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on Contract Theory and Applications |
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Issue of 2010‒01‒10
thirteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Bernard Cornet (Centre d'Economie de la Sorbonne and University of Kansas); Lionel De Boisdeffre (INSEE and Centre d'Economie de la Sorbonne) |
| 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. This article provides a dual behavior of the one studied in Cornet and De Boisdeffre (2002). |
| Keywords: | Arbitrage, incomplete markets, asymmetric information, information revealed by prices. |
| JEL: | D52 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09078&r=cta |
| By: | Shuyun May Li |
| Abstract: | This paper discusses two ways to amend the optimal lending contract under asymmetric information studied in Clementi and Hopenhayn (2006) to change its long-run implications so that firm growth and exit driven by borrowing constraints exist in the long run. One way assumes that the entrepreneur has a lower discount factor than the bank, and the other assumes the bank has limited commitment. The optimal lending contracts under each variation closely resemble each other. |
| Keywords: | Optimal lending contract; Borrowing constraints; Asymmetric information; Limited commitment; Impatient entrepreneur |
| JEL: | G3 L2 D21 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1065&r=cta |
| By: | João Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto); Joana Resende (CEF.UP and Faculdade de Economia, Universidade do Porto) |
| Abstract: | We consider a model in which a free daily newspaper distributes news to readers and sells ad-space to advertisers, having private information about its readership. Depending on the type of readers in the market, the newspaper's may have a "plentiful and seeking" audience or a "lacking and avoiding" audience. We find that if the readers are plentiful and seeking, the newspaper prints an excessive number of copies. The rationale for this over-printing strategy lies on the newspaper's need to send a credible signal to the advertisers that there are plentiful and seeking readers in the market. When the readers are lacking and avoiding, the newspaper chooses the socially optimal tirage (does not try to cheat the advertisers). |
| Keywords: | two-sided markets, asymmetric information, free press |
| JEL: | D82 D86 L82 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:350&r=cta |
| By: | Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cornelia Holthausen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We study the functioning and possible breakdown of the interbank market in the presence of counterparty risk. We allow banks to have private information about the risk of their assets. We show how banks’ asset risk affects funding liquidity in the interbank market. Several interbank market regimes can arise: i) normal state with low interest rates; ii) turmoil state with adverse selection and elevated rates; and iii) market breakdown with liquidity hoarding. We provide an explanation for observed developments in the interbank market before and during the 2007-09 financial crisis (dramatic increases of unsecured rates and excess reserves banks hold, as well as the inability of massive liquidity injections by central banks to restore interbank activity). We use the model to discuss various policy responses. JEL Classification: G01, G21, D82. |
| Keywords: | Financial crisis, Interbank market, Liquidity, Counterparty risk, Asymmetric information. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091126&r=cta |
| By: | Lovo, Stefano; Tomala, Tristan; Hörner, Johannes |
| Abstract: | In this paper, the authors characterize belief-free equilibria in infinitely repeated games with incomplete information with N \ge 2 players and arbitrary information structures. This characterization involves a new type of individual rational constraint linking the lowest equilibrium payoffs across players. The characterization is tight: we define a set of payoffs that contains all the belief-free equilibrium payoffs; conversely, any point in the interior of this set is a belief-free equilibrium payoff vector when players are sufficiently patient. Further, we provide necessary conditions and sufficient conditions on the information structure for this set to be non-empty, both for the case of known-own payoffs, and for arbitrary payoffs. |
| Keywords: | repeated game with incomplete information; Harsanyi doctrine; belief-free equilibria |
| JEL: | C72 C73 |
| Date: | 2009–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0921&r=cta |
| By: | Sara BIANCINI (THEMA, Université de Cergy Pontoise) |
| Abstract: | The paper analyzes the effects of liberalization in increasing returns to scale industries. It studies the optimal regulation of an incumbent competing with an unregulated strategic competitor, when public funds are costly. The model shows a trade off between productive and allocative efficiency. Moreover, the welfare gains of liberalization, as compared with regulated monopoly, are a non monotonic function of the cost of public funds. Finally, in the case of severe cash constraint of the government, incomplete regulation may also dominate full regulation of duopoly. |
| Keywords: | Incomplete Regulation, Asymmetric Information, Incentives, Cost of Public Funds. |
| JEL: | L43 L51 D82 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2009-08&r=cta |
| By: | Fabienne Llense (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | This paper puts forward an explanation of the rapid increase in golden handshake provision in Europe over the last ten years, based on both enhanced investor protection and attractive tax codes for severance pay. This article takes up a framework in which asymmetric information about the quality of the match between CEO and firm explains the use of golden handshakes for CEOs. It shows how corporate governance and taxation can modify the magnitude and the use of golden handshakes and thus CEO turnover rates. The second-best optimal taxation rate depends on the kind of private benefits accorded to the CEO. I show that golden handshakes should be taxed in the same way as CEO incomes. However, nonpecuniary private benefits strengten the agency cost and require some transfers for firms providing parachute-type contracts. In effect, this means partial exemption. An improvement in the quality of corporate governance should lead to smaller golden handshakes, higher turnover-performance sensitivity and the disappearance of advantageous tax codes for termination pay. |
| Keywords: | CEOs turnover, corporate governance, golden handshakes, optimal taxation, severance pay. |
| JEL: | G34 H32 J33 J44 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09080&r=cta |
| By: | Mourad Ali; Patrick Rio |
| Abstract: | In the context of nonpoint source pollution the regulator can not attribute individually the responsibility of pollution because of informational asymmetry which makes the costs of monitoring of individual emission very high. This grounds a moral hazard problem. We analyse group performance based instruments to regulate this kind of informational problem. In particular, we assess randomand collective fining schemes with respect to their deterrence and efficiency. We show that a collective fine scheme is more deterrent than a random fine scheme. However, the analysis of efficiency is less categorical between these two schemes. The efficiency depends on the number of non-compliant agents. If the number of non-compliant agents is high it is better to implement a collective fine scheme. If the number of non-compliant agents is small it is better to implement a random fine scheme. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:09-22&r=cta |
| By: | Shchetinin, Oleg (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | I show that a simple formal model of reciprocal altruism is able to predict human behavior in contracting situations, puzzling when considered within selfishness assumption. For instance, motivation and performance crowding-out are explained by a signaling mechanism in which provision of an extrinsic incentive signals non-generosity of the Principal and decreases Agent’s intrinsic motivation. The model’s equilibrium predicts behavior in the Control Game of Falk and Kosfeld and in a variant of Trust Game by Fehr and Rockenbach. This suggests that reciprocal altruism modeling could be fruitful more generally in applications of contract theory.<p> |
| Keywords: | Reciprocal Altruism; Extrinsic and intrinsic motivation; Contract Theory; Behavioral Economics. |
| JEL: | D82 M54 |
| Date: | 2009–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0421&r=cta |
| By: | Wassim DAHER; Leonard J. MIRMAN; Marc Santugini (IEA, HEC Montréal) |
| Abstract: | Using the rational expectations approach, we study signaling in Cournot models, in which each oligopolist sets quantity, and, thus, partially controls the price-signal. We show that the quality of a homogeneous good is signaled by the market-clearing price. Moreover, our applications illustrate the tractability and usefulness of the rational expectations approach to signaling in complex economic settings. Indeed, the rational expectations equilibrium yields simple expressions for price, quantity, profit, and consumer surplus. Moreover, the rational expectations approach allows the model to specify posterior beliefs (including out-of-equilibrium beliefs). |
| Keywords: | Asymmetric information, Cournot, Learning, Oligopoly, Quality, Rational expectations, Signaling. |
| JEL: | D21 D43 D82 D83 D84 L13 L15 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0909&r=cta |
| By: | Lovo, Stefno; Bisière, Christophe; Décamps, Jean-Paul |
| Abstract: | In this paper, the authors conduct a series of experiments that simulate trading in financial markets and which allows them to identify the different effects that subjects’ risk attitudes and belief updating rules have on the information content of the order flow. They find that there are very few risk-neutral subjects and that subjects displaying risk aversion or risk-loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. Consequently, private information struggles penetrating trading prices. The authors find evidence of non-Bayesian belief updating (confirmation bias and under-confidence). This reduces (improves) market efficiency when subjects’ prior beliefs are weak (strong). |
| Keywords: | risk attitude; financial market; information; belief; risk-neutral information |
| JEL: | F16 F17 F18 |
| Date: | 2009–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0917&r=cta |
| By: | Alessandro Fedele; Francesco Liucci; Andrea Mantovani |
| Abstract: | In this paper we propose a moral hazard model to illustrate a credit crunch scenario. A firm is denied the access to bank funding due to high informational or monitoring costs that the bank must pay to induce the firm to behave. This is likely to happen in periods of recession, when trust between economic actors is limited. We then examine the activity carried out by the European Investment Bank Group (EIBG), with special attention to the provision of (1) credit lines to banks to help them to finance small and medium-sized enterprises (SMEs) and (2) guarantees for portfolios of SMEs' loans. We show that such services are extremely helpful to overcome the credit crunch as they mitigate the moral hazard problem without resorting to informational or monitoring expenses. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:0913&r=cta |
| By: | Bougheas, Spiros (University of Nottingham); Dasgupta, Indraneel (University of Durham); Morrissey, Oliver (University of Nottingham) |
| Abstract: | Lenders condition future loans on some index of past performance. Typically, banks condition future loans on repayments of earlier obligations whilst international organizations (official lenders) condition future loans on the implementation of some policy action (‘investment’). We build an agency model that accounts for these tendencies. The optimal conditionality contract depends on exclusivity – the likelihood that a borrower who has been denied funds from the original lenders can access funds from other lenders. |
| Keywords: | repayment conditions, investment conditions, long-term loans, exclusivity |
| JEL: | G21 F34 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4604&r=cta |