|
on Contract Theory and Applications |
| By: | Jeanne Hagenbach (Ecole Polytechnique - Ecole Polytechnique); Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We characterize sufficient conditions for full and decentralized disclosure of hard information in organizations with asymmetrically informed and self interested agents with quadratic loss functions. Incentive conflicts arise because agents have different (and possibly interdependent) ideal actions and different incentives to coordinate with each others. A fully revealing sequential equilibrium exists in the disclosure game if each player's ideal action is monotonic in types and types are independently distributed, but may fail to exist with non-monotonic ideal actions or correlated types. When biases between players' ideal actions are constant across states, complete information is the Pareto dominant information structure. In that case, there is a fully revealing sequential equilibrium in which informational incentive constraints are satisfied ex-post, so it exists for all possible prior beliefs, even when players' types are correlated. This existence result applies whether information disclosure is private or public, and is extended to partial certifiability of information. |
| Keywords: | Certifiable types ; Coordination ; Information disclosure ; Multi-divisional organizations |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00652279&r=cta |
| By: | Ohad Kadan (Washington University in St. Louis - Olin School of Business); Philip J. Reny (University of Chicago - Department of Economics); Jeroen Swinkels (Northwestern University - Kellogg School of Management) |
| Abstract: | We provide general conditions under which principal-agent problems admit mechanisms that are optimal for the principal. Our result covers as special cases those in which the agent has no private information –i.e., pure moral hazard –as well as those in which the agent’s only action is a participation decision – i.e., pure adverse selection. We allow multi-dimensional actions and signals, as well as both …nancial and non-…nancial rewards. Beyond measurability, we require no a priori restrictions on the space of mechanisms. Consequently, our optimal mechanisms are optimal among all measurable mechanisms. A key to obtaining our result is to permit randomized mechanisms. We also provide conditions under which randomization is unnecessary. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2011-002&r=cta |
| By: | Cabrales, Antonio; Charness, Gary |
| Abstract: | We devise an experiment to explore optimal contracts in a hidden-information context. A principal offers one of three possible contract menus to a team of two agents of unknown skill levels, with both agents’ participation needed for production. We observe numerous rejections of the more lopsided menus, and principals respond by offering more favorable menus. Apart from rejections,wesee almost complete separation in agent choices according to the agent types. Behavior converges towards a consensus in which one of the more equitable menus is proposed and agents accept a contract. The consensus menu differs across two treatments in which we vary the payoffs resulting from a rejection. We find strong evidence of social learning by low-skill agents (but only for low-skilled agents), in that a low-skill agent is more likely to reject a contract menu if her teammate rejected a contract menu in the previous period. In addition, low-skilled agents have a particularly adverse reaction to reduced wage offers. |
| Keywords: | Experiment; Hidden information; Optimal contract; Production team; Wage rigidity; |
| JEL: | A13 B49 C91 C92 D21 J41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/12809&r=cta |
| By: | Liu, Taoxiong; Zhou, Bihua |
| Abstract: | We propose an extended principal-agent model considering employee commitment and describe how to motivate committed agent, who not only shows regard for his own income but also cares the organizational benefit. The principal also would like to provide support to such an agent and his utility depends on both the final profit and the payoff to the agent. There are some interesting insights into the characteristic of optimal contracts: First, commitment is an effective motivator and committed employee needs less monetary inducement to perform his job well than one who not. More specifically, undifferentiated pay is sufficient in incentivizing committed agent to implement high effort in some cases. Second, commitment and wage differential are substitutable to each other in the optimal incentive compensation design. Third, commitment is not always good for organizational efficiency when the increase in employee commitment relies on the principal’s support. Our model's finding is consistent with employee incentive in some organizations, and also help to incentive mechanism design under wages differential constraints and understanding excessive compensation. |
| Keywords: | Commitment; Organizational support; Optimal Incentive; Contract |
| JEL: | D23 J33 |
| Date: | 2011–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35550&r=cta |
| By: | Serra Garcia, M.; Damme, E.E.C. van; Potters, J.J.M. (Tilburg University, Center for Economic Research) |
| Abstract: | We compare communication about private information to communication about actions in a one- shot 2-person public good game with private information. The informed player, who knows the exact return from contributing and whose contribution is unobserved, can send a message about the return or her contribution. Theoretically, messages can elicit the uninformed player's contribution, and allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, however, we find that free-riding depends on the language: the informed player free-rides less, and thereby lies less frequently, when she talks about her contribution than when she talks about the return. Further experimental evidence indicates that it is the promise component in messages about the contribution that leads to less free-riding and less lying. |
| Keywords: | Information transmission;lying;communication;experiment. |
| JEL: | C72 D82 D83 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011139&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:11.08&r=cta |
| By: | Winter, Jennifer L. |
| Abstract: | This paper examines how concealing the existence of private information affects winning bids in a large, well-functioning auction environment. Standard auction theory suggests firms should wish to advertise the existence of private information in order to reduce the bids of their competitors (Milgrom and Weber, 1982). There are a limited number of empirical studies on how concealing the existence of private information affects bids. Instead, most articles test for the presence of private information, rather than the effect of revealing or concealing its existence. An institutional feature of the auctions for petroleum and natural gas leases in Alberta is that firms can hire a broker to bid on their behalf, thereby hiding their identity. Anecdotal evidence suggests rms use brokers to conceal information from their competitors. In order to test the predictions of standard theory, I develop a model of bidding behaviour incorporating the choice to use a broker. The model provides an explicit relationship between broker usage, firms' private information, and equilibrium bids. Using a newly constructed dataset, I estimate this relationship. I find results consistent with standard theory: bids are higher when brokers are used to hide the existence of some private information. |
| Keywords: | exhaustible resources; auctions; strategic behaviour; private information |
| JEL: | Q32 Q38 D44 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35560&r=cta |
| By: | Jonathan Chiu; Thorsten V. Koeppl |
| Abstract: | We study the trading dynamics in an asset market where the quality of assets is private information of the owner and finding a counterparty takes time. When trading of a financial asset ceases in equilibrium as a response to an adverse shock to asset quality, a large player can resurrect the market by buying up lemons which involves assuming financial losses. The equilibrium response to such a policy is intricate as it creates an announcement effect: a mere announcement of intervening at a later point in time can cause markets to function again. This effect leads to a gradual recovery in trading volume, with asset prices converging non-monotonically to their normal values. The optimal policy is to intervene immediately with minimal size when markets are deemed important and losses are small. As losses increase and the importance of the market declines, the optimal intervention is delayed and it can be desirable to rely more on the announcement effect by increasing the size of the intervention. Search frictions are important for all these results. They compound adverse selection, making a market more fragile with respect to a classic lemons problem. They dampen the announcement effect and cause the optimal policy to be more aggressive, leading to an earlier intervention at a larger scale. |
| Keywords: | Financial markets, Financial stability |
| JEL: | G1 E6 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-30&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 modelwith 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. <P> |
| Keywords: | Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy, |
| JEL: | E44 E52 G21 |
| Date: | 2011–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-76&r=cta |
| By: | Jacob K. Goeree; Alexey Kushnir |
| Abstract: | An important result in convex analysis is the duality between a closed convex set and its support function. We exploit this duality to develop a novel geometric approach to mechanism design. For a general class of social choice problems we characterize the feasible set, which is closed and convex, and its support function. We next provide a geometric interpretation of incentive compatibility and refine the support function to include incentive constraints using arguments from majorization theory. The optimal mechanism can subsequently be derived from the support function using Hotelling's lemma. We first assume that values are linear in types and types are independent, private, and one-dimensional. For this environment we provide a simple geometric proof that Bayesian and dominant strategy implementation are equivalent by showing that the feasible sets that remain after imposing either type of incentive constraints coincide. Furthermore, we derive the optimal mechanism for any social choice problem and any linear objective, including revenue and surplus maximization. As an illustration, we determine the optimal multi-unit auction for a class of value functions that exhibit decreasing marginal valuations. Other types of constraints, such as capacity constraints and budget balancedness, can be interpreted geometrically as well, which facilitates a unified approach to a range of social choice problems, including auctions, bargaining, and public goods provision. We discuss how our geometric approach extends to environments with value interdependencies, non-linear valuations, and correlated or multi-dimensional types. Specifically, we illustrate that with interdependent valuations the equivalence between Bayesian and dominant strategy implementation breaks down, and our approach naturally produces the second-best outcomes for both types of incentive constraints. |
| Keywords: | Convex sets, support functions, majorization, Hotelling's lemma, mechanism design, revenue equivalence, BIC-DIC equivalence, multi-unit auctions, bargaining, public goods provision, capacity constraints, budget balance, interdependent values, second best efficiency |
| JEL: | D44 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:056&r=cta |
| By: | Dunia López-Pintado (Department of Economics, Universidad Pablo de Olavide; CORE, Université catholique de Louvain); Juan D. Moreno-Ternero (Department of Economics, Universidad Pablo de Olavide; CORE, Université catholique de Louvain) |
| Abstract: | We study optimal wage schemes for teams, under the presence of budget constraints, in a model in which agents’ effort decisions are mapped into the probability of the team’s success. We show that (first-best) efficiency can only be attained with complex contracts that are vulnerable to ex post manipulations and off-equilibrium path violations of the budget constraints. Within the domain of simple (and budget-balanced) contracts, an interesting scheme, which treats equal members of the team unequally, emerges as optimal |
| Keywords: | Team production, budget constraints, efficiency, manipulability, impartiality |
| JEL: | C70 D23 D78 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:11.11&r=cta |
| By: | Maria Saez Marti |
| Abstract: | I study the effect of fatigue and innate ability on performance in a model with incomplete contracts, lumpy tasks requiring multiple periods of work and stochastic productivity shocks. I find that increasing ability or reducing fatigue does not lead necessarily to more productive efficiency, since it may exacerbate the incentive for agents take "too much" on-the-job leisure. In a world with heterogenous agents, the problem may be ameliorated by the introduction of a dual labour market with free-lancers (who can take breaks at their discretion) and regular workers (who work on a fixed schedule). |
| Keywords: | Breaks, leisure, productivity, freelancing |
| JEL: | D0 D8 D9 M51 M55 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:055&r=cta |
| By: | Barlo, Mehmet; Ozdogan, Ayca |
| Abstract: | This study analyzes a continuous-time N-agent Brownian hidden-action model with exponential utilities, in which agents' actions jointly determine the mean and the variance of the outcome process. In order to give a theoretical justi¯cation for the use of linear contracts, as in Holmstrom and Milgrom (1987), we consider a variant of its generalization given by Sung (1995), into which collusion and renegotiation possibilities among agents are incorporated. In this model, we prove that there exists a linear and stationary optimal compensation scheme which is also immune to collusion and renegotiation. |
| Keywords: | Principal-agent problems; moral hazard; linear contracts; continuous-time model; Brownian motion martingale method; collusion;; renegotiation; team |
| JEL: | D86 D82 C61 C73 |
| Date: | 2011–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35548&r=cta |
| By: | Iversen, Vegard Iversen (University of Manchester); Torsvik, Gaute (Department of Economics, University of Bergen) |
| Abstract: | Abstract: Workplace referrals may resolve incentive problems that arise due to incomplete contracts. We use an in-depth primary data set covering low- and unskilled migrants from Western Uttar Pradesh (India), to examine this and alternative explanations for referral-based recruitment. We find little evidence of referral screening for unobservable worker traits, but some support for a hypothesis of referral as a mechanism to enforce workforce discipline. Two observations back this conjecture: the high prevalence of strong kinship ties between referees and new recruits and that those who recruit are in more ‘prestigious’ jobs and therefore have higher stakes vis-à-vis their employer. These main findings are exposed to robustness checks to rule out rival explanations: that entry through a workplace insider merely reflects privileged access to job vacancy information; that workplace clustering results from preferences for working together or that the higher prevalence of referral for very young migrants that we observe may reflect that referral has an insurance dimension. |
| Keywords: | Work Migration; Social Networks; Screening; Moral Hazard |
| JEL: | J24 J61 R23 Z13 |
| Date: | 2011–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bergec:2011_014&r=cta |
| By: | Michele Dell'Era; Luis Santos-Pinto |
| Abstract: | This paper studies the impact of entrepreneurial overconfidence on self-financing and capital-market efficiency. We generalize Rochet and Freixas (2008) model of competitive capital markets with adverse selection by assuming some entrepreneurs are overconfident and others underconfident. We show that the existence of biased entrepreneurs lowers the equilibrium fraction of projects' self-financing. We find that entrepreneurial overconfidence reduces capital-market effciency when (i) no entrepreneur is underconfident or (ii) risk aversion is low and the ratio of overconfident to underconfident entrepreneurs is high. However, overconfidence improves capital-market efficiency when risk aversion is high and the ratio of overconfident to underconfident entrepreneurs is moderate. |
| Keywords: | signaling; overconfidence; market efficiency; self-finance |
| JEL: | D82 G11 G14 G32 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:11.06&r=cta |
| By: | Ponzetto, Giacomo AM |
| Abstract: | Protectionism enjoys surprising popular support, in spite of deadweight losses. At the same time, trade barriers appear to decline with public information about protection. This paper develops an electoral model with heterogeneously informed voters which explains both facts and predicts the pattern of trade policy across industries. In the model, each agent endogenously acquires more information about his sector of employment. As a result, voters support protectionism, because they learn more about the trade barriers that help them as producers than those that hurt them as consumers. In equilibrium, asymmetric information induces a universal protectionist bias. The structure of protection is Pareto inefficient, in contrast to existing models. The model predicts a Dracula effect: trade policy for a sector is less protectionist when there is more public information about it. Using a measure of newspaper coverage across industries, I find that cross-sector evidence from the United States bears out my theoretical predictions. |
| Keywords: | Dracula effect; Imperfect information; Media coverage; Pareto inefficiency; Protectionism; Voters |
| JEL: | D72 D83 F13 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8726&r=cta |
| By: | Urs Fischbacher (Department of Economics, University of Konstanz, Konstanz, Germany; Thurgau Institute of Economics, Kreuzlingen, Switzerland); Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); M. Vittoria Levati (Max Planck Institute of Economics, Strategic Interaction Group; Department of Economics, University of Verona) |
| Abstract: | Participants in a public goods experiment receive private or common signals regarding the so-called "point of no return", meaning that if the group's total contribution falls below this point, all payoffs are reduced. An individual faces the usual conflict between private and collective interests above the point of no return, while he incurs the risk of damaging everyone by not surpassing the point. Our data reveal that contributions are higher if the cost of not reaching the threshold is high. In particular if the signal is private, many subjects are not willing to provide the necessary contribution. |
| Keywords: | Public goods, provision point mechanism, experiments, reduction factor, signal |
| JEL: | H41 C92 C72 |
| Date: | 2011–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-059&r=cta |
| By: | Stolper, Anno |
| Abstract: | It is often argued that certifiers have an incentive to offer inflated certificates, although they deny it. In this paper, we study a model in which a certifier is paid by sellers, and may offer them inflated certificates, but incurs costs if doing so. We find that the certifier may face a commitment problem: The certifier offers inflated certificates if the costs of offering the first inflated certificate are lower than the sellers' willingness-to-pay for it. However, in equilibrium, the buyers cannot be fooled. The certifier would hence make a higher profit if the certifier did not offer inflated certificates and the buyers believed it. The number of inflated certificates, which the certifier offers in equilibrium, depends on the costs of offering inflated certificates. Yet, the certifier may oppose an increase in the costs of offering inflated certificates. We show that whether a certifier welcomes tighter regulation or lobbies against it, may depend on whether the new regulation only imposes higher costs, or also reduces the certifier's commitment problem significantly. |
| Keywords: | Certification; commitment problem; credibility |
| JEL: | C72 D82 G24 L15 M42 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12523&r=cta |
| By: | Viral V. Acharya; Bart M. Lambrecht |
| Abstract: | We consider a setting in which insiders have information about income that outside shareholders do not, but property rights ensure that outside shareholders can enforce a fair payout. To avoid intervention, insiders report income consistent with outsiders' expectations based on publicly available information rather than true income, resulting in an observed income and payout process that adjust partially and over time towards a target. Insiders under-invest in production and effort so as not to unduly raise outsiders' expectations about future income, a problem that is more severe the smaller is the inside ownership and results in an "outside equity Laffer curve". A disclosure environment with adequate quality of independent auditing mitigates the problem, implying that accounting quality can enhance investments, size of public stock markets and economic growth. |
| JEL: | D82 D92 G32 G35 M41 M42 O43 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17696&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:bgse12_2012&r=cta |
| By: | Federico Etro (Department of Economics, University Of Venice Cà Foscari); Laura Pagani (Department of Economics, University Of Milan, Bicocca); ; |
| Abstract: | We study the XVII century market for figurative paintings in Italy, analyzing original contracts between patrons and artists: this is one of the first manufacturing markets for which econometric evidence of the basic laws of economics can be found. Size of paintings, expected quality, type of commissions and aggregate shocks affect prices as expected. We find evidence of contractual solutions to moral hazard problems in the patron-artist relation: since quality was not negotiable, prices were made conditional on correlated variables such as the number of figures depicted. We find evidence of price equalization between high and low demand destinations due to endogenous mobility of the painters (or the paintings). We also provide support for the Galenson hypothesis of a positive relation between age of experimental artists and quality as priced by the market. |
| Keywords: | Art market, Moral hazard, Endogenous market structures, Galenson hypothesis |
| JEL: | Z11 N0 D4 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2011_22&r=cta |
| By: | Luis Santos-Pinto |
| Abstract: | I extend Spence's (1973) signaling model by assuming some workers are overconfident - they underestimate their marginal cost of acquiring education - and some are underconfident. Firms cannot observe workers' productive abilities and beliefs but know the fractions of high-ability, overconfident, and underconfident workers. I find that biased beliefs lower the wage spread and compress the wages of unbiased workers. I show that gender differences in self-confidence can contribute to the gender pay gap. If education raises productivity, men are overconfident, and women underconfident, then women will, on average, earn less than men. Finally, I show that biased beliefs can improve welfare. |
| Keywords: | signaling; education; self-confidence; wage compression; gender pay gap |
| JEL: | D03 D82 J24 J31 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:11.07&r=cta |
| By: | Kris De Jaegher; Robert van Rooij |
| Abstract: | This paper combines a literature overview of existing literature in game-theoretic pragmatics, with new models that fill some voids in the literature. We start with an overview of signaling games with a conflict of interest between sender and receiver, and show that the literature on such games can be classified into models with direct, costly, noisy and imprecise signals. We then argue that this same subdivision can be used to classify signaling games with common interests, where we fill some voids in the literature. For each of the signaling games treated, we show how equilibrium- refinement arguments and evolutionary arguments can be interpreted in the light of pragmatic inference. |
| Keywords: | Signaling games, pragmatics, equilibrium refinements, evolutionary game theory |
| JEL: | D82 D83 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1125&r=cta |