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on Contract Theory and Applications |
| By: | Sandén, Klas (Centre for Labour Market Policy Research (CAFO)) |
| Abstract: | This paper makes a theoretical contribution by investigating how the optimal copyright legislation depend on hidden information. A mixed hidden action – hidden information model is used. The regulator neither observes the type of firm nor the quality choice of firms. The paper provides no evidence that hidden information can motivate a copyright legislation. In fact it shows that the optimal policy, with asymmetric information, is a reward system that is second best. |
| Keywords: | Asymmetric information; Copyright; Reward system; Legislation |
| JEL: | D20 D82 |
| Date: | 2008–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vxcafo:2009_004&r=cta |
| By: | Yolanda Portilla |
| Abstract: | This paper characterizes the contractual relationship between an external auditor and a manager of a client firm when the incentives for both agents are implicit as in the career concerns framework. The main result is that the earning management and the audit effort are decreasing over time because the incentives to build a reputation also decline for both agents in spite of a managers first mover advantage. This suggests that the audit effort should be higher when the auditor is an emerging firm and the future employment opportunities for the client firm´s manager are larger. |
| Keywords: | Contract theory, Career concerns, Reputation, Auditing |
| JEL: | C73 G38 D82 D83 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we091308&r=cta |
| By: | Dirk Bergemann; Stephen Morris |
| Date: | 2009–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000155&r=cta |
| By: | Yolanda Portilla |
| Abstract: | An important puzzle in financial economics is why fund managers invest in short-maturity assets when they could obtain larger profits in assets with longer maturity. This work provides an explanation to this fact based on labor contracts signed between institutional investors and fund managers. Using a career concern setup, we examine how the optimal contract design, in the presence of both explicit and implicit incentives, affects the fund managers decisions on investment horizons. A numerical analysis characterizes situations in which young (old) managers prefer short-maturity (long-maturity) positions. However, when including multitask analysis, we find that career concerned managers are bolder and also prefer assets with long maturity. |
| Keywords: | Contract theory, Career concerns, Financial equilibrium, Investment maturity |
| JEL: | G29 J44 J24 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we091106&r=cta |
| By: | Jacob Gyntelberg; Mico Loretan; Tientip Subhanij; Eric Chan |
| Abstract: | Explaining exchange rates has long been an important but vexing issue in international economics and finance. In recent years, a number of studies have shown that investors' private information plays a central role in determining exchange rates. We demonstrate in this paper that the private information of investors relevant for exchange rates is largely connected to the stock market, and that this information is conveyed to foreign exchange (FX) markets by order flow that is induced by investors' transactions in the stock market. We establish these results by analyzing several novel unused datasets on nearly two years' worth of daily-frequency capital flows of nonresident investors in the foreign exchange, stock, and bond markets of Thailand. We present compelling evidence that FX order flow that is induced by nonresident investors transactions in the Stock Exchange of Thailand - which we show are driven largely by private information - has far greater explanatory power for the exchange rate than other order flow has, both in the short run and the long run. In contrast, FX order flow of nonresident investors that is related to their transactions in Thai government bonds - which we find are not driven appreciably by private information - does not have a statistically significant effect on the exchange rate. |
| Keywords: | Exchange rate models, market microstructure approach, asymmetric information, Thailand, generated regressors, impulse response functions, I(1) measurement error |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:271&r=cta |
| By: | Besancenot, Damien (CEPN and University Paris 13); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | This short paper analyzes banks' communication policies in crisis times and the role of imperfect information in enhancing banks' distress. If banks differ in their exposure to risky assets, fragile banks may claim to be solid only in order to manipulate investors' expectations. Then solid banks must pay a larger interest rate than in a perfect information set-up. A stronger sanction for false information would improve the situation of the low-risk banks but deteriorate the situation of the high-risk banks. The total effect on defaulting credit institutions is ambiguous. It is shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behaviour. |
| Keywords: | Banks; Disclosure; Financial Crisis; Transparency |
| JEL: | D82 E44 G21 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-08018&r=cta |
| By: | Itai Agur |
| Abstract: | This paper develops a game theory model to analyze the optimal structure of the Lender of Last Resort in Europe. When depositors are imperfectly informed, the indifference to international transmission displayed by national authorities has value. A centralized authority, because it internalizes externalities, faces a pooling equilibrium. It cannot effectively signal the motivation behind its interventions. This leads to unnecessary depositor scares. The first-best is achieved by delegation: the central authority decides when to retain control and when to delegate to the national authorities. Central coordination dominates pure centralization. |
| Keywords: | Lender of Last Resort; Bailout; Delegation; Contagion; Centralization |
| JEL: | D82 G21 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:200&r=cta |
| By: | Binswanger, J.; Prüfer, J. (Tilburg University, Center for Economic Research) |
| Abstract: | The modern world is complex and difficult to understand for voters, who may hold beliefs that are at variance with reality. Politicians face incentives to pander to voters' beliefs to get reelected. We analyze the welfare effects of this pandering and show that it entails both costs and benefits. Moreover, we explore optimal constitutional design in the presence of imperfect information about how the world works. We compare indirect democracy to direct democracy and to delegation of policy making to independent agents. We find that indirect democracy is often welfare maximizing. |
| Keywords: | Imperfect information;beliefs;democracy;populism;accountabil- ity;experts. |
| JEL: | D72 D78 D83 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200910&r=cta |
| By: | Roland Bénabou |
| Abstract: | I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants' tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other's delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general "Mutually Assured Delusion" principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierachical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious "exuberance" can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations' attitudes toward free speech and dissent. |
| JEL: | D23 D53 D83 D84 E32 Z1 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14764&r=cta |