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on Contract Theory and Applications |
| By: | Muthoo, Abhinay (Department of Economics, University of Warwick); Mutuswami, Suresh (Department of Economics, University of leicester) |
| Abstract: | This paper studies the impact of competition on the degree of inefficiency in lemons markets. More precisely, we characterize the second-best mechanism (i.e., the optimal mechanism with private information) in a stylized lemons market with finite numbers of buyers and sellers. We then study the relationship between the degree of efficiency of the second-best mechanism and market competitiveness. The relationship between the first-best and second-best mechanisms is also explored. JEL Classification: C7 ; D4 ; D61 ; D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:939&r=cta |
| By: | Cédric Wasser (Humboldt University of Berlin) |
| Abstract: | We consider a general class of imperfectly discriminating contests with privately informed players. We show that findings by Athey (2001) imply the existence of a Bayesian Nash equilibrium in monotone pure strategies. |
| Keywords: | contest, imperfectly discriminating, asymmetric information, equilibrium existence, interdependent values |
| JEL: | D72 D74 D82 C72 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:331&r=cta |
| By: | Hajime Tomura |
| Abstract: | This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected. |
| Keywords: | Financial stability; Financial system regulation and policies |
| JEL: | E44 G21 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-22&r=cta |
| By: | Ronald Strausz (Humboldt-Universität zu Berlin) |
| Abstract: | This note relates the mechanisms that are based on mediated contracts of Rahman and Obara (2010) to the mechanisms of Myerson (1982). It shows that the mechanisms in Myerson (1982) are more general in that they encompass the mechanisms based on mediated contracts. It establishes an equivalence between the two classes if mediated contracts are allowed to be stochastic |
| Keywords: | mediatedcontract, mechanismdesign, revelationprinciple, moralhazard |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:322&r=cta |
| By: | Ferriani, Fabrizio |
| Abstract: | The impact that informed and uninformed agents have on market prices is crucial for informational issues in financial markets. Informed trades are associated with institutional operators while uninformed trades are executed on behalf of retail investors. Using high-frequency data from Euronext Paris, I estimate a model where I take into account traders' identities at transaction level. The results show that when the identities of the traders are different on the two sides of the market, stock prices follow the direction indicated by institutional agents. This means that when the buyer is an informed operator and the seller is a retail one, the former transmits a positive pressure to the market. Conversely, when the seller is an institutional agent and the buyer is an uninformed one market prices depress. There is no significant effect when the agent types are the same on both market sides. Since traders' identities are concealed in Euronext Paris, the last part of the paper discusses the informational content implicitly provided by observed market variables. Institutional trading is found to increase throughout the day, whereas no evidence of informed trading is found during specific time periods of the continuous auction, except for the first thirty minutes of the day where there are more uninformed trades. Institutional trading is more common during periods of low price changes and high frequency of transactions. Price variations show that informed agents are usually able to trade at better price conditions. Finally, the tick-test algorithm strongly confirms that informed traders always act as initiators of market transactions. |
| Keywords: | High-frequency data; Euronext Paris; informational asymmetries. |
| JEL: | G14 C22 C25 |
| Date: | 2010–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24487&r=cta |
| By: | Adams, Charles (Asian Development Bank Institute) |
| Abstract: | This paper reviews recent state interventions in financial crises and draws lessons for crisis management. A number of areas are identified where crisis management could be strengthened, including with regard to the tools and instruments used to involve the private sector in crisis resolution (with a view to reducing the recent enhanced role of official bailouts and the associated moral hazard), to allow for the orderly resolution of systemically important financial firms (to make these firms "safe to fail"), and with regard to achieving better integration with ex ante macroprudential surveillance. The paper proposes the establishment of high level systemic risk councils (SRCs) in each country with responsibility for overseeing systemic risk in both tranquil times and crisis periods and coordinating the activities of key government ministries, agencies, and the central bank. |
| Keywords: | global financial crisis; state intervention; macroprudential surveiilance; crisis resolution; prevention |
| JEL: | E01 E58 |
| Date: | 2010–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0242&r=cta |
| By: | Dirk Bergemann; Johannes Horner |
| Date: | 2010–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000128&r=cta |
| By: | Dorra Riahi; Louis Lévy-Garboua; Claude Montmarquette |
| Abstract: | We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterized version of the lemons’ model (Akerlof 1970) in the insurance context predicts total crowding out of low-risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz (1976) to solve this major inefficiency consists of adding a partial insurance contract so as to obtain a self-selection of risks. We test the theoretical predictions of these two well-known models in two experiments. A clean test is obtained by matching the parameters of the two experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding out of low risks in the first experiment. Crowding out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. We interpret these results by observing that, in any period, some high risks do not purchase full insurance at lower than fair price and some low risks purchase insurance at a price higher than their induced willingness to pay. These robust findings are inconsistent with expected utility maximization. The observed distortion of probabilities leads to a partial homogenization of perceived risks. <P>Ce travail offre une analyse expérimentale des marchés d’assurance avec anti-sélection. Nous nous intéressons particulièrement aux modèles canoniques d’Akerlof [1970] et de Rothschild et Stiglitz [1976]. Selon Alerlof (1970) l’anti-sélection peut aboutir à une éviction complète des agents les moins risqués. Selon Rothschild et Stiglitz (1976), les contrats de franchise permettent de dépasser cette limite en organisant la sélection des risques : à l’équilibre de marché, les contrats sont spécialisés en fonction des risques individuels. La présente contribution vise à tester ces prédictions théoriques à travers deux expériences de marché d’assurance. Afin de respecter au mieux les hypothèses de base des modèles d’Akerlof et de Rothschild et Stiglitz, nous recourons, dans l’expérimentation, à la technique des loteries binaires. Cette technique génère une neutralité au risque pour les assureurs et une même aversion au risque pour les assurés. Ces expériences sont, à notre connaissance, les premières visant à tester les prédictions des modèles d’assurance avec anti-sélection avec un contrôle des préférences des participants. Les résultats démontrent une éviction partielle des bas risques dans le contexte d’Akerlof (expérience 1). Une éviction qui ne disparaît pas après l’introduction des contrats de franchise (expérience 2). Enfin, à l’opposé de l’équilibre séparateur préconisé par Rothschild et Stiglitz, c’est l’équilibre de pooling qui apparaît (expérience 2). Nous interprétons ces résultats en observant que, dans certaines périodes, certains hauts risques n’achètent pas une assurance complète à un prix inférieur au prix équitable et que certains bas risques achètent une assurance à un prix supérieur à leur volonté induite à payer. Ces résultats robustes sont incompatibles avec la maximisation de l'utilité attendue. La distorsion observée des probabilités conduit à une homogénéisation partielle des risques perçus. |
| Keywords: | experimental economics, insurance markets, adverse selection, binary lottery procedure, expected utility , économie expérimentale, marché d’assurance, anti-sélection, loterie binaire |
| JEL: | C91 D82 G22 |
| Date: | 2010–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2010s-34&r=cta |