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on Contract Theory and Applications |
| By: | Camargo, Braz; Pastorino, Elena |
| Abstract: | We analyze a dynamic principal–agent model where an infinitely-lived principal faces asequence of finitely-lived agents who differ in their ability to produce output. The ability of anagent is initially unknown to both him and the principal. An agent’s effort affects the informationon ability that is conveyed by performance. We characterize the equilibrium contracts andshow that they display short–term commitment to employment when the impact of effort onoutput is persistent but delayed. By providing insurance against early termination, commitmentencourages agents to exert effort, and thus improves on the principal’s ability to identify theirtalent. We argue that this helps explain the use of probationary appointments in environmentsin which there exists uncertainty about individual ability.Keywords: dynamic principal–agent model, learning, commitment. |
| Date: | 2010–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:219&r=cta |
| By: | Max Bruche (CEMFI, Centro de Estudios Monetarios y Financieros); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | Due to limited liability, banks that are essentially insolvent may have incentives to roll over bad loans as a gamble for resurrection, even though it is socially inefficient to do so. This paper considers the problem of making such banks remove and/or foreclose bad loans, when the proportion of loans on a bank's balance sheet that has gone bad is private information. The private information implies that many plausible schemes are likely to generate widfall gains for bank equity holders, which is undesirable. We propose a scheme with voluntary participation, under which banks (i) reveal the proportion of bad loans on their balance sheet, (ii) remove or foreclose them, and (iii) bank equity holders are no better off than they would be in the absence of the scheme, that is, the scheme produces no windfall gains for bank equity holders. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2010_1003&r=cta |
| By: | Hertel, Johanna; Smith, John |
| Abstract: | We model an interaction between an informed sender and an uninformed receiver. Like the classic cheap talk setup, the informed player sends a message to an uninformed receiver who is to take an action which affects the payoffs of both players. However, unlike the classic cheap talk setup, the sender can communicate only through the use of discrete messages. In particular, the sender has a finite set of message elements with which to compose messages. The sender incurs a communication cost which is increasing in the number of elements contained in the message. We characterize the resulting equilibria with a permissive out-of-equilibrium restriction. We introduce a stronger out-of-equilibrium requirement and show that if the sender and receiver have aligned preferences regarding the action of the receiver then only the most informative equilibrium exists. When the preferences between players are not aligned, we show that our stronger condition does not guarantee uniqueness and we provide an example where an increase in communication costs can improve communication. As we show in an example, this improvement can occur to such an extent that an equilibrium can outperform the Goltsman et. al. (2009) upper bound for payoffs in mediated communication. |
| Keywords: | information transmission; cheap talk; costly communication |
| JEL: | D82 D83 C72 |
| Date: | 2010–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23560&r=cta |
| By: | Araujo, Luis; Camargo, Braz |
| Abstract: | A well–established fact in monetary theory is that a key ingredient for the essentialityof money is its role as a form of memory. In this paper we study a notion ofmemory that includes information about an agent’s past actions and trading opportunitiesbut, in contrast to Kocherlakota (1998), does not include information aboutthe past actions and trading opportunities of an agent’s past partners. We first showthat the first–best can be achieved with memory even if it only includes informationabout an agent’s very recent past. Thus, money can fail to be essential even if memoryis minimal. We then establish, more interestingly, that if information about tradingopportunities is not part of an agent’s record, then money can be better than memory.This shows that the societal benefit of money lies not only on being a record of pastactions, but also on being a record of past trading opportunities, a fact that has beenoverlooked by the monetary literature. |
| Date: | 2010–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:224&r=cta |
| By: | Christophe J. Godlewski; Bulat Sanditov; Thierry Burger-Helmchen |
| 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:ulp:sbbeta:2010-16&r=cta |
| By: | Jörg Franke |
| Abstract: | This paper analyzes the incentive effects of affirmative action in competitive environments modeled as contest games. Competition is between heterogeneous players where heterogeneity might be due to past discrimination. Two policy options are analyzed that tackle the underlying asymmetry: Either it is ignored and the contestants are treated equally, or affirmative action is implemented which compensates discriminated players. It is shown in a simple two-player contest game that a tradeoff between affirmative action and high effort exertion does not exist. Instead, the implementation of affirmative action fosters effort incentives. Similar results hold in the n-player contest as well as under imperfect information if the heterogeneity between contestants is moderate. |
| Keywords: | Asymmetric contest; affirmative action; discrimination |
| JEL: | C72 D63 I38 J78 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0185&r=cta |
| By: | Tibor Neugebauer (Luxembourg School of Finance, University of Luxembourg); Sascha Füllbrunn (Luxembourg School of Finance, University of Luxembourg) |
| Abstract: | Safety nets may reduce incentives to mitigate risks, and adversely affect people’s behavior. We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. Individuals take costly measures to avoid a likely loss which, if incurred, is collectively indemnified. The situation is compared to a situation with full liability and the deterministic benchmark, i.e. the public goods game. We report experimental results. The data show that limited liability leads to higher risk taking in comparison to full liability; however, the difference is much smaller than predicted by theory. In comparison to the deterministic benchmark, individuals take higher loss avoidance levels. We attribute this effect to social responsibility since subjects behave as if they were liable for the losses they impose on the group. With repetition, the experimental data indicate a gradual emergence of the moral hazard problem in safety nets. |
| Keywords: | Experiment, social safety net, moral hazard, linear public goods game, hidden action |
| JEL: | C9 D7 D8 H4 I1 I3 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:10-04&r=cta |
| By: | Christopher L. House; Yusufcan Masatlioglu |
| Abstract: | We present a model in which banks trade toxic assets to raise funds for investment. The toxic assets generate an adverse selection problem and, as a consequence, the interbank asset market provides insufficient liquidity to finance investment. While the best investments are fully funded, socially efficient projects with modest payoffs are not. Investment is inefficiently low because acquiring funding requires banks to sell high-quality assets for less than their "fair" value. We then consider whether equity injections and asset purchases can improve market outcomes. Equity injections do not improve liquidity and may be counterproductive as a policy for increasing investment. By allowing banks to fund investments without having to sell high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. Paradoxically, if equity injections are directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. In contrast, asset purchase programs, like the Public-Private Investment Program, often have favorable impacts on liquidity, investment and welfare. |
| JEL: | D53 D82 E22 E44 E5 G18 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16145&r=cta |
| By: | Facundo Albornoz; Esther Hauk |
| Abstract: | We study a symmetric information bargaining model of civil war where a third (foreign) party can affect the probabilities of winning the conflict and the size of the post conflict spoils. We show that the possible alliance with a third party makes peaceful agreements difficult to reach and might lead to new commitment problems that trigger war. Also, we argue that the foreign party is likely to induce persistent informational asymmetries which might explain long lasting civil wars. We explore both political and economic incentives for a third party to intervene. The explicit consideration of political incentives leads to two predictions that allow for identifying the influence of foreign intervention on civil war incidence. Both predictions are confirmed for the case of the U.S. as a potential intervening nation: (i) civil wars around the world are more likely under Republican governments and (ii) the probability of civil wars decreases with U.S. presidential approval rates. |
| Date: | 2010–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:836.10&r=cta |
| By: | Aureo de Paula (Department of Economics, University of Pennsylvania); Xun Tang (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper studies the inference of interaction effects, i.e., the impacts of players' actions on each other's payoffs, in discrete simultaneous games with incomplete information. We propose an easily implementable test for the signs of state-dependent interaction effects that does not require parametric specifications of players' payoffs, the distributions of their private signals or the equilibrium selection mechanism. The test relies on the commonly invoked assumption that players' private signals are independent conditional on observed states. The procedure is valid in the presence of multiple equilibria, and, as a by-product of our approach, we propose a formal test for multiple equilibria in the data-generating process. We provide Monte Carlo evidence of the test's good performance infinite samples. We also implement the test to infer the direction of interaction effects in couples' joint retirement decisions using data from the Health and Retirement Study. |
| Keywords: | identification, inference, multiple equilibria, incomplete information games |
| JEL: | C01 C72 |
| Date: | 2010–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:10-021&r=cta |