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on Contract Theory and Applications |
| By: | Berliant, Marcus; Kung, Fan-chin |
| Abstract: | The modern literature on city formation and development, for example the New Economic Geography literature, has studied the agglomeration of agents in size or mass. We investigate agglomeration in sorting or by type of worker, that implies agglomeration in size when worker populations differ by type. This kind of agglomeration can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin. |
| Keywords: | Adverse Selection; Agglomeration |
| JEL: | R13 D82 R12 |
| Date: | 2009–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13085&r=cta |
| By: | Engel, Eduardo (Yale U); Fischer, Ronald (U of Chile) |
| Abstract: | The government contracts with a foreign firm to extract a natural resource that requires an upfront investment and which faces price uncertainty. In states where profits are high, there is a likelihood of expropriation, which generates a social cost that increases with the expropriated value. In this environment, the planner's optimal contract avoids states with high probability of expropriation. The contract can be implemented via a competitive auction with reasonable informational requirements. The bidding variable is a cap on the present value of discounted revenues, and the firm with the lowest bid wins the contract. The basic framework is extended to incorporate government subsidies, unenforceable investment effort and political moral hazard, and the general thrust of the results described above is preserved. |
| JEL: | H21 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:34&r=cta |
| By: | Ville Mälkönen |
| Abstract: | This paper presents a model where the central government cannot ensure that regional governments manage risks prudentially, due to soft budget constraint. Competition for project funding induces the regional governments use financial instruments as commitment devices as a signal of prudential risk management. A Public-Private Partnership contract, which delegates the monitoring task to a financial institute, is the most efficient commitment device provided that private financiers have an access to the same monitoring technology the regional governments fail to employ. The optimal capital structure of a PPP contract is a combination of public funds and debt from financial institutes. JEL Classification: D8, L3, H54, H57 |
| Keywords: | PPP contracts, public investments, moral hazard |
| Date: | 2008–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:fer:dpaper:464&r=cta |
| By: | Quinzii, Martine (U of California, Davis); Magill, Michael (U of Southern California) |
| Abstract: | This paper presents a model of stock market equilibrium with a finite number of corporations and studies its normative properties. Each firm is run by a manager whose effort is unobservable and influences the probabilities of the firm's outcomes. The Board of Directors of each firm chooses an incentive contract for the manager which maximizes the firm's market value. With a finite number of firms, the equilibrium is constrained Pareto optimal only when investors are risk neutral and firms' outcomes are independent. The inefficiencies which arise when investors are risk averse, or when firms are influenced by a common shock, are studied and it is shown that under reasonable assumptions there is under investment in effort in equilibrium. The inefficiencies exist when the firms are not completely negligible, as is typical of the large corporations with dispersed ownership traded on public exchanges in the US. In the idealized case where firms of each type are replicated and replaced by a continuum of firms of each type with independent outcomes, the inefficiencies disappear. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ucdeco:08-2&r=cta |
| By: | Axelson, Ulf (Stockholm School of Economics and SIFR); Stromberg, Per (Stockholm School of Economics and SIFR); Weisbach, Michael S. (Ohio State U) |
| Abstract: | Private equity funds are important actors in the economy, yet there is little analysis explaining their financial structure. In our model the financial structure minimizes agency conflicts between fund managers and investors. Relative to financing each deal separately, raising a fund where the manager receives a fraction of aggregate excess returns reduces incentives to make bad investments. Efficiency is further improved by requiring funds to also use deal-by-deal debt financing, which becomes unavailable in states where internal discipline fails. Private equity investment becomes highly sensitive to economy-wide availability of credit and investments in bad states outperform investments in good states. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2008-15&r=cta |
| By: | Engel, Eduardo (Yale U); Fischer, Ronald (U of Chile); Galetovic, Alexander (U of the Andes) |
| Abstract: | Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are justified on efficiency grounds, the contract that optimally balances demand risk, user-fee distortions and the opportunity cost of public funds, features a minimum revenue guarantee and a revenue cap. However, observed revenue guarantees and revenue sharing arrangements differ from those suggested by the optimal contract. Also, this contract can be implemented via a competitive auction with realistic informational requirements. Finally, the allocation of risk under the optimal contract suggests that PPPs are closer to public provision than to privatization. |
| JEL: | H21 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:35&r=cta |
| By: | Hermalin, Benjamin E. (?); Weisbach, Michael S. (Ohio State U) |
| Abstract: | Disclosure is widely assumed to play an important role in corporate governance. Yet governance has not been the focus of previous academic analyses of disclosure. We consider disclosure in the context of corporate governance. We argue that disclosure is a two-edged sword. On one side, disclosure of information permits principals to make better decisions. On the other, it can create or exacerbate agency problems: The release of information has the potential to harm agents (e.g., management) either through the actions the principals take as a consequence (e.g., dismiss the agent) or because the agents care about how they are perceived (e.g., the agents have career concerns or hold equity in the firm). This can lead agents to pursue actions that are not in the principals' interests. Moreover, these problems become worse, the more precise the principals' information. We present a series of models formalizing this idea. These models lead to a number of empirical implications, both for disclosure-increasing regulations and for the relation between disclosure and governance. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2008-17&r=cta |
| By: | Osório-Costa, António M. |
| Abstract: | This paper studies frequent monitoring in a simple infinitely repeated game with imperfect public information and discounting, where players observe the state of a continuous time Brownian process at moments in time of length Δ. It shows that efficient strongly symmetric perfect public equilibrium payoffs can be achieved with imperfect public monitoring when players monitor each other at the highest frequency, i.e. Δ→0. The approach proposed places distinct initial conditions on the process, which depend on the unknown action profile simultaneously and privately decided by the players at the beginning of each period of the game. The strong decreasing effect on the expected immediate gains from deviation when the interval between actions shrinks, and the associated increase precision of the public signals, make the result possible in the limit. The existence of a positive monotonic relation between payoffs and monitoring intensity is also found. |
| Keywords: | Repeated Games; Frequent Monitoring; Imperfect Public Monitoring; Brownian Motion; Moral Hazard |
| JEL: | D82 C73 C72 |
| Date: | 2009–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13104&r=cta |
| By: | Anderlini, Luca (Georgetown U); Gerardi, Dino (Yale U); Lagunoff, Roger (Georgetown U) |
| Abstract: | We study the intergenerational accumulation of knowledge in an infinite-horizon model of communication. Each in a sequence of players receives an informative but imperfect signal of the once-and-for-all realization of an unobserved state. The state affects all players' preferences over present and future decisions. Each player observes his own signal but does not directly observe the realized signals or actions of his predecessors. Instead, he must rely on cheap-talk messages from the previous players to fathom the past. Each player is therefore both a receiver of information with respect to his decision, and a sender with respect to all future decisions. Senders' preferences are misaligned with those of future decision makers. We ask whether there exist "full learning'' equilibria -- ones in which the players' posterior beliefs eventually place full weight on the true state. We show that, regardless of how small the misalignment in preferences is, such equilibria do not exist. This is so both in the case of private communication in which each player only hears the message of his immediate predecessor, and in the case of public communication, in which each player hears the message of all previous players. Surprisingly, in the latter case full learning may be impossible even in the limit as all players become infinitely patient. We also consider the case where all players have access to a mediator who can work across time periods arbitrarily far apart. In this case full learning equilibria exist. |
| JEL: | C70 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:37&r=cta |