nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2010‒05‒08
ten papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Egalitarian Equivalence under Asymmetric Information By Geoffroy de Clippel; David Perez-Castrillo; David Wettstein
  2. A Note on Free Entry under Uncertainty: on the Role of Asymmetric Information By Salvatore Piccolo
  3. Vertical Separation with Private Contracts By Marco Pagnozzi; Salvatore Piccolo
  4. Money Talks? An Experimental Study of Rebate in Reputation System Design By Li, Lingfang (Ivy); Xiao, Erte
  5. Why Less Informed Managers May Be Better Leaders By Sergei Guriev; Anton Suvorov
  6. The Value of Delegation in a Dynamic Agency By Barbara Schöndube-Pirchegger; Jens Robert Schöndube
  7. Bank Runs Without Sunspots By Francisco J. Santos-Arteaga
  8. Ownership concentration and audit fees: do auditors matter most when investors are protected least? By Ben Ali Chiraz; Cédric Lesage
  9. Transport Pricing and Public-Private Partnerships By Roger Vickerman; Emil Evenhuis
  10. Experts, Conflicts of Interest, and the Controversial Role of Reputation By Filippo Pavesi; Massimo Scotti

  1. By: Geoffroy de Clippel; David Perez-Castrillo; David Wettstein
    Abstract: We propose a definition of egalitarian equivalence that extends Pazner and Schmeidler’s (1978) concept to environments with incomplete information. If every feasible allocation rule can be implemented by an incentive compatible mechanism (as, for instance, in the case of non-exclusive information), then interim egalitarian equivalence and interim incentive efficiency remain compatible, as they were under complete information. When incentive constraints are more restrictive, on the other hand, the two criteria may become incompatible.
    Keywords: Pareto Efficiency: Egalitarian Equivalence; Asymmetric Information
    Date: 2010
  2. By: Salvatore Piccolo (University of Naples "Federico II" and CSEF)
    Abstract: In a model of competing managerial .rms I show that the equilibrium number of firms decreases with uncertainty if entry is relatively more costly than monitoring. The result adds to the earlier theoretical contributions and is consistent with the available evidence.
    Keywords: Asymmetric information, free entry, uncertainty, managerial firms
    JEL: D43 D81 L12
    Date: 2010–04–24
  3. By: Marco Pagnozzi (University of Napoli "Federico II" and CSEF); Salvatore Piccolo (University of Naples "Federico II" and CSEF)
    Abstract: We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetry beliefs), vertical separation by all manufacturers is an equilibrium, and it results in higher consumers' prices and manufacturers' profits. Even with private contracts, vertically separated manufacturers reduce competition by inducing less aggressive behaviour by retailers in the final market. We characterize a condition for manufacturers' profits to be higher with private than with public contracts. Our results hold both with price and with quantity competition, and do not hinge on retailers' beliefs being perfectly symmetric.
    Keywords: Delegation, vertical separation, private contracts, symmetry beliefs
    JEL: D20 D43
    Date: 2010–04–26
  4. By: Li, Lingfang (Ivy); Xiao, Erte
    Abstract: Reputation systems that rely on feedback from traders are important institutions for helping sustain trust in markets, while feedback information is usually considered a public good. We apply both theoretical models and experiments to study how raters' feedback behavior responds to different reporting costs and how to improve market efficiency by introducing a pre-commitment device for sellers in reputation systems. In particular, the pre-commitment device we study here allows sellers to provide rebates to cover buyers' reporting costs before buyers make purchasing decisions. Using a buyer-seller trust game with a unilateral feedback scheme, we find that a buyer’s propensity to leave feedback is more sensitive to reporting costs when the seller cooperates than when the seller defects. The seller’s decision on whether to provide a rebate significantly affects the buyer’s decision to leave feedback by compensating for the feedback costs. More importantly, the rebate decision has a significant impact on the buyer's purchasing decision via signaling the seller's cooperative type. The experimental results show that the rebate mechanism improves the market efficiency.
    Keywords: reputation; trust; feedback mechanism; asymmetric information; public goods; experimental economics
    JEL: D02 H41 D82 L86 C91
    Date: 2010–04–29
  5. By: Sergei Guriev (New Economic School (Moscow)); Anton Suvorov (New Economic School (Moscow))
    Abstract: Unlike the textbook model of a top manager being an omniscient planner, coordinator and monitor, the real life managers suffer from discontinuity, lack of systematic information collection and limited time for analysis and re?ection. Why do not business leaders set up their organizations in the way that would allow themselves to make informed choices based on thorough analysis? We argue that in some situations top managers may benefit from being less informed. In our model, additional information raises ex post flexibility of the decision-makers which may undermine the ex ante incentives of their subordinates to make specific investments. The subordinates expect less informed leaders to be more committed to the original strategy which increases the returns to the strategy-specific investments. We show that this effect is more likely to take place in more predictable environments; we also discuss how this effect depends on the hierarchical structure of the organization.
    Keywords: leadership, commitment, organizational structure
    Date: 2010–04
  6. By: Barbara Schöndube-Pirchegger (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Jens Robert Schöndube (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: In this paper we analyze the value of delegation in a two-period agency. A central management hires an agent to perform a personal effort in each period. Due to time constraints or lack of ability this effort can not be performed by central management. Besides personal effort firm value is influenced by the decision to launch a project which has to be made at the beginning of period two. The project decision can either be delegated to the agent (decentralization) or it can be made by central management (centralization). Under decentralization the agent observes the project’s contribution before its decision. While this captures the benefit of delegation its cost is that the project decision is unobservable and must be motivated together with personal effort via the same incentive contract. In the centralized regime, in contrast, no incentives for the project decision are necessary, however, the project’s actual contribution will not be observed such that the project decision has to be made based on expectations. We analyze optimal performance measurement for both regimes in a linear contracting setting and analyze the variables that affect the value of delegation. We do this for two different contracting regimes: long-term commitment and long-term renegotiation-proof contracts. Trade-offs under both contracting environments differ substantially. In particular, under renegotiation-proof contracts, decentralization might become optimal even if its direct benefit in terms of acquiring specific knowledge about the project vanishes. The reason is that with delegation of the project decision central management implicitly commits to a higher second period incentive rate as personal effort and the project decision must be controlled via the same incentive contract. This is beneficial if renegotiation-proofness requires central management to set too low second-period incentives compared to long-term commitment. A necessary condition for that is, that intertemporal correlation is negative. Contrary to the classical view this result implies that the incentive problem under centralization may become more severe than under decentralization.
    Date: 2009–12
  7. By: Francisco J. Santos-Arteaga (Universidad Complutense de Madrid,Instituto Complutense de Estudios Internacionales (ICEI))
    Abstract: The literature on bank runs reduces all coordination mechanisms triggering attacks on banks to exogenous sunspots. We present a general equilibrium version of these models where the uncertainty faced by depositors is modeled explicitly, such that bank runs arise as optimal equilibrium outcomes corresponding to Bayesian coordination games played by rational agents before depositing. Differentials in information sets between the bank and its depositors lead to rational self-contained equilibrium runs. The coexistence of different beliefs in equilibrium jointly with the self-fulfilling nature of the attacks follow from Adam Smith's invisible hand principle. The runs obtained do not violate the revelation principle.
    Keywords: Bank runs, Self-contained attacks, Bayesian coordination games, Revelation principle, Invisible hand principle, Pánicos bancarios, Ataques autocontenidos, Juegos de coordinación Bayesianos, Principio de revelación, Principios de la mano invisible.
    Date: 2010
  8. By: Ben Ali Chiraz (ESC Amiens - ESC Amiens); Cédric Lesage (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: Minority expropriation could result when controlling shareholders can expropriate minority shareholders and profit from private benefits of control. This agency conflict (named Type II) has been rarely studied, as the most commonly assumed agency conflict resides between managers and shareholders (Type I). We want to study the role of the auditors in reducing the type II agency conflict. Using an audit fees model derived from Simunic (1980), we study the impact of type I and type II agency conflicts on audit fees in code law vs common law countries. We then focus two civil law countries (Germany and France) providing a lower investor protection level, and two common law countries (the USA and UK) providing a higher investor protection level (La Porta et al. 1998, 2000). Our results show 1) a negative relation between audit fees and managerial shareholding, which is stronger for common law than for civil law countries; 2) a curvilinear (concave) relation between audit fees and controlling shareholding for civil law countries; 3) no Type II conflict in the common law countries. These results illustrate the mixed effects of the legal environment and of each agency conflict on audit fees.
    Date: 2010
  9. By: Roger Vickerman; Emil Evenhuis
    Abstract: Public-Private Partnerships have become a favoured way of introducing private capital into transport projects whilst maintaining an element of public interest. This paper considers the potential conflicts that might arise between the freedom of the private operator within a PPP and other elements of the public sector’s transport policy. Specifically it tackles the question of the problems that might arise when the public sector wishes to implement a type of price regulation, for example SMC Pricing, which might appear to limit the freedom of the private interest to maximise its value from the PPP according to the contract. The paper demonstrates theoretically the potential inconsistencies between such policies and suggest ways in which they may be overcome. We first briefly discuss Public-Private Partnerships in transport: what are the defining characteristics and what are the main types that exist in the different modes of transport? Next we consider the economics of Public-Private Partnerships, in particular from the viewpoint of incentives. Subsequently we identify and examine the issues that arise when Social Marginal Cost Pricing is to be incorporated in PPPs as a regulation with regard to pricing in the transport sector. Lastly, we investigate the possibilities of resolving these issues.
    Keywords: Public-private partnerships; Social Marginal Cost Pricing; Incentives; Contracts; EU Transport Policy
    JEL: L14 L33 L51 L91 R48
    Date: 2010–04
  10. By: Filippo Pavesi; Massimo Scotti
    Abstract: This paper studies the impact of reputation on the reporting strategy of experts that face conflicts of interest. The framework we propose applies to different settings involv- ing decision makers that rely on experts for making informed decisions, such as financial analysts and goverment agencies. We show that reputation has a non-monotonic effect on the degree of information revelation. In general, truthful revelation is more likely to occur when there is more uncertainty on an expert's ability. Furthermore, above a certain threshold, an increase in reputation always makes truthful revelation more difficult to achieve. Our results shed light on the relationship between the institutional features of the reporting environment and informational efficiency.
    Date: 2010–04

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