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on Contract Theory and Applications |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | We analyze games of incomplete information and offer equilibrium predictions which are valid for all possible private information structures that the agents may have. Our characterization of these robust predictions relies on an epistemic result which establishes a relationship between the set of Bayes Nash equilibria and the set of Bayes correlated equilibria. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action-state distribution. We derive exact bounds on how prior information of the analyst refines the set of equilibrium distribution. As an application, we obtain new results regarding the optimal information sharing policy of firms under demand uncertainty. Finally, we reverse the perspective and investigate the identification problem under concerns for robustness to private information. We show how the presence of private information leads to partial rather than complete identification of the structural parameters of the game. As a prominent example we analyze the canonical problem of demand and supply identification. |
| Keywords: | Incomplete information, Correlated equilibrium, Robustness to private information, Moments restrictions, Identification, Information bounds |
| JEL: | C72 C73 D43 D83 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1821&r=cta |
| By: | Vianney Dequiedt (Universite 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 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:crm:wpaper:1115&r=cta |
| By: | Berliant, Marcus; Yu, Chia-Ming |
| Abstract: | Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under reasonable modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer's utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on the consumer's location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. |
| Keywords: | Urban Economics; General Equilibrium; Private Information; Rational Expectations |
| JEL: | R13 D82 D51 |
| Date: | 2011–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33754&r=cta |
| By: | Schöb, Ronnie; Thum, Marcel |
| Abstract: | Individual labour productivities are often unobservable for firms when hiring new workers. Job protection may prevent firms ex post from using information about labour productivities. We show that a binding minimum wage introduced in the presence of job protection will lead to lower unemployment levels than predicted by the standard labour market model with heterogeneous labour and full information. -- |
| Keywords: | Minimum wages,unemployment,hidden information,labour market regulation |
| JEL: | J2 J3 H5 L5 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201114&r=cta |
| By: | René Böheim (Department of Economics, Johannes Kepler University Linz, Austria); Thomas Leoni (Österreichisches Institut für Wirtschaftsforschung (WIFO) (Austrian Institute of Economic Research)) |
| Abstract: | Sick workers in many countries receive sick pay during their illness- related absences from the workplace. In several countries, the social security system insures firms against their workers’ sickness absences. However, this insurance may create moral hazard problems for firms, leading to the inefficient monitoring of absences or to an underinvestment in their prevention. In the present paper, we investigate firms’ moral hazard problems in sickness absences by analyzing a legislative change that took place in Austria in 2000. In September 2000, an insurance fund that refunded firms for the costs of their blue-collar workers’ sickness absences was abolished (firms did not receive a similar refund for their white-collar workers’ sickness absences). Before that time, small firms were fully refunded for the wage costs of blue- collar workers’ sickness absences. Large firms, by contrast, were refunded only 70% of the wages paid to sick blue-collar workers. Using a difference-in-differences-in-differences approach, we estimate the causal impact of refunding firms for their workers’ sickness absences. Our results indicate that the incidences of blue-collar workers’ sicknesses dropped by approximately 8% and sickness absences were almost 11% shorter following the removal of the refund. Several robustness checks confirm these results. |
| Keywords: | absenteeism, moral hazard, sickness insurance |
| JEL: | J22 I38 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2011_13&r=cta |
| By: | Shakeeb Khan; Denis Nekipelov |
| Abstract: | Discrete response models are of high interest in economics and econometrics as they encompass treatment effects, social interaction and peer effect models, and discrete games. We study the impact of the structure of information sets of economic agents on the Fisher information of (strategic) interaction parameters in such models. While in complete information models the information sets of participating economic agents coincide, in incomplete information models each agent has a type, which we model as a payoff shock, that is not observed by other agents. We allow for the presence of a payoff component that is common knowledge to economic agents but is not observed by the econometrician (representing unobserved heterogeneity) and have the agents' payoffs in the incomplete information model approach their payoff in the complete information model as the heterogeneity term approaches 0. We find that in the complete information models, there is zero Fisher information for interaction parameters, implying that estimation and inference become nonstandard. In contrast, positive Fisher information can be attained in the incomplete information models with any non-zero variance of player types, and for those we can also find the semiparametric efficiency bound with unknown distribution of unobserved heterogeneity. The contrast in Fisher information is illustrated in two important cases: treatment effect models, which we model as a triangular system of equations, and static game models. In static game models we show this result is not due to equilibrium refinement with an increase in incomplete information, as our model has a fixed equilibrium selection mechanism. We find that the key factor in these models is the relative tail behavior of the unobserved component in the economic agents' payoffs and that of the observable covariates. |
| Keywords: | endogeneity, semiparametric efficiency, optimal convergence rate, strategic response |
| JEL: | C35 C14 C25 C13 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-19&r=cta |
| By: | Rothbauer, Julia; Sieg, Gernot |
| Abstract: | Viewer's private information consumption generates external benefits for society, because information improves the ability of voters to control politicians. Our study compares two settings in a free-to-air TV market: a differentiated duopoly of private channels and an oligopoly with both private channels and a public service broadcaster broadcasting information as well as entertainment programs. We find that welfare effects of public service broadcasting depend on its program design and cost efficiency, the external benefits of voter's information, and the magnitude of lost rents from the advertising market. |
| Keywords: | Media; two-sided TV market; information externalities |
| JEL: | L82 L32 D72 |
| Date: | 2011–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33779&r=cta |
| By: | Philip J. Grossman; Mana Komai; Evelyne Benie |
| Abstract: | The current “buzzword” among leaders is “transparency.” Hardly a day goes by that a group leader (politician, manager, or administrator) doesn’t state that he values transparency and will provide full disclosure of his information and actions. This project tests experimentally whether or not leaders, when given a choice, actually reveal a preference for transparency. Our experiment is based on a theoretical model by Komai, Stegeman, and Hermalin (2007). Fifteen subjects are randomly assigned to five groups of three. Each group separately participates in an investment game with three possible return scenarios (high, average, and low) that are equally likely to happen. Investing in the low-return scenario is not profitable to either individual group members or the whole group. In the average-return scenario, group well-being is maximized if all the group members invest in the project, but full cooperation may not be achieved simply because the dominant strategy of the individuals is to free ride on others. In the high-return scenario full cooperation is also optimal for the group, but subjects may or may not coordinate on full cooperation because they may fail to coordinate their efforts with the others. We consider a leader-follower setting. Only one member of the group (the leader) observes the scenario. The leader moves before the rest of the group members and first decides whether or not to invest in the project. The leader then chooses between two information regimes: revealing his decision and the return scenario to the rest of the group or revealing his decision but not the return scenario. Absent any information provided by their leader, followers know only the possible return scenarios and their likelihoods. They do not know which scenario is assigned to their group. Given the leaders’ information choices and investment decisions, the relevant information will be conveyed to the followers. The followers then will separately and simultaneously decide whether or not to invest in the project (followers do not know anything about the different information regimes). This is realistic in many real-world circumstances because in many business or political environments the leaders have exclusive access to critical information and are in charge of deciding whether or not to reveal the details of their information and actions to their potential followers; in many circumstances it is practically difficult for the followers to verify the real information or the leaders’ actions. |
| Keywords: | Transparency, leading by example, free-riding, cooperation. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2011-27&r=cta |
| By: | Dam, Lammertjan; Koetter, Michael |
| Abstract: | To test if safety nets create moral hazard in the banking industry, we develop a simultaneous structural two-equations model that specifies the probability of a bailout and banks' risk taking.We identify the effect of expected bailout probabilities on risk taking using exclusion restrictions based on regional political, supervisor, and banking market traits. The sample includes all observed capital preservation measures and distressed exits in the German banking industry during 1995-2006. The marginal effect of risk with respect to bailout expectations is 7.2 basis points. A change of bailout expectations by two standard deviations increases the probability of official distress from 6.2% to 9.9%. Only interventions directly targeting bank management and, to a lesser extent, penalties mitigate moral hazard. Weak interventions, such as warnings, do not reduce moral hazard. -- |
| Keywords: | Banking,supervision,moral hazard,intervention,bailouts |
| JEL: | C30 C78 G21 G28 L51 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:201110&r=cta |
| By: | Livshits, Igor; MacGee, James; Tertilt, Michèle |
| Abstract: | Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, as well as increased dispersion of interest rates. Using the Survey of Consumer Finance and interest rate data collected by the Board of Governors, we find evidence supporting these predictions, as the dispersion of credit card interest rates nearly tripled, and the share of credit card debt of lower income households nearly doubled. |
| Keywords: | bankruptcy; consumer credit; endogenous financial contracts |
| JEL: | E21 E49 G18 K35 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8580&r=cta |
| By: | Matthew Wiswall; Basit Zafar |
| Abstract: | We investigate how college students form and update their beliefs about future earnings using a unique “information” experiment. We provide college students true information about the population distribution of earnings and observe how this information causes respondents to update their beliefs about their own future earnings. We show that college students are substantially misinformed about population earnings and logically revise their self-beliefs in response to the information we provide, with larger revisions when the information is more specific and is good news. We classify the updating behaviors observed and find that the majority of students are non-Bayesian updaters. |
| Keywords: | Prediction (Psychology) ; Wages ; Universities and colleges ; Demography ; Uncertainty ; Bayesian statistical decision theory |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:516&r=cta |
| By: | Ismail Saglam (TOBB University of Economics and Technology, Department of Economics); Mehmet Y. Gurdal (TOBB University of Economics and Technology, Department of Economics); Ayca Ozdogan (TOBB University of Economics and Technology, Department of Economics) |
| Abstract: | Recent experimental studies find excessive truth-telling in strategic information transmission games with conflictive preferences. In this paper, we show that this phenomenon is more pronounced in sender-receiver games where a truthful regulator randomly intervenes. We also establish that intervention significantly increases the excessive trust of receivers. |
| Keywords: | Strategic information transmission, truth-telling, trust, sender-receiver game. |
| JEL: | C72 C90 D83 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1123&r=cta |
| By: | Hoewer, Daniel; Schmidt, Tobias; Sofka, Wolfgang |
| Abstract: | Information economics has emerged as the primary theoretical lens for framing financing decisions in firm R&D investment. Successful outcomes of R&D projects are either ex-ante impossible to predict or the information is asymmetrically distributed between inventors and investors. As a result, bank lending for firm R&D has been rare. However, firms can signal the value of their R&D activities and as a result reduce the information deficits that block the availability of external funding. In this study we focus on three types of signals: Firm's existing patent stock, the presences of a joint venture investor and whether the firm has received a government R&D subsidy. We argue theoretically that all of these signals have the potential to alter the risk assessment of the firm's main bank. Additionally, we explore heterogeneities in these risk assessments arising from the industry level and the main bank's portfolio. We test our theoretical predictions for a sample of more than 7,000 firm observations in Germany over a multi-year period. Our theoretical predictions are only supported for firms' past patent activity while other signals fail to alter the risk assessment of a firm's main bank. Besides, we confirm that the risk evaluation is not randomly distributed across bank-firm dyads but depends on industry and bank characteristics. -- |
| Keywords: | Innovation,banking,information asymmetry |
| JEL: | D82 G30 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201119&r=cta |
| By: | Hoewer, Daniel; Schmidt, Tobias; Sofka, Wolfgang |
| Abstract: | Information economics has emerged as the primary theoretical lens for framing financing decisions in firm R&D investment. Successful outcomes of R&D projects are either ex-ante impossible to predict or the information is asymmetrically distributed between inventors and investors. As a result, bank lending for firm R&D has been rare. However, firms can signal the value of their R&D activities and as a result reduce the information deficits that block the availability of external funding. In this study we focus on three types of signals: Firm's existing patent stock, the presences of a joint venture investor and whether the firm has received a government R&D subsidy. We argue theoretically that all of these signals have the potential to alter the risk assessment of the firm's main bank. Additionally, we explore heterogeneities in these risk assessments arising from the industry level and the main bank's portfolio. We test our theoretical predictions for a sample of more than 7,000 firm observations in Germany over a multi-year period. Our theoretical predictions are only supported for firms' past patent activity while other signals fail to alter the risk assessment of a firm's main bank. Besides, we confirm that the risk evaluation is not randomly distributed across bank-firm dyads but depends on industry and bank characteristics. -- |
| Keywords: | Innovation,banking,information asymmetry |
| JEL: | D82 G30 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:11055&r=cta |
| By: | Hetland, Ove Rein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Mjøs, Aksel (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | We study how firm-bank lending relationships affect firms' access to and terms of credit. We use bank mergers and acquisitions (M&As) as exogenous events that affect lending relationships. Bank M&As lead to organisational changes at the involved banks, which may reduce the amount of soft information encompassed in the firm-bank relationship. Using a unique Norwegian dataset, which combines information on companies' bank accounts, annual accounts, bankruptcies, and bank M&As for the years 1997-2009, we find that domestic bank mergers increase interest rate margins by 0.24 percentage points for opaque small and medium sized rms, relative to less opaque firms. Since, due to information asymmetries, opaque firms are typically more dependent on bank lending relationships, our results indicate that these relationships are advantageous for such borrowers, and the destruction of a relationship during the merger process has adverse effects for the firm. Conversely, the results are not consistent with a lock-in effect due to an information monopoly by the relationship lender that on average increases a firm's borrowing costs over its life cycle. The results are robust to the inclusion of variables that control for eects of market competition. |
| Keywords: | Bank Mergers and Acquisitions; Lending Relationships |
| JEL: | G00 G30 G34 |
| Date: | 2011–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2011_013&r=cta |
| By: | Ambec, Stefan (Toulouse School of Economics (INRA-LERNA) and University of Gothenburg); Coria, Jessica (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We examine the choice of policy instrument price, quantity, or a mix of the two when two pollutants are regulated and firms’ abatement costs are private information. A key parameter that affects this choice is the technological externality between the abatement efforts involved, i.e., whether they are substitutes or complements. If they are complements, a mix policy instrument with a tax on one pollutant and a quota on the other is sometime preferable, even if the pollutants are identical in terms of benefits and costs of abatement. Yet, if they are substitutes, the mix policy is dominated by taxes or quotas.<p> |
| Keywords: | pollution; environmental regulation; policy mixes; tax; emission standard; asymmetric information |
| JEL: | D62 Q50 Q53 Q58 |
| Date: | 2011–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0517&r=cta |