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on Contract Theory and Applications |
| By: | Annamaria Menichini (CSEF, Università di Salerno); Giovanni Immordino (Università di Salerno and CSEF); Maria Grazia Romano (University of Salerno and CSEF) |
| Abstract: | The paper analyses, within a moral hazard scenario, a contract between an agent with anticipatory emotions and a principal who responds strategically to those emotions. The agent receives a private signal on the profitability of the task he was hired for. If the signal is informative about the return from effort, the agent would benefit from knowing accurate news. However, if the agent derives utility from the anticipation of his final payoff, the suppression of a bad signal may induce a positive interim emotional effect. We show that it may be impossible to achieve the first-best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written. |
| Keywords: | Hidden action, anticipatory utility. |
| JEL: | D86 |
| Date: | 2010–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:262&r=cta |
| By: | Julie Rosaz (Université de Lyon, Lyon, F-69003, France; CNRS, GATE Lyon St Etienne, UMR 5824, 93, chemin des Mouilles, Ecully, F-69130, France; ENS-LSH, Lyon, France) |
| Abstract: | We study the impact of information manipulation by a principal on the agent’s effort. In a context of asymmetric information at the principal’s advantage, we test experimentally the principal’s willingness to bias (overestimate or under-estimate) the information she gives to her agent on his ability in order to motivate him to exert more effort. We find that i) principals do bias information, ii) agents trust the cheap-talk messages they receive and adjust their effort accordingly. Therefore, biased messages improve both the agent’s performance and thus the principal’s profit. This, however, does not increase efficiency. We also find that over-estimation occurs much more often than under-estimation. Making the signal costly in an additional treatment reduces this effect. |
| Keywords: | information, feedback, bias, motivation, experiment |
| JEL: | D83 C92 M12 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1025&r=cta |
| By: | Julie Rosaz (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | We study the impact of information manipulation by a principal on the agent's effort. In a context of asymmetric information at the principal's advantage, we test experimentally the principal's willingness to bias (overestimate or under-estimate) the information she gives to her agent on his ability in order to motivate him to exert more effort. We find that i) principals do bias information, ii) agents trust the cheap-talk messages they receive and adjust their effort accordingly. Therefore, biased messages improve both the agent's performance and thus the principal's profit. This, however, does not increase efficiency. We also find that over-estimation occurs much more often than under-estimation. Making the signal costly in an additional treatment reduces this effect. |
| Keywords: | information ; feedback ; bias ; motivation ; experiment |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00527563_v1&r=cta |
| By: | James M. Malcomson |
| Abstract: | This chapter reviews the literature on the theory of relational incentive contracts. It motivates the discussion by the classic applications of relational contracts to the GM-Fisher Body relationship and the relationships between Japanese automobile manufacturers and their subcontractors. It presents basic models with symmetric information to illustrate the fundamental issues and then goes on to consider specific investments, the role of legally enforceable contracts alongside relational contracts, private information, multiple suppliers, and issues of organization design. |
| Keywords: | Relational contracts, informal enforcement, legal enforcement, incentives, private information, partnerships, vertical integration, organization design |
| JEL: | D21 D2 D82 D86 L14 L22 L23 L24 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:508&r=cta |
| By: | Eeckhout, Jan; Kircher, Philipp |
| Abstract: | In a market where sellers compete by posting trading mechanisms, we allow for a general search technology and show that its features crucially affect the equilibrium mechanism. Price posting prevails when meetings are rival, i.e., when a meeting by one buyer reduces another buyer's meeting probability. Under price posting buyers reveal their type by sorting ex-ante. Only if the meeting technology is sufficiently non-rival, price posting is not an equilibrium. Multiple buyer types then visit the same sellers who screen ex-post through auctions. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ner:lselon:http://eprints.lse.ac.uk/29704/&r=cta |
| By: | Murat Yilmaz |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bou:wpaper:2010/14&r=cta |
| By: | Koralai Kirabaeva; Assaf Razin |
| Abstract: | We survey several key mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). In particular, we focus on the following market frictions: asymmetric information in capital markets and exposure to liquidity shocks. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. Exposure to liquidity shocks due to the mismatch of debt maturity may induce banking crises and cause sudden reversals of short-term capital flows. When there is asymmetric information between sellers and buyers in the capital market, then due to the adverse selection foreign direct investment is associated with higher liquidation costs than portfolio investment. The difference in exposure to liquidity shocks (in addition to asymmetric information) can explain the composition of equity flows between developed and emerging countries, and the patterns of foreign direct investments during financial crises. |
| JEL: | F3 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16492&r=cta |
| By: | Arnold, Lutz G.; Reeder, Johannes; Trepl , Stefanie |
| Abstract: | This paper introduces non-diversifiable risk in the Stiglitz-Weiss adverse selection model, so that an increase in the average riskiness of the borrower pool causes higher portfolio risk. This opens up the possibility of equilibrium credit rationing. Comparative statics analysis shows that an increase in risk aversion turns a two-price equilibrium into a rationing equilibrium. A two-price equilibrium is more inefficient than a rationing equilibrium, and a usury law that rules out the higher of the two interest rates can be welfare-improving. Contrary to the common result, the equilibrium may be characterized by over-investment. |
| Keywords: | asymmetric information; credit rationing |
| JEL: | D82 E51 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:17365&r=cta |
| By: | Viral V. Acharya; Peter M. DeMarzo; Ilan Kremer |
| Abstract: | We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don’t know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns. |
| JEL: | D82 G14 G30 M41 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16485&r=cta |
| By: | Randall Morck; Bernard Yeung |
| Abstract: | Economics has firms maximizing value and people maximizing utility, but firms are run by people. Agency theory concerns the mitigation of this internal contradiction in capitalism. Firms need charters, regulations and laws to restrain those entrusted with their governance, just as economies need constitutions and independent judiciaries to restrain those entrusted with government. Agency problems distort capital allocation if corporate insiders are inefficiently selected or incentivized, and this hampers economic growth absent a legal system with appropriate constraints. However, political economy problems and agency problems in corporations may reinforce each other, compromising the quality of both corporate governance and government. |
| JEL: | B53 G28 G34 N20 P1 P12 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16490&r=cta |