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on Contract Theory and Applications |
| By: | Eric Van Tassel |
| Abstract: | In this paper we analyze a repeated game in which an intermediary offers unsecured loans to entrepreneurs using future credit denial to induce repayment. To finance the loans, the intermediary uses a combination of equity capital and external funds. We focus on a moral hazard problem that emerges between the intermediary and the less informed external investors over a costly loan monitoring choice. The presence of informed borrowers in the lender’s portfolio turns out to act as a substitute for capital requirements. The result is that the lending strategy utilized by the intermediary minimizes the moral hazard problem but implies the intermediary’s balance sheet is fragile to exogenous risk. |
| Keywords: | Moral hazard; Capital requirements; Bank regulation; Repayment incentives |
| JEL: | G21 G28 O16 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:fal:wpaper:09003&r=cta |
| By: | Alessandro Bonatti (Dept. of Economics, Yale University); Johannes Horner (Cowles Foundation, Yale University) |
| Abstract: | This paper examines moral hazard in teams over time. Agents are collectively engaged in an uncertain project, and their individual efforts are unobserved. Free-riding leads not only to a reduction in effort, but also to procrastination. The collaboration dwindles over time, but never ceases as long as the project has not succeeded. In fact, the delay until the project succeeds, if it ever does, increases with the number of agents. We show why deadlines, but not necessarily better monitoring, help to mitigate moral hazard. |
| Keywords: | Moral hazard, Teams, Experimentation, Collaboration, Public goods, Learning |
| JEL: | C72 C73 D83 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1695&r=cta |
| By: | Marc Santugini (IEA, HEC Montréal) |
| Abstract: | We use the Hendricks and Kovenock (1989) framework to study the consumer problem under an informational externality. The informational externality arises when each consumer of a social network is endowed with private information regarding the quality of a good. In such situations, the past purchasing decisions of the consumers are informative and, thus, are used as partially revealing signals of private information. Asymmetric information and the observability of actions render the consumer problem dynamic and strategic because the purchasing decision of a consumer affects the other consumers' future payoffs through the learning process. We show that there exists a unique symmetric Bayesian Nash equilibrium. The informational externality increases the likelihood for a consumer to refrain from purchasing the good immediately in order to make a more informed decision in the future. |
| Keywords: | consumer problem; dynamic game; informational externality, learning |
| JEL: | D0 D8 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0904&r=cta |
| By: | Ludwig Ensthaler; Thomas Giebe |
| Abstract: | A budget-constrained buyer wants to purchase items from a shortlisted set. Items are differentiated by quality and sellers have private reserve prices for their items. Sellers quote prices strategically, inducing a knapsack game. The buyer's problem is to select a subset of maximal quality. We propose a buying mechanism which can be viewed as a game theoretic extension of Dantzig's greedy heuristic for the classic knapsack problem. We use Monte Carlo simulations to analyse the performance of our mechanism. Finally, we discuss how the mechanism can be applied to award R&D subsidies. |
| Keywords: | Auctions, Subsidies, Market Design, Knapsack Problem |
| JEL: | D21 D43 D44 D45 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp880&r=cta |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We consider a simple extension of the basic new-Keynesian setup in which we relax the assumption of frictionless financial markets. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we derive analytically the loglinearised equations which characterise aggregate dynamics in our model and show that they nest those of the new- Keynesian model. A key difference is that marginal costs increase not only with the output gap, but also with the credit spread and the nominal interest rate. Second, we find that financial market imperfections imply that exogenous disturbances, including technology shocks, generate a trade-off between output and inflation stabilisation. Third, we show that, in our model, an aggressive easing of policy is optimal in response to adverse financial market shocks. JEL Classification: E52, E44. |
| Keywords: | optimal monetary policy, financial markets, asymmetric information. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901043&r=cta |
| By: | Tsuchihashi, Toshihiro |
| Abstract: | We consider whether market research can always increase a seller's sales under bilateral asymmetric information. If a monopoly seller provides a high quality object, market research cannot increase sales even when the cost is sufficiently low. A low quality seller, on the other hand, can likely benefit from market research. However, this research has shown that market research alone does not improve sales and that advertising complements market research. Thus the high quality seller can increase sales by using both methods. The availability of advertising and market research to both types of seller results in disappearance of information asymmetry and efficient trade. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2008-05&r=cta |
| By: | Laurent-Lucchetti, Jérémy; Leroux, Justin |
| Abstract: | Implementing a project, like a nationwide nuclear waste disposal, which benefits all involved agents but brings major costs only to the host is often problematic. In practice, revelation issues and redistributional concerns are significant obstacles to achieving stable agreements. We address these issues by proposing the first mechanism to implement the efficient site (the host with the lowest cost) and share the exact cost while retaining total control over realized transfers. Our mechanism is simple and in the vein of the well-known Divide and Choose procedure. The unique Nash equilibrium outcome of our mechanism coincides with truthtelling, is budget-balanced, individually rational and immune to coalitional deviations. More generally, our mechanism can also handle the symmetric case of positive local externalities (e.g., Olympic Games) and even more complex situations where the usefulness of the project---regardless of its location---is not unanimous. |
| Keywords: | Public goods; local externalities; NIMBY; implementation; mechanism design; VCG mechanisms. |
| JEL: | H41 D61 C70 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14929&r=cta |
| By: | Okada, Akira |
| Abstract: | We consider information transmission in the core of an exchange economy with incomplete information by non-cooperative bargaining theory. Reformulating the coalitional voting game by Serrano and Vohra [Information transmission in coalitional voting games, J. of Economic Theory (2007), 117-137] so that an informed agent proposes an allocation, we define a notion of the informational core. A coalition has an informational objection to the status-quo allocation if and only if there exists an equilibrium rejection in the coalitional voting game. We present a non-cooperative sequential bargaining game in which coalitional voting games are repeated, and prove that a refinement of a sequential equilibrium of the bargaining game necessarily yields an allocation in the informational core. |
| Keywords: | core, exchange economy, incomplete information, information transmission, non-cooperative bargaining |
| JEL: | C71 C72 D51 D82 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2009-03&r=cta |
| By: | Einy, Ezra; Haimanko, Ori; Moreno, Diego; Shitovitz, Benyamin |
| Abstract: | We show that when firms have incomplete information about the market demand and their costs, a (Bayesian) Cournot equilibrium in pure strategies may not exist, or be unique. In fact, we are able to construct surprisingly simple and robust examples of duopolies with these features. However, we also find some sufficient conditions for existence, and for uniqueness, of Cournot equilibrium in a certain class of industries. More general results arise when negative prices are possible. |
| Keywords: | Oligopoly, Incomplete Information, Bayesian, Cournot, Equilibrium, Existence, Uniqueness |
| JEL: | C72 D43 L13 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2008-11&r=cta |
| By: | Kikuchi, Kazuya |
| Abstract: | This paper presents a model of Downsian political competition in which voters are imperfectly informed about economic fundamentals. In this setting, parties' choices of platforms influence voters' behavior not only through voters' preferences over policies, but also through formation of their expectation on the unknown fundamentals. We show that there exist pure-strategy equilibria in this political game with asymmetric information at which the two parties' policies diverge with positive probability. This result is in contrast with the well-known median voter theorem in the classical model of Downsian competition. We also study refinement of equilibria, and identify the perfect equilibria (Selten, 1975) and the strictly perfect equilibria (Okada, 1981). The Nash equilibria with the strongest asymmetry in the parties' strategies are proved to be strictly perfect. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2008-06&r=cta |