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on Contract Theory and Applications |
| By: | Daniel Kraus (University of Rostock) |
| Abstract: | This paper examines the conditions for credit volume or borrower rationing in a competitive credit market in which the project characteristics are private information of the borrowers. There can only be credit volume rationing if the higher-risk credit applicants have a higher return in the event of a project success than the lower-risk credit applicants. Then the higher-risk borrowers are not rationed and obtain the social efficient credit volume. If the incentive compatibility constraint of the higher risk borrowers is binding, the lower-risk borrowers are credit volume rationed such that the constraint holds as an equation. If credit volume rationing is not sufficient to separate the borrower types, there is additionally a rationing of the low-risk borrowers. If the low-risk borrowers prefer a pooling to a separating contract, then there will not be a Cournot-Nash separating equilibrium, but a Wilson and a Grossmann pooling equilibrium. |
| Keywords: | Credit rationing, Credit Size, Loan, Asymmetric Information, Adverse Selection, Non-linear optimization |
| JEL: | D82 G21 |
| Date: | 2010–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:ros:wpaper:117&r=cta |
| By: | Tigran Melkonyan (Department of Resource Economics, University of Nevada, Reno); Michael Taylor (Department of Resource Economics, University of Nevada, Reno) |
| Abstract: | This paper analyzes regulatory design for agroecosystem management on public rangelands. We present an informational and institutional environment where three of the most prominent regulatory instruments on public rangelands – input regulation, cost-sharing/taxation, and performance regulation – can be defined and compared. The paper examines how the optimal regulation is shaped by the informational and institutional constraints faced by federal land management agencies (FLMAs) such as the Bureau of Land Management and the U.S. Forest Service. These constraints include informational asymmetries between ranchers and FLMAs, limitations on FLMAs’ ability to monitor ranch-level ecological conditions, and constraints on FLMAs’ actions due to budget limitations and restrictions on the level of penalties they can assess. The theoretical model extends the previous work of Baker (1992), Prendergast (2002), and Hueth and Melkonyan (2009) by considering optimal regulation by a budget-constrained regulator in an environment of asymmetric information and moral hazard. |
| Keywords: | Agri-Environmental Policy, Asymmetric Information, Budget-Constrained Regulation |
| JEL: | D86 Q18 Q20 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:unr:wpaper:10-007&r=cta |
| By: | Alp E. Atakan (Koc University) |
| Abstract: | This paper shows that all perfect Bayesian equilibria of a dynamic matching game with two-sided incomplete information of independent private values variety are asymptotically Walrasian. Buyers purchase a bundle of heterogeneous, indivisible goods and sellers own one unit of an indivisible good. Buyer preferences and endowments as well as seller costs are private information. Agents engage in costly search and meet randomly. The terms of trade are determined through a Bayesian mechanism proposal game. The paper considers a market in steady state. As discounting and the fixed cost of search become small, all trade takes place at a Walrasian price. However, a robust example is presented where the limit price vector is a Walrasian price for an economy where only a strict subsets of the goods in the original economy are traded, i.e, markets are missing at the limit. Nevertheless, there exists a sequence of equilibria that converge to a Walrasian equilibria for the whole economy where all markets are open. |
| Keywords: | Conditional CAPM |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1031&r=cta |
| By: | Alp E. Atakan (Koc University) |
| Abstract: | This paper considers a frictional market where buyers and sellers, with unit demand and supply, search for trading opportunities. The analysis focuses on explicit search frictions, allows for two-sided incomplete information, and puts no restriction on agent heterogeneity. In this context, a non-trivial, full trade search equilibrium is shown to exist, equilibria are characterized as the values that satisfy the first order conditions for a non-linear planner’s (optimization) problem, and necessary and sufficient conditions are provided for the existence of efficient search equilibria under complete information. These results fully generalize to the two-sided incomplete information setting, under an additive separability condition. |
| Keywords: | Conditional CAPM |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1030&r=cta |
| By: | Alexey Kushnir (Pennsylvania State University) |
| Abstract: | Some labor markets have recently developed formal signalling mechanisms, e.g. the signalling 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 some commonly known preferences over workers. We show that the introduction of a signalling 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 signalling mechanism lessens the expected number of matches when signals are informative. |
| Keywords: | Signaling, Cheaptalk, Matching |
| JEL: | C72 C78 D80 J44 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.121&r=cta |
| By: | Brigitte Granville; Eshref Trushin |
| Abstract: | We propose a 2-stage procurement model of public-private partnership to provide better incentives for R&D on neglected diseases. The model combines advance market commitment, subsidized clinical trials, and rewards based on therapeutical contributions of new drugs through a prize screening mechanism. The model is primarily intended to facilitate small firms’ R&D by providing cash flow, rewarding quality of new drugs, and sharing risks and costs of new drugs development, while limiting moral hazards. The model’s advantages include reduction of overpayments, better disclosure of information, provision of production licences, and direct targeting of better quality drugs. |
| Keywords: | neglected diseases, prize screening, pharmaceutical R&D |
| JEL: | I12 I18 D82 H41 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:cgs:wpaper:36&r=cta |
| By: | Markus Kinateder (Universidad de Navarra) |
| Abstract: | Imperfect private monitoring in an infinitely repeated discounted Prisoner’s Dilemma played on a communication network is studied. Players observe their direct neighbors’ behavior only, but communicate strategically the repeated game’s history throughout the network. The delay in receiving this information requires the players to be more patient to sustain the same level of cooperation as in a complete network, although a Folk Theorem obtains when the players are patient enough. All equilibria under exogenously imposed truth-telling extend to strategic communication, and additional ones arise due to richer communication. There are equilibria in which a player lies. The flow of information is related with network centrality measures. |
| Keywords: | Repeated Game, Prisoner’s Dilemma, Imperfect Private Monitoring, Network, Strategic Communication, Centrality |
| JEL: | C72 C73 D85 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.120&r=cta |
| By: | Françoise Forges (Université Paris-Dauphine); Ram Orzach (Oakland University) |
| Abstract: | In a common value auction in which the information partitions of the bidders are connected, all rings are core-stable. More precisely, the ex ante expected utilities of rings, at the (noncooperative) sophisticated equilibrium proposed by Einy, Haimanko, Orzach and Sela (Journal of Mathematical Economics, 2002), describe a cooperative game, in characteristic function form, in spite of the underlying strategic externalities. A ring is core-stable if the core of this characteristic function is not empty. Furthermore, every ring can implement its sophisticated equilibrium strategy by means of an incentive compatible mechanism. |
| Keywords: | Auctions, Bayesian Game, Collusion, Core, Partition Form Game, Characteristic Function |
| JEL: | C71 C72 D44 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.119&r=cta |
| By: | Leandro Arozamena; Martin Besfamille; Pablo Sanguinetti |
| Abstract: | We examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers —some of whom are honest— play a report-audit game that, depending on taxes, fines and audit costs, generates either full evasion and no audits, or partial evasion and random auditing. Anticipating both possibilities, we characterize the optimal tax law. We show that it may be optimal for the government not to fine evaders as a way to commit not to audit. Moreover, social welfare is nonmonotonic in the audit cost. |
| Keywords: | Tax rates, Tax evasion, Enforcement, Audit costs, No commitment, Mixed-strategy equilibrium. |
| JEL: | D82 H26 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpecon:2010-10&r=cta |
| By: | Ali Dib |
| Abstract: | The author develops a dynamic stochastic general-equilibrium model with an active banking sector, a financial accelerator, and financial frictions in the interbank and bank capital markets. He investigates the importance of banking sector frictions on business cycle fluctuations and assesses the role of a regulatory capital requirement in propagating the effects of shocks in the real economy. Bank capital is introduced to satisfy the regulatory capital requirement, and serves as collateral for borrowing in the interbank market. Financial frictions are introduced by assuming asymmetric information between lenders and borrowers that creates moral hazard and adverse selection problems in the interbank and bank capital markets, respectively. Highly leveraged banks are vulnerable and therefore pay higher costs when raising funds. The author finds that financial frictions in the interbank and bank capital markets amplify and propagate the effects of shocks; however, the capital requirement attenuates the real impacts of aggregate shocks (including financial shocks), reduces macroeconomic volatilities, and stabilizes the economy. |
| Keywords: | Economic models; Business fluctuations and cycles; Financial markets; Financial stability |
| JEL: | E32 E44 G1 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-26&r=cta |
| By: | Rob Simmons; Babatunde Buraimo; Alex Bryson |
| Abstract: | We establish the effects of salaries on worker performance by exploiting a natural experiment in which some workers in a particular occupation (football referees) switch from short-term contracts to salaried contracts. Worker performance improves among those who move onto salaried contracts relative to those who do not. The finding is robust to the introduction of worker fixed effects indicating that it is not driven by better workers being awarded salary contracts. Nor is it sensitive to workers sorting into or out of the profession. Improved performance could arise from the additional effort workers exert due to career concerns, the higher income associated with career contracts (an efficiency wage effect) or improvements in worker quality arising from off-the-job training which accompanies the salaried contracts. |
| Keywords: | incentives; salaries; productivity; sports |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:006863&r=cta |
| By: | Majumdar, Dipjyoti; Shneyerov, Art; Xie, Huan |
| Abstract: | Abstract We study a market search equilibrium with aggregate uncertainty, private information and heterogeneus beiefs. Traders initially start out optimistic and then update their beliefs based on their matching experience in the market, using the Bayes rule. It is shown that all separating equilibria converge to perfect competition in the limit as the time between matches tends to 0. We also establish existence of a separating equilibrium. |
| Keywords: | Markets with search frictions, aggregate uncertainty, heterogeneous beliefs, optimism, bargaining, foundations of Walrasian equilibrium |
| JEL: | C73 C78 D83 |
| Date: | 2010–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:artyom_shneyerov-2010-32&r=cta |
| By: | Huck, Steffen (University College London); Kübler, Dorothea (WZB - Social Science Research Center Berlin); Weibull, Jörgen (Stockholm School of Economics) |
| Abstract: | This paper studies the interplay between economic incentives and social norms in firms. We introduce a general framework to model social norms arguing that norms stem from agents’ desire for, or peer pressure towards, social efficiency. In a simple model of team production we examine the interplay of different types of contracts with social norms. We show that one and the same norm can be output-increasing, neutral, or output-decreasing depending on the incentive scheme. We also show how social norms can induce multiplicity of equilibria and how steeper economic incentives can reduce effort. |
| Keywords: | social norms, incentives, contracts |
| JEL: | D23 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5264&r=cta |
| By: | Ralph Boleslavsky (Department of Economics, University of Miami); Tracy R. Lewis |
| Abstract: | An advocate for a special interest provides information to an uninformed planner for her to consider in making a sequence of important decisions. Although the advocate may have valuable information for the planner, it is is also known that the advocate is biased and will distort her advice if necessary to inaÌuence the planneriÌs decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocateiÌs recommendation, mitigating some of the advocateiÌs incentive to act in a self-serving manner. We propose a theory of advocacy to explain why planners do sometimes rely on information provided by advocates in making decisions. The interaction takes place in two stages, a cheap talk recommendation from the advocate, followed by decisions and learning by the planner. The theory predicts conditions under which an advocateiÌs advice will be ignored and when it will inaÌuence a planneriÌs decision, when planners will prefer the advice of an advocate to the advice of a neutral adviser and, Önally, how an advocate gains inaÌuence with a decision maker by making his preferences for action unpredictable. Applications of our theory are used to explain why regulated enterprises are sometimes delegated authority to determine how they are monitored and why some consumers of Önancial services give Önancial advisors who beneÖt from their business such great latitude in managing their investments and Önances. |
| Keywords: | Advocates, Advocacy, Learning, Cheap Talk, Dynamic Contract |
| JEL: | D82 D83 D86 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2010-17&r=cta |
| By: | Agarwal, Vikas; Jiang, Wei; Tang, Yuehua; Yang, Baozhong |
| Abstract: | This paper studies the 'confidential holdings' of institutional investors, especially hedge funds, where the quarter-end equity holdings are disclosed with a significant delay through amendments to the Form 13F. Our evidence supports hiding private information as the dominant motive for hedge funds to seek confidentiality. Hedge funds managing large risky portfolios with less conventional investment strategies seek confidentiality more frequently. Stocks included in the confidential holdings of hedge funds are disproportionately associated with information-sensitive events such as mergers and acquisitions, and share characteristics indicating greater information asymmetry. Moreover, confidential holdings of hedge funds exhibit superior performance up to the typical confidential period of twelve months, suggesting valuable private information. Overall, our study presents new evidence on the performance of hedge funds, provides reference on the potential limitations of the standard 13F holdings databases which usually exclude the confidential holdings, and contributes to the policy debate regarding ownership disclosure. -- |
| Keywords: | Confidential treatment,ownership disclosure,13F holdings,hedge funds |
| JEL: | G10 G19 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1009&r=cta |
| By: | Alessandra Bonfiglioli; Gino Gancia |
| Abstract: | This paper formalizes in a fully-rational model the popular idea that politicians perceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters. To do so, it proposes a model of elections where political ability is ex-ante unknown and investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians make too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannot be fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to the conventional wisdom, uncertainty makes reforms more politically viable and may, under some conditions, increase social welfare. The model is then used to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistent with a number of empirical regularities on the determinants of reforms and reelection. They are also consistent with a new stylized fact documented in this paper: economic uncertainty is associated to more reforms in a panel of 20 OECD countries. |
| Keywords: | Elections, Reforms, Asymmetric Information, Uncertainty. |
| JEL: | E6 H3 |
| Date: | 2010–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:847.10&r=cta |
| By: | Claudio Panico (KITeS, Bocconi University, Milan, Italy) |
| Abstract: | Managing research collaborations remains challenging in many respects. The research efforts of the parties involved are hardly verifiable, and it is not possible to contract a clearly defined research output in advance. The parties negotiate to allocate potential gains, but the collaboration still is unstable and prone to disintegration. Although contractual forms of collaboration have become increasingly common and sophisticated, formal contracts are incomplete and produce a large variety of governance structures with specified ownership patterns and the configurations of control. In the context of a research collaboration between two parties with asymmetric positions, such as a large pharmaceutical company contracting with a small biotech, the company must decide how to allocate ownership and control rights while considering the effects on the biotech's bargaining position in the negotiation. This study shows that the forms of governance vary with the contractibility of effort and the stability of the collaboration, which suggests novel prescriptions for the management of research collaborations. |
| Keywords: | research collaborations, governance, contracts, property rights, control rights |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:cri:cespri:kites32_wp&r=cta |