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on Contract Theory and Applications |
| By: | Andrea Attar (Faculty of Economics, University of Rome "Tor Vergata"); Eloisa Campioni (Faculty of Economics, University of Rome "Tor Vergata"); Gwenael Piaser (IPAG Business School, Paris;) |
| Abstract: | We consider multiple-principal multiple-agent games of incomplete information. In this context, we identify a class of direct and incentive compatible mechanisms: each principal privately recommends to each agent to reveal her private information to the other principals, and each agent behaves truthfully. We show that there is a rationale in restricting attention to this class of mechanisms: if all principals make use of direct incentive compatible mechanisms, there are no incentives to unilaterally deviate towards more sophisticated mechanisms. We develop two examples to show that private recommendations are a key element of our construction, and that the restriction to direct incentive compatible mechanisms is not sufficient to provide a complete characterization of equilibria. |
| Keywords: | Incomplete information, competing mechanisms, information revelation |
| JEL: | D82 |
| Date: | 2011–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:205&r=cta |
| By: | Olivier, Bos |
| Abstract: | Recent papers show that all-pay auctions are better at raising money for charity than first-price auctions with symmetric bidders and under incomplete information. Yet, this result is lost with sufficiently asymmetric bidders and under complete information. In this paper, we consider a framework on charity auctions with asymmetric bidders under some incomplete information. We find that all-pay auctions still earn more money than first-price auction. Thus, all-pay auctions should be seriously considered when one wants to organize a charity auction. |
| Keywords: | All-pay auctions; Charity; Externalities |
| JEL: | D62 D44 D64 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31877&r=cta |
| By: | Pérez-Nievas, Mikel |
| Abstract: | In this paper, I characterize the set of interim incentive efficient allocation mechanisms for a broad class of problems with private information, which includes those associated with the provision of public goods (with or without exclusion) as well as the allocation of one or more units of a private good. |
| Keywords: | Incomplete information; Interim efficiency; Pooling of types; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/7220&r=cta |
| By: | Dequiedt, Vianney; Zenou, Yves |
| 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 |
| JEL: | D82 F22 J61 O12 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8459&r=cta |
| By: | Bonfiglioli, Alessandra; Gancia, Gino A |
| Abstract: | We study a dynamic model where growth requires both long-term investment and the selection of talented managers. When ability is not ex-ante observable and contracts are incomplete, managerial selection imposes a cost, as managers facing the risk of being replaced tend to choose a sub-optimally low level of long-term investment. This generates a trade-off between selection and investment that has implications for the choice of contractual relationships. Our analysis shows that rigid long-term contracts sacrificing managerial selection may be optimal at early stages of economic development and when access to information is limited. As the economy grows, however, knowledge accumulation increases the return to talent and makes it optimal to adopt flexible contractual relationships, where managerial selection is implemented even at the cost of lower investment. Better institutions, in the form of a richer contracting environment and less severe informational frictions, speed up the transition to short-term relationships. |
| Keywords: | appropriate contracts; appropriate institutions; development; growth; information; selection |
| JEL: | D8 O40 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8462&r=cta |
| By: | Nabi, Mahmoud Sami; Ben Souissi, Souraya |
| Abstract: | Could a credit bureau incite banks to report correct information about their borrowers? We show that banks will choose the incorrect information sharing in the last period to increase their profits. Interestingly, however, it is shown that this strategy is optimal at the second period only if the proportion of successful projects is superior to 50%. In that case the Credit Bureau should enforce a sufficiently high penalty in order to incite banks to share information honestly. The penalty threshold that conditions the efficiency of the credit bureau’s role is endogenously derived. |
| Keywords: | Information sharing; penalty; incitation mechanism; credit bureau. |
| JEL: | L14 D82 G21 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32010&r=cta |
| By: | Andrea Attar (Faculty of Economics, University of Rome "Tor Vergata"); Eloisa Campioni (Faculty of Economics, University of Rome "Tor Vergata"); Gwenael Piaser (IPAG Business School, Paris;) |
| Abstract: | We consider multiple-principal multiple-agent games of incomplete information in which each agent can at most participate with one principal. In such contexts, we show that the restriction to direct truthful mechanisms involves a loss of generality, even if one only focuses on pure strategy equilibria. However, the traditional Revelation Principle retains its power in games with a single agent. |
| Keywords: | Competing Mechanisms, Exclusivity |
| JEL: | D82 |
| Date: | 2011–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:201&r=cta |
| By: | Pérez-Nievas, Mikel |
| Abstract: | In this paper. I characterize the set of Bayesian incentive compatible anonymous mechanisms in a discrete public good problem when preferences are private information. With this result in hand, I characterize the set of interim incentive efficient mechanisms as voting schemes in which votes are weighted according to the tax paid by each agent. |
| Keywords: | Public goods; Voting mechanisms; Interim efficiency; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/7221&r=cta |
| By: | Maravall Rodríguez, Carlos |
| Abstract: | I consider an election with candidate entry and a state variable that affects all players' utility, as it translates their ideal points. Candidates are informed of the realization of the state, whilst voters are not. I study the effect of candidates' commitment on equilibria. I show that if they cannot commit, their private information is of no consequence for the election (i.e. even in a decisiontheoretic sense). Instead, when they can commit this is a standard signaling game. |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/347&r=cta |
| By: | Anil R. Doshi (Harvard Business School); Glen W.S. Dowell (Johnson School of Management, Cornell University); Michael W. Toffel (Harvard Business School, Technology and Operations Management Unit) |
| Abstract: | We explore which organizations are particularly likely to resist, or acquiesce to, new institutional pressures that arise from mandatory information disclosure regulations. We hypothesize that when information is disclosed about organizational performance, certain organizational characteristics amplify pressures to improve. Examining organizational responses to a change in a prominent information disclosure program, we provide some of the first empirical evidence characterizing organizations' heterogeneous responses to information disclosure regulations. We find that private ownership and proximity to headquarters and corporate siblings are associated with superior performance trends following information disclosure. We also find that regional density moderates effect of establishment size on performance improvement. We find no evidence that capability transfers are associated with performance improvement. We highlight implications for institutional theory, managers, and policymakers. |
| Keywords: | information disclosure, institutional theory, empirical analysis, Toxics Release Inventory, environmental strategy, mandatory disclosure. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:12-001&r=cta |
| By: | Rendón, Silvio |
| Abstract: | This paper analyzes the problem of matching heterogenous agents in a Bayesian learning model. One agent gives a noisy signal to another agent, who is responsible for learning. If production has a strong informational component, a phase of cross-matching occurs, so that agents of low knowledge catch up with those of higher one. It is shown that (i) a greater informational component in production makes cross-matching more likely; (ii) as the new technology is mastered, production becomes relatively more physical and less informational; (iii) a greater dispersion of the ability to learn and transfer information makes self-matching more likely; and (iv) self-matching leads to more self-matching, whereas croos-matching can make less productive agents overtake more productive ones. |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/268&r=cta |
| By: | Kondor, Péter |
| Abstract: | I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested. |
| Keywords: | higher-order expectations; public announcement; trading volume |
| JEL: | D82 D84 G11 G12 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8455&r=cta |
| By: | Kranich, Laurence |
| Abstract: | I consider the problem of equalizing opportunities among agents who differ in both their tastes and innate productive abilities when these characteristics are unobservable. The government specifically wishes to offset the effects of differences in innate talents by affording public education or training to those with lesser skills. I first show that in the benchmark case involving complete infonnation it is possible to fully equalize opportunities as defmed axiomatically by Bossert and Fleurbaey. Moreover, in the incomplete infonnation case, it is possible to implement any input progressive education policy by means of a direct implementation/revelation mechanism. However, it is not possible to afford equal opportunities. I conclude with an example demonstrating the alternative, social welfare function approach which I argue is more suitable for second-best analyses. |
| Keywords: | Equal opportunities; Public education; Individual responsibility; Multidimensional characteristics; Asymmetric information; |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/7216&r=cta |
| By: | Guerrieri, Veronica; Kondor, Péter |
| Abstract: | We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default risk. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which a¤ect investment decisions, generating a counter-cyclical 'reputational premium.' When default risk is high, the bond’s return is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility. |
| Keywords: | amplification; career concerns; delegated portfolio management |
| JEL: | D53 D8 G1 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8454&r=cta |
| By: | Matteo Bassi (Università di Salerno and CSEF); Marco Pagnozzi (University of Napoli "Federico II" and CSEF); Salvatore Piccolo (University of Naples "Federico II" and CSEF) |
| Abstract: | We revisit the choice of product differentiation by competing firms in the Hotelling model, under the assumption that firms are vertically separated, and that retailers choose products’ characteristics. We show that retailers with private information about their marginal costs choose to produce less differentiated products than retailers with no private information, in order to increase their information rents. Hence, information asymmetry increases social welfare because it induces firms to sell products that appeal to a larger number of consumers. The socially optimal level of transparency between manufacturers and retailers depends on the weight assigned to consumers’ surplus and trades of two effects: higher transparency reduces price distortion but induces retailers to produce excessively similar products. |
| Keywords: | product differentiation, vertical relations, transparency, regulation |
| JEL: | D43 D82 L13 L51 |
| Date: | 2011–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:288&r=cta |
| By: | Serrano, Roberto; Vohra, Rajiv |
| Abstract: | A core allocation of a complete information economy can be characterized as one that would not be unanimously rejected in favor of another feasible alternative by any coalition. We use this test of coalitional voting in an incomplete information environment to formalize a notion of resilience. Since information transmission is implicit in the Bayesian equilibria of such voting games, this approach makes it possible to derive core concepts in which the transmission of information among members of a coalition is endogenous. Our results lend support to the credible core of Dutta and Vohra [4] and the core proposed by Myerson [11] as two that can be justified in terms of coalitional voting |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/354&r=cta |
| By: | Nadine Chlaß (School of Economics and Business Administration FSU Jena) |
| Abstract: | The winner's curse is a well-known deviation from rational self-interest in decision-making under asymmetric information. Yet, most prominent explanations for the curse have experimentally been ruled out so far. In particular, the curse did neither seem to emanate from a lack of experience with a given task (Grosskopf et al. 2007), nor from the complexity of the decision task, nor level-k thinking, nor a disability to infer information from others' actions (Charness and Levin 2009), (Ivanov et al. 2010). This paper elicits individuals' sensitivity to incur a winner's curse in a common-value auction where the explanations above do not apply, tracks down the potential source of the curse, and tests to what extent individuals' cursedness evolves (Fudenberg 2006). It finds that the curse is tightly associated with a relatively stable individual characteristic - individuals' personality traits. Personality traits explain individuals' initial cursedness, and also govern whether individuals unlearn, or instead, acquire the curse. I review biological evidence on how personality influences individuals' handling of information to explain why personality matters here. |
| Keywords: | asymmetric information, winner's curse, personality traits |
| JEL: | D82 D83 |
| Date: | 2011–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-027&r=cta |
| By: | Ulrich Horst; Santiago Moreno-Bromberg |
| Abstract: | In this paper the problem of optimal derivative design, profit maximization and risk minimization under adverse selection when multiple agencies compete for the business of a continuum of heterogenous agents is studied. The presence of ties in the agents' best-response correspondences yields discontinuous payoff functions for the agencies. These discontinuities are dealt with via efficient tie--breaking rules. In a first step, the model presented by Carlier, Ekeland & Touzi (2007) of optimal derivative design by profit-maximizing agencies is extended to a multiple--firm setting, and results of Page & Monteiro (2003, 2007, 2008) are used to prove the existence of (mixed-strategies) Nash equilibria. On a second step we consider the more complex case of risk minimizing firms. Here the concept of socially efficient allocations is introduced, and existence of the latter is proved. It is also shown that in the particular case of the entropic risk measure, there exists an efficient "fix--mix" tie-breaking rule, in which case firms share the whole market over given proportions. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1107.0839&r=cta |
| By: | Fabrice Defever |
| Abstract: | We embed a North-South trade model into an incomplete contracts setting where the production of heterogeneous firms can be geographically separated. When a Northern headquarter contracts with a Southern supplier instead of a Northern supplier, the presence of international incomplete contracts may lead to a higher price. As a result, trade liberalization, that induces offshoring, is not necessarily welfare-enhancing for consumers, despite the lower cost of labor in the South. In addition, firms which use the supplier's component intensively, offshore their supplier in the South using outsourcing. As trade costs fall, less componentintensive firms also offshore, but by vertically integrating their supplier. We argue that this organizational change increases production-shifting in the South, implying that a larger number of varieties will be produced in the South where contracts are incomplete. We show that, this may reduce consumer welfare in both countries. |
| Keywords: | Consumer Welfare, Incomplete Contracts, hold-up problem |
| JEL: | F23 L22 R3 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1057&r=cta |
| By: | Francesca Barigozzi (UNIBO - Università di Bologna - Università degli studi di Bologna); Renaud Bourlès (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Dominique Henriet (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Giuseppe Pignataro (Department of Economics - University of Bologna) |
| Abstract: | We analyze mutual insurance arrangements (policies based on risk-sharing among a pool of policyholders) when consumers choose a self-insurance effort, that is an effort decreasing the size of any loss occurring. We consider both cooperative and non-cooperative strategies in the effort choice. Cooperation among policyholders leads to the full internalization of the positive impact the effort exerts on the premium. We show that, for an infinite size of pool, with cooperation first-best efficiency is achieved. Moreover, cooperation is sustained as an equilibrium in a repeated interaction game for a sufficiently low size of pool. An interesting implication of our results is that a cooperative mutual policy can dominate a stock insurance contract. Simulations show that mutual insurance with cooperation as an equilibrium dominates a second-best stock-type insurance policy even when pool size is low. |
| Keywords: | Mutual arrangement; self-insurance; positive externality on the insurance premium; cooperation |
| Date: | 2011–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00605267&r=cta |
| By: | Kory Kroft; Matthew J. Notowidigdo |
| Abstract: | We study how the level of unemployment insurance (UI) benefits that trades off the consumption smoothing benefit with the moral hazard cost of distorting job search behavior varies over the business cycle. Empirically, we find that the moral hazard cost is procyclical, greater when the unemployment rate is relatively low. By contrast, our evidence suggests that the consumption smoothing benefit of UI is acyclical. Using these estimates to calibrate our model, we find that a one standard deviation increase in the unemployment rate leads to a roughly 14 to 27 percentage point increase in the welfare-maximizing wage replacement rate. |
| JEL: | H5 J64 J65 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17173&r=cta |
| By: | F. Barigozzi; R. Bourles; D. Henriet; G. Pignataro |
| Abstract: | We analyze mutual insurance arrangements (policies based on risk-sharing among a pool of policyholders) when consumers choose a self-insurance effort, that is an effort decreasing the size of the loss when the latter occurs. We both consider cooperative and non-cooperative strategies in the effort choice. Cooperation among policyholders leads to the full internalization of the positive impact the effort exerts on the premium. We show that, for an infinite size of the pool, with cooperation first-best efficiency is achieved. Moreover, cooperation is sustained as an equilibrium in a repeated interaction game for a sufficiently low size of the pool. An interesting implication of our results is that a cooperative mutual policy can dominate a stock insurance contract. Simulations show that mutual insurance with cooperation as an equilibrium dominates a second-best stock-type insurance policy for low value of the pool size. |
| JEL: | D82 I11 I18 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp765&r=cta |