|
on Contract Theory and Applications |
|
Issue of 2010‒05‒02
thirteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Fabio Caccioli; Matteo Marsili |
| Abstract: | We study a simple model of an asset market with informed and non-informed agents. In the absence of non-informed agents, the market becomes information efficient when the number of traders with different private information is large enough. Upon introducing non-informed agents, we find that the latter contribute significantly to the trading activity if and only if the market is (nearly) information efficient. This suggests that information efficiency might be a necessary condition for bubble phenomena, induced by the behavior of non-informed traders, or conversely that throwing some sands in the gears of financial markets may curb the occurrence of bubbles. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1004.5014&r=cta |
| By: | Serra Garcia, M.; Damme, E.E.C. van; Potters, J.J.M. (Tilburg University, Center for Economic Research) |
| Abstract: | We compare signaling by words and actions in a one-shot 2-person public good game with private information. The informed player, who knows the exact return from contributing, can signal by contributing first (actions) or by sending a costless message (words). Words can be about the return or about her contribution decision. Theoretically, actions lead to fully e¢ cient contributions. Words can be as influential as actions, and thus elicit the uninformed player's contribution, but allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, we find that words can be as influential as actions. Free-riding, however, does depend on the language: the informed player free-rides less when she talks about her contribution than when she talks about the returns. |
| Keywords: | Information transmission;costly signaling;communication;experiment. |
| JEL: | C72 D82 D83 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201033&r=cta |
| By: | Cheng, X.; Degryse, H.A. (Tilburg University, Center for Economic Research) |
| Abstract: | We provide the first evidence on how the introduction of information sharing via a public credit registry affects banks’ lending decisions. We employ a unique dataset containing detailed information on credit card applications and decisions from one of the leading banks in China. While we do not find that information sharing decreases credit rationing on average, the distribution of granted credit among borrowers with shared information has a unique pattern. In particular, compared to those with information reported only by this bank, borrowers with extra information shared by other banks receive higher credit card lines. While positive information shared by other banks augments lending of this bank, the effect of negative information shared by other banks is not significant. In addition, the availability of shared information through the Public Registry has mixed effects on how the bank utilizes internally produced information. Last, information sharing alleviates informational barriers in China’s credit card market, but not completely. |
| Keywords: | information sharing;credit availability;credit rationing;credit card |
| JEL: | G21 G32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201034s&r=cta |
| By: | Roland Hodler; Hadi Yektas |
| Abstract: | We study a model of war in which the outcome is uncertain not because of luck on the battlefield (as in standard models), but because the involved countries lack information about their opponent. In our model their production and military technologies are common knowledge, but their resources are private information. Each country decides how to allocate its resources to production and warfare. The country with the stronger military wins and receives aggregate production. In equilibrium the country with a comparative advantage in warfare allocates all resources to warfare for low resource levels and follows a non-decreasing concave strategy thereafter. The opponent allocates a constant fraction of its resources to warfare for low resource levels and follows an increasing non-linear strategy thereafter. From an ex ante perspective the country with a comparative advantage in warfare is likely to win the war unless its military technology is much weaker than the opponent’s. |
| Keywords: | Conflict; war; all-pay auction; private information |
| JEL: | D44 D74 H56 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1098&r=cta |
| By: | Shuchi Chawla; Jason Hartline; David Malec; Balasubramanian Sivan |
| Abstract: | We consider the classical mathematical economics problem of {\em Bayesian optimal mechanism design} where a principal aims to optimize expected revenue when allocating resources to self-interested agents with preferences drawn from a known distribution. In single-parameter settings (i.e., where each agent's preference is given by a single private value for being served and zero for not being served) this problem is solved [Myerson '81]. Unfortunately, these single parameter optimal mechanisms are impractical and rarely employed [Ausubel and Milgrom '06], and furthermore the underlying economic theory fails to generalize to the important, relevant, and unsolved multi-dimensional setting (i.e., where each agent's preference is given by multiple values for each of the multiple services available) [Manelli and Vincent '07]. In contrast to the theory of optimal mechanisms we develop a theory of sequential posted price mechanisms, where agents in sequence are offered take-it-or-leave-it prices. These mechanisms are approximately optimal in single-dimensional settings, and avoid many of the properties that make optimal mechanisms impractical. Furthermore, these mechanisms generalize naturally to give the first known approximations to the elusive optimal multi-dimensional mechanism design problem. In particular, we solve multi-dimensional multi-unit auction problems and generalizations to matroid feasibility constraints. The constant approximations we obtain range from 1.5 to 8. For all but one case, our posted price sequences can be computed in polynomial time. |
| Date: | 2010–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1486&r=cta |
| By: | Penelope Hernandez (ERI-CES); Amparo Urbano Salvador (ERI-CES); Jose E. Vila (ERI-CES) |
| Abstract: | This paper shows the existence of an equilibrium pragmatic Language with a universal grammar as a coordination device under communication misunderstandings. Such a language plays a key role in achieving efficient outcomes in those Sender-Receiver games where there may exist noisy information transmission. The Language is pragmatic in the sense that the Receiver’ best response depends on the context, i.e, on the payoffs and on the initial probability distribution of the states of nature of the underlying game. The Language has a universal grammar because the coding rule does not depend on such specific parameters and can then be applied to any Sender-Receiver game with noisy communication. |
| Keywords: | grammar, pragmatic language, prototypes, separating equilibria |
| JEL: | C61 C73 D82 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:dbe:wpaper:0110&r=cta |
| By: | Rene Kirkegaard (Department of Economics,University of Guelph) |
| Abstract: | In many contests a subset of contestants is granted preferential treatment which is presumably intended to be advantageous. Examples include affirmative action and biased procurement policies. In this paper, however, I show that some of the supposed beneficiaries may in fact become worse off when the favored group is diverse. The reason is that the other favored contestants become more aggressive, which may outweigh the advantage that is gained over contestants who do not receive preferential treatment. Likewise, a contestant may be made better off when a subset of his competitors is granted preferential treatment. The contest is modelled as an incomplete-information all-pay auction in which contestants have heterogenous and non-linear cost functions. Incomplete information is crucial for the results. |
| Keywords: | Affirmative Action, All-Pay Auctions, Contests, Preferential Treatment. |
| JEL: | C72 D44 D82 J71 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2010-5.&r=cta |
| By: | John M. Nunley; Mark F. Owens; R. Stephen Howard |
| Abstract: | We conduct a field experiment to determine whether racial discrimination can be identified in product-market auctions and, if so, under what conditions it is more likely to emerge. We compare the prices paid for perfectly substitutable products sold on eBay between sellers with distinctively white and distinctively black names. Price differences arise in favor of sellers whose names match the expected racial characteristics of buyers. However, the price differences only emerge in markets characterized by low levels of competition, and eBay's feedback system, which reduces asymmetric information between buyer and seller, is successful at mitigating these differences. The results suggest, rather strongly, that competitive forces and market mechanisms designed to reduce informational asymmetries both can aid in promoting non-discriminatory outcomes in markets. |
| Keywords: | Racial Discrimination; Statistical Discrimination; Asymmetric Information; Competition; eBay |
| JEL: | C93 J15 D82 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:mts:wpaper:201007&r=cta |
| By: | Thomas Markussen (Department of Economics, University of Copenhagen); Jean-Robert Tyran (Department of Economics, University of Copenhagen) |
| Abstract: | We present a model of political selection in which voters elect a president from a set of candidates. We assume that some of the candidates are benevolent and that all voters prefer a benevolent president, i.e. a president who serves the public interest. Yet, political selection may fail in our model because voters cannot easily tell benevolent from egoistic candidates by observing their pre-election behavior. Egoistic types may strategically imitate benevolent types in the pre-election stage to extract rents once in office. We show that strategic imitation is less likely if the political system is likely to produce good governance. That is, if benevolent candidates are common, if the president has little discretionary power, and if the public sector is effective. We analyze the role of institutions like investigative media and re-election and show that they can improve or further hamper political selection, depending on the parameters of the political game. |
| Keywords: | political selection; elections; social preferences; political leadership |
| JEL: | D64 D72 D82 H0 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1011&r=cta |
| By: | Nakamura, L.I.; Roszbach, K. (Tilburg University, Center for Economic Research) |
| Abstract: | In this paper we use credit rating data from two Swedish banks to elicit evidence on these banks’ loan monitoring ability. We do so by comparing the ability of bank ratings to predict loan defaults relative to that of public ratings from the Swedish credit bureau. We test the banks’ abilility to forecast the credit bureau’s ratings and vice versa. We show that one of the banks has a superior predictive ability relative to the credit bureau. This is evidence that bank credit ratings do contain valuable private information and suggests they may be be a reasonable basis for risk management. However, public ratings are also found to have predictive ability for future bank ratings, indicating that risk analysis should be based on both public and bank ratings. The methods we use represent a new basket of straightforward techniques that enable both financial institutions and regulators to assess the performance of credit ratings systems. |
| Keywords: | Monitoring;banks;credit bureau;private information;ratings;regulation;supervision. |
| JEL: | D82 G18 G21 G24 G32 G33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201037s&r=cta |
| By: | Timo Henckel; Gordon D. Menzies; Daniel J. Zizzo |
| Abstract: | We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, we assume agents switch to the rational expectation. We build a state dependent Phillips curve, and show that adjustments to equilibria may be contaminated by noise adverse selection, where agents in possession of extreme information are the first to adjust to changed economic circumstances. This approach is able to replicate recent micro-level evidence on firms’ pricing behavior and sheds light onto the dynamics of disaggregated prices |
| JEL: | E30 E50 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-01&r=cta |
| By: | Mauro Roca |
| Abstract: | Is it desirable that central banks be more transparent in the communication of sensible information when agents have diverse private information? In practice, there exists some consensus about the benefits of acting in this way. However, other studies warn that increasing the precision of public information may raise the volatility of some aggregate variables - in particular, the price level - due to the disproportionate influence that it exerts on agents' decisions, and that this, in turn, will have negative effects on welfare. This paper studies the welfare effects of varying levels of transparency in a model of price-setting under monopolistic competition and imperfect common knowledge. Our results indicate that more precise public information never leads to a reduction of welfare in this framework. We find that the beneficial effects of decreased imperfect common knowledge due to a more precise common signal always compensates the potential rise in aggregate volatility. Moreover, we show that, in contrast to what has previously been assumed, the variability of the aggregate price level has no detrimental welfare effects in this model. |
| Keywords: | Announcements , Central banks , Economic models , Monetary policy , Private sector , Public information , Transparency , |
| Date: | 2010–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/91&r=cta |
| By: | Sherrill Shaffer |
| Abstract: | Economic theory predicts that reciprocal brokered deposits, by facilitating an extension of deposit insurance coverage, may exacerbate moral hazard and reduce market discipline for banks, permitting them to take more risk in various dimensions. Using a newly available dataset, this note explores empirical evidence related to that hypothesis. |
| JEL: | G21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-15&r=cta |