nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒10‒13
four papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Efficient Contests By Riis, Christian
  2. Advice by an Informed Intermediary: Can You Trust Your Broker? By Anton Suvorov; Natalia Tsybuleva
  3. Axiomatic Theory of Equilibrium Selection in Signalling Games with Generic Payoffs By Srihari Govindan; Robert Wilson
  4. Quality provision under referral consumption By Noemí Navarro

  1. By: Riis, Christian
    Abstract: In their seminal contribution Lazear and Rosen (1981) show that wages based upon rank induce the same e¢ cient e¤ort as incentive-based reward schemes. They also show that this equivalence result is not robust towards heterogeneity in worker ability, as long as ability is private information, as it is not possible to structure contests to simultaneously satisfy self-selection constraints and first best incentives. This paper demonstrates that efficiency is achievable by a simple modification of the prize scheme in a mixed (heterogenous) contest. In the L&R contest, the winner's prize as well as the loser's prize are fixed in advance. In this paper I demonstrate that efficiency is restored by a modification of contest design, in which contestants choose from a menu of prizes.
    Keywords: Tournaments; Labor Contracts
    JEL: J33
    Date: 2008–04
  2. By: Anton Suvorov (CEFIR, NES); Natalia Tsybuleva
    Abstract: The paper investigates credibility of the intermediary's advice in a bilateral trade model. A seller and a buyer with private and independent uniformly distributed valuations exchange a unit of good. Their trade is mediated by an intermediary, who at the pre-bargaining stage observes a coarse signal about the buyer's valuation and reveals some information to the seller. We first show that if the broker gets a fixed fee for each executed transaction, he can transmit his information credibly via cheap talk. Full information revelation can be sustained even when the intermediary's information about the buyer becomes arbitrarily precise. The transmission of information by the broker increases ex ante welfare of the seller and the broker, but has ambiguous impact on the buyer. If the intermediary observes signals about valuations of both participants, the fully revealing equilibrium exists only under certain restrictions on parameters of the model. Another limit to effcient communication can be imposed by competition between intermediaries. We then consider the mechanism design problem for an informed intermediary, and prove that choosing an appropriate system of two-part tariffs allows the intermediary to secure the same payoff as in the optimal direct mechanism.
    Date: 2008–10
  3. By: Srihari Govindan; Robert Wilson
    Date: 2008–10–05
  4. By: Noemí Navarro (Department of Economic Theory, Universidad de Málaga)
    Abstract: I analyze incentives for provision of quality in a market for an experience good. There is a single producer who is choosing quality and price taking into account three features. First, consumers do not know the quality of the good before purchasing it but use their acquaintances in order to obtain information about it. Second, consumers assign a common initial willingness-to-pay before information transmission takes place. Third, the social network of acquaintances is known to the producer. I define an equilibrium concept taking the point of view of the producer and characterize the set of resulting equilibria for any possible social network. One implication from this characterization is that, if there is a maximal level of quality (given by technological knowledge) that can be chosen, the producer may choose lower levels of quality as the population of consumers is getting more internally connected. This is due to free-riding of information by consumers when quality levels are low. In addition, I identify necessary and sufficient conditions for a new producer arriving in the market to provide a lower quality level though a higher price than the initial producer.
    Keywords: Networks, word-of-mouth information, referral consumption
    JEL: D4 D8 L1
    Date: 2008–10

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