nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒01‒10
six papers chosen by
Simona Fabrizi
Massey University, Albany

  1. A smoke screen theory of financial intermediation By Breton, R.
  2. Infinite dimensional mixed economies with asymmetric information By Bhowmik, Anuj; Cao, Jiling
  3. Information, Commitment, and Separation in Illiquid Housing Markets By Derek Stacey
  5. Implementation in adaptive better-response dynamics: Towards a general theory of bounded rationality in mechanisms. By Cabrales, Antonio; Serrano, Roberto
  6. The Public Resource Management Game By Myles J. Watts; Jennifer L. Steele; Jay P. Shimshack; Jeffrey T. LaFrance

  1. By: Breton, R.
    Abstract: This paper explores the role of diversification and size in protecting information. We present a simple two period credit market with a sophisticated lender faced with competitors who free ride on his screening activity. Absent commitment problems, the lender funds one borrower and exerts optimal evaluation. When borrowers cannot commit to a long term relationship, the free riding problem is responsible for too little evaluation. We show how this problem can be mitigated by simultaneously financing several borrowers. This effect provides a rationale for intermediaries as an `information garbling' device.
    Keywords: financial intermediation, informational rent, asymmetric information, free riding, diversification.
    JEL: D82 G00 G21
    Date: 2011
  2. By: Bhowmik, Anuj; Cao, Jiling
    Abstract: In this paper, we study asymmetric information economies consisting of both non-negligible and negligible agents and having ordered Banach spaces as their commodity spaces. In answering a question of Herves-Beloso and Moreno-Garcia in [17], we establish a characterization of Walrasian expectations allocations by the veto power of the grand coalition. It is also shown that when an economy contains only negligible agents a Vind's type theorem on the private core with the exact feasibility can be restored. This solves a problem of Pesce in [20].
    Keywords: Asymmetric information; Exactly feasible; Ex-post core; mixed economy; NY-fine core; NY-private core; Robustly efficient allocation; NY-strong fine core; RW-fine core; Walrasian expectations allocation
    JEL: C71 D41 D82 D51 D43
    Date: 2011–12–28
  3. By: Derek Stacey (Queen's University)
    Abstract: I propose a model of the housing market using a search framework with asymmetric information in which sellers are unable to commit to asking prices announced ex ante. Relaxing the commitment assumption prevents sellers from using price posting as a signalling device to direct buyers` search. Adverse selection and inefficient entry on the demand side then contribute to housing market illiquidity. Real estate agents that can improve the expected quality of a match can segment the market and alleviate information frictions. Even if one endorses the view that real estate agents provide no technological advantage in the matching process, incentive compatible listing contracts are implementable as long as housing is not already sufficiently liquid. The theoretical implications are qualitatively consistent with the empirical observations of real estate brokerage: platform differentiation, endogenous sorting, and listing contract features that reinforce incentive compatibility.
    Keywords: Housing, Search, Liquidity, Real Estate Agents
    JEL: D40 D44 D83 R31
    Date: 2012–01
  4. By: Vinod Mishra; Rajabrata Banerjee; Tania Dey
    Abstract: This paper analyzes how influence activities in the form of signal jamming affect the capital budgeting process of corporate organizations in Australia. First, the relationship between investment in the smallest division and its past performances is tested. The relationship is defined as investment sensitivity. Second, how the investment sensitivity varies as influence problems become more severe is examined. Finally, the relationship between compensation incentives for the large division manager and the investment sensitivity is reviewed. The findings suggest that investment sensitivity is positive for Australian firms. Mixed evidence is obtained between investment sensitivity and increase in the severity of influence problems when measures such as, relatedness and number of divisions are used. With increase in number of divisions, influence activity becomes more severe and headquarters relies more on public signal. However, with the increase in relatedness across divisions, influence problem increases and headquarters relies more on private information from manager of the large division. Evidence suggest that Australian firms provide high short term incentive payments to managers of large divisions to mitigate the influence activity problems and thus rely more on managerial recommendations for investing in smallest division as compared to noisy accounting measures.
    Keywords: Influence activity, capital budgeting, compensation incentives
    JEL: G31 M52 J33 D82
    Date: 2011–12
  5. By: Cabrales, Antonio; Serrano, Roberto
    Abstract: We study the classic implementation problem under the behavioral assumption that agents myopically adjust their actions in the direction of better-responses or bestresponses. First, we show that a necessary condition for recurrent implementation in better-response dynamics (BRD) is a small variation of Maskin monotonicity, which we call quasimonotonicity. We also provide a mechanism for implementation in BRD if the rule is quasimonotonic and excludes worst alternatives – no worst alternative (NWA). Quasimonotonicity and NWA are both necessary and sufficient for absorbing implementation in BRD. Moreover, they characterize implementation in strict Nash equilibria. Under incomplete information, incentive compatibility is necessary for any kind of stable implementation in our sense, while Bayesian quasimonotonicity is necessary for recurrent implementation in interim BRD. Both conditions are also essentially sufficient for recurrent implementation, together with a Bayesian NWA. A characterization of implementation in strict Bayesian equilibria is also provided. Partial implementation results are also obtained.
    Keywords: Robust implementation; Bounded rationality; Evolutionary dynamics; Mechanisms;
    JEL: C72 D70 D78
    Date: 2011–03–21
  6. By: Myles J. Watts; Jennifer L. Steele; Jay P. Shimshack; Jeffrey T. LaFrance
    Abstract: Use of public resources for private economic gain is a longstanding, contested political issue. Public resources generate benefits beyond commodity uses, including recreation, environmental and ecological conservation and preservation, and existence and aesthetic values. We analyze this problem using a dynamic resource use game. Low use fees let commodity users capture more of the marginal benefit from private use. This increases the incentive to comply with government regulations. Optimal contracts therefore include public use fees that are lower than private rates. The optimal policy also includes random monitoring to prevent strategic learning and cheating on the use agreements and to avoid wasteful efforts to disguise noncompliant behavior. An optimal policy also includes a penalty for cheating beyond terminating the use contract. This penalty must be large enough that the commodity user who would gain the most from noncompliance experiences a negative expected net return.
    Keywords: Renewable resources, public resources policy, optimal contracts
    Date: 2011–12

This nep-cta issue is ©2012 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.