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on Contract Theory and Applications |
| By: | Kilenthong, Weerachart; Townsend, Robert |
| Abstract: | This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price islands, created endogenously in equilibrium. |
| Keywords: | Externalities; Private information; Moral hazard; Retrading; Walrasian equilibrium; Constrained efficiency; Decentralization |
| JEL: | D62 D61 D82 D51 |
| Date: | 2010–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20725&r=cta |
| By: | Thomas J. Miceli (University of Connecticut) |
| Abstract: | The "puzzle" of blackmail is that threats to reveal private information that would be harmful to someone in exchange for money are illegal, but revelation is not. The resolution is that concealment of information about product quality impedes the efficient operation of markets, whereas revelation promotes it. The real puzzle is why possessors aren't naturally inclined to sell to uninformed parties, who value the information more than would-be blackmail victims. The answer has to do with the public good qualities of information, which create an appropriability problem in transactions with uninformed parties. The paper also discusses incentives to acquire compromising information. |
| Keywords: | Asymmetric information, blackmail, adverse selection |
| JEL: | D82 K42 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2010-08&r=cta |
| By: | Francesca Cornelli (London Business School and the Center for Economic Policy Research); Zbigniew Kominek; Alexander Ljungqvist (New York University's Stern School of Business and CEPR) |
| Abstract: | We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly communist countries coupled with detailed “hard” information about the board’s performance expectations and “soft” information about board and CEO actions and the board’s beliefs about CEO competence in 473 mostly private sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the board’s expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making “honest mistakes”. Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit. |
| Keywords: | Corporate governance, large shareholders, boards of directors, CEO turnover, legal reforms, transition economies, private equity. |
| JEL: | G34 G24 G32 K22 O16 P21 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebd:wpaper:110&r=cta |
| By: | Thomas Stöckl; Michael Kirchler |
| Abstract: | We study the use of trading strategies and their profitability in experimental asset markets with asymmetrically informed traders. We find that insiders make most of their profits from trades which are initiated by their limit orders -- especially at the beginning of a period and when the change in their fundamental information is large. The average informed lose most with market orders and their losses are highest at the beginning of a period when they can be exploited by insiders. Uninformed traders act as liquidity providers. They place the highest number of limit orders and end up with the market return. |
| Keywords: | Asymmetric information; liquidity; trading strategies; limit order markets; experiment |
| JEL: | G12 G14 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2010-09&r=cta |
| By: | Manel Antelo (Universidad de Santiago de Compostela) |
| Abstract: | A patent holder owning a two-period lasting innovation is unable to push it into the market, so it is licensed to a downstream user with production capabilities to market it. The production cost of this firm can be low or high, but the patent holder has only a prior on this fact |
| Keywords: | Licensing, asymmetric information, screening, signaling |
| JEL: | D82 L12 L13 L14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2010_05&r=cta |
| By: | Dongsoo Shin (Santa Clara University); Roland Strausz (Humboldt-Universität zu Berlin) |
| Abstract: | We study the optimal hierarchical structure of an organization under limited commit- ment. The organization cannot make a long term commitment to wages and output levels, while it can commit to its hierarchical structure. We show that the optimal hierarchical structure is horizontal when it is highly likely that the employees are efficient or inefficient. By contrast, when such likelihood is intermediate or output does not expand very fast over time, the optimal hierarchical structure is vertical - with a vertical hierarchy, the organi- zation can mitigate dynamic incentive problems linked to limited commitment. |
| Keywords: | Dynamic Incentives, Organization Design |
| JEL: | D82 D86 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:318&r=cta |
| By: | Guillaume Bazot |
| Abstract: | This paper examines why and how a better geographical implantation of central bank branches (Succursales)can reduce credit constraints to local firms.Some economic structures involve "soft" and "clustered" information therefore distance enhances asymmetries.Thus picking up local information Succursales improves local banks access to liquidity.Consequently banks increases their supply of funds what reduce credit constraints.Evidence comes from a model of banking choice and econometric analysis.Through Hotelling Bertrand equilibria the theoretical model put especially in front the critical role of "soft" information on the efficiency of the Banque implantation.Thanks to a new data set about credit per French district (Départements)panel econometrics confirm the theory through the positive effect of Succursale's density on credit development. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2010-08&r=cta |
| By: | Jakub Steiner; Colin Stewart |
| Abstract: | We present a simple model of elections in which experts with special interests endorse candidates and endorsements are observed by the voters. We show that the equilibrium election outcome is biased towards the experts' interests even though voters know the distribution of expert interests and account for it when evaluating endorsements. Expert influence is fully decentralized in the sense that individual experts have no incentive to exert influence. The effect arises when some agents prefer, ceteris paribus, to support the winning candidate and when experts are much better informed about the state of the world than are voters. |
| Keywords: | Voting, coordination, experts |
| JEL: | D72 D82 D83 |
| Date: | 2010–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-403&r=cta |
| By: | Chen, Yongmin; Hua, Xinyu |
| Abstract: | Low-quality products may cause consumer harm. A firm can reduce the probability of low quality through ex ante investment before sales, and can take remedy actions such as product recalls if it learns after sales that product quality is low. An increase in the firm's product liability increases its incentive for ex post remedy; more ex post remedy, however, may reduce the firm's ex ante quality investment. On the other hand, higher product liability increases consumer demand for the product, resulting in high output and hence greater return to ex ante investment. The trade-off between these two effects, the "substitution effect" and the "output effect", can lead to an inverted U-shaped relationship between ex ante investment and product liability. We find that the firm always prefers full liability whereas consumers might be better off with less than full liability. Full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high; otherwise partial liability can be socially optimal. |
| Keywords: | Ex ante Investment; Product Recall; Liability |
| JEL: | K13 L15 |
| Date: | 2010–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22031&r=cta |
| By: | Siddhartha Bandyopadhyay; Bryan C McCannon |
| Abstract: | We examine how retention motives affect prosecutor behaviour under different evaluation criteria. In particular, we analyze how prosecutors of differing capabilities respond in choosing which cases to take to trail and which to plea bargain. We show how different criteria distort the mix of cases chosen for trail and that the direction of the distortion depends crucially on the evaluation tool used. Optimal evaluation metrics are derived that combine multiple signals of performance and are shown to achieve the first-best outcome. |
| Keywords: | plea bargaining, prosecutor evaluation, retention, signaling |
| JEL: | K41 D82 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:10-11&r=cta |
| By: | Sergey Chernenko; C. Fritz Foley; Robin Greenwood |
| Abstract: | Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear agency costs and therefore have a strong incentive to minimize conflicts of interest with outside investors. We show that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations support listings associated with greater agency costs. We test the predictions that follow from this idea on a sample of publicly listed corporate subsidiaries in Japan. When there is greater scope for expropriation by the parent firm, minority shareholders fare poorly after listing. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced. |
| JEL: | G14 G3 G32 K22 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15910&r=cta |