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on Contract Theory and Applications |
| By: | Raffaele Fiocco; Mario Gilli |
| Abstract: | Within a standard three-tier regulatory model, a benevolent prin- cipal delegates to a regulatory agency two tasks: the supervision of the rms (two-type) costs and the arrangement of a pricing mecha- nism. The agency may have an incentive to manipulate information to the principal to share the gains of collusion with the rm. The novelty of this paper is that both the regulatory mechanism and the side contracting between the agency and the rm are modelled as a bargaining process. While as usual the ine¢ cient rm does not have any interest in cost manipulation, we nd that the e¢ cient rm has an incentive to collude only if the agencys bargaining power is high enough, and the total gains of collusion are now lower than those the two partners would appropriate if the agency could make a take-it-or- leave-it o¤er. Then, we focus on the optimal institutional responses to the possibility of collusion. In our setting, where the incomplete- ness of contracts prevents the principal from designing of a screening mechanism and thus Tiroles equivalence principle does not apply, we show how the playersbargaining powers crucially drive the optimal response to collusion. |
| Keywords: | bargaining, collusion, regulation |
| JEL: | D73 D82 L51 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-047&r=cta |
| By: | Celik, Gorkem; Peters, Michael |
| Abstract: | We study an incomplete information game in which players are involved in a reciprocal relationship that allows them to coordinate their actions by contracting among themselves. We model this as a competing mechanism game in which players have the ability to write contracts. We characterize the set of outcome functions that can be supported as equilibrium in this enhanced game. We use our characterization to show that the set of supportable outcomes is bigger than the set of outcomes supported by a centralized mechanism designer who can offer mechanisms in which all players participate. The difference is that the contracting game makes it possible for players to convey partial information about their type at the time they offer contracts. |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:gorkem_celik-2011-19&r=cta |
| By: | Stadler, Manfred |
| Abstract: | As is well-known from the literature on oligopolistic competition with incomplete information, firms have an incentive to share private demand information. However, by assuming verifiability of demand data, these models ignore the possibility of strategic misinformation. We show that if firms can send misleading demand information, they will do so. Furthermore, we derive a costly signaling mechanism implementing demand revelation, even without verifiability. For the case of a gamma distribution of the firms' demand variables, we prove that the expected gross gains from information revelation exceed the expected cost of signaling if the skewness of the distribution is sufficiently large and the products are sufficiently differentiated. -- |
| Keywords: | Information sharing,simultaneous signaling,demand uncertainty |
| JEL: | C73 D82 L13 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:17&r=cta |
| By: | Jacob K. Goeree; Alexey Kushnir |
| Abstract: | We consider a standard social choice environment with linear utilities and independent, one-dimensional, private values. We provide a short and constructive proof that for any Bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents. We demonstrate the usefulness and applicability of our approach with several examples. Finally, we show that the equivalence between Bayesian and dominant strategy implementation breaks down when utilities are non-linear or when values are interdependent, multi-dimensional, or correlated. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:021&r=cta |
| By: | Raffaele Fiocco; Carlo Scarpa |
| Abstract: | We examine the issue of whether two monopolists which produce substitutable goods should be regulated by one (centralization) or two (decentralization) regulatory authorities, when the regulator(s) can be partially captured by industry. Under full information, two decentral- ized agencies - each regulating a single market - charge lower prices than a unique regulator, making consumers better off. However, this leads to excessive costs for the taxpayers who subsidize the rms, so that centralized regulation is preferable. Under asymmetric informa- tion about the firms' costs, lobbying induces a unique regulator to be more concerned with the industry's interests, and this decreases social welfare. When the substitutability between the goods is high enough, the firms'lobbying activity may be so strong that decentralizing the regulatory structure may be social welfare enhancing. |
| Keywords: | regulation, lobbying, asymmetric information, energy markets |
| JEL: | D82 L51 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-046&r=cta |
| By: | Blaise Gadanecz; Alper Kara; Philip Molyneux |
| Abstract: | The unique structure of syndicated lending results in information asymmetries within the lending syndicate between banks of varying degrees of seniority. While previous studies have attempted to use indirect proxy measures to capture the effects of such information asymmetries, in this paper we propose a more direct measure. This offers new insights into how junior and senior banks rely on their own and each other's information sets in lending syndicates. In particular, we look at the previous number of borrowing/lending relationships between individual borrowers and lenders and the duration of these interactions. Using this new, direct and explicit measure on a sample of 5,842 syndicated loan transactions between 1993 and 2006, we find that when participant banks have information inferiority in the syndicate they require higher loan spreads to compensate for this asymmetry. This is amplified when the borrowers are more opaque. We thus show how junior participant banks with repeat relationships with the same borrower graduate from uniformed to informed lenders (the spread goes down as asymmetry diminishes) and how they rely both on the arranger's reputation and their own repeat experience with the borrower. |
| Keywords: | syndicated loans, repetitive lending, arranger opportunistic behaviour, arranger reputation, opaque borrowers |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:350&r=cta |
| By: | Hans Gersbach (ETH Zurich, Switzerland); Volker Hahn (ETH Zurich, Switzerland) |
| Abstract: | We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. |
| Keywords: | central banks, incentive contracts, transparency, inflation targeting, inflation forecast targeting, intermediate targets |
| JEL: | E58 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:11-149&r=cta |
| By: | Itai Agur |
| Abstract: | This paper models a financial sector in which there is a feedback between individual bank risk and aggregate funding market problems. Greater individual risk taking worsens adverse selection problems on the market. But adverse selection premia on that market push up bank risk taking, leading to multiple equilibria. The model identifies shifts among equilibria as a function of parameter shocks. Measures that reduce individual bank default risk within an equilibrium can actually make the system as whole more sensitive to shocks. Risks may thus seem small and market risk premia low precisely when the system as whole is most fragile. |
| Keywords: | Bank risk; Wholesale funding; Adverse selection; Financial crisis; Liquidity |
| JEL: | G21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:305&r=cta |
| By: | Zur Shapira; Gary Dushnitsky |
| Abstract: | This paper investigates the effect of compensation of corporate personnel on their investment in new technologies. We focus on a specific corporate activity, namely corporate venture capital (CVC), describing minority equity investment by established-firms in entrepreneurial ventures. The setting offers an opportunity to compare corporate investors to investment experts, the independent venture capitalists (IVCs). On average, we observe a performance gap between corporate investors and their independent counterparts. Interestingly, the performance gap is sensitive to CVCs' compensation scheme: it is the largest when CVC personnel are awarded performance pay. Not only do we study the association between incentives and performance but we also document a direct relationship between incentives and the actions managers undertake. For example, we observe disparity between the number of participants in venture capital syndicates that involve a corporate investor, and those that consist solely of IVCs. The disparity shrinks substantially, however, for a subset of CVCs that compensate their personnel using performance pay. We find a parallel pattern when analyzing the relationship between compensation and another investment practice, staging of investment. To conclude, the paper investigates the three elements of the principal-agent framework, thus providing direct evidence that compensation schemes (incentives) shape investment practices (managerial action), and ultimately investors¡¦ outcome (performance). |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp589&r=cta |
| By: | Eldridge, Damien; Koç, Cagatay; Onur, Ilke; Velamuri, Malathi |
| Abstract: | We estimate the impact of private hospital insurance on utilization of hospital care services in Australia. We employ the two-stage residual inclusion approach to address the endogeneity of private insurance. We calculate moral hazard based on a difference-of-means estimator. Our three-stage estimation framework provides evidence of selection into private hospital insurance. We find strong evidence of moral hazard when we treat hospital insurance as exogenous. After controlling for the endogeneity of hospital insurance, we find robust evidence of substitution from public to private hospital care but no evidence of ex-post moral hazard in the number of nights spent in hospital. |
| Keywords: | Health Insurance, Health Care Consumption, Moral Hazard, |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:1674&r=cta |