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on Contract Theory and Applications |
| By: | Imran Rasul; Silvia Sonderegger |
| Abstract: | We consider a principal-agent model of adverse selection where, in order to trade with the principal, the agent must undertake a relationship-specific investment which affects his outside option to trade, i.e. the payoff that he can obtain by trading with an alternative principal. This creates a distinction between the agent’s ex ante (before investment) and ex post (after investment) outside options to trade. We investigate the consequences of this distinction, and show that whenever an agent's ex ante and ex post outside options differ, this equips the principal with an additional tool for screening among different agent types, by randomizing over the probability with which trade occurs once the agent has undertaken the investment. In turn, this may enhance the e¢ciency of the optimal second-best contract. |
| Keywords: | adverse selection, randomization, type-dependent outside options. |
| JEL: | D21 L14 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:08/605&r=cta |
| By: | Giovanni Immordino (Università di Salerno and CSEF); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR) |
| Abstract: | We analyze corporate fraud in a model where managers have superior information but, due to private benefits from empire building, are biased against liquidation. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To restrain fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking into account external corporate governance and auditing regulation. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and managerial incentive pay are used, worse external governance must be balanced by heavier reliance on both of these incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while options worsen them. |
| Keywords: | accounting fraud, auditing, managerial compensation, corporate governance, regulation |
| JEL: | G28 K22 M42 |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:203&r=cta |
| By: | Kräkel, Matthias (University of Bonn); Schöttner, Anja (University of Bonn) |
| Abstract: | Several empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We explain these empirical puzzles by combining job-promotion tournaments with higher-level bonus payments in a two-tier hierarchy. Moreover, we show that under certain conditions the firm implements first-best effort on tier 2 although workers earn strictly positive rents. The reason is that the firm can use second-tier rents for creating incentives on tier 1. If workers are heterogeneous, the firm strictly improves the selection quality of a job-promotion tournament by employing a hybrid incentive scheme that includes bonus payments. |
| Keywords: | bonuses, external recruitment, job promotion, limited liability, tournaments |
| JEL: | D82 D86 J33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3702&r=cta |
| By: | Kobayashi, Hajime; Suehiro, Hideo |
| Abstract: | We study endogenous signaling in teams by analyzing a team production problem with endogenous timing. Each agent of the team is privately endowed with some level of confidence about team productivity. Each of them must then commit a level of effort in one of two periods. At the end of each period, each agent observes his partner's move in this period. Both agents are rewarded by a team output determined by team productivity and total invested effort. Each agent must personally incur the cost of effort that he invested. We show a sufficient condition under which sender and receiver emerge endogenously in a stable equilibrium. This result implies that leadership in teams emerges through the leader's signaling incentives only based on his confidence. |
| Keywords: | Endogenous Signaling; Team Production; Leadership |
| JEL: | D82 C72 |
| Date: | 2008–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10717&r=cta |
| By: | Matthias Sutter; Jürgen Huber; Michael Kirchler |
| Abstract: | We study whether information about imminent future dividends can abate bubbles in experimental asset markets. Using the seminal design of Smith et al. (1988) we find that markets where traders are asymmetrically informed about future dividends have smaller, and shorter, bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices – implying higher market efficiency – when some traders know more than others about the future prospects of an asset. We also find that asymmetric information has a similar abating impact on bubbles as when uninformed traders accumulate experience, though for different reasons. |
| Keywords: | Bubbles, information, experiment |
| JEL: | C91 D83 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2008-20&r=cta |
| By: | Bolhaar, Jonneke (Free University of Amsterdam); Lindeboom, Maarten (Free University of Amsterdam); van der Klaauw, Bas (Free University of Amsterdam) |
| Abstract: | We investigate the presence of moral hazard and advantageous or adverse selection in a market for supplementary health insurance. For this we specify and estimate dynamic models for health insurance decisions and health care utilization. Estimates of the health care utilization models indicate that moral hazard is not important. Furthermore, we find strong evidence for advantageous selection, largely driven by heterogeneity in education, income and health preferences. Finally, we show that ignoring dynamics and unobserved fixed effects changes the results dramatically. |
| Keywords: | supplementary private health insurance, health care utilization, advantageous selection, moral hazard, panel data |
| JEL: | I11 D82 G22 C33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3698&r=cta |
| By: | Helena Veiga; Marc Vorsatz |
| Abstract: | We study with the help of a laboratory experiment the conditions under which an uninformed manipulator - a robot trader that unconditionally buys several shares of a common value asset in the beginning of a trading period and unwinds this position later on - is able to induce higher asset prices. We find that the average contract price is significantly higher in the presence of the manipulator if, and only if, the asset takes the lowest possible value and insiders have perfect information about the true value of the asset. It is also evidenced that the robot trader makes trading gains; i.e., independently on whether the informed traders have perfect or partial information, it earns always more than the average trader. Finally, not only uninformed subjects suffer from the presence of the robot trader, but also some of the imperfectly informed insiders have lower payoffs once the robot trader is added as a market participant. |
| Keywords: | Asset market, Experiment, Price manipulation, Rational expectations |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws084110&r=cta |