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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, and in this sense robust to, all possible private information structures that the agents may have. 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 knowledge about the private information refines the set of equilibrium predictions. We consider information sharing among firms under demand uncertainty and find newly optimal information policies via the Bayes correlated equilibria. Finally, we reverse the perspective and investigate the identification problem under concerns for robustness to private information. The presence of private information leads to set rather than point identification of the structural parameters of the game. |
| 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:1821r&r=cta |
| By: | Boone, Jan; Schottmüller, Christoph |
| Abstract: | This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms' cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare. |
| Keywords: | deregulation; procurement; specialization |
| JEL: | H75 L51 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8704&r=cta |
| By: | Olivella, Pau (Universitat Autonóma de Barcelona); Schroyen, Fred (Dept. of Economics, Norwegian School of Economics and Business Administration) |
| Abstract: | In this paper, we consider a population of ndividuals who differ in two dimensions: their risk type (expected loss) and their risk aversion. We solve for the profit maximizing menu of contracts that a monopolistic insurer puts out on the market. First, we …nd that it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, we show that when the average man and woman differ only in risk aversion, gender discrimination may lead to a Pareto improvement. |
| Keywords: | insurance markets; asymmetric information; screening; gender discrimination; positive correlation test. |
| JEL: | D82 G22 |
| Date: | 2011–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2011_019&r=cta |
| By: | Boone, J.; Schottmuller, C. (Tilburg University, Center for Economic Research) |
| Abstract: | This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms’ cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare. |
| Keywords: | procurement;specialization;deregulation. |
| JEL: | H75 L51 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011131&r=cta |
| By: | Roi Zultan (Department of Economics, Ben-Gurion University of the Negev, Beer-Sheva 84105, Israel); Eva-Maria Steiger |
| Abstract: | Transparency in teams can facilitate cooperation. We study contribution decisions by agents when previous decisions can be observed. We find that an information chain, in which each agent directly observes only the decision of her immediate predecessor, is at least as effective as a fully-transparent protocol in inducing cooperation under increasing returns to scale. In a comparable social dilemma, the information chain leads to high cooperation both in early movers when compared to a non-transparent protocol and in late movers when compared to a fully-transparent protocol. we conclude that information chains facilitate cooperation by balancing positive and negative reciprocity. |
| Keywords: | team production, public goods, incentives, externality, information, transparency, conditional cooperation |
| JEL: | C72 C92 D21 J31 M52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1108&r=cta |
| By: | Todd R. Kaplan (Department of Economics, University of Haifa, Israel.); Bradley J. Ruffle Author-X-Name-Bradley J. (Department of Economics, Ben-Gurion University, Beer Sheva, Israel.) |
| Abstract: | We introduce a two-player, binary-choice game in which both players have a privately known incentive to enter, yet the combined surplus is highest if only one enters. Repetition of this game admits two distinct ways to cooperate: turn taking and cutoffs, which rely on the player’s private value to entry. A series of experiments highlights the role of private information in determining which mode players adopt. If an individual’s entry values vary little (e.g., mundane tasks), taking turns is likely; if these potential values are diverse (e.g., difficult tasks that differentiate individuals by skill or preferences), cutoff cooperation emerges. |
| JEL: | C90 Z13 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1105&r=cta |
| By: | Ufuk Akcigit (Department of Economics, University of Pennsylvania); Qingmin Liu (Department of Economics, University of Pennsylvania) |
| Abstract: | Technological progress is typically a result of trial-and-error research by competing firms. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be dead ends. Consequently, technological progress is slowed down, and the society benefits from innovations with delay, if ever. To study this prevalent problem, we build a tractable two-arm bandit model with two competing firms. The risky arm could potentially lead to a dead end and the safe arm introduces further competition to make firms keep their dead-end findings private. We characterize the equilibrium in this decentralized environment and show that the equilibrium necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety - an early abandonment of the risky project. Finally, we design a dynamic mechanism where firms are incentivized to disclose their actions and share their private information in a timely manner. This mechanism restores efficiency and suggests a direction for welfare improvement. |
| Keywords: | Learning, Two-arm Bandit, R&D Competition, Dead-end Inefficiency, Trial-and-error |
| JEL: | O31 D83 D92 |
| Date: | 2011–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-038&r=cta |
| By: | Ella Segev (Department of Industrial Engineering and Management,Ben-Gurion University of the Negev, Israel); Aner Sela (Economics Department, Ben-Gurion University of the Negev, Ben-Gurion University of the Negev, Israel) |
| Abstract: | We study a sequential (Stackelberg) all-pay auction with two contestants who are privately informed about a parameter (ability) that affects their cost of effort. Contestant 1 (the fi?rst mover) exerts an effort in the fi?rst period, while contestant 2 (the second mover) observes the effort of contestant 1 and then exerts an effort in the second period. Contestant 2 wins the contest if his effort is larger than or equal to the effort of contestant 1; otherwise, contestant 1 wins. We characterize the unique subgame perfect equilibrium of this sequential all-pay auction and analyze the use of head starts to improve the contestants' performances. We also study this model when contestant 1 exerts an effort in the fi?rst period which translates into an observable output but with some noise. We study two variations of this model where contestant 1 either knows or does not know the realization of the noise before she chooses her effort. Contestant 2 does not know the realization of the noise in both variations. For both variations, we characterize the subgame perfect equilibrium and investigate the effect of a random noise on the contestants' performance. |
| Keywords: | Sequential all-pay auctions, head starts, noisy outputs. |
| JEL: | D44 O31 O32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1106&r=cta |
| By: | Chong Huang (Department of Economics, University of Pennsylvania) |
| Abstract: | How does the central bank's incentive to build a reputation affect speculators' ability to coordinate and the likelihood of the devaluation outcome during speculative currency crises? What role does market information play in speculators' coordination and the central bank's reputation building? I address these questions in a dynamic regime change game that highlights the interaction between the central bank's reputation building and speculators' individual learning. On the one hand, the central bank has private information about its value from the currency peg and decides whether to maintain it. By defending against speculative attacks, it can build a reputation of defending, which may deter future attacks. On the other hand, speculators individually learn the central bank's value, and such learning may encourage speculators to coordinate an attack. I show that though learning makes the central bank's value approximate common knowledge over time, there is a unique equilibrium when learning is slow. In this equilibrium, no speculator attacks and the central bank sustains the currency peg forever, because the central bank obtains commitment power through the incentive to build a reputation. When learning is fast, there may be equilibria with attacks. In any equilibrium with attacks, the onset of the attack depends on the entire learning process. Once speculators attack, they attack frequently and infinitely often. Consequently, the central bank has no incentive to build a reputation and abandons the currency peg almost surely. |
| Keywords: | Speculative attacks, Reputation, Coordination, Common Learning |
| JEL: | D83 D84 F31 G01 |
| Date: | 2011–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-039&r=cta |
| By: | Socorro, M. Pilar.; De Rus, Ginés |
| Abstract: | Public infrastructure investment is usually co-financed by supranational organizations. The selection of projects is supposed to be decided using the information provided by conventional cost-benefit analysis. Nevertheless, we show that the type of institutional design regarding the financing mechanism affects the incentives of national governments to reduce costs and increase revenues, affecting project selection, the infrastructure capacity, the choice of technology, and the type of contract used for the construction and operation of projects. With a total cost-plus financing mechanism there is no incentive in being efficient and the price charged for the use of the new infrastructure is zero, the market quantity excessive, and the level of supranational financing disproportionate. In contrast, with a sunk cost-plus financing mechanism social optimal pricing is always implemented, though there is no incentive in being efficient. Finally, with a fixed-price financing mechanism the maximal efficiency may be achieved, and the socially optimal pricing is always implemented. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2011-13&r=cta |
| By: | Fahn, Matthias |
| Date: | 2011–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:dissen:13750&r=cta |
| By: | Ian Christensen; Césaire Meh; Kevin Moran |
| Abstract: | This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority. |
| Keywords: | Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy |
| JEL: | E44 E52 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1140&r=cta |
| By: | Roi Zultan (Department of Economics, Ben-Gurion University of the Negev, Beer-Sheva 84105, Israel) |
| Abstract: | The Aumann (1990) conjecture states that cheap-talk messages do not necessarily help to coordinate on efficient Nash equilibria. In an experimental test of Aumann’s conjecture, Charness (2000) found that cheap-talk messages facilitate coordination when they precede the action, but not when they follow the action. Standard game-theoretical modeling abstracts from this timing effect, and therefore cannot account for it. To allow for a formal analysis of the timing effect, I study the sequential equilibria of the signaling game in which the sender is modeled as comprising two selves: an acting self and a signaling self. I interpret Aumann’s argument in this context to imply that all of the equilibria in this game are ‘babbling’ equilibria, in which the message conveys no information and does not affect the behavior of the receiver. Using this framework, I show that a fully communicative equilibrium exists—only if the message precedes the action but not when the message follows the action. In the latter case, no information is transmitted in any equilibrium. This result provides a game-theoretical explanation for the puzzling experimental results obtained by Charness (2000). I discuss other explanations for this timing-of-message effect and their relationship to the current analysis. |
| Keywords: | pre-play communication, Nash equilibrium, coordination games, multiple selves |
| JEL: | A13 C72 C91 D82 D84 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1109&r=cta |
| By: | Hanna Halaburda (Strategy Unit, Harvard University); Yaron Yehezkel (The Recanati Graduate School of Business Administration, Tel Aviv University) |
| Abstract: | In the context of platform competition in a two-sided market, we study how ex-ante uncertainty and ex-post asymmetric information concerning the value of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which result in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, that bring major technological innovations to the market. |
| Keywords: | asymmetric information, platform competition, exclusive dealing, technology adoption |
| JEL: | L15 L41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1105&r=cta |
| By: | Häseler, Sönke |
| Abstract: | Over the last ten years, organisations such as the IMF have launched several initiatives to change market practice with respect to sovereign bond contract drafting to ease restructuring after defaults. The first of these, the universal adoption of collective action clauses, was embraced by the market after some hesitation. Another proposal - the more widespread appointment of trustees to represent bondholders in times of crisis, to centralise enforcement action against the debtor and thus to facilitate debt relief - has so far failed to have the desired impact. Amongst other potential reasons for this failure, the argument has been made that to vest enforcement rights in the trustee, as opposed to individual bondholder rights, would be to reduce the deterrence against opportunistic defaults and thus to exacerbate moral hazard. Using a sample of secondary market bond spreads and information on default status, this paper assesses empirically whether sovereign bonds issued under a trust structure indeed carry a higher default risk. It finds no systematic evidence of either a spread premium or higher actual default rates for bonds with collective enforcement rights. |
| Keywords: | trustee; fiscal agent; sovereign bonds; default; moral hazard; collective action clauses |
| JEL: | K33 F34 K12 |
| Date: | 2010–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35332&r=cta |
| By: | Nicholas Ziros |
| Abstract: | This article characterizes the set of correlated equilibria that result from open negotiations, which players make prior to playing a strategic game. A negotiation-proof correlated equilibrium is defined as a correlated strategy in which the negotiation process among all of the players prevents the formation of any improving coalitional deviation. Additionally, this notion of equilibrium is adapted to general games with incomplete information. |
| Keywords: | Correlated equilibrium, coalitions, negotiation, incomplete information |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:14-2011&r=cta |
| By: | Manuel Förster (Université Paris I); Frank Riedel (Institute of Mathematical Economics, Bielefeld University) |
| Abstract: | In a recent paper, Jäger, Metzger, and Riedel (2011) study communication games of common interest when signals are simple and types complex. They characterize strict Nash equilibria as so–called Voronoi languages that consist of Voronoi tesselations of the type set and Bayesian estimators on the side of receivers. In this note, we introduce conflicts of interest in the same setting. We characterize strict Nash equilibria as distorted Voronoi languages that use all messages. For large conflicts, such informative equilibria need not exist. If the bias is sufficiently small, however, these equilibria do exist. This establishes the robustness of the results in Jäger, Metzger, and Riedel (2011) to biased interests. We finally give examples of strict Nash equilibria, one of them using simulations to illustrate an equilibrium with many messages and non-uniformly distributed types. |
| Keywords: | Cheap Talk, Signaling Game, Communication Game, Voronoi tesselation, Conflict of Interest |
| JEL: | C72 D82 D83 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:458&r=cta |
| By: | Gustavo Silva Araújo; Claudio Henrique da Silveira Barbedo; José Valentim Machado Vicente |
| Abstract: | This study analyzes the adverse selection cost component embedded in the spreads of Brazilian stocks. We show that it is higher than in the U.S. market and presents an intraday U-shape pattern (i.e., it is higher at the beginning and at the end of the day). In addition, we investigate the relationships of the adverse selection cost with firm’s characteristics. We find that stocks listed in the highest corporate governance levels do not have the lowest costs. On the other hand, the liquidity of shares, the trade size and the market value of the firm are directly correlated with this cost. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:263&r=cta |
| By: | Slavica, Stevanovic; Ivana, Simeunovic |
| Abstract: | In this paper we have emphasized on the importance of the management incentives and their impact on company’s efficiency and effectiveness of corporate governance. Company owners, who regard managerial incentives as an investment rather than as a financial outlay, could expect a commitment of the managers to the interests of the company, achievement of desired results and business prosperity. At the same time, the potential conflict of interests between company’s shareholders and management could be solved by allocation of appropriate management incentives. As the effectiveness of management incentives depends on their good evaluation, it is important to identify potential indicators and to measure their consistency with the value created to business owners. Moreover we have identified financial measures for manager’s contribution to the company operations, used as a criterion for entitlement to managers’ incentives. Paper ends by assessing the need to adjust the company to changing global financial environment, with a special reference to the changes of incentives’ policy in Serbian companies, and the most important motivational factors affecting Romanian employees during the current period of global financial crisis. |
| Keywords: | Management Incentives; Principal-Agent Problem; Incentive Schemes; Company Performance |
| JEL: | J32 M12 M52 |
| Date: | 2011–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35364&r=cta |
| By: | Schottmuller, C. (Tilburg University, Center for Economic Research) |
| Abstract: | Some results can be readily applied. For example, overinsurance, i.e. insurance levels above first best as in 'Cadillac' insurance plans, can be rationalized. In a non-linear pricing framework, the model also provides an explanation for marginal prices below marginal costs as observed in flat rate offers. |
| Keywords: | adverse selection;single crossing;Spence-Mirrlees condition;global incentive compatibility. |
| JEL: | D82 D86 L11 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011123&r=cta |
| By: | Gregory Lewis; Patrick Bajari |
| Abstract: | Procurement projects often encounter unanticipated problems. Deadlines and penalties are one important instrument used to incentivize contractors to adapt their plans. We develop a theory of highway procurement in which contractors must modify their construction rate following a productivity shock. We model how time incentives affect the work rate and time taken, characterizing the efficient contract design. Using new micro-level data from Minnesota that includes day-by-day information on work plans, actual outcomes and delays, we find strong evidence supporting the theory. As an application, we build an econometric model that endogenizes adaptation, and simulate how different incentive structures affect outcomes and the variance of contractor payments. Accounting for the traffic delays caused by construction, switching to a more efficient design would substantially increase welfare without substantially increasing risk. |
| JEL: | D86 H57 L92 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17647&r=cta |