|
on Contract Theory and Applications |
| By: | Alexey Kushnir |
| Abstract: | Some labor markets have recently developed formal signaling mechanisms, e.g. the signaling for interviews in the job market for new Ph.D. economists. We evaluate the effect of such mechanisms on two-sided matching markets by considering a game of incomplete information between firms and workers. Workers have almost aligned preferences over firms: each worker has 'typical' commonly known preferences with probability close to one and 'atypical' idiosyncratic preferences with the complementary probability close to zero. Firms have commonly known preferences over workers. We show that the introduction of a signaling mechanism is harmful for this environment. Though signals transmit previously unavailable information, they also facilitate information asymmetry that leads to coordination failures. As a result, the introduction of a signaling mechanism lessens the expected number of matches when signals are informative. |
| Keywords: | Signaling, cheaptalk, matching |
| JEL: | C72 C78 D80 J44 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:509&r=cta |
| By: | Yaron Leitner |
| Abstract: | When contracts are unobserved, agents may have the incentive to promise the same asset to multiple counterparties and subsequently default. The author constructs an optimal mechanism that induces agents to reveal all their trades voluntarily. The mechanism allows agents to report every contract they enter, and it makes public the names of agents who have reached some prespecified position limit. In some cases, an agent's position limit must be higher than the number of contracts he enters in equilibrium. The mechanism has some features of a clearinghouse. |
| Keywords: | Contracts ; Asset-liability management ; Clearinghouses (Banking) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-28&r=cta |
| By: | Dino Gerardi; Johannes Horner; Lucas Maestri |
| Abstract: | We examine the buyer-seller problem under different levels of commitment. The seller is informed of the quality of the good, which affects both his cost and the buyer's valuation, but the buyer is not. We characterize the allocations that can be achieved through mechanisms in which, unlike with full commitment, the buyer has the option to "walk away" after observing a given offer. We further characterize the equilibrium payoffs that can be achieved in the bargaining game in which the seller makes all the offers, as the discount factor goes to one. This allows us to identify how different levels of commitment affect outcomes, and which constraints, if any, preclude efficiency. |
| Keywords: | bargaining; mechanism design; market for lemons |
| JEL: | C70 C78 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:151&r=cta |
| By: | Rene Saran; Roberto Serrano |
| Abstract: | In contexts in which players have no priors, we analyze a learning pro- cess based on ex-post regret as a guide to understand how to play games of incomplete information under private values. The conclusions depend on whether players interact within a fixed set (fixed matching) or they are ran- domly matched to play the game (random matching). The relevant long run predictions are minimal sets that are closed under “the same or better reply” operations. Under additional assumptions in each case, the prediction boils down to pure Nash equilibria, pure ex-post equilibria or pure minimax regret equilibria. These three paradigms exhibit nice robustness properties in the sense that they are independent of beliefs about the exogenous uncertainty of type spaces. The results are illustrated in second-price auctions, first-price auctions and Bertrand duopolies. |
| Keywords: | Fixed and Random Matching; Incomplete Information; Ex-Post Regret Learning; Nash Equilibrium; Ex-Post Equilibrium; Minimax Regret |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2010-11&r=cta |
| By: | Manzano, Carolina (Universitat Rovira i Virgili); Vives, Xavier (IESE Business School) |
| Abstract: | We study a general static noisy rational expectations model, where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust. |
| Keywords: | Rational expectations equilibrium; strategic complementarity; multiplicity of equilibria; asymmetric information; risk exposure; hedging; supply information; |
| JEL: | D82 D83 G14 |
| Date: | 2010–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0874&r=cta |
| By: | Hermalin, Benjamin E. (University of California); Weisbach, Michael S. (Ohio State University) |
| Abstract: | In public-policy discussions about corporate disclosure, more is typically judged better than less. In particular, better disclosure is seen as a way to reduce the agency problems that plague firms. We show that this view is incomplete. In particular, our theoretical analysis shows that increased disclosure is a two-edged sword: More information permits principals to make better decisions; but it can, itself, generate additional agency problems and other costs for shareholders, including increased executive compensation. Consequently, there can exist a point beyond which additional disclosure decreases firm value. We further show that larger firms will tend to adopt stricter disclosure rules than smaller firms, ceteris paribus. Firms with better disclosure will tend, all else equal, to employ more able management. We show that governance reforms that have imposed greater disclosure could, in part, explain recent increases in both CEO compensation and CEO turnover rates. |
| Keywords: | Corporate governance; Corporate disclosure |
| JEL: | D82 D83 G30 L20 M42 |
| Date: | 2010–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0076&r=cta |
| By: | Aronsson, Thomas (Department of Economics, Umeå University); Granlund, David (Department of Economics, Umeå University) |
| Abstract: | In this paper, we analyze the welfare effects of publicly provided health care in an economy where the consumers have "present-biased" preferences due to quasi-hyperbolic discounting. The analysis is based on a two-type model with asymmetric information between the government and the private sector, and each consumer lives for three periods. We present formal conditions under which public provision to the young and middle-aged generation, respectively, leads to higher welfare. Our results show that quasi-hyperbolic discounting provides a strong incentive for public provision to the young generation; especially if the consumers are naive (instead of sophisticated). |
| Keywords: | Public provision of private goods; hyperbolic discounting; intertemporal model; asymmetric information |
| JEL: | D61 H42 |
| Date: | 2010–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0813&r=cta |
| By: | Viral V. Acharya; Hamid Mehran; Anjan Thakor |
| Abstract: | This paper examines how much capital banks should optimally hold. Our model encompasses different kinds of moral hazard studied in banking: asset substitution (or risk shifting, e.g., making risky, negative net present value loans), managerial rent seeking (e.g., shirking or investing in inefficient “pet” projects that yield private benefits), and the free cash flow problem (manifesting as inefficient consumption of cash for perquisites by the manager). The privately optimal capital structure of the bank balances the benefit of leverage as reflected in the market discipline imposed by uninsured creditors on rent seeking on the one hand and the cost of leverage as reflected in the asset substitution induced at high levels of leverage on the other hand. Under some conditions, the capital structure resolves all the moral hazard problems we study, but under other conditions, the goal of having the market discipline of leverage clashes with the goal of having the benefit of equity capital in attenuating asset substitution moral hazard. In this case, private contracting must tolerate some form of inefficiency and bank value is not maximized as it is in the first best. Despite this, there is no economic rationale for regulation. However, when bank failures are correlated and en masse failures can impose significant social costs, regulators may intervene ex post via bank bailouts. Anticipation of this generates multiple Nash equilibria, one of which features systemic risk in that all banks choose inefficiently high leverage, take excessively correlated asset risk, and, because debt is paid off by regulators when banks fail en masse, market discipline is compromised. While a simple minimum (tier-1) capital requirement suffices to restore efficiency under some conditions, there are also conditions under which an optimal arrangement to contain the build-up of systemic risk takes the form of the regular (tier-1) capital requirement plus a “special capital account” that involves 1) building up capital via dividend payout restrictions, 2) investment of the retained earnings in designated assets, and 3) contingent distribution provisions. |
| Keywords: | Bank capital ; Bank reserves ; Financial leverage ; Systemic risk ; Bank failures |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:469&r=cta |
| By: | Kirschenmann, Karolin |
| Abstract: | This paper studies how credit constraints develop over bank relationships. I analyze a unique dataset of matched loan application and loan contract information and measure credit constraints as the ratio of requested to granted loan amounts. I find that the most important determinants of receiving smaller than requested loan amounts are firm age and size at the time of the first interaction between borrower and bank. Over loan sequences, credit constraints decease most pronouncedly in the beginning of relationships and for the initially young and small firms. Moreover, the structure of the dataset allows me to disentangle the demand and supply effects behind these observed credit constraints. I find that the gap between requested and granted loan amounts decreases because both sides converge. If previous credit constraints were large, requested amounts increase more moderately, while granted amounts increase more strongly than in the case of small previous constraints. The findings are a sign of the use of dynamic incentives at the bank side to overcome information problems when contracting repeatedly with opaque borrowers. The results further suggest that, particularly in the beginning of a bank relationship, borrowers learn from their previous experience with credit constraints and adjust their demand accordingly. -- |
| Keywords: | Relationship lending,credit constraints,small business lending,asymmetric information,learning |
| JEL: | D82 G20 G21 G30 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec10:7&r=cta |
| By: | Auriol, Emmanuelle; Brilon, Stefanie |
| Abstract: | Intrinsic motivation of workers may arise from different individual motives. While some workers care about the mission of an organization and derive an intrinsic benefit from advancing this mission ("good" workers), others derive pleasure from some form of destructive or anti-social behavior ("bad" workers). We show that mission-oriented organizations can take advantage of the intrinsic motivation of good workers. Compared to profit-oriented organizations, lower bonus payments and lower monitoring are necessary in order to achieve a high output. However, as soon as there are bad workers, mission-oriented organizations may become more vulnerable to their anti-social behavior than profit-oriented organizations. We analyze the optimal wage contracts and monitoring levels for both types of organization and discuss appropriate measures of ex ante candidate screening to overcome the problems caused by bad workers. -- |
| Keywords: | motivated agents,non-profit,sabotage,candidate selection |
| JEL: | D21 D23 L31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec10:40&r=cta |
| By: | Berger André; Müller Rudolf; Naeemi Seyed Hossein (METEOR) |
| Abstract: | We study the role of monotonicity in the characterization of incentive compatible allocation rules when types are multi-dimensional, the mechanism designer may use monetary transfers, and agents have quasi-linear preferences over outcomes and transfers. It is well-known that monotonicity of the allocation rule is necessary for incentive compatibility. Furthermore, if valuations for outcomes are either convex or differentiable functions in types, revenue equivalence literature tells that path-integrals of particular vector fields are path-independent. For the special case of linear valuations it is known that monotonicity plus path-independence is sufficient for implementation. We show by example that this is not true for convex or differentiable valuations, and introduce a stronger version of monotonicity, called path-monotonicity. We show that path-monotonicity and path-independence characterize implementable allocation rules if (1) valuations are convex and type spaces are convex; (2) valuations are differentiable and type spaces are path-connected. Next we analyze conditions under which monotonicity is equivalent to path-monotonicity. We show that an increasing difference property of valuations ensures this equivalence. Next, we show that for simply connected type spaces incentive compatibility of the allocation rule is equivalent to path-monotonicity plus incentive compatibility in some neighborhood of each type. This result is used to show that on simply connected type spaces incentive compatible allocation rules with a finite range are completely characterized by path--monotonicity, and thus by monotonicity in cases where path-monotonicity and monotonicity are equivalent. This generalizes a theorem by Saks and Yu to a wide range of settings. |
| Keywords: | microeconomics ; |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2010035&r=cta |
| By: | Saral, Krista Jabs |
| Abstract: | In auctions where bidders are uncertain of their value and are fully liable for their bids, there exists the potential for losses if bids exceed realized values. Theoretically, bids will be higher if bidders are able to mitigate this downside loss through some form of limited liability. To determine the impact of differing forms of limited liability, this paper theoretically and experimentally examines a second price auction with uncertain private values in three environments: market-based limited liability, statutory limited liability, and full liability. Market-based limited liability is induced through inter-bidder resale following the auction. Statutory limited liability is created through a default penalty option in the event that a bidder would make a loss. Bids are theoretically shown to be higher under resale and the penalty default environments than under full liability. The experimental results confirm more aggressive bidding for resale and the low penalty default treatments, but not by as much as theory predicts. Notably, under the high default penalty bidders are not bidding significantly more than under full liability, despite the theoretical prediction that they should. |
| Keywords: | Auctions; Limited Liability; Resale; Experimental Economics |
| JEL: | D44 C90 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25143&r=cta |