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on Contract Theory and Applications |
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Issue of 2008‒08‒14
thirteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Berliant, Marcus; Kung, Fan-chin |
| Abstract: | The modern literature on city formation and development, for example the New Economic Geography literature, has studied the agglomeration of agents in size or mass. We investigate agglomeration in sorting or by type of worker, that implies agglomeration in size when worker populations differ by type. This kind of agglomeration can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin. |
| Keywords: | Adverse Selection; Agglomeration |
| JEL: | R13 R12 D82 |
| Date: | 2008–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9951&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Juuso Valimaki (Dept. of Economics, Helsinki School of Economics) |
| Abstract: | We consider truthful implementation of the socially efficient allocation in an independent private-value environment in which agents receive private information over time. We propose a suitable generalization of the pivot mechanism, based on the marginal contribution of each agent. In the dynamic pivot mechanism, the ex-post incentive and ex-post participation constraints are satisfied for all agents after all histories. In an environment with diverse preferences it is the unique mechanism satisfying ex-post incentive, ex-post participation and efficient exit conditions. We develop the dynamic pivot mechanism in detail for a repeated auction of a single object in which each bidder learns over time her true valuation of the object. We show that the dynamic pivot mechanism is equivalent to a modified second price auction. |
| Keywords: | Pivot mechanisms, Dynamic mechanism design, Ex-post equilibrium, Marginal contribution, Multi-armed bandit, Bayesian learning |
| JEL: | C72 C73 D43 D83 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1672&r=cta |
| By: | Deb, Rahul |
| Abstract: | We model new experience goods in the context of dynamic mechanism design. These are goods for which an agent is unsure of her valuation but can learn it through consumption experience. We consider a dynamic environment with a single buyer and seller in which contracting occurs over T periods, where each time the agent consumes the object, she receives a signal which allows her to revise her valuation. In this setting, experimentation with the product is strategic both for the buyer and seller. We derive the efficient and seller optimal contracts and compare them. We present a simple two period example which highlights some of the key features of the model. Finally, the methodology developed in the paper can be used to design efficient and optimal contracts in a multi-buyer setting with learning, where each buyer has single unit demand and there is a single object for sale in each period. |
| Keywords: | Dynamic mechanism design; new experience goods; bandit problems |
| JEL: | D86 D44 D82 D83 C73 |
| Date: | 2008–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9880&r=cta |
| By: | Annamaria Menichini (CSEF, Università di Salerno); Peter Simmons (Department of Economics and Related Studies, University of York) |
| Abstract: | Within a principal-agent framework with costly state verification, the paper analyses the consequences on the properties of the relationship of the agent acquiring, either before or after a loan contract has been agreed, a public signal which reduces the variance of revenues. It finds that it may be optimal to gather information, either randomly or deterministically, but only after a contract has been agreed and never before. Whenever information is randomly acquired, audits should be deterministic: low revenue reports should be audited always upon good signal realisations and never upon bad signal realisations; high revenue reports should never be audited following any signal realisation. Last, it may be optimal never to audit low revenue reports when, as a result of the randomisation process, information is not gathered. The intuition is that gathering information works as an extra instrument for the principal to elicit truthtelling that allows to better select when to audit thereby reducing the inefficiency associated with it. |
| Keywords: | financial contracts, signalling, information gathering, monitoring |
| JEL: | D82 D83 |
| Date: | 2008–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:201&r=cta |
| By: | José R. Correa; Nicolás Figueroa |
| Abstract: | In this paper we study a large class of resource allocation problems with an important complication, the utilization cost of a given resource is private information of a profit maximizing agent. After reviewing the characterization of the optimal bayesian mechanism, we study the informational cost introduced by the presence of private information. Our main result is to provide an upper bound for the ratio between the cost under asymmetric information and the cost of a fully informed designer, which is independent of the combinatorial nature of the problem and tight. We also show that this bound holds for a variation of the Vickrey-Clark-Groves mechanism. Finally we point out implementation issues of the optimal mechanism. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:247&r=cta |
| By: | Ben Youssef, Slim |
| Abstract: | We consider a model consisting of a monopolistic firm producing a certain good with pollution. This firm can adopt a cleaner technology within a finite time by incurring an investment cost decreasing exponentially with the adoption date. At each period of time, the firm is regulated by an emission tax which induces the socially optimal pollution and production levels, and a lump sum tax on profit. The firm is induced to adopt the cleaner technology at the socially optimal date by an appropriate innovation subsidy. In the incomplete information context, the firm has private information concerning the cost of acquiring the new technology. By an appropriate contract consisting of an adoption date and a R&D subsidy depending on the value of the innovation cost parameter announced by the firm, the regulator can induce the latter to reveal the true value of its private information in compensation of a socially costly intertemporal informational rent. However, the socially optimal adoption date of incomplete information is delayed with respect to the complete information one. |
| Keywords: | cleaner technology; adoption date; incomplete information |
| JEL: | H57 D62 D82 O32 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9879&r=cta |
| By: | Sun, Ching-jen |
| Abstract: | Laffont and Tirole [3] show that when the uncertainty about the agent's ability is small, the equilibrium must involve a large amount of pooling, but it is not necessary to be a partition equilibrium. They construct a nonpartition continuation equilibrium for a given first-period menu of contracts and conjecture that this continuation equilibrium need not be suboptimal for the whole game under small uncertainty. We show that, irrespective of the amount of uncertainty, this nonpartition continuation equilibrium generates a smaller payoff for the principal than a different menu of contracts with a partition continuation equilibrium. In this sense, Laffont and Tirole's menu of contracts, giving rise to a nonpartition continuation equilibrium, is not optimal. An intuition behind this result is provided that may shed some light on the problem of dynamic contracting without commitment. |
| Keywords: | Incentive Contracts; Dynamic Contracting; Commitment; Partition Equilibrium; Ratchet Effect; Bunching. |
| JEL: | D86 L51 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9813&r=cta |
| By: | Eduardo Engel; Ronald Fischer |
| Abstract: | The government contracts with a foreign firm to extract a natural resource that requires an upfront investment and which faces price uncertainty. In states where profits are high, there is a likelihood of expropriation, which generates a social cost that increases with the expropriated value. In this environment, the planner’s optimal contract avoids states with high probability of expropriation. The contract can be implemented via a competitive auction with reasonable informational requirements. The bidding variable is a cap on the present value of discounted revenues, and the firm with the lowest bid wins the contract. The basic framework is extended to incorporate government subsidies, unenforceable investment effort and political moral hazard, and the general thrust of the results described above is preserved. JEL classification: Q33, Q34, Q38, H21, H25. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:244&r=cta |
| By: | Parimal Bag (National University of Singapore, Singapore.); Santanu Roy (Southern Methodist University, Dallas, Texas.) |
| Abstract: | Under incomplete information about (independent) private valuations of a public good, we establish sufficient conditions under which, despite the incentive to free ride on future contributors, the expected total amount of voluntary contributions is higher when agents contribute sequentially (observing prior contributions) rather than simultaneously. We establish this in a conventional framework with quasi-linear utility where agents care only about the total provision of the public good (rather than individual contribution levels) and there is no non-convexity in provision of the public good. We allow for arbitrary number of agents and fairly general distribution of types. |
| Keywords: | Contribution games, public good, incomplete information. |
| JEL: | D73 H41 L44 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:smu:ecowpa:0805&r=cta |
| By: | Olivier Compte; Andrew Postlewaite |
| Date: | 2008–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002307&r=cta |
| By: | Said, Maher |
| Abstract: | We develop a model of a dynamic market with randomly arriving participants. Both buyers and sellers arrive probabilistically over time. The valuation of each buyer for each object is independently distributed and private information to each buyer. Equilibrium prices are determined by a sequence of second-price auctions. We examine the manner in which equilibrium behavior and payoffs are influenced by both current market conditions and anticipated future dynamics. |
| Keywords: | Dynamic markets; Random arrivals; Endogenous option value; Sequential auctions; Stochastic equivalence. |
| JEL: | D44 D83 C73 |
| Date: | 2008–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9868&r=cta |
| By: | Andriy Zapechelnyuk; Ro'i Zultan |
| Date: | 2008–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002301&r=cta |
| By: | Etienne Dumont; Bernard Fortin; Nicolas Jacquemet; Bruce S. Shearer |
| Abstract: | We analyse how physicians respond to contractual changes and incentives within a multitasking environment. In 1999 the Quebec government (Canada) introduced an optional mixed compensation (MC) system, combining a fixed per diem with a partial (relative to the traditional fee-for-service system) fee for services provided. We combine panel survey and administrative data on Quebec physicians to evaluate the impact of this change in incentives on their practice choices. We highlight the differentiated impact of incentives on various dimensions of physician behaviour by considering a wide range of labour supply variables: time spent on seeing patients, time devoted to teaching, administrative tasks or research, as well as the volume of clinical services and average time per clinical service. Our results show that, on average, the reform induced physicians who changed from FFS to MC to reduce their volume of (billable) services by 6.15% and to reduce their hours of work spent on seeing patients by 2.57%. Their average time spent per service increased by 3.81%, suggesting a potential quality-quantity substitution. Also the reform induced these physicians to increase their time spent on teaching and administrative duties (tasks not remunerated under the fee-for-service system) by 7.9%. <P>En 1999, le ministère de la Santé et des Services Sociaux du Québec introduisait un mode de rémunération mixte optionnel pour rémunérer l’activité hospitalière des médecins spécialistes. Ce mode combine une rémunération forfaitaire pour chaque jour de travail (per diem ou demi per diem) et une rémunération partielle à l’acte s’exprimant en un pourcentage du tarif habituellement applicable pour un service donné. Cette étude jumelle en panel des données de sondage du Collège des Médecins du Québec et des données administratives de la Régie de l’assurance maladie du Québec pour évaluer l’impact de ce mode de rémunération sur les choix de pratique des spécialistes. Nous mettons l’accent sur l’effet de la rémunération mixte sur plusieurs dimensions du comportement professionnel du médecin : heures consacrées aux patients, heures consacrées à l’enseignement, aux activités médicales administratives et à la recherche, volume de services médicaux et temps moyen par service médical. Nos résultats montrent que l’introduction de la rémunération mixte a incité les médecins qui sont passés de la rémunération à l’acte à la rémunération mixte à réduire leur nombre de services médicaux (facturables) de 6,15 % et à réduire leurs heures de travail consacrées aux patients de 2,57 %. En revanche, le temps moyen par service médical s’est accru de 3,81 %, ce qui peut suggérer une substitution entre la quantité et la qualité des services. La réforme a aussi incité ces médecins à accroître le temps consacré à l’enseignement et aux activités médicales administratives (activités non rémunérées par la rémunération à l’acte) de 7,9 %. En outre, le temps consacré par ces médecins à la recherche (activité non rémunérée par l’un ou l’autre des modes de rémunération) a diminué de 14,7 %. Enfin, le revenu des médecins qui sont passés à la rémunération mixte s’est accru de 8,05 %, indiquant qu’il était financièrement rentable pour ceux-ci de choisir ce mode de rémunération. |
| Keywords: | physician payment mechanisms, multitasking, mixed-payment systems, incentive contracts, labour supply, self-selection, panel estimation., mécanismes de rémunération des médecins, fonctionnement multitâche, rémunération mixte, contrats incitatifs, offre de travail, auto-sélection, estimation en panel |
| JEL: | I10 J22 |
| Date: | 2008–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2008s-20&r=cta |