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on Contract Theory and Applications |
|
Issue of 2009‒02‒14
seventeen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Alessandro Pavan; Ilya Segal; Juuso Toikka |
| Abstract: | This paper examines the problem of how to design incentive-compatible mechanisms in environments in which the agents' private information evolves stochastically over time and in which decisions have to be made in each period. The environments we consider are fairly general in that the agents' types are allowed to evolve in a non-Markov way, decisions are allowed to affect the type distributions and payoffs are not restricted to be separable over time. Our first result is the characterization of a dynamic payoff formula that describes the evolution of the agents' equilibrium payoffs in an incentive-compatible mechanism. The formula summarizes all local first-order conditions taking into account how current information affects the dynamics of expected payoffs. The formula generalizes the familiar envelope condition from static mechanism design: the key difference is that a variation in the current types now impacts payoffs in all subsequent periods both directly and through the effect on the distributions of future types. First, we identify assumptions on the primitive environment that guarantee that our dynamic payoff formula is a necessary condition for incentive compatibility. Next, we specialize this formula to quasi-linear environments and show how it permits one to establish a dynamic "revenue-equivalence" result and to construct a formula for dynamic virtual surplus which is instrumental for the design of optimal mechanisms. We then turn to the characterization of sufficient conditions for incentive compatibility. Lastly, we show how our results can be put to work in a variety of applications that include the design of profit-maximizing dynamic auctions with AR(k) values and the provision of experience goods. |
| Keywords: | dynamic mechanisms, asymmetric information, stochastic processes, incentives |
| JEL: | D82 C73 L1 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:84&r=cta |
| By: | Alessandro Pavan; Giacomo Calzolari |
| Abstract: | This paper considers games in which multiple principals contract simultaneously with the same agent. We introduce a new class of revelation mechanisms that, although it does not always permit a complete equilibrium characterization, it facilitates the characterization of the equilibrium outcomes that are typically of interest in applications (those sustained by pure-strategy profiles in which the agent's behavior in each relationship is Markov, i.e., it depends only on payoff-relevant information such as the agent's type and the decisions he is inducing with the other principals). We then illustrate how these mechanisms can be put to work in environments such as menu auctions, competition in nonlinear tariffs, and moral hazard settings. Lastly, we show how one can enrich the revelation mechanisms, albeit at a cost of an increase in complexity, to characterize also equilibrium outcomes sustained by non-Markov strategies and/or mixed-strategy profiles. |
| Keywords: | Mechanism design, contracts, revelation principle, menus, endogenous payoff-relevant information |
| JEL: | D89 C72 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:85&r=cta |
| By: | Elisabetta Iossa; David Martimort |
| Abstract: | We build a unified theoretical framework to analyze the main incentive issues in Public Private Partnerships (PPPs) and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multitask environment in which a risk-averse agent chooses unobservable efforts in cost reduction and quality improvement. We begin by studying the effect on incentives and risk transfer of bundling building and operation into a single contract, allowing for different assumptions on the contractual framework and the quality of the information held by the government. We then extend the basic model in several directions. We consider the factors that affect the optimal allocation of demand risk and their implications for the use of user charges and the choice of contract length. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in long-term PPP agreements and the dynamics of PPP contracts, including cost overruns. We also consider how the institutional environment, and specifically the risk of regulatory opportunism, affects contract design and incentives. We conclude with some policy implications on the desirability of PPPs. |
| Keywords: | Contracting out, public-private partnerships, public-service provision |
| JEL: | D8 L5 H54 H57 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:08/199&r=cta |
| By: | Stefano Barbieri (Department of Economics, Tulane University); David A. Malueg (Department of Economics, UC Riverside) |
| Abstract: | We analyze a symmetric Bayesian game in which two players individually contribute to fund a discrete public good; contributions are refunded if they do not meet a threshold set by the seller of the good. We provide a general characterization of symmetric equilibrium strategies that are continuous and nonconstant over the set of values for which the good has a positive chance of provision. Piecewise-linear strategies are our special focus. We characterize the distributions of players' private values that can support a continuous piecewise-linear symmetric equilibrium, and we calculate such equilibria for these distributions. Allowing the seller to charge a nonrefundable entry fee before players make their private contributions, we show these piecewise-linear equilibria can maximize the seller's expected utility, which may include an altruistic component, over all incentive compatible selling mechanisms. |
| Keywords: | discrete public good, subscription game, Revelation Principle |
| JEL: | H41 D61 D82 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:0902&r=cta |
| By: | Luca Anderlini; Dino Gerardi; Roger Lagunoff |
| Abstract: | We study strategic information transmission in an organization consisting of an infinite sequence of individual decision makers. Each decision maker chooses an action and receives an informative but imperfect signal of the once-and-for-all realization of an unobserved state. The state affects all individuals' preferences over present and future decisions. Decision makers do not directly observe the realized signals or actions of their predecessors. Instead, they must rely on cheap-talk messages in order to accumulate information about the state. Each decision maker is therefore both a receiver of information with respect to his decision, and a sender with respect to all future decisions. We show that if preferences are not perfectly aligned "full learning" equilibria - ones in which the individuals' posterior beliefs eventually place full weight on the true state - do not exist. This is so both in the case of private communication, in which each individual only hears the message of his immediate predecessor, and in the case of public communication, in which a decision maker hears the message of all his predecessors. Surprisingly, in the latter case full learning may be impossible even in the limit as all members of the organization become infinitely patient. We also consider the case where all individuals have access to a mediator who can work across time periods arbitrarily far apart. In this case full learning equilibria exist. |
| Keywords: | Communication, Learning, Dynamic Strategic Information Transmission |
| JEL: | C70 C72 C73 D80 D83 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:82&r=cta |
| By: | George-Marios Angeletos; Alessandro Pavan |
| Abstract: | Information regarding economic fundamentals is widely dispersed in society, is only imperfectly aggregated through prices or other indicators of aggregate activity, and can not be centralized by the government or any other institution. In this paper we seek to identify policies that can improve the decentralized use of such dispersed information without requiring the government to observe this information. We show that this can be achieved by appropriately designing the contingency of taxation on ex-post public information regarding the realized fun- damentals and aggregate activity. When information is common (as in the Ramsey literature) or when agents have private information only about idiosyncratic shocks (as in the Mirrlees literature), the contingency on fundamentals alone suffices for efficiency. When instead agents have private information about aggregate shocks, the contingency on aggregate activity is crucial. An appropriate combination of the two contingencies permits the government to: (i) dampen the impact of noise and hence reduce non-fundamental volatility, without also dampening the impact of fundamentals; (ii) induce agents to internalize informational externalities, and hence improve the speed of social learning; (iii) restore a certain form of constrained efficiency in the decentralized use of information; (iv) guarantee that welfare increases with the provision of any additional information. |
| Keywords: | Optimal policy, private information, complementarities, information externalities, social learning, efficiency |
| JEL: | C72 D62 D82 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:86&r=cta |
| By: | Andersson, Fredrik (Department of Economics) |
| Abstract: | The make-or-buy decision is analyzed in a three-layer principal-management-agent model. There is a cost-saving/quality tradeoff in effort provision. The principal chooses between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are, endogenously, weaker in the former case. Cost-saving incentives trickle down to the agent, affecting the cost-saving/quality trade-off. It is shown that weak cost-saving incentives to the management promote quality provision by the agent, and that a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, make an in-house management more attractive. |
| Keywords: | Make-or-buy decision; Multitask principal-agent problem; Outsourcing |
| JEL: | D23 L22 L24 |
| Date: | 2009–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0784&r=cta |
| By: | Dirk Bergemann; Stephen Morris |
| Date: | 2009–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000109&r=cta |
| By: | Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR) |
| Abstract: | The historical record shows that financial crises are far from being a rare a phenomenon; they occur often enough to be considered part of the workings of finance capitalism. While there is no single hypothesis that can best explain all crises, the implications of the credit boom-and-bust hypothesis, supplemented with asymmetric information, are consistent with the onset and development of many crises, including the current subprime crisis. Governments have reacted to crises by erecting a vast and growing safety net. In turn, to minimize their risk exposure, they have also put in place expansive systems of regulation and supervision. The unwinding of the current crisis will mark a big enlargement of the safety net and moral hazard, as well as a predictable flurry of policy proposals aimed at closing past regulatory loopholes. The maintained hypothesis is that regulatory and market failures are inexorably intertwined. |
| Keywords: | Bailout, Credit, Crisis, Money, Moral hazard, Regulation, Safety net, Subprime |
| JEL: | E58 F30 G21 N20 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:5&r=cta |
| By: | Christine Hauser |
| Abstract: | This paper studies the provision of a public good between two agents under lack of commitment and applies it to the problem of children's consumption in separated couples, where children are considered to be public goods. The custodial mother controls the child's consumption, whereas the father can contribute indirectly by making monetary transfers to the mother, but has no control over how the mother spends them. Using minmax punishments, I look for the Pareto frontier of the Subgame Perfect Equilibrium payoffs, and characterize the equilibrium and long term implications of the model. As in the previous literature, agents' consumptions and continuation values covary positively with their income levels. In the case where the constraint for the public good provision binds, both agents' private consumptions increase relative to the public good provision. In the long run, if some first best allocation is sustainable, the long-term equilibrium will converge to a first best allocation. Otherwise, agents' utilities oscillate over a finite set of values. I then study the theoretical implications of one-sided enforcement when the public good provider has the authority to enforce transfers from the second agent. This is motivated by the wave of US policy reforms to enforce child support payments from fathers. The model predicts an increase in the ratio of the mother's consumption to the child's. |
| Keywords: | insurance, lack of commitment, optimal dynamic contract, public good |
| JEL: | C72 C73 D90 E21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:87&r=cta |
| By: | Stefano Barbieri (Department of Economics, Tulane University); David A. Malueg (Department of Economics, UC Riverside) |
| Abstract: | We introduce threshold uncertainty, a la Nitzan and Romano (1990), into a private-values model of voluntary provision of a discrete public good. Players are allowed to make any level of contribution toward funding the good, which is provided only if the cost threshold is reached. Otherwise, contributions are refunded. Conditions ensuring existence and uniqueness of a Bayesian equilibrium are established. Further restricting the threshold uncertainty to a uniform distribution, we show the equilibrium strategies are very simple, even allowing for any number of players with asymmetric distributions of values. Comparative statics with respect to changes in players' distributions are derived, allowing changes in both the intensity and the dispersion of values. Finally, we show the equilibrium is interim incentive inefficient. The sharpness of our results greatly contrasts with the more qualified insights of earlier private-values models with known cost threshold, which relied on there being two symmetric players and generally exhibited multiple equilibria. |
| Keywords: | discrete public good, subscription game, threshold uncertainty |
| JEL: | H41 D61 D82 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:0903&r=cta |
| By: | Goerg, Sebastian (University of Bonn); Kube, Sebastian (Max Planck Institute for Research on Collective Goods); Zultan, Ro'i (Max Planck Institute for Economics) |
| Abstract: | The importance of fair and equal treatment of workers is at the heart of the debate in organizational management. In this regard, we study how reward mechanisms and production technologies affect effort provision in teams. Our experimental results demonstrate that unequal rewards can potentially increase productivity by facilitating coordination, and that the effect strongly interacts with the exact shape of the production function. Taken together, our data highlight the relevance of the production function for organization construction and suggest that equal treatment of equals is neither a necessary nor a sufficient prerequisite for eliciting high performance in teams. |
| Keywords: | team incentives, equity, production function, social preferences, laboratory experiment, discriminating mechanism, mechanism desig |
| JEL: | C92 D23 D63 J31 J33 J41 M12 M52 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3959&r=cta |
| By: | Winand Emons; Claude Fluet |
| Abstract: | Two firms produce a product with a horizontal and a vertical characteristic. We call the vertical characteristics quality. The difference in the quality levels determines how the firms share the market. Firms know the quality levels, consumers do not. Under non-comparative advertising a firm may signal its own quality. Under comparative advertising firms may signal the quality differential. In both scenarios the firms may attempt to mislead at a cost. If firms advertise, in both scenarios equilibria are revealing. Under comparative advertising the firms never advertise together which they may do under non-comparative advertising. |
| Keywords: | Advertising, costly state falsification, signalling |
| JEL: | D82 K41 K42 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0902&r=cta |
| By: | David B. Audretsch (Indiana University and Max Planck Institute of Economics, Jena, Germany); Werner Bönte (Bergische Universität Wuppertal and Max Planck Institute of Economics, Jena, Germany); Prashanth Mahagaonkar (Max Planck Institute of Economics, Jena, Germany) |
| Abstract: | External finance is central for nascent entrepreneurs, people in the process of starting new ventures. We argue that nascent entrepreneurs use patents and prototypes in order to signal their ability to appropriate the returns from their innovation as well as the project's feasibility. Our analysis of 900 nascent entrepreneurs finds that patents and prototypes increase the likelihood of obtaining equity finance. Thus, if signals are credible, innovation positively impacts external financing. Interestingly, entrepreneurs in planning versus early start-up stage portray different signaling effects, indicating that the relation between finance and innovation depends on the stage of a start-up lifecycle. |
| Keywords: | Innovation, Entrepreneurship, Finance, Information Asymmetries |
| JEL: | L26 M13 G14 G24 G32 O34 |
| Date: | 2009–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-012&r=cta |
| By: | David B. Audretsch / Werner Bönte / Prashanth Mahagaonkar (Indiana University and Max Planck Institute of Economics); Prashanth Mahagaonkar (Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group); Werner Bönte (Schumpeter School of Economics and Business, Bergische Universität Wuppertal and Max Planck Institute of Economics) |
| Abstract: | External finance is central for nascent entrepreneurs, people in the process of starting new ventures. We argue that nascent entrepreneurs use patents and prototypes in order to signal their ability to appropriate the returns from their innovation as well as the project's feasibility. Our analysis of 900 nascent entrepreneurs finds that patents and prototypes increase the likelihood of obtaining equity finance. Thus, if signals are credible, innovation positively impacts external financing. Interestingly, entrepreneurs in planning versus early start-up stage portray different signaling effects, indicating that the relation between finance and innovation depends on the stage of a start-up lifecycle. |
| Keywords: | Innovation; Entrepreneurship; Finance; Information Asymmetries |
| JEL: | L26 M13 G14 G24 G32 O34 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:schdps:sdp09001&r=cta |
| By: | Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Kerstin Pull (University of Tübingen, Department of Economics and Business Administration); Manfred Stadler (University of Tübingen, Department of Economics and Business Administration) |
| Abstract: | We study interaction effects between intra-firm conflicts and interfirm competition on a duopolistic market with seller firms employing one or more agents and implementing tournament incentives. We show that inter-firm competition leads to higher incentive intensity, higher efforts and output levels but lower profits. |
| Keywords: | Tournament, Worker compensation, Strategic competition |
| JEL: | C72 L22 M52 |
| Date: | 2009–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-007&r=cta |
| By: | Joao Correia-da-Silva |
| Date: | 2009–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000121&r=cta |