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on Contract Theory and Applications |
| By: | Salvatore Piccolo (Università Cattolica di Milano and CSEF); Emanuele Tarantino (Università di Bologna and TILEC) |
| Abstract: | We study the effects of information sharing on optimal contracting in a vertical hierarchies model with moral hazard and effort externalities. The paper has three main objectives. First, we determine and compare the equilibrium contracts with and without communication. We identify how each principal relates her agent’s wage to the opponent’s performance when they share information about agents’ performances. It turns out that the type of effort externalities across organizations is the main determinant of the responsiveness of each agent’s reward to the opponent’s performance. Second, in order to throw novel light on the emergence of information sharing agreements, we characterize the equilibria of a non- cooperative game where principals first decide whether to share information and then offer contracts to their exclusive agents. We explore the implications of introducing certification costs and show that three types of equilibria may emerge depending on the nature and (relative) strength of effort externalities: principals bilaterally share information if agents’ effort choices exhibit strong complementarity; only the principal with stronger monitoring power discloses information in equilibrium for intermediate levels of effort’s complementarity; principals do not share information if efforts are substitutes and for low values of effort’s complementarity. Moreover, differently from the common agency framework studied in Maier and Ottaviani (2009), in our model a prisoner’s dilemma may occur when efforts are substitutes and certification costs are negligible: if a higher effort by one agent reduces the opponent’s marginal productivity of effort the equilibrium involves no communication although principals would jointly be better off by sharing information. Finally, the model also offers novel testable predictions on the impact of competition on the basic trade-off between risk and incentives, the effects of organizations’ asymmetries on information disclosure policies as well as on the link between corporate control and the power of incentives. |
| Keywords: | Competing Hierarchies, Information Sharing, Moral Hazard |
| Date: | 2011–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:294&r=cta |
| By: | Felipe Balmaceda |
| Abstract: | This paper studies the problem of how to allocate n =2 independent tasks among an ndogenously determined number of jobs in a setting with risk neutral workers subject to limited liability and ex-post asymmetric information. The main message is that firms narrow down the scope of their jobs to deal with workers’ incentives to game the performance system (workers’ incentives to work harder in tasks that are well rewarded ex-post and to underperform in tasks that are poorly rewarded). Firms’ incentives to narrow job scopes are diminished when workers are intrinsically motivated by moral standards and, in contrast to Holmström and Milgrom (1991), when the degree to which tasks are substitutes increases. JEL-Classification: J41, J24, D21. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:279&r=cta |
| By: | Amedeo Fossati (University of Genoa, Italy); Marcello Montefiori (University of Genoa, Italy) |
| Abstract: | This paper provides a theoretical model to analyse public funding of family elderly care when two severity type are present (the high and the low), under asymmetry of information and increasing costs. The social planner can redistribute between households, but because of incomplete information he is prevented from observing the type of household. The welfare optimum is characterized both under full and asymmetric information. Under complete information it turns out that the transfer has to be set in such a way to induce equality in the marginal utility of income. The direction of the transfer is no longer clear-cut (both under complete and asymmetric information). Specifically it cannot be ruled out that the transfer flows from the high severity / high cost type to the low severity /low cost type, where intuitively one would expect the opposite. |
| Keywords: | asymmetric information, adverse selection, elderly care, redistribution |
| JEL: | D82 I18 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:gea:wpaper:7/2011&r=cta |
| By: | Natalia Montinari (Max Planck Institute of Economics) |
| Abstract: | Whether friendship or competitive relationships deserve to be encouraged in the workplace is not obvious a priori. In this paper we derive the conditions under which a profit-aximizing employer finds it convenient to induce a rat race among workers exhibiting horizontal reciprocity in order to obtain underpaid or unpaid extra eort. We characterize the optimal compensation scheme under both symmetric and asymmetric information about workers'actions, and we also derive conditions for our result to hold in the presence of vertical reciprocity. |
| Keywords: | Extra Effort, Horizontal Reciprocity, Negative Reciprocity |
| JEL: | D83 J33 |
| Date: | 2011–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-052&r=cta |
| By: | Chen , Yehning (National Taiwan University); Hasan, Iftekhar (Lally School of Management, Rensselaer Polytechnic Institute, and Bank of Finland) |
| Abstract: | This paper demonstrates that subordinated debt (‘subdebt’ thereafter) regulation can be an effective mechanism for disciplining banks. Under our proposal, investors buy the subdebt of a bank only if they receive favourable information about the bank, and the bank is subject to a regulatory examination if it fails to issue subdebt. By forcing banks to be examined when they are likely weak, subdebt regulation not only reduces the chance that managers of distressed banks can take value-destroying actions to benefit themselves, but may also encourage banks to lower asset risk. It shows that subdebt regulation and bank capital requirements can be complements for alleviating the banks’ moral hazard problems. It also suggests that to make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require the subdebt to convert into the issuing bank’s equity when the government takes over or provides open assistance to the bank. |
| Keywords: | subordinated debt regulation; bank capital regulation; market discipline; moral hazard; contingent capital certificate |
| JEL: | G21 G28 |
| Date: | 2011–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2011_020&r=cta |
| By: | Herweg, Fabian; Müller, Daniel |
| Abstract: | We consider a monopolistic supplier’s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on thirddegree price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts—the usual legal practice in the EU and US— often is beneficial for social welfare. This result is shown to be robust even when the upstream supplier faces competition in the form of fringe supply. |
| Keywords: | Asymmetric Information; InputMarkets; Quantity Discounts; Price Discrimination; Screening; Vertical Contracting |
| JEL: | D43 L11 L42 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12414&r=cta |
| By: | Roland Benabou; Jean Tirole |
| Abstract: | This paper analyzes how private decisions and public policies are shaped by personal and societal preferences ("values"), material or other explicit incentives ("laws") and social sanctions or rewards ("norms"). It first examines how honor, stigma and social norms arise from individuals' behaviors and inferences, and how they interact with material incentives. It then characterizes optimal incentive-setting in the presence of norms, deriving in particular appropriately modified versions of Pigou and Ramsey taxation. Incorporating agents' imperfect knowledge of the distribution of preferences opens up to analysis several new questions. The first is social psychologists' practice of "norms-based interventions", namely campaigns and messages that seek to alter people’s perceptions of what constitutes "normal" behavior or values among their peers. The model makes clear how such interventions operate but also how their effectiveness is limited by a credibility problem, particularly when the descriptive and prescriptive norms conflict. The next main question is the expressive role of law. The choices of legislators and other principals naturally reflect their knowledge of societal preferences, and these same "community standards" are also what shapes social judgments and moral sentiments. Setting law thus means both imposing material incentives and sending a message about society's values, and hence about the norms that different behaviors are likely to encounter. The analysis, combining an informed principal with individually signaling agents, makes precise the notion of expressive law, determining in particular when a weakening or a strengthening of incentives is called for. Pushing further this logic, the paper also sheds light on why societies are often resistant to the message of economists, as well as on why they renounce certain policies, such as "cruel and unusual" punishments, irrespective of effectiveness considerations, in order to express their being "civilized". |
| JEL: | D64 D82 H41 K1 K42 Z13 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17579&r=cta |
| By: | Herweg, Fabian; Müller, Daniel |
| Abstract: | We extend Akerlof ’s (1970) “Market for Lemons” by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is at display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. The main finding is that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market. |
| Keywords: | Adverse Selection; Market for Lemons; Overconfidence |
| JEL: | D82 L15 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12411&r=cta |
| By: | Attila Ambrus; Eric Chaney; Igor Salitskiy |
| Abstract: | This paper uses ransom prices and time to ransom for over 10,000 captives rescued from two Barbary strongholds to investigate the empirical relevance of dynamic bargaining models with one-sided asymmetric information in ransoming settings. We observe both multiple negotiations that were ex ante similar from the uninformed party’s (seller’s) point of view, and information that only the buyer knew. Through reduced form analysis, we test some common qualitative predictions of dynamic bargaining models. We also structurally estimate the model in Cramton (1991), to compare negotiations in different Barbary strongholds. Our estimates suggest that the historical bargaining institutions were remarkably efficient, despite the presence of substantial asymmetric information. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-24&r=cta |
| By: | Gabriel Desgranges (THEMA - Université de Cergy-Pontoise); Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability is obtained when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability is obtained when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1. |
| Keywords: | Asymmetric information, common knowledge, eductive learning, rational expectations, rationalizability, volatility. |
| JEL: | C62 D82 D84 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11061&r=cta |
| By: | George-Marios Angeletos; Jennifer La'O |
| Abstract: | We study optimal monetary policy in an environment in which firms’ pricing and production decisions are subject to informational frictions. Our framework accommodates multiple formalizations of these frictions, including dispersed private information, sticky information, and certain forms of inattention. An appropriate notion of constrained efficiency is analyzed alongside the Ramsey policy problem. Similarly to the New-Keynesian paradigm, efficiency obtains with a subsidy that removes the monopoly distortion and a monetary policy that replicates flexible-price allocations. Nevertheless, “divine coincidence” breaks down and full price stability is no more optimal. Rather, the optimal policy is to “lean against the wind”, that is, to target a negative correlation between the price level and real economic activity. |
| JEL: | D61 D83 E32 E52 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17525&r=cta |
| By: | Ehrlich, Isaac (University at Buffalo, SUNY); Shin, Jong Kook (University at Buffalo, SUNY); Yin, Yong (University at Buffalo, SUNY) |
| Abstract: | By allowing for imperfectly informed markets and the role of private information, we offer new insights about observed deviations of portfolio concentrations in domestic relative to foreign risky assets, or "home bias", from what standard finance models predict. Our model ascribes the "bias" to endogenous information acquisition bolstered by investors' human capital. We develop discriminating hypotheses about the influence of "specific" and "general" human capital endowments and direct and opportunity costs of managing risky assets in determining whether to hold these assets, and how the assets' portfolio shares vary across investors and financial markets. These hypotheses are supported by numerical and econometric analyses of panel data from the US over 1992-2007, and 23 international financial markets over 2001-2007. The results indicate the existence of differences across countries in the degree to which home asset prices are "information-revealing", which may be relevant for fully understanding the global financial crisis of 2007-09. |
| Keywords: | risky assets, financial markets, home bias, human capital, private information, global financial crisis |
| JEL: | D82 F30 G11 G12 G15 J24 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6060&r=cta |
| By: | John Mc Breen; Florence Goffette-Nagot; Pablo Jensen |
| Abstract: | We simulate a closed rental housing market with search and matching frictions, in which both landlord and tenant agents may be imperfectly informed of the characteristics of the market. The model hypotheses are set so as to match a rent posting search model in the spirit of search models of the labor market. In the simulations, landlords decide what rent to post based on the expected effect of the rent on the time-on-the-market (TOM) required to find a tenant. Each tenant observes their idiosyncratic preference for a random offer and decides whether to accept the offer or continue searching, based on their imperfect knowledge of the distribution of offered rents. The steady state to which the simulation evolves shows price dispersion, nonzero search times and vacancies. We further assess the effects of altering the level of information for landlords. Landlords are better off when they have less information. In that case they underestimate the TOM and so the steady-state of the market moves to higher rents. However, when landlords with different levels of information are present on the market, the better informed are consistently better off. The model setup also allows the analysis of market dynamics. It is observed that dynamic shocks to the discount rate can provoke overshoots in rent adjustments due in part to landlords use of outdated information in their rent posting decision. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa11p1395&r=cta |
| By: | Paolo Pellizzari (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | We numerically determine the equilibrium trading strategies in a Continuous Double Auction (CDA). We consider heterogeneous and liquidity motivated agents, with private values and costs, that trade sequentially in random order under time constraints and are not aware of the type of the other agents in their session. We assume that they submit limit orders using a simple linear function of the current best quotes (ask and bid). In equilibrium, found using an Evolution Strategies algorithm, impatient agents do not always submit market orders, as in other models of CDAs, and agents take into account both sides of the book in their optimal decision. Finally, we provide a description of the price and of the ``small'' set of states of the equilibrium book. |
| Keywords: | Continuous double auction, dynamic equilibrium, optimal trad- ing strategies, evolution strategies. |
| JEL: | D44 D82 C63 C72 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2011_16&r=cta |
| By: | Matthias Kräkel |
| Abstract: | Participants of dynamic competition games may prefer to play with the rules of the game by systematically withholding e¤ort in the beginning. Such behavior is referred to as sandbagging. I consider a two-period con- test between heterogeneous players and analyze potential sandbagging of high-ability participants in the first period. Such sandbagging can be ben- eficial to avoid second-period matches against other high-ability opponents. I characterize the conditions under which sandbagging leads to a coordina- tion problem, similar to that of the battle-of-the sexes game. Moreover, if players' abilities have a stronger impact on the outcome of the first-period contest than e¤ort choices, mutual sandbagging by all high-ability players can arise. |
| Keywords: | ecoordination problem, dynamic contest, heterogeneous contestants, withholding e¤ort |
| JEL: | C72 D72 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse11_2012&r=cta |
| By: | David Andolfatto |
| Abstract: | Lagos and Wright (2005) demonstrate how the essential properties of a money-search model are preserved in an environment that is rendered highly tractable with the use of quasi-linear preferences. In this paper, I show that this same innovation can be applied to closely related environments used elsewhere in the literature that study insurance and credit markets under limited commitment and private information. The analysis demonstrates clearly how insurance, credit, and money are interrelated in terms of their basic functions. The analysis also leads to a heretofore neglected result pertaining to the Friedman rule. In particular, I find that the same frictions that render money essential may at the same time operate to render the Friedman rule infeasible. Thus, even if the Friedman rule is a desirable policy, an incentive-induced lower bound on the rate of deflation may nevertheless entail a strictly postive rate of inflation. |
| Keywords: | Money ; Credit |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-038&r=cta |