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on Contract Theory and Applications |
| By: | Ignacio Monzon; Michael Rapp |
| Abstract: | Observational learning is typically examined when agents have precise information about their position in the sequence of play. We present a model in which agents are uncertain about their positions. Agents are allowed to have arbitrary ex-ante beliefs about their positions: they may observe their position perfectly, imperfectly, or not at all. Agents sample the decisions of past individuals and receive a private signal about the state of the world. We show that social learning is robust to position uncertainty. Under any sampling rule satisfying a stationarity assumption, learning is complete if signal strength is unbounded. In cases with bounded signal strength, we show that agents achieve what we define as constrained efficient learning: individuals do at least as well as the most informed agent would do in isolation. |
| Keywords: | social learning; information aggregation; herds; position uncertainty; observational learning |
| JEL: | C72 D83 D85 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:206&r=cta |
| By: | Fuzhou Gong; Hong Liu |
| Abstract: | In this paper, we present a multi-period trading model by assuming that traders face not only asymmetric information but also heterogenous prior beliefs, under the requirement that the insider publicly disclose his stock trades after the fact. We show that there is an equilibrium in which the irrational insider camouflages his trades with a noise component so that his private information is revealed slowly and linearly whenever he is overconfident or underconfident. We also investigate the relationship between the heterogeneous beliefs and the trade intensity in the presence of trade disclosure, and show that the weights on asymmetric information and heterogeneous prior beliefs are opposite in sign and they change alternatively in the next period. Under the requirement of disclosure, the irrational insider trades more aggressively and leads to smaller market depth. Moreover, the co-existence of "public disclosure requirement" and "heterogeneous prior beliefs" leads to the fluctuant multi-period expected profits and a larger total expected trading volume which is positively related to the degree of heterogeneity. More importantly, even public disclosure may lead to negative profits of the irrational insider's in some periods, inside trading remains profitable from the whole trading period. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1105.2414&r=cta |
| By: | Kohei Daido (School of Economics, Kwansei Gakuin University); Takeshi Murooka (Department of Economics, University of California, Berkeley) |
| Abstract: | This paper examines a multi-agent moral hazard model in which agents have expectation-based reference-dependent preferences `a la K˝oszegi and Rabin (2006, 2007). The agents’ utilities depend not only on their realized outcomes but also on the comparisons of their realized outcomes with their reference outcomes. Due to loss aversion, the agents have a first-order aversion to wage uncertainty. Thus, reducing their expected losses by partially compensating for their failure may be beneficial for the principal. When the agent is loss averse and the project is hard to achieve, the optimal contract is based on team incentives which exhibit either joint performance evaluation or relative performance evaluation. Our results provide a new insight: team incentives serve as a loss-sharing device among agents. This model can explain the empirical puzzle of why firms often pay a bonus to low-performance employees as well as high-performance employees. |
| Keywords: | Moral Hazard, Team Incentives, Reference-Dependent Preferences, Loss Aversion, Joint Performance, Evaluation, Relative Performance Evaluation |
| JEL: | D86 M12 M52 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:70&r=cta |
| By: | Aristotelis Boukouras (Georg-August-University Göttingen) |
| Abstract: | This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker, whose effort is necessary for running a project. The worker\'s effort determines the probability that the project will be completed on time, but the worker receives some unobservable benefit by continuing his employment in the project. Thus, motivating the worker requires an efficiency wage which is inflated by the private benefit. The entrepreneur would pay out a smaller wage if he could commit to terminate the project if a delay occurs, but this threat is not credible, because the project has positive continuation value. We show that hiring a manager can solve this time-inconsistency issue and reduce the efficiency wage. We extend the model to include managerial moral hazard and we examine the conditions under which separation of ownership and control is more likely to happen. The model is consistent with many of the findings of the empirical literature, while it generates some new predictions too. |
| Keywords: | control structure; delegation; efficiency wage; entrepreneur; managerial contract; moral hazard; organizational hierarchy; private benefits; separation of owner-ship and control; time-inconsistency |
| JEL: | D86 G34 J31 L22 L26 |
| Date: | 2011–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:got:gotcrc:079&r=cta |
| By: | Fahad Khalil; Jacques Lawarree; Troy J Scott |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2011-08&r=cta |
| By: | Tim Friehe (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper demonstrates that increasing the expected sanctions for a crime may increase this crime's prevalence, using a principal-agent model with different crimes. The intuition is that the policy change may increase the principal's expected payoff from crime by decreasing the information rent required by the agent. |
| Keywords: | Crime, principal-agent relation, information rent |
| JEL: | K42 H23 |
| Date: | 2011–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1109&r=cta |
| By: | Anup Malani; Scott A. Baker |
| Abstract: | We develop a model where products liability trials provide information to consumers who are not parties to the litigation. Consumers use this information to take precautions against dangerous products. A critical assumption is that consumers cannot differentiate between firms that have never been sued and firms that have been sued but settled out of court. In this framework, we show that perfectly accurate courts do not maximize information to consumers and thus welfare, contrary to Kaplow and Shavell (1994). More accurate courts provide more information only if producers go to trial. Greater accuracy, however, encourages producers of dangerous products to settle and hide their type. When courts are perfectly accurate, all low quality producers settle. And given the lack of any information from trials about bad types, consumers (rationally) fail to take precautions. If consumer precautions are relatively more efficient than producer precautions, our conclusion stands even when firms can invest in improving the safety of their products. |
| JEL: | K10 K40 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17036&r=cta |
| By: | Duffy, Sean; Hartwig, Tyson; Smith, John |
| Abstract: | Language is an imperfect and coarse means of communicating information about a complex and nuanced world. We run an experimental investigation of a setting in which the messages available to the sender imperfectly describe the state of the world, however the sender can improve communication, at a cost, by increasing the complexity or elaborateness of the message. As is standard in the communication literature, the sender learns the state of the world then sends a message to the receiver. The receiver observes the message and provides a best guess about the state. The incentives of the players are aligned in the sense that both sender and receiver are paid an amount which is increasing in the accuracy of the receiver's guess. We find that the size of the language endogenously arises as a function of the costs of communication. Specifically, we find that higher communication costs are associated a smaller language. Although the equilibrium predictions do not perform well, this divergence occurs in a manner which is consistent with the experimental communication literature: overcommunication. For the receiver, there is a positive relationship between the payoffs relative to the equilibrium predictions and communication costs. This relationship is negative for the senders. We also find that the response times of both the senders and receivers are negatively, not positively, related to their payoffs. |
| Keywords: | information transmission; cheap talk; overcommunication; bounded rationality; experimental game theory |
| JEL: | D82 C91 C72 |
| Date: | 2011–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30914&r=cta |
| By: | Balafoutas, Loukas (University of Innsbruck); Beck, Adrian (University of Innsbruck); Kerschbamer, Rudolf (University of Innsbruck); Sutter, Matthias (University of Innsbruck) |
| Abstract: | Credence goods are characterized by informational asymmetries between sellers and consumers that invite fraudulent behavior by sellers. This paper presents the results of a natural field experiment on taxi rides in Athens, Greece, set up to measure different types of fraud and to examine the influence of passengers’ presumed information and income on the extent of fraud. Results reveal that taxi drivers cheat passengers in systematic ways: Passengers with inferior information about optimal routes are taken on longer detours while asymmetric information on the local tariff system leads to manipulated bills. Higher income seems to lead to more fraud. |
| Keywords: | credence goods, expert services, natural field experiment, taxi rides, fraud, asymmetric information |
| JEL: | C93 D82 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5700&r=cta |
| By: | Plant, Emily J.; Stowe, C. Jill |
| Keywords: | asymmetric information, mandatory disclosure, voluntary disclosure, Thoroughbred industry, auction, Agribusiness, Farm Management, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103663&r=cta |
| By: | Cadot, Julien |
| Abstract: | This research aims at identifying the incentives associated to collaterals in an asymmetric information context and when the bank is the main financial partner of the entrepreneurs, which is typically the case for most farms and especially in the wine sector. In one hand, collaterals may reduce the risk of overinvestment by entrepreneurs and so reduce the risk of repayment default. In the other hand, to contract collaterals may lead the bank to reduce the monitoring effort. In this paper we test these two hypotheses in taking into account the fact that entrepreneurs can benefit from a banking relationship or not. Our results confirm that collateralsâ incentives depend on the bank monitoring. Moreover, this emphasizes the uniqueness of land mortgages. Besides, our results confirm that the revenue constraint is binding and thus, make critical the question of financial resources for newly established wine farmers. |
| Keywords: | Collaterals, incentives, bank monitoring, Agricultural Finance, G32, G33, G35, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103414&r=cta |
| By: | Timothy P. Hubbard; Rene Kirkegaard; Harry J. Paarsch |
| Abstract: | In models of first-price auctions, when bidders are ex ante heterogenous, deriving explicit equilibrium bid functions is typically impossible, so numerical methods (such as polynomial approximations) are often employed to find approximate solutions. Recent theoretical research concerning asymmetric auctions has determined conditions under which equilibrium bid functions must cross. When equilibrium bid functions are approximated by low-order polynomials, however, such polynomials may not be flexible enough to satisfy the qualitative predictions of the theory. Plotting the relative expected pay-offs of bidders is a quick, informative way to decide whether the approximate solutions are consistent with theory. |
| Keywords: | first-price auctions; asymmetric auctions; numerical methods |
| JEL: | C20 D44 L1 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:207&r=cta |
| By: | Annamaria Conti; Marie C. Thursby; Frank Rothaermel |
| Abstract: | We examine the potential for technology startups to use patents and founders, friends and family money (FFF money) as signals to attract business angel and venture capital funds, patents reflect technology quality and FFF money reflects founder commitment. We find that if investors value technology quality more (less) than founder commitment, the optimal mix of signals is a relatively higher (lower) use of patents than FFF money. Regardless of investor preferences, high quality founders should invest more in both signals than in the absence of private information. This investment is inversely related to the opportunity cost of investing in the signals. We test these predictions empirically and find evidence in support of this proposition. When we distinguish between venture capitalist and business angel investment, we find that patents serve as a signal for venture capitalists and FFF money is a signal for business angels (but not vice versa). |
| JEL: | G24 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17050&r=cta |
| By: | Castilla, Carolina |
| Abstract: | I present a simple model of intra-household allocation between spouses to show that when the quantity of resources available to the household is not perfectly observed by both spouses, hiding of income can occur even when revelation of the additional resources increases bargaining power. From the model, a test to identify income hiding empirically is derived. For the empirical application, a household survey conducted in Southern Ghana is used. I exploit the variation in the degree of asymmetric information between spouses, measured as the difference between the husbandâs own reporting of farm sales and the wifeâs reporting of his farm sales, to test whether the allocation of resources is consistent with hiding. For identification, the wifeâs clan and the husbandâs bride-wealth payments upon marriage are used as instruments for asymmetric information. My findings indicate that allocations are suggestive of men hiding farm sales income in the form of gifts to extended family members, which are not closely monitored. It is unclear whether hiding has negative consequences in the long run because hiding occurs in the form of gifts, instead of expenditure in alcohol or tobacco. If the gifts represent a form of risk-sharing, then these gifts will return to the household in the future, and hiding is not necessarily inefficient. However, if these gifts are motivated by social pressure then hiding can result on poverty traps caused by kin system. The wifeâs response is also suggestive of hiding. As information asymmetries increase, she reduces her expenditure in non-essential items, such as prepared foods and oil, but increases personal spending. Expenditure in oil is one of the main sources of calories among poor households in the region. |
| Keywords: | incomplete information, income hiding, non-cooperative family bargaining, Consumer/Household Economics, International Development, D13, D82, J12, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:104072&r=cta |
| By: | Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Sebastian Kube (Max Planck Institute for Research on Collective Goods, Bonn); Michael Kurschilgen (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Cooperation problems are at the heart of many everyday situations. In this paper, we propose a very simple and light-handed mechanism to sustain cooperation and test its performance in a rich laboratory environment. The mechanism moderates cooperation by controlling experiences, more specifically, it "manipulates" subjects’ initial beliefs by providing them with selective information about (un)cooperative behavior in other, unrelated, groups. We observe that contributions are considerably sensitive to such selective information. First impressions participants happen to make predict subsequent behavior. Our results, however, suggest an asymmetry in the strength of the reaction – which might pose a limit on the effectiveness of the mechanism in natural settings. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_05&r=cta |
| By: | Gustavo J Bobonis; Luis R Cámara Fuertes; Rainer Schwabe |
| Abstract: | Does the disclosure of information about corrupt activities induce a sustained reduction in corruption? We use publicly released routine audits of municipal governments in Puerto Rico to answer this question. We first develop a political agency model where voters re-elect incumbents based on their performance while in office. We show that, because voters cannot directly observe incumbents’ actions, an incumbent whose reputation improved in the previous term is likely to engage in more rent-seeking activities in a future term. Guided by this model, we use longitudinal data on audit results to examine the long-term consequences of providing information to voters on levels of political corruption. We find that municipal corruption levels in subsequent audits are on average the same in municipalities audited preceding the previous election and those not audited then. In spite of this, mayors in municipalities audited preceding the previous election have higher re-election rates, suggesting that audits enable voters to select more competent politicians. We conclude that short-term information dissemination policies do not necessarily align politicians’ long-term actions with voter preferences as politicians exploit their reputational gains by extracting more rents from office. |
| Keywords: | corruption; information; political agency; dynamic incentives |
| JEL: | D72 O12 |
| Date: | 2011–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-428&r=cta |
| By: | Saak, Alexander E. |
| Abstract: | This paper analyzes the optimal advertising and price policies of a monopolist who sells a new experience good over time to a population of heterogeneous forward-looking buyers. We consider informative advertising that can complement or substitute for learning-by-purchasing, and show that the advertising intensity always peaks during the early stages when the price extracts surplus from the buyers who are yet to learn their valuation for the good. We also show that even though informative advertising may temporarily raise prices and slow down the learning process, an advertising ban can reduce welfare. |
| Keywords: | Monopoly, Advertising, Experience Goods, Learning, Private Information, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, Marketing, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103536&r=cta |
| By: | Olimov, Jafar |
| Abstract: | I study a hybrid bargaining model with an English auction in each state. The seller uses auctions to extract information about the biddersâ values of the object on sale. The bargaining element is introduced to maximize revenue, since the winning bidder has to exceed not only the second-highest bid but also the reservation price of the seller. This model can explain the following empirical facts from Ebay auctions: multiple relisting of similar items, the use of secret reserve prices, and the convergence of sale |
| Keywords: | Demand and Price Analysis, Industrial Organization, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103386&r=cta |
| By: | Cordero Salas, Paula |
| Abstract: | This paper provides experimental evidence of the economic impact from shifting bargaining power in relational contracts. I implement an experimental design that adjusts the bargaining power of sellers (agents) and the enforceability of the contract. I find that the vast majority of contracts take the form of efficiency wage contracts instead of contingent performance contracts when enforcement is partially incomplete and sellers have more bargaining power than buyers. The total contracted and actual compensation increase with the bargaining power of the sellers. However, sellers' prots are found to increase only if a part of the total payment is third-party enforceable. In this case, observed surplus and efficiency are lower than predictions. When no part of a contract is third-party enforceable, more cooperative relationships emerge, exhibiting higher quality provision resulting in higher surplus and efficiency while rent sharing is lower. The result is explained by the stronger buyer's deviation, confirming predictions derived in Cordero Salas (2010). The results here provide insight into the economic consequences of enacting policies that improve the bargaining conditions of weaker parties in market settings relying on self-enforcement from underdeveloped legal institutions. |
| Keywords: | contracts, incomplete enforcement, bargaining, experiments, distribution, institutions, Industrial Organization, Institutional and Behavioral Economics, International Development, D86, K12, L14, O12, Q13, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103579&r=cta |
| By: | Sproul, Thomas; Zilberman, David |
| Abstract: | Major externality cases are random accidents which are not adequately addressed by the deterministic environmental policy literature -Ââ that of Pigouvian taxes, abatement subsidies and cap-Ââand-Ââtrade. We consider a risk-Ââneutral industry where firms control the probability and Severity of accidents by preventive and responsive choices, but asymmetric information means Government only observes outcomes. We show that even without intervention, some care will be taken, however -Ââ we identify three policies that lead to the optimal solution: strict liability, a Stochastic subsidy, and a mandatory mutual insurance scheme. The subsidy policy may be very costly to taxpayers, especially when prevention affects the probability of accident occurrence, and strict liability may be excessively draconian; polluters are also victims and liabilities must exist regardless of adherence to professional standards of care. Thus, we propose a revenue-Ââneutral liability-Ââpooling scheme which plays a similar role to tradable pollution permits in the deterministic case. |
| Keywords: | Agricultural and Food Policy, Risk and Uncertainty, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103927&r=cta |
| By: | Jörg Vorbrink (Institute of Mathematical Economics, Bielefeld University) |
| Abstract: | We investigate American options in a multiple prior setting of continuous time and determine optimal exercise strategies form the perspective of an ambiguity averse buyer. The multiple prior setting relaxes the presumption of a known distribution of the stock price process and captures the idea of incomplete information of the market data leading to model uncertainty. Using the theory of (reflected) backward stochastic differential equations we are able to solve the optimal stopping problem under multiple priors and identify the particular worst-case scenario in terms of the worst-case prior. By means of the analysis of exotic American options we highlight the main difference to classical single prior models. This is characterized by a resulting endogenous dynamic structure of the worst-case scenario generated by model adjustments of the agent due to particular occurring events that change the agent’s beliefs. |
| Keywords: | optimal stopping for exotic American options, uncertainty aversion, multiple priors, robustness, (reflected) BSDEs |
| JEL: | G13 D81 C61 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:448&r=cta |