|
on Contract Theory and Applications |
|
Issue of 2008‒11‒25
sixteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Peter Bardsley; Ingrid Burfurd |
| Abstract: | Market based instruments are proving e¤ective in biodiversity procure- ment and in the management of regulatory schemes to preserve biodiversity. The design of these schemes brings together issues in auction design, con- tract theory, ecology, and monitoring. Using a mixed adverse selection, moral hazard procurement model, we show that optimal contract design may di¤er signi?cantly between procurement and regulatory policy environ- ments |
| Keywords: | biodiversity; procurement; adverse selection; contract theory |
| JEL: | D82 D86 Q57 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1031&r=cta |
| By: | Said, Maher |
| Abstract: | We examine an environment where goods and privately informed buyers arrive stochastically to a market. A seller in this setting faces a sequential allocation problem with a changing population. We characterize the set of incentive compatible allocation rules and provide a generalized revenue equivalence result. In contrast to a static setting where incentive compatibility implies that higher-valued buyers have a greater likelihood of receiving an object, in this dynamic setting, incentive compatibility implies that higher-valued buyers have a greater likelihood of receiving an object sooner. We also characterize the set of efficient allocation rules and show that a dynamic Vickrey-Clarke-Groves mechanism is efficient and dominant strategy incentive compatible. We then derive an optimal direct mechanism. We show that the revenue-maximizing direct mechanism is a pivot mechanism with a reserve price. Finally, we consider sequential ascending auctions in this setting, both with and without a reserve price. We construct memoryless equilibrium bidding strategies in this indirect mechanism. Bidders reveal their private information in every period, yielding the same outcomes as the direct mechanisms. Thus, the sequential ascending auction is a natural institution for achieving either efficient or optimal outcomes. Interestingly, this is not the case for sequential second-price auctions, as the bids in a second-price auction do not reveal sufficient information to realize either the efficient or optimal allocation. |
| Keywords: | Dynamic mechanism design; Random arrivals; Revenue equivalence; Indirect mechanisms; Sequential ascending auctions. |
| JEL: | D44 D82 D83 C73 |
| Date: | 2008–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11456&r=cta |
| By: | Lan Shi; Anjana Susarla |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2008-16&r=cta |
| By: | Viaggi, D. |
| Abstract: | The aim of this paper is to test the relevance of considering private fixed transaction costs for contract design of Agri-Environmental Schemes, when transaction costs are negatively correlated to marginal compliance costs. In order to do so, a principal-agent model of contract design under adverse selection, including fixed private transaction costs, is developed. The model is applied to the design of payments in the Emilia Romagna region of Italy. The results show that fixed transaction costs in the range of those actually faced by farmers may significantly affect the optimal amount of environmental good to be produced by each farm type. In some cases, fixed transaction costs can even reverse the standard insight that more of a public good should be produced when the cost of its provision is lower (countervailing incentives). The results call for a higher attention to private transaction costs in the design of agri-environmental contracts. |
| Keywords: | Agri-environmental schemes, principal-agent, countervailing incentives, Environmental Economics and Policy, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:44322&r=cta |
| By: | Fernandez-Olmos, M.; Rosell-Martinez, J.; Espitia-Escuer, M. |
| Abstract: | This paper develops a double-sided moral hazard model of share contract in agriculture, with imperfect quality measurement by the agent and the principal, who contribute to the final good quality in terms of production effort and marketing effort respectively. Using this model, we analyse the implications of the share contract for quantity and quality, often ignored in previous analysis. With the help of a simulation exercise, we prove that the outcome-conditioned share generally weakens the agent´s incentive to make effort in quality input. This finding could explain the contractual evidence in some differentiated markets such as the wine market, where bottle-price conditioned contracts are rarely used. |
| Keywords: | share-contract, double moral-hazard, quality, Farm Management, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:43863&r=cta |
| By: | Starbird, S.A.; Amanor-Boadu, V.; Roberts, T. |
| Abstract: | Errors in traceability can significantly impact the moral hazard associated with producing safe food. The effect of moral hazard depends on the proportion of unsafe food costs that can be allocated to the responsible producer, which depends on the efficiency of the traceability system. In this paper, we develop a model that identifies the minimum level of traceability needed to mitigate moral hazard and motivate suppliers to produce safe food. Regulators and consumer can use the results of this research to design regulations and contracts that mitigate moral hazard and motivate producers to deliver safe food. |
| Keywords: | Food safety, traceability, moral hazard, Food Consumption/Nutrition/Food Safety, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:43840&r=cta |
| By: | Yano, Y.; Blandford, D. |
| Abstract: | Several theoretical and empirical models have been developed to examine how risk aversion affects compliance with agri-environmental schemes under asymmetric information and uncertainty. However, none has examined the case where the level of compliance is a continuous variable and producers face simultaneous monitoring, output price and production uncertainty. Treating conservation effort as a continuous variable, we show that risk aversion can mitigate the moral hazard problem in most cases. However, if conservation effort has a risk-increasing impact on production the effect of risk aversion on compliance is ambiguous. |
| Keywords: | Agri-environmental schemes, uncertainty, moral hazard, Environmental Economics and Policy, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:44323&r=cta |
| By: | Arguedas, C.; Meijerink, G.W.; van Soest, D. |
| Abstract: | Many conservation programs offer financial compensation to farmers in exchange for socially desired services, such as soil conservation or biodiversity protection. Realization of the conservation objective at minimum cost requires payments to just cover the extra costs incurred by each individual (type of) farmer. In the presence of information asymmetries regarding costs, incentive-compatible contracts can be designed to mitigate excess compensation, but these typically only provide partial improvement because of several distortions. We argue that these distortions are inevitable only if all conservation costs are variable in nature. If there are fixed costs too, we find that the least-cost solution can be incentive compatible. We identify the exact conditions under which these maximum savings can be obtained and conclude that, given the relevance of fixed costs in conservation services provision, incentive€ԣompatible contracts deserve a second look. |
| Keywords: | Asymmetric information, environmental benefits, mechanism design, Environmental Economics and Policy, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae08:44320&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:cor:louvco:2008017&r=cta |
| By: | Shuyun May Li |
| Abstract: | This paper develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment. |
| Keywords: | Asymmetric information; Limited liability; Limited commitment; Dynamiccontract; Job reallocation; Stationary competitive equilibrium; Stationary firm distribution. |
| JEL: | E24 D82 L14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1044&r=cta |
| By: | Gallerani, Vittorio; Raggi, Meri; Viaggi, Davide |
| Abstract: | Agri-Environmetal Policy (AEP) application raised a wide debate about the determination of payment levels and the efficiency of the economic instruments used. In particular, some aspects support the hypothesis of relevant rents due to an overcompensation of farmersÏ¿Ý compliance costs. A policy tool suitable for improving the efficiency of AEP can be the adoption of auctions mechanisms in contract allocation. In theory, in an auction mechanism, the farmers have incentives to reveal their compliance costs, helping to reduce the information rents and increase cost-effectiveness. A crucial problem therefore arises from the uneven distribution of information between landowners and the public administration. Auctions mechanism can be useful in reducing opportunistic behavior that arises due to these information asymmetries. The aim of this work is to simulate the potential contribution of auctions mechanism to the efficiency of Agri-Environmental contracts in Emilia Romagna Region (Italy). The results give some indications about the efficiency of auction mechanism compared to other contract mechanism. |
| Keywords: | Auction, Agri-Environmental Policy, Information asymmetries., Agricultural Finance, Environmental Economics and Policy, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaa107:6660&r=cta |
| By: | Seth Freedman (Department of Economics, University of Maryland); Ginger Zhe Jin (Department of Economics, University of Maryland); |
| Abstract: | This paper studies peer-to-peer (p2p) lending on the Internet. Prosper.com, the first p2p lending website in the US, matches individual lenders and borrowers for unsecured consumer loans. Using transaction data from June 1, 2006 to July 31, 2008, we examine what information problems exist on Prosper and whether social networks help alleviate the information problems. As we expect, data identifies three information problems on Prosper.com. First, Prosper lenders face extra adverse selection because they observe categories of credit grades rather than the actual credit scores. This selection is partially offset when Prosper posts more detailed credit information on the website. Second, many Prosper lenders have made mistakes in loan selection but they learn vigorously over time. Third, as Stiglitz and Weiss (1981) predict, a higher interest rate can imply lower rate of return because higher interest attracts lower quality borrowers. Micro-finance theories argue that social networks may identify good risks either because friends and colleagues observe the intrinsic type of borrowers ex ante or because the monitoring within social networks provides a stronger incentive to pay off loans ex post. We find evidence both for and against this argument. For example, loans with friend endorsements and friend bids have fewer missed payments and yield significantly higher rates of return than other loans. On the other hand, the estimated returns of group loans are significantly lower than those of non-group loans. That being said, the return gap between group and non-group loans is closing over time. This convergence is partially due to lender learning and partially due to Prosper eliminating group leader rewards which motivated leaders to fund lower quality loans in order to earn the rewards. |
| Keywords: | peer-to-peer lending, e-commerce, adverse selection, information asymmetry, social networks. |
| JEL: | D45 D53 D8 D81 |
| Date: | 2008–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0843&r=cta |
| By: | Ernst Fehr; Oliver D. Hart; Christian Zehnder |
| Abstract: | In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and important aspects of the employment relation. However, so far there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore's notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model's prediction that there is a tradeoff between rigidity and flexibility in a trading environment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts - which would dominate rigid contracts under standard assumptions - cause a significant amount of shading on ex post performance, while under rigid contracts, much less shading occurs. Thus, although rigid contracts rule out trading in some states of the world, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract. |
| JEL: | D0 K0 C9 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14501&r=cta |
| By: | Pascal Courty; Gerald R. Marschke |
| Abstract: | We model the sorting of medical students across medical occupations and identify a mechanism that explains the possibility of differential productivity across occupations. The model combines moral hazard and matching of physicians and occupations with pre-matching investments. In equilibrium assortative matching takes place; more able physicians join occupations less exposed to moral hazard risk, face more powerful performance incentives, and are more productive. Under-consumption of health services relative to the first best allocation increases with occupational (moral hazard) risk. Occupations with risk above a given threshold are not viable. The model offers an explanation for the persistence of distortions in the mix of health care services offered the differential impact of malpractice risk across occupations, and the recent growth in medical specialization. |
| JEL: | D82 I10 J31 J33 L23 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14502&r=cta |
| By: | Bartolini, F.; Gallerani, V.; Raggi, M.; Viaggi, D. |
| Abstract: | The effects of cross-compliance depend on the strategies of participation/compliance of farmers, as well as on the ability of public administration to design appropriate mechanisms of control and sanctions. The objective of this paper is to present a reference framework for the analysis of cross-compliance under asymmetric information and to test the empirical relevance of the problem. The methodology is applied to a case study represented by the province of Bologna (Italy). The results show that, in the present conditions of control and sanctions, only a small share of farms is interested in complying with cross-compliance. The profitability of the choice of compliance/noncompliance depends mainly on the amount of single farm payment entitlements compared with the total land.. The main message, however, is that, in order to increase effectiveness, environmental prescriptions as well as control effort should be considered as a variable to be adapted to incentive compatibility criteria. |
| Keywords: | Cross-compliance, asymmetric information, Single farm payment, Agricultural Finance, Farm Management, Research Methods/ Statistical Methods, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaa107:6670&r=cta |
| By: | Lehner, Maria |
| Abstract: | Microfinance is typically associated with joint liability of group members. However, a large part of microfinance institutions rather offers individual instead of group loans. We analyze the incentive mechanisms in both individual and group contracts. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high, and competition between microfinance institutions is low. Otherwise, individual loans are offered. Interestingly, our analysis predicts that individual lending in microfinance will gain in importance in the future if microfinance institutions continue to get better access to capital markets and if competition further rises. |
| JEL: | F37 G21 G34 L13 O16 |
| Date: | 2008–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:7486&r=cta |