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on Contract Theory and Applications |
| By: | Daniel Garrett; Alessandro Pavan |
| Abstract: | We characterize a firm's pro fit-maximizing turnover policy in an environment where managerial productivity changes stochastically over time and is the manager's private information. Our key positive result shows that the productivity level that the firm requires for retention declines with the manager's tenure in the firm. Our key normative result shows that, compared to what is efficient, the profit-maximizing policy either induces excessive retention (i.e., inefficiently low turnover) at all tenure levels, or excessive fi ring at the early stages of the relationship followed by excessive retention after succiently long tenure. |
| Keywords: | managerial turnover, termination clauses, dynamic mechanism design, adverse selection,moral hazard |
| JEL: | D82 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1490&r=cta |
| By: | Christian Ewerhart |
| Abstract: | We consider symmetric rent-seeking contests with independent private valuations of the contest prize. For a two-parameter specification with continuous types, we fully characterize the Bayesian equilibrium, and study its basic properties. The willingness to waste is a hump-shaped function of the private valuation, with the median type expending the highest share of her valuation. A first-order (second-order) stochastic increase in the common type distribution raises (lowers) ex-ante expected efforts. However, neither first-order nor second-order stochastic dominance in valuations necessarily leads to a first-order stochastic dominance ranking in efforts. We also show that, as uncertainty vanishes, the Bayesian equilibrium converges to the Nash equilibrium of the model with complete information. |
| Keywords: | Rent seeking, conflict, independent private valuations, first-order stochastic dominance, mean-preserving spread |
| JEL: | C72 H41 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:490&r=cta |
| By: | Konrad Stahl (University of Mannheim); Roland Strausz (Humboldt-University at Berlin) |
| Abstract: | Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer --- the seller --- follows from a non--trivial analysis revealing a clear intuition. Buyer--induced certification acts as an inspection device, whence seller--induced certification acts as a signalling device. Seller--induced certification maximizes the certifier's profit and social welfare. This suggests the general principle that certification is, and should be induced by the better informed party. The results are reflected in a case study from the automotive industry, but apply also to other markets -- in particular the financial market. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:323&r=cta |
| By: | Eisenhuth, Roland |
| Abstract: | Auctioneers who have an indivisible object for sale and believe that bidders are risk neutral can find the recipe for an optimal auction in Myerson (1981); auctioneers who believe that bidders are loss averse can find it here: An optimal auction is an all pay auction with minimum bid, and any optimal mechanism is all pay. |
| Keywords: | Auctions; Loss Aversion; All Pay Mechanisms; Mechanism Design; Revenue Equivalence |
| JEL: | D86 D81 D44 C70 |
| Date: | 2010–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23357&r=cta |
| By: | Christophe J. Godlewski (LaRGE Research Center, Université de Strasbourg); Bulat Sanditov (University of Maastricht); Thierry Burger-Helmchen (BETA Research Center, Université de Strasbourg) |
| Abstract: | We investigate the network structure of syndicated lending markets and evaluate the impact of lenders’ network centrality, considered as measures of their experience and reputation, on borrowing costs. We show that the market for syndicated loans is a “small world” characterized by large local density and short social distances between lenders. Such a network structure allows for better information and resources flows between banks thus enhancing their social capital. We then show that lenders’ experience and reputation play a significant role in reducing loan spreads and thus increasing borrower’s wealth. |
| Keywords: | Agency costs, bank syndicate, experience, loan syndication, reputation, small world, social network analysis. |
| JEL: | G21 G24 L14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2010-07&r=cta |
| By: | Fabretti, Annalisa (University of Rome “Tor Vergata"); Herzel, Stefano (University of Rome “Tor Vergata") |
| Abstract: | We consider the problem of how to set a compensation for a portfolio manager who is required to restrict the investment set, as it happens when applying socially responsible screening. This is a problem of Delegated Portfolio Management where the reduction of the investment opportunities to the subset of sustainable assets involves a loss in the expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, the manager and the market, we compute the optimal bonus as a function of the manager's risk aversion and his expertise, and of the impact of the portfolio restriction on the Mean Variance efficient frontier. We conclude by discussing the problem of selecting the best managers when his ability is not directly observable by the investor. |
| Keywords: | Delegated portfolio management; Socially responsible investment; Incentives; Extrinsic incentives; Intrinsic motives |
| Date: | 2010–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:sicgwp:2010_007&r=cta |
| By: | Leonard I. Nakamura; Kasper Roszbach. |
| Abstract: | In this paper, the authors use credit rating data from two Swedish banks to elicit evidence on banks' loan monitoring ability. They test the banks' ability to forecast credit bureau ratings, and vice versa, and show that bank ratings are able to predict future credit bureau ratings. This is evidence that bank credit ratings, consistent with theory, contain valuable private information. However, the authors also find that public ratings have an ability to predict future bank ratings, implying that internal bank ratings do not fully or efficiently incorporate all publicly available information. This suggests that risk analyses by banks or regulators should be based on both internal bank ratings and public ratings. They also document that the credit bureau ratings add information to the bank ratings in predicting bankruptcy and loan default. The methods the authors use represent a new basket of straightforward techniques that enables both financial institutions and regulators to assess the performance of credit ratings systems. |
| Keywords: | Credit ratings ; Risk assessment |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-21&r=cta |
| By: | Canan Yildirim (Kadir Has University) |
| Abstract: | This paper analyzes the role of moral hazard and corporate governance structures in bank failures within the context of the 2000-2001 currency and financial crises experienced in Turkey. The findings suggest that poor performers with lower earnings potential and managerial quality, and hence lower franchise value, were more likely to respond to moral hazard incentives provided by the regulatory failures and full coverage deposit insurance system. The findings also suggest that ownership and control variables are significantly related to the probability of failure. Privately owned Turkish commercial banks were more likely to fail. Moreover, among the privately owned Turkish commercial banks, the existence of family involvement on the board increased the probability of failure. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:486&r=cta |
| By: | Alessandro Pavan; Ilya Segal; Juuso Toikka |
| Abstract: | These notes examine the problem of how to extend envelope theorems to in nite-horizon dynamic mechanism design settings, with an application to the design of "bandit auctions." |
| Date: | 2010–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1492&r=cta |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); George Perendia (London Metropolitan University); Bo Yang (University of Surrey) |
| Abstract: | We provide a tool for estimating DSGE models by BayesianMaximum-likelihood methods under very general information assumptions. This framework is applied to a New Keynesian model where we compare the standard approach, that assumes an informational asymmetry between private agents and the econometrician, with an assumption of informational symmetry. For the former, private agents observe all state variables including shocks, whereas the econometrician uses only data for output, inflation and interest rates. For the latter both agents have the same imperfect information set and this corresponds to what we term the 'informational consistency principle'. We first assume rational expectations and then generalize the model to allow some households and firms to form expectations adaptively. We find that in terms of model posterior probabilities, impulse responses, second moments and autocorrelations, the assumption of informational symmetry by rational agents significantly improves the model fit. We also find qualified empirical support for the heterogenous expectations model. JEL Classification: C11, C52, E12, E32. |
| Keywords: | Imperfect Information, DSGE Model, Rational versus Adaptive Expectations, Bayesian Estimation |
| JEL: | E52 E37 E58 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0310&r=cta |
| By: | Ojo, Marianne |
| Abstract: | Through a focus on the ever increasing need to address information asymmetries, as well as reference to the uniqueness of the degree to which systemic risks are triggered in banking, this paper aims primarily to highlight reasons why government and central bank intervention are essential and required in financial regulation. The role presently assumed by regulation is not the same as it was thirty years ago. Deregulation and conglomeration have significantly altered the landscape in which regulation previously existed and to an extent, defined the role which it presently assumes. For this reason, arguments which were (and have been) directed against government, central bank intervention, as well as the role of regulation, require re-evaluation. Deposit insurance and lender of last resort arrangements serve to instil confidence in depositors hence contributing towards safeguarding system stability and preventing unnecessary runs where panics occur. Such benefits are not only considered against those arguments advanced by antagonists of deposit insurance and lender of last resort arrangements, but also against those views which do not favour government and central bank intervention. In evaluating whether free banking is equipped with as many mechanisms and safeguards required in safeguarding the stability of the financial system, the urgency for such safety net instruments, which is attributed to the peculiar and unique nature of banking, will be considered. Contrary to the argument [that “if markets are generally better at allocating resources than governments are, then the differences or distinctions which exist between “money” and the industry that provides it (the banking industry) should not serve as bases for an assumption that money and banking are exceptions to the general rule”], it has to be highlighted (for several reasons) that the banking industry could not be equated to other areas of the financial sector. One of such reasons relates to the extent to which the impact of systemic runs differ within the banking sector when compared to other areas such as the securities markets. The differences in the nature of risks which exist in banking and those which exist within the securities markets, constitutes another reason why the need for government and central bank intervention is advocated. Furthermore, even though the nature of banking risks warrants government and central bank intervention – as well as capital adequacy regulation, capital regulation should also be extended to the securities markets for many reasons – one of which is the ability to securitise assets. If there was no longer a role for regulation, then re- regulation should not have occurred in certain jurisdictions which have adopted and successfully implemented consolidated supervision. |
| Keywords: | asymmetric information; lender of last resort; central banks; systemic; regulation; deposit insurance; free banking |
| JEL: | E0 K2 E5 D8 |
| Date: | 2010–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23298&r=cta |
| By: | Feng, Shuaizhang (Princeton University); Zheng, Bingyong (Shanghai University of Finance and Economics) |
| Abstract: | This paper develops a two-period labor market model with imperfect information and on-the-job training, and uses data from National Longitudinal Survey of Youth 1979 Cohorts (NLSY79) to test its predictions. We find that training does not explain the positive relationship between employer size and wage. In addition, for industries that display size-wage premium, workers in large establishments are more likely to receive on-the-job training but their return to training is smaller. Our theory, substantiated by the new empirical evidence, suggests that it is not large firms, per se, but firms that hire better workers who are paying a wage premium. |
| Keywords: | imperfect information, sorting, on-the-job training, size-wage premium |
| JEL: | D83 J31 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4998&r=cta |