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on Contract Theory and Applications |
| By: | Crémer, Jacques |
| Abstract: | I show that cutting the flow of information between a principal and an agent can increase the power of the incentives of the agent to reveal private information. |
| Date: | 2009–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21974&r=cta |
| By: | Martimort, David; Poudou, Jean-Christophe; Sand-Zantman, Wilfried |
| Abstract: | We analyze the contract between an innovator and a developer, when the former has private information on his idea and the latter must exert efforts but may also quit the relationship after having been informed. We show that the equilibrium contracts distort downwards the developer's incentives but in different ways according to the strength of intellectual property rights (IPR). For example, with intermediate IPR, only pooling contracts arise with a limited amount of information revealed. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21957&r=cta |
| By: | Martimort, David; Poudou, Jean-Christophe; Sand-Zantman, Wilfried |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21917&r=cta |
| By: | Aubert, Cécile |
| Abstract: | We investigate the interactions between managers’ incentives to collude or compete, and incentives to exert effort. A manager privately chooses the competitive strategy of the firm, and his own effort to improve productivity; He may substitute collusion to effort to increase profits. High profit targets — i.e., strong effort incentives — make participating in a cartel more attractive. To answer this double moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels. This affects cartel sustainability and profitability. Because of reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically thanks to individual sanctions: They foster internal efficiency in competing firms while worsening it in cartelized firms. This improves both efficiency under competition and cartel deterrence. Individual fines are thus more beneficial than corporate fines; criminal sanctions are even more effective. Last, individual leniency programs have ambiguous effects, even when not used in equilibrium. |
| Keywords: | collusion, managerial incentives, leniency programs |
| JEL: | D82 K21 L41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22250&r=cta |
| By: | Biais, Bruno; Bossaerts, Peter; Spatt, Chester |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21923&r=cta |
| By: | Dessi, Roberta |
| Abstract: | Contractual execution generates hard information, available to the contracting parties, even when contracts are secretly executed. Building on this simple observation, the paper shows that incomplete contracts can be preferred to complete contracts. This is because (i) execution of incomplete contracts reveals less information to outside parties, giving rise to strategic gains; (ii) secretly executed complete contracts could not do better, given the possible strategic uses of the hard information generated by execution of the contract. The key effects at work are explored in the case of financial contracts for innovative start-up companies, providing a rationale for the observed differences in the extent to which venture capital contracts include a variety of contingencies, and for how this varies across industries and geographically. |
| JEL: | D82 G24 L22 D86 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21921&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Maher Said (Microsoft Research New England & Olin Business School, Washington University in St. Louis) |
| Abstract: | We survey the recent literature on designing auctions and mechanisms for dynamic settings. Two settings are considered: those with a dynamic population of agents whose private information remains fixed throughout time; and those with a fixed population of agents whose private information changes across time. Within each of these settings, we discuss both efficient (welfare-maximizing) and optimal (revenue-maximizing) mechanisms. |
| Keywords: | Dynamic auctions and mechanisms, Random arrivals and departures, Changing private information, Incentive compatibility |
| JEL: | C73 D43 D44 D82 D83 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1757r&r=cta |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts. |
| JEL: | E44 E52 G28 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21951&r=cta |
| By: | Jullien, Bruno; Park, In-Uck |
| Abstract: | It is shown that if there is adverse selection on seller's ability in experience goods market, credible communication can be sustained by reputation motives in spite of the inherent conflict of interests between sellers and buyers. In the absence of "commitment" types, reputation motives are explained as a consequence of equilibrium interplay between the market's perception on a seller's ability to deliver quality and the level of trust it places on the information he provides. Moreover, reputation motives do not disappear even after the seller's ability is revealed. This model is applied to examine the extent to which consumer rating systems may discipline sellers in honestly informing buyers about the quality of their product. Also analyzed is the impact of the possibility that sellers may restart as new traders by obtaining new identities. |
| JEL: | C73 D82 D83 L14 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21955&r=cta |
| By: | Felix Hoeffler (Department WHU - Otto Beisheim School of Management); Sebastian Kranz (Bonn Graduate School of Economics, University of Bonn) |
| Abstract: | A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only. |
| Keywords: | incentive regulation, regulatory capture, virtual power plants |
| JEL: | L42 L51 K23 L94 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:320&r=cta |
| By: | Biais, Bruno; Rochet, Jean-Charles; Woolley, Paul |
| Abstract: | Speculative industries exploit novel technologies subject to two risks. First, there is uncertainty about the fundamental value of the innovation: is it strong or fragile? Second, it is difficult to monitor managers, which creates moral hazard. Because of moral hazard, managers earn agency rents in equilibrium. As time goes by and profits are observed, beliefs about the industry are rationally updated. If the industry is strong, confidence builds up. Initially this spurs growth. But increasingly confident managers end up requesting very large rents, which curb the growth of the speculative sector. If rents become too high, investors may give up on incentives, and risk and failure rates rise. Furthermore, if the innovation is fragile, eventually there is a crisis, and the industry shrinks. Our model thus captures important stylized facts of the financial innovation wave which took place at the beginning of this century. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21941&r=cta |
| By: | Jeon, Doh-Shin; Menicucci, Dominico |
| Abstract: | Whether a microfinance institution should use a state-contingent repayment or not is very important since a state-contingent loan can provide insurance for borrowers. However, the classic Grameen bank used state non-contingent repayment, which is puzzling since it forces poor borrowers to make their payments even under hard circumstances. This paper provides an explanation to this puzzle. We consider two modes of lending, group and individual lending, and for each mode we characterize the optimal lending and supervisory contracts when a staff member (a supervisor) can embezzle borrowers' repayments by misrepresenting realized returns. We identify the main trade-off between the insurance gain and the cost of controlling the supervisor's misbehavior. We also found that group lending dominates individual lending either by providing more insurance or by saving audit costs. |
| JEL: | O16 D82 G20 |
| Date: | 2010–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:22425&r=cta |
| By: | Brusset, Xavier; Cattan-Jallet, Roxane |
| Abstract: | In supply chain management, information about the downstream party's willingness to pay (wtp) for a service or a good sold by an upstream party may not be known to the latter. The seller has to make an educated guess for the price at which to offer a good or service. If the buyer refuses to buy, the seller can still turn to a third party and sell at a lower price or hold onto the good. We show that the seller has one interior profit maximizing price if his Bayesian belief about the buyer's wtp follows a distribution which has an increasing failure rate (IFR) in the sense of \cite{bar3}. We prove that the precision of information available to the supplier influences the rent distribution and how the downstream party might opportunistically mis-inform the upstream partner. We propose another reading of the single-price newsvendor problem in Lariviere and Porteus (2001), Ziya et al. (2004a,b), Paul (2006) or Lariviere (2006). Our approach applies to all types of mechanism design problems where a profit-maximizing party has to rely on Bayesian belief to palliate information asymmetry and has alternative sources of income or cost. |
| Keywords: | supply chain optimization; Bayesian belief; mechanism design; increasing failure rate |
| JEL: | D84 C44 D82 C72 |
| Date: | 2009–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22638&r=cta |
| By: | Peters, Michael |
| Abstract: | This paper provides a set of mechanisms that we refer to as emph{dual mechanisms. }These mechanisms have the property that every outcome that can be supported as a Bayesian equilibrium in a competing mechanism game can be supported as an equilibrium in dual mechanisms. In this sense, dual mechanisms play the same role as direct mechanisms do in single principal problems. The advantage of these mechanisms over alternatives like the universal set of mechanisms cite{epspet97} is that they are conceptually straightforward and no more difficult to deal with than the simple direct mechanisms used in single principal mechanism design. |
| Keywords: | competing mechanisms, revelation principle |
| Date: | 2010–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:michael_peters-2010-18&r=cta |
| By: | Dino Gerardi (Cowles Foundation, Yale University); Johannes Horner (Cowles Foundation, Yale University); Lucas Maestri (Yale University) |
| Abstract: | We examine the buyer-seller problem under different levels of commitment. The seller is informed of the quality of the good, which affects both his cost and the buyer’s valuation, but the buyer is not. We characterize the allocations that can be achieved through mechanisms in which, unlike with full commitment, the buyer has the option to "walk away" after observing a given offer. We further characterize the equilibrium payoffs that can be achieved in the bargaining game in which the seller makes all the offers, as the discount factor goes to one. This allows us to identify how different levels of commitment affect outcomes, and which constraints, if any, preclude efficiency. |
| Keywords: | Bargaining, Mechanism design, Market for lemons |
| JEL: | C70 C78 D82 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1760&r=cta |
| By: | Thomas Hellman (University of British Columbia); Enrico Perotti (University of Amsterdam) |
| Abstract: | Novel early stage ideas face uncertainty on the expertise needed to elaborate them, which creates a need to circulate them widely to find a match. Yet as information is not excludable, shared ideas may be stolen, reducing incentives to innovate. Still, in idea-rich environments inventors may share them without contractual protection. Idea density is enhanced by firms ensuring rewards to inventors, while their legal boundaries limit idea leakage. As firms limit idea circulation, the innovative environment involves a symbiotic interaction: firms incubate ideas and allow employees to leave if they cannot find an internal fit; markets allow for wide circulation of ideas until matched and completed; under certain circumstances ideas may be even developed in both firms and markets. |
| Keywords: | Ideas, Innovation, Entrepreneurship, Firm Organization, Start-Ups |
| JEL: | D83 L22 M13 O31 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.47&r=cta |
| By: | Attar, Andrea; Mariotti, Thomas; Salanié, François |
| Abstract: | We consider an exchange economy in which a seller can trade an endowment of a divisible good whose quality she privately knows. Buyers compete in menus of non-exclusive contracts, so that the seller may choose to trade with several buyers. In this context, we show that an equilibrium always exists and that aggregate equilibrium allocations are generically unique. Although the good offered by the seller is divisible, aggregate equilibrium allocations exhibit no fractional trades. In equilibrium, goods of relatively low quality are traded at the same price, while goods of higher quality may end up not being traded at all if the adverse selection problem is severe. This provides a novel strategic foundation for Akerlof's (1970) results, which contrasts with standard competitive screening models postulating enforceability of exclusive contracts. Latent contracts that are issued but not traded in equilibrium turn out to be an essential feature of our construction. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21926&r=cta |
| By: | Keith Blackburn; Niloy Bosey; Salvatore Capasso |
| Abstract: | We study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation. Agents with heterogenous skills seek loans in order to undertake risky investment projects. Asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self-selection in a separating equilibrium. Faced with these contracts, agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations. The key implication of the analysis is that the marginal net bene?t of income disclosure increases with the level of ?financial development. Thus, in accordance with empirical observation, we establish the result that the lower is the stage of such development, the higher is the incidence of tax evasion and the greater is the size of the underground economy. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:138&r=cta |
| By: | Bobtcheff, Catherine (Toulouse School of Economics (CNRS, LERNA)); Mariotti, Thomas (Toulouse School of Economics (CNRS, GREMAQ, IDEI)) |
| Abstract: | We consider a preemption game with two potential competitors who come into play at some random secret times. The presence of a competitor is revealed to a player only when the former moves, which terminates the game. We show that all perfect Bayesian equilibria give rise to the same distribution of players' moving times. Moreover, there exists a unique perfect Bayesian equilibrium in which each player's behavior from any time on is independent of the date at which she came into play. We find that competitive pressure is nonmonotonic over time, and that private information tends to alleviate rent dissipation. Our results have a natural interpretation in terms of eroding reputations. |
| JEL: | C73 D82 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22000&r=cta |
| By: | F.Adriani; L.G.Deidda |
| Abstract: | In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers’ chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market. |
| Keywords: | Market for lemons; Adverse selection; Price dispersion; Price- setting; Signaling; Competition |
| JEL: | D4 D8 L15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201012&r=cta |
| By: | Moinas, Sophie |
| Abstract: | This paper analyzes the rationale for the submission of hidden limit orders, and compares opaque and transparent limit order books. In my sequential model, the limit order trader may be informed with some probability. Both informed and large uninformed liquidity suppliers submit hidden orders in order to decrease the informational impact of their large orders, while ensuring a large trading volume. As they cannot adopt such a strategy in the transparent market, I find that pre-trade opacity improves market liquidity, and the welfare of the participants. My model further yields empirical predictions on the use and revelation of hidden orders in opaque markets. |
| JEL: | G10 G14 G18 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:22438&r=cta |
| By: | Moinas, Sophie |
| Abstract: | This paper analyzes the rationale for the submission of hidden limit orders, and compares opaque and transparent limit order books. In my sequential model, the limit order trader may be informed with some probability. Both informed and large uninformed liquidity suppliers submit hidden orders in order to decrease the informational impact of their large orders, while ensuring a large trading volume. As they cannot adopt such a strategy in the transparent market, I find that pre-trade opacity improves market liquidity, and the welfare of the participants. My model further yields empirical predictions on the use and revelation of hidden orders in opaque markets. |
| JEL: | G10 G14 G18 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22439&r=cta |
| By: | Bourjade, Sylvain; Rey, Patrick; Seabright, Paul |
| Abstract: | We study the effect of encouraging private actions for breaches of competition law. We develop a model in which a plaintiff, who may have private information about whether a breach of law has been committed, decides whether to open a case against a defendant. If opened, the case may be settled out of court or may proceed to full trial. The authorities can facilitate private actions by lowering the costs of opening a case or of proceeding to a full trial, or by raising the damages to be expected in the event of success. We show that facilitating private action increases the number of cases opened and sometimes but not always makes plaintiffs more aggressive in pre-trial bargaining. The latter, if it occurs, tends to make defendants who have committed anti-trust violations more likely to settle than innocent defendants. We also show that for screening to work requires the Court to be committed to rely only on submitted evidence in the case, and not on other possibly relevant background material. We finally study how to design the rules so as to enhance the role of private litigation on antitrust enforcement and prove that it is better to increase damages that to reduce costs of initiating a suit. In particular we find large benefits from introducing a system of compensation for Defendants found non-liable, paid by unsuccessful plaintiffs. |
| JEL: | K41 K42 L40 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21925&r=cta |
| By: | Tirole, Jean (University of Toulouse Capitole) |
| Abstract: | The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macroprudential policies. |
| JEL: | E44 E52 G28 |
| Date: | 2009–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21959&r=cta |