nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2008‒12‒21
five papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. On the Sorting of Physicians across Medical Occupations By Courty, Pascal; Marschke, Gerald
  2. Do prices in the unmediated call auction reflect insider information? - An experimental analysis By Tobias Brünner; Rene Levinsky
  3. The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered By Jun Chen; Zhiqi Chen
  4. Prize Structure and Information in Tournaments: Experimental Evidence By Freeman, Richard B.; Gelber, Alexander M.
  5. The role of information provision as a policy instrument to supplement environmental taxes: Empowering consumers to choose optimally By Sartzetakis, Eftichis; Xepapadeas, Anastasios; Petrakis, Emmanuel

  1. By: Courty, Pascal (European University Institute); Marschke, Gerald (Harvard University)
    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.
    Keywords: performance measurement, moral hazard, incentives, matching, pre-matching investment, career choice, medical specialization
    JEL: D82 I10 J31 J33 L23
    Date: 2008–12
  2. By: Tobias Brünner (Institut zur Erforschung der wirtschaftlichen Entwicklung, Albert-Ludwigs-Universität); Rene Levinsky (Max Planck Institute of Economics, Jena, Germany)
    Abstract: The unmediated call auction is a useful trading mechanism to aggregate dispersed information. Its ability to incorporate information of a single informed insider, however, is less well understood. We analyse this question by presenting a simple call auction game where both auction prices and limit prices of uninformed traders re?ect potential insider information. The predictions of the model are tested in the laboratory. While an insider improves the call auction outcomes in terms of increasing trading volume, uninformed traders fail to incorporate the (potential) insider information in their limit prices. We also derive an equilibrium relationship between auction returns and transaction costs similar to the relations that can be found in market microstructure models of continuous markets and which are commonly applied to estimate transaction costs. The experiment provides a good environment to assess the usefulness of this method to estimate transaction costs.
    Keywords: call auction, asymmetric information, experiment, market microstructure
    JEL: C92 G14 D82
    Date: 2008–12–08
  3. By: Jun Chen (Department of Economics, Carleton University); Zhiqi Chen (Department of Economics, Carleton University)
    Abstract: In this paper we study the efficiency losses of monopoly by analyzing a model where a firm's total costs of production decrease with the manager's effort to control costs. We consider two separate cases with regard to ownership and control: (1) the owner of the firm manages the firm himself; and (2) the owner hires a manager to operate the firm. We demonstrate that even in the case where the owner manages the firm, the level of effort exerted by the owner-manager of a monopoly is not first-best. Interestingly, the productive inefficiency of monopoly in this case may be caused by too much rather than too little effort. In such a situation, moreover, the separation of ownership and control can mitigate the productive inefficiency of monopoly, thus raising the intriguing possibility that managerial slack can actually improve the efficiency of monopoly equilibrium. To phrase our results in Hicks'(1935) terminology, a monopolist does not necessarily live a quiet life, and a quiet life is not necessarily a bad thing from the perspective of economic efficiency.
    Keywords: Monopoly, Efficiency losses, Principal-agent problem
    JEL: L12 D82
    Date: 2008–06–02
  4. By: Freeman, Richard B.; Gelber, Alexander M.
    Abstract: This paper examines behavior in a tournament in which we vary the tournament prize structure and the information available about participants' skill at the task of solving mazes. The number of solved mazes is lowest when payments are independent of performance; higher when a single, large prize is given; and highest when multiple, differentiated prizes are given. This result is strongest when we inform participants about the number of mazes they and others solved in a pre-tournament round. Some participants reported that they solved more mazes than they actually solved, and this misreporting also peaked with multiple differentiated prizes.
    Keywords: Tournaments; Wage Structure
    JEL: J22 D01 J33
    Date: 2008–12–05
  5. By: Sartzetakis, Eftichis; Xepapadeas, Anastasios; Petrakis, Emmanuel
    Abstract: The present paper examines, within a dynamic framework, the use of information provision as a policy instrument to supplement environmental taxation. We assume that at least a fraction of consumers do not posses the required information to make the optimal choices, and that their behavior at each time period depends on the accumulated stock of information. We show that, as the accumulated stock of information provision increases, both the optimal level of information provided at each period of time and the optimal tax rate decline over time. Our results provide strong evidence in support of information campaigns as a policy instrument to supplement traditional environmental policies. Information provision can sift the demand towards environmentally friendly products over time and thus, reduce the required level of the tax rate.
    Keywords: Information provision; environmental taxes; policy instruments
    JEL: Q50 H21
    Date: 2008–12

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