|
on Contract Theory and Applications |
| By: | Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | This paper investigates the effect of monopoly subsidies on entry deterrence. We consider a potential entrant who observes two signals: the subsidy set by the regulator and the output level produced by the incumbent firm. We show that not only an informative equilibrium can be supported, where information about the incumbent's costs is conveyed to the entrant, but also an uninformative equilibrium, where the actions of regulator and incumbent conceal the monopolist's type, thus deterring entry. While the regulator?s role can support entry-deterrence practices, we demonstrate that his presence is nonetheless welfare improving. Furthermore, we compare equilibrium welfare relative to two benchmarks: complete information environments, and standard entry-deterrence games where the regulator is absent. |
| Keywords: | Entry deterrence; Signaling; Monopoly subsidies |
| JEL: | D82 H23 L12 Q5 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:espinola-10&r=cta |
| By: | Norovsambuu Tumennasan (School of Economics and Management, Aarhus University, Denmark) |
| Abstract: | Economists perceive moral hazard as an undesirable problem because it undermines efficiency. Carefully designed contracts can mitigate the moral hazard problem, but this assumes that a team is already formed. This paper demonstrates that these contracts are sometimes the reason why teams do not form. Formally, we study the team formation problem in which the agents’ efforts are not verifiable and the size of teams does not exceed quota r. We show that if the team members can make only balanced transfers, then moral hazard affects stability adversely. However, if the team members cannot make transfers, then moral hazard affects stability positively in a large class of games. For example, a stable team structure exists if teams produce public goods or if the quota is two. However, these existence results no longer hold if efforts are verifiable. |
| Keywords: | team formation, hedonic game, moral hazard, assortative partition |
| JEL: | C71 C78 |
| Date: | 2011–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2011-12&r=cta |
| By: | Martimort, David; Sand-Zantman, Wilfried |
| Abstract: | We analyze environmental agreements in contexts with asymmetric information, voluntary participation by sovereign countries and possibly limited enforcement. Taking a mechanism design perspective, we study how countries can agree on effort levels and compensations to take into account multilateral externalities. We delineate conditions for efficient agreements and trace out possible inefficiencies to the conjectures that countries hold following disagreement. We show how optimal mechanisms admit simple approximations with attractive implementation properties. Finally, we also highlight how limits on commitment strongly hinder performances of optimal mechanisms. |
| JEL: | D82 |
| Date: | 2011–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:24929&r=cta |
| By: | Joanne Evans (University of Surrey); Paul Levine (University of Surrey); Neil Rickman (University of Surrey and CEPR); Francesc Trillas (Universitat Autonoma de Barcelona) |
| Abstract: | Dynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this causes welfare to fall. We study this problem in the case of regulatory procurement and show that delegation by the government to an independent regulator whose preferences differ from the government's can overcome this inefficiency, and we provide 'conservative' conditions under which this happens. Our solution reflects several aspects of many modern regulatory settings: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across available regulators. Our results also provide an analogy with the literatures on the benefits of delegation to independent principals in other settings, such as monetary policy, financial regulation and trade and hence contribute to this broader research agenda. |
| Keywords: | delegation; ratchet effect; procurement |
| JEL: | L51 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0911&r=cta |
| By: | Peress, Joël |
| Abstract: | A competitive stock market is embedded into a neoclassical growth economy to analyze the interplay between the acquisition of information about firms, its partial revelation through stock prices, capital allocation and income. The stock market allows investors to share their costly private signals in a cost-effective incentive-compatible way. It contributes to economic growth by raising total factor productivity, but its impact is only transitory. Several predictions on the evolution of real and financial variables are derived, including capital efficiency, total factor productivity, industrial specialization, wealth inequality, stock trading intensity, liquidity and return volatility. |
| Keywords: | asymmetric information; capital allocation; financial development; growth; learning; noisy rational expectations equilibrium; stock market |
| JEL: | G11 G14 O16 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8569&r=cta |
| By: | Stephen Hansen; Michael McMahon |
| Abstract: | We first establish that policymakers on the Bank of England's Monetary Policy Committee choose lower interest rates with experience. We then reject increasing confidence in private information or learning about the structure of the macroeconomy as explanations for this shift. Instead, a model in which voters signal their hawkishness to observers better fits the data. The motivation for signalling is consistent with wanting to control inflation expectations, but not career concerns or pleasing colleagues. There is also no evidence of capture by industry. The paper suggests that policy-motivated reputation building may be important for explaining dynamics in experts' policy choices. |
| Keywords: | Signalling, learning, monetary policy |
| JEL: | D78 E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1074&r=cta |
| By: | Matthew Gentzkow; Emir Kamenica |
| Abstract: | Does competition among persuaders increase the extent of information revealed? We study ex ante symmetric information games where a number of senders choose what information to gather and communicate to a receiver, who takes a non-contractible action that affects the welfare of all players. We characterize the information revealed in pure-strategy equilibria. We consider three ways of increasing competition among senders: (i) moving from collusive to non-cooperative play, (ii) introducing additional senders, and (iii) decreasing the alignment of senders' preferences. For each of these notions, we establish that increasing competition cannot decrease the amount of information revealed, and will in a certain sense tend to increase it. |
| JEL: | D83 L15 M37 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17436&r=cta |
| By: | B. Ravikumar; Yuzhe Zhang |
| Abstract: | We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can underreport his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly and imperfect auditing technology, we show that the optimal auditing mechanism in our model consists of cycles. Within each cycle, a low-income taxpayer is initially unaudited, but if the duration of low-income reports exceeds a threshold, then the auditing probability becomes positive. That is, the tax authority guarantees that the taxpayer will not be audited until the threshold duration is reached. We also find that auditing becomes less frequent if the auditing cost is higher or if the variance of income is lower. |
| Keywords: | Tax auditing ; Taxation |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-020&r=cta |
| By: | Dan Kovenock; Brian Roberson |
| Abstract: | In the Colonel Blotto game, each of two players simultaneously allocates his fixed budget of a resource across a finite number n of battleelds. Within each battlefield, the player that allocates the higher level of the resource wins the battlefield. Each player's payoff is equal to the sum of the values of the battlefields he wins. In this paper we examine a multi-dimensional incomplete information version of the Colonel Blotto game in which each player's n-tuple of battlefield valuations is drawn from a common n-variate joint distribution function. |
| Keywords: | Colonel Blotto Game, Con ict, Multi-dimensional Incomplete Information, Multi-dimensional Action Space |
| JEL: | C72 D72 D74 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1262&r=cta |
| By: | Marco A Espinosa-Vega; Juan Sole; Rafael Matta; Charles Kahn |
| Abstract: | Until the recent financial crisis, the safety and soundness of financial institutions was assessed from the perspective of the individual institution. The financial crisis highlighted the need to take systemic externalities seriously when rethinking prudential oversight and the regulatory architecture. Current financial reform legislation worldwide reflects this intent. However, these reforms have overlooked the need to also consider regulatory agencies’ forbearance and information sharing incentives. In a political economy model that explicitly accounts for systemic connectedness, and regulators’ incentives, we show that under an expanded mandate to explicitly oversee systemic risk, regulators would be more forbearing towards systemically important institutions. We also show that when some regulators have access to information regarding an institutions’ degree of systemic importance, these regulators may have little incentive to gather and share it with other regulators. These findings suggest that (and we show conditions under which) a unified regulatory arrangement can reduce the degree of systemic risk vis-á-vis a multiple regulatory arrangement. |
| Keywords: | Bank regulations , Banks , Economic models , External shocks , Financial institutions , Financial risk , Liquidity , |
| Date: | 2011–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/193&r=cta |
| By: | Klênio de Souza Barbosa; Pierre C. Boyer |
| Abstract: | Many local governments allow competition between public and private rms for provision of local public services in order to reduce procurement cost. Competition is usually introduced through competitive tendering for concession contracts. We show that in a symmetric competition between public and private rms with learning-by-doing, private rm's ability to transfer learning among concessions may reduce consumer's welfare. The model provides testable implications which are consistent with the empirical evidence: little competition for concessions, retail prices higher under private operation than under public one, and subsidies and retail prices to service providers increased over time. In addition, consumers' gains from switching to private ownership are higher in industries where private rms have low-ability to transfer learning among dierent concessions. |
| Keywords: | Sequential Auction, Public versus Private Firms, Learning-by-doing, Transferability of Learning |
| JEL: | D44 H57 H70 H87 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:fea:wpaper:06-2011&r=cta |
| By: | Braz Camargo; Benjamin Lester |
| Abstract: | The authors study a dynamic, decentralized lemons market with one-time entry and characterize its set of non-stationary equilibria. This framework offers a theory of how a market suffering from adverse selection recovers over time endogenously; given an initial fraction of lemons, the model provides sharp predictions about how prices and the composition of assets evolve over time. Comparing economies in which the initial fraction of lemons varies, the authors study the relationship between the severity of the lemons problem and market liquidity. They use this framework to understand how asymmetric information contributed to the breakdown in trade of asset-backed securities during the recent financial crisis, and to evaluate the efficacy of one policy that was implemented in attempt to restore liquidity. |
| Keywords: | Liquidity (Economics) ; Trade |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-36&r=cta |
| By: | Richard S. Grossman (Department of Economics, Wesleyan University); Masami Imai (Department of Economics, Wesleyan University) |
| Abstract: | The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited liability. This paper examines the empirical relationship between the size of banks’ contingent liability and their risk-taking behavior using data on British banks from 1878-1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated moral hazard problem at banks. |
| Keywords: | Contingent Capital, Bank Risk-Taking, British Banks |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2011-003&r=cta |
| By: | Timothy Perri |
| Abstract: | Oyer (2007, 2008) considered the turnover of economics professors early in their careers. He found professors are more likely to move down from higher ranked schools than up from lower ranked schools. An asymmetric information model suggests this phenomenon is explained by imperfect screening at one’s initial hiring. A smaller fraction of more able individuals and more accurate screening imply a greater chance downward movement exceeds movement up. Key Words: |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:11-13&r=cta |