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on Contract Theory and Applications |
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Issue of 2009‒03‒22
sixteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Alfredo Burlando (Boston University); Alberto Motta (University di Padova) |
| Abstract: | This paper analyzes a simple modification of a standard mechanism in hierarchical centralized structures with hard-information supervision. The supervisor receives a signal about the productive agent's technology. With some probability the supervisor learns the true agent's technology, otherwise she learns nothing. Our design lets the productive agent choose between two competing contracts, a "secure" contract or a grand contract subject to uncertainty. The mechanism eliminates agency costs by providing the productive agent with the possibility of avoiding inspection. When productive agent is risk averse, our mechanism also provides him with an insurance coverage: as a consequence, this mechanism would be worthwhile even abstracting from collusion. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0095&r=cta |
| By: | Ghosal, Sayantan (Department of Economics, University of Warwick); Thampanishvong, Kannika (School of Economics and Finance, University of St Andrews,) |
| Abstract: | In a model with both issues of sovereign debtor moral hazard and creditor coordination under incomplete information, we show that the resulting conflict between ex ante and interim efficiency limits the welfare impact of strengthening CACs. Conditional on default, we show that an interim efficient CAC threshold exists and improving creditor coordination results in welfare gains. However, when ex ante efficiency requires the sovereign debtor to choose actions that reduce the probability of default, improved creditor coordination reduces ex ante efficiency and the interim efficient CAC threshold is higher than the ex ante efficient CAC threshold. |
| Keywords: | Sovereign Debt ; Coordination ; Moral Hazard ; Collective Action Clauses ; Ex Ante ; Ex Post ; Efficiency |
| JEL: | C72 C78 D82 F34 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:895&r=cta |
| By: | Max Blouin (Université du Québec à Montréal - CIRPEE and Department of Economics); Jean-Marc Bourgeon (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Institut National de la Recherche Agronomique - INRA) |
| Abstract: | We examine an economy where professionals provide services to clients and where a professional can sell his practice to another. Professionals vary in quality, and clients in their need (or willingness-to-pay) for high-quality service. efficiency is measured as the number of matches between high-quality professionals and high-need clients. However, agent types are unobservable a priori. We find that trade in practices can facilitate the transmission of information about agent types; sometimes full efficiency is achieved. In cases where it is not, a tax on the sale of practices (based on the seller's age) can be used to achieve full efficiency. In addition, a ceiling on the price of services can be used to adjust the distribution of surplus between clients and professionals, while preserving efficiency. |
| Keywords: | signaling, professional services, practices, goodwill |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00360512_v1&r=cta |
| By: | Hannu Vartiainen (Department of Economics, Turku School of Economics) |
| Abstract: | We study auction design when parties cannot commit to the mechanism. The seller may change the rules of the game any number of times and the buyers may choose their outside option at any stage of the game. A dynamic consistency condition and an optimality condition property are defined to characterize the seller's mechanism selection behavior. The unique stationary mechanism selection rule that meets the conditions is the English auction. |
| Keywords: | auctions, commitment, consistency, one-deviation property, stationarity |
| JEL: | C72 D44 D78 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp44&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: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00354820_v2&r=cta |
| By: | Jonathan Pincus (School of Economics, University of Adelaide); Richard Pomfret |
| Abstract: | Financial sector innovation and development has been an integral part of the rise of capitalism over the last half millennium. The innovations of the last three decades of the twentieth century were a continuation of the trend; they contributed to an era of global prosperity, but also increased the probability of bank failures as bankers and policymakers inexperienced in the new instruments made mistaken decisions. The likelihood of crises was increased by public policies which increased moral hazard. Governments regulate the financial sector due to asymmetric information between depositors and deposit-taking institutions; restricting entry or the lending activity of financial institutions is inefficient, so the weight is now placed on deposit insurance with moral hazard consequences. The policy challenge is to reduce moral hazard without repressing the financial sector and creating adverse selection in lending practices. Since the mid-1980s cheap money policies have exacerbated moral hazard associated with inadequate financial sector regulation by encouraging highly leveraged investments. The post-2007 financial crisis was one of many crises with idiosyncratic catalysts but with common underlying causes: cheap money available to participants in the integrated but imperfectly regulated global financial market eventually led to loan defaults and bank failures. This is not the end of capitalism, but a reminder of the difficult balancing acts involved in policing the financial sector which is at the heart of capitalist economies. |
| Keywords: | financial development – moral hazard |
| JEL: | O16 G28 F43 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2009-05&r=cta |
| By: | Jakub Kastl (Stanford University); David Martimort (Toulouse School of Economics); Salvatore Piccolo (University of Naples "Federico II", CSEF and Toulouse School of Economics,) |
| Abstract: | We revisit the Chicago School argument, advocating for the lawfulness of resale price restrictions, in a setting of competing manufacturer-retailer pairs with both adverse selection and moral hazard. A "laissez-faire" approach towards vertical price control might harm consumers when privately informed retailers impose non-market externalities on each other. We show that letting manufacturers free to control retail prices harms consumers as long as retailers impose positive non-market externalities on each other, and that the converse is true otherwise. In contrast to previous work, we show that, in these instances, consumers' and suppliers' preferences over contractual choices are not always aligned. These results underscore the scarce appeal of per se rules and predict circumstances where retail price restrictions should be forbidden. |
| Keywords: | Competing hierarchies, resale price maintenance, retail externalities |
| JEL: | D2 D23 D82 K21 |
| Date: | 2009–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:218&r=cta |
| By: | Silva Marchesi (Università di Milano Bicocca / Italy); Laura Sabani (Università di Firenze / Italy); Axel Dreher (University of Goettingen / Germany) |
| Abstract: | We focus on the role that the transmission of information between a multilateral (the IMF) and a country has for the optimal design of conditional reforms. Our model predicts that when agency problems are especially severe, and/or IMF information is valuable, a centralized control is indeed optimal. To the contrary, when local knowledge is more important than the agency bias we expect delegation to dominate. Controlling for economic and political factors, our empirical tests show that the number of IMF conditions is lower in countries with a greater social complexity, while it increases with the bias of the countries’ authorities, openness, and transparency, consistently with the theory. |
| Keywords: | IMF conditionality, delegation, communication, panel data |
| JEL: | C23 D82 F33 N2 |
| Date: | 2009–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:got:iaidps:183&r=cta |
| By: | Marchesi, Silvia (University of Milan Bicocca); Sabani, Laura (University of Florence); Dreher, Axel (University of Göttingen) |
| Abstract: | We focus on the role that the transmission of information between a multilateral (the IMF) and a country has for the optimal design of conditional reforms. Our model predicts that when agency problems are especially severe, and/or IMF information is valuable, a centralized control is indeed optimal. To the contrary, when local knowledge is more important than the agency bias we expect delegation to dominate. Controlling for economic and political factors, our empirical tests show that the number of IMF conditions is lower in countries with a greater social complexity, while it increases with the bias of the countries’ authorities, openness, and transparency, consistently with the theory. |
| Keywords: | communication, delegation, IMF conditionality, panel data |
| JEL: | C23 D82 F33 N2 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4041&r=cta |
| By: | Silvia Marchesi (Dipartimento di Economia Politica, Università di Milano Bicocca); Laura Sabani (Dipartimento di Studi saullo Stato, Università di Firenze); Axel Dreher (Economics Department, University of Goettingen, KOF Swiss Economic Institute, IZA and CESIfo) |
| Abstract: | We focus on the role that the transmission of information between a multilateral (the IMF) and a country has for the optimal design of conditional reforms. Our model predicts that when agency problems are especially severe, and/or IMF information is valuable, a centralized control is indeed optimal. To the contrary, when local knowledge is more important than the agency bias we expect delegation to dominate. Controlling for economic and political factors, our empirical tests show that the number of IMF conditions is lower in countries with a greater social complexity, while it increases with the bias of the countries’ authorities, openness, and transparency, consistently with the theory. |
| Keywords: | IMF conditionality, delegation, communication, panel data |
| JEL: | C23 D82 F33 N2 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:09-218&r=cta |
| By: | Stefan Arping (Faculty of Economics & Business, University of Amsterdam); Gyöngyi Lóránth (Judge Business School, University of Cambridge); Alan Morrison (Said Business School, University of Oxford) |
| Abstract: | We analyze financial support for the entrepreneurial sector. State support can raise welfare by relaxing financial constraints, but it can also reduce lending standards if entrepreneurs substitute public sources of collateral for their own assets, if it encourages excessive entrepreneurial entry, or if it undermines bank monitoring incentives. We derive a “pecking order” for support schemes: support funds should be channeled first to credit guarantee schemes and then, when entrepreneurs start to substitute public for private collateral, to co-funding entrepreneurial projects. The optimal level of credit guarantee is diminishing in the costs of incentivising bank monitoring. We show in an extension that the long-term effect of public subsidies may be to impair the private sector’s initiative to uncover cost savings. |
| Keywords: | Partial Credit Guarantees; Co-funding and Loan Subsidies; Private Sector Initiative; Lending Standards |
| JEL: | G2 G3 |
| Date: | 2009–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090019&r=cta |
| By: | de Haas, Ralph; van Horen, Neeltje |
| Abstract: | We examine the strategic reaction of banks to the current global financial crisis. In particular, we test whether banks predominantly react by diversifying their loan portfolio or by stepping up their screening and monitoring. To this end we analyze information on nearly 17,000 syndicated loans that were granted to private borrowers in 60 countries over the period 2005-2008. We exploit the variation in lender and borrower characteristics to examine whether banks’ risk-mitigating strategies differ across borrower types. Our results show that during a financial crisis arranging banks retain larger portions of loans and form more concentrated syndicates, reflecting an increased need to screen and monitor borrowers. During a crisis, agency problems are attenuated in syndicates that lend to repeat borrowers and that are composed by experienced arrangers. |
| Keywords: | bank lending; financial crisis; asymmetric information; syndication |
| JEL: | G15 D82 G21 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14164&r=cta |
| By: | Katrin Millock (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Angels Xabadia (Department of Economics - University of Girona); David Zilberman (Department of Agricultural and Ressource Economics - University of California, Berkeley) |
| Abstract: | With the development of modern information technologies, relying on nanotechnologies and remote sensing, a number of systems can be envisaged that allow for monitoring of the negative externalities generated by producers, consumers or travelers - road pricing schemes or individual emission meters for automobiles are two examples. In the paper, we analyze a dynamic model of stock pollution when the regulator has incomplete information on emissions generated by heterogeneous agent. The paper's contribution is to explicitly study a decentralized policy for adoption of monitoring equipment over time. Each agent has to choose between paying a fixed fee or installing monitoring technology and paying a tax on actual emissions. We determine the second-best tax rates, the pattern of monitoring technology adoption, and identify conditions for the voluntary diffusion of monitoring technologies over time. |
| Keywords: | Externalities ; environmental taxation ; monitoring technology adoption ; diffusion ; nanotechnologies |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00367888_v1&r=cta |
| By: | André De Palma (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan); Robin Lindsey (University of Alberta - University of Alberta); Nathalie Picard (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise) |
| Abstract: | Information about traffic conditions has traditionally been conveyed to drivers by radio and variable message signs, and more recently via the Internet and Advanced Traveler Information Systems. This has spurred research on how travelers respond to information, how much they are willing to pay for it and how much they are likely to benefit from it collectively. In this paper we analyze the decisions of drivers whether to acquire information and which route to take on a simple congested road network. Drivers vary in their degree of risk aversion with respect to travel time. Four information regimes are considered: No information, Free information which is publicly available at no cost, Costly information which is publicly available for a fee, and Private information which is available free to a single individual. Private information is shown to be individually more valuable than either Free or Costly information, while the benefits from Free and Costly information cannot be ranked in general. Free or Costly information can decrease the expected utility of drivers who are very risk-averse, and with sufficient risk aversion in the population the aggregate compensating variation for information can be negative. |
| Keywords: | Transportation, route choice, information provision, expected utility, congestion |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00349492_v1&r=cta |
| By: | Jeanne Hagenbach (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales - Ecole Nationale des Ponts et Chaussées - Ecole Normale Supérieure de Paris) |
| Abstract: | We consider situations in which individuals would like to choose an action which is close to that of others, as well as close to a state of nature, with the ideal proximity to the state varying across agents. Before this coordination game is played, a cheap-talk communication stage is offered to the individuals who decide to whom they reveal their private information about the state. The information transmission occurring in the communication stage is characterized by a strategic communication network. We provide an explicit link between players' preferences and the equilibrium strategic communication networks. A key feature of our equilibrium characterization is that whether communication takes place between two agents not only depends on the conflict of interest between these agents, but also on the number and preferences of the other agents with whom they communicate. Apart from some specific cases, the equilibrium communication networks are quite complex despite our simple one-dimensional description of preference heterogeneity. In general, strategic communication networks cannot be completely Pareto-ranked, but expected social welfare always increases as the communication network expands. |
| Keywords: | Cheap talk ; coordination ; incomplete information ; networks |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00367692_v1&r=cta |
| By: | Jos Jansen (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free-rider effect in the competition for the innovation that countervails the familiar business-stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms.profits and the probability of innovation. |
| Keywords: | R&D competition, innovation, spillovers, information disclosure, strategic substitutes, free-rider effect, externality |
| JEL: | D82 D83 L23 O31 O32 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2009_06&r=cta |