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on Contract Theory and Applications |
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Issue of 2009‒06‒03
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Huang, Shin-Chen; Lu, Chia-Hui |
| Abstract: | This paper aims to study the choice of offshoring modes made by multinationals in the presence of asymmetric information. We focus on two types of asymmetric information, namely hidden characteristics and hidden action. The former creates adverse selection problem, and the later leads to moral hazard problem, both of which incur non-trivial costs to multinationals. We show that different offshoring modes, including greenfield foreign direct investment, joint venture, and outsourcing, can serve as a means to overcome or mitigate the problem of information asymmetry. We study the conditions under which one particular type of offshore modes dominates the others. The model generates implications consistent with the patterns of the prevalence of various offshoring models over time, and across industries and countries. |
| Keywords: | Asymmetric Information, Global Sourcing, Foreign Direct Investment, Joint Venture, Outsourcing |
| JEL: | F21 F23 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hit:ccesdp:16&r=cta |
| By: | Shin Chen Huang; Chia Hui Lu |
| Abstract: | This paper aims to study the choice of offshoring modes made by multinationals in the presence of asymmetric information. We focus on two types of asymmetric information, namely hidden characteristics and hidden action. The former creates adverse selection problem, and the later leads to moral hazard problem, both of which incur non-trivial costs to multinationals. We show that different offshoring modes, including greenfield foreign direct investment, joint venture, and outsourcing, can serve as a means to overcome or mitigate the problem of information asymmetry. We study the conditions under which one particular type of offshore modes dominates the others. The model generates implications consistent with the patterns of the prevalence of various offshoring models over time, and across industries and countries. |
| Keywords: | Asymmetric Information, Global Sourcing, Foreign Direct Investment, Joint Venture, Outsourcing |
| JEL: | F21 F23 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd09-067&r=cta |
| By: | Kahana, Nava (Bar-Ilan University); Mealem, Yosef (Netanya Academic College); Nitzan, Shmuel (Bar-Ilan University) |
| Abstract: | This paper focuses on indivisible multiple-cost–single-benefit projects that must be approved by the government. A simple mechanism is proposed that ensures an efficient and fair implementation of such projects. The proposed mechanism is appropriate for a unilateral information structure: the single beneficiary has complete information on the cost and benefit of the project while the government official has no such information and the cost bearers have information only on each other's costs. |
| Keywords: | indivisible project, single beneficiary, multiple-cost bearers, unilateral information, efficient and fair implementation |
| JEL: | D61 D62 D78 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4181&r=cta |
| By: | Cigno, Alessandro (University of Florence); Luporini, Annalisa (University of Florence) |
| Abstract: | We examine the second-best family policy under the assumption that both the number and the future earning capacities of the children born to a couple are random variables with probability distributions conditional on unobservable parental actions. Potential parents take their decisions without taking into account the effects of these actions on the government's future tax revenue. The second-best policy provides parents with credit and insurance, and allows them to appropriate the external benefits of their actions. |
| Keywords: | stochastic quantity and quality of children, moral hazard, population externalities, family allowances, scholarships, pensions |
| JEL: | D13 D78 D82 H31 J13 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4179&r=cta |
| By: | Erwan MORELLEC (Ecole Polytechnique Federale de Lausanne (EPFL), Swiss Finance Institute and CEPR); Norman SCHURHOFF (University of Lausanne and Swiss Finance Institute) |
| Abstract: | This paper develops a tractable real options framework to analyze the effects of asymmetric information on investment and financing decisions when firms require external funds to finance investment. Our analysis shows that corporate insiders can signal their private information to outside investors using the timing of investment and the firm's debt-equity mix. Several important contributions follow from this result. First, we show that firms' equilibrium investment strategies differ significantly from those implied by standard real options models with perfect information. In particular, informational asymmetries erode the option value of waiting to invest and induce firms with good prospects to speed up investment, leading to overinvestment. Second, we demonstrate that informational asymmetries may not translate into a financing hierarchy. Most notably, we find that equity issues can be more attractive than debt issues even for firms with ample debt capacity, providing a rationale for the stylized fact that small high-growth firms do not behave according to the pecking order theory. |
| Keywords: | asymmetric information; financing decisions; investment timing |
| JEL: | G13 G14 G31 G34 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0909&r=cta |
| By: | Joan Esteban; Facundo Albornoz; Paolo Vanin |
| Abstract: | This paper studies a model of announcements by a privately informed government about the future state of the economic activity in an economy subject to recurrent shocks and with distortions due to income taxation. Although transparent communication would ex ante be desirable, we find that even a benevolent government may ex-post be non-informative, in an attempt to countervail the tax distortion with a "second best" compensating distortion in information. This result provides a rationale for independent national statistical offices, committed to truthful communication. We also find that whether inequality in income distribution favors or harms government transparency depends on labor supply elasticity. |
| Keywords: | Government announcements, Cheap talk, Asymmetric in- formation, Inequality |
| JEL: | D82 E61 |
| Date: | 2009–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:774.09&r=cta |
| By: | Abraham Neyman |
| Abstract: | It is known that the value of a zero-sum infinitely repeated game with incomplete information on both sides need not exist [Aumann Maschler 95]. It is proved that any number between the minmax and the maxmin of the zero-sum infinitely repeated game with incomplete information on both sides is the value of the long finitely repeated game where players' information about the uncertain number of repetitions is asymmetric. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp512&r=cta |
| By: | Alexander Matros (University of Pittsburgh); Andriy Zapechelnyuk (University of Bonn and Kyiv School of Economics) |
| Abstract: | We consider a model where sellers make repeated attempts to sell an object via two competing auction houses. An auction house that attracts a seller runs a Vickrey auction among a random sample of buyers and collects two fees: a listing fee and, if the object is sold, a closing fee. We characterize equilibria and show that two equilibrium outcomes are possible: a (contestable) monopoly, and a market segmentation between the two competitors. |
| Keywords: | Competing auctions, mediator, listing fee, closing fee |
| JEL: | C73 D44 D82 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:kse:dpaper:17&r=cta |
| By: | CASAMATTA, Catherine; POUGET, Sébastien |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:9616&r=cta |
| By: | Bowmaker, Simon W. (New York University); Emerson, Patrick M. (Oregon State University) |
| Abstract: | Previous studies have suggested that more liberal abortion laws should lead to a decrease in marriage rates among young women as 'shotgun weddings' are no longer necessary. Empirical evidence from the United States lends support to that hypothesis. This paper presents an alternative theory of abortion access and marriage based on asymmetric information, which suggests that more liberal abortion laws may actually promote young marriage. An empirical examination of marriage data from Eastern Europe shows that countries that liberalized their abortion laws saw an increase in marriage rates among non-teenage women. |
| Keywords: | abortion, marriage asymmetric information |
| JEL: | J12 J13 K0 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4176&r=cta |
| By: | Bernard De Meyer (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Ehud Lehrer (School of Mathematical Sciences - Tel Aviv University); Dinah Rosenberg (LAGA - Laboratoire d'Analyse, Géométrie et Applications - CNRS : UMR7539 - Université Paris-Nord - Paris XIII) |
| Abstract: | In a Bayesian game some players might receive a noisy signal regarding the specific game actually being played before it starts. We study zero-sum games where each player receives a partial information about his own type and no information about that of the other player and analyze the impact the signals have on the payoffs. It turns out that the functions that evaluate the value of information share two property. The first is Blackwell monotonicity, which means that each player gains from knowing more. The second is concavity on the space of conditional probabilities. |
| Keywords: | Value of information, Blackwell monotonicity, concavity. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00390625_v1&r=cta |
| By: | Ramazan GENCA (Simon Fraser University and Rimini Center for Economic Analysis); Rajna GIBSON (University of Geneva and Swiss Finance Institute); Yi XUE (Simon Fraser University) |
| Abstract: | In this study, we examine the rationale that informed traders use in choosing various financial instruments in order to speculate on the volatility of the underlying asset, here a common stock. Using a continuous-time trading model, we demonstrate that the quality of the private information regarding the volatility parameter together with the relative transaction costs observed in the various segments of the cash and derivatives markets will determine informed agents’ trading habitats. We further show that in the presence of imprecise volatility signals, only the “most sophisticated” traders (those with highly precise volatility signals) will engage in pure volatility bets. Traders with less precise signals will choose a naked option strategy, while traders at the low spectrum of the precision scale will invest in the underlying stock. Thus, the low volume of pure volatility trades observed by Lakonishok et al. (2007) does not necessarily imply that only fringe traders have chosen to speculate on volatility. Rather, it may suggest that the majority of informed traders do not have precise volatility signals. |
| Keywords: | Informed traders, options, stocks, signal precision, transaction costs, volatility trading |
| JEL: | G11 G14 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0911&r=cta |
| By: | BISIÈRE, Christophe; DÉCAMPS, Jean-Paul; LOVO, Stefano |
| JEL: | G14 D82 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:20671&r=cta |
| By: | Victor C. Domansky (St. Petersburg Institute for Economics and Mathematics - Russian Academy of Sciences); Victoria L. Kreps (St. Petersburg Institute for Economics and Mathematics - Russian Academy of Sciences) |
| Abstract: | This paper is concerned with multistage bidding models introduced by De Meyer and Moussa Saley (2002) to analyze the evolution of the price system at finance markets with asymmetric information. The zero-sum repeated games with incomplete information are considered modeling the bidding with countable sets of possible prices and admissible bids. It is shown that, if the liquidation price of a share has a finite variance, then the sequence of values of n-step games is bounded and converges to the value of the game with infinite number of steps. We construct explicitly the optimal strategies for this game. The optimal strategy of Player 1 (the insider) generates a symmetric random walk of posterior mathematical expectations of liquidation price with absorption. The expected duration of this random walk is equal to the initial variance of liquidation price. The guaranteed total gain of Player 1 (the value of the game) is equal to this expected duration multiplied with the fixed gain per step. |
| Keywords: | Multistage bidding, asymmetric information, repeated games, optimal strategy. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00390701_v1&r=cta |