nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2009‒10‒24
nine papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Family Capitalism Corporate Governance Theory By Jellal, Mohamed
  4. "Implementation and Mind Control" By Hitoshi Matsushima
  5. Bank incentives and optimal CDOs By Pagès, H.
  7. Free-riding in International Environmental Agreements: A Signaling Approach to Non-Enforceable Treaties By Ana Espinola-Arredondo; Felix Munoz-Garcia
  8. A Theory of House Allocation and Exchange Mechanisms By Marek Pycia; M. Utku Ünver
  9. Moderated Online Communities and User-Generated Content By Jianqing Chen; Hong Xu; Andrew B. Whinston

  1. By: Jellal, Mohamed
    Abstract: Family firms, which are prevalent around the world both for small organizations and large corporations, are usually more performant than other types of firms. This paper draws on altruism and on the theory of incentives contracting to explain why family firms perform better. Assuming that altruism only exists in family firms, we show that the strength of family ties has an impact on the optimal contract only under asymmetric information. Then, we extend the analysis to the principal-agent supervisor setting and prove that the recruitment of family members may be seen as a device against collusion within a three-tier hierarchy.
    Keywords: Family Capitalism; Altruism; Family Ties ;Asymmetric Information;Supervisor Agent Principal; Collusion
    JEL: D86 D21 L2 Z1 D64 D82
    Date: 2009–10–15
  2. By: Roberto Serrano (Brown University); Yusuke Kamishiro (Brown University)
    Abstract: We study information transmission in large interim quasilinear economies using the theory of the core. We concentrate on the core with respect to equilibrium blocking, a core notion in which information is transmitted endogenously within coalitions, as blocking can be understood as an equilibrium of a communication mechanism used by players in coalitions. We consider independent, ex-post and signal-based replicas of the basic economy. For each, we offer an array of negative and positive convergence results as a function of the complexity of the mechanisms used by coalitions. We identify conditions under which asymmetric information remains as an externality and non-market outcomes stay in the core, as well as those for the core to converge to the set of incentive compatible ex-post Walrasian allocations. Further, all the results are robust to the relaxation of the incentive constraints, and hence suggest a process through which information may get incorporated into a fully revealing equilibrium price function.
    Keywords: Core w.r.t. equilibrium blocking, core convergence, independet replicas, ex-mechanisms, mediation, rational expectations equilibrium.
    JEL: C71 C72 D51 D82
    Date: 2009–10
  3. By: Roberto Serrano (Brown University)
    Abstract: Watson (2007) proposes non-forcing contracts as a way to show the limitations of the mechanism design program with ex-post renegotiation (Maskin and Moore (1999)). If one takes a partial implementation approach, as Watson does, we show that nonforcing contracts do not constitute an intermediate paradigm between implementation with no renegotiation and with ex-post renegotiation. Moreover, taking a full implementation approach, non-forcing contracts fail if and only if one goes outside of the constraints identified by Maskin and Moore, because of the appearance of undesirable equilibria.
    Keywords: Contracts, renegotiation, mechanism desing.
    JEL: C70 D74 K10
    Date: 2009–09
  4. By: Hitoshi Matsushima (Faculty of Economics, University of Tokyo)
    Abstract: This paper incorporates social psychology into implementation theory, where an uninformed principal manipulates a dynamic decision-making process without employing any tailored contractual device. We demonstrate the principal's mind-control method through which he can effectively utilize social psychology tactics to incentivize informed agents to announce their information in keeping with his wishes. We show that with incentive compatibility, the principal can implement any alternative that he wishes as the unique Nash equilibrium outcome, even if the psychological cost of each agent from disobeying the principal's wishes is small as compared to his total material benefits.
    Date: 2009–09
  5. By: Pagès, H.
    Abstract: The paper examines a delegated monitoring problem between investors and a bank holding a portfolio of correlated loans displaying “contagion.” Moral hazard prevents the bank from monitoring continuously unless it is compensated with the right incentive-compatible contract. The asset pool is liquidated when losses exceed a state-contingent cut-off rule. The bank bears a relatively high share of the risk initially, as it should have high-powered incentives to monitor, but its long term financial stake tapers off as losses unfold. Liquidity regulation based on securitization can replicate the optimal contract. The sponsor provides an internal credit enhancement out of the proceeds of the sale and extends protection in the form of weighted tranches of collateralized debt obligations. In compensation the trust pays servicing and rent-preserving fees if a long enough period elapses with no losses occurring. Rather than being detrimental, well-designed securitization seems an effective means of implementing the second best.
    Keywords: Credit risk transfer, Default Risk, Contagion.
    JEL: G21 G28 G32
    Date: 2009
  6. By: Roberto Serrano (Brown University); Rajiv Vohra (Brown University)
    Abstract: We characterize full implementation of social choice sets in mixed strategy Bayesian equilibrium. Our results concern both exact and virtual mixed implementation. For exact implementation, we identify a strengthening of Bayesian monotonicity, which we refer to as mixed Bayesian monotonicity. It is shown that, in economic environments with at least three agents, mixed Bayesian implementation is equivalent to mixed Bayesian monotonicity, incentive compatibility and closure. For implementing a social choice function, the case of two-agents is also covered by these conditions and mixed Bayesian monotonicity reduces to Bayesian monotonicity. Following parallel steps, mixed virtual implementation is shown to be equivalent to mixed virtual monotonicity, incentive compatibility and closure. The key condition, mixed virtual monotonicity, is argued to be very weak. In particular, it is weaker than Abreu-Matsushima’s measurability, thereby implying that: (1) virtual implementation in mixed Bayesian equilibrium is more permissive than virtual implementation in iteratively undominated strategies, and (2) non-regular mechanisms are essential for the implementation of rules in that gap.
    Keywords: Exact implementation, approximate implementation, incomplete information, incentive compatibility, monotonicity.
    JEL: C72 D78 D82
    Date: 2009–09
  7. By: Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University)
    Abstract: This paper examines countries’ free-riding incentives in international environmental agreements (IEAs) when, first, the treaty is non-enforceable, and second, countries do not have complete information about other countries’ noncompliance cost. We analyze a signaling model whereby the country leading the negotiations of the international agreement can reveal its own noncompliance costs through the commitment level it signs in the IEA. Our results show that countries’ probability to join the IEA is increasing in the free-riding benefits they can obtain from other countries’ compliance, and decreasing in their own noncompliance costs. This paper shows that, when free-riding incentives are strong enough, there is no equilibrium in which all types of countries join the IEA. Despite not joining the IEA, countries invest in clean technologies. Finally, we relate our results with some common observations in international negotiations.
    Keywords: Signaling games, environmental agreements, nonbinding negotiations, noncom- pliance cost.
    JEL: C72 D62 Q28
    Date: 2009–03
  8. By: Marek Pycia (UCLA); M. Utku Ünver (Boston College)
    Abstract: We study the allocation and exchange of indivisible objects without monetary transfers. In market design literature, some problems that fall in this category are the house allocation problem with and without existing tenants, and the kidney exchange problem. We introduce a new class of direct mechanisms that we call "trading cycles with brokers and owners," and show that (i) each mechanism in the class is coalitional strategy-proof and Pareto-efficient, and (ii) each coalitional strategy-proof and Pareto-efficient direct mechanism is in the class. As corollaries, we obtain new characterizations in the aforementioned market design problems.
    Keywords: Mechanism design, coalitional strategy-proofness, Pareto-efficiency, matching, house allocation.
    JEL: C78 D78
    Date: 2009–01–01
  9. By: Jianqing Chen (Haskayne School of Business, The University of Calgary); Hong Xu (; McCombs School of Business, The University of Texas at Austin); Andrew B. Whinston (; McCombs School of Business, The University of Texas at Austin)
    Abstract: Online communities provide a social sphere for people to share information and knowledge. While information sharing is becoming a ubiquitous online phenomenon, how to ensure information quality or induce quality content, however, remains a challenge due to the anonymity of commentators. This paper introduces moderation into reputation systems. We show that moderation directly impacts strategic commentators incentive to generate useful information, and moderation is generally desirable to improve information quality. Interestingly, we find that when being moderated with different probabilities based on their reputations, commentators may display a pattern of reputation oscillation, in which they generate useful content to build up high reputation and then exploit their reputation. As a result, the expected performance from high-reputation commentators can be inferior to that from low-reputation ones (reversed reputation). We then investigate the optimal moderation resource allocation, and conclude that the seemingly abnormal reversed reputation could arise as an optimal result. The paper concludes with a discussion of the development of a scientific moderation system with application to academic publishing.
    Keywords: moderation, reputation, online community, knowledge management
    JEL: K21 L41 L42 L12 L86 L63
    Date: 2009–08

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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