nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2009‒10‒03
ten papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Inflation and output volatility under asymmetric incomplete information. By Giacomo Carboni; Martin Ellison
  2. Risk sharing, inequality, and fertility By Roozbeh Hosseini; Larry E. Jones; Ali Shourideh
  3. Can information asymmetry cause agglomeration? By Berliant, Marcus; Kung, Fan-chin
  4. An equilibrium analysis of the simultaneous ascending auction By Jacob K. Goeree; Yuanchuan Lien
  5. Uncertainty aversion and equilibrium existence in games with incomplete information By Azrieli, Yaron; Teper, Roee
  6. Life’s a breach! Ensuring ‘permanence’ in forest carbon sinks under incomplete contract enforcement By Charles Palmer; Markus Ohndorf; Ian A. MacKenzie
  7. An experimental study of jury deliberation By Jacob K. Goeree; Leeat Yariv
  8. Auditor Expertise: Evidence from the Public Sector By Mark Schelker
  9. Prizes and patents: using market signals to provide incentives for innovations By V.V. Chari; Mikhail Golosov; Aleh Tsyviski
  10. Informal Finance: A Theory of Moneylenders By Andreas Madestam

  1. By: Giacomo Carboni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Ellison (Department of Economics, University of Oxford, Manor Road Building, Oxford, OX1 2UQ, United Kingdom.)
    Abstract: The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility. JEL Classification: E32, E37, E52.
    Keywords: Imperfect credibility, Asymmetric information, Signal extraction.
    Date: 2009–09
  2. By: Roozbeh Hosseini; Larry E. Jones; Ali Shourideh
    Abstract: We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property - whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.
    Keywords: Taxation ; Contracts ; Risk
    Date: 2009
  3. By: Berliant, Marcus; Kung, Fan-chin
    Abstract: The modern literature on city formation and development, for example the New Economic Geography literature, has studied the agglomeration of agents in size or mass. We investigate agglomeration in sorting or by type of worker, that implies agglomeration in size when worker populations differ by type. This kind of agglomeration can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin.
    Keywords: Adverse Selection; Agglomeration
    JEL: R13 R12 D82
    Date: 2009–09–28
  4. By: Jacob K. Goeree; Yuanchuan Lien
    Abstract: We analyze the dynamic simultaneous ascending auction (SAA), which was pioneered by the US Federal Communications Commission (FCC) in 1994 and has since become the standard to conduct large-scale, large-stakes spectrum auctions around the world. We consider an environment where local bidders, each interested in a single item, compete against one or more global bidders with super-additive values for combinations of items. In the SAA, competition takes place on an item-by-item basis, which creates an exposure problem for global bidders - when competing aggressively for a package, a global bidder may incur a loss when winning only a subset. We characterize the Bayes-Nash equilibria of the SAA, evaluate the impact of the exposure problem on revenue and efficiency, and compare its performance to that of the benchmark Vickrey-Clarke-Groves (VCG) mechanism. We show that individual and social incentives are aligned in the SAA in the sense that bidders' drop-out levels maximize expected welfare. Unlike the VCG mechanism, however, the SAA is not fully efficient because when a bidder drops out, information about others' values has been only partially revealed. Like the VCG mechanism, the SAA exhibits perverse revenue properties: due to the exposure problem, the SAA may result in non-core outcomes where local bidders obtain items at very low prices, and seller revenue can be decreasing in the number of bidders. Moreover, the SAA may result in lower revenues than the VCG mechanism. Finally, when the number of items grows large, the SAA and VCG mechanisms become (efficiency and revenue) equivalent.
    Keywords: Simultaneous ascending auction, exposure problem, auction design
    JEL: D44
    Date: 2009–09
  5. By: Azrieli, Yaron; Teper, Roee
    Abstract: We consider games with incomplete information a la Harsanyi, where the payoff of a player depends on an unknown state of nature as well as on the profile of chosen actions. As opposed to the standard model, players' preferences over state--contingent utility vectors are represented by arbitrary functionals. The definitions of Nash and Bayes equilibria naturally extend to this generalized setting. We characterize equilibrium existence in terms of the preferences of the participating players. It turns out that, given continuity and monotonicity of the preferences, equilibrium exists in every game if and only if all players are averse to uncertainty (i.e., all the functionals are quasi--concave). We further show that if the functionals are either homogeneous or translation invariant then equilibrium existence is equivalent to concavity of the functionals.
    Keywords: Games with incomplete information, equilibrium existence, uncertainty aversion, convex preferences.
    JEL: D81 C72
    Date: 2009–09–29
  6. By: Charles Palmer (IED Institute for Environmental Decisions, ETH Zurich); Markus Ohndorf (IED Institute for Environmental Decisions, ETH Zurich); Ian A. MacKenzie (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: As carbon sinks, forests play a critical role in helping to mitigate the growing threat from anthropogenic climate change. Forest carbon offsets transacted between GHG emitters in industrialised countries and sellers in developing countries have emerged as a useful climate policy tool. A model is developed that investigates the role of incentives in forestry carbon sequestration contracts. It considers the optimal design of contracts to ensure landowner participation and hence, permanence in forest carbon sinks in a context of uncertain opportunity costs and incomplete contract enforcement. The optimal contract is driven by the quality of the institutional framework in which the contract is executed, in particular, as it relates to contract enforcement. Stronger institutional frameworks tend to distort the seller’s effort upwards away from the full enforcement outcome. This also leads to greater amounts of carbon sequestered and higher conditional payments made to the seller. Further, where institutions are strong, there is a case for indexing the payment to the carbon market price if permanence is to be ensured. That is, as the carbon price increases, the payment could be raised and vice versa.
    Keywords: forest carbon offsets, permanence, contract design, incomplete enforcement
    JEL: K12 Q15
    Date: 2009–07
  7. By: Jacob K. Goeree; Leeat Yariv
    Abstract: We study the effects of deliberation on collective decisions. In a series of experiments, we vary groups' preference distributions (between common and conflicting interests) and the institutions by which decisions are reached (simple majority, two-thirds majority, and unanimity). When deliberation is prohibited, different institutions generate significantly different outcomes, tracking the theoretical comparative statics. Deliberation, however, significantly diminishes institutional differences and uniformly improves efficiency. Furthermore, communication protocols exhibit an array of stable attributes: messages are public, consistently reveal private information, provide a good predictor for ultimate group choices, and follow particular (endogenous) sequencing.
    Keywords: Jury decision making, deliberative voting, strategic voting
    JEL: C92 D02 D72
    Date: 2009–09
  8. By: Mark Schelker
    Abstract: Public Audit Offices are fundamental institutions to supervise government agents. Without accurate information principals would find it hard to make adequate decisions. Since agents face strong incentives to misreport, competent audits of financial information is crucial. This paper is the first attempt to study the relationship between auditor expertise and fiscal performance. More competent auditors are more effective supervisors; they reduce the leeway of agents to misreport and improve fiscal outcomes. The empirical results support this hypothesis. I found that States requiring the auditor to hold a professional degree feature significantly lower expenditures and debts and higher credit ratings.
    Keywords: public auditor; tenure length; term limit; governance
    JEL: H11 D70 H10
    Date: 2009–08
  9. By: V.V. Chari; Mikhail Golosov; Aleh Tsyviski
    Abstract: Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses - for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.
    Keywords: Public goods ; Patents
    Date: 2009
  10. By: Andreas Madestam (Bocconi University)
    Abstract: I study the coexistence of formal and informal finance in underdeveloped credit markets. While weak institutions constrain formal banks, shallow pockets hamper informal lenders. In such economies, informal finance has two effects. By increasing the investment return it decreases borrowers’ relative payoff following default, inducing banks to lend more liberally (disciplinary effect). By channeling bank capital it reduces banks’ agency costs from lending directly to borrowers, limiting banks’ extension of borrower credit (rent-extraction effect). Among other things, the model shows that informal interest rates are higher, borrower welfare lower, and informal finance more prevalent when the rent-extraction effect prevails, consistent with stylized facts in poor societies.
    Keywords: Credit Markets, Financial Development, Institutions, Market Structure
    JEL: O12 O16 O17 D40
    Date: 2009–09

This nep-cta issue is ©2009 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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