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on Contract Theory and Applications |
| By: | Andrea Beccarini |
| Abstract: | The aim of this paper is to show that an option on an appropriate future may solve some market failures caused by asymmetric information. Some models related to the adverse selection, moral hazard and verification costs are analyzed and the performance of these options on futures is evaluated. The typical situation regards a consumer (or an investor) who wishes to discount his/her future income in order to finance his/her present consumption (investment); under asymmetric information this agent may incur in liquidity constraints (credit rationing), which is not the case when buying the option on a futures contract. This contract is constructed so that the (future) agent’s income is correlated with some futures contract (but this is private information) on which the option is issued. Some examples show that this is not a very stringent assumption. |
| Keywords: | Asymmetric information, credit rationing, options on futures |
| JEL: | D82 G14 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:1911&r=cta |
| By: | Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Ariane Lambert-Mogiliansky (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper examines firms' incentives to commit to a transparent behavior (that precludes bribery) in a competitive procedure modeled as an asymmetric information beauty contest managed by a corrupt agent. In his evaluation of firms' offers for a public contract the agent has some discretion to favor a firm in exchange of a bribe. It is shown that a conditional commitment mechanism can eliminate corruption when it is pure extortion. Otherwise, when corruption can affect allocation and the market's profitability is small, a low quality firm may prefer not to commit. In that situation, the existence of a separating equilibrium in which only the high quality firms commit is guaranteed when commitment decisions are kept secret, but requires some conditions on firms' beliefs when commitment decisions are publicly announced. Generally, a unilateral commitment mechanism that rewards commitment with a bonus performs less well. A mechanism combining both conditional commitment and a bonus has the potential to fully eliminate corruption. |
| Keywords: | commitment ; bribery ; competitive procedures ; transparency |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00564890&r=cta |
| By: | Laurent Lamy (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | In the symmetric independent private value model, we revisit auctions with entry by adding two additional ingredients: difficulties to commit to the announced mechanism, in particular not to update the reserve price after bidders took their entry decisions, and seller's ex ante uncertainty on her reservation value which calls for flexibility. Shill bidding or ex post rights to cancel the sale may provide some valuable flexibility in second price auctions. However, both fail to be efficient since the seller may keep the good while it would be efficient to allocate it to the highest bidder. The English auction with jump bids and cancelation rights is shown to implement the first best in large environments. On the positive side, special emphasis is put on the equilibrium analysis of auctions with shill bidding and on a variety of associated new insights including counterintuitive comparative statics and a comparison with posted-prices. |
| Keywords: | auctions ; auctions with entry ; shill bidding ; commitment failure ; hold-up ; posted-price ; cancelation rights ; jump bids ; bilateral asymmetric information |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00564888&r=cta |
| By: | Salvatore Piccolo (University of Naples "Federico II" and CSEF) |
| Abstract: | I study the rationale for information sharing in a model where two principals, which exert production externalities one on another, endogenously decide whether to exchange information about their exclusive agents. I show that one novel effect shapes communication decisions when agents are privately informed about production costs. This effect is absent under complete information and it turns out to be of first-order magnitude relative to those emerging in such benchmark. Roughly, what matters is how sharing information impacts contracting relationships within opponent organizations, and therefore its effect on equilibrium outputs. Information exchange induces strategies to be correlated via the distortions channel. Because of those distortions, the equilibrium value of communication depends on the interplay between the nature of upstream externalities and the sign of cost correlation. When upstream externalities and cost correlation have the same sign, there exists a unique symmetric equilibrium with no communication. By contrast, when upstream externalities and cost correlation have opposite signs there exists a unique symmetric equilibrium where both principals share information. I also show that, unlike in previous models, under asymmetric information principals might run into a prisoner dilemma when there is no communication at equilibrium. Information sharing is also shown to have an unambiguous negative effect on rents. Moreover, there exists a system of transfers such that the equilibrium outcome obtained when both principals share information is collusion-proof. |
| Keywords: | Adverse selection, communication, information sharing, vertical hierarchies |
| Date: | 2011–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:273&r=cta |
| By: | Nicolas Jacquemet (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); Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris) |
| Abstract: | This paper studies experimentally the value of private information in strictly competitive interactions with asymmetric information. We implement in the laboratory three examples from the class of zero-sum repeated games with incomplete information on one side and perfect monitoring. The stage games share the same simple structure, but differ markedly on how information should be optimally used once they are repeated. Despite the complexity of the optimal strategies, the empirical value of information coincides with the theoretical prediction in most instances. In particular, it is never negative, it decreases with the number of repetitions, and it is nicely bounded below by the value of the infinitely repeated game and above by the value of the one-shot game. Subjects are unable to completely ignore their information when it is optimal to do so, but the use of information in the lab reacts qualitatively well to the type and length of the game being played. |
| Keywords: | Concavification, laboratory experiments, incomplete information, value of information, zero-sum repeated games. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00565157&r=cta |
| By: | Rupayan Pal (Indira Gandhi Institute of Development Research); Bibhas Saha (University of East Anglia) |
| 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: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2010-016&r=cta |
| By: | Aureo de Paula (Department of Economics, University of Pennsylvania); Xun Tang (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper studies the inference of interaction effects (impacts of players' actions on each other's payoffs) in discrete simultaneous games with incomplete information. We propose an easily implementable test for the signs of state-dependent interaction effects that does not require parametric specifications of players' payoffs, the distributions of their private signals or the equilibrium selection mechanism. The test relies on the commonly invoked assumption that players' private signals are independent conditional on observed states. The procedure is valid in (but does not rely on) the presence of multiple equilibria in the data-generating process (DGP). As a by-product, we propose a formal test for multiple equilibria in the DGP. We also show how to extend our arguments to identify signs of interaction effects when private signals are correlated. We provide Monte Carlo evidence of the test's good performance in finite samples. We then implement the test using data on radio programming of commercial breaks in the U.S., and infer stations' incentives to synchronize their commercial breaks. Our results support the earlier finding by Sweeting (2009) that stations have stronger incentives. |
| Keywords: | identification, inference, multiple equilibria, incomplete information games |
| JEL: | C01 C72 |
| Date: | 2010–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-003&r=cta |
| By: | Christos Genakos; Mario Pagliero |
| Abstract: | Little is known about the effects of revealing information on relative performance during a dynamic tournament. We empirically study the impact of interim rank on risk taking and performance using data on professionals competing in tournaments for large rewards. As our data allows us to observe both the intended action and the performance of each participant, we can thus measure risk taking and performance separately. We present two key findings. First, risk taking exhibits an inverted-U relationship with interim rank. Revealing information on relative performance induces individuals trailing just behind the interim leaders to take greater risks. Second, competitors systematically underperform when ranked closer to the top, despite higher incentives to perform well. Disclosing information on relative ranking hinders interim leaders. |
| Keywords: | Dynamic tournaments; interim ranking; relative performance; risk taking |
| JEL: | J33 J40 M50 M52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:196&r=cta |
| By: | Jean-Marie Baland (University of Namur); Rohini Somanathan (Department of Economics, Delhi School of Economics & Institute for Advanced Study, Princeton); Zaki Wahhaj (University of Oxford) |
| Abstract: | Group loans with joint liability have been a distinguishing feature of many micronance programs. While such lending has benetted millions of borrowers, major lending insti- tutions have acknowledged their limited impact among the very poor and have recently favored individual contracts. This paper attempts to understand these empirical patterns using a model in which there is a single investment project and access to credit is limited by weak repayment incentives. We show that in the absence of large social sanctions, the poorest borrowers are oered individual and not group contracts. When both types of contracts are feasible, the relative gains from group loans are shown to be decreasing in loan size. We compare the role of bank enforcement with social sanctions and nd that bank enforcement is more eective in increasing outreach while social sanctions raise the welfare of infra-marginal borrowers. Finally, we explore the welfare eects of group size and nd that those requiring small loans are better served by larger groups but group size eects are, in general, ambiguous. |
| Keywords: | microcredit, joint-liability, group lending, repayment incentives, social sanctions. |
| JEL: | I38 G21 O12 O16 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:192&r=cta |
| By: | Ariane Lambert-Mogiliansky (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | The Type Indeterminacy model is a theoretical framework that uses some elements of quantum formalism to model the constructive preference perspective suggested by Kahneman and Tversky. In this paper we extend the TI-model from simple to strategic decision-making and show that TI-games open a new field of strategic interaction. We first establish an equivalence result between static games of incomplete information and static TI-games. We next develop a new solution concept for non-commuting dynamic TI-games. The updating rule captures the novelty brought about by Type Indeterminacy namely that in addition to affecting information and payoffs, the action of a player impacts on the profile of types. We provide an example showing that TI-game predictions cannot be obtained as Bayes Nash equilibrium of the corresponding classical game. |
| Keywords: | type indeterminacy ; games ; endogeneous preferences |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00564895&r=cta |
| By: | Ben Fung; Enchuan Shao |
| Abstract: | Recent studies on counterfeiting in a monetary search framework show that counterfeiting does not occur in a monetary equilibrium. These findings are inconsistent with the observation that counterfeiting of bank notes has been a serious problem in some countries. In this paper, we show that counterfeiting can exist as an equilibrium outcome in a model in which money is not perfectly recognizable and thus can be counterfeited. A competitive search environment is employed in which sellers post offers and buyers direct their search based on posted offers. When sellers are uninformed about the quality of the money, their offers are pooling and thus buyers can extract rents by using counterfeit money. In this case, counterfeit notes can coexist with genuine notes under certain conditions. We also explicitly model the interaction between sellers' verification decisions and counterfeiters' choices of counterfeit quality. This allows us to better understand how policies can affect counterfeiting. |
| Keywords: | Bank notes |
| JEL: | D82 D83 E42 E50 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-4&r=cta |
| By: | Raphaël Godefroy (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Eduardo Perez-Richet (Ecole Polytechnique - Ecole Polytechnique) |
| Abstract: | This paper studies selection rules i.e. the procedures committees use to choose whether to place an issue on their agenda. The main ingredient of the model is that committee members are uncertain about their final preferences at the selection stage: they only know the probability that they will eventually prefer the proposal to the status quo at the decision stage. This probability is private information. We find that a more stringent selection rule makes the voters more conservative. Hence individual behavior reinforces the effect of the rule instead of balancing it. For a voter, conditional on being pivotal, the probability that the proposal is adopted depends on which option she eventually favors. The probability that the proposal is adopted if she eventually prefers the proposal increases at a higher rate with the selection rule than if she eventually prefers the status quo. In order to compensate for that, the voters become more selective. The decision rule has the opposite effect. We describe optimal rules when there is a fixed cost of organizing the final election. |
| Keywords: | selection rules ; strategic voting ; asymmetric information ; agenda setting ; large deviations ; petitions ; citizens' initiative |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00564976&r=cta |
| By: | Alex Gershkov; Benny Moldovanu; Xianwen Shi |
| Abstract: | We consider a standard social choice environment with linear utility and one-dimensional types. We show by counterexample that, when there are at least three physical alternatives, Bayes-Nash Incentive Compatibility (BIC) and Dominant Strategy Incentive Compatibility (DIC) need no longer be equivalent. The example with three alternatives is minimal since we do obtain a general equivalence result for settings with only two social alternatives. Our negative result does not mathematically contradict the Manelli and Vincent (2010) equivalence obtained in a one-object auction setting, but it shows that BIC-DIC equivalence is only valid in restrictive environments. Our insights are based on mathematical results about the existence of monotone measures with given monotone marginals. |
| Keywords: | Bayesian Implementation, Dominant Strategy Implementation, Equivalence |
| JEL: | D80 D82 |
| Date: | 2011–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-422&r=cta |
| By: | Zudenkova, Galina |
| Abstract: | This paper provides a theoretical model for the coattail effect, where a popular candidate for one branch of government attracts votes to candidates from the same political party for other branches of government. I assume a political agency framework with moral hazard in order to analyze the coattail effect in simultaneous presidential and congressional elections. I show that coattail voting is the outcome of the optimal reelection scheme adopted by a representative voter to motivate politicians' efforts in a retrospective voting environment. I assume that an office-motivated politician (executive or member of congress) prefers her counterpart to be affiliated with the same political party. This correlation of incentives leads the voter to adopt a joint performance evaluation rule, which is conditioned on the politicians belonging to the same party or to different parties. Two-sided coattail effects then arise. On the one hand, an executive's success props up, while failure drags down, her partisan ally in the congressional election, which implies a presidential coattail effect. On the other hand, the executive's reelection itself is affected by a congress member's performance, which results in a reverse coattail effect. |
| Keywords: | Coattail voting; Presidential coattail effect; Reverse coattail effect; Simultaneous elections; Political Agency; Retrospective voting. |
| JEL: | D72 |
| Date: | 2010–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28800&r=cta |