|
on Contract Theory and Applications |
|
Issue of 2008‒10‒28
thirteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Quentin David; Alexandre Janiak; Etienne Wasmer |
| 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:248&r=cta |
| By: | Heydenreich Birgit; Mishra Debasis; Müller Rudolf; Uetz Marc (METEOR) |
| Abstract: | We study the design of optimal mechanisms in a setting where job-agents compete for being processed by a service provider that can handle one job at a time. Each job has a processing time and incurs a waiting cost. Jobs need to be compensated for waiting. We consider two models, one where only the waiting costs of jobs are private information (1-d), and another where both waiting costs and processing times are private (2-d). Probability distributions represent the public common belief about private information. We consider discrete and continuous distributions. In this setting, an optimal mechanism minimizes the total expected expenses to compensate all jobs, while it has to be Bayes-Nash incentive compatible. We derive closed formulae for the optimal mechanism in the 1-d case and show that it is efficient for symmetric jobs. For non-symmetric jobs, we show that efficient mechanisms perform arbitrarily bad. For the 2-d discrete case, we prove that the optimal mechanism in general does not even satisfy IIA, the `independent of irrelevant alternatives'' condition. Hence any attempt along the lines of the classical auction setting is doomed to fail. In the 2-d discrete case, we also show that the optimal mechanism is not even efficient for symmetric agents. |
| Keywords: | operations research and management science; |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2008033&r=cta |
| By: | Hakan Inal |
| Abstract: | It is well-known that when multiple goods are to be auctioned, standard auction mechanisms are generally inefficient. Ausubel’s dynamic auction for heterogeneous goods (AER 2006) is among the few exceptions. It yields an efficient equilibrium outcome when bidders have private values, i.e., values that are not interdependent. However, Ausubel’s mechanism works in a limited environment when goods are discrete. If bidders’ values for goods are not integers, then the auction mechanism may not yield an efficient allocation without any information on bidders’ values. In this paper, I extend Ausubel's auction for heterogeneous discrete goods to real-valued quasilinear utility functions. The mechanism I propose reaches a Walrasian equilibrium price vector in finite “steps” without any additional information on bidders’ values. I also show that truthful bidding constitutes an efficient equilibrium. |
| Keywords: | Auctions, Ausubel auction, heterogeneous goods auction, price adjustment, tatonnement. |
| JEL: | D44 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2008_06&r=cta |
| By: | Maria Goltsman (University of Western Ontario); Gregory Pavlov (University of Western Ontario) |
| Abstract: | We analyze the performance of various communication protocols in a generalization of the Crawford-Sobel (1982) model of cheap talk that allows for multiple receivers. We find that whenever the sender can communicate informatively with both receivers by sending private messages, she can communicate informatively by sending public messages. In particular, it is possible that informative communication with one or both receivers is impossible in private, but possible in public. When the sender is allowed to send both public and private messages, it is possible for the sender to combine the commitment provided by public communication with the flexibility provided by private communication and transmit more information to the receivers than under either private or public communication scenarios. When the players can communicate through a mediator and the receivers are biased in the same direction, it is optimal for the sender to communicate with the receivers through independent private noisy communication channels. It is in general optimal to take advantage of pooling the sender’s truthtelling constraints across the receivers when they are biased in the opposite directions. |
| Keywords: | Communication; Information; Mechanism design; Cheap talk; Long Cheap talk; Multiple audiences |
| JEL: | C72 C78 D74 D82 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20081&r=cta |
| By: | Sabrina Teyssier (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| 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 |
| JEL: | C92 D63 J31 J33 M52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0821&r=cta |
| By: | Marcello Basili; Antonio Nicita; Maria Alessandra Rossi |
| Abstract: | The literature on Open Source phenomenon has revealed the crucial role played by both intrinsic and extrinsic motivations. However an analysis attempting to formally explore this interplay is still missing. In this paper, we try to fill the gap by introducing intrinsic motivations in standard principal-agent model, focusing on the case of Open Source Software (OSS). We show that, if developers’ intrinsic motivation is sufficiently high, paying developers to work on OSS projects allows the firm to induce a desired level of workers’ effort at a lower cost compared to the standard case of monetary incentives and sanctions coupled with costly monitoring. |
| Keywords: | extrinsic and intrisic motivations, agency contracts, open-source software, open-source software developers |
| JEL: | O32 M52 M54 O33 O31 M12 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:544&r=cta |
| By: | Olivier Jeanne; Jonathan David Ostry; Jeromin Zettelmeyer |
| Abstract: | We present a framework that clarifies the financial role of the IMF, the rationale for conditionality, and the conditions under which IMF-induced moral hazard can arise. In the model, traditional conditionality commits country authorities to undertake crisis resolution efforts, facilitating the return of private capital, and ensuring repayment to the IMF. Nonetheless, moral hazard can arise if there are crisis externalities across countries (contagion) or if country authorities discount crisis costs too much relative to the national social optimum, or both. Moral hazard can be avoided by making IMF lending conditional on crisis prevention efforts-"ex ante" conditionality. |
| Date: | 2008–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/236&r=cta |
| By: | Hakan Inal |
| Abstract: | An important question in auction theory is designing a dynamic efficient auction mechanism for multiple objects when bidders’ values are interdependent. Perry and Reny (REStud 2005) introduced an efficient auction for discrete homogeneous goods when bidders’ values are interdependent. In this paper, I propose an ascending auction mechanism for heterogeneous goods when bidders’ values are interdependent. I construct the auction mechanism by using a Perry and Reny auction mechanism for each type of good. I show that if agents' utility functions are additively separable in goods, quasilinear in money and agents’ budget constraints are not binding, then this auction mechanism has an efficient equilibrium outcome. |
| Keywords: | Auctions, Ausubel auction, heterogeneous goods auction, price adjustment, tatonnement. |
| JEL: | D44 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2008_04&r=cta |
| By: | Carolyn Pitchik |
| Abstract: | I study a budget-constrained, private-valuation, sealed-bid sequential auction with two incompletely-informed, risk-neutral bidders in which the valuations and income may be non-monotonic functions of a bidder's type. Multiple equilibrium symmetric bidding functions may exist that differ in allocation, efficiency and revenue. The sequence of sale affects the competition for a good and therefore also affects revenue and the prices of each good in a systematic way that depends on the relationship among the valuations and incomes of bidders. The sequence of sale may affect prices and revenue even when the number of bidders is large relative to the number of goods. If a particular good, say α, is allocated to a strong bidder independent of the sequence of sale, then auction revenue and the price of good α are higher when good α is sold first. |
| Keywords: | sequential auctions, budget constraints, efficiency, revenue, price, sequence |
| JEL: | C7 C72 L1 |
| Date: | 2008–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-342&r=cta |
| By: | Dardanoni, V; Li Donni, P |
| Abstract: | In two important recent papers, Finkelstein and McGarry [25] and Finkelstein and Poterba [28] propose a new test for asymmetric information in insurance markets that considers explicitly unobserved heterogeneity in insurance demand. In this paper we propose an alternative implementation of the Finkelstein-McGarry-Poterba test based on the identification of unobservable types by use of finite mixture models. The actual implementation of our test follows some recent advances on marginal modelling as applied to latent class analysis; formal testing procedures for the null of asymmetric information and for the hypothesis that private information is indeed multidimensional can be performed by imposing restrictions on the behavior of these unobservable types. To show the potential applicability of our approach, we look at the long term insurance market as analyzed in Finkelstein and McGarry [25], where we also find strong evidence for both asymmetric information and multidimensional unobserved heterogeneity. |
| Keywords: | Asymmetric Information, Unobservable Types, Latent Class Analysis, Long Term Insurance Market. |
| JEL: | D82 G22 I11 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:yor:hectdg:08/26&r=cta |
| By: | Jun Zhang |
| Abstract: | This paper analyzes the signaling effect of bidding in a two-round elimination contest. Before the final round, bids in the preliminary round are revealed and act as signals of the contestants' private valuations. Depending on his valuation, a contestant may have an incentive to bluff or sandbag in the preliminary round in order to gain an advantage in the final round. I analyze this signaling effect and characterize the equilibrium in this game. Compared to the benchmark model, in which private valuations are revealed automatically before the final round and thus no signaling of bids takes place, I find that strong contestants bluff and weak contestants sandbag. In a separating equilibrium, bids in the preliminary round fully reveal the contestants' private valuations. However, this signaling effect makes the equilibrium bidding strategy in the preliminary round steeper for high valuations and flatter for low valuations compared to the benchmark model. |
| Keywords: | all-pay auction, elimination contests, incomplete, lottery, signaling |
| JEL: | C72 D44 D82 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1184&r=cta |
| By: | Decreuse, Bruno; Kazbakova, Elvira |
| Abstract: | We revisit the signalling hypothesis, whereby potential employers use the duration of unemployment as a signal as to the productivity of applicants. We suggest that the quality of such a signal is very low when the unemployed receive unemployment benefits: individuals have good reasons to remain unemployed. Conversely, the signal becomes much more efficient once benefits have elapsed: skilled workers should not stay unemployed in such cases. Therefore, the potential duration of unemployment benefits should drive employers' expectations and their recruitment practices. This mechanism can explain why hazards fall after benefit expiration, and why hazards respond more to the potential duration of benefits than to replacement rates. |
| Keywords: | Worker heterogeneity; Signalling; Hazard rate; Unemployment compensation; Moral hazard |
| JEL: | J65 J64 D83 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11223&r=cta |
| By: | Marc Blatter (Economics Department, University of Bern); Andras Niedermayer (Kellogg School of Management, CMS-EMS, Northwestern University) |
| Abstract: | We consider software developers who can either work on an open source project or on a closed source project. The former provides a publicly available signal about their talent, whereas the latter provides a signal only observed by their employer. We show that a talented employee may initially prefer a less paying job as an open source developer to commercial closed source projects, because a publicly available signal gives him a better bargaining position when renegotiating wages with his employer after the signal has been revealed. Also, we derive conditions under which two effects suggested by standard intuition are reversed: a “pooling equilibrium” (with both talented and untalented workers doing closed source) is less likely if differences in talent are large; a highly visible open source job leads to more effort in a career concerns setup. The former effect is because a higher productivity of talented workers raises not only the value but also the cost of signaling; the latter stems from more effort and the choice of a high visibility job being substitutes for the purpose of signaling. Results naturally apply to other industries with high and low visibility jobs, e.g. academic rather than commercial research, consulting rather than management. |
| Keywords: | Open source software, signaling |
| JEL: | C70 L86 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0806&r=cta |