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on Contract Theory and Applications |
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Issue of 2008‒11‒11
fifteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Dino Gerardi (Cowles Foundation, Yale University); Lucas Maestri (Dept. of Economics, Yale University) |
| Abstract: | This paper analyzes the optimal provision of incentives in a sequential testing context. In every period the agent can acquire costly information that is relevant to the principal's decision. Neither the agent's effort nor the realizations of his signals are observable. First, we assume that the principal and the agent are symmetrically informed at the time of contracting. We construct the optimal mechanism and show that the agent is indifferent in every period between performing the test and sending an uninformative message which continues the relationship. Furthermore, in the first period the agent is indifferent between carrying out his task and sending an uninformative message which ends the relationship immediately. We then characterize the optimal mechanisms when the agent has superior information at the outset of the relationship. The principal prefers to offer different contracts if and only if the agent types are sufficiently diverse. Finally, all agent types benefit from their initial private information. |
| Keywords: | Dynamic mechanism design, Information acquisition, Sequential testing |
| JEL: | C72 D82 D83 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1680&r=cta |
| By: | Alexander K. Koch; Eloïc Peyrache (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Labor turnover creates longer term career concerns incentives that motivate employees in addition to the short term monetary incentives provided by the current employer. We analyze how these incentives interact and derive implications for the design of incentive contracts and organizational choice. The main insights stem from a trade-off between ‘good monetary incentives’ and ‘good reputational incentives’. We show that the principal optimally designs contracts to create ambiguity about agents’ abilities. This may make it optimal to contract on relative performance measures, even though the extant rationales for such schemes are absent. Linking the structure of contracts to organizational design, we show that it can be optimal for the principal to adopt an opaque organization where performance is not verifiable, despite the constraints that this imposes on contracts. |
| Keywords: | Reputation, Asymmetric learning, Relative performance contracts, Transparency |
| JEL: | D82 J33 L14 |
| Date: | 2008–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2008-16&r=cta |
| By: | Charness, Gary (University of California, Santa Barbara); Kuhn, Peter J. (University of California, Santa Barbara); Villeval, Marie-Claire (CNRS, GATE) |
| Abstract: | The 'ratchet effect' refers to a situation where a principal uses private information that is revealed by an agent's early actions to the agent's later disadvantage, in a context where binding multi-period contracts are not enforceable. In a simple, context-rich environment, we experimentally study the robustness of the ratchet effect to the introduction of ex post competition for principals or agents. While we do observe substantial and significant ratchet effects in the baseline (no competition) case of our model, we find that ratchet behavior is nearly eliminated by labor-market competition; interestingly this is true regardless of whether market conditions favor principals or agents. |
| Keywords: | ratchet effect, competition, experiment, private information, labor markets |
| JEL: | C91 D23 D82 J24 L14 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3784&r=cta |
| By: | MARINUCCI, Marco (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)) |
| Abstract: | This paper faces two questions concerning Joint Ventures (JV) agreements. First, we study how the partners contribution affect the creation and the profit sharing of a JV when partners' effort is not observable. Then, we see whether such agreements are easier to enforce when the decision on JV profit sharing among partners is either delegated to the independent JV management (Management Sharing) or jointly taken by partners (Coordinated Sharing). We find that the firm whose effort has a higher impact on the JV's profits should have a larger profit shares. Moreover, a Management sharing ensures, at least in some cases, a wider range of self-enforceable JV agreements. |
| Keywords: | joint ventures, strategic alliances, ownership structure, asymmetries. |
| JEL: | D43 L13 L14 L22 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008023&r=cta |
| By: | Marco, MARINUCCI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)) |
| Abstract: | This paper faces two questions concerning Joint Ventures (JV) agreements. First, we study how the partners contribution affect the creation and the profit sharing of a JV when partnersÕ effort is not obervable. Then, we see whether such agreements are easier to enforce when the decision on JV profit sharing among partners is either delegated to the independent JV management (Management Sharing) or jointly taken by partners (Coordinated Sharing). We find that the firm whose effort has a higher impact on the JVÕs profits should have a larger profit shares. Moreover, a Management sharing ensures, at least in some cases, a wider range of self-enforceable JV agreements |
| Keywords: | Joint ventures, strategic alliances, ownership structure, asymmetries |
| JEL: | D43 L13 L14 L22 |
| Date: | 2008–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008016&r=cta |
| By: | Satyajit Chatterjee; Esteban Rossi-Hansberg |
| Abstract: | We present a theory of spinoffs in which the key ingredient is the originator’s private information concerning the quality of his new idea. Because quality is privately observed, by the standard adverse-selection logic, the market can at best offer a price that reflects the average quality of ideas sold. This gives the holders of above-average-quality ideas the incentive to spin off. We show that only workers with very good ideas decide to spin off, while workers with mediocre ideas sell them. Entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them. Hence, firms’ project selection is independent of firm size, which, under some additional assumptions, leads to scale-independent growth. The entry and growth process of firms leads to invariant firm-size distributions that resemble the ones for the U.S. economy and most of its individual industries. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-26&r=cta |
| By: | ISAAC, Tanguy (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics) |
| Abstract: | We study information revelation in markets with pairwise meetings. We focus on the one-sided case and perform a dynamic analysis of a constant entry flow model. The same question has been studied in an identical framework in Serrano and Yosha (1993) but they limit their analysis to the stationary steady states. Blouin and Serrano (2001) study information revelation in a one-time entry model and obtain results different than Serrano and Yosha (1993). We establish that the main difference is not due to the steady state analysis but is due to the differences concerning the entry assumption. |
| Keywords: | information revelation, asymmetric information, decentralized trade. |
| JEL: | D49 D82 D83 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008017&r=cta |
| By: | Enrico Sette (Bank of Italy, Economics, Research and International Relations area) |
| Abstract: | This paper investigates the incentives of experts competing to influence decision making. Competition for influence is shown to have an ambiguous effect on truthtelling incentives and a decision maker might be better off relying on one source of information only. This result has important implications for organizational design: the paper shows that delegation and favoritism can arise as a way to promote the correct flow of information within an organization. Delegation can lead to stronger truthtelling incentives than communication and it can be optimal when the importance of the decision is intermediate or high. Favoritism, consisting in biasing the competition for influence in favour of one expert, can further increase truthtelling incentives. |
| Keywords: | reputation, competition, delegation, favoritism |
| JEL: | C73 D82 L23 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_693_08&r=cta |
| By: | Rebecca Morton (New York University); Jean-Robert Tyran (Department of Economics, University of Copenhagen) |
| Abstract: | We examine abstention when voters in standing committees are asymmetrically informed and there are multiple pure strategy equilibria-swing voter's curse (SVC) equilibria where voters with low quality information abstain and equilibria when all participants vote their information. When the asymmetry in information quality is large, we find that voting groups largely coordinate on the SVC equilibrium which is also Pareto Optimal. However, we find that when the asymmetry in information quality is not large and the Pareto Optimal equilibrium is for all to participate, significant numbers of voters with low quality information abstain. Furthermore, we find that information asymmetry induces voters with low quality information to coordinate on a non-equilibrium outcome. This suggests that coordination on "letting the experts" decide is a likely voting norm that sometimes validates SVC equilibrium predictions but other times does not. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0825&r=cta |
| By: | Ascensión Andina-Díaz (Department of Economic Theory, Universidad de Málaga) |
| Abstract: | We model strategic communication as a two-period game between an advisor and a decision maker, in which the advisor has private information on a policy-relevant state of the world but does not know the motives of the decision maker. If the advisor has the desire to please the decision maker and there is a positive probability that the decision maker values information, we identify different modes of communication that lead to information disclosure. We discuss our results in the context of a freelance journalist - editor game. Among the results is that if the journalist sufficiently values second period payoff, no information is transmitted in period one and the only equilibria implies information manipulation. Additionally, we show that the quality of the communication process does not depend on who manipulates the information although welfare does. |
| Keywords: | Strategic Communication, Conformity, Screening, Signaling; Mass Media |
| JEL: | C72 D72 D83 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:mal:wpaper:2008-13&r=cta |
| By: | LEROUX, Marie-Louise (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)) |
| Abstract: | This paper studies the normative problem of redistribution among individuals who can influence their longevity through a non-monetary effort but have different taste for effort. As benchmarks, we first present the laissez-faire and the first best. In the first best, the level of effort is always lower than in the laissez-faire as the social planner takes into account the consequences of higher survival on the budget constraint. However, since we suppose that effort is private and non-monetary (like exercising), it is reasonable to think that the social planner has no control over it. Thus, we modify our framework and assume for the rest of the paper that effort is determined by the individual while the social planner only allocates consumptions. Under full information with non monitored effort, early consumption is preferred to future consumption and the high-survival individual obtains higher future consumption. Under asymmetric information, the distortion is identical for the low-survival individual while the direction of the distortion for the high-survival individual is ambiguous. We finally show how to decentralize these allocations through a perfect annuity market and (positive or negative) taxes on annuities. |
| Keywords: | annuities, effort, differential mortality, non linear taxation. |
| JEL: | H21 H23 H55 I12 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008029&r=cta |
| By: | Tanguy, ISAAC (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | We study information revelation in markets with pairwise meetings. We focus on the one-sided case and perform a dynamic analysis of a constant entry flow model. The same question has been studied in an identical framework in Serrano and Yosha (1993) but they limit their analysis to the stationary steady states. Blouin and Serrano (2001) study information revelation in a one-time entry model and obstain results different than Serrano and Yosha (1993). We establish that the main difference is not due to the steady state analysis but is due to the differences concerning the entry assumption. |
| Keywords: | D49, D82, D83 |
| Date: | 2008–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008014&r=cta |
| By: | Berdugo, Binyamin; Hadad, Sharon |
| Abstract: | This paper analyzes the implication of employment protection legislation on a firm's screening process. We present a model in which human-capital-intensive firms (high-tech) with imperfect information about their workers' type attempt during a trial period to identify those incompetent workers who they will subsequently dismiss. Employment protection measures, however, place a burden on this screening process and thereby motivate innovators to embark on medium-tech projects which are more flexible in their human capital requirements. Employment protection legislation thereby distorts the pattern of specialization in favor of medium-tech firms rather than high-tech firms and consequently slows down the process of economic growth. The results of the paper are consistent with documented data on Europe versus US productivity growth and specialization patterns as well as with employment protection legislation in those economies. |
| Keywords: | Screening; Firing Costs; Employment Protection; Innovation; Growth; Specialization |
| JEL: | J08 O43 D82 D24 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11410&r=cta |
| By: | Hart, Robert A. (University of Stirling); Ma, Yue (Lingnan University) |
| Abstract: | This paper offers a contract-based theory to explain the determination of standard hours, overtime hours and overtime premium pay. We expand on the wage contract literature that emphasises the role of firm-specific human capital and that explores problems of contract efficiency in the face of information asymmetries between the firm and the worker. We first explore a simple wage-hours contract without overtime and show that incorporating hours into the contract may itself produce efficiency gains. We then show how the introduction of overtime hours, remunerated at premium rates, can further improve contract efficiency. Our modelling outcomes in respect of the relationship between the overtime premium and the standard wage rate relate closely to earlier developments in hedonic wage theory. Throughout, we emphasise the intuitive reasoning behind the theory and we also supply relevant empirical evidence. Mathematical derivations are provided in an appendix. |
| Keywords: | wage-hours contracts, overtime, premium pay, specific human capital, asymmetric information |
| JEL: | J41 J33 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3797&r=cta |
| By: | Emmanuel Farhi; Josh Lerner; Jean Tirole |
| Abstract: | The sub-prime crisis has shown a harsh spotlight on the practices of securities underwriters, which provided too many complex securities that proved to ultimately have little value. This uproar calls attention to the fact that the literature on intermediaries has carefully analyzed their incentives, but that we know little about the broader strategic dimensions of this market. The paper explores three related strategic dimensions of the certification market: the publicity given to applications, the coarseness of rating patterns and the sellers' dynamic certification strategies. In the model, certifiers respond to the sellers' desire to get a chance to be highly rated and to limit the stigma from rejection. We find conditions under which sellers opt for an ambitious certification strategy, in which they apply to a demanding, but non-transparent certifier and lower their ambitions when rejected. We derive the comparative statics with respect to the sellers’ initial reputation, the probability of fortuitous disclosure, the sellers' self-knowledge and impatience, and the concentration of the certification industry. We also analyze the possibility that certifiers opt for a quick turnaround time at the expense of a lower accuracy. Finally, we investigate the opportunity of regulating transparency. |
| JEL: | D82 O31 O34 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14457&r=cta |