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on Contract Theory and Applications |
| By: | von Siemens, Ferdinand (University of Amsterdam); Kosfeld, Michael (University of Frankfurt) |
| Abstract: | Rothschild and Stiglitz (1976) show that there need not exist a competitive equilibrium in markets with adverse selection. Building on their framework we demonstrate that externalities between agents − an agent's utility upon accepting a contract depends on the average type attracted by the respective principal − can solve the equilibrium existence problem, even when the size of the externalities is arbitrarily small. Our result highlights the degree of control a principal has over the attractiveness of his contracts as an important feature for equilibrium existence, thereby offering a new perspective on existing theories of competition in markets with adverse selection. |
| Keywords: | asymmetric information, competition, adverse selection, externality |
| JEL: | D82 D86 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4125&r=cta |
| By: | Lionel De Boisdeffre (Centre d'Economie de la Sorbonne) |
| 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, asymmetric information, arbitrage, existence of equilibrium. |
| JEL: | D52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08105&r=cta |
| By: | L. Montanari |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:642&r=cta |
| By: | Janet Hua, Jiang; Mei, Dong |
| Abstract: | We investigate whether money constitutes a perfect substitute for the missing record-keeping technology in a quasi-linear environment, where private information and limited commitment are present. We adopt the mechanism design approach and solve a social planners problem subject to the resource constraint, the incentive constraints imposed by the existing frictions, and the available memory technologies. The result is that when money is divisible, concealable and in variable supply, a single money may or may not be su¢ cient to replace the record-keeping technology. We further show that two monies serve as a perfect substitute for the record-keeping technology so that there is no need for a third money. |
| Keywords: | Record-keeping; Money; Private Information; Limited Commit- ment; Mechanism Design |
| JEL: | F30 D82 E40 |
| Date: | 2008–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14846&r=cta |
| By: | Lionel De Boisdeffre (Centre d'Economie de la Sorbonne) |
| Abstract: | Our earlier papers had extend to asymmetric information the classical existence theorems of general equilibrium theory, under the standard assumption that agents had perfect foresights, that is, they knew, ex ante, which price would prevail on each spot market. Common observation suggests, however, that agents more often trade with an un-precise knowledge of future prices. We now let agents anticipate, in each random state, a set of plausible prices, called expectations, endowed with a probability distribution. These expectations are assumed to define a so-called "structure of beliefs", along which agents' expectations sets intersect on each spot market. We introduce a related concept of "correct foresights equilibrium" (CFE), in which equilibrium prices belong to all agents expectations sets. We prove that the existence of a CFE is still characterized by the no-arbitrage condition of finance. This result, which extends our earlier theorems, shows that private information or price uncertainty would not affect the existence but only the value of equilibrium prices and allocations. |
| Keywords: | General equilibrium, incomplete markets, asymmetric information, arbitrage, existence of equilibrium. |
| JEL: | D52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08104&r=cta |
| By: | Ngo Van Long; Gerhard Sorger |
| Abstract: | We consider situations in which a principal tries to induce an agent to spend e®ort on accumulating a state variable that a®ects the well-being of both parties. The only incentive mechanism that the principal can use is a state-dependent transfer of her own utility to the agent. Formally, the model is a Stackelberg di®erential game in which the players use feedback strategies. Whereas in general Stackelberg di®erential games with feedback strategy spaces the leader's optimization problem has non-standard features that make it extremely hard to solve, in the present case this problem can be rewritten as a standard optimal control problem. Two examples are used to illustrate our approach. |
| JEL: | C61 C73 D82 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0905&r=cta |
| By: | Jos Jansen (Max Planck Institute for Research on Collective Goods) |
| Abstract: | An innovative firm chooses strategically whether to patent its process innovation or rely on secrecy. By doing so, the firm manages its rival’s beliefs about the size of the innovation, and affects the incentives in the product market. Different measures of competitive pressure in the product market have different effects on the equilibrium patenting choices of an innovative firm with unknown costs and probabilistic patent validity. Increasing the number of firms (degree of product substitutability) gives a smaller (greater) patenting incentive. Switching from Bertrand to Cournot competition gives a smaller (greater) patenting incentive if patent protection is weak (strong). |
| Keywords: | Bertrand and Cournot competition, oligopoly, product differentiation, entry, asymmetric information, strategic disclosure, stochastic patent, trade secret, process innovation, imitation |
| JEL: | D82 L13 O31 O32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2009_13&r=cta |