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on Contract Theory and Applications |
| By: | Toru Suzuki (Max Planck Institute of Economics, Jena) |
| Abstract: | Agents compete to solve a problem. Each agent knows own computational capacity as private information and simultaneously chooses either a risky or a safe problem solving method. This paper analyzes the optimal prize schemes from the perspective of the prize designer who wishes to find a solution as quick as possible. It is shown that (i) the winner- take-all scheme can induce excessive risk taking and make problem solving slower (ii) prize schemes with milder competitive pressure induce the optimal risk taking and quicker problem solving. |
| Keywords: | Optimal prize scheme, Risk taking, Problem solving |
| JEL: | D82 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-083&r=cta |
| By: | Monique Florenzano (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| 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. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00543296_v1&r=cta |
| By: | Mandell, Svante (vti - Swedish National Road & Transport Research Institute); Nilsson, Jan-Eric (vti - Swedish National Road & Transport Research Institute) |
| Abstract: | Today’s dominant mechanism for infrastructure project tendering is the Unit Price Contract (UPC). While the winning bidder retains risk related to the unit price bids submitted, the Principal carries all risk related to misspecification of the activities required for having a project build. This paper reviews the microeconomic foundations for this contracting procedure and identifies situations where an alternative mechanism, Design – Build (DB) contracts, may be preferable. DB leaves the bulk of project risk with the agent and therefore requires bidders to hedge against unpleasant surprises in the implementation by increasing the demand for compensation for undertaking the job. It is argued that DB should not be used if the number of bidders is expected to be large; this is a means for reducing the duplication of design costs. Moreover, DB projects should be complex with respect to the number of sub-tasks required for construction and it should be feasible to substitute one input for another. This is a way for society to benefit from the agent’s superior information about alternative implementation techniques and relative input prices. The projects should moreover not include too many unobservable quality features and the risks for geotechnical problems should be manageable. |
| Keywords: | Procurement; Unit Price Contracts; Design build; Infrastructure |
| JEL: | H57 L98 R42 R48 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vtiwps:2010_013&r=cta |
| By: | Rupayan Pal; Bibhas Saha (Indira Gandhi Institute of Development Research) |
| Abstract: | We examine whether the outcome of bargaining over wage and employment between an incumbent firm and a union remains efficient under entry threat. The workers\' reservation wage is not known to the entrant, and entry is profitable only against the high reservation wage. The entrant observes the pre-entry price, but not necessarily the wage agreements. When wage is not observed, contracts feature over-employment. Under separating equilibrium the low type is over-employed, and under pooling equilibrium the high type is over-employed. But when wage is observed, pooling equilibrium may not always exist, and separating equilibrium does not involve any inefficiency. |
| Keywords: | Efficient Bargaining, Entry Threat, Signalling, Inefficiency |
| JEL: | J51 L12 D43 J58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:laborw:2362&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Ji Shen (Department of Economics, Yale University); Yun Xu (Dept. of Electrical Engineering, Yale University); Edmund M. Yeh (Dept. of Electrical Engineering, Yale University) |
| Abstract: | We analyze the canonical nonlinear pricing model with limited information. A seller offers a menu with a finite number of choices to a continuum of buyers with a continuum of possible valuations. By revealing an underlying connection to quantization theory, we derive the optimal finite menu for the socially efficient and the revenue-maximizing mechanism. In both cases, we provide an estimate of the loss resulting from the usage of a finite n-class menu. We show that the losses converge to zero at a rate proportional to 1/n^2 as n becomes large. |
| Keywords: | Mechanism design, Limited information, Nonlinear pricing, Quantization, Lloyd-max optimality |
| JEL: | D82 D83 D86 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1775&r=cta |
| By: | Barbara Schöndube-Pirchegger (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | This paper examines a principal-agent problem between a manager (principal) and an employee (agent). At the contracting date uncertainty with regard to the profitability of the relationship is present. Once the contract is signed, the employee performs a specific investment that reduces his disutility from working hard. After that, but before the employee performs his effort, the uncertainty is resolved. The manager and the employee are free to renegotiate the contract at this point. Moreover, we distinguish three settings with respect to the principal's and the agent's options to terminate the relationship irrespective of possible renegotiation. If both parties are free to quit we find that an underinvestment problem with regard to the employee's personal investment is present. If none of the parties are allowed to breach the contract, an overinvestment problem arises. Finally, allowing the employee to quit but not the manager allows achieving first best investment. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:100022&r=cta |
| By: | Moszoro, Marian (IESE Business School) |
| Abstract: | Opportunism, either governmental or private, may become a powerful deterrent against public-private project financing, especially considering the scale of the investment in infrastructure. The parties can secure themselves against counterparty opportunism by assigning the investor an exit (put) option and the public agent a bail-out (call) option on the private investor's shares. This paper presents a mechanism for converting natural monopolies into contestable markets using over-the-counter option contracts that combine the stability of long-term contracts and the flexibility of short-term contracts. The exit/bail-out option mechanism reduces entry barriers by streamlining incomplete long-term contracts and avoiding contractual problems related to bounded rationality and opportunism. |
| Keywords: | Opportunism; Public-Private Partnerships; Infrastructure; Natural Monopolies; Contestable Markets; Exit and Bail-out Options; Game Theory; |
| JEL: | C72 D23 D42 G32 G38 H54 |
| Date: | 2010–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0887&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: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1250&r=cta |
| By: | Toru Suzuki (Max Planck Institute of Economics, Jena) |
| Abstract: | Candidates compete to persuade a decision maker. The decision maker wishes to select a candidate who possesses a certain ability. Then, as a signaling, each candidate decides whether to perform a task whose performance statistically reflects the ability. However, since the cost of the performance is the same across all candidates, the performance is a poor signaling device. This paper analyzes a "signaling game with performance" in which the standard single crossing condition is violated. It is shown that more competition makes the equilibrium signaling more informative when the level of competition is moderate. Moreover, the equilibrium signaling can perfectly reveal the ability under a certain level of competition. On the other hand, too much competition always makes the equilibrium signaling less informative. |
| Keywords: | Signaling, Competition |
| JEL: | D82 D83 |
| Date: | 2010–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-084&r=cta |
| By: | Bastani, Spencer (Uppsala Center for Fiscal Studies); Blomquist, Sören (Uppsala Center for Fiscal Studies); Micheletto, Luca (Uppsala Center for Fiscal Studies) |
| Abstract: | Previous literature has shown that public provision of private goods can be a welfareenhancing device in second-best settings where governments pursue redistributive goals. However, three issues have so far been neglected. First, the case for supplementing an optimal nonlinear income tax with public provision of private goods has been made in models where agents dier only in terms of market ability. Second, the magnitude of the welfare gains achievable through public provision schemes has not been assessed. Third, the similarities/dierences between public provision schemes and tagging schemes have not been thoroughly analyzed. Our purpose in this paper is therefore threefold: rst, to extend previous contributions by incorporating in the theoretical analysis both heterogeneity in market ability and in the need for the publicly provided good; second, to perform numerical simulations to quantify the size of the potential welfare gains achievable by introducing a public provision scheme, and to characterize the conditions under which these welfare gains are sizeable; nally, to compare the welfare gains from public provision with the welfare gains from tagging. |
| Keywords: | optimal income taxation; in-kind transfers; tagging |
| JEL: | H21 H42 |
| Date: | 2010–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uufswp:2010_014&r=cta |
| By: | Sabrina Buti; Barbara Rindi; Ingrid M. Werner |
| Abstract: | We model a dynamic financial market where traders submit orders either to a limit order book (LOB) or to a Dark Pool (DP). We show that there is a positive liquidity externality in the DP, that orders migrate from the LOB to the DP, but that overall trading volume increases when a DP is introduced. We also demonstrate that DP market share is higher when LOB depth is high, when LOB spread is narrow, when the tick size is large and when traders seek protection from price impact. Further, while inside quoted depth in the LOB always decreases when a DP is introduced, quoted spreads can narrow for liquid stocks and widen for illiquid ones. We also show that traders' interaction with both LOB and DP generates interesting systematic patterns in order ow: di¤erently from Parlour (1998), the probability of a continuation is greater than that of a reversal only for liquid stocks. In addition, when depth decreases on one side of LOB, liquidity is drained from DP. When a DP is added to a LOB, total welfare as well as institutional traders' welfare increase but only for liquid stocks; retail traders' welfare instead always decreases. Finally, when flash orders provide select traders with information about the state of the DP, we show that more orders migrate from the LOB to the DP, and DP welfare effects are enhanced. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:371&r=cta |
| By: | Xavier Giroud |
| Abstract: | A reduction in travel time between headquarters and plants makes it easier for headquarters to monitor plants and gather “soft” information--i.e., information that cannot be transmitted through non-personal means. Using a difference-in-differences methodology, I find that the introduction of new airline routes that reduce the travel time between headquarters and plants leads to an increase in plant-level investment of 8% to 9% and an increase in plants’ total factor productivity of 1.3% to 1.4%. Consistent with the notion that a reduction in travel time makes it easier for headquarters to monitor plants and gather soft information, I find that my results are stronger: i) for plants whose headquarters are more time constrained; ii) for plants operating in soft-information industries; iii) during the earlier years of my sample period, when alternative, non-personal, means of monitoring and transmitting information were less developed; iv) for plants where information uncertainty is likely to be greater and soft information is likely to be more valuable, such as smaller plants and peripheral plants operating in industries that are not the firm’s main industry. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:10-38r&r=cta |
| By: | Armantier, Olivier; Treich, Nicolas |
| Abstract: | Accurate measurements of probabilistic beliefs have become increasingly important both in practice and in academia. Introduced by statisticians in the 1950s to promote truthful reports in simple environments, Proper Scoring Rules (PSR) are now arguably the most popular incentivized mechanisms to elicit an agent's beliefs. This paper generalizes the analysis of PSR to richer environments relevant to economists. More speci cally, we combine theory and experiment to study how beliefs reported with a PSR may be biased when i) the PSR payments are increased, ii) the agent has a financial stake in the event she is predicting, and iii) the agent can hedge her prediction by taking an additional action. Our results reveal complex distortions of reported beliefs, thereby raising concerns about the ability of PSR to recover truthful beliefs in general economic environments. |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:23504&r=cta |