nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2010‒02‒20
eight papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. The organization of expertise in the presence of communication By Roldan, Flavia
  2. Asset auctions, information and liquidity By Vives, Xavier
  3. Does the market kill bad ideas? An institutional comparision of committees and markets in network industries By Prabal Roy Choudhury; Debadatta Saha
  4. Information Acquisition and Price Discrimination By Fatemi, Farshad
  5. The signaling role of policy action. By Romain Baeriswyl; Camille Cornand
  6. Extremal Incentive Compatible Transfers By Nenad Kos; Matthias Messner
  7. Informed trading in the Euro money market for term lending By Zagaglia, Paolo
  8. Asymmetric Information and the Demand for Voluntary Health Insurance in Europe By Kristian Bolin; Daniel Hedblom; Anna Lindgren; Bjorn Lindgren

  1. By: Roldan, Flavia (IESE Business School)
    Abstract: A decision-maker has to elicit information from informed multiple experts about a policy's value. The principal may prevent communication among the agents. However, it may be in the principal's interest to allow communication among them. I assume that communication allows synergies to emerge among the experts but also opens the possibility of collusion among them. I study the optimal design of contracts, focusing on the organization of expertise in the communication phase. I show that, from the principal's point of view, when the advantage of synergies prevails over the collusion problem, communication dominates the no communication case. However, synergies will always prevail if the principal lets agents communicate with each other before they make their choices rather than after.
    Keywords: information acquisition; communication; coordination; collusion; expertise; organization;
    JEL: D81 D82 L23
    Date: 2009–11–09
  2. By: Vives, Xavier (IESE Business School)
    Abstract: A model is presented of a uniform price auction where bidders compete in demand schedules; the model allows for common and private values in the absence of exogenous noise. It is shown how private information yields more market power than the levels seen with full information. Results obtained here are broadly consistent with evidence from asset auctions, may help explain the response of central banks to the crisis and suggest potential improvements in the auction formats of asset auctions.
    Keywords: adverse selection; market power; reverse auctions; bid shading;
    JEL: D44 D82 E58 G14
    Date: 2009–12–03
  3. By: Prabal Roy Choudhury (Indian Statistical Institute, New Delhi); Debadatta Saha (Indian Statistical Institute, New Delhi)
    Abstract: The paper analyzes the problem of protocol coordination between two firms, where one firm has private information about its own protocol. The institutional characteristics of the market and the class of strategies adopted by the firms admit multiple equilibria in the market. Of these, one particular equilibrium has an interior information revelation cutoff for the firm with private information. This demonstrates that the market might not be able to "kill bad ideas", but it does "reward good ideas". In contrast, the institutional design of the committee ensures that the same class of strategies gives rise to a unique equilibrium in the committee, with the informed firm revealing all private information. The committee game results generalize easily to multiple periods as well as to multiple firms and is robust to an exit option. The market game result holds for a certain range of parameter values for multiple firms.
    Keywords: Networks, standardization, coordination, asymmetric information, institutional design
    JEL: L14 L15 D82 D02
    Date: 2009–06
  4. By: Fatemi, Farshad
    Abstract: We consider a Hotelling model of price competition where firms may acquire costly information regarding the preferences (i.e. “location”) of customers. By purchasing additional information, a firm has a finer partition regarding customer preferences, and its pricing decisions must be measurable with respect to this partition. If information acquisition decisions are common knowledge at the point where firms compete via prices, we show that a pure strategy subgame perfect equilibrium exists, and that there is “excess information acquisition” from the point of view of the firms. If information acquisition decisions are private information, a pure strategy equilibrium fails to exist. We compute a mixed strategy equilibrium for a range of parameter values.
    Keywords: Information Acquisition; Price Discrimination
    JEL: L13 D82 D43
    Date: 2010–01–30
  5. By: Romain Baeriswyl; Camille Cornand
    Abstract: This paper analyzes the conduct of the optimal monetary policy with imperfect information on the shocks hitting the economy where firms’ prices are strategic complements. Monetary policy entails a dual stabilizing role, as a policy response that influences directly the economy and as a vehicle for information that shapes firms’ beliefs. In the case where more information is welfare detrimental, the central bank faces a dilemma, for its monetary instrument aimed at stabilizing the economy may harmfully shape firms’ beliefs. Recognizing the signaling role of its instrument, the central bank finds it optimal to distort its policy response in order to mitigate the detrimental information that it may convey.
    Keywords: differential information, monetary policy, transparency.
    JEL: E52 E58 D82
    Date: 2010
  6. By: Nenad Kos; Matthias Messner
    Abstract: In a quasi-linear environment we characterize the (pointwise) largest and the (pointwise) smallest transfer schemes which implement a given allocation rule and are equal to zero at some pre-specied type (extremal transfers). Exploiting the concept of extremal transfers allows us to generalize and unify several existing results of the mechanism design literature. In particular, our approach delivers exact characterization results both for the set of implementable allocation rules and the set of allocation rules which satisfy Revenue Equivalence. In the second part of the paper we investigate the role of extremal transfers in the presence of individual rationality constraints. We provide sucient conditions under which the (pointwise) largest element of the set of transfers which are both incentive compatible and individually rational is an extremal transfer (or an appropriate translation thereof). We show that for a large class of mechanism design problems this implies that the optimal transfer is simply given by an extremal transfer associated with the optimal allocation rule. In such a case mechanism design problems can be reduced to the choice of an allocation rule only even when Revenue Equivalence does not hold. Finally, under the same conditions we show that an allocation rule can be implemented in a way which satisfies individual rationality and ex post budget balance if and only if there exists an individually rational extremal transfer scheme which delivers an ex ante budget surplus.
    Date: 2010
  7. By: Zagaglia, Paolo
    Abstract: I address the role of information heterogeneity in the Euro interbank market for unsecured term lending. I use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the Euro area money market. I obtain four main results. First, I show that the loose supply of liquidity of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market. I also find that the probability of trading with a better informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. The results indicate that information is segmented, in the sense that heterogenous knowledge among banks is maturity-specific. Finally, the paper presents some evidence suggesting that the risk of trading with a counterparty that enjoys an enhanced information set is priced.
    Keywords: Market microstructure; PIN model; money markets; term structure
    JEL: G14 E52
    Date: 2010–02–03
  8. By: Kristian Bolin; Daniel Hedblom; Anna Lindgren; Bjorn Lindgren
    Abstract: Several past studies have found health risk to be negatively correlated with the probability of voluntary health insurance. This is contrary to what one would expect from standard textbook models of adverse selection and moral hazard. The two most common explanations to the counter-intuitive result are either (1) that risk-aversion is correlated with health — i.e. that healthier individuals are also more risk-averse — or (2) that insurers are able to discriminate among customers based on observable health-risk characteristics. We revisited these arguments, using data from the Survey of Health, Ageing and Retirement in Europe (SHARE). Self-assessed health served as an indicator of risk: better health, lower risk. We did, indeed, observe a negative correlation between risk and insurance but found no evidence of heterogeneous risk-preferences as an explanation to our finding.
    JEL: D82 I1
    Date: 2010–01

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