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on Contract Theory and Applications |
| By: | Hugo H. Hopenhayn; Arantxa Jarque |
| Abstract: | We study the problem of a firm that faces asymmetric information about the productivity of its potential workers. In our framework, a worker’s productivity is either assigned by nature at birth, or determined by an unobservable initial action of the worker that has persistent effects over time. We provide a characterization of the optimal dynamic compensation scheme that attracts only high productivity workers: consumption –regardless of time period– is ranked according to likelihood ratios of output histories, and the inverse of the marginal utility of consumption satisfies the martingale property derived in Rogerson (1985). However, in the case of i.i.d. output and square root utility we show that, contrary to the features of the optimal contract for a repeated moral hazard problem, the level and the variance of consumption are negatively correlated, due to the influence of early luck into future compensation. Moreover, in this example long-term inequality is lower under persistent private information |
| Keywords: | Mechanism design, Moral hazard, Persistence |
| JEL: | D80 D82 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we092717&r=cta |
| By: | Hoppe, Eva I.; Schmitz, Patrick W. |
| Abstract: | A central insight of agency theory is that when a principal offers a contract to a privately informed agent, the principal trades off ex post efficiency in the bad state of nature against a larger profit in the good state of nature. We report about an experiment with 508 participants designed to test whether this fundamental trade-off is actually relevant. In particular, we investigate settings with both exogenous and endogenous information structures. We find that theory is indeed a useful predictor for the relative magnitudes of the principals' offers, the agents' information gathering decisions, and the occurrence of ex post inefficiencies. |
| Keywords: | adverse selection; agency theory; experiment; information gathering |
| JEL: | C72 C91 D82 D86 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7252&r=cta |
| By: | Veronica Guerrieri; Robert Shimer; Randall Wright |
| Abstract: | We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection. Principals (e.g. employers or agents who want to buy assets) post contracts, which we model as revelation mechanisms. Agents (e.g. workers, or asset holders) have private information about the potential gains from trade. Agents observe the posted contracts and decide where to apply, trading off the contracts' terms of trade against the probability of matching, which depends in general on the principals' capacity constraints and market search frictions. We characterize equilibrium as the solution to a constrained optimization problem, and prove that principals offer separating contracts to attract different types of agents. We then present a series of applications, including models of signaling, insurance, and lemons. These illustrate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures. |
| JEL: | D82 E24 J6 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14915&r=cta |
| By: | Giorgio Calcagnini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Fabio Farabullini (Banca d'Italia (Italy)); Germana Giombini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)) |
| Abstract: | This paper aims at shedding light on the influence of guarantees on the loan pricing. After reviewing the literature on the role of guarantees in bank lending decisions, we estimate a bank interest rate model that explicitly includes collateral and personal guarantees as explanatory variables. We show that banks follow different lending policies according to the type of customer. In the case of firms banks seem to efficiently screen and monitor customers, and guarantees (real and personal) are used to reduce moral hazard problems. In the case of consumer households and sole proprietorships banks behave “lazily” by replacing screening and monitoring activities with personal guarantees. Collateral, instead, is used to separate good from bad customers (i.e., to mitigate adverse selection problems). |
| Keywords: | Banking Crisis; Determination of Interest Rates, Banks, Asymmetric and Private Information. |
| JEL: | E43 G21 D82 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:09_04&r=cta |
| By: | Elisabetta Iossa; David Martimort |
| Abstract: | Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bundling building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects contract design and incentives. |
| Keywords: | Contracting out, public-private partnerships, public-service provision, transport |
| JEL: | D8 H54 H57 L5 L91 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:09/210&r=cta |
| By: | HOSONO Kaoru; XU Peng |
| Abstract: | This paper examines whether commercial banks screen loan applications based on private information on firms' future profitability, and consequently how banks' ex-ante private information and screening decisions affect firms' ex-post profitability. Using a dataset of banks' loan application screenings and the ex-post firm performance for Japanese SMEs, we obtained strong evidences suggesting that banks' ex-ante private information was related to firms' ex-post performance. We found this relationship to be especially strong for small, mature firms, which supports the relationship-lending hypothesis. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09016&r=cta |
| By: | Magali Chaudey (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - CNRS : FRE2938 - Université Jean Monnet - Saint-Etienne); Muriel Fadairo (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - CNRS : FRE2938 - Université Jean Monnet - Saint-Etienne) |
| Abstract: | This paper deals with contractual design and vertical relationships within a franchise chain, in the field of the literature on share contracts. Within a double-sided moral hazard, the contract sharing the profit generated by the vertical decentralized structure results from the necessity to incite both the franchisee and the franchisor. This paper takes into account the five franchisor incentive mechanisms in order to study the chosen type of vertical coordination in different contexts. Using a multinational European dataset, we provide evidence that the two-sided externalities and monitoring costs have an influence on the type of vertical coordination in the network |
| Keywords: | Agency theory; econometrics of contracting; vertical restraints |
| Date: | 2009–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00376243_v1&r=cta |
| By: | Alexander Frankel; Michael Schwarz |
| Abstract: | Consider an environment where long-lived experts repeatedly interact with short-lived customers. In periods when an expert is hired, she chooses between providing a profitable major treatment or a less profitable minor treatment. The expert has private information about which treatment best serves the customer, but has no direct incentive to act in the customer's interest. Customers can observe the past record of each expert's actions, but never learn which actions would have been appropriate. We find that there exists an equilibrium in which experts always play truthfully and choose the customer's preferred treatment. The expert is rewarded for choosing the less profitable action with future business: customers return to an expert with high probability if the previous treatment was minor, and low probability if it was major. If experts have private information regarding their own payoffs as well as what treatments are appropriate, then there is no equilibrium with truthful play in every period. But we construct equilibria where experts are truthful arbitrarily often as their discount factor converges to one. |
| JEL: | C7 C73 D82 J01 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14921&r=cta |
| By: | Holm, Claus (Department of Business Studies, Aarhus School of Business); Schøler, Finn (Department of Business Studies, Aarhus School of Business) |
| Abstract: | Research Question/Issue: Is the reduction of asymmetric information through Corporate Governance mechanisms more important for some listed companies than for others? The purpose of this study is to examine how differences in "ownership dispersion" and "international orientation" affect the particular use of the Corporate Governance mechanisms "transparency" and "board independence" in listed companies. <p> Research Findings/Insights: Our findings are based on a Danish dataset which includes 100 listed companies. We find that transparency is a more important Corporate Governance mechanism for companies with an international orientation, while differences in ownership dispersion do not affect the use of this mechanism. In contrast, we find that board independence is a more important Corporate Governance mechanism for companies with dispersed ownership while international orientation has less importance. <p> Theoretical/Academic Implications: The study contributes to an improved understanding of the circumstantial relationship between good Corporate Governance and good corporate performance. This is important in order to interpret differences in prior research findings and provide insight for the design of future studies of the seemingly endogenous nature of many Corporate Governance relationships. <p> Practitioner/Policy Implications: The requirement to adhere to the "comply or explain rules" for Corporate Governance has become commonplace for listed companies. The study provides insight into valid reasons for differences in compliance. Regulators and other capital market participants should acknowledge that companies may differ in their use of Corporate Governance mechanisms for various reasons, including differences in ownership dispersion and international orientation |
| Keywords: | Corporate Governance; Transparency; Board Member Independence; Two Tier Board Structure; Ownership Dispersion; Internationalisation |
| Date: | 2008–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:aarbac:2008-02&r=cta |