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on Contract Theory and Applications |
| By: | Robert Dur; Arjan Non; Hein Roelfsema |
| Abstract: | We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker¿s effort nor manager¿s attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay. |
| Keywords: | Reciprocity, social exchange, incentive contracts, double moral hazard, GSOEP |
| JEL: | D86 J41 M51 M52 M54 M55 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp177&r=cta |
| By: | Jeanne Hagenbach (Centre d'Economie de la Sorbonne); Frédéric Koessler (Paris-Jourdan Sciences Economiques (PSE)) |
| 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 indivisuals 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. |
| JEL: | C72 D82 D83 D85 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09005&r=cta |
| By: | Katrin Millock (Centre d'Economie de la Sorbonne - Paris School of Economics); Angels Xabadia (Department of Economics - University of Girona); David Zilberman (Department of Agricultural and Resource Economics - University of California) |
| 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. |
| JEL: | D62 H23 L51 O33 Q58 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09010&r=cta |
| By: | Gerald Eisenkopf |
| Abstract: | The paper discusses the impact of performance based selection in secondary education on student incentives. The theoretical approach combines human capital theory with signaling theory. The consideration of signaling offers an explanation for observed performance of educational systems with a standard peer effect argument. More specifically it can be optimal to select students according to ability even if selective systems do not outperform comprehensive systems in tests. Selection achieves the same output with lower private costs for the students. The paper questions the strong focus on educational tests to measure the efficiency of selective systems as long as these tests provide no information about a student’s incentives and private costs. |
| Keywords: | Education, signalling, selection, ability grouping, incentives |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0042&r=cta |
| By: | Moral-Carcedo, Julián (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.) |
| Abstract: | The main consistent conclusions of the empirical literature about the effects of minimum wages are threefold. First, there exists evidence about the negative employment effects of minimum wages, notably for the least-skilled groups. Secondly, after an increase in minimum wage, the probability that a teenager leaves school also increases. And, thirdly, the minimum wage affects not only the earnings of workers on minimum wage, but also of other workers with higher wages. In this paper we present an adverse selection model that deals with all these aspects. In this model, costly education serves as a signal of the worker’s ability, which, initially, is private information. The firms in this model make competitive offers to workers after observing if they are or not educated, but retain the option to fire them when their true ability is revealed. Under this model setting, after the establishment of a minimum wage, an adverse selection problem emerges and no low skilled worker is hired. We show how a situation of equilibrium could be re-established through changes in the firing and educational costs that reinforce the signalling mechanism. These changes, however, do not alter, qualitatively, the main conclusions about the effects of minimum wage, since the negative effect on low skilled unemployment, on the spill-over in wages, and on the discouraging effect on education, persist. |
| Keywords: | Signalling; minimum wages; firing costs; education |
| JEL: | J24 J31 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:uam:wpaper:200904&r=cta |
| By: | Toshihiro Okada (School of Economics, Kwansei Gakuin University); Kohei Daido (School of Economics, Kwansei Gakuin University) |
| Abstract: | Some firms may exhibit better operating performance than others because they undertake riskier projects: risk-return tradeoff. We develop a model to examine the effects of financial contracts on a firm's choice between safer (lower risk, lower return) and riskier (higher risk, higher return) projects. The model shows that, assuming a competitive capital market (i.e., financiers with no monopoly power), three types of financial contracts can each be an equilibrium contract, depending on conditions. We show that firms undertake ''safer'' projects when using rollover loans (i.e., short-term loans with a possible rollover), while firms undertake ''riskier'' projects when using non-rollover loans (i.e., long-term loans) or new share issues. The model emphasizes the role of rollover loans (with passive monitoring) as a potential disciplinary device to suppress a firm's risk-taking. The model generates several predictions about the determinants of a firm's risk-taking and its performance. One key prediction of the model is that (risk-neutral) firms with closer bank relationships are more likely to use rollover loans and undertake ''safer'' projects, even with a contestable capital market. We find novel empirical support for the model's predictions. |
| Keywords: | corporate finance, corporate governance, firm risk-taking, firm performance, loan rollover |
| JEL: | G32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:45&r=cta |
| By: | Christophe J. Godlewski (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg); Ydriss Ziane (BETA, Université de Nancy) |
| Abstract: | The aim of this paper is to empirically investigate the determinants of creditor concentration in the use of bank loans by firms in a European cross-country framework. We analyze the influence of loan and borrower characteristics but also banking market structure and legal enforcement country-specific variables that are expected to influence the financial and strategic decision relative to the number of bank lenders. We find that firms tend to diversify sources of financing by reducing bank concentration when their level of quality is higher and both asymmetric information and the risk of early liquidation are minimal (larger, older, transparent, liquid and profitable firms). Furthermore, lenders’ monitoring appears to be an important feature of lending concentration, particularly in order to prevent private benefits extraction by insiders in legal environment where shareholders benefit from better protections. |
| Keywords: | Financial intermediation, bank lending, creditor concentration, information asymmetry, Europe. |
| JEL: | G21 G32 G33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2009-06&r=cta |
| By: | Manolis Galenianos; Rosalie Liccardo Pacula; Nicola Persico |
| Abstract: | A search-theoretic model of the retail market for illegal drugs is developed. Trade occurs in bilateral, potentially long-lived matches between sellers and buyers. Buyers incur search costs when experimenting with a new seller. Moral hazard is present because buyers learn purity only after a trade is made. The model produces testable implications regarding the distribution of purity offered in equilibrium, and the duration of the relationships between buyers and sellers. These predictions are consistent with available data. The effectiveness of different enforcement strategies is evaluated, including some novel ones which leverage the moral hazard present in the market. |
| JEL: | J64 K14 K42 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14980&r=cta |
| By: | Irene Valsecchi (University of Milano-Bicocca) |
| Abstract: | The paper shows that Perfect Bayesian equilibria need not be unique in the strategic communication game of Crawford and Sobel (1982). First, different equilibrium partitions of the state space can have equal cardinality, despite fixed prior beliefs. Hence, there can be different equilibrium action profiles with the same size. Second, provided a Perfect Bayesian equilibrium exists, different message rules and beliefs can hold in other equilibria inducing the same action profile. |
| Keywords: | Sender-Receiver Games, Strategic Information Transmission |
| JEL: | D83 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.19&r=cta |
| By: | Jeanne Hagenbach (Centre d'Economie de la Sorbonne) |
| Abstract: | In the dynamic game we consider, players are the members of a fixed network. Everyone is initially endowed with an information item that he is the only paper to hold. Players are offered a finite number of periods to centralize the initially dispersed items in the hands of any one member of the network. In every period, each agent strategically chooses whether or not to transmit the items he holds to this neighbors in the network. The sooner all the items are gathered by any individual, the better it is for the group of players as a whole. Besides, the agent who first centralizes all the items is offered an additional reward that he keeps for himself. In this framework where information transmission is strategic and physically restricted, we provide a necessary and sufficient condition for a group to pool information items in every equilibrium. This condition is independent of the network structure. The architecture of links however affects the time needed before items are centralized in equilibrium. This paper provides theoretical support to Bonacich (1990)'s experimental results. |
| Keywords: | Social network, social dilemma, dynamic network game, strategic communication. |
| JEL: | D83 C72 L22 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09011&r=cta |
| By: | Jesse Bull (Department of Economics, Florida International University) |
| Abstract: | In a team production problem with non-verifiable effort, budget breaking is essential to inducing efficient levels of effort. This short paper considers the use of a third party, who does not exert effort, in a setting with general contracts that can include message games, as a way to remove resources from the team. We show that, given reasonable assumptions on side-contracting, the addition of the third party is not helpful. Additionally, we consider assumptions on side-contracting that others have used, and show that the third party may be of only limited use in those situations. |
| JEL: | C70 D74 K10 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0909&r=cta |
| By: | Bruce I. Carlin; Simon Gervais |
| Abstract: | Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, what legal rules maximize social welfare in the market? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they service clients in the market. All participants in the market are rational, and prices are set based on consistent beliefs about equilibrium actions of the firm and the broker. We characterize the optimal law within our modeling context, and derive how the legal system splits the blame between parties to the transaction. We also analyze how complexity in assessing clients and conflicts of interest affect the law. Since these markets are large, the implications of the analysis have great welfare import. |
| JEL: | G18 K2 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14972&r=cta |