|
on Contract Theory and Applications |
| By: | Arvidsson, Sara (VTI) |
| Abstract: | Contract-relevant information asymmetries are known to cause inefficien-cies in markets. The information asymmetry is largest in the beginning of the customer-insurer relationship but reduces over time; the longer a poli-cyholder stays with the insurer the more the insurer learns about the poli-cyholder’s risk. Two important characteristics of the market studied here imply that the information asymmetry may not be reduced for all policy-holders. First, insurers do not have access to traffic violations, which are predictors of risk since policyholders with traffic violations are more likely to report a claim. Second, the insurers do not share information, such as previous claims, which means that the policyholder can flee a poor claim record by switching insurer. Hence, there may be a selection of high risk customers who switch insurer more often, such that the information asymmetry in this group is never reduced. To test this, we compare infor-mation asymmetries in two groups of policyholders; new customers who stay with the insurer for a period or less (short term), and long-term cus-tomers who stay with the insurer for several periods (loyal). The results indicate that departing policyholders are disproportionately high risks that constitute an adverse selection of risks, while loyal policyholders constitute a propitious (favorable) selection of risks. |
| Keywords: | Asymmetric information; insurance; accidents; adverse selection; propitious selection |
| JEL: | D82 |
| Date: | 2011–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2011_002&r=cta |
| By: | Simone Galperti |
| Abstract: | I analyze common agency games in which the principals, and possibly the agent,have private information. I distinguish between games in which the principals delegate the fi nal decisions to the agent, and games in which they retain some decision power after offering their mechanisms. I show that,in contrast with mechanism design models with one informed Myerrson's Inscrutability Principle fails when there are many informed principals. I also find that, in contrast with common agency models with uninformed principals, the Delegation Principle (Menu Theorem) fails when principals are informed. I then focus on Perfect Bayesian Equilibria in which principals offer their mechanisms without randomizing. I characterize the outcomes of arbitrary games with delegation as outcomes of a new game in which principals offer menus and send cheap-talk signals. Next, I characterize the outcomes of arbitrary games without delegation as outcomes of a new game in which principals offer menus of direct revelation mechanisms, to which they truthfully report their types. JEL Code: C18, C53, D89 |
| Keywords: | Common agency, informed principals, Inscrutability Principle, Delegation Principle, menus, signals, direct revelation mechanisms. |
| Date: | 2011–30–31 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1541&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 D72 L32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tbswps:13&r=cta |
| By: | Alex Edmans; Itay Goldstein; Wei Jiang |
| Abstract: | This paper identifies a limit to arbitrage that arises from the fact that a firm's fundamental value is endogenous to the act of exploiting the arbitrage. Trading on private information reveals this information to managers and helps them improve their real decisions, in turn enhancing fundamental value. While this increases the profitability of a long position, it reduces the profitability of a short position -- selling on negative information reveals that firm prospects are poor, causing the manager to cancel investment. Optimal abandonment increases firm value and may cause the speculator to realize a loss on her initial sale. Thus, investors may strategically refrain from trading on negative information, and so bad news is incorporated more slowly into prices than good news. The effect has potentially important real consequences -- if negative information is not incorporated into stock prices, negative-NPV projects may not be abandoned, leading to overinvestment. |
| JEL: | G14 G34 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17582&r=cta |
| By: | Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| 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. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00639813&r=cta |
| By: | Robertas Zubrickas |
| Abstract: | We argue that job performance appraisal is an agency problem with asymmetric transfer values: an employee is paid in proportion to the rating received from his line manager, who only partially internalizes the resultant payroll cost. This asymmetry in rating valuations is based on evidence that managers are not fully accountable for payroll expense, with the degree of unaccountability increasing in fi rm size. We develop a nested agency model of economic organization of a fi rm with unaccountable managers, which in equilibrium obtains the firm-size wage effects the large-fi rm wage premium and inverse relationship between fi rm size and wage dispersion. |
| Keywords: | Compression of ratings, managerial incentives, soft budget constraint, firm-size wage effects, principal-agent model |
| JEL: | J30 D21 M52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:474&r=cta |
| By: | Nagore Iriberri (Universitat Pompeu Fabra); José Ramón Uriarte (UPV/EHU) |
| Abstract: | We study a society inside which two official languages, the majority language A and the minority language B, are in contact and compete for the same social functions. We propose a non-cooperative game to capture some features of this competitive situation. In the game, there are two types of players: the bilingual one who speaks both A and B and the monolingual one who speaks only A. The information about which type is each player is private. A real life situation captured by the game is that in many interactions bilingual players must decide under incomplete information about which language to use. One implication of this information structure is that while A satisfies the main properties of a public good, B does not. Another implication is that it may have dangerous consequences on the language diversity of the society. We show that in many equilibria bilingual players fail to coordinate in their preferred language and end up using the majority language A. |
| Date: | 2011–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:200624&r=cta |
| By: | Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Bjuland, Terje (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Øksendal, Bernt (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | The single auction equilibrium of Kyle's (1985) is studied, in which noise traders may be partially informed, or alternatively they can be manipulated. Unlike Kyle's assumption that the quantity traded by the noise traders is independent of the asset value, we assume that the noise traders are able to correlate their trade with the true price. This has several implications for the equilibrium, one being that the insider's expected profits decrease as the noise traders' ability to correlate positively improve. In the limit, the noise traders do not lose on average, and the insider makes zero expected profits. When the correlation is negative, we interpret this as manipulation. In this case the insider makes the highest expected profits, and the informativeness of prices is at its minimum. |
| Keywords: | Insider trading; asymmetric information; strategic trade; correlated trade; partially informed noise traders |
| JEL: | G00 |
| Date: | 2011–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2011_021&r=cta |
| By: | Kazuya Kamiya (Faculty of Ecocnomics, University of Tokyo); Meg Sato (Crawford School of Economics & Government, The Australian National University) |
| Abstract: | Holmstrom and Milgrom (1991) proposed a multitask principal-agent model in which the principal's utility is determined by several tasks the agent engages in. Their results depend on externalities between tasks and several assumptions related to the agent's effort. In this paper, we override certain assumptions (such as, the agent's effort can be negative and disutility is a non-increasing function of the effort up to some level) and obtain the similar outcomes in deriving fixed wage contracts and e¤ort allocation problems. We further introduce timing, outputs that are unverifiable (such as leadership and collegial work), and firm-specific knowledge as observed in actual labor markets and practices. This restructure also allows us to develop a multitask model without externalities, allowing us to study an optimal wage profile and find the optimal timing to sign a contract. Our model predicts that in industries where unverifiable outputs are valued, the more frequently the wage contract is renewed. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2011cf825&r=cta |
| By: | Hitoshi Matsushima (Faculty of Economics, University of Tokyo) |
| Abstract: | We investigate combinatorial exchanges as a generalization of combinatorial auctions and bilateral trades, where the multiple commodities to be traded are possessed by participants and a central planner as endowments. Private values, risk neutrality, and independent types are assumed. Efficiency, Bayesian Incentive Compatibility, and Interim Individual Rationality are required. We characterize the least upper bound of the central plannerfs expected revenue. We introduce a stability notion, namely, the marginal core, to the assumption that the central plannerfs endowment is unprotected. We show that the central planner has a deficit in expectation if and only if the marginal core is non-empty. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf258&r=cta |