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on Contract Theory and Applications |
| By: | Gary Charness; Marie Claire Villeval; Antonio Cabrales |
| Abstract: | We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2009-08&r=cta |
| By: | Vives, Xavier (IESE Business School) |
| Abstract: | A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness. |
| Keywords: | imperfect competition; adverse selection; competitiveness; rational expectations; collusion; welfare; |
| JEL: | D44 D82 L13 L94 |
| Date: | 2008–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0774&r=cta |
| By: | Stefan Bühler (University of St.Gallen); Dennis L. Gärtner (Socioeconomic Institute, University of Zurich) |
| Abstract: | This paper provides a theoretical rationale for non-binding retail price recommendations (RPRs) in vertical supply relations. Analyzing a bilateral manufacturer-retailer relationship with repeated trade, we show that linear relational contracts can implement the surplus-maximizing outcome. If the manufacturer has private information about production costs or consumer demand, RPRs may serve as a communication device from manufacturer to retailer. We characterize the properties of efficient bilateral relational contracts with RPRs and discuss extensions to settings where consumer demand is affected by RPRs, and where there are multiple retailers or competing supply chains. |
| Keywords: | vertical relationships, relational contracts, asymmetric information, price recommendations |
| JEL: | D23 D43 L14 L15 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0902&r=cta |
| By: | Rajiv Sethi (Department of Economics, Barnard College, Columbia University and Institute for Advanced Study); Muhamet Yildiz (Department of Economics, MIT and Institute for Advanced Study) |
| Abstract: | Members of different social groups often hold widely divergent public beliefs regarding the nature of the world in which they live. We develop a model that can accommodate such public disagreement, and use it to explore questions concerning the aggregation of distributed information and the consequences of social integration. The model involves heterogeneous priors, private information, and repeated communication until beliefs become public information. We show that when priors are correlated, all private information is eventually aggregated and public beliefs are identical to those arising under observable priors. When priors are independently distributed, however, some private information is never revealed and the expected value of public disagreement is greater when priors are unobservable than when they are observable. If the number of individuals is large, communication breaks down entirely in the sense that disagreement in public beliefs is approximately equal to disagreement in prior beliefs. Interpreting integration in terms of the observability of priors, we show how increases in social integration can give rise to less divergent public beliefs on average. Communication in segregated societies can cause initial biases to be amplified and new biases to emerge where none previously existed. Even though all announcements are public and all signals equally precise, minority group members face a disadvantage in the interpretation of public information that results in medium run beliefs that are less closely aligned with the true state. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0089&r=cta |
| By: | Francesca Stroffolini (University of Napoli “Federico II” and CSEF) |
| Abstract: | The paper analyses how information acquisition and transmission issues affect the determination of the optimal access pro.t-sharing plan in regulated network industries. It considers a regulated upstream monopoly with cost uncertainty and a downstream unregulated duopoly. It will be shown that, under an access price cap regulatory mechanism, the transfer of a sufficiently high share of access profits to consumers induces an integrated upstream monopolist to transmit to his downstream rival the information privately acquired on the upstream cost and this, in turn, may negatively affect welfare. On account of these effects the optimal access profit-sharing plan will depend on the variance and shape of cost distribution, on information acquisition costs as well as on the regulator’s redistributive concerns. |
| Keywords: | Access price cap regulation, profit-sharing, information transmission and acquisition |
| JEL: | D82 D83 L5 |
| Date: | 2009–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:214&r=cta |
| By: | Hofmann, Anett (Department of Economics, University of Warwick, and Department of Economics, London School of Economics.) |
| Abstract: | The paper argues that the incidence of moral hazard played a significant role in the 2007/2008 credit crunch. In particular, bank traders subjected to asymmetric compensation structures have an incentive to take excessive risks even when the bank's shareholders would prefer prudent investment. Traders' incentives are shown to be unaffected by capital regulations, with the associated financial burden falling upon the taxpayer through deposit insurance or government bail-outs. Selected case studies further indicate that the phenomenon of “gambling traders” was widespread during the credit crunch, when high bonuses tempted bank employees to invest in risky subprime-backed securities. The intransparency of structured products and the inaccuracy of credit ratings contributed to the employees' ability to conceal the underlying risk from the banks' shareholders. The analysis points to an urgent need to reform compensation practices in the financial sector. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:892&r=cta |