nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2011‒06‒04
three papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Mediation and Peace By Johannes Hoerner; Massimo Morelli; Francesco Squintani
  2. Essays on Microeconomics with Incomplete Information By Jie Zheng
  3. Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery By Jonathan Chiu; Thorsten Koeppl

  1. By: Johannes Hoerner; Massimo Morelli; Francesco Squintani
    Abstract: This paper applies mechanism design to conict resolution. We determine when and how unmediated communication and mediation reduce the ex ante probability of conflict in a game with asymmetric information. Mediation improves upon unmediated communication when the intensity of conict is high, or when asymmetric information is significant. The mediator improves upon unmediated communication by not precisely reporting information to conflicting parties, and precisely, by not revealing to a player with probability one that the opponent is weak. Arbitrators who can enforce settlements are no more effective than mediators who only make non-binding recommendations.
    Date: 2011
  2. By: Jie Zheng
    Date: 2011–05–28
  3. By: Jonathan Chiu (Bank of Canada); Thorsten Koeppl (Queen's University)
    Abstract: We study the trading dynamics in an asset market where the quality of assets is private information of the owner and finding a counterparty takes time. When trading of a financial asset ceases in equilibrium as a response to an adverse shock to asset quality, a large player can resurrect the market by purchasing bad assets which involves financial losses. The equilibrium response to such a policy is intricate as it creates an announcement effect: a mere announcement of intervening at a later point in time can cause markets to function again. This effect leads to a gradual recovery in trading volume, with asset prices converging non-monotonically to their normal values. The optimal policy is to intervene immediately at a minimal scale when markets are deemed important and losses are small. As losses increase and the importance of the market declines, the optimal intervention is delayed and it can be desirable to rely more on the announcement effect by increasing the size of the intervention. Search frictions are important for all these results. They compound adverse selection, making a market more fragile with respect to a classic lemons problem. They dampen the announcement effect and cause the optimal policy to be more aggressive, leading to an earlier intervention at a larger scale.
    Keywords: Trading Dynamics, Adverse Selection, Search, Intervention in Asset Markets, Announcement Effect
    JEL: G1 E6
    Date: 2011–04

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