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on Contract Theory and Applications |
| By: | Arvidsson, Sara (VTI) |
| Abstract: | Contract relevant information asymmetries are known to cause inefficiencies in markets. The information asymmetry is largest in the beginning of the customer insurer relationship but reduces over time; the longer a policyholder stays with the insurer the more the insurer learns about the policyholder’s risk. Two important characteristics of the market studied here imply that the information asymmetry may not be reduced for all policyholders. First, insurers do not have access to traffic violations, which are predictors of risk since policyholders with traffic violations are more likely to report a claim. Second, the insurers do not share information, such as previous claims, which means that the policyholder can flee a poor claim record by switching insurer. Hence, there may be a selection of high risk customers who switch insurer more often, such that the information asymmetry in this group is never reduced. To test this, we compare information asymmetries in two groups of policyholders; new customers who stay with the insurer for a period or less (short term), and long-term customers who stay with the insurer for several periods (loyal). The results indicate that departing policyholders are disproportionately high risks that constitute an adverse selection of risks, while loyal policyholders constitute a propitious (favorable) selection of risks. |
| Keywords: | Asymmetric information; insurance; accidents; adverse selection; propitious selection |
| JEL: | D82 |
| Date: | 2011–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vtiwps:2011_002&r=cta |
| By: | AGRELL, Per (Université catholique de Louvain, CORE & Louvain School of Management, B-1348 Louvain-la-Neuve, Belgium); GAUTIER, Axel (CREPP, HEC-Université de Liège, B-4000 Liège, Belgium; Université catholique de Louvain, CORE, B- 1348 Louvain-la-Neuve, Belgium) |
| Abstract: | In this paper, wee propose a model for regulatory capture that is based on information transmission and asymmetric information. In a three- tier model, a regulator is charged by a political principal to provide a signal for the type of a regulated firm. Only the firm can observe his type and the production of a correlated signal with a given accuracy is costly for the regulator. The firm can costlessly provide an alternative signal of lower accuracy that is presented to the regulator. In a self-enforcing equilibrium, the regulator transmits the firm-produced signal, internalizes its own savings in information cost and the firm enjoys higher information rents. The main feature of soft capture is that it is not based on a reciprocity of favors but on a congruence of interests between the firm and the regulator. |
| Keywords: | regulation, capture, information |
| JEL: | D72 L51 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010084&r=cta |
| By: | Patricia Crifo (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, University Paris X - (-), CIRANO - Montréal); Hind Sami (COACTIS - Université Lumière - Lyon II : EA4161 - Université Jean Monnet - Saint-Etienne) |
| Abstract: | This paper proposes a model to analyze the dynamic relations between incentive contracts and analysts' effort in providing accurate research when both ethical and reputational concerns matter. First, we show that reputation picks up ability and thus serves as a sorting device: when analysts have a relatively low reputation for providing research quality (below a threshold level) banks find it more profitable to offer a mix of monetary and non monetary (ethic based) incentives and rely on the analyst's work ethic in ordre to provide research quality. Alternatively, when analysts have a high reputation, full financial (performance based) incentives contracts offer a substantial reward for their contribution to the firm's profits. Second, we find that the design of compensation contracts, in the presence of reputational concerns and work ethic, may lead to incentive problems: full financial incentives contracts may exacerbate conflicts of interest by giving analysts extrinsic rewards on reporting, thereby inducing them to prefer high short term benefits to the detriment of long term research and coverage effort. On the contrary, a mix of monetary and non monetary rewards based on the analyst's work ethic may allow them to resist pressures from conflicts of interest and induces a high research effort thus enhancing long-run reputation. |
| Keywords: | Motivation, Reputation, Reporting, Investment analysts. |
| Date: | 2011–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00561929&r=cta |
| By: | Yolande Hiriart (Toulouse School of Economics (IDEI-LERNA)); David Martimort (Toulouse School of Economics (EHESS, IDEI-GREMAQ)); Jerome Pouyet (Paris School of Economics) |
| Abstract: | When a firm undertakes risky activities, the conflict between social and private incentives to implement safety care requires public intervention which can take the form of both monetary incentives but also ex ante or ex post monitoring, i.e., before or after an accident occurs. We delineate the optimal scope of monitoring depending on whether public monitors are benevolent or corruptible. We show that separating the ex ante and the ex post monitors increases the likelihood of ex post investigation, helps prevent capture and improves welfare. |
| Keywords: | Risk Regulation, Monitoring, Capture, Integration, Separation |
| JEL: | L51 D82 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.144&r=cta |
| By: | AGRELL, Per (Université catholique de Louvain, CORE & Louvain School of Management, B-1348 Louvain-la-Neuve, Belgium); KASPERZEC, Roman (Siemens AG, Fossil Power Generation Division, D-91058 Erlangen, Germany) |
| Abstract: | Supply chain management involves the selection, coordination and motivation of independently operated suppliers. However the central planner's perspective in operations management translates poorly to vertically separated chains, where suppliers may have rational myopic reasons to object to full in- formation sharing and centralized decision rights. Particular problems occur when a downstream coordinator demands relation-specific investments (equipment, cost improvements in processes, adaptation of components to downstream processes, allocation of future capacity etc) from upstream suppliers without being able to commit to long-term contracts. In practice and theory, this leads of- ten to a phenomenon of either underinvestment in the chain or costly vertical integration to solve the commitment problem. A two-stage supply chain under stochastic demand and information asymmetry is modelled. A repeated investment-production game with coordinator commitment in supplier's investment addresses the information sharing and asset- specific investment problem. We provide a mitigation of the hold-up problem on the investment cost observed by the supplier and an instrument for truthful revelation of private information by using an investment sharing device. We show that there is an interior solution for the investment sharing parameter and discuss some extensions to the work. |
| Keywords: | supply chain management, investment, information |
| JEL: | M11 L24 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010085&r=cta |
| By: | Paris Cleanthous |
| Abstract: | This paper formulates an empirical methodology that evaluates pharmaceutical innovation in the American antidepressant market by quantifying patient welfare benefits from innovation. While evaluating pharmaceutical innovation in antidepressants, I uncover and address the moral hazard issue that arises due to the existence of prescription drug insurance coverage. A combination of market-level data, drug and patient characteristics are used to estimate demand for all antidepressants between 1980 and 2001. The paper estimates large and varied patient welfare gains due to innovation and helps explain a detected divergence between social and private patient benefits by the existence of insurance. |
| Keywords: | Health, Innovation, Moral Hazard, Pharmaceuticals, Welfare |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:03-2011&r=cta |
| By: | Gerard van der Laan; Zaifu Yang |
| Abstract: | A number of heterogeneous items are to be sold to a group of potential bidders. Every bidder knows his own values over the items and his own budget privately. Due to budget constraint, bidders may not be able to pay up to their values. In such a market, a Walrasian equilibrium typically fails to exist and furthermore no existing allocation mechanism can tackle this case. We propose the notion of an `equilibrium under allotment' to such markets and develop an ascending auction mechanism that always finds such an equilibrium assignment and corresponding price system in finitely many rounds. The auction can be viewed as an appropriate and proper generalization of the ascending auction of Demange, Gale and Sotomayor from settings without financial constraints to settings with financial constraints. We examine various properties of the auction and its outcome. |
| Keywords: | Ascending auction, Financial constraint, Equilibrium under allotment. |
| JEL: | D44 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:11/04&r=cta |
| By: | MAULEON, Ana (Facultés universitaires Saint-Louis, CEREC, B-1000 Brussels, Belgium and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VANNETELBOSCH, Vincent (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VERGARI, Cecilia (Department of Economic Sciences, University of Bologna, I-40125 Bologna, Italy) |
| Abstract: | We consider a model of wage determination with private information in a duopoly. We investigate the effects of unions having relative concerns on the negotiated wage and the strike activity. We show that an increase of unions' relative concerns has an ambiguous effect on the strike activity. |
| Keywords: | relative position, wage bargaining, private information, strike activity |
| JEL: | C70 J50 D60 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010076&r=cta |
| By: | Eva I. Hoppe (Department of Economics, University of Cologne); David J. Kusterer (Department of Economics, University of Cologne); Patrick W. Schmitz (Department of Economics, University of Cologne) |
| Abstract: | A government agency wants an infrastructure-based public service to be provided. Our experimental study compares two different modes of provision. In a public-private partnership, the two tasks of building the infrastructure and operating it are delegated to one private contractor (a consortium), while under traditional procurement, these tasks are delegated to separate contractors. We find support for the theoretical prediction that, compared to traditional procurement, a public-private partnership provides stronger incentives to make cost-reducing investments (which may increase or decrease service quality). In two additional treatments, we study governance structures which explicitly take subcontracting within private consortia into account. |
| Keywords: | experiment, incomplete contracts, procurement, public-private partnerships |
| JEL: | D86 H11 L33 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:02-02&r=cta |
| By: | MAULEON, Ana (Facultés universitaires Saint-Louis, CEREC, B-1000 Brussels, Belgium and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VANNETELBOSCH, Vincent (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VERGARI, Cecilia (Department of Economic Sciences, University of Bologna, I-40125 Bologna, Italy) |
| Abstract: | We consider a model of licensing of a non-drastic innovation in which the patent holder (an outside innovator) negotiates either up-front fixed fees or per-unit royal- ties with two firms producing horizontally differentiated brands and competing à la Cournot. We investigate how licensing schemes (fixed fee or per-unit royalty) and the number of licenses sold (exclusive licensing or complete technology diffusion) affect price agreements and delays in reaching an agreement. We show that the patent holder prefers to license by means of up-front fixed fees except if market competition is mild and the innovation size is small. Once there is private information about the relative bargaining power of the parties, the patent holder may prefer licensing by means of per-unit royalties even if market competition is strong. Moreover, the delay in reaching an agreement is greater whenever the patent holder chooses to negotiate up-front fixed fees instead of per-unit royalties. |
| Keywords: | patent licensing, fixed fee, royalty, bargaining, private information |
| JEL: | C78 D43 D45 L13 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010077&r=cta |
| By: | PESTIEAU, Pierre (CREPP, HEC-Management School, University of Liège, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; PSE and CEPR.); RACIONERO, Maria (Research School of Economics, Australian National University, ACT 0200 Canberra, Australia) |
| Abstract: | We study optimal redistributive taxes when individuals differ in two characteristics - earning ability and leisure needs - assumed to be imperfectly correlated. Individuals have private information about their abilities but needs are observable. With two different levels of observable needs the population can be separated into two groups and needs may be used as a tag. We first assume that the social planner considers individuals should be compensated for their leisure needs and characterize the optimal redistributive policy, and the extent of compensation for needs, with tagging. We also consider an alternative social objective in which individuals are deemed responsible for their needs. |
| Keywords: | optimal non-linear taxation, quasi-linear preferences, tagging needs, responsibility |
| JEL: | H21 H41 |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010041&r=cta |
| By: | Jean-Louis Arcand (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I) |
| Abstract: | In their celebrated contribution on credit rationing, Stiglitz and Weiss (1981) showed that the expected return to the borrower on a loan is increasing in the risk of the project it funds. In this paper, I show that their results do not necessarily carry over to the case where the agents' preferences can be described by rank-dependent expected utility (RDEU). In particular, a pessimistic probability distortion function for borrowers can yield sufficient concavity in returns for the latter to be decreasing in risk, thus eliminating adverse selection. Whether credit rationing can obtain or not is then shown to depend upon the interaction between borrower pessimism and lender optimism. |
| Keywords: | Keywords: rank-dependent expected utility;credit rationing |
| Date: | 2011–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00562645&r=cta |