nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒12‒07
seven papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Repeated moral hazard with effort persistence By Arantxa Jarque
  2. Optimal personal bankruptcy design : A Mirrlees approach By Borys Grochulski
  3. Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process By Fabrizi, Simona; Lippert, Steffen; Norbäck, Peh; Persson, Lars
  4. Fear of Rejection? Tiered Certification and Transparency By FARHI, Emmanuel; LERNER, Josh; TIROLE, Jean
  5. Corruption and Positive Selection in Privatization By Raluca E. Buia; M. Cristina Molinari
  6. Do Credit Constraints Matter more for College Dropout Entrepreneurs? By Werner, Arndt
  7. A quantitative theory of information and unsecured credit By Kartik Athreya; Xuan S. Tam; Eric R. Young

  1. By: Arantxa Jarque
    Abstract: I study a problem of repeated moral hazard in which the effect of effort is persistent over time: each period's outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. To illustrate, I present the computed solution of an example. ; See also: WP 07-07
    Keywords: Microeconomics ; Economics
    Date: 2008
  2. By: Borys Grochulski
    Abstract: In this paper, we develop a normative theory of unsecured consumer credit and personal bankruptcy based on the optimal trade-off between incentives and insurance. First, in order to characterize this trade-off, we solve a dynamic moral hazard problem in which agents' private effort decisions influence the life-cycle profiles of their earnings. We then show how the optimal allocation of individual effort and consumption can be implemented in a market equilibrium in which (i) agents and intermediaries repeatedly trade in secured and unsecured debt instruments, and (ii) agents obtain (restricted) discharge of their unsecured debts in bankruptcy. The structure of this equilibrium and the associated restrictions on debt discharge closely match the main qualitative features of personal credit markets and bankruptcy law that actually exist in the United States.
    Keywords: Bankruptcy ; Credit
    Date: 2008
  3. By: Fabrizi, Simona (Massey University Auckland); Lippert, Steffen (Massey University Auckland); Norbäck, Peh (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper we construct a model in which entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We show that as exacerbated development by better-informed venture-backed rms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufciently more ecient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed rms' signaling-driven investment, despite the risk of buying a bad innovation. We nally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations.
    Keywords: Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development;
    JEL: C70 D21 D82 G24 L20 M13 O30
    Date: 2008–11–06
  4. By: FARHI, Emmanuel; LERNER, Josh; TIROLE, Jean
    JEL: D82 O31 O34
    Date: 2008–10
  5. By: Raluca E. Buia (Advanced School of Economics, University Of Venice Cà Foscari); M. Cristina Molinari (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We consider the supply of a public good based on a publicly-owned facility. The Government has a choice between provision in-house and privatizing the facility and then outsourcing the production. In particular, we focus on corruption in the decision to privatize and on its effect on social welfare when there is asymmetric information on the public and private manager's efficiency. Our analysis shows that a corrupt Government, that chooses to privatize only in exchange for a bribe, makes a positive selection on the private firm's efficiency and, thus, may raise expected social welfare above what an honest Government could get.
    Keywords: Corruption, Privatization, Private vs. public provision.
    JEL: D73 H44 K42 L33
    Date: 2008
  6. By: Werner, Arndt
    Abstract: Start-ups and their respective market partners are faced with severe problems of asymmetric information due to their lack of prior production history and reputation. Given this situation, it is most likely that outside financiers will not be informed about the potential gains, losses, and risks of the new venture. In our paper, we study how banks screen the abilities of the entrepreneurs. We argue that specific characteristics of the educational history of individuals signal their quality as founders. Namely, we expect banks to also use “college dropout” as an indicator when deciding to extend credit to a founder. We empirically test our hypotheses using a dataset of 189 German start-ups collected in 1998/99. Our hypothesis is borne out by the data. Applying ordered probit techniques we find that college dropouts have more difficulties to obtain the credit they need in the beginning of their start-up than those without college dropout experience.
    Keywords: adverse selection; financial constraints; entrepreneurship; education
    JEL: G14 D82 M13 M21
    Date: 2008–11–01
  7. By: Kartik Athreya; Xuan S. Tam; Eric R. Young
    Abstract: Over the past three decades five striking features of aggregates in the unsecured credit market have been documented: (1) rising availability of credit along both the intensive and extensive margins, (2) rising debt accumulation, (3) rising bankruptcy rates and discharge in bankruptcy, (4) rising dispersion in interest rates across households, and (5) the emergence of a discount for borrowers with good credit ratings. We show that all five outcomes are quantitatively consistent with improvements in the ability of lenders to observe borrower characteristics. Part of our contribution is the development of an algorithm for computing equilibria with asymmetric information and individualized pricing. From a welfare perspective, our main finding is that more information is better ex ante, even though better information can rule out pooling outcomes that some groups might find beneficial ex-post.
    Keywords: Bankruptcy
    Date: 2008

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