|
on Contract Theory and Applications |
| By: | Timothy N. Cason; Karthik N. Kannan; Ralph Siebert |
| Abstract: | Theoretical models of information asymmetry have identied a tradeo between the desire to learn and the desire to prevent an opponent from learning private information. This paper reports a laboratory experiment that investigates if actual bidders account for this tradeo, using a sequential procurement auction with private cost information and varying information revelation policies. Specically, the Complete Information Policy, where all submitted bids are revealed between auctions, is compared against the Incomplete Information Policy, where only the winning bid is revealed. The experimental results are largely consistent with the theoretical predictions. For example, bidders pool with other types to prevent an opponent from learning signicantly more often under a Complete Information Policy. Also as predicted, the procurer pays less when employing an Incomplete Information Policy only when the market is highly competitive. Bids are usually more aggressive than the risk neutral quantitative prediction, which is usually consistent with risk aversion. |
| Keywords: | Complete and Incomplete Information Revelation Policies, Laboratory Study, Procurement Auction, Multistage Game |
| JEL: | C91 D44 D82 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1235&r=cta |
| By: | James B. Bushnell |
| Abstract: | Although international programs for carbon offsets play an important role in current and prospective climate-change policy, they continue to be very controversial. Asymmetric information creates several incentive problems, include adverse selection and moral hazard, in offset markets. The current regulatory focus on additionality tends to paint all these problems with a broad brush without proper consideration of the context or their implications. |
| JEL: | H23 L14 L5 Q54 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16305&r=cta |
| By: | David P. Myatt; Chris Wallace |
| Abstract: | In the context of a “beauty contest” coordination game (in which payoffs depend on the quadratic distance of actions from an unobserved state variable and from the average action) players choose how much costly attention to pay to various informative signals. Each signal has an underlying accuracy (how precisely it identifies the state) and a clarity (how easy it is to understand). The unique linear equilibrium has interesting properties: the signals which receive attention are the clearest available, even if they have poor underlying accuracy; the number of signals observed falls as the complementarity of players’ actions rises; and, if actions are more complementary, the information endogenously acquired in equilibrium is more public in nature. The consequences of “rational” inattention constraints on information transmission and processing are also studied. |
| Keywords: | Beauty contest games, Coordination games, Endogenous information acquisition, Rational inattention |
| JEL: | C72 D83 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:501&r=cta |
| By: | Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); |
| Abstract: | We consider a labor market signaling model with an endogenous quality choice and we start by deriving intuitive conditions on when self-fulfilling statistical discrimination can occur. It is more likely if the variance of the distribution of types is low or if the signal has more value to the firm. This self-fulfilling statistical discrimination is different than that proposed by Spence in his original work on market signaling, which requires employers to believe that some women play a strictly dominated strategy. We next show that a very low potential pooling stereotype forces the high-quality agent with that bad stereotype to separate and engage in counter-stereotypical behavior. |
| JEL: | J70 D82 O15 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp024&r=cta |
| By: | Alexander Sebald (Department of Economics, University of Copenhagen); Markus Walzl (Bamberg University) |
| Abstract: | We conduct a laboratory experiment with agents working on and principals benefiting from a real effort task in which the agents’ effort/performance can only be evaluated subjectively. Principals give subjective performance feedback to agents and agents have an opportunity to sanction principals. We find that agents sanction whenever the feedback of principals is below their subjective self-evaluations even if the agents’ payoff is independent of the principals’ feedback. Based on our experimental analysis we propose a principal-agent model with subjective performance evaluations that accommodates this finding. We analyze the agents’ (optimal) behavior, optimal contracts, and social welfare in this environment. |
| Keywords: | contracts; subjective performance evaluations; self-esteem; ego-threats |
| JEL: | D01 D02 D82 D86 J41 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1018&r=cta |
| By: | Riccardo Calcagno (VU University Amsterdam); Stefano Lovo (HEC, France) |
| Abstract: | We introduce a form of pre-play communication that we call "preopening". During the preopening, players announce their tentative actions to be played in the underlying game. Announcements are made using a posting system which is subject to stochastic failures. Posted actions are publicly observable and players payoffs only depend on the opening outcome, i.e. the action profile that is posted at the end of the preopening phase. We show that when the posting failures hit players idiosyncratically all equilibria of the preopening game lead to the same opening outcome that corresponds to the most "sensible" pure Nash equilibrium of the underlying game. By contrast preopening does not operate an equilibrium selection when posting failure hits players simultaneously. |
| Keywords: | Preopening; equilibrium selection; bargaining; cheap talk |
| JEL: | C72 C73 C78 G1 |
| Date: | 2010–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100023&r=cta |
| By: | Gerlinde Fellner (WU Vienna, Department of Economics, Institute of Economic Policy and Industrial Economics); Sebastian Krügel (Max Planck Institute of Economics, IMPRS "Uncertainty", Jena) |
| Abstract: | Overweighting private information is often used to explain various detrimental decisions. In behavioral economics and finance, it is usually modeled as a direct consequence of misperceiving signal reliability. This bias is typically dubbed overconfidence and linked to the judgment literature in psychology. Empirical tests of the models often fail to find evidence for the predicted effects of overconfidence. These studies assume, however, that a specific type of overconfidence, i.e., "miscalibration," captures the underlying trait. We challenge this assumption and borrow the psychological methodology of single-cue probability learning to obtain a direct measure for overweighting private information. We find that overweighting private information and measures of "miscalibration" are unrelated, indicating that different kinds of misperceptions are at work. Thus, in order to test the theoretical predictions of the overconfidence literature in economics and finance, one cannot rely on the well-established "miscalibration" bias. We find no gender differences in overconfidence for our measures except for one, where women are more overconfident than men. |
| Keywords: | overconfidence, miscalibration, signal perception, cognitive bias |
| JEL: | C91 D83 |
| Date: | 2010–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-058&r=cta |
| By: | Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (1993) that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty's critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system. |
| Keywords: | Optimal Income Taxation, Mechanism Design |
| JEL: | D82 H21 D86 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2010_14&r=cta |
| By: | Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Pierre C. Boyer (Toulouse School of Economics (GREMAQ) and EHESS) |
| Abstract: | We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier which incorporates incentive constraints due to private information on productive abilities relates to the first-best frontier which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, but chooses a lower public-goods provision level. |
| Keywords: | Optimal Income Taxation, Public-good provision, Laer-Curve |
| JEL: | D82 H21 H41 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2010_16&r=cta |