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on Contract Theory and Applications |
| By: | Wolfgang R. Köhler |
| Abstract: | We analyze task allocation and randomization in Principal Agent models. We identify a new rationale that determines the allocation of tasks and show that it can be optimal to assign tasks that are very different to one agent. Similar to randomization, the reason to assign several tasks to one agent is to mitigate the effect of the participation constraint. We show that the allocation of tasks can be used as a substitute if randomization is not feasible. |
| Keywords: | Job design, multi-task agency, ex-ante randomization, moral hazard |
| JEL: | D |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:381&r=cta |
| By: | Ernst Fehr; Martin Brown; Christian Zehnder |
| Abstract: | We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks. |
| Keywords: | Reputation, Reciprocity, Relational Contracts, Price Rigidity, Wage Rigidity |
| JEL: | D82 J3 J41 E24 C9 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:384&r=cta |
| By: | Jaap Abbring (VU University Amsterdam); Pierre-André Chiappori (Columbia University); Tibor Zavadil (VU University Amsterdam) |
| Abstract: | This paper empirically analyzes moral hazard in car insurance using a dynamic theory of an insuree's dynamic risk (ex ante moral hazard) and claim (ex post moral hazard) choices and Dutch longitudinal micro data. We use the theory to characterize the heterogeneous dynamic changes in incentives to avoid claims that are generated by the Dutch experience-rating scheme, and their effects on claim times and sizes under moral hazard. We develop tests that exploit these structural implications of moral hazard and experience rating. Unlike much of the earlier literature, we find evidence of moral hazard. |
| Keywords: | insurance; moral hazard; selection; state dependence; event-history analysis |
| JEL: | D82 G22 C41 C14 |
| Date: | 2008–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080075&r=cta |
| By: | Dirk Bergemann; Juuso Välimäki |
| Date: | 2008–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002340&r=cta |
| By: | Oliver Board; Andreas Blume |
| Abstract: | This paper analyzes communication with a language that is vague in the sense that identical messages do not always result in identical interpretations. It is shown that strategic agents frequently add to this vagueness by being intentionally vague, i.e. they deliberately choose less precise messages than they have to among the ones available to them in equilibrium. Having to communicate with a vague language can be welfare enhancing because it mitigates conflict. In equilibria that satisfy a dynamic stability condition intentional vagueness increases with the degree of conflict between sender and receiver. |
| JEL: | C72 D82 D83 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:365&r=cta |
| By: | Galina Hale; Joao A. C. Santos |
| Abstract: | Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market. |
| Keywords: | Corporate bonds ; Credit ratings |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-14&r=cta |
| By: | Lamont K. Black |
| Abstract: | The presence of private information about a firm can affect the competition among potential lenders. In the Sharpe (1990) model of information asymmetry among lenders (with the von Thadden (2004) correction), an uninformed outside bank faces a winner’s curse when competing with an informed inside bank. This paper examines the model’s prediction for observed interest rates at an inside vs. outside bank. Although the outside bank wins more bad firms than the inside bank, the winner’s curse also causes the outside rate conditional on firm type to be lower in expectation than the inside rate conditional on firm type. I show analytically that the expected interest rate at the outsider can be either higher or lower than the expected interest rate at the insider, depending on the net of these two effects. Under the assumption that the banks split the firms in a tie bid, a numerical solution shows that the outside expected interest rate is higher than the inside expected interest rate for high quality borrower pools, but the outside expected interest rate is lower for low quality borrower pools. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-36&r=cta |