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on Contract Theory and Applications |
| By: | Dino Gerardi; Lucas Maestri |
| Abstract: | This paper analyzes the optimal provision of incentives in a sequential testing context. In every period the agent can acquire costly information that is relevant to the principal's decision. Neither the agent's effort nor the realizations of his signals are observable. First, we assume that the principal and the agent are symmetrically informed at the time of contracting. We construct the optimal mechanism and show that the agent is indifferent in every period between performing the test and sending an uninformative message which continues the relationship. Furthermore, in the first period the agent is indifferent between carrying out his task and sending an uninformative message which ends the relationship immediately. We then characterize the optimal mechanisms when the agent has superior information at the outset of the relationship. The principal prefers to offer different contracts if and only if the agent types are sufficiently diverse. Finally, all agent types benefit from their initial private information. |
| Keywords: | Dynamic Mechanism Design, Information Acquisition, Sequential Testing. |
| JEL: | C72 D82 D83 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:115&r=cta |
| By: | Alex Gershkov; Motty Perry |
| Abstract: | We analyze the nature of optimal contracts in a dynamic model of repeated (and persistent) adverse selection and moral hazard. In particular we consider the case of surgeons who diagnose patients and then decide whether to perform an operation, and if so, whether to exert a costly but unobservable effort. The probability of a successful operation is a function of the surgeon’s effort, his quality, and the severity of the patient’s problem, all of which are the surgeon’s private information. The principal observes only the history of successes and failures and is allowed to promise financial rewards as a function of the observed history. His goal is to provide incentives at minimum cost so that if the patient needs minor surgery he will be treated by any type of surgeon (low- or high-quality) but if he needs major surgery, only a high-quality surgeon will perform the operation. The optimal contract-pair is characterized and is shown to reflect the practice often observed in the medical industry. Performing an operation is a gamble whose probability of success is higher, the higher the quality of the surgeon. A sequence of operations is exponentially less likely to be successful if the surgeon is not high-quality. An optimal contract for a high-quality surgeon exploits this fact by stipulating a high reward conditional on a long history of successes, while such a stipulation makes the contract much less attractive to a low-quality surgeon. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp516&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:004&r=cta |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We consider a simple extension of the basic new-Keynesian setup in which we relax the assumption of frictionless financial markets. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we derive analytically the loglinearised equations which characterise aggregate dynamics in our model and show that they nest those of the new- Keynesian model. A key difference is that marginal costs increase not only with the output gap, but also with the credit spread and the nominal interest rate. Second, we find that financial market imperfections imply that exogenous disturbances, including technology shocks, generate a trade-off between output and inflation stabilisation. Third, we show that, in our model, an aggressive easing of policy is optimal in response to adverse financial market shocks. JEL Classification: E52, E44. |
| Keywords: | optimal monetary policy, financial markets, asymmetric information. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091043&r=cta |
| By: | Marco Ottaviani (Kellogg School of Management, Northwestern University); Peter Norman Sørensen (Department of Economics, University of Copenhagen) |
| Abstract: | In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of risk neutrality and bounded budget, underreaction to information also holds in a more general asset market with heterogeneous priors, provided traders have decreasing absolute risk aversion. In a dynamic asset market, the underreaction of the first period price is followed by momentum. |
| Keywords: | prediction markets; private information; heterogeneous prior beliefs; limited budget; underreaction |
| JEL: | D82 D83 D84 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0914&r=cta |
| By: | Matthias Dahm (d'Economia, Universitat Rovira i Virgili); Robert Dur (Department of Economics, Erasmus University); Amihai Glazer (Department of Economics, University of California-Irvine) |
| Abstract: | A firm may induce voters or elected politicians to support a policy it favors by suggesting that it is more likely to invest in a district whose voters or representatives support the policy. In equilibrium, no one vote may be decisive, and the policy may gain strong support though the majority of districts suffer from adoption of the program. When votes reveal information about the district, the firm's implicit promise or threat can be credible. |
| Keywords: | Lobbying; Inefficient policies; Signaling |
| JEL: | D72 D82 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:080926&r=cta |
| By: | Steven Ongena (CentER – Tilburg University and CEPR, Department of Finance PO Box 90153, NL -5000 LE Tilburg, The Netherlands.); Viorel Roscovan (RSM – Erasmus University, Department of Finance, PO Box 1738, NL 3062 PA Rotterdam, The Netherlands.) |
| Abstract: | Banks play a special role as providers of informative signals about the quality and value of their borrowers. Such signals, however, may have a quality of their own as the banks’ selection and monitoring abilities may differ. Using an event study methodology, we study the importance of the geographical origin and organization of the banks for the investors’ assessments of firms’ credit quality and economic worth following loan announcements. Our sample comprises 986 announcements of bank loans to U.S. firms over the period of 1980-2003. We find that investors react positively to such announcements if the loans are made by foreign or local banks, but not if the loans are made by banks that are located outside the firm’s headquarters state. Investor reaction is, in fact, the largest when the bank is foreign. Our evidence suggest that investors value relationships with more competitive and skilled banks rather than banks that have easier access to private information about the firms. These results are applicable also to the European markets where regulatory and economic borders do not coincide and bank identities and reputation seem to matter a great deal. JEL Classification: G21, G32, H11, D80. |
| Keywords: | relationship banking, bank organization, bank origin, loan announcement return. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091023&r=cta |