|
on Contract Theory and Applications |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | In a general interdependent preference environment, we characterize when two payoff types can be distinguished by their rationalizable strategic choices without any prior knowledge of their beliefs and higher order beliefs. We show that two payoff types are strategically distinguishable if and only if they satisfy a separability condition. The separability condition for each agent essentially requires that there is not too much interdependence in preferences across agents. A social choice function -- mapping payoff type profiles to outcomes -- can be robustly virtually implemented if there exists a mechanism such that every equilibrium on every type space achieves an outcome arbitrarily close to the social choice function. This definition is equivalent to requiring virtual implementation in iterated deletion of strategies that are strictly dominated for all beliefs. The social choice function is robustly measurable if strategically indistinguishable payoff types receive the same allocation. We show that ex post incentive compatibility and robust measurability are necessary and sufficient for robust virtual implementation. |
| Keywords: | Mechanism design, Virtual implementation, Robust implementation, Rationalizability, Ex-post incentive compatibility |
| JEL: | C79 D82 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1609rr&r=cta |
| By: | Li, Jianpei |
| Abstract: | This paper studies different rules in dissolving a common value partnership where one partner holds proprietary information. In winner's bid auction (WBA) and loser's bid auction (LBA), there exists a unique mixed strategy equilibrium. ``Payoff equivalence'' is established in the sense that partners' expected payoffs are the same under the two auction formats. The informed partner benefits from an information rent while the uninformed suffers from an ``ownership's curse''. When cake-cutting mechanism (CCM) is applied, whether pure strategy equilibrium exists or not depends on the identity of the proposer. If the uninformed partner is the proposer, the informed partner receives an information rent in a pure strategy equilibrium. If the informed partner is the proposer, the asset value is shared equally between the two parties in a mixed strategy equilibrium. The paper then compares the information rents and prices offered for proprietary information by the three rules. |
| Keywords: | partnership dissolution; proprietary information; winner's bid auction; loser's bid auction; cake-cutting mechanism |
| JEL: | D86 D74 D82 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12505&r=cta |
| By: | Clayton Featherstone; Muriel Niederle |
| Abstract: | Criteria for evaluating school choice mechanisms are first, whether truth-telling is sometimes punished and second, how efficient the match is. With common knowledge preferences, Deferred Acceptance (DA) dominates the Boston mechanism by the first criterion and is ambiguously ranked by the second. Our laboratory experiments confirm this. A new ex ante perspective, where preferences are private information, introduces new efficiency costs borne by strategy-proof mechanisms, like DA. In a symmetric environment, truth-telling can be an equilibrium under Boston, and Boston can first-order stochastically dominate DA in terms of efficiency, both in theory and in the laboratory. |
| JEL: | C78 C9 I2 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14618&r=cta |
| By: | Luis Cabral; Zhu Wang |
| Abstract: | We develop a “passive learning” model of firm entry by spin-off: firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a lowproductivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-off (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding “covenant not to compete” laws |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-15&r=cta |
| By: | Oliver Hart; Bengt Holmstrom |
| Abstract: | The existing literature on firms, based on incomplete contracts and property rights, emphasizes that the ownership of assets - and thereby firm boundaries - is determined in such a way as to encourage relationship-specific investments by the appropriate parties. It is generally accepted that this approach applies to owner-managed firms better than to large companies. In this paper, we attempt to broaden the scope of the property rights approach by developing a simple model with three key ingredients: (a) decision rights can be transferred ex ante through ownership, (b) managers (and possibly workers) enjoy private benefits that are non-transferable, and (c) owners can divert a firm's profit. In our basic model decisions are ex post non-contractible; in an extension we use the idea that contracts are reference points to relax this assumption. We show that firm boundaries matter. Nonintegrated firms fail to account for the external effects that their decisions have on other firms. An integrated firm can internalize such externalities, but it does not put enough weight on the private benefits of managers and workers. We explore this tradeoff in a model that focuses on the difficulties companies face in cooperating through the market if the benefits from cooperation are unevenly divided; therefore, they may sometimes end up merging. We show that the assumption that contracts are reference points introduces a friction that permits an analysis of delegation. |
| JEL: | D23 L23 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14613&r=cta |
| By: | Alex Possajennikov (University of Nottingham) |
| Abstract: | The evolutionary stability of payoff-maximizing preferences in the model of indirect evolution in symmetric games depends on the slope of the reaction function being zero at equilibrium. The application of this result to contests confirms that in two-player contests the optimal delegation involves giving the agent incentives to maximize principal's payoff while in contests with more than two players incentives will be different from principal's payoff maximization. Further examples are also discussed. |
| Keywords: | delegation, indirect evolution, contests |
| JEL: | C72 D02 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2008-15&r=cta |
| By: | Eric Langlais |
| Abstract: | The purpose of this note is to investigate the optimal enforcement of the penal code when criminals invest in a specific class of avoidance activities termed dissembling activities (i.e. self-protection efforts undertaken by criminals to hedge their illegal gains in case of detection and arrestation). We show that the penal law may have two different screening effects: it may separate the population of potential criminals between those who commit the crime and those who do not, and in the former group, between those who undertake dissembling efforts and those who do not. Then, we show that it is never optimal to use less than the maximal fine in contrast to what may occur with avoidance detection (i.e. efforts undertaken in order to reduce the probability of arrestation: MALIK [1990]); and furthermore, that the optimal penal code may imply overdeterrence. Finally, we show that any reform of the penal code has ambiguous effects when criminals undertake dissembling activities which are a by-product of illegal activities, since increasing the maximum possible fine may increase or decrease the number of crimes committed and may increase or decrease the proportion of illegal gains hedged by criminals. |
| Keywords: | deterrence, dissembling activities, optimal enforcement of law |
| JEL: | D81 K42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-40&r=cta |
| By: | Bruns, Christian; Himmler, Oliver |
| Abstract: | Whenever citizens want their elected officials to employ funds efficiently, they are in need of information in order to establish accountability. We develop an agency model with imperfect monitoring where newspapers provide voters with this information. The model predicts that an informed electorate is more likely to hold an incumbent accountable. Using panel data on Norwegian municipalities we show that increases in local newspaper circulation are associated with higher levels of local government efficiency as measured by an index introduced by the Norwegian authorities. |
| Keywords: | media; newspapers; local government; public sector efficiency; Norway |
| JEL: | H7 D72 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12582&r=cta |