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on Contract Theory and Applications |
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Issue of 2009‒05‒16
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Bontems, Philippe |
| Abstract: | We explore in this paper the consequences of status seeking preferences among agents contracting with a private principal in the context of production. We examine in partic- ular the case of envy and we show that in general envy entails augmented distortions due to asymmetric information in optimal contracts. Furthermore if the principal neglects the preferences of the agents with respect to status, then potentially there is under- participation to the contract. We also show that if the principal is free to choose who can participate to the contract, then under some conditions the principal may prefer to contract with only a subset of potentially "profitable" agents (that is where his utility is strictly positive). We then ask whether contracting with agents seeking status would yield to more incentives to exert unobservable effort. We actually show that the principal has incentives to discourage effort. In the last part of the paper, we consider the case of costly observation of private decisions so that we investigate whether envy encourages non compliance or not. |
| Keywords: | status, adverse selection, contracts, envy, externalities, Production Economics, D6, H0, D86, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea09:49507&r=cta |
| By: | Zsolt Becsi (Department of Economics, Southern Illinois University Carbondale); Victor E. Li (Department of Economics and Statistics, Villanova School of Business, Villanova University); Ping Wang (Department of Economics, Washington University in St. Louis) |
| Abstract: | This paper studies the phenomenon of mismatch in a decentralized credit market where borrowers and lenders must engage in costly search to establish credit relationships. Our dynamic general equilibrium framework integrates incentive based informational frictions with a matching process highlighted by (i) borrowers’ endogenous market entry and exit decision (entry frictions) and (ii) time and resource costs necessary to locate credit opportunities (search frictions). A key feature of the incentive compatible loan contract negotiated between borrowers and lenders is the interaction of informational frictions (in the form of moral hazard) with entry and search frictions. We find that the removal of entry barriers can eliminate information-based equilibrium credit rationing. More generally, entry and incentive frictions are important in understanding the extent of credit rationing, while entry and search frictions are important for understanding credit market breakdown. |
| Keywords: | Entry, Moral Hazard, Credit Rationing, Credit Mismatch, Credit-Market Breakdown |
| JEL: | C78 D82 D83 E44 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:7&r=cta |
| By: | Guido Voigt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | The strategic use of private information causes efficiency losses in traditional principal-agent settings. One stream of research states that these efficiency losses cannot be overcome if all agents use their private information strategically. Yet, another stream of research highlights the importance of communication, trust and trustworthiness in supply chain management. The underlying work links the concepts of communication, trust and trustworthiness to a traditional principal-agent setting in a supply chain environment. Surprisingly, it can be shown that communication and trust can actually lead to increasing efficiency losses although there is a substantial level of trustworthiness. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:09006&r=cta |
| By: | Dhillon Amrita, (University of Warwick); García-Fronti Javier (University of Warwick); Zhang Lei (University of Warwick) |
| Abstract: | The main motivation of this paper is to study the impact of the composition of creditors on the probability of default and the risk premium on sovereign bonds, when there is debtor moral hazard. In the absence of any legal enforcement, relational contracts work only when there are creditors who have a repeated relationship with the borrower. We show that ownership structures with a larger fraction of long term lenders are associated with a lower default probability and lower risk premia. Moreover, competitive markets structures lead to loss in efficiency as well when there is moral hazard, in contrast to the case with perfect enforceability and information. |
| Keywords: | Sovereign default ; Institutions ; Reputation ; Uncertainty |
| JEL: | F34 G34 H63 D82 D86 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:901&r=cta |
| By: | Brown, Zachary S.; Bellemare, Marc F. |
| Abstract: | We develop a method to structurally estimate principal-agent mod- els by ordinary least squares (OLS). We set up a general principal- agent model which explicitly incorporates the wealth levels of each party and the opportunity cost to the agent of entering the contract. This yields an optimal contract that is linearized by way of an Nth order Taylor approximation. This in turn imposes N(3N-1)/2 restric- tions on the parameters and yields an empirical test of the canonical principal-agent model. In the application, we consider the case where N = 2 and apply our method to a sample of land tenancy contracts in rural Madagascar. Empirical tests lead to consistent failure to reject the hypotheses derived from our structural model, which lends support to our structural method as well as to the canonical principal-agent model. |
| Keywords: | Principal-Agent Models, Contract Theory, Structural Estimations, Risk and Uncertainty, C12, C13, D86, O12, Q12, |
| Date: | 2009–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea09:49368&r=cta |
| By: | F. Barigozzi; D. Henriet |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:657&r=cta |
| By: | Faias, Marta; Hervés-Beloso, Carlos; Moreno García, Emma |
| Abstract: | In this paper we consider a pure exchange economy with a finite set of types of agents which have incomplete and asymmetric information on the states of nature. Our aim is to describe the equilibrium price formation and how the lack of information may affect the allocation of resources. For it, we adapt to an asymmetric information scenario a variant of the Shapley-Shubik game introduced by Dubey and Geanakoplos (2003). |
| Keywords: | C72/ D51 |
| JEL: | C71 D51 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15176&r=cta |
| By: | Marc Labie (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and Faculté Warocqué, Université Mons-Hainaut.); Pierre-Guillaume Méon (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.); Ariane Szafarz (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.) |
| Abstract: | This paper studies how high-powered incentives may affect credit officers’ discriminatory practices in microfinance institutions. Using an agency model applied to a non-profit MFI, we argue that incentive contracts may help align the officer’s behavior with the MFI’s mission. However, since incentives are costly, and the MFI’s budget is limited, even a benevolent institution faces a trade-off between fighting discrimination and raising outreach. Welfare maximization may not imply full eradication of discriminatory practices. A non discriminating welfare-maximizing MFI may thus prefer paying smaller incentives, and letting its credit officer discriminate to some extent. |
| Keywords: | Microfinance, Discrimination, Credit Officers, Incentives. |
| JEL: | O16 D82 J33 L31 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:09-017&r=cta |
| By: | Qiu, Feng; Goodwin, Barry K.; Gervais, Jean-Philippe |
| Abstract: | This study investigates the contribution of different farm programs to farmland rental contract choices under a principal-agent framework. It focuses on the existence and increasing use of hybrid contracts. An optimal contract will balance efficient risk sharing with appropriate incentives to curtail moral hazard, as well as divide the government program benefits between the landlord and the tenant operator. A multinomial logit model reveals that government support programs have significant impacts on a farmland contract choice. The effects differ substantially across programs and regions. Furthermore, the empirical results also show that risk attitudes and the tenantâs effort productivity have significant impacts on the contract choice. |
| Keywords: | rental contract choice, hybrid contract, decoupled program, coupled program, Agricultural and Food Policy, Environmental Economics and Policy, Industrial Organization, Institutional and Behavioral Economics, Land Economics/Use, Risk and Uncertainty, Q12, Q15, Q18, |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea09:49242&r=cta |
| By: | Gary B. Gorton; Lixin Huang; Qiang Kang |
| Abstract: | Stock prices are more informative when the information has less social value. Speculators with limited resources making costly (private) information production decisions must decide to produce information about some firms and not others. We show that producing and trading on private information is most profitable in the stocks of firms with poor corporate governance -- precisely because it will not be acted upon -- and less profitable at firms with better corporate governance. To the extent that the information in the stock price is used for disciplining the CEO by the board of directors, the informed trader has a reduced incentive to produce the information in the first place. We test our model using the probability of informed trading (PIN) and the probability of forced CEO turnover in a simultaneous-equation system. The empirical results support the model predictions. Stock prices are efficient, but there is a limit to the disciplining role they can fulfill. We apply the model to evaluate the effects of the Sarbanes-Oxley Act of 2002. |
| JEL: | G0 G1 G14 G3 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14944&r=cta |
| By: | Roberto Burguet; Juan-José Ganuza; Esther Hauk |
| Abstract: | In the presence of cost uncertainty, limited liability introduces the possibility of default in procurement with its associated bank-ruptcy costs. When financial soundness is not perfectly observable, we show that incentive compatibility implies that financially less sound contractors are selected with higher probability in any feasible mechanism. Informational rents are associated with unsound financial situations. By selecting the financially weakest contractor, stronger price competition (auctions) may not only increase the probability of default but also expected rents. Thus, weak conditions are suffcient for auctions to be suboptimal. In particular, we show that pooling firms with higher assets may reduce the cost of procurement even when default is costless for the sponsor. |
| Keywords: | Procurement, limited liability, bankruptcy |
| JEL: | L51 H57 D44 |
| Date: | 2009–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:767.09&r=cta |
| By: | F. Barigozzi; R. Levaggi |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:656&r=cta |
| By: | Nick Netzer (Socioeconomic Institute, University of Zurich); Florian Scheuer (Massachusetts Institute of Technology) |
| Abstract: | We examine equilibria in competitive insurance markets with adverse selection when wealth differences arise endogenously from unobservable savings or labor supply decisions. The endogeneity of wealth implies that high risk individuals may ceteris paribus exhibit the lower marginal willingness to pay for insurance than low risks, a phenomenon that we refer to as irregular-crossing preferences. In our main model, both risk and patience (or productivity) are privately observable. In contrast to the models in the existing literature, where wealth heterogeneity is exogenously assumed, equilibria in our model no longer exhibit a monotone relation between risk and coverage. Individuals who purchase larger coverage are no longer higher risks, a phenomenon frequently observed in empirical studies. |
| Keywords: | Insurance Markets, Adverse Selection, Multidimensional Screening |
| JEL: | D82 G22 J22 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0907&r=cta |
| By: | Giofré, Maela M. |
| Abstract: | We investigate the role of information asymmetries and inflation hedging in shaping international equity portfolios. We confirm, in a multinational setting, Cooper and Kaplanis (1994) result of no inflation hedging motive driving investors' behavior and find evidence of a crucial role for financial market development and trade linkages. |
| Keywords: | equity home bias; portfolio choice; inflation hedging; information asymmetries |
| JEL: | G11 F30 G15 F21 F36 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13925&r=cta |