocating aid. For some of them (Germany, Italy and the Netherlands), however, strategic/economic considerations are important, while the UK is also motivated by purely altruistic concerns. According to our model, Denmark and Japan are mainly driven by recipient needs, while the USA, and to a lesser extent France, allocate aid mainly on the basis of strategic/economic interests. |
| Keywords: | Aid Allocation, Corruption, Moral Hazard. |
| JEL: | F35 D82 |
| Date: | 2008–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:121&r=cta |
| By: | Maarten C. W. Janssen; Vladimir A. Karamychev |
| Abstract: | This paper analyzes the welfare consequences of bundling different risks in one insurance contract in markets where adverse selection is important. This question is addressed in the context of a competitive insurance model a la Rothschild and Stiglitz (1976) with two sources of risk. Accordingly, there are four possible types of individuals and many incentive compatibility constraints to be considered. We show that the effect of bundling on these incentive compatibility constraints is such that bundling always yields a welfare improvement, and this result only holds when all four types have strictly positive shares in the population. Due to the competition between insurance companies, these benefits accrue to consumers who potentially have fewer contracts to choose from, but benefit from the better sorting possibilities due to bundling. |
| JEL: | G22 D82 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0809&r=cta |
| By: | Arantxa Jarque (Universidad Carlos III de Madrid) |
| Abstract: | We study the incentive problem between the owners of a firm and its CEO's due to the unobservability of the manager's actions. Our model departs from the literature in two ways. First, we acknowledge that, in contrast with standard repeated moral hazard models, actions taken by CEO's have a persistent effect in time. Second, we derive the effect of effort on stock prices from primitives; i.e., effort affects directly the conditional distribution of profits, and not the distribution of prices. The stock market determines the price of the stock of the firm using information about past profits. A complete characterization of the Second Best contract assuming limited liability is given as a benchmark. Allowing for an arbitrary number of option grants to be awarded, sufficient conditions are given for the implementation of the Second Best contract by an Options Scheme. For a stylized scheme with a unique option grant, the characteristics of the solution are analyzed. We find that the optimal time of exercise balances the increase in quality of information of waiting one extra period with the cost of the poorer smoothing of incentives of doing so. The number of options in the grant, the constant wage, and especially the exercise price are used to best exploit the correlation between the changes in prices and in the likelihood ratios of the histories of profits generating them. As an example, whenever low prices are poorly correlated with the likelihood ratios, the optimal option scheme implies a positive exercise price, which allows for a better use of a higher correlation over the high stock price range than a simple restricted stock scheme. Our results suggest caution regarding regulations that influence the setting of exercise prices. Este artículo estudia el problema de incentivos que surge entre los dueños de una empresa y el ejecutivo que la dirige, fruto de la imposibilidad de observar directamente las acciones del directivo. El modelo difiere del modelo estándar en la literatura en dos puntos clave. En primer lugar, tiene en cuenta que las acciones que toma el directivo tienen un efecto persistente en el tiempo; esta persistencia no la consideran los modelos estándar de riesgo moral repetido. En segundo lugar, el efecto del esfuerzo del directivo en el precio de las acciones de la empresa se deriva de los primitivos del modelo: el esfuerzo determina la distribución de probabilidad de los beneficios de la empresa, y no directamente la distribución de precios. Los compradores en el mercado de valores determinan el precio de las acciones basándose en la información disponible sobre los beneficios pasados. El artículo presenta, como marco de referencia, una caracterización del contrato óptimo asumiendo responsabilidad limitada por parte del directivo. Para el caso en que se pueden emitir múltiples paquetes de opciones, se presentan condiciones suficientes para la implementación del contrato óptimo. Para un caso simplificado en el que la compensación se realiza con un solo paquete de opciones, se analizan las características del mismo. Los resultados del análisis indican que la fecha de ejercicio óptima se determina balanceando los beneficios y los costes de esperar un periodo más: por un lado, aumenta la calidad de información; por el otro, aumenta el coste de proveer incentivos, por tener que estar estos concentrados en un horizonte temporal menor. El número de opciones en el paquete, el salario, y especialmente el precio de ejercicio se usan para explotar la correlación entre los cambios en precios y los cocientes de probabilidad relativa correspondientes a las historias de beneficios que generan esos precios. Por ejemplo, cuando los precios bajos están débilmente correlacionados con los correspondientes cocientes, el paquete óptimo de opciones tiene un precio de ejercicio positivo, que permite explotar la correlación existente en el rango de precios alto mejor que un paquete que incluyera simplemente acciones (i.e, acciones de venta restringida). Estos resultados sugieren cautela a la hora de aprobar regulación que pueda distorsionar la elección de los precios de ejercicio de las opciones en los paquetes de compensación de directivos de empresa. |
| Keywords: | Riesgo Moral, Contratos Óptimos, Persistencia, Compensación de Directivos, Opciones Moral Hazard, Optimal Contracts, Persistence, CEO Compensation, Stock |
| JEL: | D30 D31 D80 D82 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasec:2008-04&r=cta |
| By: | GAVIN C REID; JULIA A SMITH |
| Abstract: | The paper uses a range of primary-source empirical evidence to address the question: ‘why is it to hard to value intangible assets?’ The setting is venture capital investment in high technology companies. While the investors are risk specialists and financial experts, the entrepreneurs are more knowledgeable about product innovation. Thus the context lends itself to analysis within a principal-agent framework, in which information asymmetry may give rise to adverse selection, pre-contract, and moral hazard, post-contract. We examine how the investor might attenuate such problems and attach a value to such high-tech investments in what are often merely intangible assets, through expert due diligence, monitoring and control. Qualitative evidence is used to qualify the more clear cut picture provided by a principal-agent approach to a more mixed picture in which the ‘art and science’ of investment appraisal are utilised by both parties alike. |
| Keywords: | venture capital, high technology, accounting information, intangible assets, financial reporting. |
| JEL: | G11 G24 M41 O3 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0806&r=cta |
| By: | Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); David BARTOLINI ([n.a.]) |
| Abstract: | A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the Authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the social optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and equilibrium binding agreements. Then we extend the analysis to the case of n symmetric firms and a generic rule of coalition formation. Finally, we consider the case of asymmetric firms and show that our results still hold for an industry populated by one Stackelberg leader and two followers. |
| Keywords: | antitrust policy, coalition formation, collusive cartels |
| JEL: | C70 L40 L41 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:325&r=cta |
| By: | Xenia Matschke (University of Connecticut); Anja Schottner (University of Bonn) |
| Abstract: | In the last two decades, trade liberalization under GATT/WTO has been partly offset by an increase in antidumping protection. Economists have argued convincingly that this is partly due to the inclusion of sales below cost in the definition of dumping during the GATT Tokyo Round. The introduction of the cost- based dumping definition gives regulating authorities a better opportunity to choose protection according to their liking. This paper investigates the domestic government's antidumping duty choice in an asymmetric information framework where the foreign firm's cost is observed by the domestic firm, but not by the government. To induce truthful revelation, the government can design a tariff schedule, contingent on firms' cost reports, accompanied by a threat to collect additional information for report verification (i.e., auditing) and, in case misreporting is detected, to set penalty duties. We show that depending on the concrete assumptions, the domestic government may not only be able to extract the true cost information, but also succeeds in implementing the full-information, governmental welfare-maximizing duty. In this case, the antidumping framework within GATT/WTO does not only offer the means to pursue strategic trade policy disguised as fair trade policy, but it also helps overcome the informational problems with regard to correctly determining the optimal strategic trade policy. |
| Keywords: | antidumping duties, asymmetric information, trade protection, strategic trade policy |
| JEL: | F13 F16 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2008-19&r=cta |
| By: | Yusuke Inami (Graduate School of Economics, Kyoto University) |
| Abstract: | This paper considers second-price, sealed-bid auctions with a buy price where biddersf types are discretely distributed. We characterize all equilibria, restricting our attention to equilibria where bidders whose types are less than a buy price bid their own valuations. Budish and Takeyama (2001) analyzed the two-bidder, two-type framework, and showed that if bidders are risk-averse, a seller can obtain a higher expected revenue from the auction with a certain buy price than from the auction without a buy price. We extend their revenue improvement result to the n-bidder, two-type framework. However, in case of three or more types, biddersf risk aversion is not a sufficient condition for the revenue improvement. Our example illustrates that even if bidders are risk-averse, a seller cannot always obtain a higher expected revenue from the auction with a buy price. |
| Keywords: | Auction; Buy price; Risk aversion |
| JEL: | C72 D44 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:657&r=cta |
| By: | Alexander S. Kritikos; Jonathan H. W. Tan |
| Abstract: | We experimentally test the efficacy of indenture as a self-enforced contract device. In an indenture game, the principal signals the intention of payment-on-delivery, by tearing a banknote and giving the agent half of it as “prepayment”; the agent receives the completing half after delivering the service. By forward induction, cooperation is incentive-compatibly self-enforcing. The indenture performs very well, inducing a significantly higher level of cooperation than that in a three-stage centipede game, which we use to benchmark the natural rate of cooperation. The difference between cooperation rates in both games increases over time. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:phu:wpaper:002&r=cta |
| By: | Sébastien ROUILLON (GREThA) |
| Abstract: | This note provides an additional argument in favour of the use of a negligence rule in tort law. When the probability of suit varies among injurers and is not observable by the judge, the judge will fail to implement the socially optimal level of care using a strict liability rule (for this implies to set damages equal to harm multiplied by the inverse of the probability of suit). However, he can still implement it using a negligence rule, subject to the condition that he chooses the negligence standard properly (for if damages are set large enough, potential injurers will comply with the standard, regardless their probability of suit). |
| Keywords: | Liability, asymmetric information |
| JEL: | D82 K13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2008-15&r=cta |
| By: | Marwan Elkhoury |
| Abstract: | Credit rating agencies (CRAs) play a key role in financial markets by helping to reduce the informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies or countries. CRAs´ role has expanded with financial globalization and has received an additional boost from Basel II which incorporates the ratings of CRAs into the rules for setting weights for credit risk. Ratings tend to be sticky, lagging markets, and overreact when they do change. This overreaction may have aggravated financial crises in the recent past, contributing to financial instability and cross-country contagion. The recent bankruptcies of Enron, WorldCom, and Parmalat have prompted legislative scrutiny of the agencies. Criticism has been especially directed towards the high degree of concentration of the industry. Promotion of competition may require policy action at national and international level to encourage the establishment of new agencies and to channel business generated by new regulatory requirements in their direction. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:unc:dispap:186&r=cta |