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on Contract Theory and Applications |
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Issue of 2010‒06‒11
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Alex Gershkov; Benny Moldovanu |
| Abstract: | We characterize the incentive compatible, constrained efficient policy ("second-best") in a dynamic matching environment, where impatient, privately informed agents arrive over time, and where the designer gradually learns about the distribution of agents' values. We also derive conditions on the learning process ensuring that the complete-information, dynamically efficient allocation of resources ("first-best") is incentive compatible. Our analysis reveals and exploits close, formal relations between the problem of ensuring implementable allocation rules in our dynamic allocation problems with incomplete information and learning, and between the classical problem, posed by Rothschild [19], of finding optimal stopping policies for search that are characterized by a reservation price property . |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp543&r=cta |
| By: | ISAAC, Tanguy (Center for Operations Research and Econometrics (CORE), UniversitŽ catholique de Louvain (UCL), Louvain la Neuve, Belgium) |
| Abstract: | We study information revelation in markets with pairwise meetings. First, we reconsider the one-sided case within constant entry flow model. The same question has been studied in an identical framework in Serrano and Yosha (1993). We prove that there exists an additional equilibrium not detected by Serrano and Yosha (1993). We show that this equilibrium is characterized by incomplete information revelation. Until now, no equilibrium with incomplete revelation of information was known in this model. Our second main result is that, at this new equilibrium, information revelation is worse when frictions are weaker. One prove also that increasing the frictions is a Pareto improvement. Finally, we show that those properties should also characterize some equilibria of the two-sided case studied by Wolinsky (1990). |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010019&r=cta |
| By: | Cuihong Fan (Shanghi University of Finance and Economics School of Economics); Byoung Heon Jun (Korea University, Seoul); Elmar G. Wolfstetter (Humboldt-University at Berlin and Korea University, Seoul) |
| Abstract: | This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming a dual licensing scheme that combines a first-price license auction with royalty contracts for losers. Prior to bidding firms observe imperfect signals of the expected cost reduction; after the auction the winning bid is made public. Bidders may signal strength to their rivals through aggressive bidding, which may however backfire and mislead the innovator to set an excessively high royalty rate. We provide sufficient conditions for existence of monotone bidding strategies and for the profitability of combining auctions and royalty contracts for losers. |
| Keywords: | Patents, licensing, auctions, royalty, innovation, R&D, mechanism design |
| JEL: | D21 D43 D44 D45 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1010&r=cta |
| By: | Evans, Keith S.; Weninger, Quinn |
| Abstract: | This paper studies equilibrium search and learning in a dynamic fishing game that is played by independent fishermen and by members of an information sharing Cooperative. Once collected, information about the location of productive fish-ing sites is an excludable public good. We show that independent fishermen do not internalize the full value of information and do not replicate first-best search patterns. An information sharing Cooperative faces a free-riding problem as eachmember prefers that another undertake costly search for information. Contracts can be written to improve upon free-riding, however they may create inefficient search relative to the first-best. The results explain why information sharing Cooperatives are rare in fisheries and provide insights for the regulation of fisheries. |
| JEL: | D8 Q2 |
| Date: | 2010–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:31606&r=cta |
| By: | Deniz Dizdar; Alex Gershkov; Benny Moldovanu |
| Abstract: | We analyze maximization of revenue in the dynamic and stochastic knapsack problem where a given capacity needs to be allocated by a given deadline to sequentially arriving agents. Each agent is described by a two-dimensional type that reflects his capacity requirement and his willingness to pay per unit of capacity. Types are private information. We first characterize implementable policies. Then we solve the revenue maximization problem for the special case where there is private information about per-unit values, but capacity needs are observable. After that we derive two sets of additional conditions on the joint distribution of values and weights under which the revenue maximizing policy for the case with observable weights is implementable, and thus optimal also for the case with two-dimensional private information. In particular, we investigate the role of concave continuation revenues for implementation. We also construct a simple policy for which per-unit prices vary with requested weight but not with time, and prove that it is asymptotically revenue maximizing when available capacity/ time to the deadline both go to infinity. This highlights the importance of nonlinear as opposed to dynamic pricing. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp544&r=cta |
| By: | Skardziukas, Domantas |
| Abstract: | Financial markets and financial intermediation are essential to well-functioning economy. They perform the role of channeling funds to parties that have value creating investment opportunities. However, asymmetric information can seriously impair the process when parties to the financial contract are not fully aware of the risks involved and, as a result, can limit their exposure to financial agreements to prevent themselves from possible losses. Increasing asymmetric information as we explain in the article has a tendency to bring a ripple effect in the financial system. This negative money multiplier then sets the stage until it severely hampers money supply, productive investment opportunities and finally aggregate economic activity. The article introduces the reader with the framework of asymmetric information developed by several authors in the last few decades and builds on the recent financial developments that pose new challenges. |
| Keywords: | Asymmetric information; Financial instability; Credit spread; credit crunch; derivatives; downturn; recession; crisis forecast. |
| JEL: | G14 G2 G38 N22 G0 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23013&r=cta |
| By: | Linda Fernandez; Glenn Sheriff |
| Abstract: | This paper analyzes border protection policies for managing risk of unintended imports of invasive species. Previous work typically assumes invasive species risk to be exogenous and commonly known. Here, we examine cases in which endogenous actions (exporter abatement) affect risk and allow for unobservable differences in exporter abatement cost. We show how the optimal inspection/penalty regime differs in such cases from that derived for homogeneous exporters. The information asymmetry also makes it optimal for the regulator to provide technical assistance grants even if it would be otherwise inefficient to do so. Further, we show that the fungibility of technical assistance with inputs in other sectors of the exporting economy significantly affects the qualitative nature of the optimal policy. If it has no outside value in the exporter's country, the optimal policy is characterized by a menu of contracts trading off higher tariffs with lower penalties for being caught with an invasive. If technical assistance can be used in other sectors of the exporter's economy, it introduces countervailing incentives that make it optimal for the regulator to use a uniform tariff/penalty combination for all exporters. |
| Keywords: | asymmetric information, inspection, international trade , invasive species |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:nev:wpaper:wp201003&r=cta |
| By: | UNO, Hiroshi (UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium) |
| Abstract: | This paper introduces the notion of nested best response potentials for complete information games. It is shown that a unique maximizer of such a potential is a Nash equilibrium that is robust to incomplete information in the sense of Kajii and Morris (1997, mimeo). |
| Keywords: | incomplete information, potential games, robustness, refinements |
| JEL: | C72 C73 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010010&r=cta |
| By: | Joseph E. Harrington, Jr. and Wei Zhao |
| Abstract: | In the context of an infinitely repeated Prisoners’ Dilemma, we explore how cooperation is initiated when players communicate and coordinate through their actions. There are two types of players - patient and impatient - which are private information. An impatient type is incapable of cooperative play, while if both players are patient types - and this is common knowledge - then they can cooperate with a grim trigger strategy. We find that the longer that players have gone without cooperating, the lower is the probability that they’ll cooperate in the next period. While the probability of cooperation emerging is always positive, there is a positive probability that cooperation never occurs. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:559&r=cta |
| By: | Alex Frino (University of Sidney); Maria Grazia Romano (University of Salerno and CSEF) |
| Abstract: | The article examines the impact of transaction costs on the trading strategy of informed institutional investors in a sequential trading market where traders can choose to transact a large or a small amount of stock. The analysis shows how the trading strategy of informed investors and the price impact of their trades depends on market conditions. The main prediction of the model is that institutional buyers are, on average, more aggressive than institutional sellers in bearish markets and less aggressive in bullish markets. Hence, the price impact is higher for purchases when market conditions are bearish, while it is higher for sales when market conditions are bullish. However, this asymmetry vanishes during strongly bearish or bullish phases, when information-based orders stop because the informational advantage of institutional investors becomes too small with respect to the transaction costs |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:252&r=cta |
| By: | André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Luc Leruth (IMF Office in Europe - EUO); Adnan Mazarei (Middle East and Central Asia Department of the IMF - IMF) |
| Abstract: | This article looks at the relationship between SWFs and their recipient countries, with a focus on the impact it may have depending on the nature of the objectives pursued by the SWF from the perspective of a principal-agent framework. In particular, when the SWF has multiple objectives, there is a risk that signals are misinterpreted and lead to misguided reactions by authorities in the recipient country. Thus, hard to interpret signals do not provide a sufficient case for imposing constraints on the SWF. However, we will show that requiring the SWF to invest through intermediary asset managers may foster cooperation, especially when the objectives of the SWF and of the authorities are closely aligned. SWFs may also alleviate the concerns in recipient countries by acting as an investor (and accepting the funds) of other SWF and non-SWF investors. |
| Date: | 2010–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00488662_v1&r=cta |
| By: | Miquel Faig; Min Zhang |
| Abstract: | If entitlement to Unemployment Insurance (UI) benefits must be earned with employment, generous UI is an additional benefit to an employment relationship, so it promotes job creation. If individuals are risk neutral, UI is fairly priced, and the UI system prevents moral-hazard, the generosity of UI has no effect on unemployment. As with Ricardian Equivalence, this result should be useful to pinpoint the effects of UI to violation of its premises. In itself, the endogenous entitlement of UI benefits does not resolve if the Mortensen-Pissarides model is able to generate realistic cycles. However, it brings some insights into this debate: The widespread concern in the design of UI systems to minimize moral-hazard unemployment only makes sense if workers have sufficiently high values of leisure (80 percent of labor productivity in our baseline calculation for the United States). Also, the fact that the generosity of UI has potentially a small effect on unemployment reconciles a high response of unemployment to changes in labor productivity with a small response to changes in UI benefits. |
| Keywords: | Search, Matching, UI Eligibility, Business Cycles, Labor Markets |
| JEL: | E24 E32 J64 |
| Date: | 2010–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-404&r=cta |
| By: | TRUYTS, Tom (Katholieke Universiteit Leuven, CES, B-3000 Leuven, Belgium; UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium) |
| Abstract: | Commodities communicate. Consumers choose a consumption bundle both for its intrinsic characteristics and for what this bundle communicates about their qualities (or 'identity') to spectators. We investigate optimal indirect taxation when consumption choices are motivated by two sorts of concerns: intrinsic consumption and costly signaling. Optimal indirect taxes are introduced into a monotonic signaling game with a finite typespace of consumers. We provide sufficient conditions for the uniqueness of the D1 sequential equilibrium in terms of strategies. In the case of pure costly signaling, signaling goods can in equilibrium be taxed without burden and the optimal quantity taxes on these goods are infinite. When commodities serve both intrinsic consumption and signaling, optimal taxes can be characterized by a generalization of the Ramsey rule, which also deals with the distortions resulting from signaling. |
| Keywords: | optimal taxation, indirect taxation, costly signaling, identity |
| JEL: | C72 H21 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010013&r=cta |
| By: | Lea Cassar; Bruno S. Frey |
| Abstract: | This paper suggests that institutional factors which reward social networks at the expenses of productivity can play an important role in explaining brain drain. The effects of social networks on brain drain are analyzed in a decision theory framework with asymmetric information. We distinguish between the role of insidership and personal connections. The larger the cost of being an outsider, the smaller is the number and the average ability of researchers working in the domestic job market. Personal connections partly compensate for this effect by attracting highly connected researchers back. However, starting from a world with no distortions, personal connections also increase brain drain. |
| Keywords: | Brain drain, social networks, institutions, asymmetric information, Italian academia |
| JEL: | D82 F22 I20 J24 J44 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:489&r=cta |