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on Contract Theory and Applications |
| By: | Bernard Cornet (Department of Economics, The University of Kansas and Universite Paris 1 Pantheon-Sorbonne); Lionel De Boisdeffre (INSEE, Paris and Universite de Paris 1) |
| Abstract: | In a financial economy with asymmetric information and incomplete markets, we study how agents, having no model of how equilibrium prices are determined, may still refine their information by eliminating sequentially "arbitrage state(s)", namely, the state(s) which would grant the agent an arbitrage, if realizable. |
| Keywords: | Arbitrage, Incomplete markets, Asymmetric information, Information revealed by prices |
| JEL: | D52 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200912&r=cta |
| By: | Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | We propose a signaling model in which the central bank and firms receive information on cost-push shocks independently from each other. If the firms’ signals are rather unlikely to be informative, central banks should remain silent about their own private signals. If, however, firms are sufficiently likely to be informed, it is socially desirable for the central bank to reveal its private information. By doing so, the central bank eliminates the distortions stemming from the signaling incentives under opacity. Our model may also explain the recent trend towards more transparency in monetary policy. |
| Keywords: | signaling games, transparency, monetary policy, central banks, communication |
| JEL: | D82 D83 E58 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:09-122&r=cta |
| By: | Vauhkonen, Jukka (Bank of Finland Research) |
| Abstract: | We consider the impact of mandatory information disclosure on bank safety in a spatial model of banking competition in which a bank’s probability of success depends on the quality of its risk measurement and management systems. Under Basel II capital requirements, this quality is either fully or partially disclosed to market participants by the Pillar 3 disclosures. We show that, under stringent Pillar 3 disclosure requirements, banks’ equilibrium probability of success and total welfare may be higher under a simple Basel II standardized approach than under the more sophisticated internal ratings-based (IRB) approach. |
| Keywords: | Basel II; capital requirements; information disclosure; market discipline; moral hazard |
| JEL: | D43 D82 G14 G21 G28 |
| Date: | 2009–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_029&r=cta |
| By: | Thomas D. Jeitschko (Department of Economics, Michigan State University); Hans-Theo Normann (Department of Economics, Goethe University Frankfurt) |
| Abstract: | We contrast a standard deterministic signaling game with one where the signal-generating mechanism is stochastic. With stochastic signals a unique equilibrium emerges that involves separation and has intuitive comparative-static properties as the degree of signaling depends on the prior type distribution. With deterministic signals both pooling and separating configurations occur. Laboratory data support the theory: In the stochastic variant, there is more signaling behavior than with deterministic signals, and less frequent types distort their signals relatively more. Moreover, the degree of congruence between equilibrium and subject behavior is greater in stochastic settings compared to deterministic treatments. |
| Keywords: | experiments, noise, signalling, learning, stochastic environments. |
| JEL: | C7 C9 D8 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:hol:holodi:0912&r=cta |
| By: | Humberto M. Ennis; John A. Weinberg |
| Abstract: | It is often the case that banks in the US are willing to borrow in the fed funds market (the interbank market for funds) at higher rates than the ones they could obtain by borrowing at the Fed's discount window. This phenomenon is commonly explained as the consequence of the existence of a stigma effect attached to borrowing from the window. Most policymakers and empirical researchers consider the stigma hypothesis plausible. Yet, no formal treatment of the issue has ever been provided in the literature. In this paper, we fill that gap by studying a model of interbank credit where: (1) banks benefit from engaging in intertemporal trade with other banks and with outside investors; and (2) informational frictions limit those trade opportunities. In our model, banks obtain loans in an over-the-counter market (involving search, bilateral matching, and negotiations over the terms of the loan) and hold assets of heterogeneous qualities which in turn determine their ability to repay those loans. When asset quality is not perfectly unobservable by outside investors, information about the actions taken by a bank in the credit market may influence the price at which it can sell its asset. In particular, under some conditions, discount window borrowing may be regarded as a negative signal about the quality of the borrower's assets. In such cases, some of the banks in our model, just as in the data, are willing to accept loans in the interbank market at higher rates than the ones they could obtain at the discount window. |
| Keywords: | Interbank market, Private information, Signaling, Banking |
| JEL: | G21 E50 E42 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we095937&r=cta |
| By: | Guinnane, Timothy (Yale University); Streb, Jochen (University of Hohenheim) |
| Abstract: | This paper studies moral hazard in a sickness-insurance fund that provided the model for social-insurance schemes around the world. The German Knappschaften were formed in the medieval period to provide sickness, accident, and death benefits for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefits had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefits at low costs. The Knappschaft underlies Bismarck's sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect. |
| JEL: | H53 H55 I18 N33 N43 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:70&r=cta |
| By: | Francis Bloch (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Nicolas Houy (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | This paper analyzes the assignment of durable objects to successive generations of agents who live for two periods. The optimal assignment rule is stationary, favors old agents and is determined by a selectivity function which satisfies an iterative functional differential equation. More patient social planners are more selective, as are social planners facing distributions of types with higher probabilities for higher types. The paper also characterizes optimal assignment rules when monetary transfers are allowed and agents face a recovery cost, when agents' types are private information and when agents can invest to improve their types. |
| Keywords: | Dynamic Assignment ; Durable Objects ; Revenue Management ; Dynamic Mechanism Design ; Overlapping Generations ; Promotions and Intertemporal Assignments |
| Date: | 2009–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00435385_v1&r=cta |
| By: | Durand-Viel, Laure; Villeneuve, Bertrand |
| Abstract: | This article analyzes the impact of incomplete contracts’ length on investment in a bilateral relationship. The seller has the power to set the contract terms whereas the buyer decides on the investment level, which acts as a cap on future demand. Two-part tariffs succeed at implementing the optimal investment and consumption even if commitment is limited, and the contract’s duration is irrelevant. Interestingly, this efficient solution is rendered possible by subsidies on consumption during the contract. In other terms, duration matters hugely for the contract details (the timing of transfers), not for its performance. Under certain circumstances that we discuss, linear pricing may have to be used, which leads to suboptimal investment. We show that longer contracts are less efficient, meaning that a degree of completeness (pricing width) may be strictly complementary to another one (contract length). The buyer’s surplus increases with respect to the contract duration, whereas the seller loses more in profit than the social surplus decreases. A longer contract actually protects expropriable investors rather than investment itself. |
| Keywords: | Long-term Contracts ; Incomplete Contracting ; Infrastructure Investment |
| JEL: | L95 D45 D92 D42 |
| Date: | 2009–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19015&r=cta |