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on Contract Theory and Applications |
| By: | Helmut Bester (Free University Berlin, Dept. of Economics, Boltzmannstr. 20, D-14195 Berlin (Germany); Daniel Krähmer (University of Bonn, Hausdorff Center for Mathematics and Institute for Theoretical Economis, Adenauer Allee 24-42, D-53113 Bonn (Germany)) |
| Abstract: | This paper analyzes bilateral contracting in an environment with contractual incompleteness and asymmetric information. One party (the seller) makes an unverifiable quality choice and the other party (the buyer) has private information about its valuation. A simple exit option contract, which allows the buyer to refuse trade, achieves the first–best in the benchmark cases where either quality is verifiable or the buyer’s valuation is public information. But, when unverifiable and asymmetric information are combined, exit options induce inefficient pooling and lead to a particularly simple contract. Inefficient pooling is unavoidable also under the most general form of contracts, which make trade conditional on the exchange of messages between the parties. Indeed, simple exit option contracts are optimal if random mechanisms are ruled out. |
| Keywords: | Incomplete Contracts, Asymmetric Information, Exit Options JEL Classification No.: D82, D86, L15; Incomplete Contracts, Asymmetric Information, Exit Options |
| JEL: | D82 D86 L15 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:251&r=cta |
| By: | Nick Netzer (Socioeconomic Institute, University of Zurich); Florian Scheuer (Massachusetts Institute of Technology) |
| Abstract: | In the presence of a time-inconsistency problem with optimal agency contracts, we show that competitive markets implement allocations that Pareto dominate those achieved by a benevolent planner, they induce strictly more e?ort, and they sometimes make the commitment problem disappear entirely. In particular, we analyze a model with moral hazard and two-sided lack of commitment. After agents have chosen a hidden e?ort and the need to provide incentives has vanished, ?rms can modify their contracts and agents can switch ?rms. As long as the ex-post market outcome satis?es a weak notion of competitiveness and su?ciently separates individuals who choose di?erent e?ort levels, the market allocation is Pareto superior to a social planner’s allocation. We construct a speci?c market game that naturally generates robust equilibria with these properties. In addition, we show that equilibrium contracts without commitment are identical to those with full commitment if the latter involve no cross-subsidization between individuals who choose di?erent e?ort levels. |
| Keywords: | Time-Inconsistency, Moral Hazard, Competitive Markets, Adverse Selection |
| JEL: | D02 D82 C73 E61 H11 P51 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0814&r=cta |
| By: | Nicolas Gruyer (LEEA (air transport economics laboratory), ENAC) |
| Abstract: | I consider optimal auctions for a seller who is bound to sell a single item to one of two potential buyers, organized in a `well-coordinated' cartel. I show that, even though the seller cannot deter collusion, he can optimally accommodate it by employing a simple mechanism which imposes an inefficient allocation on the bidders unless they pay a sufficiently high amount to avoid it. |
| Keywords: | auctions; optimal auctions; collusion; cartel; mechanism design; auction theory |
| JEL: | D44 |
| Date: | 2008–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:enc:abcdef:auction6&r=cta |
| By: | Gill, David (University of Southampton); Sgroi, Daniel (University of Warwick) |
| Abstract: | A principal who knows her type can face public testing to help attract endorsements from agents. Tests are pass/fail and have an innate toughness (bias) corresponding to a trade-off between the higher probability of passing a softer test and the greater impact on agents’ beliefs from passing a tougher test. Conditional on the test result, the principal also selects the price of endorsement. The principal always wants to be tested, and chooses the toughest or softest test available depending upon the precision of the agents’ and tests’ information. Applications abound in industrial organization, political economy and labor economics. |
| Keywords: | tests ; reviewers ; Bayesian learning ; information transmission ; bias; marketing |
| JEL: | D82 D83 L15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:877&r=cta |
| By: | Renaud Bourlès (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | This paper examines the effect of moral hazard on dynamic insurance contract. It models primary prevention in a two period model with classification risk. Agents' preferences appear to play an important role in the determination of preventive effort and prepayment. If absolute prudence is larger that absolute risk aversion, moral hazard increases prepayment of premium and classification risk. This highlights a tradeoff between prevention and prepayment that arises from the classification risk. An increase in the difference between prudence and twice risk aversion (that we define as the degree of foresight) moreover makes dynamic insurance contracts more stable (when competing with spot insurance) if the cost of prevention is low enough when agents preferences exhibit CRRA. Under a formulated utility function with linear reciprocal derivative, we finally show that an increase in agents' degree of foresight enhances the stability of dynamic contract and the extent of prepayment. |
| Keywords: | Dynamic Insurance, Classification Risk, Moral Hazard, Prudence |
| Date: | 2008–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00340830_v1&r=cta |
| By: | Antonio Cabrales (Universidad Carlos III, Madrid); Piero Gottardi (European University Institute and Ca’ Foscari University of Venice) |
| Abstract: | In this paper we study, within a formal model, market environments where information is costly to acquire and is of use also to potential competitors. Agents may then sell, or buy, reports - of unverifiable quality - over the information acquired and choose the trades in the market on the basis of what they learnt. We find that, in equilibrium, information is acquired when its costs are not too high and in that case it is also sold, though reports are typically noisy. Also, the market for information tends to be a monopoly, and there is inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to agents uninterested in trading the underlying object, only make the inefficiency worse. Efficiency can be attained with a monopolist selling differentiated information, provided entry is blocked. The above findings hold when information has a prevalent horizontal differentiation component. When the vertical differentiation element is more important firewalls can in fact be beneficial. |
| Keywords: | Information sale, Cheap talk, Conflicts of interest, Information Acquisition, Firewalls, Market efficiency |
| JEL: | D83 C72 G14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2008_37&r=cta |
| By: | Feess, Eberhard (Frankfurt School of Finance and Management); Gerfin, Michael (University of Bern); Muehlheusser, Gerd (University of Bielefeld) |
| Abstract: | Recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis-à-vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) clubs and players sign binding contracts which are, however, frequently renegotiated when other clubs (entrants) want to hire the player. Because they weaken entrants in renegotiations, long term contracts are useful rent seeking devices for the contracting parties. From a social point of view, however, they lead to allocative distortions in the form of deterring efficient transfers. Since incumbent clubs tend to benefit more from long term contracts in renegotiations than players, these must be compensated ex ante by a higher wage when agreeing to a long term contract. Using data from the German "Bundesliga", our model predictions are broadly confirmed. In particular, our analysis supports the concerns expressed in the theoretical literature about detrimental effects of strategic contracting on allocative inefficiency. |
| Keywords: | strategic contracting, rent seeking, empirical contract theory, long-term contracts, breach of contract, sports economics |
| JEL: | L14 J63 L40 L83 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3834&r=cta |