|
on Contract Theory and Applications |
| By: | James A. Best |
| Abstract: | In this paper, I look at the interaction between social learning and cooperative behavior. I model this using a social dilemma game with publicly observed sequential actions and asymmetric information about payoffs. I find that some informed agents in this model act, individually and without collusion, to conceal the privately optimal action. Because the privately optimal action is socially costly the behavior of informed agents can lead to a Pareto improvement in a social dilemma. In my model I show that it is possible to get cooperative behavior if information is restricted to a small but non-zero proportion of the population. Moreover, such cooperative behavior occurs in a nite setting where it is public knowledge which agent will act last. The proportion of cooperative agents within the population can be made arbitrarily close to 1 by increasing the infinite number of agents playing the game. Finally, I show that under a broad set of conditions that it is a Pareto improvement on a corner value, in the ex-ante welfare sense, for an interior proportion of the population to be informed. |
| Keywords: | Asymmetric information, cooperation, efficiency, social learning, social dilemmas. |
| JEL: | C72 D62 D82 D83 |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:206&r=cta |
| By: | Koralai Kirabaeva (Bank of Canada); Assaf Razin (Cornell University and Hong Kong Institute for Monetary Research) |
| Abstract: | We survey several mechanisms that explain the composition of international capital flows: foreign direct investment, foreign portfolio investment and debt flows (bank loans and bonds). We focus on information frictions such as adverse selection and moral hazard, and exposure to liquidity shocks, and discuss the following implications for composition of capital flows: (1) home-court information advantage; (2) panic-based capital-flow reversals; (3) information-liquidity trade-off in the presence of source and host country liquidity shocks; (4) moral hazard in international debt contracts; and (5) risk sharing role of domestic bonds in the presence of home bias in goods and equities. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:142011&r=cta |
| By: | Luis C. Corchón; Anil Yildizparlak |
| Abstract: | In this paper we study mediation when two countries might fight a war over the ownership of a resource. Under complete information mediation is always successful, but a little bit of asymmetric information or some imperfect observability may render mediation impossible |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1114&r=cta |
| By: | Vianney Dequiedt (Universit´ e d’Auvergne); Yves Zenou (Stockholm University, IFN, and CEPR) |
| Abstract: | We consider a model of international migration where skills of workers are imperfectly observed by firms in the host country and where information asymmetries are more severe for immigrants than for natives. There are two stages. In the first one, workers in the South decide whether to move and pay the migration costs. These costs are assumed to be sunk. In the second stage, firms offer wages to the immigrant and native workers who are in the country. Because of imperfect information, firms statistically dicriminate high-skilled migrants by paying them at their expected productivity. The decision of whether to migrate or not depends on the proportion of high-skilled workers among the migrants. The migration game exhibits strategic complementarities, which, because of standard coordination problems, lead to multiple equilibria. We characterize them and examine how international migration affects the income of individuals in sending and receiving countries, and of migrants themselves. We also analyze under which conditions there is positive or negative self-selection of migrants. |
| Keywords: | asymmetric information, screening, self-selection of migrants, skill-biased migration, wage differentials |
| JEL: | D82 J61 F22 O12 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nor:wpaper:2011009&r=cta |
| By: | Dequiedt, Vianney (CERDI, University of Auvergne); Zenou, Yves (Stockholm University) |
| Abstract: | We consider a model of international migration where skills of workers are imperfectly observed by firms in the host country and where information asymmetries are more severe for immigrants than for natives. There are two stages. In the first one, workers in the South decide whether to move and pay the migration costs. These costs are assumed to be sunk. In the second stage, firms offer wages to the immigrant and native workers who are in the country. Because of imperfect information, firms statistically discriminate high-skilled migrants by paying them at their expected productivity. The decision of whether to migrate or not depends on the proportion of high-skilled workers among the migrants. The migration game exhibits strategic complementarities, which, because of standard coordination problems, lead to multiple equilibria. We characterize them and examine how international migration affects the income of individuals in sending and receiving countries, and of migrants themselves. We also analyze under which conditions there is positive or negative self-selection of migrants. |
| Keywords: | asymmetric information, screening, self-selection of migrants, skill-biased migration, wage differentials |
| JEL: | D82 J61 F22 O12 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5786&r=cta |
| By: | David Blake (city University London); John Cotter (University College Dublin, Ireland); Kevin Dowd (The University of Nottingham, UK) |
| Abstract: | This paper discusses the financial risks faced by the UK Pension Protection Fund (PPF) and what, if anything, it can do about them. It draws lessons from the regulatory regimes under which other financial institutions, such as banks and insurance companies, operate and asks why pension funds are treated differently. It also reviews the experience with other government-sponsored insurance schemes, such as the US Pension Benefit Guaranty Corporation, upon which the PPF is modelled. We conclude that the PPF will live under the permanent risk of insolvency as a consequence of the moral hazard, adverse selection, and, especially, systemic risks that it faces. |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:2006/15&r=cta |
| By: | Michael Kumhof; Jaromir Benes |
| Abstract: | We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending. Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth. The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses. Their main response is to raise lending rates to rebuild net worth. Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare. But the gains from eliminating limited liability and moral hazard would be an order of magnitude larger. |
| Date: | 2011–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/130&r=cta |
| By: | Albert Marcet; Ramon Marimon |
| Abstract: | We obtain a recursive formulation for a general class of contracting problems involving incentive constraints. These constraints make the corresponding maximization (sup) problems non recursive. Our approach consists of studying a recursive Lagrangian. Under standard general conditions, there is a recursive saddle-point (infsup) functional equation (analogous to a Bellman equation) that characterizes the recursive solution to the planner's problem and forward-looking constraints. Our approach has been applied to a large class of dynamic contractual problems, such as contracts with limited enforcement, optimal policy design with implementability constraints, and dynamic political economy models. |
| Keywords: | Transactional relationships, contracts and reputation, recursive formulation,participation constraint |
| JEL: | D80 L14 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1055&r=cta |