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on Contract Theory and Applications |
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Issue of 2010‒06‒18
fourteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Schmitz, Patrick W. |
| Abstract: | A seller and a buyer can write a contract. After that, the seller produces a good. She can influence the expected quality of the good by making unobservable investments. Only the seller learns the realized quality. Finally, trade can occur. It is always ex post efficient to trade. Yet, it may be impossible to achieve the first best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written. The second best is characterized by distortions that are reminiscent of adverse selection models (i.e., models with precontractual private information but without hidden actions). |
| Keywords: | Hold-up problem; hidden action; hidden information; common values |
| JEL: | D23 D86 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23157&r=cta |
| By: | Mitchell, Matthew; Zhang, Yuzhe |
| Abstract: | This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini [4]. The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment. |
| Keywords: | hidden savings; hidden wealth; repeated moral hazard; unemployment insurance. |
| JEL: | D86 J65 D82 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23214&r=cta |
| By: | Rene Saran; Roberto Serrano |
| Abstract: | In contexts in which players have no priors, we analyze a learning process based on ex-post regret as a guide to understand how to play games of incomplete information under private values. The conclusions depend on whether players interact within a fixed set (fixed matching) or they are randomly matched to play the game (random matching). The relevant long run predictions are minimal sets that are closed under “the same or better reply” operations. Under additional assumptions in each case, the prediction boils down to pure Nash equilibria, pure ex-post equilibria or pure minimax regret equilibria. These three paradigms exhibit nice robustness properties in the sense that they are independent of beliefs about the exogenous uncertainty of type spaces. The results are illustrated in second-price auctions, first-price auctions and Bertrand duopolies. |
| Keywords: | fixed and random matching; incomplete information; ex-post regret learning; nash equilibrium; ex-post equilibrium; minimax regret equilibrium; second-price auction;first-price auction;bertrand duopoly |
| JEL: | C72 C73 D43 D44 D82 D83 |
| Date: | 2010–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2010-11&r=cta |
| By: | Beria Leimona (The World Agroforestry Center); Brooke Kelsey Jack (The World Agroforestry Center); Betha Lusiana (The World Agroforestry Center); Rachman Pasha (The World Agroforestry Center) |
| Abstract: | The setting of this study is a watershed in Lampung, Indonesia where soil erosion has broad implications for both on-site and off-site environmental damage. The strategy to engage farmers in environmental protection initiative is through the Payment for Environmental Services (PES) scheme. A key condition of PES is transparency regarding the conditions under which incentives or rewards can be granted. Balanced information and the power of transaction are the basis for any environmental service (ES). A contract procurement auction is an alternative mechanism for extracting information from ES providers on levels of payments or incentives that will cover their costs when joining a conservation program. This study tested the application of a procurement auction method to reveal hidden information on the opportunity costs of supplying environmental services. The result show that a seal-bid, multiple round second-price Vickrey auction with a uniform price can be applied where most of the auction participants have a low education level, low asset endowment, small plot size and where market-based competitiveness is not common. It reveals too that farmers' bids to be involved in conservation contracts is more dependent on their learning process during the auction than observable factors such as their socioeconomic background, their awareness of conservation and their social capital state. Finally, it shows that introducing procurement auction as a market-based approach to rural communities does not harm their social relationships and is an applicable method in a rural setting. |
| Keywords: | watershed, Indonesia |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:eep:report:rr2010042&r=cta |
| By: | Svetlana Andrianova; Badi Baltagi; Panicos Demetriades; David Fielding |
| Abstract: | We put forward a plausible explanation of African financial underdevelopment in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). We provide empirical evidence from a large panel of African banks which suggests that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions. |
| Keywords: | Dynamic panel data; African financial under-development; African credit markets |
| JEL: | G21 O16 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:10/18&r=cta |
| By: | Yuki Kumagai (School of Economics, University of Nottingham) |
| Abstract: | The purpose of this paper is to explore strategic incentives to use trade networks rather than markets and shed light on the dynamic relation between the two distinct trading systems: a formal system of markets and a decentralised system of networks. We investigate the issues in the infinitely repeated multi-player prisoner's dilemma game with random matching. The existing literature emphasises the impor- tance of information transmission in sustaining long-run cooperation in repeated personal transactions under perfect observability. By con- trast, we show that a folk theorem may hold if we change the way traders are matched, without introducing any information sharing. We also examine different stages of the evolution of trading system. The study states conditions under which agents prefer to trade on networks rather than in markets. |
| Keywords: | Repeated trade; Moral hazard; Matching; Transaction costs; Networks; Institutions |
| JEL: | F10 C73 D02 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2010-07&r=cta |
| By: | Lindbeck, Assar (Research Institute of Industrial Economics (IFN)); Persson, Mats (IIES) |
| Abstract: | In this paper we treat an individual’s health as a continuous variable, in contrast to the traditional literature on income insurance, where it is regularly treated as a binary variable. This is not a minor technical matter; in fact, a continuous treatment of an individual’s health sheds new light on the role and functioning of income insurance and makes it possible to capture a number of real-world phenomena that are not easily captured in binary models. In particular, moral hazard is not regarded as outright fraud, but as a gradual adjustment of the willingness to go to work when income insurance is available. Further, the model can easily encompass phenomena such as administrative rejection of claims and the role of social norms. It also gives a rich view of the desirability of insurance in the first place. |
| Keywords: | Moral hazard; Disability insurance; Sick pay; Work absence; Social norms |
| JEL: | G22 H53 I38 J21 |
| Date: | 2010–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0840&r=cta |
| By: | Rene Saran; Roberto Serrano |
| Date: | 2010–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000083&r=cta |
| By: | Paola Paiardini (Department of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | In this paper we use three years high-frequency data to investigate the role played by public and private information in the process of price formation in two secondary government bond markets. As public information we examine the impact of regularly scheduled macroeconomic news announcements. We identify those announcements with the greatest impact on these markets. As private information we estimate the price impact of order flow. In fact, according to the microstructure models, private information in this context is related to the subjective evaluation of information and order flow can reflect difference of opinions among market participants. Thus, market participant may infer information about the subjective beliefs of other market participants looking at the aggregate order flow. We then use a vector autoregressive model for prices and trades to empirically test the role played by intraday trading intensity and by the waiting time between consecutive transactions in the process of price formations. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1011&r=cta |
| By: | Fricke, Christoph; Menkhoff, Lukas |
| Abstract: | This paper examines the relative information shares of the Bund, i.e. the ten-year Euro bond future contract on German sovereign debt, versus two futures with shorter maturity. We find that the Bund is most important but does not dominate price discovery. The other contracts also have relevant - and at many days even higher - information shares. In examining determinants of information shares, we add order flow measures to market state variables and macroeconomic news. More order flow in a contract consistently increases this contract's information share. |
| JEL: | G14 G23 D85 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-449&r=cta |
| By: | Min Zhang |
| Abstract: | This paper shows that the Mortensen-Pissarides search and matching model can be successfully parameterized to generate observed large cyclical fluctuations in unemployment and modest responses of unemployment to changes in unemployment insurance (UI) benefits. The key features behind this success are the consideration of the eligibility for UI benefits and the heterogeneity of workers. With the linear utilities commonly assumed in the Mortensen-Pissarides model, a fully rated UI system designed to prevent moral hazard has no effect on unemployment. However, the UI system in the United States is neither fully rated nor able to prevent workers with low productivity from quitting their jobs or rejecting employment offers to collect benefits. As a result, an increase in UI generosity has a positive, but realistically small, effect on unemployment. This paper answers the Costain and Reiter (2008) criticism to the Hagedorn and Manovskii (2008) strategy of adopting a high value of non-market activities to generate realistic business cycles with the Mortensen-Pissarides model. |
| Keywords: | Search, Matching, Moral Hazard, UI Entitlement, Equilibrium Unemployment, Labor Markets |
| JEL: | E24 E32 J64 |
| Date: | 2010–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-405&r=cta |
| By: | Karolina Kaiser (Université de Munich); Emmanuelle Taugourdeau (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We introduce political economics into the soft budget constraint problem by asking if the timing of elections has the potential to harden budget constraints. Specifically, we ask under which circumstances the soft budget constraint problem is worse - with synchronized elections, i.e. simultaneous central and regional office terms, or with staggered elections, i.e. terms of office that do not coincide. We find that staggered elections clearly improve fiscal discipline at the local level as well as welfare. |
| Keywords: | Soft budget constraints, fiscal federalism, elections. |
| JEL: | D72 H77 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10036&r=cta |
| By: | Muhren, W.J. (Tilburg University); Walle, B.A. van de (Tilburg University) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-4068878&r=cta |
| By: | Adrian Masters |
| Abstract: | This paper considers the effect of monetary policy and inflation on retail markets. It analyzes a model in which: goods are dated and produced prior to being retailed, buyers direct their search on the basis of price and general quality and, buyers' match specific tastes are their private information. Sellers set the same price for all buyers but some do not value the good highly enough to purchase it. The market economy is typically inefficient as a social planner would have the good consumed. The Friedman rule represents optimal policy as long as there is free-entry of sellers. When the upper bound on the number of participating sellers binds sufficiently, moderate levels of inflation can be welfare improving. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:10-11&r=cta |