nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2011‒04‒16
seven papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Dynamic Adverse Selection and the Size of the Informed Side of the Market By Ennio Bilancini; Leonardo boncinelli
  2. Bankruptcy: is it enough to forgive or must we also forget? By Ronel Elul; Piero Gottardi
  3. Noncontractible Investments and Reference Points By Oliver D. Hart
  4. Quantum and algorithmic Bayesian mechanisms By Wu, Haoyang
  5. Sequential auction and auction design By salant, david j
  6. Some Evidence of Information Aggregation in Auction Prices By Chezum, Brian; Stowe, C. Jill
  7. Financial imbalances and financial fragility By Frédéric Boissay

  1. By: Ennio Bilancini; Leonardo boncinelli
    Abstract: In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information. We show that in equilibrium all goods can be traded if a simple piece of information is made publicly available: the size of the informed side of the market. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. More precisely we prove that, if the size of the informed side of the market is a public information at each trading stage, then there exists a weak perfect Bayesian equilibrium where all goods are sold in finite time and where the price and quality of traded goods are increasing over time. Moreover, we show that as the time between exchanges becomes arbitrarily small, full trade still obtains in finite time – i.e., all goods are actually traded in equilibrium while total surplus from exchanges converges to the entire potential. These results suggest two policy interventions in markets suffering from dynamic adverse selection: first, the public disclosure of the size of the informed side of the market in each trading stage and, second, the increase of the frequency of trading stages
    Keywords: dynamic adverse selection; full trade; size of the informed side; frequency of exchanges; asymmetric information
    JEL: D82 L15
    Date: 2011–03
  2. By: Ronel Elul; Piero Gottardi
    Abstract: In many countries, lenders are restricted in their access to information about borrowers' past defaults. The authors study this provision in a model of repeated borrowing and lending with moral hazard and adverse selection. They analyze its effects on borrowers' incentives and access to credit, and identify conditions under which it is optimal. The authors argue that “forgetting” must be the outcome of a regulatory intervention by the government. Their model's predictions are consistent with the cross-country relationship between credit bureau regulations and the provision of credit, as well as the evidence on the impact of these regulations on borrowers' and lenders' behavior.
    Keywords: Bankruptcy
    Date: 2011
  3. By: Oliver D. Hart
    Abstract: We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer’s value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take‐it‐or‐leave‐it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller’s offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed.
    JEL: D23 D86 K12
    Date: 2011–04
  4. By: Wu, Haoyang
    Abstract: Bayesian implementation concerns decision making problems when agents have incomplete information. This paper proposes that the traditional sufficient conditions for Bayesian implementation shall be amended by virtue of a quantum Bayesian mechanism. Furthermore, by using an algorithmic Bayesian mechanism, this amendment holds in the macro world too.
    Keywords: Bayesian implementation; Quantum game theory; Mechanism design
    JEL: D71
    Date: 2011–04–05
  5. By: salant, david j
    Abstract: Often an auction designer has the option of selling, or purchasing, those lots available in one auction or a sequence of auctions. In addition, bidder opportunities will not be static, in part due to arrival of information, but also because bidders can face deadlines for making decisions. This paper examines the optimal decision about how to divide what is available over time.
    Keywords: sequential auctions
    JEL: L51 D44 C73
    Date: 2010–11–04
  6. By: Chezum, Brian; Stowe, C. Jill
    Abstract: Paper was previously titled "The Informativeness of Prices as Quality Signals in the Thoroughbred Industry"
    Keywords: Efficient Markets Hypothesis, information aggregation, auctions, Thoroughbred industry, Agribusiness, Livestock Production/Industries,
    Date: 2010–11–30
  7. By: Frédéric Boissay (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a general equilibrium model to analyze the link between financial imbalances and financial crises. The model features an interbank market subject to frictions and where two equilibria may (co-)exist. The normal times equilibrium is characterized by a deep market with highly leveraged banks. The crisis times equilibrium is characterized by bank deleveraging, a market run, and a liquidity trap. Crises occur when there is too much liquidity (savings) in the economy with respect to the number of (safe) investment opportunities. In effect, the economy is shown to have a limited liquidity absorption capacity, which depends –inter alia– on the productivity of the real sector, the ultimate borrower. I extend the model in order to analyze the effects of financial integration of an emerging and a developed country. I find results in line with the recent literature on global imbalances. Financial integration permits a more efficient allocation of savings worldwide in normal times. It also implies a current account deficit for the developed country. The current account deficit makes financial crises more likely when it exceeds the liquidity absorption capacity of the developed country. Thus, under some conditions –which this paper spells out– financial integration of emerging countries may increase the fragility of the international financial system. Implications of financial integration and global imbalances in terms of output, wealth distribution, welfare, and policy interventions are also discussed. JEL Classification: E21, F36, G01, G21.
    Keywords: Financial Integration, Global Imbalances, Asymmetric Information, Moral Hazard, Financial Crisis.
    Date: 2011–04

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