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on Contract Theory and Applications |
| By: | EL BOUHADI, Abdelhamid |
| Abstract: | This paper deals with the moral hazard problem associated with the behavior of corporate managers. The stockholders (shareholders) cannot control ex ante the managers, because the latter’s action is unobservable to the former, and the stockholders cannot oblige the managers to choose an action which is effective and benefit both parties. The stockholders may not modify the impact of action taken by managers if and only if they decide to condition the action payment to the final observable income. In the specific context of emerging markets listed companies in where the level of opacity and the inefficiency to monitor are very high, the revelation principle does not play correctly. Therefore, it is not interesting to the Agent to show his true type. In this Paper we will specifically deal with this type of problem within the framework of companies listed in the Casablanca Stock Exchange. Our approach consists to show the moral hazard issue existing between two parties: the stockholders (i.e., uninformed “Principal”) and the manager namely the Chief Executive Officer (i.e., informed “Agent”). |
| Keywords: | Asymmetrical Information; Moral Hazard; Non-fulfilment of Contract; Governance of Listed Companies; Collusion; Cooperative Game; Stockholders; Corporate Managers; Casablanca Stock Exchange. |
| JEL: | G34 |
| Date: | 2010–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26653&r=cta |
| By: | Nada Mora |
| Abstract: | This paper tests for agency problems between the lead arranger and syndicate participants in the syndicated loan market. One problem comes from adverse selection, whereby the lead arranger has a private informational advantage over participants. A second problem comes from moral hazard, whereby the lead arranger puts less effort in monitoring when it retains a smaller loan portion. Applying an instrumental variables strategy, I find that borrowers' performance is influenced by the lead's share. Dynamic tests extract active contributions made by the lead, supporting a monitoring interpretation. Loan covenants serve as a mechanism to induce the lead arranger to monitor. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-12&r=cta |
| By: | Monique Florenzano (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | Focusing on their analysis of the optimal public goods provision problem, this paper follows the parallel development of equilibrium models and mechanism design after the accomodation of Samuelson's definition of collective goods to the general equilibrium framework. Both paradigms lead to the negative conclusion of the impossibility of a fully decentralized optimal public goods provision through market or market-like institutions. |
| Keywords: | Lindahl-Foley equilibrium, Wicksell-Foley equilibrium, private provision equilibrium, free-rider problem, mechanism design, incentive compatibility, principal-agent models. |
| JEL: | B20 B21 H10 H41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10084&r=cta |
| By: | Daniel O. Beltran; Charles P. Thomas |
| Abstract: | A key feature of the 2007-2008 financial crisis is that for some classes of securities trade has ceased. And where trade does occur, it appears that market prices are well below what one might believe to be the intrinsic value for that class of security. This seems to be especially true for those securities where the payoff streams are particularly complex (for example, CDOs). One explanation for this is that information about these securities' intrinsic values is asymmetric, with the current holders having better information than potential buyers. We show how the resulting adverse selection problem can help explain why more complex securities trade at significant discounts to their intrinsic values or do not trade at all. To examine whether asymmetric information alone would suffice to shut down portions of the asset-backed securities (ABS) market, we append a simple "workhorse" model for pricing securities under asymmetric information into a Monte Carlo simulation that generates hypothetical securities backed by residential mortgages. We conduct a type of "stress test" on the ABS by making the distribution of payoffs to the underlying loans worse, and find that the intrinsic values of the securities further down the securitization chain become dispersed in such a way that the market for them may shut down under asymmetric information. We then consider the role for government intervention, and compare the effectiveness of different policies that aim to unclog these markets. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1010&r=cta |
| By: | Aner Sela (Department of Economics, Ben-Gurion University of the Negev, Israel); Reut Megidish |
| Abstract: | We study all-pay contests with an exogenous minimal effort constraint where a player can participate in a contest only if his effort (output) is equal to or higher than the minimal effort constraint. Contestants are privately informed about a parameter (ability) that affects their cost of effort. The designer decides about the size and the number of prizes. We analyze the optimal prize allocation for the contest designer who wishes to maximize either the total effort or the highest effort. It is shown that if the minimal effort constraint is relatively high, the winner-take-all contest in which the contestant with the highest effort wins the entire prize sum does not maximize the expected total effort nor the expected highest effort. In that case, the random contest in which the entire prize sum is equally allocated to all the participants yields a higher expected total effort as well as a higher expected highest effort than the winner-take-all contest. |
| Keywords: | Winner-take-all contests, all-pay auctions, participation constraints. |
| JEL: | D44 O31 O32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1008&r=cta |
| By: | Christian Lukas (Department of Economics, University of Konstanz, Germany) |
| Abstract: | The optimal reporting frequency is an important issue in accounting. In many production settings, substitution effects across periods occur. This paper shows that the optimal reporting frequency depends on the strength of the substitution effect and on the information content of performance signals. For a subset of parameter combinations - the low-chance scenario - infrequent reporting is always efficient; for other parameter combinations – the high-chance scenario - infrequent reporting is efficient as long as first-period signals show high informativeness (and substitution effects are strong). Limited commitment by the principal does not influence results. |
| Keywords: | dynamic agency, intertemporal aggregation, reporting frequency, performance measurement, substitubtable tasks, commitment |
| JEL: | D86 M12 M41 M52 |
| Date: | 2010–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1013&r=cta |
| By: | Paul Heidhues (ESMT European School of Management and Technology); Nicolas Melissas (CIE – ITAM) |
| Abstract: | We study a two-player dynamic investment model with information externalities and provide necessary and sufficient conditions for a unique switching equilibrium. Within this setup, we ask whether policymakers should interfere when better informed agents make individual investment decisions. We find that when the public information is sufficiently high and a social planer therefore expects an investment boom, investments should be taxed. Conversely, any positive investment tax is suboptimally high if the public information is sufficiently unfavorable. We also show that an investment tax may increase overall investment activity. |
| Keywords: | information externality, strategic waiting, delay, information cascade, investment boom, optimal taxation |
| JEL: | D62 D83 |
| Date: | 2010–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-10-007&r=cta |
| By: | Angelo Baglioni; Luca Colombo (DISCE, Università Cattolica) |
| Abstract: | We build a simple model in which corporate governance may allow for institutions acting as commitment devices (e.g., the introduction of independent and minority members in the board). The model predicts that the incentive to adopt an institution — letting the general interest of shareholders prevail over private benefits of control by dominant shareholders — is decreasing in ownership concentration and increasing in free cash flow. We take the predictions of our theoretical model to the data, by providing empirical evidence on the board structure of Italian listed companies over the period 2004-2007. We find that board composition favors independent members in firms where the free cash flow is large, and executive members in firms with high ownership concentration and in family firms, supporting the view of corporate governance as a mechanism to control agency costs. More ambiguous conclusions are reached as for the link between governance and firm value, as the presence of minority lists in the board appears to improve value while that of independent members reduces performance. |
| Keywords: | corporate boards, agency problems, private benefits, firms’ performance. |
| JEL: | G32 G34 L22 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie3:ief0096&r=cta |
| By: | Alberto Martin; Filippo Taddei |
| Abstract: | The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy’s equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection. |
| Keywords: | Limited Liability, Asymmetric Information, International Capital Flows. |
| JEL: | D53 D82 E22 F34 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1245&r=cta |
| By: | Gill, David; Sgroi, Daniel |
| Abstract: | We develop a framework in which: (i) a firm can have a new product tested publicly before launch; and (ii) tests vary in toughness, holding expertise fixed. Price flexibility boosts the strong positive impact on consumer beliefs of passing a tough test and mitigates the strong negative impact of failing a soft test. As a result, profits are convex in toughness: the firm selects either the toughest or softest test available. The toughest test is optimal when consumers start with an unfavorable prior and receive sufficiently uninformative private signals (an “innovative" product); the softest test is optimal when signals are sufficiently informative. <BR>Keywords; tests, reviewers, certification, Bayesian learning, information transmission, marketing, product launch, bias, tough test, soft test. <BR>JEL Classification: D82, D83, L15 |
| Date: | 2010–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:stn:sotoec:1017&r=cta |