|
on Contract Theory and Applications |
| By: | Zheng, Charles Zhoucheng |
| Abstract: | A social planner wishes to launch a project but the contenders capable of running the project are cash-constrained and may default. To signal their capabilities, the contenders may finance their bids through debt or equity, depending on the mechanism chosen by the social planner. When moral hazard is absent, it is established as theorems that the ex post efficient social choice function cannot be achieved by any mechanism using only debt financing and can be achieved by a mechanism using equity financing. When moral hazard is present, however, it is illustrated heuristically that equity share discourages effort and exacerbates default more than risky debt does. |
| Keywords: | auction; finance; debt; equity; default; financial constraint; budget constraint |
| JEL: | D44 D92 |
| Date: | 2010–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:31517&r=cta |
| By: | Peters, M.; Szentes, B. |
| Abstract: | This paper analyzes a normal form game in which players write contracts that condition their actions on the contracts of the other players. These contracts are required to be representable in a formal language. This is accomplished by constructing contracts which are definable functions of the Godel code of every other player’s contract. We characterize the set of outcomes that are supportable as (pure strategy) equilibrium with such contracts. With symmetric information, this is all outcomes in which all players receive at least their min max payoff. With incomplete information this all allocation rules that are incentive compatible and satisfy an individual rationality condition that we describe. We contrast the set of allocation rules that can be supported by Bayesian equilibrium with those attainable by a mechanism designer. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ner:ucllon:http://eprints.ucl.ac.uk/15001/&r=cta |
| By: | Aghion, P.; Fudenberg, D.; Holden, R.T. |
| Abstract: | The foundations of incomplete contracts have been questioned using or extending the subgame perfect implementation approach of Moore and Repullo (1988). We consider the robustness of subgame perfect implementation to the introduction of small amounts of asymmetric information. We show that Moore- Repullo mechanisms may not yield (even approximately) truthful revelation in pure or totally mixed strategies as the amount of asymmetric information goes to zero. Moreover, we argue that a wide class of extensive-form mechanisms are subject to this fragility. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ner:ucllon:http://eprints.ucl.ac.uk/17757/&r=cta |
| By: | Shengle Lin (Economic Science Institute, Chapman University) |
| Abstract: | Gradual information diffusion model predicts that as private information travels across the population, pricing accuracy would improve and asset prices would exhibit momentum as a result. In laboratory markets I investigate the market’s aggregation capacity in response to varying proportions of informed traders as a consequence of information diffusion. The results demonstrate that pricing errors are high when private information is dispersed and that, as the information spreads, the market gradually revise the errors and manifest momentum. Analysis suggests that aggregation under dispersed information conditions is hampered by three factors: equilibrium multiplicity, slow arrival of myopic traders, and anonymous trading. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:10-04&r=cta |
| By: | Matthias Kräkel; Anja Schöttner |
| Abstract: | We identify a new problem that may arise when heterogeneous workers are motivated by relative performance schemes: If workers’ abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker’s productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague, thereby reducing the motivation of both workers to exert effort under a relative incentive scheme. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise. |
| Keywords: | complementarities; heterogeneous workers; production technology; tournament. |
| JEL: | D82 D86 J33 M52 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse10_2010&r=cta |
| By: | Jehiel, P. |
| Abstract: | Non-transparency both in the form of incomplete information disclosure and in the form of coarse feedback disclosure is optimal in virtual all organizational arrangements of interest. Speci cally, in moral hazard interactions, some form of non-transparency is always desirable, as soon as the dimensionality of the problem exceeds the dimensionality of the action spaces of the various agents. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:ner:ucllon:http://eprints.ucl.ac.uk/19477/&r=cta |
| By: | Martimort, David; Piccolo, Salvatore |
| JEL: | D2 D23 D82 K21 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/2548/&r=cta |
| By: | Christine Binzel; Dietmar Fehr |
| Abstract: | While social relationships play an important role for individuals to cope with missing market institutions, they also limit individuals' range of trading partners. This paper aims at understanding the determinants of trust at various social distances when information asymmetries are present. Among participants from an informal housing area in Cairo we find that the increase in trust following a reduction in social distance comes from the fact that trustors are much more inclined to follow their beliefs when interacting with their friend. When interacting with an ex-ante unknown agent instead, the decision to trust is mainly driven by social preferences. Nevertheless, trustors underestimate their friend's intrinsic motivation to cooperate, leading to a loss in social welfare. We relate this to the agents' inability to signal their trustworthiness in an environment characterized by strong social norms. |
| Keywords: | trust, hidden action, social distance, solidarity, reciprocity, economic development |
| JEL: | C72 C93 D82 O12 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-028&r=cta |
| By: | Alessandra Bonfiglioli |
| Abstract: | This paper studies the relationship between investor protection, entrepreneurial risk taking and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk when lending to firms, thereby improving the degree of risk sharing between financiers and entrepreneurs. On the other hand, by increasing risk sharing, investor protection also induces more firms to undertake risky projects. By increasing entrepreneurial risk taking, it raises income dispersion. By reducing the risk faced by entrepreneurs, it reduces income volatility. As a result, investor protection raises income inequality to the extent that it fosters risk taking, while it reduces it for a given level of risk taking. Empirical evidence from a panel of forty-five countries spanning the period 1976-2000 supports the predictions of the model. |
| Keywords: | Keywords: Investor protection, income inequality, optimal financial contracts, risk taking, risk sharing. |
| JEL: | D31 E44 O16 |
| Date: | 2010–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:827.10&r=cta |
| By: | Vives, Xavier (IESE Business School) |
| Abstract: | I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition. |
| Keywords: | trade-off; competition; stability; banking; |
| Date: | 2010–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0852&r=cta |
| By: | Antti Kauhanen; Sami Napari |
| Abstract: | This paper explores performance measurement in incentive plans. Based on theory, we argue that differences in the nature of jobs between blue- and white-collar employees lead to differences in incentive systems. We find that performance measurement for white-collar workers is broader in terms of the performance measures, the organizational level of performance measurement and the time horizon. The intensity of incentives is also stronger for white-collar employees. All of these findings are consistent with theory. |
| Keywords: | incentive pay, performance measurement, risk versus distortion trade-off, agency theory |
| JEL: | J33 M52 M54 |
| Date: | 2010–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:rif:dpaper:1216&r=cta |