|
on Contract Theory and Applications |
|
Issue of 2009‒01‒31
seventeen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Abbring, J.H.; Chiappori, P.A.; Zavadil, T. (Tilburg University, Center for Economic Research) |
| Abstract: | This paper empirically analyzes moral hazard in car insurance using a dynamic theory of an insuree's dynamic risk (ex ante moral hazard) and claim (ex post moral hazard) choices and Dutch longitudinal micro data. We use the theory to characterize the heterogeneous dynamic changes in incentives to avoid claims that are generated by the Dutch experience-rating scheme, and their effects on claim times and sizes under moral hazard. We develop tests that exploit these structural implications of moral hazard and experience rating. Unlike much of the earlier literature, we find evidence of moral hazard. |
| Keywords: | insurance;moral hazard;selection;state dependence;event-history analysis. |
| JEL: | D82 G22 C41 C14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200877&r=cta |
| By: | Luca Anderlini (Department of Economics, Georgetown University); Leonardo Felli (Department of Economics, London School of Economics and Political Science); Andrew Postlewaite (Department of Economics, University of Pennsylvania) |
| Abstract: | We find an economic rationale for the common sense answer to the question in our title - courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties' welfare under a veil of ignorance. We study a buyer-seller model with risk-neutral agents and asymmetric information. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, if the court enforces all contracts, inefficient pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare. |
| Keywords: | Optimal Courts, Informational Externalities, Ex-Ante Welfare |
| JEL: | C79 D74 D89 K40 L14 |
| Date: | 2009–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-004&r=cta |
| By: | Joao Correia-da-Silva (CEMPRE and Faculdade de Economia, Universidade do Porto) |
| Abstract: | The notion of uncertain delivery is extended to study exchange economies in which agents have different abilities to distinguish between goods (for example a car in good condition versus a car in bad condition). In this setting, it is useful to distinguish goods not only by their physical characteristics,but also by the agent that is bringing them to the market. Equilibrium is shown to exist, and characterized by the fact that agents always receive the cheapest bundle among those that they cannot distinguish from truthful delivery. Several examples are presented as an illustration. |
| Keywords: | General equilibrium, Asymmetric information, Adverse selection, Uncertain delivery, Pool, Delivery rates |
| JEL: | C62 C72 D51 D82 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:310&r=cta |
| By: | Dino Gerardi; Lucas Maestri |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000076&r=cta |
| By: | Juan Manuel Julio Román |
| Abstract: | A minimum performance insurance in the Principal-Agent problem is wealth reducing to the principal. This result points to further ine±- ciencies in mandatory individual Pension Funds' contracts, particularly the one established in the 1993's 100th Law in Colombia. |
| Date: | 2009–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005222&r=cta |
| By: | Roland Strausz |
| Abstract: | The paper provides a tractable, analytical framework to study regulatory risk under optimal incentive regulation. Regulatory risk is captured by uncertainty about the policy variables in the regulator’s objective function: weights attached to profits and costs of public funds. Results are as follows: 1) The regulator’s reaction to regulatory risk depends on the curvature of the aggregate demand function. 2) It yields a positive information rent effect exactly when demand is convex. 3) Firms benefit from regulatory risk exactly when demand is convex. 4) Consumers’ risk preferences tend to contradict the firm’s. 5) Benevolent regulators always prefer regulatory risk and these preferences may contradict both the firm’s and consumers’ preferences. |
| Keywords: | optimal incentive regulation, regulatory risk, procurement, information rents |
| JEL: | L51 D82 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-006&r=cta |
| By: | Peters, Michael; Szentes, Balazs |
| Abstract: | This paper analyzes Bayesian normal form games in which players write contracts that condition their actions on the contracts of the other players. These contracts are required to be representable in a formal language. This is accomplished by constructing contracts which are definable functions of the Godel code of every other player's contract. We provide a complete characterization of the set of allocations supportable as pure strategy Bayesian equilibrium of this contracting game. When information is complete, this characterization provides a folk theorem. In general, the set of supportable allocations is smaller than the set supportable by a centralized mechanism designer. |
| Date: | 2009–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:michael_peters-2009-7&r=cta |
| By: | Eric J. Van den Steen (Harvard Business School, Strategy Unit) |
| Abstract: | This paper studies a principal's trade-off between using persuasion versus using interpersonal authority to get the agent to 'do the right thing' from the principal's perspective (when the principal and agent openly disagree on the right course of action). It shows that persuasion and authority are complements at low levels of effectiveness but substitutes at high levels. Furthermore, the principal will rely more on persuasion when agent motivation is more important for the execution of the project, when the agent has strong intrinsic or extrinsic incentives, and, for a wide range of settings, when the principal is more confident about the right course of action. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:09-085&r=cta |
| By: | Dimitri Paolini |
| Abstract: | This article studies the behavior of the firm when it is searching to fill a vacancy. The principal hypothesis is that the firm can offer two kinds of contracts to the workers, short-term or long-term contracts. We suppose that the worker’s bargaining power over the wage is different according to the type of contract. We utilize this framework to study the firms’ optimal policy choice and its welfare implications. |
| Keywords: | Search, Temporary Employment. |
| JEL: | J31 J41 J64 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:200819&r=cta |
| By: | Serra Garcia, M.; Damme, E.E.C. van; Potters, J.J.M. (Tilburg University, Center for Economic Research) |
| Abstract: | We examine communication in a 2-player sequential public good game in which the leader has private information about the return from contributing to it. The leader decides first and the follower observes the leader's contribution, before de- ciding whether or not to contribute. Without communication, the unique equilib- rium is fully efficient. We study whether the introduction of communication about returns can destroy efficiency. Communication can be precise (about the exact re- turn), or vague. If leaders would communicate precisely and truthfully, they would reveal that followers would do best to free ride, thereby distorting both players' incentives to invest and destroying efficiency. We show that leaders lie in order to avoid these negative consequences. If vague messages are allowed, the extent of lying drops and vague messages are used instead. Overall, followers contribute when the leader does, and the introduction of communication neither increases nor decreases contributions to the public good. |
| Keywords: | Communication; Efficiency; Lying; Public Goods. |
| JEL: | C72 C92 D83 H41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2008107&r=cta |
| By: | Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Our earlier papers had extended to asymmetric information some classical existence theorems of general equilibrium theory, under the standard assumption that agents had perfect foresights, that is, they knew at the outset which price would prevail tomorrow on each spot market. Yet, observation suggests that agents more often trade with an un-precise knowledge of future prices. Hereafter, we let agents anticipate, in each random state, an idiosyncratic set of plausible prices, called price expectations, which overlap across agents on each spot market. A state equilibrium is reached when agents have expectations, which include "true" spot prices, and make decisions at the first period, which are optimal within the budget set and clear on all markets ex post. In an earlier model with finitely many expectations, we showed the existence of this so-called "correct foresights equilibrium" was characterized by the no-arbitrage condition of finance. We now extend this result to the case of infinite price expectations' sets and continuous probability distributions. |
| Keywords: | General equilibrium, incomplete markets, existence of equilibrium, asymmetric information. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00354820_v1&r=cta |
| By: | Braggion, F.; Moore, L. (Tilburg University, Center for Economic Research) |
| Abstract: | We examine the e¤ects of dividend policies on 469 British firms between 1895 and 1905. These firms operated in an environment of very low taxation and an absence of institutional constraints. We find strong support for asymmetric information/signaling theories of dividend policy, and little support for agency models. Our results suggest that dividends can signal information from managers to shareholders, even if dividend payments incur only very low taxes. However, taxes appear to be necessary to allow dividend policies to resolve agency problems between managers and investors. |
| Keywords: | Dividend Policy;London Stock Exchange |
| JEL: | N23 G14 G35 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200883&r=cta |
| By: | Alberto Martin |
| Abstract: | This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relatively low; (ii) separating equilibria, in which investment is increasing in entrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively high and; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuous fall in investment. |
| Keywords: | Adverse Selection, Collateral, Investment, Lending Standards, Screening |
| JEL: | D82 E44 G10 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1136&r=cta |
| By: | Kangsik, Choi |
| Abstract: | By introducing the government's preference for tax revenues into the theoretical framework of unionized mixed oligopolies, this study investigates the efficiency of privatization. The results show that (i) regardless of the government's preference for tax revenues, its incentive to privatize a public firm depends on the number of the private firms and (ii) social welfare can decrease with an increase in the number of firms depending on the level of government's preference for tax revenue. Moreover, if the number of private firms and the government's preference for tax revenue are sufficiently small, then social welfare under a unionized privatized oligopoly is greater than under a unionized mixed oligopoly while the government has an incentive not to privatize the public firm, and vice versa if only the number of firms is sufficiently large. |
| Keywords: | Government's Preference; Social Welfare; Tax; Privatization; Union. |
| JEL: | J51 L13 C7 D43 A11 H44 C72 |
| Date: | 2009–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13028&r=cta |
| By: | Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Our earlier papers had extend to asymmetric information the classical existence theorems of general equilibrium theory, under the standard assumption that agents had perfect foresights, that is, they knew, ex ante, which price would prevail on each spot market. Common observation suggests, however, that agents more often trade with an un-precise knowledge of future prices. We now let agents anticipate, in each random state, a set of plausible prices, called expectations, endowed with a probability distribution. These expectations are assumed to define a so-called "structure of beliefs", along which agents' expectations sets intersect on each spot market. We introduce a related concept of "correct foresights equilibrium" (CFE), in which equilibrium prices belong to all agents expectations sets. We prove that the existence of a CFE is still characterized by the no-arbitrage condition of finance. This result, which extends our earlier theorems, shows that private information or price uncertainty would not affect the existence but only the value of equilibrium prices and allocations. |
| Keywords: | General equilibrium, incomplete markets, existence of equilibrium, asymmetric information. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00354814_v1&r=cta |
| By: | Zuzana Fungacova; Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg); Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg) |
| Abstract: | The objective of this paper is to investigate whether the participation of local banks exerts an impact on the spreads of syndicated loans in Russia. Following Berger, Klapper and Udell (2001), we aim to test whether local banks possess a superior ability to solve information asymmetries. In this aim, we use a sample of 528 syndicated loans to Russian borrowers. We perform regressions of the spread on a set of variables including information on the participation of local banks, loan and borrower characteristics. Unlike former papers, we consider separately foreign banks with and without a local presence, as this presence may influence their monitoring ability and their information. We observe no significant impact of the participation of local banks in syndicated loans on the spread. We also do not find any significant influence of the presence of domestic-owned banks or foreign-owned banks on the spread. Additional estimations considering subsamples for which information asymmetries are exacerbated provide similar results. Therefore our conclusion is that local banks do not benefit from an advantage in monitoring ability and in information in Russia. |
| Keywords: | Bank, Information asymmetry, Loan, Syndication, Russia. |
| JEL: | G21 P34 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2009-01&r=cta |
| By: | Lippert, Steffen; Schumacher, Christoph |
| Abstract: | This paper investigates the impact of a 'free drug program' on the market equilibrium of drugs. We introduce a screening model of the hard drug market in which dealers use payment and punishment options to screen between high and low risk users. We show that, if a free drug program selects sufficiently many high risk drug users, the pure-strategy separating market equilibrium ceases to exist and a symmetric mixed-strategy equilibrium results, in which drug users derive a higher expected utility. This encourages new drug users to enter the market. The novelty of the paper is the transmission mechanism for this effect, which is via the influence on market price. |
| Keywords: | Drugs; Drug Policy; Drug Dealing; Free Drug Programs; Screening |
| JEL: | D11 I12 I18 D82 I1 |
| Date: | 2009–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13043&r=cta |