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on Contract Theory and Applications |
| By: | Gul, Faruk (Princeton University); Pesendorfer, Wolfgang (Princeton University) |
| Abstract: | We analyze political campaigns between two parties with opposing interests. Parties pay a cost to provide information to a voter who chooses the policy. The information flow is continuous and stops when parties quit. The parties' actions are strategic substitutes: a party with a lower cost provides more but its opponent provides less information. For voters, the parties' actions are complements and raising the low-cost party's cost may be beneficial. Asymmetric information adds a signaling component in the form of a belief-threshold beyond which unfavorable information is offset by the informed party's decision to continue campaigning. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:prirpe:9-13-2010&r=cta |
| By: | Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal) |
| Abstract: | We provide a closed-form solution of the monopoly problem when the price imperfectly signals quality to the uninformed buyers, as well as expressions for the effects of noise on output, price, and information flows. |
| Keywords: | Asymmetric information, monopoly, learning, noise, quality, signaling |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:1103&r=cta |
| By: | Ghatak, Maitreesh; Karaivanov, Alexander |
| Abstract: | We analyze optimal contracts and optimal matching patterns in a simple model of partnership where there is a double-sided moral hazard problem and potential partners differ in their productivity in two tasks. It is possible for one individual to accomplish both tasks (sole production) and there are no agency costs associated with this option but partnerships are a better option if comparative advantages are significant. We show that the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if partnerships are optimal for an exogenously given pair of types, they may not be observed in equilibrium when matching is endogenous, suggesting that empirical studies on agency costs are likely to underestimate their extent by focusing on the intensive margin and ignoring the extensive margin. |
| Keywords: | contractual structure; endogenous matching; partnerships |
| JEL: | D12 D21 D23 D82 Q15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8298&r=cta |
| By: | Simone Galberti |
| Abstract: | We study a dynamic model of monopolistic provision of commitment devices to sophisticated, Strotzian decision makers. We allow for unobservable heterogeneity at the contracting stage in the agents’ preferences for commitment vs. flexibility. The first-best contracts under complete information allow to successfully commit to the optimal level of flexibility. Importantly, this outcome is robust to small amounts of unobservable heterogeneity. When individuals differ substantially in their self control, under asymmetric information highly time-inconsistent agents exert a positive externality on low time-inconsistent fellows. Its magnitude depends on the degree of contractual flexibility and the likelihood of facing temptation. We derive the optimal screening mechanism and characterize its distortions. We analyze the inefficiency of the monopolist’s offers in terms of the induced balance between commitment and flexibility. |
| Keywords: | Time inconsistency, self-control, commitment, flexibility, contracts, screen-ing, information externalities JEL Classification Numbers: D42, D62, D82, D86, D91, G21, G23 |
| Date: | 2011–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1520&r=cta |
| By: | Thakor, Anjan; Mehran, Hamid; Acharya, Viral V. |
| Abstract: | Banks face two moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient “pet” projects or simply being lazy and uninnovative). The privately-optimal level of bank leverage is neither too low nor too high: It balances efficiently the market discipline imposed by owners of risky debt on managerial rent-seeking against the asset-substitution induced at high levels of leverage. However, when correlated bank failures can impose significant social costs, regulators may bail out bank creditors. Anticipation of this generates an equilibrium featuring systemic risk in which all banks choose inefficiently high leverage to fund correlated assets. A minimum equity capital requirement can rule out asset substitution but also compromises market discipline by making bank debt too safe. The optimal capital regulation requires that a part of bank capital be unavailable to creditors upon failure, and be available to shareholders only contingent on good performance. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:643&r=cta |
| By: | Giovanni Cespa (Cass Business School, CSEF, and CEPR); Xavier Vives (IESE Business School) |
| Abstract: | We propose a theory that jointly accounts for an asset illiquidity and for the asset price potential over-reliance on public information. We argue that, when trading frequencies differ across traders, asset prices reect investors' Higher Order Expectations (HOEs) about the two factors that inuence the aggregate demand: fundamentals information and liquidity trades. We show that it is precisely when asset prices are driven by investors' HOEs about fundamentals that they over-rely on public information, the market displays high illiquidity, and low volume of informational trading; conversely, when HOEs about fundamentals are subdued, prices under-rely on public information, the market hovers in a high liquidity state, and the volume of informational trading is high. Over-reliance on public information results from investors' under-reaction to their private signals which, in turn, dampens uncertainty reduction over liquidation prices, favoring an increase in price risk and illiquidity. Therefore, a highly illiquid market implies higher expected returns from contrarian strategies. Equivalently, illiquidity arises as a byproduct of the lack of participation of informed investors in their capacity of liquidity suppliers, a feature that appears to capture some aspects of the recent crisis. |
| Keywords: | Expected returns, multiple equilibria, average expectations, over-reliance on public information, Beauty Contest. |
| JEL: | G10 G12 G14 |
| Date: | 2011–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:276&r=cta |
| By: | Saak, Alexander E. |
| Keywords: | Advertising, experience goods, Learning, monopoly, private information, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:1062&r=cta |
| By: | Toru Suzuki (Max Planck Institute of Economics, Jena, Germany) |
| Abstract: | A decision maker (DM) wishes to select a competent candidate to fill a position. However, since the wage and task of the position is predetermined, the DM cannot use contract as a screening device. This paper formulates the problem as a class of selection problem and derives the optimal selection procedure. The key element of our selection procedure is voluntary testing. That is, unlike statistical selection procedures, the signal generating process is endogenous. Then, the optimal selection rule takes into account not only the test performances but also signaling element of the test. We analyze the selection procedure as a signaling game and derive the optimal selection rule. Moreover, the optimal size of candidate pool and the selection efficiency are also analyzed. It is shown that, by making the test voluntary, the selection efficiency can be dramatically improved. |
| Keywords: | Signaling, Screening, Selection problem, Selection procedure, Testing |
| JEL: | D82 |
| Date: | 2011–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-013&r=cta |
| By: | Christopher Bruce; Jeremy Clark |
| Abstract: | In many cases governments invite interest groups to use collaborative bargaining to resolve environmental conflicts. If the parties fail to reach agreement, the government threatens to impose a backstop policy. Bargaining models have predicted that any agreements will be influenced, variously, by self-interest, equity, or entitlement (to the status quo). Although most such models assume that the parties are well informed about one another’s utility functions, this assumption conflicts with the reality of negotiations over environmental policy. We develop a laboratory experiment to investigate the impact of private information. Subjects who bargain under this constraint are almost as likely to reach (approximately efficient) agreements as those bargaining under full information. We also find that equity plays a less important role, and entitlement a more important role, under private information than under full information. There is only limited evidence to suggest that parties are drawn to the Nash bargain. |
| JEL: | C92 D74 H44 Q58 |
| Date: | 2011–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2011-07&r=cta |
| By: | Hideo Hashimoto (Osaka University); Kojun Hamada (Niigata University); Marcela Nobuhiro Hosoe (National Graduate Institute for Policy Studies) |
| Abstract: | This is a study to develop and solve numerical models based on Itoh’s (2003, Ch. 1) “Parts Supply Problems” for better understanding the contract theory. In the first part of this paper, by following Itoh (2003) we investigate 2- and 3-agent type cases; in the succeeding part, by using numerical examples, we examine how likely the simplifying assumptions often used in theoretical analysis are to hold. Finally, we demonstrate that we can extend these basic models to ones with a much larger number of agent types easily by exploiting the merit of our programming-model approach. |
| Keywords: | Principal-agent problem, adverse selection, numerical model, single-crossing property, monotonicity |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:10-34&r=cta |
| By: | Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger |
| Abstract: | We develop a theory of innovation for entry and sale into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under bidding competition. Asymmetric information problems are shown to be solved by verification through entry for sale. |
| Keywords: | Acquisitions; Entrepreneurship; Innovation; Ownership; Patent; Start-ups |
| JEL: | G24 L1 L2 M13 O3 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8281&r=cta |