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on Contract Theory and Applications |
| By: | Gérard Mondello (University of Nice Sophia Antipolis, CREDECO, GREDEG, UMR 6727, CNRS) |
| Abstract: | This paper studies the delegation of activities that pose serious risks to health and the environment in an economy regulated by strict liability schemes. Strict liability induces judgment-proof possibilities. Two civil liability regimes are then compared: a strict liability scheme and a capped strict liability one. The argument is led under a twofold asymmetric information assumption between the principal and the agent: the efficiency level in effort for safety and the agent’s level of wealth. The paper shows that standard strict liability under information asymmetries deters the efficient agent to compete and favors adverse selection. Then, under conditions, a capped strict liability regime is a better regime than a standard strict liability one because it induces the efficient agent to supply the level of safety effort equivalent to the first best solution. The counterpart is the perception of an informational rent by the efficient agent. At the optimum, this rent is minimized by the efficient contract supplied by the principal. |
| Keywords: | Environment, Strict Liability, Ex-Ante Regulation, Ex-Post Liability, Judgment-Proof, Environment Law, CERCLA, Environmental Liability |
| JEL: | K0 K32 Q01 Q58 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.103&r=cta |
| By: | Annamaria Menichini (CSEF, Università di Salerno); Giovanni Immordino (Università di Salerno and CSEF); Maria Grazia Romano (University of Salerno and CSEF) |
| Abstract: | Managers with anticipatory emotions have higher current utility if they are optimistic about the future. We study an employment contract between an (endogenously) optimistic manager and realistic investors. The manager faces a trade-off between ensuring that the chosen levels of effort reflect accurate news and savoring emotionally beneficial good news. We show that optimism may exacerbate incentive problems. Specifically, investors and manager agree over the optimal news recall when the manager's weight on anticipatory utility is low. For intermediate values, there is a conflict of interest and investors bear an extra-cost to have the manager recalling bad news. For high weights on anticipatory utility, investors become indifferent between inducing signal recollection or not, and a pooling equilibrium obtains, reminiscent of adverse selection models. We then extend the analysis to the case in which the parameter capturing anticipatory utility is the manager's private information. Last, we derive interesting testable predictions on the relationship between personality traits, managerial compensation and hiring policies. |
| Keywords: | Over-optimism, managerial compensation, anticipatory utility |
| JEL: | D82 |
| Date: | 2010–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:258&r=cta |
| By: | Frédéric Koessler; Ariane Lambert-Mogiliansky |
| Abstract: | This paper examines firms' incentives to commit to a transparent behavior (that precludes bribery) in a competitive procedure modeled as an asymmetric information beauty contest managed by a corrupt agent. In his evaluation of firms' offers for a public contract the agent has some discretion to favor a firm in exchange of a bribe. It is shown that a conditional commitment mechanism can eliminate corruption when it is pure extortion. Otherwise, when corruption can affect allocation and the market's profitability is small, a low quality firm may prefer not to commit. In that situation, the existence of a separating equilibrium in which only the high quality firms commit is guaranteed when commitment decisions are kept secret, but requires some conditions on firms' beliefs when commitment decisions are publicly announced. Generally, a unilateral commitment mechanism that rewards commitment with a bonus performs less well. A mechanism combining both conditional commitment and a bonus has the potential to fully eliminate corruption. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2010-18&r=cta |
| By: | Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | This paper analyzes the protection of a common pool resource (CPR) through the manage- ment of information. Speci?cally, we examine an entry deterrence model between an incumbent perfectly informed about the initial stock of a CPR and an uninformed potential entrant. In our model, the appropriation of the CPR by the incumbent reduces both players?future pro?ts from exploiting the resource. In the case of complete information, we show that the incumbent operating in a high-stock common pool overexploits the CPR during the ?rst period since it does not internalize the negative external e¤ect that its ?rst-period exploitation imposes on the en- trant?s future pro?ts. This ine¢ ciency, however, is absent when the common totally regenerates across periods. Under incomplete information, we identify an additional form of ine¢ ciency. In particular, the incumbent operating in a low-stock CPR underexploits the resource in order to signal the low available stock to potential entrants, deterring entry. When the common fully regenerates, we show that such underexploitation becomes more signi?cant since the low-stock incumbent aims to protect its larger monopoly pro?ts. |
| Keywords: | Common Pool Resources; Signaling games; Externalities |
| JEL: | L12 D82 Q20 D62 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:munoz-6&r=cta |
| By: | Georges Dionne; Pierre-Carl Michaud; Maki Dahchour |
| Abstract: | The identification of information problems in different markets is a challenging issue in the economic literature. In this paper, we study the identification of moral hazard from adverse selection and learning within the context of a multi-period dynamic model. We extend the model of Abbring et al. (2003) to include learning and insurance coverage choice over time. We derive testable empirical implications for panel data. We then perform tests using longitudinal data from France during the period 1995-1997. We find evidence of moral hazard among a sub-group of policyholders with less driving experience (less than 15 years). Policyholders with less than 5 years of experience have a combination of learning and moral hazard, whereas no residual information problem is found for policyholders with more than 15 years of experience. |
| Keywords: | Moral hazard, adverse selection, learning, dynamic insurance contracting, panel data, empirical test |
| JEL: | D81 C22 C12 C33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1035&r=cta |
| By: | Oktay Surucu (Advanced School of Economics, University Ca'Foscari of Venice) |
| Abstract: | The article is concerned with the interaction between fully and boundedly rational agents in situations where their interests are perfectly aligned. The cognitive limitations of the boundedly rational agent do not allow him to fully understand the market conditions and lead him to take non-optimal decisions in some situations. Using categorization to model bounded rationality, we show that the fully rational agent can manipulate information to help decreasing the expected loss caused by the boundedly rational agent. Assuming different types for the boundedly rational agent, who differ only in the categories used, we show that the fully rational agent may learn the type of the boundedly rational agent along their interaction. Using this additional information, the outcome can be improved and the amount of manipulated information can be decreased. Furthermore, as the length of the interaction gets longer the probability that the fully rational agent learns the type of the boundedly rational agent increases. |
| Keywords: | Bounded rationality; categorization; learning. |
| JEL: | C00 C70 D83 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpaper:199&r=cta |
| By: | Valentina Cristiana MATERIA (Universita' Politecnica delle Marche, Dipartimento di Economia); Roberto ESPOSTI (Universita' Politecnica delle Marche, Dipartimento di Economia) |
| Abstract: | This paper analyses how a public institution chooses the optimal contract (cofinancing rate) in funding agricultural R&D research projects. A theoretical model is developed within a principal-agent framework taking into account the asymmetric information both players have to handle. The researcher (the agent) initially does not know the cofinancing granted by the funding institution (the principal). This latter, in turn, only observes some objective features of the researchers and of the selected research projects and, ex post, the research outcome, but not the agent's actual effort on the project. The principal uses the available information to offer the cofinancing rate (the contract) that, under specific contractual clauses, induces the agent's effort that maximizes principal's utility. The model eventually assumes the form of a Stackelberg-type game. An empirically testable relation is also derived from the theoretical model and is then applied to the agricultural R&D programme funded by the Italian region Emilia-Romagna over years 2001-2006. |
| Keywords: | Censored-Normal Regression, Principal-Agent Problem, Public R&D Funding, Stackelberg-type game |
| JEL: | O32 Q16 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:347&r=cta |
| By: | Lev Ratnovski; Rocco Huang |
| Abstract: | Banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad but refinancing good ones. This paper models a "dark side" of wholesale funding. In an environment with a costless but noisy public signal on bank project quality, short-term wholesale financiers have lower incentives to conduct costly monitoring, and instead may withdraw based on negative public signals, triggering inefficient liquidations. Comparative statics suggest that such distortions of incentives are smaller when public signals are less relevant and project liquidation costs are higher, e.g., when banks hold mostly relationship-based small business loans. |
| Date: | 2010–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/170&r=cta |
| By: | Laurent Lamy |
| Abstract: | In the symmetric independent private value model, we revisit auctions with entry by adding two additional ingredients: difficulties to commit to the announced mechanism, in particular not to update the reserve price after bidders took their entry decisions, and seller's ex ante uncertainty on her reservation value which calls for flexibility. Shill bidding or ex post rights to cancel the sale may provide some valuable flexibility in second price auctions. However, both fail to be efficient since the seller may keep the good while it would be efficient to allocate it to the highest bidder. The English auction with jump bids and cancelation rights is shown to implement the first best in large environments. On the positive side, special emphasis is put on the equilibrium analysis of auctions with shill bidding and on a variety of associated new insights including counterintuitive comparative statics and a comparison with posted-prices. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2010-17&r=cta |
| By: | Li, Sanxi; Peitz, Martin; Zhao, Xiaojian |
| Abstract: | Whether consumers are aware of potentially adverse product effects, is key for private and social incentives to disclose information. To obtain a better understanding of this issue we propose a simple monopoly model that highlights the conceptual difference between consumer unawareness and consumer uncertainty. We show that total surplus may be larger in an environment in which consumers are unaware of the potentially adverse effect. We also show that disclosing information whether a particular ingredient is harmful or not increases consumer surplus, but mandatory disclosure of the level of this ingredient may make consumers worse off. |
| Keywords: | Information disclosure, informative advertising, consumer awareness |
| JEL: | D8 L5 M3 |
| Date: | 2010–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22665&r=cta |
| By: | Sauvagnat, Julien |
| Abstract: | We present a model where the Antitrust Authority is privately informed about the strength of the case against a given cartel. In this context, the Antitrust Authority may obtain cartel members' confessions even when it opens an investigation knowing that it has no chance to find hard evidence. More generally, we show that offering leniency allows to raise the conviction rate, which in turn enhances cartel desistance and cartel deterrence. A second contribution of the paper is to show that the optimal leniency scheme involves a single informant rule. That is, amnesty should be given only if a unique cartel member reports information. |
| Keywords: | Antitrust law and policy; Cartels; Collusion; Self-reporting |
| JEL: | K21 K42 L41 |
| Date: | 2010–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:23201&r=cta |
| By: | Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | TThis paper investigates a signaling entry deterrence model under learning-by-doing. We show that a monopolist’s practice of entry deterrence imposes smaller welfare losses (or larger welfare gains) when learning effects are present than when they are absent, making the intervention of antitrust authorities less urgent. If, however, the welfare loss associated to entry deterrence is still significant, and thus intervention is needed, our paper demonstrates that the incumbent’s practice of entry deterrence is easier to detect by a regulator who does not have access to accurate information about the incumbent’s profit function. Learning-by-doing hence facilitates the regulator’s ability to detect entry deterrence, thus suggesting its role as an “ally” of antitrust authorities. |
| Keywords: | Learning-by-doing, Entry deterrence, Incomplete information, Spillovers |
| JEL: | L12 D82 D83 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:espinola-6&r=cta |
| By: | Ariane Lambert-Mogiliansky |
| Abstract: | The Type Indeterminacy model is a theoretical framework that uses some elements of quantum formalism to model the constructive preference perspective suggested by Kahneman and Tversky. In this paper we extend the TI-model from simple to strategic decision-making and show that TI-games open a new field of strategic interaction. We first establish an equivalence result between static games of incomplete information and static TI-games. We next develop a new solution concept for non-commuting dynamic TI-games. The updating rule captures the novelty brought about by Type Indeterminacy namely that in addition to affecting information and payoffs, the action of a player impacts on the profile of types. We provide an example showing that TI-game predictions cannot be obtained as Bayes Nash equilibrium of the corresponding classical game. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2010-20&r=cta |
| By: | Yijuan Chen; Juergen Meinecke |
| Abstract: | This paper focuses on testing providers' moral hazard caused by a health care report card policy. We argue that, to indicate providers' moral hazard, empirical approaches should be based on understanding that the policy may cause different sides of participants to take actions. Neglecting this, an estimation strategy will estimate treatment effects that only capture the mixture of the providers' and patients' actions, and therefore cannot identify either side's action. We propose a simple remedy to the estimation strategy in the previous literature: Restricting to data before the report cards are published and setting the date when providers' performance start being recorded as the effective date of the policy. The U.S. state of Pennsylvania started collecting information on mortality outcomes for coronary artery bypass graft (CABG) surgery in 1990. The first report cards were published in 1992. Using U.S. Nationwide Inpatient Sample data from 1988 to 1992, we find insignificant quantity and incidence effects of the report-card policy before report cards are published. This means that the report card policy has not affected the likelihood that heart patients receive CABG surgery and it has not led hospitals to select patients strategically. |
| JEL: | I18 D82 C31 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2010-527&r=cta |
| By: | Carpena, Fenella; Cole, Shawn; Shapiro, Jeremy; Zia, Bilal |
| Abstract: | Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans -- there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. The analysis finds compelling evidence that contract structure matters: for the same borrower, required monthly loan installments are 6 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 19 percent less likely to be missed under group liability contracts. |
| Keywords: | Debt Markets,Bankruptcy and Resolution of Financial Distress,Access to Finance,Microfinance,Deposit Insurance |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5427&r=cta |