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on Contract Theory and Applications |
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Issue of 2010‒01‒16
sixteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Crémer, Jacques |
| Abstract: | I show that cutting the flow of information between a principal and an agent can increase the power of the incentives of the agent to reveal private information. |
| Date: | 2009–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:21623&r=cta |
| By: | Bernard Cornet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, University of Kansas - University of Kansas); Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| 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. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00441895_v1&r=cta |
| By: | Manel Antelo (Universidad de Santiago de Compostela) |
| Abstract: | This paper compares different licensing contracts defined by the type of payment (fees or royalties) and contract duration (short- or long-term) in a setting in which an outside patent holder that owns a patented innovation lasting for two periods licenses it to downstream Cournot firms; further, there is asymmetric information about firms' costs emerged from the use of innovation, but they are signaled through the output produced in period 1. In this context, if we concentrate on fee contracts, the patent holder prefers short-term (revealing) contracts rather than long-term contracts. |
| Keywords: | Licensing, signaling, fees, royalties, short- and long-term contracts, welfare |
| JEL: | D45 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2009_08&r=cta |
| By: | Okada, Akira |
| Abstract: | We consider information transmission in the core of an exchange economy with incomplete information by non-cooperative bargaining theory. Reformulating the coalitional voting game by Serrano and Vohra [Information transmission in coalitional voting games, J. of Economic Theory (2007), 117-137] so that an informed agent proposes an allocation, we define a notion of the informational core. A coalition has an informational objection to the status-quo allocation if and only if there exists an equilibrium rejection in the coalitional voting game. We present a non-cooperative sequential bargaining game in which coalitional voting games are repeated, and prove that a refinement of a sequential equilibrium of the bargaining game necessarily yields an allocation in the informational core. |
| Keywords: | core, exchange economy, incomplete information, information transmission, non-cooperative bargaining |
| JEL: | C71 C72 D51 D82 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2009-16&r=cta |
| By: | Alia Gizatulina (Max Planck Institute for Research on Collective Goods); Martin Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | For an incomplete-information model of public-good provision with interim participation constraints, we show that e¢ cient outcomes can be approximated, with approximately full surplus extraction, when there are many agents and each agent is informationally small. The result holds even if agents' payoffs cannot be unambiguously inferred from their beliefs, i.e., even if the so-called BDP property ("Beliefs Determine Preferences") of Neeman (2004) does not hold. The contrary result of Neeman (2004) rests on an implicit uniformity requirement that is incompatible with the notion that agents are informationally small because there are many other agents who have information about them. |
| Keywords: | surplus extraction, mechanism design, BDP, informational smallness, correlated information |
| JEL: | D40 D44 D80 D82 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2009_28&r=cta |
| By: | Berliant, Marcus; Yu, Chia-Ming |
| Abstract: | Agglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at a location. When workers’ price elasticity of demand for housing is negatively correlated with their productivity, skill-biased technological change causes a core-periphery bifurcation where the agglomeration of high-skill workers eventually constitutes a unique stable equilibrium. When workers’ price elasticity of demand for housing and their productivity are positively correlated, skill-biased technological improvements will never result in a core periphery equilibrium. This paper claims that location can at best be an approximate rather than a precise sieve for high-skill workers. |
| Keywords: | Agglomeration; Adverse Selection; Asymmetric Information; Locational Signaling |
| JEL: | R13 D82 D51 |
| Date: | 2009–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19462&r=cta |
| By: | Fabienne Llense (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| 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. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00441911_v1&r=cta |
| By: | Wendelin Schnedler |
| Abstract: | Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. This paper provides conditions such that no success bonus induces the agent to exert more effort and the optimal contract is independent of success. Moreover, success bonuses may even reduce effort and thus the probability of success. The reason is that bonuses increase the perceived income of the agent and can hence reduce his willingness to exert effort. This perceived income effect has to be weighed against the incentive effect of the bonus. The trade-off is determined by the marginal effect of effort on the success probability in relation to this probability itself (success hazard-rate of effort). The paper also discusses practical implications of the finding. |
| Keywords: | bonus, premium, incentives, income effect, moral hazard |
| JEL: | H00 H11 H20 H30 H71 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:09/226&r=cta |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:munoz-3&r=cta |
| By: | Carsten Krabbe Nielsen (Istituto Politica Economica, Universita Cattolica and Korea University) |
| Abstract: | We generalize the characterization of the loan contract due to Gale and Hellwig (1985) to the case of risk aversion of the borrower and diverse subjective beliefs about the outcome of the investment. We continue to assume costly state verification (Townsend, 1979) i.e. that the lender must incur costs in order to observe the outcome of the project. Contract terms now reflect returns on capital as well as risk sharing and trade on the differences in probabilities. Because there are no financial markets where agents could purchase insurance for state contingencies, private contracting replaces markets for contingent claims. This also means that verification states are not necessarily interpreted as "default" states. We characterize the optimal contract showing that (i) the contractual payoff in verification states varies by states in accord with risk aversion and probability belief of the two parties, and (ii) the verification region may consist of several intervals. We provide conditions and examples to show that when the borrower is more optimistic than the bank, there may be fewer verification regions. |
| Keywords: | Loan Contract, Costly State Verification, Subjective Beliefs |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0918&r=cta |
| By: | Naiditch, Claire (CES-Matisse University Paris 1); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | Like all human beings, migrants may have a concern about their prestige or social status in the eyes of left home family and friends. They can remit money in order to signal their economic success and increase their status. We show that, if migrants' income is private information, unsuccessful migrants might accept a worsening of their living conditions and send back home large amounts of remittances only in order to make residents believe that they are successful. In some cases, successful migrants can signal their true favorable economic situation by remitting an even larger amount. |
| Keywords: | Imperfect Information; Poverty; Remittances; Signaling |
| JEL: | D82 F24 O15 Z13 |
| Date: | 2010–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-09015&r=cta |
| By: | Vo Thi Quynh Anh (Norges Bank (Central Bank of Norway)) |
| Abstract: | Prompt Corrective Action (PCA) is a system of predetermined capital/asset ratios that trigger supervisory actions by a banking regulator. Our paper addresses the optimality of this regulation system by dapting a dynamic model of entrepreneurial finance to banking regulation. In a dynamic moral hazard setting, we first derive the optimal contract between the banker and the regulator and then implement it by a menu of regulatory tools. Our main findings are the following: first, the insurance premium is a risk-based premium where the risk is measured by the capital level; second, our model implies a capital regulation system that shares several similarities with the US PCA. According to our proposed system, regulatory supervision should be realized in the spirit of gradual intervention and the book-value of capital is used as information to trigger intervention. Banks with high capital are not subject to any restrictions. Dividend distribution is prohibited in banks with intermediate level of capital. When banks have low capital level, a plan of recapitalization is required and in the worst case, banks are placed in liquidation. |
| Keywords: | Prompt Corrective Action, Capital Regulation, Dynamic Contracting, Recapitalization |
| JEL: | D82 G21 G28 |
| Date: | 2009–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_28&r=cta |
| By: | Christian A. Stoltenberg (Universiteit van Amsterdam, Department of Economics); Vadym Lepetyuk (Universidad de Alicante, Departamento de Fundamentos del Analisis Economico) |
| Abstract: | In the presence of idiosyncratic risk, the public revelation of information about uncertain aggregate outcomes such as policy choices can be detrimental to social welfare. By announcing informative signals on non-insurable aggregate risk, the policy maker distorts agents’ insurance incentives and increases the riskiness of the optimal allocation that is feasible in self-enforceable arrangements. As an application, we consider a monetary authority that may reveal changes in the inflation target, and document that the negative effect of distorted insurance incentives can very well dominate conventional effects in favor for the release of better information. |
| Keywords: | Social value of information, policy announcements, monetary policy, transparency |
| JEL: | D81 D86 E21 E52 E65 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:65&r=cta |
| By: | Christoph March (Max Planck Institute of Economics, IMPRS "Uncertainty", Jena (Germany)); Anthony Ziegelmeyer (Max Planck Institute of Economics, Strategic Interaction Group, Jena (Germany) and Technical University of Berlin, Faculty of Economics and Management, Berlin (Germany)) |
| Abstract: | We revisit the economic models of social learning by assuming that individuals update their beliefs in a non-Bayesian way. Individuals either overweigh or underweigh (in Bayesian terms) their private information relative to the public information revealed by the decisions of others and each individual's updating rule is private information. First, we consider a setting with perfectly rational individuals with a commonly known distribution of updating rules. We show that introducing heterogeneous updating rules in a simple social learning environment reconciles equilibrium predictions with laboratory evidence. Additionally, a model of social learning with bounded private beliefs and sufficiently rich updating rules corresponds to a model of social learning with unbounded private beliefs. A straightforward implication is that heterogeneity in updating rules is efficiency-enhancing in most social learning environments. Second, we investigate the implications of heterogeneous updating rules in social learning environments where individuals only understand the relation between the aggregate distribution of decisions and the state of the world. Unlike in rational social learning, heterogeneous updating rules do not lead to a substantial improvement of the societal welfare and there is always a non-negligible likelihood that individuals become extremely and wrongly conï¬dent about the state of the world. |
| Keywords: | Social learning, Non-Bayesian updating, Herding, Informational cascades |
| JEL: | D82 D83 |
| Date: | 2009–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-105&r=cta |
| By: | Albert Banal-Estañol; Jo Seldeslachts |
| Abstract: | This paper proposes an explanation as to why some mergers fail, based on the interaction between the pre- and post-merger processes. We argue that failure may stem from informational asymmetries arising from the pre-merger period, and problems of cooperation and coordination within recently merged firms. We show that a partner may optimally agree to merge and abstain from putting forth any post-merger effort, counting on the other partner to make the necessary efforts. If both follow the same course of action, the merger goes ahead but fails. Our unique equilibrium allows us to make predictions on which mergers are more likely to fail. |
| Keywords: | Mergers, Synergies, Asymmetric Information, Complementarities |
| JEL: | D82 G34 L20 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1192&r=cta |
| By: | Dubois, Pierre; Vukina, Tomislav |
| Abstract: | In this paper we study the effects of the change in contract length on the agents' incentives to invest and exert effort. We present an agent's dynamic decision model that explicitly deals with two types of investments and directly allows for contract regime switching by varying the probability of contract renewal parameter. The fact that the unobservable investment in human capital is complementary with the agent's effort produces a result that increasing the probability of contract renewal increases investment and effort, with the consequent increase in production. We also show that there exists a specific level of investment in human capital, for which the investment in physical capital is profitable. We test these theoretical predictions using contract settlement data for the production of hatching eggs. The data was generated by a natural experiment where during the period covered by the data the contract had changed from short-term to long-term. The obtained empirical results are largely supportive of the developed theory. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:21782&r=cta |