|
on Contract Theory and Applications |
| By: | Campbell, Arthur; Ederer, Florian; Spinnewijn, Johannes |
| Abstract: | We analyze costly information acquisition and information revelation in groups in a dynamic setting. Even when group members have perfectly aligned interests the group may inefficiently delay decisions. When deadlines are far away, uninformed group members freeride on each others' efforts to acquire information. When deadlines draw close, informed group members stop revealing their information in an attempt to incentivize other group members to continue searching for information. Surprisingly, setting a tighter deadline may increase the expected decision time and increase the expected accuracy of the decision in the unique equilibrium. As long as the deadline is set optimally, welfare is higher when information is only privately observable to the agent who obtained information rather than to the entire group. |
| Keywords: | deadlines; group decisions; information disclosure; information search |
| JEL: | D71 D82 D83 H42 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8531&r=cta |
| By: | Darrell Duffie; Semyon Malamud; Gustavo Manso |
| Abstract: | We calculate equilibria of dynamic double-auction markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors are segmented into groups that differ with respect to characteristics determining information quality, including initial information precision as well as market “connectivity,” the expected frequency of their trading opportunities. Investors with superior information sources attain strictly higher expected profits, provided their counterparties are unable to observe the quality of those sources. If, however, the quality of bidders’ information sources are commonly observable, then, under conditions, investors with superior information sources have strictly lower expected profits. |
| JEL: | D53 D83 G14 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17295&r=cta |
| By: | Itai Sher; Rakesh Vohra |
| Abstract: | We study a seller's optimal mechanism for maximizing revenue when the buyer may present evidence relevant to the buyer's value, or when different types of buyer have a differential ability to communicate. We introduce a dynamic bargaining protocol in which the buyer first makes a sequence of concessions in a cheap talk phase, and then at a time determined by the seller, the buyer presents evidence to support his previous assertions, and then the seller makes a take-it-or-leave-it offer. Our main result is that the optimal mechanism can be implemented as a sequential equilibrium of our dynamic bargaining protocol. Unlike the optimal mechanism to which the seller can commit, the equilibrium of the bargaining protocol also provides incentives for the seller to behave as required. We thereby provide a natural procedure whereby the seller can optimally price discriminate on the basis of the buyer's evidence. JEL Code: C78, D82, D83. |
| Keywords: | price discrimination, communication, bargaining, commitment, evidence, network flows |
| Date: | 2011–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1536&r=cta |
| By: | Yanhui Wu |
| Abstract: | This paper embeds a principal-agent firm in an otherwise standard trade model a la Melitz (2003) to investigate the impact of globalization on the provision of managerial incentives and on the distribution of managerial compensation. Facing contractual frictions due to limited liability, firms with heterogeneous productivity endogenously sort into different pay structures to mitigate different levels of agency problems. More productive firms use a higher-powered incentive contract while less productive firms use a lowered- powered one. International trade within an industry enhances market competition, inducing resources reallocated from low productivity domestic firms to high productivity exporting .rms. The uneven effects of international trade on firms that differ in their exporting status and pay structure result in more prevalence of high-powered incentive pay, a larger wage gap between managers and production workers, and a higher level of wage inequality among managers. |
| Keywords: | trade, heterogeneous firms, pay contracts, managerial incentives, managerial compensation, wage inequality |
| JEL: | D2 F1 J3 L1 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1066&r=cta |
| By: | Chong Huang (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper studies the interaction between coordination and social learning in a dynamic regime change game. Social learning provides public information to which players overreact due to the coordination motive. So coordination affects the aggregation of private signals through players' optimal choices. Such endogenous provision of public information results in inefficient herds with positive probability, even though private signals have an unbounded likelihood ratio property. Therefore, social learning is a source of coordination failure. An extension shows that if players could individually learn, inefficient herding disappears, and thus coordination is successful almost surely. This paper also demonstrates that along the same history, the belief convergence differs in different equilibria. Finally, social learning can lead to higher social welfare when the fundamentals are bad. |
| Keywords: | Coordination, social learning, inefficient herding, dynamic global game, common belief |
| JEL: | C72 C73 D82 D83 |
| Date: | 2011–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-021&r=cta |
| By: | Antonio Cabrales (Departamento de Economía - Universidad Carlos III de Madrid); Gary Charness (Department of Economics, University of California - University of California, Santa Barbara); Marie-Claire Villeval (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| Abstract: | We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents' informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more 'generous' (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes. |
| Keywords: | experiment; hidden information; bargaining power; competition; efficiency |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00614472&r=cta |
| By: | Aditi Sengupta |
| Abstract: | I analyze the pricing and investment behavior of a firm that signals the environmental attribute of its production technology through its price to uninformed environmentally conscious consumers. I then analyze the effect of change in environmental regulation on the signaling outcome and the firm's ex ante incentive to invest in cleaner technology. When regulation is weak, a firm signals cleaner technology through higher price; in this case, the firm earns lower profit when it has cleaner technology and thus, has no incentive to invest in cleaner technology. The price charged by the clean firm declines sharply beyond a critical level of regulation. When regulation is sufficiently stringent, the firm with cleaner technology charges lower price but earns higher signaling profit, and ex ante the firm has positive incentive to invest in cleaner technology. With weak regulation, the incentive of the firm to directly disclose its environmental performance rather than signal it through price (signaling distortion of profit) is increasing in the level of regulation, but the opposite holds when regulation is sufficiently stringent. |
| Keywords: | Environmental consciousness; Environmental regulation; Incomplete information; Investment; Signaling |
| JEL: | D42 D43 D82 L51 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2011-10&r=cta |
| By: | Yanhui Wu |
| Abstract: | This paper develops a simple theory of pay structures and pay levels across heterogeneous agents by bringing together optimal contracts inside the firm and competitive resource allocation in the market. The central idea is that more talented people tend to create greater value but face larger conflicts of interest in their employment relationship, and different pay contracts are optimally designed to mitigate different levels of agency problems. Sorted by their talent, people are stratified into production workers, self-employed, salaried managers with low-powered performance pay, and CEOs with high-powered equity-based pay. In a general equilibrium framework, I show that the sorting of managerial talent into pay contracts is tied to firm size. The theory highlights that high-powered incentive pay and large scales of operations cause the disproportionately large wage earnings at the top, and are the main source of income inequality. Market forces that reallocate resources from smaller to larger firms tend to increase the threshold talent for becoming a manager, increase the prevalence of high-powered incentive pay, raise the top earnings, and spread out the wage distribution. |
| Keywords: | Managerial Talent, Limited Liability, Provision of Incentives, Pay Structure, CEOPay, Wage Distribution |
| JEL: | D2 J3 L1 L2 M5 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1067&r=cta |
| By: | Onur, Esen |
| Abstract: | This paper offers a dynamic model of the foreign exchange market where some investors in the market are more informed than others. By adjusting the proportion of informed investors in the market, it is shown that the disconnect between macroeconomic variables and the exchange rate is sensitive to the amount of asymmetric information in the market. A surprising fi nding is that this disconnect is bigger when the proportion of informed investors in the market is smaller. |
| Keywords: | Market microstructure; Foreign exchange market; Asymmetric information |
| JEL: | D82 F31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32772&r=cta |
| By: | Kazuaki Okamura (Department of Economics and Social Sciences, Faculty of Humanities and Economics, Kochi University) |
| Abstract: | Under asymmetric information conditions regarding worker productivity between current and prospective employers, a worker's promotion signals his/her productivity. In this Paper, we tested the signalling role of promotion, using Japanese micro-level data. We found that among lower-level positions, promotion seems to signal a worker's ability, and both the business cycle and foreign-capital ratio of his/her company significantly strengthen this effects. These results suggest that external labour market conditions (i.e. asymmetric information regarding a worker's abilities between a current and prospective employer) affect the economic differences among workers in the internal labour market. |
| Keywords: | Strategically delayed promotion, Signalling, Wage growth, Japan. |
| JEL: | C23 J31 L22 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1112&r=cta |