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on Contract Theory and Applications |
| By: | Johannes Horner (Cowles Foundation, Yale University); Larry Samuelson (Cowles Foundation, Yale University) |
| Abstract: | We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The agent's actions are hidden, and the principal, who makes the offers, cannot commit to future actions. We identify the unique Markovian equilibrium (whose structure depends on the parameters) and characterize the set of all equilibrium payoffs, uncovering a collection of non-Markovian equilibria that can Pareto dominate and reverse the qualitative properties of the Markovian equilibrium. The prospect of lucrative continuation payoffs makes it more expensive for the principal to incentivize the agent, giving rise to a dynamic agency cost. As a result, constrained efficient equilibrium outcomes call for nonstationary outcomes that front-load the agent's effort and that either attenuate or terminate the relationship inefficiently early. |
| Keywords: | Experimentation, Learning, Agency, Dynamic agency, Venture Capital, Repeated principal-agent problem |
| JEL: | D8 L2 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1726&r=cta |
| By: | Jung, Hanjoon Michael |
| Abstract: | Crawford and Sobel (1982) developed a model of strategic information transmission in which a better-informed sender sends a possibly informative signal to a decision-making receiver and studied how strategically transmitted information is related to the analogy between the two players' interests. They adopted the Bayesian Nash equilibrium as their equilibrium concept and showed that the signal by the sender, the transmitted information, is more informative in pareto-superior equilibrium when the players' interests are more analogous. Their analyses, however, are not complete in that they analyzed the model based on partial consideration of the players' behavior, mixed behavior of the sender and pure behavior of the receiver. In the present study, we attempt to complete their analyses by analyzing the model based on full consideration of the players' behavior, both pure and mixed behavior. We adopt the Nash equilibrium as our equilibrium concept and conclude that results in our complete analyses are similar to the results in Crawford and Sobel (1982). |
| Keywords: | Nash equilibrium; Signaling Game; Cheap Talk |
| JEL: | C72 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17115&r=cta |
| By: | Emily Oster; Ira Shoulson; Kimberly Quaid; E. Ray Dorsey |
| Abstract: | Individual, personalized genetic information is increasingly available, leading to the possibility of greater adverse selection over time, particularly in individual-payer insurance markets; this selection could impact the viability of these markets. We use data on individuals at risk for Huntington disease (HD), a degenerative neurological disorder with significant effects on morbidity, to estimate adverse selection in long-term care insurance. We find strong evidence of adverse selection: individuals who carry the HD genetic mutation are up to 5 times as likely as the general population to own long-term care insurance. We use these estimates to make predictions about the future of this market as genetic information increases. We argue that even relatively limited increases in genetic information may threaten the viability of private long-term care insurance. |
| JEL: | D82 I11 I18 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15326&r=cta |
| By: | Marie Hoerova; Cyril Monnet; Ted Temzelides |
| Abstract: | The authors study credible information transmission by a benevolent central bank. They consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the central bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the central bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy. |
| Keywords: | Banks and banking, Central ; Information theory |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-18&r=cta |
| By: | Alex Edmans; Xavier Gabaix; Tomasz Sadzik; Yuliy Sannikov |
| Abstract: | Contracts in a dynamic model must address a number of issues absent from static frameworks. Shocks to firm value may weaken the incentive effects of securities (e.g. cause options to fall out of the money), and the impact of some CEO actions may not be felt until far in the future. We derive the optimal contract in a setting where the CEO can affect firm value through both productive effort and costly manipulation, and may undo the contract by privately saving. The optimal contract takes a surprisingly simple form, and can be implemented by a "Dynamic Incentive Account." The CEO's expected pay is escrowed into an account, a fraction of which is invested in the firm's stock and the remainder in cash. The account features state-dependent rebalancing and time-dependent vesting. It is constantly rebalanced so that the equity fraction remains above a certain threshold; this threshold sensitivity is typically increasing over time even in the absence of career concerns. The account vests gradually both during the CEO's employment and after he quits, to deter short-termist actions before retirement. |
| JEL: | D2 D3 G34 J3 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15324&r=cta |
| By: | Junichiro Ishida |
| Abstract: | In most firms, if not all, workers are divided asymmetrically in terms of authority and responsibility. In this paper, we view the asymmetric allocations of authority and responsibility as essential features of hierarchy and examine why hierarchies often prevail in organizations from that perspective. The focus of attention is on the tradeoff between costly information acquisition and costless communication. When the agency problem concerning information acquisition is sufficiently severe, the contractual arrangement which allocates responsibility asymmetrically often emerges as the optimal organizational form, which gives rise to the chain of command pertaining to hierarchical organizations. This explains why hierarchies often prevail in firms since a relatively fixed group of members must confront with new problems and come up with solutions on the day-to-day basis, and hence the agency problem is an issue to be reckoned with. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0751&r=cta |
| By: | Thomas Jensen (Department of Economics, University of Copenhagen) |
| Abstract: | In this paper we study the functioning of representative democracy when politicians are better informed than the electorate about conditions relevant for policy choice. We consider a model with two states of the world. The distribution of voters' preferred policies shifts with the state. The two candidates are both completely office-motivated but differ in state-dependent quality. Voters have some information about the state but candidates are better informed. If voters' information is unknown to the candidates when they take positions and sufficiently accurate then candidates will, in refined equilibrium, reveal their information by converging to the most likely median. If voters' information is not sufficiently accurate then there is polarization and the candidates'information is not revealed to the voters. We also show that if voters'information is known to the candidates then they will never reveal their information to the voters. The candidates will either pander by converging on the median that is most likely given only the voters'information or be polarized. With respect to welfare, if voters are well informed then they all prefer that their information is unknown to the candidates. However, if voters are not well informed then it is the other way around, all voters prefer that their information is known by the candidates. |
| Keywords: | electoral competition; uncertainty; information; candidate quality |
| JEL: | D72 D82 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:09-06&r=cta |
| By: | Ingolf Dittmann (Erasmus University Rotterdam); Ko-Chia Yu (Erasmus University Rotterdam) |
| Abstract: | This paper investigates whether observed executive compensation contracts are designed to provide risk-taking incentives in addition to effort incentives. We develop a stylized principal-agent model that captures the interdependence between firm risk and managerial incentives. We calibrate the model to individual CEO data and show that it can explain observed compensation practice surprisingly well. In particular, it justifies large option holdings and high base salaries. Our analysis suggests that options should be issued in the money. If tax effects are taken into account, the model is consistent with the almost uniform use of at-the-money stock options. We conclude that the provision of risk-taking incentives is a major objective in executive compensation practice. |
| Keywords: | Stock Options; Executive Compensation; Effort Aversion; Risk-Taking Incentives; Optimal Strike Price |
| JEL: | G30 M52 |
| Date: | 2009–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090076&r=cta |
| By: | Carlsen, Benedicte (The Rokkan Centre, University of Bergen); Nyborg, Karine (Dept. of Economics, University of Oslo) |
| Abstract: | Primary care physicians have two roles: the healer and the gatekeeper. We show that, due to information asymmetries, they cannot be expected to fulfill the latter role. Better gatekeepers will be poorer healers; hence all patients, both truly sick and shirkers, will strictly prefer physicians who give priority to healing. The choice between work and sick leave thus lies, essentially, with the patient. Interviews with Norwegian primary care physicians confirm this: Our interviewees report that shorter sick leaves are granted at request, while longer sick leaves are normally granted if the patient still prefer so after discussions with the physician. |
| Keywords: | Sicklisting; subjective diagnoses; asymmetric information; focus group interviews. |
| JEL: | D11 D21 H42 I11 I18 |
| Date: | 2009–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2009_007&r=cta |