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on Contract Theory and Applications |
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Issue of 2008‒08‒06
seventeen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Berardino Cesi (University "G. D.Annunzio"); Gian Luigi Albano (Italian Public Procurement Agency (Consip S.p.A.)) |
| Abstract: | When procurement contracts are awarded through competitive tendering participating firms commit ex ante to fulfil a set of contractual duties. However, selected contractors may find profitable to renege ex post on their promises by opportunistically delivering lower quality standards. In order to deter ex post moral hazard, buyers may use different strategies depending on the extent to which quality dimensions are contractible, that is, verifiable by contracting parties and by courts. We consider a stylized repeated procurement framework in which a buyer awards a contract over time to two firms with different efficiency levels. If the contractor does not deliver the agreed level of performance the buyer may handicap the same firm in future competitive tendering. We prove that under complete information extremely severe handicapping is never a credible strategy for the buyer, rather the latter finds it optimal to punish the opportunistic firm so as to make the pool of competitors more alike. In other words, when opportunistic behaviour arises, the buyer should use handicapping to “level the playing field”. |
| Keywords: | Repeated Procurement, Handicapping, Relational Contracts, Stick and Carrot Strategy |
| JEL: | C73 D82 D44 H57 K12 L14 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2008.19&r=cta |
| By: | Carmine Guerriero (University of Cambridge) |
| Abstract: | The determinants of incentive regulation are a key issue in industrial policy. I study an asymmetric information model of incentive rules selection by a political principal endowed with an information-gathering technology whose efficiency increases with the effort exerted by two accountable supervisors (a regulator and a judge). This set up captures the institutions of several international markets. The model predicts that reforms toward higher powered rules are more likely the more inefficient (efficient) is the production (information-gathering) technology, the less tight is political competition and the greater are pro-consumer supervisors’ incentives. This prediction is consistent with evidence based on US electric power market data. |
| Keywords: | Incentive Schemes, Accountability Rules, Regulatory Capture |
| JEL: | D73 H11 L51 K2 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2008.34&r=cta |
| By: | MESNARD, Alice; SEABRIGHT, Paul |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:4875&r=cta |
| By: | Irene Valsecchi (University of Milano-Bicocca) |
| Abstract: | The survey is concerned with the issue of information transmission from experts to non-experts. Two main approaches to the use of experts can be traced. According to the game-theoretic approach expertise is a case of asymmetric information between the expert, who is the better informed agent, and the non-expert, who is either a decision-maker or an evaluator of the expert’s performance. According to the Bayesian decision-theoretic approach the expert is the agent who announces his probabilistic opinion, and the non-expert has to incorporate that opinion into his beliefs in a consistent way, despite his poor understanding of the expert’s substantive knowledge. The two approaches ground the relationships between experts and non-experts on such different premises that their results are very poorly connected. |
| Keywords: | Expert, Information Transmission, Learning |
| JEL: | D81 L21 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2008.35&r=cta |
| By: | Shmuel Zamir |
| Abstract: | An encyclopedia article on games with incomplete information. Table of contents: 1. Definition of the subject and its importance. 2. Introduction: Modeling incomplete information. 3. Harsanyi’s model: The notion of type. 4. Aumann’s model. 5. Harsanyi’s model and the hierarchies of beliefs. 6. The Universal Belief Space. 7. Belief subspaces. 8. Consistent beliefs and Common prior. 9. Bayesian games and Bayesian equilibrium. 10. Bayesian equilibrium and Correlated equilibrium. 11. Concluding remarks and future directions. 12. Bibliography. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp486&r=cta |
| By: | Dirk Bergemann; Stephen Morris |
| Date: | 2008–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002286&r=cta |
| By: | Roberto Burguet; Martin K. Perry |
| Abstract: | In a procurement setting, this paper examines agreements between a buyer and one of the suppliers which would increase their joint surplus. The provisions of such agreements depend on the buyer's ability to design the rules of the final procurement auction. When the buyer has no such ability, their joint surplus can be increased by an agreement which grants to the preferred supplier a right-of-first-refusal on the lowest price offer from the other suppliers. When the buyer does have this ability, one agreement which maximizes their joint surplus includes a revelation game for the cost of the preferred supplier and a reserve price in the procurement auction based on that cost. |
| Keywords: | procurement auctions, bilateral agreements |
| JEL: | D44 D82 C79 |
| Date: | 2008–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:752.08&r=cta |
| By: | Sabrina Teyssier (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper reports on the results of an experiment testing whether the agents selfselect between a competitive payment scheme and a revenue-sharing scheme depending on their inequity aversion. Average efficiency should be increased when these payment schemes are endogenously chosen by agents. We show that the choice of the competition is negatively affected by disadvantageous inequity aversion and risk aversion. In the second half of the experiment, the effect of individual preferences is indirect through the effect of past results. The self-selection of agents increases the efficiency of the competitive scheme but not that of the revenue-sharing scheme, due to a heterogeneity of behaviors. |
| Keywords: | performance pay ; incentives ; self-selection ; inequity aversion ; competition ; revenue-sharing scheme |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00303727_v1&r=cta |
| By: | Viceisza, Angelino |
| Abstract: | "This study reports theory-testing laboratory experiments on the effect of yardstick competition on corruption. The results reveal that on the incumbent's side, yardstick competition acts as a corruption-taming mechanism only if the incumbent politician is female. On the voter's side, voters focus on the difference between the tax rate in their own jurisdiction versus that in another jurisdiction. If the voters' tax rate is deemed unfair compared to that in the other jurisdiction, voters are less likely to re-elect. These findings support the claim by Besley and Case (1995) that incumbent behavior and tax setting are tied together through the nexus of yardstick competition, suggesting that our laboratory experiments have some external validity." from Author's Abstract |
| Keywords: | Corruption, Yardstick competition, Political agency, Asymmetric and private information, Experiments, Social protection, Institutions, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:774&r=cta |
| By: | M. V. Ibrahimo; Carlos Pestana Barros |
| Abstract: | In this paper we examine the effects of asymmetric information on the nature of financial equilibrium and on the capital structure of firms. In the first model presented, the financial contracts on offer involve pooling equilibrium with no adverse selection. However, in the special case analyzed, where contracts are of mixed form, there may be a separating equilibrium and also equilibrium may not exist. Interesting result is that the separating equilibrium found is not economically efficient since aggregate investments falls short of first-best level. More importantly, capital structure does matter. The relative magnitude of outside equity makes a real difference to the quantity of aggregate investment in equilibrium. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp322008&r=cta |
| By: | Mette Ejrnaes (Copenhagen University); Stefan Hochguertel (VU University Amsterdam) |
| Abstract: | We study risk behavior of Danish self-employed entrepreneurs, whose income risk may be driven by both exogenous factors and effort choice (moral hazard). Partial insurance is available through voluntary unemployment insurance (UI). Additional incentives to sign insurance contracts stem from a UI-embedded, government-subsidized early retirement (ER) program, giving benefits that are unrelated to business risk. Indeed, we argue that the self-employed's incentives to insure themselves stem from the ER plan rather than from the UI cover. We show how to use a policy reform to identify moral hazard in observed transitions to unemployment when insurance is a choice variable. We use administrative (register) panel data covering 10% of the Danish population. We find that the insured are indeed more likely to transit into unemployment than the uninsured, once we properly instrument for the insurance choice. |
| Keywords: | entrepreneurs; self-employment; early retirement; unemployment insurance; moral hazard; Denmark; panel data |
| JEL: | C33 D12 D14 D91 J23 J26 |
| Date: | 2008–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080065&r=cta |
| By: | Carlos A. Chavez (Departamento de Economia, Universidad de Concepcion, Concepcion, Chile); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst) |
| Abstract: | In contrast with what we perceive is the conventional wisdom about setting emissions taxes under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, efficient emissions tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary. |
| Keywords: | Emissions Taxes, Incomplete Information, Uncertainty |
| JEL: | L51 Q28 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:dre:wpaper:2008-5&r=cta |
| By: | Andriy Zapechelnyuk (Kyiv School of Economics); Ro'i Zultan (Hebrew University of Jerusalem) |
| Abstract: | The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We consider a labor market in which workers can either establish a long-term relationship with an employer by being productive, or shirk and move from one employer to the next. In addition, the workers can signal to a potential employer their intention to be productive. We show that lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium. |
| Keywords: | Signaling; job market; job search; separating equilibrium; unemployment; moral hazard |
| JEL: | D82 C72 C73 J64 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:kse:dpaper:10&r=cta |
| By: | Mette Ejrnæs (Department of Economics, University of Copenhagen); Gabriel Stefan Hochguertel (VU University Amsterdam) |
| Abstract: | We study risk behavior of Danish self-employed entrepreneurs, whose income risk may be driven by both exogenous factors and effort choice (moral hazard). Partial insurance is available through voluntary unemployment insurance (UI). Additional incentives to sign insurance contracts stem from a UI-embedded, government-subsidized early retirement (ER) program, giving benefits that are unrelated to business risk. Indeed, we argue that the self-employeds’ incentives to insure themselves stem from the ER plan rather than from the UI cover. We show how to use a policy reform to identify moral hazard in observed transitions to unemployment when insurance is a choice variable. We use administrative (register) panel data covering 10% of the Danish population. We find that the insured are indeed more likely to transit into unemployment than the uninsured, once we properly instrument for the insurance choice. |
| Keywords: | entrepreneurs; self-employment; early retirement; unemployment insurance; moral hazard; Denmark; panel data |
| JEL: | C33 D12 D14 D91 J23 J26 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuieca:2008_02&r=cta |
| By: | FRIEBEL, Guido; SCHNEDLER, Wendelin |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:9341&r=cta |
| By: | Alexander F. Tieman; Daniel C. L. Hardy |
| Abstract: | The volume of credit extended by a bank can be an informative signal of its abilities in loan selection and management. It is shown that, under asymmetric information, banks may therefore rationally lend more than they would otherwise in order to demonstrate their quality, thus negatively affecting financial system soundness. Small shifts in technology and uncertainty associated with new technology may lead to large jumps in equilibrium outcomes. Prudential measures and supervision are therefore warranted. |
| Date: | 2008–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/188&r=cta |
| By: | Andriy Zapechelnyuk; Ro'i Zultan |
| Abstract: | The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We consider a labor market in which workers can either establish a long-term relationship with an employer by being productive, or shirk and move from one employer to the next. In addition, the workers can signal to a potential employer their intention to be productive. We show that lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp488&r=cta |