|
on Contract Theory and Applications |
| By: | Guillaume Roger (School of Economics, The University of New South Wales) |
| Abstract: | We study a model of moral hazard with soft information: the risk-averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection. High-power contracts may not be appropriate when information is soft. The optimal truth-telling mechanism with audit requires a two-part tariff to be offered to the agent. The fixed component affords the agent a constant ex post information rent, which weakens the ex ante incentives for effort. We then establish an equivalence between a truthful mechanism and the general mechanism, for the agent’s payoff set and action choice. For the principal a truth-telling mechanism strictly dominates because it shields the agent from variations in the ex post payoffs. In that sense the optimal contract is unique. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2010-26&r=cta |
| By: | Ohlendorf, Susanne; Schmitz, Patrick W. |
| Abstract: | We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first-period success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified." |
| Keywords: | Dynamic moral hazard; hidden actions; limited liability |
| JEL: | D86 M52 J33 C73 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28823&r=cta |
| By: | Giuseppe Dari-Mattiacci (University of Amsterdam); Sander Onderstal (University of Amsterdam); Francesco Parisi (University of Minnesota, and University of Bologna) |
| Abstract: | This paper studies markets plagued with asymmetric information on the quality of traded goods. In Akerlof's setting, sellers are better informed than buyers. In contrast, we examine cases where buyers are better informed than sellers. This creates an inverse adverse selection problem: The market tends to disappear from the bottom rather than from the top. In contrast to the traditional model, it is the high-value goods (gems) that are traded on the market, rather than the low-value goods (lemons). We investigate the consequences of this inverse adverse selection and its potential solutions. The uninformed buyer in a traditional market for lemons experiences the quality of the good he purchased; instead, the uninformed seller may never know the quality of the good that he sold. This renders the conventional legal and contractual solutions to the lemons problem often ineffective in the gems case. We further explore the theoretical and practical appeal of m arket, contractual, and legal solutions. Our results show that auctions (competition among many informed buyers) provide a solution to the inverse adverse selection problem. |
| Keywords: | Lemons; Gems; Adverse selection; Asymmetric information; Auction |
| JEL: | D44 D82 D86 K12 |
| Date: | 2011–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110017&r=cta |
| By: | Guillaume Roger (School of Economics, The University of New South Wales); Luis I. Vasconcelos (Department of Economics, Universidade Nova de Lisboa) |
| Abstract: | We study pricing by a monopoly platform that matches buyers and sellers in an environment with cross-market externalities. Said platform has no private information, does not set the commodity's price and can only charge trading parties for the transaction. Our innovation consists in introducing moral hazard on the sellers' side and an equilibrium notion of platform reputation in an infinite horizon model. With linear fees the platform can mitigate, but not eliminate, the loss of reputation induced by moral hazard. If lump-sum fees (registration fees) can be levied, moral hazard can be overcome. The upfront payment determines the participation threshold of sellers and extracts them, while (lower) transactions fees provide incentives for good behavior. This breaks the equivalence of lump-sum payments and linear fees (Rochet and Tirole (2006)). We draw implications for the role of subsidies (Caillaud and Jullien (2003)). |
| Keywords: | Platforms; Two-Sided Markets; Reputation; Moral Hazard |
| JEL: | L11 L12 L14 L81 D21 D82 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2010-28&r=cta |
| By: | Loukil, Nadia; Yousfi, Ouidad |
| Abstract: | This paper analyzes the relationship between public disclosure, private information and stock liquidity in the Tunisian market. We use a sample of 41 listed firms in the Tunis Stock Exchange in 2007. First, we find no evidence that there is a relation between public and private information. Second, Tunisian investors do not trust the information disclosed in both annual reports and web sites, consequently it has no effects on stock liquidity, in contrast with private information. |
| Keywords: | corporate information disclosure; private information; stock liquidity; emerging market. |
| JEL: | G14 M41 G10 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28699&r=cta |
| By: | Luca Colombo (DISCE, Università Cattolica); Gianluca Femminis (DISCE, Università Cattolica) |
| Abstract: | We study information acquisition in a framework characterized by strategic complementarity or substitutability. Agents’ actions are based on costly public and private signals, the precisions of which are set by a policy maker and by private agents, respectively. The policy maker – acting as a von Stackelberg leader – takes into account that an increase in the precision of public information reduces the incentives for private information acquisition. The precisions of both the public and private information available to each agent are shown to depend crucially on the degree of strategic complementarity or substitutability. We explore the welfare and policy implications of our results in economies with beauty contests, price setting complementarities, and negative externalities entailing strategic substitutability. |
| Keywords: | Incomplete information, strategic complementarity, strategic substitutability, welfare |
| JEL: | C72 D62 D83 E50 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie3:ief0100&r=cta |
| By: | George J. Jiang; Ingrid Lo |
| Abstract: | Existing studies show that U.S. Treasury bond price changes are mainly driven by public information shocks, as manifested in macroeconomic news announcements and events. The literature also shows that heterogeneous private information contributes significantly to price discovery for U.S. Treasury securities. In this paper, we use high frequency transaction data for 2-, 5-, and 10-year Treasury notes and employ a Markov switching model to identify intraday private information flow in the U.S. Treasury market. We show that the probability of private information flow (PPIF) identified in our model effectively captures permanent price effects in U.S. Treasury securities. In addition, our results show that public information shocks and heterogeneous private information are the main factors of bond price discovery on announcement days, whereas private information and liquidity shocks play more important roles in bond price variation on non-announcement days. Most interestingly, our results show that the role of heterogeneous private information is more prominent when public information shocks are either high or low. Furthermore, we show that heterogeneous private information flow is followed by low trading volume, low total market depth and hidden depth. The pattern is more pronounced on non-announcement days. |
| Keywords: | Financial markets; Market structure and pricing |
| JEL: | G12 G14 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-5&r=cta |
| By: | Kar, Saibal (Centre for Studies in Social Sciences, Calcutta); Saha, Bibhas Chandra (University of East Anglia) |
| Abstract: | Immigrant workers and their labor force participation in host countries have received critical attention in all concerned disciplines, principally owing to its strong implications for well-being of natives. The ageing population in many rich countries and several related and unrelated issues including global integration, pension provisions or security threats keeps immigration under continuous impact evaluation. However, of the several studies that dealt with patterns and consequences aspects of labor migration, only a handful discusses asymmetric information across transnational labor markets despite agreement that a standardized screening mechanism is unavailable. At the same time, several empirical studies show that immigrants are proportionally overrepresented in self-employment, vis-à-vis natives of equivalent skill levels. We try to explain this phenomenon based on asymmetric information in the host country labor market. We focus on the design of a contract menu by the employers, which when offered to a mixed cohort of immigrants facilitates self-selection in favor of paid employment or the outside option of self-employment/entrepreneurship. We also discuss countervailing incentives among the mixed cohort. |
| Keywords: | immigrants, asymmetric information, labor contracts, self-employment, incentive compatibility |
| JEL: | D82 J23 J24 J41 J61 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5508&r=cta |
| By: | Jana Vyrastekova (Radboud University Nijmegen); Sander Onderstal (University of Amsterdam); Pierre Koning (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | We examine how self-selection of workers into firms depends on the power of the firms' incentive schemes and how it affects the performance of firms that increase the power of the incentive schemes. In a laboratory experiment, we let subjects choose between (low-powered) team incentives and (high-powered) individual incentives. We observe that subjects exhibiting high trust or reciprocity in the trust game are more likely to choose team incentives. When exposed to individual incentives, workers who chose team incentives perform worse if both the unobservable interdependency between workers and their incentive to cooperate under team incentives are high. |
| Keywords: | Incentive scheme; Self-selection; Laboratory experiment |
| JEL: | C91 J33 M52 |
| Date: | 2010–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100074&r=cta |
| By: | Klor, Esteban F. (Hebrew University, Jerusalem); Kube, Sebastian (University of Bonn); Winter, Eyal (Hebrew University, Jerusalem); Zultan, Ro'i (Max Planck Institute for Economics) |
| Abstract: | Conventional wisdom suggests that an increase in monetary incentives should induce agents to exert higher effort. In this paper, however, we demonstrate that this may not hold in team settings. In the context of sequential team production with positive externalities between agents, incentive reversal might occur: an increase in monetary incentives (either because rewards increase or effort costs decrease) may lead agents to exert lower effort in the completion of a joint task – even if agents are fully rational, self-centered money maximizers. Herein we discuss this seemingly paradoxical phenomenon and report on two experiments that provide supportive evidence. |
| Keywords: | incentives, incentive reversal, team production, externalities, laboratory experiments, personnel economics |
| JEL: | C92 D23 J31 J33 J41 M12 M52 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5501&r=cta |
| By: | Klarita Gerxhani (University of Amsterdam); Jordi Brandts (Autonoma University, Barcelona); Arthur Schram (University of Amsterdam) |
| Abstract: | We use laboratory experiments to investigate how employers develop social structures for sharing information about the trustworthiness of job candidates, when worker opportunism is possible. The experimental data show that substantial information sharing emerges. Two types of information networks are observed. One consists of 'anonymity networks' where information is anonymously and voluntarily provided as a collective good for all employers to use. The other type is a 'reciprocity network' where information sharing is driven by the rewarding of previously given information by the requestor. In both types, the extent of information sharing depends on the costs of providing it. Moreover, information sharing enables employers to recruit trustworthy workers which creates a high quality of trading, benefiting both employer and worker. |
| Keywords: | Social structure; Information networks; Recruitment; Experiments |
| JEL: | Z13 J23 |
| Date: | 2011–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110032&r=cta |
| By: | Peter Postl |
| Abstract: | We study procurement procedures that simultaneously determine specification and price of the required good. Two suppliers can each produce the good in any one of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. Our model is a special case of the interdependent-value settings with multi-dimentional types in Jehiel and Moldovanu (2001) in which an efficient and incentive compatible mechanism exists. In this setting, we characterize supplier bidding behavior if the winning supplier is selected purely on the basis of price, and irrespective of the specification offered. While there is a strictly positive chance of obtaining an inefficient specification, this procurement mechanism involves lower information rents than efficient mechanisms, suggesting that there is a trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen. |
| Keywords: | Procurement, interdependent valuations, multi-dimensional information, efficient mechanisms; optimal mechanisms |
| JEL: | C72 D44 D82 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:11-03&r=cta |
| By: | Céline Rochon; Gabriel Desgranges |
| Abstract: | We study a model where investment decisions are based on investors’ information about the unknown and endogenous return of the investment. The information of investors consists of endogenously determined messages sold by financial analysts who have access to both public and private information on the return of the investment. We assume that the return of the investment is correlated with the aggregate investment. This results into a beauty contest among analysts (or a "conformism" effect). In equilibrium, analysts sell all the information they have to all the investors. A striking result is that there are sometimes multiple equilibria. There are equilibria where the beauty contest is exacerbated. Because of the correlation across analysts' information sources, not all the information available in the economy is transmitted to investors. |
| Keywords: | Economic models , Private investment , Public information notices , |
| Date: | 2011–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/33&r=cta |
| By: | Erik R. de Wit (University of Amsterdam); Bas van der Klaauw (VU University Amsterdam) |
| Abstract: | In housing markets with asymmetric information list prices may signal unobserved properties of the house or the seller. Asymmetric information is the starting point of many models for the housing market. In this paper, we estimate the causal effect of list-price reductions to test for the presence of asymmetric information. We use very rich and extensive administrative data from the Netherlands. Our empirical results show that list-price reductions significantly increase the probability of selling a house, but also the rate of withdrawal from the market increases. |
| Keywords: | Time-on-the-market; duration analysis; transaction prices; selectivity |
| JEL: | C41 D82 R21 R31 |
| Date: | 2010–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100038&r=cta |
| By: | Chirantan Ganguly; Indrajit Ray |
| Abstract: | In the Crawford-Sobel (uniform, quadratic utility) cheap-talk model, we consider a simple mediation scheme (a communication device) in which the informed agent reports one of N possible elements of a partition to the mediator and then the mediator suggests one of N actions to the uninformed decision-maker according to the probability distribution of the device. We show that such a simple mediated equilibrium cannot improve upon the unmediated N-partition. Crawford-Sobel equilibrium when the preference divergence parameter (bias) is small. |
| Keywords: | Cheap talk, Mediated Equilibrium |
| JEL: | C72 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:05-08rr&r=cta |
| By: | Brams, Steven J.; Kaplan, Todd R; Kilgour, D. Marc |
| Abstract: | We describe a simple 2-stage mechanism that induces two bargainers to be truthful in reporting their reservation prices in a 1st stage. If these prices criss-cross, the referee reports that they overlap, and the bargainers proceed to make offers in a 2nd stage. The average of the 2nd-stage offers becomes the settlement if both offers fall into the overlap interval; if only one offer falls into this interval, it is the settlement, but is implemented with probability 1/2; if neither offer falls into the interval, there is no settlement. Thus, if the bargainers reach the 2nd stage, they know their reservation prices overlap even if they fail to reach a settlement, possibly motivating them to try again. |
| Keywords: | Bargaining; truth-telling mechanisms; probabilistic implementation; incomplete information. |
| JEL: | C78 D74 D02 J52 C72 |
| Date: | 2011–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28999&r=cta |
| By: | Joeri Sol (Erasmus University Rotterdam) |
| Keywords: | peer evaluation; peer appraisal; incentive contracts; co-worker relations; likeability bias |
| JEL: | D86 J33 M50 |
| Date: | 2010–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100055&r=cta |
| By: | Marco A. Haan (University of Groningen); Bart Los (University of Groningen); Sander Onderstal (University of Amsterdam); Yohanes E. Riyanto (Nanyang Technological University Singapore) |
| Abstract: | Politicians differ in their ability to implement some policy. In an election, candidates make commitments regarding the plans they will try to implement if elected. These serve as a signal of true ability. In equilibrium, candidates make overambitious promises. The candidate with the highest ability wins. Yet, the electorate may be better off having a random candidate implement her best plan, rather than seeing the winner implementing an overambitious plan. This is more likely if the ability distribution is skewed toward high values, the number of candidates is high, with private benefits from being elected, or if parties select candidates. |
| Keywords: | election promises; signalling |
| JEL: | D72 |
| Date: | 2010–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100056&r=cta |