|
on Contract Theory and Applications |
| By: | Richard Watt |
| Abstract: | Under current copyright law, Internet Service Providers (ISPs) can be found liable for the traffic on the websites that they host. While the ISPs themselves are not undertaking acts that infringe copyright, indirect liability asserts that they either contribute to, or encourage in some way, infringing activities, and thus they are liable to claims of indirect involvement by the affected copyright holders. The present paper explores indirect liability in a standard principal-agent setting, where both moral hazard (the act of monitoring) and adverse selection (differential costs of monitoring over ISPs) are present. The model considers the kinds of contracts that could be signed between the copyright holders (acting through a collective) and the ISPs (acting individually). The self-selecting, incentive compatible equilibrium is found for the feasible scenarios that may present themselves. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:16-2011&r=cta |
| By: | Krähmer, Daniel; Strausz, Roland |
| Abstract: | This paper considers the canonical sequential screening model and shows that when the agent has an ex post outside option, the principal does not benefit from eliciting the agent's information sequentially. Unlike in the standard model without ex post outside options, the optimal contract is static and conditions only on the agent's aggregate final information. The benefits of sequential screening in the standard model are therefore due to relaxed participation rather than relaxed incentive compatibility constraints. We argue that in the presence of ex post participation constraints, the classical, local approach fails to identify binding incentive constraints and develop a novel, inductive procedure to do so instead. The result extends to the multi-agent version of the problem. |
| Keywords: | dynamic mechanism design; Mirrlees approach; participation constraints; Sequential screening |
| JEL: | D82 H57 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8629&r=cta |
| By: | David Bardey; Philippe De Donder |
| Abstract: | Abstract: We develop a model where a free genetic test reveals whether the individual tested has a low or high probability of developing a disease. A costly prevention effort allows high-risk agents to decrease the probability of developing the disease. Agents are not obliged to take the test, but must disclose its results to insurers. Insurers offer separating contracts which take into account the individual risk, so that taking the test is associated to a discrimination risk. We study the individual decisions to take the test and to undertake the prevention effort as a function of the effort cost and of its efficiency. We obtain that, if effort is observable by insurers, agents undertake the test only if the effort cost is neither too large nor too low. If the effort cost is not observable by insurers, they face a moral hazard problem which induces them to under-provide insurance. We obtain the counter intuitive result that moral hazard increases the value of the test if the effort cost is low enough. Also, agents may perform the test for lower levels of prevention efficiency when effort is not observable. |
| Date: | 2011–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:009083&r=cta |
| By: | Inés Macho-Stadler (Department of Economics, Universitat Autònoma de Barcelona); David Pérez-Castrillo (Department of Economics, Universitat Autònoma de Barcelona); Nicolás Porteiro (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | We consider a market where firms hire workers to run their projects and such projects differ in profitability. At any period, each firm needs two workers to successfully run its project: a junior agent, with no specific skills, and a senior worker, whose effort is not verifiable. Senior workers differ in ability and their competence is revealed after they have worked as juniors in the market. We study the length of the contractual relationships between firms and workers in an environment where the matching between firms and workers is the result of market interaction. We show that, despite in a one-firm-one-worker set-up long-term contracts are the optimal choice for firms, market forces often induce firms to use short-term contracts. Unless the market only consists of firms with very profitable projects, firms operating highly profitable projects offer short-term contracts to ensure the service of high-ability workers and those with less lucrative projects also use short-term contracts to save on the junior workers' wage. Intermediate firms may (or may not) hire workers through long-term contracts. |
| Keywords: | Labor contracts, short-term, long-term, matching, incentives. |
| JEL: | D86 C78 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:1108&r=cta |
| By: | Popov, Sergey V. |
| Abstract: | I study the institution of avoiding to hire one’s school own PhD graduates for assistant professorships. I argue that this institution is necessary to create better incentives for researchers to incorporate new information in studies, facilitating the convergence to asymptotic learning of the studied fundamentals. |
| Keywords: | academic inbreeding; moral hazard; knowledge; information dissemination |
| JEL: | L13 D83 D43 A11 |
| Date: | 2011–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34414&r=cta |
| By: | Carlos Canon (Toulouse School of Economics) |
| Abstract: | This paper studies a "market creating" firm (platform) that offers a matching environment by charging an access fee to a population of high and low type users who wish to form a match. We focus on an environment where users only observe a signal of their randomly assigned partner's type and where the informativeness of the signal is controlled by the firm. We study how both tools, access fee and signal informativeness, can be used to screen particular segments of the population. We finish by characterizing the set of optimal menus. The paper proposes three results. We show that information provision has a screening role when network effects are heterogeneous because a platform cannot induce every level of participation using only the access fee. Secondly, any platform will optimally offer a menu such that only high types participate, or where every user participates. In the former the signal is perfectly informative; in the latter it is partially informative. Lastly, the profit maximizing firm will over-provide information in relation to the surplus maximizing firm, and the higher the heterogeneity in the population, the higher the chance of the optimal menu excluding low type users. |
| Keywords: | Pricing; Market Design; Matching; Information Provision; Heterogeneous Network Effects |
| JEL: | L11 L15 D42 D83 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1120&r=cta |
| By: | Alessandro Bonatti (MIT, Sloan School of Management); Johannes Horner (Cowles Foundation, Yale University) |
| Abstract: | This paper develops a model of career concerns. The worker's skill is revealed through output, and wage is based on expected output, and so on assessed ability. Specifically, work increases the probability that a skilled worker achieves a one-time breakthrough. Effort levels at different times are strategic substitutes. Effort (and, if marginal cost is convex, wage) is single-peaked with seniority. The agent works too little, too late. Both delay and underprovision of effort worsen if effort is observable. If the firm commits to wages but faces competition, the optimal contract features piecewise constant wages as well as severance pay. |
| Keywords: | Career concerns, Experimentation, Career paths, Up-or-out, Reputation |
| JEL: | D82 D83 M52 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1831&r=cta |
| By: | Peter Postl |
| Abstract: | We study procurement procedures that simultaneously determine specification and price of a good. Suppliers can offer and produce the good in either of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier received two signals about production cost, one per specification. Our model is a special case of the interdependent-value settings with multi-dimensional types in Jehiel and Moldovanu (2001) where an efficient and incentive compatible mechanism exists. We characterize equilibrium bidding behaviour if the winning supplier is selected purely on the basis of price, regardless of the specification offered. While there is a positive chance of obtaining an inefficient specification, this procurement mechanism involves lower information rents than efficient mechanisms, suggesting that there is at trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen. |
| Keywords: | Procurement, Interdependent valuations, multi-dimensional information, efficienct mechanisms, optimal mechanisms |
| JEL: | C72 D44 D82 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:11-03r&r=cta |
| By: | Friedrici, Karola; Hakenes, Hendrik |
| Abstract: | Research can be carried out in academia, or in the private sector, or as a mixture, for example as privately funded academic research. We develop a theoretical framework in which private research funding (PRF) transfers information about the value of a research project from the private sector into academia, in an incentive compatible way. PRF dominates neither pure academia nor private research. We derive predictions about the optimal sequence of research designs, and about the optimal duration of a project within different designs. For example, PRF is never optimal if not preceded by pure academical research. We compare our results with stylized facts. |
| Keywords: | Innovation, Research Funding, Research Finance, R\& D, Academia, University Finance. |
| JEL: | L33 H52 O31 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-481&r=cta |
| By: | Dietmar Fehr; Frank Heinemann; Aniol Llorente-Saguer |
| Abstract: | We present an experiment in which extrinsic information (signals) may generate sunspot equilibria. The underlying coordination game has a unique symmetric non-sunspot equilibrium, which is also risk-dominant. Other equilibria can be ordered according to risk dominance. We compare treatments with different salient, but extrinsic signals. By increasing the precision of private signals, we manipulate the available public information, which allows us to measure the force of extrinsic signals. We also vary the number of signals and combine public and private signals, allowing us to see how subjects aggregate available (and possibly irrelevant) information. Results indicate that sunspot equilibria emerge naturally if there are salient (but extrinsic) public signals. However, salient private signals of high precision may also cause sunspot-driven behavior, even though this is no equilibrium. The higher the precision of signals and the easier they can be aggregated, the more powerful they are in dragging behavior away from the risk-dominant to risk-dominated strategies. Sunspot-driven behavior may lead to welfare losses and exert negative externalities on agents, who do not receive extrinsic signals. |
| Keywords: | coordination games, strategic uncertainty, sunspot equilibria, irrelevant information |
| JEL: | C72 C92 D84 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-070&r=cta |
| By: | He, Qichun |
| Abstract: | We study how entrepreneurs and households share the monopolistic profit from inventions would affect growth. The share to the entrepreneur is called entrepreneur's inventive incentive (EII). First, there are two representative agents (a borrowing entrepreneur and a household who provides the financing capital), both making intertemporal savings decisions. Second, the two agents sign credit contracts to deal with asymmetric information. A larger EII elicits more entrepreneurs' effort, increasing the monopolistic profit from innovations (a "bigger cake" effect); it, however, leaves a smaller share of the cake to households. Initially, the former effect dominates, but beyond a point, the latter effect dominates. As the cake becomes bigger, if the creditor's share gets too small, her return (the product of the size of the cake and her share in the cake) may decrease and she would be less willing to save to finance R&D. Therefore, growth is an inverted-U function of EII. |
| Keywords: | Two Representative Agents; Credit Market Imperfection; Credit Contract; Entrepreneur's Inventive Incentive; Inverted-U |
| JEL: | O43 O31 O12 |
| Date: | 2011–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34450&r=cta |
| By: | Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich) |
| Abstract: | Bonus taxes have been implemented to prevent managers from excessive risk-taking. This paper analyzes the effects of taxing executives' bonuses in a principal-agent model. Our model shows that unintentionally the introduction of a bonus tax intensifies the manager's risk-taking behavior and decreases the manager's effort. The principal responds to a bonus tax by offering the manager a higher fixed salary but a lower incentive-based salary. |
| Keywords: | Principal-agent model, bonus tax, risk-taking, executive compensation, financial regulation |
| JEL: | H24 J30 M52 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iso:wpaper:0150&r=cta |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | This paper examines the combination of cash and share payments proposed in the corporate acquisition process. Particularly, it analyzes the conditions of an optimal mixed payment in the context of an asymmetry of information. Using a model, we highlight that setting the conditions of payment is an endogenous part of a takeover agreement between the acquirer and the target. Our contribution is to show how, in the acquisition process, the setting of the cash percentage is a key element for conveying private information on the gains of synergy and the gains that result from the transaction. In our model, we internalize asymmetries of information and possible exaggeration biases. Both will influence the joint setting of a mixed payment scheme. |
| Keywords: | mergers and acquisitions, information asymmetry, means of payment, contractual approach, synergy gains |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00636349&r=cta |
| By: | Mei Dong; Janet Hua Jiang |
| Abstract: | We study price posting with undirected search in a search-theoretic monetary model with divisible money and divisible goods. Ex ante homogeneous buyers experience match specific preference shocks in bilateral trades. The shocks follow a continuous distribution and the realization of the shocks is private information. We show that generically there exists a unique price posting monetary equilibrium. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers spend only when they have high enough preferences. As their preferences are higher, they spend more till they become cash constrained. Since inflation reduces the future purchasing power of money and the value of retaining money, buyers tend to spend their money faster in response to higher inflation. In particular, more buyers choose to spend money and buyers spend on average a higher fraction of their money. The model naturally captures the hot potato effect of inflation along both the intensive margin and the extensive margin. |
| Keywords: | Economic models; Inflation and prices |
| JEL: | D82 D83 E31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-22&r=cta |
| By: | Whelan, Kenneth T. (Cornell University); Ehrenberg, Ronald G. (Cornell University); Hallock, Kevin F. (Cornell University); Seeber, Ronald L. (Cornell University) |
| Abstract: | We evaluate potential determinants of enrollment in an early retirement incentive program for non-tenure-track employees at a large university. Using administrative records on the eligible population of employees not covered by collective bargaining agreements, historical employee count and layoff data by budget units, and public information on unit budgets, we find dips in per-employee finances in a budget unit during the application year and higher recent per employee layoffs were associated with increased probabilities of eligible employee program enrollment. Our results also suggest that, on average, employees whose salaries are lower than we would predict given their personal characteristics and job titles were more likely to enroll in the early retirement program. To the extent that employees' compensation reflect their productivity, as it should under a pay system in which annual salary increases are based on merit, this finding suggests that adverse selection was not a problem with the program. That is, we find no evidence that on average the "most productive" employees took the incentive. |
| Keywords: | retirement incentive program, adverse selection, layoff threat, university |
| JEL: | I23 J26 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6055&r=cta |
| By: | Mandell, Svante (VTI); Nyström, Johan (VTI) |
| Abstract: | Earlier theoretical models of unbalanced bidding in unit price contracts (UPC) ofter predict corner solutions, i.e. zero bids for unit prices of expected overextimated quantities. However, anecdotal evidence indicates a lack of zero bids in the actual contracts. We pursue a possible explanation for this anomaly in risk-aversion of the contractor. Using a simple model we show that a contractor with superior information may exploit this in the bidding process to increase her expectd revenue. However, in so doing she increases her risk exposure. If the contractor is risk-averse, she typically will avoid a corner solution to this risk vs. expected return trade-off. |
| Keywords: | Unbalanced bidding; risk; modelling; unit price contraction; public procurement |
| JEL: | D82 D86 H51 L51 |
| Date: | 2011–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2011_013&r=cta |
| By: | Kenneth T. Whelan; Ronald G. Ehrenberg; Kevin F. Hallock; Ronald L. Seeber |
| Abstract: | We evaluate potential determinants of enrollment in an early retirement incentive program for non-tenure-track employees of a large university. Using administrative record on the eligible population of employees not covered by collective bargaining agreements, historical employee count and layoff data by budget units, and public information on unit budgets, we find dips in per-employee finance in a budget unit during the application year and higher recent per employee layoffs were associated with increased probabiliites of eligible employee program enrollment. Our results also suggest, on average, that employees whose salaries are lower than we would predict given their personal characteristics and job titles were more likely to enroll in the early retirement program. To the extent that employees' compensation reflects their productivity, as it should under a pay system in which annual salary increases are based on merit, this finidng suggests that adverse selection was not a problem with the program. That is, we find no evidence that on average the "most productive" employees took the incentive. |
| JEL: | I23 J26 J33 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17538&r=cta |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | The leveraging of control is the possibility for the controlling shareholder to lower her direct participation in capital through a convergence of financial and economic interest with other shareholders or would-be shareholders in the firm. In this paper, the setting of a coalition contract is done by awarding stocks to managers and employees. This article analyses it, on one side, in a rationale of economic incentive and, on the other side, in a rationale of political coalition of the initial dominant shareholder with managers and employees. It is shown that the two logics are not opposite but complementary. The sharing of the private benefits between members of the new coalition is at the heart of a new implicit contract. The initial controlling shareholder "buys" efficient efforts by awarding a stake of capital to managers or employees, but also by allowing them to share a part of the private benefits and to join a new dominant group. Even if the effort function of the employees is not productive nor observable, a targeted broad diffusion of new stocks may still respect the coherence between an economic incentive rationale and a political substitution rationale. At the end, we introduce the idea of political management of the leverage of control. |
| Keywords: | Ownership structure, private benefits, stock ownership plans, employees' incentives, coalition contract, control |
| Date: | 2011–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00636608&r=cta |