nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2010‒07‒03
ten papers chosen by
Simona Fabrizi
Massey University Department of Commerce

  1. Asymmetric information and exchange of information about product differentiation By António Brandão; Joana Pinho
  2. Setting Incentives for Collaboration Among Agricultural Scientists: Application of Principal-Agent Theory to Team Work By Wallace E. Huffman
  3. Endogenous differential information in financial markets By Sebastian cea-Echenique; Juan Pablo Torres-Martínez
  4. Strategic truth and deception By Carlos Oyarzun; Paan Jindapon
  5. Public Goods and Optimal Paternalism under Present-Biased Preferences By Aronsson, Thomas; Granlund, David
  6. Who moves up the career ladder? A model of gender differences in job promotion By Empar Pons Blasco; Luisa Escriche Bertolín
  7. Setting Incentives for Scientists Who Engage in Research and Other Activities: An Application of Principal-Agent Theory By Wallace E. Huffman; Just, Richard E.
  8. Financial innovation and risk: the role of information By Roberto Piazza
  9. Does Hidden Information Make Trade Liberalization More Fragile? By Herzing, Mathias
  10. What renders financial advisors less treacherous? - On commissions and reciprocity - By Vera Popva

  1. By: António Brandão (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal); Joana Pinho (Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: We introduce asymmetric information about consumers' transportation costs (i.e., the degree of product differentiation) in the model of Hotelling (1929). When the transportation costs are high, both firms have lower profits than in the case of perfect information. Contrarily, both firms may prefer the asymmetric information case if the transportation costs are low (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information sharing is ex-ante advantageous for the firms, but ex-post damaging in the case of low transportation costs. If the information is not verifiable, the informed firm always tends to announce that the transportation cost is high. To induce truthful revelation: (i) the uninformed firm must pay for the informed firm to confess that the transportation costs are low; and (ii) the informed firm must make a payment (to the uninformed firm or to a third party) for the uninformed firm to believe that the transportation costs are high.
    Keywords: Hotelling model; Horizontal differentiation; Asymmetric information; Transportation costs; Information sharing
    JEL: D43 D82 L13
    Date: 2010–06
  2. By: Wallace E. Huffman
    Abstract:  The USDA is attempting to shift more research funds into competitive grants involving collaboration across disciplines on large projects. This type of research structure raises a host of information and incentive issues. The objective of this paper is to shed new light on principal-agent problems that are likely to arise in this new funding structure.
    Keywords: incentives; Principal-agent model; team research; competitive grants; multi-disciplinary research
    Date: 2010–06–22
  3. By: Sebastian cea-Echenique; Juan Pablo Torres-Martínez
    Abstract: We develop a two period general equilibrium model with incomplete financial markets and differential information. Making endogenous the traditional informational restriction on consumption, we allow agents to obtain information from physical and financial markets. Thus, the investment in financial promises and the trade of commodities in spot markets appear as natural channels to improve the information that an agent has about the realization of future states of nature.
    Keywords: Incomplete Markets, Differential information, Enlightening equilibrium.
    JEL: D52 D53 D82
    Date: 2010–07
  4. By: Carlos Oyarzun (Universidad de Alicante); Paan Jindapon (University of Alabama)
    Abstract: We study strategic communication in a sender-receiver gamein which the sender sends a message about the observed quality ofthe good to the receiver who may accept or reject the good without knowing the true quality or the sender's type. The game has infinitely many perfect Bayesian Nash equilibria. An equilibrium refinement identifies a unique class of equilibria that are outcome equivalent to the equilibrium in which the neutral sender always tells the truth and the biased sender adopts a feigning strategy to disguise himself by not fully exaggerating about the quality of the good.
    Keywords: Cheap Talk, Feigning Strategy, Strategic Information Transmission.
    JEL: C72 C78
    Date: 2009–09
  5. By: Aronsson, Thomas (Department of Economics, Umeå University); Granlund, David (Department of Economics, Umeå University)
    Abstract: This paper deals with the optimal provision of a state-variable public good in a two-type model, when the consumers have present-biased preferences due to quasi-hyperbolic discounting. The results show that the preference for immediate gratification facing the (mimicking) high-ability type weakens the incentive to adjust the public provision in response to the self-selection constraint.
    Keywords: Public Goods; Quasi-Hyperbolic Discounting; Redistribution; Asymmetric Information
    JEL: D61 H41
    Date: 2010–06–21
  6. By: Empar Pons Blasco (Universitat de València); Luisa Escriche Bertolín (Universitat de València)
    Abstract: This paper presents an adverse selection model that contributes to explain why women are less likely to be promoted. There are two types of workers: family-committed and job-committed workers. The cost of job effort during the first period of the working life is higher for the former. Firms offer two types of contract, one involving high effort during the first period with promotion possibilities and the other requiring low effort but with no opportunity for promotion attached. We show that women are less likely to apply for jobs with promotion possibilities, but when they do, women are just as likely to succeed as men.
    Keywords: Gender Discrimination, Promotions, Asymmetric Information, Status Concerns
    JEL: D82 J71
    Date: 2009–09
  7. By: Wallace E. Huffman; Just, Richard E.
    Abstract:  The objective of this paper is to develop an optimal incentive system for multitaskingscientists in universities or professors under repeat contracting. With the aid of a principalagentmodel under repeat contracting, we show that (i) when a second task is assigned to aprofessor and the two tasks are related, the size of the optimal incentive rate for the first task isreduced in some situations but not others relative to that of a single task, (ii) with an increasein the noise in the technical relationship of the second task or imprecision in outputmeasurement, the optimal incentive rate for that task is reduced and for the first task may bereduced or increased , (iii) with greater efficiency of the professor in producing the secondoutput, as reflected in ability relative to cost of effort, the optimal incentive rate for the firsttask generally decreases, (iv) if the output of the professor’s two tasks are negativelycorrelated then the optimal incentive rate on the first task declines as the size of thiscorrelation increases. The size of the guarantee is always reduced as the professor’s ability fora task increases, but is increased as his cost of effort, noisiness of the technology ormeasurement of output, or correlation between the two outputs increases. It is also possiblethat, as a professor undertakes several difficult-to-measure tasks, the incentive rate will bereduced to the point that an optimal compensation system will involve only a guaranteedsalary, which is a very weak incentive for effort. Selective audits may be useful in thesesituations.
    Keywords: incentives; Principal-agent model; Multitask; scientists; professors; respeat contracting; linear contracts
    Date: 2010–06–11
  8. By: Roberto Piazza (International Monetary Fund)
    Abstract: Financial innovation has increased opportunities for diversification and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies compared with passive (less informed) strategies. What are the consequences? I have studied an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps in avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and causes a deterioration in public information: the economy more often invests in excessively risky technologies. This changes the properties of the business cycle and can reduce welfare by increasing the likelihood of “liquidation crises".
    Keywords: Financial innovation, information collection, great moderation, liquidation crisis
    JEL: G14 G33 E32
    Date: 2010–06
  9. By: Herzing, Mathias (Dept. of Economics, Stockholm University)
    Abstract: This paper focuses on the impact of hidden information on strategic interaction in the context of trade agreements. In the presence of informational asymmetry it is possible that a tradeoff between liberalization and sustainability of cooperation emerges. It is shown that it may be optimal to agree on a degree of liberalization associated with a strictly positive ex ante probability of deviation occurring. In that case, cooperation will break down in …finite time, and the optimal degree of liberalization cannot be applied indefinitely.
    Keywords: Trade agreements; repeated games; asymmetric information; trade policy
    JEL: C72 C73 D82 F13
    Date: 2010–06–24
  10. By: Vera Popva (Max Planck Institute of Economics, Jena, Germany)
    Abstract: An advisor is supposed to recommend a financial product in the best interest of her client. However, the best product for the client may not always be the product yielding the highest commission (paid by product providers) to the advisor. Do advisors nevertheless provide truthful advice? If not, will a voluntary or obligatory payment by a client induce more truthful advice? According to the results, only the voluntary payment reduces the conflict of interest faced by advisors.
    Keywords: financial advisors, moral hazard, reciprocity, experiments
    JEL: C91 D82 L15 M52
    Date: 2010–06–23

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