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on Contract Theory and Applications |
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Issue of 2010‒01‒30
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Gea M. Lee (Singapore Management University) |
| Abstract: | In this paper, we develop a model of collusion in which two firms play an infinitelyrepeated Bertrand game when each firm has a privately-informed agent. The colluding firms, fixing prices, allocate market shares based on the agent’s information as to cost types. We emphasize that the presence of privately-informed agents may provide firms with a strategic opportunity to exploit an interaction between internal contracting and market-sharing arrangement- the contracts with agents may be used to induce firms’ truthful communication in their collusion, and collusive market-share allocation may act to reduce the agents’ information rents. |
| Keywords: | Optimal collusion, internal contract, privately-informed agents, price-fixing |
| JEL: | C73 L13 L14 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1553&r=cta |
| By: | Nicolas Gothelf |
| Abstract: | This paper asks whether revealing the identity of dropping bidders is in the interest of the auctioneer in an ascending price auction with asymmetric bidders and interdependent values. We show that revealing no information about bidders’ identities may increase the expected revenue. In this setup, we identify the underlying mechanism for the failure of the often-heard recommendation that more transparency increases revenue. We also consider bidder ranking over auction formats. |
| Keywords: | Information revelation, identity, English auctions, market design. |
| JEL: | C70 D44 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2010_003&r=cta |
| By: | Phillippe Gagnepain; Marc Ivaldi; David Martimort |
| Abstract: | We construct and estimate a structural principal/agent model of contract renegotiation in the French urban transport sector in a context where operators are privately informed on their innate costs (adverse selection) and can exert cost-reducing managerial effort (moral hazard). This model captures two important features of the industry. First, only two types of contracts are used in practice by local public authorities to regulate the service: cost-plus and fixedprice contracts with positive subsidies. Second, these subsidies increase over time. Such increasing subsidies are consistent with the theoretical hypothesis that principals cannot commit not to renegotiate and contracts are renegotiationproof. We compare this situation to the hypothetical case with full commitment. The distribution of innate costs of operators is shifted upwards under this hypothetical scenario. The welfare gains of commitment are significant and accrue mostly to operators. Estimates of the weights that local governments give to the operator´s profit in their objective functions and of the social value of the cost-reducing managerial effort are obtained as by-products. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we096742&r=cta |
| By: | Fali Huang (Singapore Management University) |
| Abstract: | In a principal–agent framework, principals can mitigate moral hazard problems not only through extrinsic incentives such as monitoring, but also through agents’ intrinsic trustworthiness. Their relative usage, however, changes over time and varies across societies. This paper attempts to explain this phenomenon by endogenizing agent trustworthiness as a response to potential returns. When monitoring becomes relatively cheaper over time, agents acquire lower trustworthiness, which may actually drive up the overall governance cost in society. Across societies, those giving employees lower weights in choosing governance methods tend to have higher monitoring intensities and lower trust. These results are consistent with the empirical evidence. |
| Keywords: | Monitoring, Trustworthiness, Trust, Screening, Economic Governance |
| JEL: | D2 J5 L2 M5 Z13 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:laborw:1531&r=cta |
| By: | Fali Huang; Peter Cappelli (Singapore Management University) |
| Abstract: | Arguably the fundamental problem faced by employers is how to elicit effort from employees. Most models suggest that employers meet this challenge by monitoring employees carefully to prevent shirking. But there is another option that relies on heterogeneity across employees, and that is to screen job candidates to find workers with a stronger work ethic who require less monitoring. This should be especially useful in work systems where monitoring by supervisors is more difficult, such as teamwork systems. We analyze the relationship between screening and monitoring in the context of a principal-agent model and test the theoretical results using a national sample of U.S. establishments, which includes information on employee selection. We find that employers screen applicants more intensively for work ethic where they make greater use of systems such as teamwork where monitoring is more difficult. This screening is also associated with higher wages, as predicted by the theory- The synergies between reduced monitoring costs and high performance work systems enable the firm to pay higher wages to attract and retain such workers. Screening for other attributes, such as work experiences and academic performance, does not produce these results. |
| Keywords: | Employee Screening, Monitoring, Work Ethic, High Performance Work Practices, Principal-Agent Model |
| JEL: | M51 M54 J30 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:laborw:1533&r=cta |
| By: | Pao-li Chang (Singapore Management University) |
| Abstract: | This paper provides a theoretical framework of dispute settlement to explain the surge in blocking incidence of GATT panel reports during the 1980s and the variations in withdrawn incidence versus total disputes across different decades of the GATT regime. The study first suggests the role of the degree of legal controversy over a panel ruling in determining countries' incentives to block (appeal) a panel report under the GATT (WTO) regime. The study then analyzes the effects of political power on countries' incentives to use, and their interactions in using, the dispute settlement mechanism, when two-sided asymmetric information exists regarding panel judgement. |
| Keywords: | dispute settlement, legal controversy, block, appeal, two-sided asymmetric information, political cost |
| JEL: | F02 F13 K33 K41 K42 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:1147&r=cta |
| By: | Fali Huang; Peter Cappelli (Singapore Management University) |
| Abstract: | Arguably the fundamental problem faced by employers is how to elicit effort from employees. Most models suggest that employers meet this challenge by monitoring employees carefully to prevent shirking. But there is another option that relies on heterogeneity across employees, and that is to screen job candidates to find workers with a stronger work ethic who require less monitoring. This should be especially useful in work systems where monitoring by supervisors is more difficult, such as teamwork systems. We analyze the relationship between screening and monitoring in the context of a principal-agent model and test the theoretical results using a national sample of U.S. establishments, which includes information on employee selection. We find that employers screen applicants more intensively for work ethic where they make greater use of systems such as teamwork where monitoring is more difficult. This screening is also associated with higher productivity and higher wages and benefits, as predicted by the theory- The synergies between reduced monitoring costs and high performance work systems enable the firm to pay higher wages to attract and retain such workers. Screening for other attributes, such as cognitive ability, does not produce these results. |
| Keywords: | elicit effort from employees, worker, screening, monitoring, cognitive ability |
| JEL: | J2 J3 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:laborw:1530&r=cta |
| By: | Nicolas L. Jacquet (Singapore Management University) |
| Abstract: | This paper considers the efficiency properties of risk-neutral workers’ mobility decisions in an equilibrium model with search frictions, but no search externalities, when the rent accruing to a match is split through bargaining. Matches are ex ante homogeneous and their true productivity is learnt after the match is formed. It is shown that the efficiency of worker turnover depends on contract enforceability, and that in the absence of complete enforceability the equilibrium fails to be efficient. This is because without complete enforceability firms cannot credibly offer workers contracts that will guarantee them the entire future of all potential future matches. |
| Keywords: | On-the-Job Search, Learning, Bargaining, Contracts, Enforceability |
| JEL: | J30 J63 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:laborw:1537&r=cta |
| By: | Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M. |
| Abstract: | In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. These “high-performance work systems” are difficult to understand in terms of standard moral hazard models. We show experimentally that complementarities between high effort discretion, rent-sharing, screening opportunities, and competition are important driving forces behind these new forms of work organization. We document in particular the endogenous emergence of two fundamentally distinct types of employment strategies. Employers either implement a control strategy, which consists of low effort discretion and little or no rent-sharing, or they implement a trust strategy, which stipulates high effort discretion and substantial rent-sharing. If employers cannot screen employees, the control strategy prevails, while the possibility of screening renders the trust strategy profitable. The introduction of competition substantially fosters the trust strategy, reduces market segmentation, and leads to large welfare gains for both employers and employees. |
| Keywords: | job design; high-performance work systems; screening; reputation; competition; trust; control; social preferences; complementarities |
| JEL: | C91 D86 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:11312&r=cta |
| By: | Erik R. Fasten; Dirk Hofmann |
| Abstract: | Certifiers contribute to the sound functioning of markets by reducing asymmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained. |
| Keywords: | Certification, Rating Agencies, Asymmetric Information, Financial Markets |
| JEL: | G14 G24 L15 D82 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-007&r=cta |
| By: | Michael Ehrmann (European Central Bank) |
| Abstract: | How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to acroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses. |
| Keywords: | public signals, inflation reports, monetary policy, interest rates, announcement effects, co-ordination of beliefs, Bank of England |
| JEL: | E58 E43 G12 G14 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:66&r=cta |
| By: | Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics) |
| Abstract: | The objective of this paper is to point out that dollarization, apart from being a commitment device, may also be used as a signaling device if there is uncertainty about the government’s intentions. To this end, we modify the standard approach to modeling monetary policy by introducing two types of government: good and bad. It is assumed that the good government conducts optimal policy while the bad government prefers to finance higher (than optimal) government expenditure by printing money. People do not observe the type of government, however they know the probability distribution over the two government types. Due to this uncertainty, the good government cannot achieve the first best even if it conducts optimal monetary policy. Hence, the good government has an incentive to dollarize, while the bad governments avoids this step. As a result, we obtain a separating equilibrium where dollarization is a perfect signal of the government type. |
| Keywords: | dollarization, monetary policy |
| JEL: | E42 F40 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:63&r=cta |
| By: | Vianney DEQUIEDT (Centre d'Etudes et de Recherches sur le Développement International); Anne-Marie GEOURJON (Centre d'Etudes et de Recherches sur le Développement International); Grégoire ROTA-GRAZIOSI (Centre d'Etudes et de Recherches sur le Développement International) |
| Abstract: | Preshipment inspection programs are implemented in many developing countries to fight customs corruption. They consist in delegating the inspection of imports to a private firm that operates in the exporting country. To study those PSI programs, we develop a hierarchical agency model where the government authority can rely on two supervisors, namely the private inspection firm and the customs administration, to control importers' declarations. The government's optimal program is fully characterized. We devote some attention to the optimal inspection policy and its comparative statics properties. In particular, we identify the situations in which PSI programs are optimal. Our results highlight the fact that implementing PSI programs both to fight corruption and to modernize customs is inconsistent. We also discuss the optimal reconciliation policy, i.e. what to do in case of conflicting inspection reports by the private firm and the customs administration. In the optimal mechanism, mutual supervision between the private firm and the customs administration is used to provide adequate incentives to all parties. |
| Keywords: | Customs administration., Mutual supervision, Preshipment inspection, corruption |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1115&r=cta |
| By: | Arvidsson, Sara (VTI) |
| Abstract: | By combining Contract Theory and vehicle positioning techniques, insurance companies can replace some of the proxies for risk by actual traffic behavior when pricing the premium. A mechanism design model is used to illustrate that Usage Based Insurance (UBI) can separate risks in terms of driving behavior. This makes it possible to reward safe driving habits since the pricing scheme better reflects the accident risk. The conclusion is that UBI provides an actuarially fair premium for the insuree. It is further an efficient instrument to separate risks for the insurer since it reduces the information asymmetries highlighted in this paper. |
| Keywords: | Usage based insurance; UBI; Pay as you drive; PAYD; Pay as you speed; PAYS; Insurance |
| JEL: | D82 D86 |
| Date: | 2010–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vtiwps:2010_002&r=cta |