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on Contract Theory and Applications |
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Issue of 2009‒07‒11
eighteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Yaron Leitner |
| Abstract: | When contracts are unobserved, agents may have the incentive to promise the same asset to multiple counterparties and subsequently default. The author constructs an optimal mechanism that induces agents to reveal all their trades voluntarily. The mechanism allows agents to report every contract they enter, and it makes public the names of agents who have reached some prespecified position limit. In some cases, an agent's position limit must be higher than the number of contracts he enters in equilibrium. The mechanism has some features of a clearinghouse. ; Supersedes Working Paper 05-12/R |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-10&r=cta |
| By: | Grepperud, Sverre (Institute of Health Management and Health Economics); Pedersen, Pål Andreas (Bodø Graduate School of Business) |
| Abstract: | This paper analyses optimal contracts in a principal-agent model where the agent is intrinsically motivated at the outset and there is an endogenous relationship between the structure of incentive payments and intrinsic motivation (crowding effects). The analysis shows that crowding effects have implications for the optimal contract and that under some conditions the principal can do better without implementing any economic incentives. Furthermore, it is shown that when high-powered incentives diminish intrinsic motivation (crowding-out) the first-best solution in a principal-agent framework is unattainable. |
| Keywords: | Agency theory; intrinsic motivation; crowding effects |
| JEL: | J01 |
| Date: | 2009–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:2001_004&r=cta |
| By: | Asheim, Geir B. (Department of Economics); Nilssen, Tore (Department of Economics); Emblem, Anne Wenche (School of Management) |
| Abstract: | We study a health-insurance market where individuals are offered coverage against both medical expenditures and losses in income. Individuals vary in their level of innate ability. If there is private information about the probability of illness and an individual’s innate ability is sufficiently low, we find that competitive insurance contracts yield screening partly in the form of co-payment, i.e., a deductible in pay, and partly in the form of reduced medical treatment, i.e., a deductible in pain. |
| Keywords: | Health insurance; adverse selection; deductibles |
| JEL: | D82 I11 |
| Date: | 2009–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:2002_013&r=cta |
| By: | Eric Van Tassel |
| Abstract: | In this paper we study a model in which asymmetrically informed banks compete with one another to offer loans to entrepreneurs with risky projects. Banks are given an opportunity to share private credit information about their borrowers. The revealed information impacts both the bank’s repayment revenue as well as its costs, in terms of either the rate paid on debt and insurance, or the risk adjusted capital requirement. In this framework, we study how the interaction of repayment revenue and cost shape individual banks’ incentives to share information and in turn, how this explains the overall degree of information sharing in the economy. |
| Keywords: | Information sharing; Bank competition; Market discipline |
| JEL: | D82 G21 O16 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:fal:wpaper:09004&r=cta |
| By: | Adriani, Fabrizio; Deidda, Luca; Sonderegger, Silvia |
| Abstract: | We consider a model of securities issues where the quality of securities is private information to the issuer, and firms of higher quality are more reluctant to issue securities than low quality firms. We show that, when the issuer directly trades with investors, market breakdown may occur. This is caused by the issuer's attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which: i) underwrites the issue, ii) influences the offering price.Underwriting creates a wedge between the interests of the intermediary and those of the issuer, which allows trade with investors to be restored. A by-product of this conflict of interest is that trade is characterized by underpricing. Another implication is that the intermediary may act as a reliable screening device when she possesses private information about the firm's quality. In general, our analysis suggests that collusion between the intermediary and the issuer hinders trade, whereas collusion between the intermediary and investors may promote it. |
| Keywords: | Signaling; Financial Intermediaries; Securities Issues; Underwriting. |
| JEL: | D82 G24 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16112&r=cta |
| By: | Emmanuel Farhi; Jean Tirole |
| Abstract: | The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, there is a role for macro-prudential supervision. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts. |
| JEL: | E44 E52 G28 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15138&r=cta |
| By: | Yolande Hiriart; David Martimort; Jérôme Pouyet |
| Abstract: | When a firm undertakes risky activities, the conflict between social and private incentives to exercise safety care requires public intervention. This control takes the form of both monetary incentives but also monitoring taking place either ex ante or ex post, i.e., before or after an accident occurs. We delineate the respective scopes of these monitoring activities when public monitors are either benevolent or corruptible. Separation between the ex ante and the ex post monitors helps to prevent capture, increases the likelihood of ex post investigation and improves welfare. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2009-20&r=cta |
| By: | Vislie, Jon (Department of Economics) |
| Abstract: | The author will in this paper analyse the issue of payment reforms for a public health care system, where public hospitals offer treatment. Any health care system should provide treatment so as to maximise expected social welfare. The implementation of this outcome, through the way private og public health care providers or hospitals are compensated for the cost of providing services, has been a policy issue in a number of countries. Many payment reforms are now based on a (high-powered) DRG-price system, so as to induce cost consciousness. <p> The hospitals are privately informed about the diseases of each patient and offer treatment with a stochastic outcome, while cost control cannot be verified. Ex post outcome and realised cost of treatment can be verified, with cost depending on treatment intensity, cost-reducing effort and the type of disease. With a disease-contingent transfer, the hospital is able to capture a rent, which has a social cost due to tax distortions and because rent has no direct weight in the welfare function. <p> When type of treatment can be verified, treatment should be less intensive than under complete information, if marginal cost of treatment is disease-dependent. However, rent extraction is accomplished not only by a less aggressive treatment (which has a negative impact on the likelihood for recovery), but also by offering a cost-reimbursement scheme, without any recovery-contingent bonus. When treatment is unverifiable, induced treatment should again be below the first-best level. This solution is implemented through a combination of a recovery-contingent bonus (declining in severity) and cost sharing (with the fraction of cost being reimbursed by the government being increasing in severity). |
| Keywords: | Public health care; hospital expenses |
| JEL: | I18 |
| Date: | 2009–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:2001_006&r=cta |
| By: | Thomas D. Jeitschko (Department of Economics, Michigan State University); Byung-Cheol Kim (School of Economics, Georgia Institute of Technology) |
| Abstract: | The decision to request a preliminary injunction-a court order that bans a party from certain behavior until its lawfulness is ascertained in a final court ruling at trial-is an important litigation instrument in many areas of the law including antitrust, copyright, patents, trademarks, employment and labor relations as well as contracts. The process of filing for a preliminary injunction and the court's ruling on such a request generates information that can affect possible settlement decisions. We consider these implications when there is uncertainty about both the plaintiff’s damages as well as the merits of case in the eyes of the court. Both plaintiff and defendant revise their beliefs about the case strength in dispute once they observe the court's ruling on preliminary injunctive relief. We study how such learning affects the likelihood of settlement. A precursor to this analysis is the study of the strategic role of preliminary injunctions as a means to signal the plaintiff's willingness to settle. |
| Keywords: | preliminary injunction, learning, signaling, screening, litigation, settlement. |
| JEL: | D8 K21 K41 K42 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:hol:holodi:0911&r=cta |
| By: | Eyster, Erik; Rabin, Matthew |
| Abstract: | In social-learning environments, we investigate implications of the assumption that people naively believe that each previous person's action reflects solely that person's private information, leading them to systematically imitate all predecessors even in the many circumstances where rational agents do not. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. They herd with positive probability on incorrect actions across a broad array of rich-information settings where rational players never do, and---because they become fully confident even when wrong---can be harmed on average by observing others. |
| Keywords: | Cursed equiliibrium; Herding; Naive inference; Social Learning |
| JEL: | B49 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7351&r=cta |
| By: | Hoel, Michael (Department of Economics); Iversen, Tor (Institute of Health Management and Health Economics) |
| Abstract: | Privacy of information is a central concern in the debate about genetic testing. Two types of social inefficiencies may occur when information about prevention and test status is private; genetic testing may not be done when it is socially efficient and genetic testing may be done although it is socially inefficient. The first type of inefficiency is shown to be likely for consumers with public insurance only, while the second type of inefficiency is likely for those with a mix of public/private insurance. This second type of inefficiency is shown to be more important the less effective prevention is. |
| Keywords: | Health insurance; genetic testing |
| JEL: | I11 |
| Date: | 2009–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:1999_001&r=cta |
| By: | Fungáová, Zuzana (BOFIT); Godlewski , Christophe J. (BOFIT); Weill, Laurent (BOFIT) |
| Abstract: | This paper considers whether local bank participation exerts an impact on the spreads for syndicated loans in Russia. Following Berger, Klapper and Udell (2001), we test whether local banks possess a superior ability to deal with information asymmetries. Using a sample of 528 syndicated loans to Russian borrowers, we perform regressions of the spread on a set of variables including information on local bank participation and the characteristics of loans and borrowers. Unlike earlier studies, we distinguish foreign banks with a local presence from those without such presence. The intuition here is that a local presence may influence a foreign bank’s monitoring ability and access to information about borrowers. We observe no significant impact on the spread when there is local bank participation in a syndicated loan, nor do we find any significant influence of the presence of domestic-owned banks or foreign-owned banks on the spread. Additional estimations considering subsamples with exacerbated information asymmetries provide similar results. Therefore our conclusion is that local banks do not benefit from an advantage in monitoring ability and in information in Russia. |
| Keywords: | bank; information asymmetry; loan; syndication; Russia |
| JEL: | G21 P34 |
| Date: | 2009–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2009_007&r=cta |
| By: | Hoel, Michael (Department of Economics); Nilssen, Tore (Department of Economics); Vislie, Jon (Department of Economics); Iversen, Tor (Institute of Health Management and Health Economics) |
| Abstract: | A central theme in the international debate on genetic testing concerns the extent to which insurance companies should be allowed to use genetic information in their design of insurance contracts. This issue is analysed within a model with the following important feature: A person's well-being depends on the perceived probability of becoming ill in the future in a way that varies among individuals. <p><p> The authors show that both tested high-risks and untested individuals are equally well off whether or not test results can be used by insurers. Individuals who test for being low-risks, on the other hand, are made worse off by not being able to verify this to insurers. This implies that verifiability dominates non-verifiability in an ex-ante sense. |
| Keywords: | Health insurance; isurance contracts; genetic testing; genetic information |
| JEL: | D82 I11 I18 |
| Date: | 2009–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:2002_010&r=cta |
| By: | Silvia Marchesi; Laura Sabani; Axel Dreher |
| Abstract: | We focus on the role that the transmission of information between a multilateral (e.g., the IMF) and a country has for optimal (conditional) reform design. The main result is that the informational advantage of the country must be strictly greater than the advantage of the multilateral in order to increase a country’s discretion in the choice of the policies to be implemented (country ownership). To the contrary, an increase in the conflict of interests between the multilateral and the country may lead the multilateral to leave more freedom in designing reforms, which is at odds to what is commonly argued. Our empirical results provide support to the idea that the IMF follows an optimal allocation rule of control rights over policies, leaving the recipient countries more freedom whenever their local knowledge appears to be crucial for designing more adequate reforms. |
| Keywords: | IMF conditionality, delegation, communication, ownership, panel |
| JEL: | C23 D82 F33 N2 |
| Date: | 2009–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:86&r=cta |
| By: | Emblem, Anne Wenche (Faculty of Economics and Social Science) |
| Abstract: | This paper studies redistribution by means of a public supply of medical treatment. We show that the government can redistribute income towards low-ability individuals in a world of asymmetric information by offering bundles of medical treatment and redistributive payment. If self-selection is a problem, then the separating scheme offers high-ability individuals complete treatment against a high payment, and low-ability individuals partial treatment against a low payment. In particular, the level of treatment offered low-ability individuals is distorted downwards. |
| Keywords: | health; medical treatment; insurance; redistribution; self-selection |
| JEL: | D81 H42 I18 |
| Date: | 2009–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:2002_004&r=cta |
| By: | Adriani, Fabrizio; Sonderegger, Silvia |
| Abstract: | We present a model of intergenerational transmission of pro-social values in which parents have information about relevant characteristics of society that is not directly available to their children. Differently from existing models of cultural transmission of values (such as Bisin and Verdier, 2001, and Tabellini, 2008) we assume that parents are exclusively concerned with their children's material welfare. If parents coordinate their educational choices, a child would look at her system of values to predict the values of her contemporaries, with whom she may interact. A parent may thus choose to instil pro-social values into his child in order to signal to her that others can generally be trusted. This implies that parents may optimally decide to endow their children with values that stand in contrast with maximization of material welfare, even if their children's material welfare is all they care about. |
| Keywords: | Intergenerational Transmission; Signaling; Values |
| JEL: | H41 D64 D82 Z13 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16107&r=cta |
| By: | Eugénia da Conceição-Heldt |
| Abstract: | This paper addresses the problem of agency losses (agency shirking and agency slippage) in the process of power delegation in EU trade policy. The central question is whether a conflictual situation exists between the interests of the member states and those of the European Commission (agency shirking), or whether the structure of delegation in itself stimulates the agent to adopt a different position from the principals (agency slippage). Drawing on the principal-agent approach, I argue that agency losses are due to the structure of delegation and that the existence of multiple principals with diverging preferences facilitates agency. I find empirical evidence that the Council-Commission relationship on trade politics has different dynamics depending on the negotiating stage. In the initial negotiating stage, when defining the negotiating mandate of the Commission, the relationship is cooperative. Conflict between the Commission and the Council only breaks out in a latter stage of negotiations, when the Commission makes concessions at the international level. |
| Keywords: | trade policy; agriculture policy; European Council; European Commission |
| Date: | 2009–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:erp:euirsc:p0212&r=cta |
| By: | Ojo, Marianne |
| Abstract: | This paper not only recommends means whereby principal-agent problems could be addressed, but also considers various ways in which the external auditor and audit committees contribute as corporate governance tools. The impact of bank regulations on risk taking and the need for a consideration of ownership structures are amongst other issues which are considered. In acknowledging the issues raised by ownership structures, it considers theories such as the banking theory and corporate governance theory. It also considers other alternatives whereby risk taking could be controlled. In recommending the external auditor’s expertise to address principal agent problems, it draws attention to the audit committee’s roles, both as a vital and complementary corporate governance tool, and also considers recurring problems which still persist with some financial reporting standards. It also highlights the importance of measures which need to be in place if the external auditor’s contribution to corporate governance is to be maximised. |
| Keywords: | agency; theory; external; auditor; banking; regulation; risk |
| JEL: | K2 D21 G3 G0 A10 M4 |
| Date: | 2009–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15989&r=cta |