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on Contract Theory and Applications |
| By: | Ludwig, Sandra |
| Abstract: | We study a model of imperfectly discriminating contests with two ex ante symmetric agents. We consider four institutional settings: Contestants move either sequentially or simultaneously and in addition their types are either public or private information. We find that an effort-maximizing designer of the contest prefers the sequential to the simultaneous setting from an ex ante perspective. Moreover, the sequential contest Pareto dominates the simultaneous one when the contestants’ types are sufficiently negatively correlated. Regarding the information structure, the designer ex ante prefers private information while the contestants prefer public information. |
| Keywords: | sequential contests; asymmetric information; rent-seeking |
| JEL: | D72 C72 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12209&r=cta |
| By: | John Thanassoulis |
| Abstract: | This paper studies the contracting problem between banks and their bankers, embedded in a competitive labour market for banker talent. To motivate effort banks must use some variable remuneration. Such remuneration introduces a risk-shifting problem by creating incentives to inflate early earnings: to manage this some bonus pay is optimally deferred. As competition between banks for bankers rises it becomes more expensive to manage the risk-shifting problem than the moral hazard problem. If competition grows strong enough, contracts which permit some risk-shifting become optimal. Empirically I demonstrate that balance sheets have changed in a manner which triggers this mechanism. |
| Keywords: | Risk-shifting, moral hazard, incentives, bonuses, banks, bankers' pay |
| JEL: | G21 G34 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:545&r=cta |
| By: | Zudenkova, Galina |
| Abstract: | This paper contrasts the incentives for cronyism in business, the public sector and politics within an agency problem model with moral hazard. The analysis is focused on the institutional differences between private, public and political organizations. In business, when facing a residual claimant contract, a chief manager ends up with a relatively moderate first-best level of cronyism within a firm. The institutional framework of the public sector does not allow explicit contracting, which leads to a more severe cronyism problem within public organizations. Finally, it is shown that the nature of political appointments (such that the subordinate's reappointment is conditioned on the chief's re-election) together with implicit contracting makes political cronyism the most extreme case. |
| Keywords: | Cronyism; Meritocracy; Manager; Bureaucrat; Politician. |
| JEL: | D73 D86 D72 |
| Date: | 2011–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30231&r=cta |
| By: | Keiichi Hori (Faculty of Economics, Ritsumeikan University); Hiroshi Osano (Institute of Economic Research, Kyoto University) |
| Abstract: | Given an owner's noncommitment timing strategy and a manager's hidden action, we consider how the optimal compensation contract for the manager is designed and how the corresponding timing decisions to launch the project and replace the manager are determined. Using a real options approach, we show that in comparison with the firstbest case, the higher (lower)-quality project is launched later (at the same time as the first-best case), whereas the incumbent manager is replaced earlier. We also indicate that compared with the case of the owner’s commitment timing strategy and the manager's hidden action, the higher (lower)-quality project is launched later (at the same time as the first-best case), whereas the incumbent manager is (is not necessarily) replaced later if the hidden-action problem is severe enough (is not severe enough). Unlike the folklore result of the standard moral hazard model, severance pay may serve to minimize the compensation for the manager's loss of his option value caused by loss of corporate control by committing the owner to delaying replacement of the manager if the hidden-action problem is not too severe. |
| Keywords: | CEO turnover, executive compensation, noncommitment, real options, severance pay. |
| JEL: | D82 G30 G34 M51 M52 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:768&r=cta |
| By: | Bushnell, James |
| Abstract: | Programs where firms sell emissions ``offsets'' to reduce their emissions continue to provide important complementsto traditional environmental regulations. However in many cases, particularly with current and prospective climate change policy, they continue to be very controversial. The problem of adverse selection lies at the heart of this controversy, as critics of offset programs continue to produce evidence that these projects are paying firms for actions they would have undertaken anyway, and are not producing ``additional'' reductions. This paper explores the theoretical sources of non-additional offsets. An important distinction arises between sales that indicate adverse selection and those that reveal information about aggregate emissions levels. |
| Keywords: | adverse selection; Emissions Markets; Offsets; Climate Policy |
| JEL: | G12 Q50 |
| Date: | 2011–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:32736&r=cta |
| By: | Xavier Vives |
| Abstract: | I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:576&r=cta |
| By: | Holmberg, Ulf (Department of Economics, Umeå University) |
| Abstract: | Why do banks suddenly tighten the criteria needed for credit? Credit crunches are often explained by the implementation of new regulatory rules or by sudden drops in firm quality. We present a novel model of an artificial credit market and show that crunches have a tendency to occur even if firm quality remains constant, as well as when there are no new regulatory rules stipulating lenders capital requirements. We find evidence in line with the asset deterioration hypothesis and results that emphasise the importance of accurate firm quality estimates. In addition, we find that an increase in the debts’ time to maturity reduces the probability of a credit crunch and that a conservative lending approach is intrinsically related to the onset of crunches. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy. |
| Keywords: | lending; screening; agent based model; financial stability |
| JEL: | C63 E51 G21 |
| Date: | 2011–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0822&r=cta |
| By: | Jonathan Pritchett (Department of Economics, Tulane University); Mallorie Smith (Tulane University) |
| Abstract: | We propose an alternative test for adverse selection using notarial records for slaves sold in New Orleans in 1830. The experiment is simple and mimics the used car example originally proposed by Akerlof (1970). When first sold in New Orleans, buyers of imported slaves were uninformed of the slaves' unobservable characteristics. In time, the new owners learned more about their slaves and the "lemons" were sold and the "peaches" retained. Because buyers anticipate that the slaves offered for sale were of lower quality on average, they reduce their bids for these slaves. Consequently, we should observe a lower price for the slaves who were resold in the market. We test this proposition by linking the sequential sales records of 833 slaves sold in New Orleans. Through a comparison of initial and resale prices, we find that prices increased which suggests that adverse selection had a relatively small effect on the prices of slaves. |
| Keywords: | slavery, human capital |
| JEL: | N31 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1115&r=cta |