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on Contract Theory and Applications |
|
Issue of 2009‒07‒28
fifteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Jean Tirole (Toulouse School of Economics); Emmanuel Farhi (Department of Economics Harvard and TSE) |
| 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, macro-prudential supervision is called for. 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. |
| Keywords: | Monetary Policy, Funding Liquidity Risk, Strategic Complementarities, Macro-Prudential Supervision |
| JEL: | E44 E52 G28 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.57&r=cta |
| By: | Carlo Scarpa (University of Brescia); Giacomo Calzolari (University of Bologna) |
| Abstract: | We study the regulation of a firm which supplies a regulated service while also operating in a competitive, unregulated sector. If the firm conducts its activities in the two markets jointly, it enjoys economies of scope whose size is the firm’s private information, unknown either to the regulator or to the rival firms. We characterize the unregulated market outcome (with price and quantity competition) and optimal regulation that involves an informational externality to the competitors. Although joint conduct of the activities generates scope economies, it also entails private information, so that regulation is less efficient and the unregulated market too may be adversely affected. Nevertheless, we show that allowing the firm to integrate productions is (socially) desirable, unless joint production is characterized by dis-economies of scope. |
| Keywords: | Regulation, Competition, Asymmetric Information, Conglomerate Firms, Multiutility, Scope Economies, Informational Externality |
| JEL: | L51 L43 L52 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.55&r=cta |
| By: | Yi Xue (Department of Economics, Simon Fraser University); Ramazan Gencay (Department of Economics, Simon Fraser University) |
| Abstract: | The rate of information diffusion and consequently price discovery, is conditional upon not only the design of the market microstructure, but also the informational structure. This paper presents a market microstructure model showing that an increasing number of information hierarchies among informed competitive traders leads to a slower information diffusion rate and informational inefficiency. The model illustrates that informed traders may prefer trading with each other rather than with noise traders in the presence of the information hierarchies. Furthermore, we show that momentum can be generated from the predictable patterns of noise traders, which are assumed to be a function of past prices |
| Keywords: | Information hierarchies, Information diffusion rate, Momentum |
| JEL: | G10 G11 D43 D82 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:wp29_09&r=cta |
| By: | Philippe Aghion; Drew Fudenberg; Richard T. Holden |
| Abstract: | The foundations of incomplete contracts have been questioned using or extending the subgame perfect implementation approach of Moore and Repullo (1988). We consider the robustness of subgame perfect implementation to the introduction of small amounts of asymmetric information. We show that Moore- Repullo mechanisms may not yield (even approximately) truthful revelation in pure or totally mixed strategies as the amount of asymmetric information goes to zero. Moreover, we argue that a wide class of extensive-form mechanisms are subject to this fragility. |
| JEL: | C72 C73 D23 L22 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15167&r=cta |
| By: | Ramazan Gencay (Department of Economics, Simon Fraser University); Nikola Gradojevic (Faculty of Business Administration, Lakehead University); Faruk Selcuk (Department of Economics, Bilkent University) |
| Abstract: | Fundamental spot exchange rate models preclude the existence of asymmetric information in foreign exchange markets. This article critically investigates the possibility that private information arises in the spot foreign exchange market. Using a rich dataset, we first empirically detect transaction behavior consistent with the informed trading hypothesis. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker’s beliefs. We find that the time-varying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular hour-of-day, day-of-week, or geographic location (market) |
| Keywords: | Foreign Exchange Markets; Volume; Informed Trading; Noise Trading |
| JEL: | G0 G1 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:wp25_09&r=cta |
| By: | Silvia Marchesi (Università di Milano Bicocca and Centro Studi Luca D’Agliano); Laura Sabani (Università di Firenze); Axel Dreher (University of Goettingen; KOF Swiss Economic Institute; IZA and CESIfo) |
| 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 data |
| JEL: | C23 D82 F33 N2 |
| Date: | 2009–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:got:gotcrc:4&r=cta |
| By: | Francesco Decarolis (University of Chicago and Bank of Italy) |
| Abstract: | In this paper I study two methods often used in public procurement to deal with the risk that the winning bidder may default on his bid: augmenting the standard first price auction with an ex-post verification of the responsiveness of the bids and using an average bid auction. I show that when penalties for defaulting are asymmetric across bidders and when their valuations are characterized by a predominant common component, the average bid auction is preferred over the standard first price by an auctioneer when the costs due to the winner's bankruptcy are high enough. Depending on the cost of the ex-post verification, the average bid auction can be dominated by the first price with monitoring. I use a new dataset of Italian public procurement auctions, run alternately using a form of the average bid auction or the augmented first price, to structurally estimate the bids' verification cost, the firms' mark up and the inefficiency generated by the average bid auctions. |
| Keywords: | auctions, public procurement, collusion, structural estimation |
| JEL: | L22 L74 D44 D82 H57 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_717_09&r=cta |
| By: | Xun Tang (Department of Economics, University of Pennsylvania) |
| Abstract: | I estimate a simultaneous discrete game with incomplete information where players’ private information are only required to be median independent of observed states and can be correlated with observable states. This median restriction is weaker than other assumptions on players’ private information in the literature (e.g. perfect knowledge of its distribution or its independence of the observable states). I show index coefficients in players’ utility functions are point-identified under an exclusion restriction and fairly weak conditions on the support of states. This identification strategy is fundamentally different from that in a single-agent binary response models with median restrictions, and does not involve any parametric assumption on equilibrium selection in the presence of multiple Bayesian Nash equilibria. I then propose a two-step extreme estimator for the linear coefficients, and prove its consistency. |
| Keywords: | Games with incomplete information, semiparametric identification, median restrictions, consistent estimation |
| JEL: | C14 C35 C51 |
| Date: | 2009–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:09-023&r=cta |
| By: | Michael Manz |
| Abstract: | This paper develops a global game model that allows for a rigorous analysis of partial deposit insurance and provides the first comparative statics of the optimal level of deposit coverage. The optimal amount of coverage increases with lower bank liquidity requirements, with a higher precision of depositors' information, and with a lower relevance of large, uninsured creditors, and it should not be increased in anticipation of an economic downturn. Optimal insurance is higher if there is contagion and lower if banks can assume excessive risk, but interestingly, a high level of coverage may not be optimal even in the absence of moral hazard on the part of banks. The model supports the inauguration of coinsurance provisions and is applied to compare various policies addressing financial fragility. While an optimal lending of last resort policy can outperform deposit insurance, anticipated bailouts are inferior in terms of welfare. Capital requirements are not a substitute for insurance, but mitigate excessive risk taking. |
| Keywords: | Deposit insurance |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:09-6&r=cta |
| By: | John Mc Breen (LET - Laboratoire d'économie des transports - CNRS : UMR5593 - Université Lumière - Lyon II - Ecole Nationale des Travaux Publics de l'Etat, IXXI - Institut rhône-alpin des systèmes complexes - INRIA - Ecole Normale Supérieure de Lyon - ENS Lyon - Institut National des Sciences Appliquées de Lyon - Université Claude Bernard - Lyon I - Ecole Normale Supérieure Lettres et Sciences Humaines - Université Joseph Fourier - Grenoble I - CNRS - IRD, Phys-ENS - Laboratoire de Physique de l'ENS Lyon - CNRS : UMR5672 - Ecole Normale Supérieure de Lyon - ENS Lyon); Florence Goffette-Nagot (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Pablo Jensen (LET - Laboratoire d'économie des transports - CNRS : UMR5593 - Université Lumière - Lyon II - Ecole Nationale des Travaux Publics de l'Etat, IXXI - Institut rhône-alpin des systèmes complexes - INRIA - Ecole Normale Supérieure de Lyon - ENS Lyon - Institut National des Sciences Appliquées de Lyon - Université Claude Bernard - Lyon I - Ecole Normale Supérieure Lettres et Sciences Humaines - Université Joseph Fourier - Grenoble I - CNRS - IRD, Phys-ENS - Laboratoire de Physique de l'ENS Lyon - CNRS : UMR5672 - Ecole Normale Supérieure de Lyon - ENS Lyon) |
| Abstract: | We simulate a closed rental housing market with search and matching frictions, in which both landlord and tenant agents are imperfectly informed. Homogeneous landlords set rents to maximise revenue, using information on the market to estimate the relationship between posted rent and time-on-the-market (TOM). Tenants, heterogeneous in income, engage in undirected search accepting residences based on their idiosyncratic tastes for housing and a disagreement point derived from information on the distribution of offers. The steady state to which the simulation evolves shows price dispersion, nonzero search times and vacancies.The main results concern the effects of increasing information on either side of the market. When tenants see a greater percentage of the distribution of offers, tenants learn to refuse high rents and so the population rises and tenants' utilities rise as does overall welfare. Conversely, when landlords have less information, their utility can rise as over estimations in best posting rent move the market to higher rents. |
| Keywords: | Real estate; Rental markets; Search; Information; Simulation; Multi-agent systems |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00374157_v2&r=cta |
| By: | Gianmarco I.P. Ottaviano (Bocconi University, FEEM and CEPR); Alireza Naghavi (Università di Bologna) |
| Abstract: | We develop an endogenous growth model to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm’s production chain between a home upstream division and a foreign downstream one. On the positive side, we show that, when contracts are incomplete, the possibility of offshoring has favorable implications for economic growth. Yet, offshoring induced by a higher bargaining power of the upstream division can hamper growth: while there is always a positive correlation between upstream bargaining weight and offshoring activities, there is a non-monotonic relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. On the normative side, we show that, whereas with complete contract efficiency is restored through a subsidy to R&D only, with incomplete contracts a production subsidy to offshored upstream divisions is needed too. |
| Keywords: | Offshoring, Heterogeneous Firms, Incomplete Contracts, Growth, Industry Dynamics |
| JEL: | D23 F23 L23 O31 O43 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.54&r=cta |
| By: | Alexey Kushnir (Pennsylvania State University) |
| Abstract: | A costless signaling mechanism has been proposed as a device to improve welfare in decentralized two-sided matching markets. An example of such an environment is a job market for new Ph.D. economists. We study a market game of incomplete information between firms and workers and show that costless signaling is actually harmful in some matching markets. Specifically, if agents have very similar preferences, signaling lessens the total number of matches and the welfare of firms, as well as it affects ambiguously the welfare of workers. These results run contrary to previous findings that costless signaling facilitates match formation. |
| Keywords: | Matching Markets, Signaling |
| JEL: | C70 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.39&r=cta |
| By: | Martins-da-Rocha, V. F. |
| Abstract: | Recently Kajii and (2008) proposed to characterize interim efficient allocations in an exchange economy under asymmetric information when uncertainty is represented by multiple posteriors.When agents have Bewley's incomplete preferences, Kajii and Ui (2008) proposed a necessary and sufficient condition on the set of posteriors.However, when agents have Gilboa--Schmeidler's MaxMin expected utility preferences, they only propose a sufficient condition.The objective of this paper is to complete Kajii and Ui's work by proposing a necessary and sufficient condition for interim efficiency for various models of ambiguity aversion and in particular MaxMin expected utility.Our proof is based on a direct application of some results proposed by Rigotti, Shannon and Stralecki (2008). |
| Date: | 2009–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:696&r=cta |
| By: | John B. Donaldson; Natalia Gershun; Marc P. Giannoni |
| Abstract: | We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. Delegation gives rise to a generic conflict of interest mediated by a convex (option-like) compensation contract which is able to align the interests of managers and their shareholders. With such a compensation contract, a given increase in the firm's output generated by an additional unit of physical investment results in a more than proportional increase in the manager's income. We find that incentive contracts of this form can easily result in an indeterminate general equilibrium, with business cycles driven by self-fulfilling fluctuations in the manager's expectations. These expectations are unrelated to fundamentals. Arbitrarily large fluctuations in macroeconomic variables may possibly result. |
| JEL: | E32 J33 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15165&r=cta |
| By: | Hornig, Stephan O.; Rottmann, Horst; Wapler, Rüdiger (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]) |
| Abstract: | "This paper analyses the effects of education signals for Ethnic Germans and Germans without a migration background ('Native Germans'). We base our analysis on a sorting model with productivity enhancing effects of education. We compare whether the signalling value differs between the migrants and non-migrants in the German labour market. Starting from the theoretical result that only a separating equilibrium can exist, we find substantial empirical differences between Ethnic and Native Germans with the same formal education level. This empirical analysis is done with a completely new dataset based on administrative data from the German Federal Employment Agency." (author's abstract, IAB-Doku) ((en)) |
| JEL: | J24 J31 F22 |
| Date: | 2009–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:200914&r=cta |