nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒01‒18
fourteen papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Robust Predictions in Games with Incomplete Information By Dirk Bergemann; Stephen Morris
  2. Hidden information, bargaining power, and efficiency: an experiment. By Cabrales, Antonio; Charness, Gary; Villeval, Marie Claire
  3. Information Provision in Competing Auctions By Cristián Troncoso Valverde
  4. Efficiency versus Optimality in Procurement By Peter Postl
  5. Information sharing and information acquisition: Ownership and coverage By Artashes Karapetyan; Bogdan Stacescu
  6. Crossing the Point of No Return: A Public Goods Experiment By Urs Fischbacher; Werner GŸth; M. Vittoria Levati
  7. Populism, Partisanship, and the Funding of Political Campaigns By Tilman Klumpp
  8. Speculative Attacks with Multiple Targets By Junichi Fujimoto
  9. A Theory of Asset Prices Based on Heterogeneous Information By Elias Albagli; Christian Hellwig; Aleh Tsyvinski
  10. Reducing overreaction to central banks’ disclosures : theory and experiment By Romain Baeriswyl; Camille Cornand
  11. Do bankers prefer married couples? By Marion Leturcq
  12. Buy-it-now or Take-a-chance: A New Pricing Mechanism for Online Advertising By L. Elisa Celis; Gregory Lewis; Markus Mobius; Hamid Nazerzadeh
  13. Left, Right, Left: Income and Political Dynamics in Transition Economies By Michael Carter; John Morrow
  14. A model of descending auction with hidden starting price and endogenous price decrease By Di Gaetano, Luigi

  1. By: Dirk Bergemann; Stephen Morris
    Date: 2012–01–09
  2. By: Cabrales, Antonio; Charness, Gary; Villeval, Marie Claire
    Abstract: We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract
    Keywords: Experiment; Hidden information; Bargaining power; Competition; Efficiency;
    JEL: A13 B49 C92 D21 J41
    Date: 2011
  3. By: Cristián Troncoso Valverde (Facultad de Economía y Empresa, Universidad Diego Portales)
    Abstract: This paper studies the incentives faced by competing auctioneers who can provide information to prospective bidders about their valuations of the objects for sale. We consider a model in which two sellers running second-price auctions compete to attract potential bidders by releasing information about valuations before bidders select trading partners. Thus, bidders' participation decisions are modeled in ex-post terms which allows us to investigate the effect of information on the composition of the set of types who visit each seller. We derive a set of necessary and su#cient conditions that supports full information provision as the unique equilibrium of the game. This result holds even if the number of bidders is restricted to two, which contrasts with the ndings of models with a single auctioneer where full information provision is never optimal. We also provide a characterization of information in terms of its strategic value to the sellers.
    Date: 2011–06
  4. By: Peter Postl
    Abstract: We study procurement procedures that simultaneously determine specification and price of a good. Suppliers can offer and produce the good in either of two possible specifications, both of which are equally good for the buyer. Production costs are interdependent and unknown at the time of bidding. Each supplier receives two signals about production cost, one per specification. Our model is a special case of the interdependent-value settings with multi-dimensional types in Jehiel and Moldovanu (2001) where an efficient and incentive compatible mechanism exists. We characterize equilibrium bidding behavior if the winning supplier is selected purely on the basis of price, regardless of the specification offered. While there is a positive chance of obtaining an inefficient specification, this procurement mechanism involves lower information rents than efficient mechanisms, suggesting that there is a trade-off between minimizing expected expenditure for the good, and ensuring that the efficient specification is chosen.
    Keywords: Procurement, interdependent valuations, multi-dimensional information, efficient mechanisms, optimal mechanisms
    JEL: C72 D44 D82
    Date: 2011–12
  5. By: Artashes Karapetyan (Norges Bank (Central Bank of Norway)); Bogdan Stacescu (Norweian School of Business)
    Abstract: We examine the conditions required for the existence of private credit bureaus, their ownership and coverage. Our model implies that bank consortia will most likely be preferred by banks, but that they will lead to restricted coverage. Independent credit bureaus have higher coverage, but they require good institutions. This implies an important role for public credit registers in developing countries with weak institutions. Our empirical findings largely support the implications of our model.
    Keywords: Information sharing, Credit markets, Default, Adverse selection
    JEL: G20 D82 L12
    Date: 2012–01–12
  6. By: Urs Fischbacher; Werner GŸth; M. Vittoria Levati
    Abstract: Participants in a public goods experiment receive private or common signals regarding the so-called 'point of no return', meaning that if the groupÕs 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
    Date: 2011
  7. By: Tilman Klumpp
    Abstract: We dene populism as a politician's eort to appeal to a large group of voters with limited information regarding a policy-relevant state of nature. In our model, the populist motive makes it impossible for political candidates to communicate their information to voters credibly. We show that the presence of special interest groups (SIGs) with partisan preferences can mitigate this eect and thereby improve policy. This does not happen because SIGs are better informed than policy makers. Instead, campaign contributions by SIGs allow politicians to insulate themselves from the need to adopt populist platforms. We show that a regime in which SIGs are allowed to contribute to political campaigns welfare-dominates (ex ante) regimes in which no such contributions are allowed, or where campaigns are publicly nanced, or where they are funded by the candidates' private wealth.
    Date: 2011–04
  8. By: Junichi Fujimoto (Faculty of Economics, University of Tokyo)
    Abstract: This paper examines a global games model of speculative attacks in which speculators can choose to attack any one of a number of targets. In the canonical global games model with a single target, it is well known that there exists a unique equilibrium that survives the iterative deletion of dominated strategies, characterized by the threshold values of the private signal and the fundamentals. This paper shows that with two targets, iterative deletion of dominated strategies yields a unique combination of threshold signal functions that are nondecreasing in the private signals of the other targetfs fundamentals, and threshold fundamentals functions that are increasing in the other targetfs fundamentals. The result is shown to extend to environments with any N symmetric targets. The key argument is to combine the iterative deletion procedure with the contraction mapping theorem. The paper then goes through a number of numerical examples and shows, among other results, that more accurate private signals have a decoupling effect on the outcomes of attack on different countries. Finally, this paper introduces public information and shows that the sufficient condition for unique equilibrium threshold functions is very similar to that for a unique equilibrium in the single-target model.
    Date: 2011–12
  9. By: Elias Albagli; Christian Hellwig; Aleh Tsyvinski
    Date: 2012–01–09
  10. By: Romain Baeriswyl (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland); Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne, Ecully, F-69130, France)
    Abstract: Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indi-erently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper, however, makes a case for partial transparency rather than partial publicity because the latter seems increasingly diffcult to implement in the present information age and is associated with discrimination as well as fairness issues.
    Keywords: heterogeneous information, public information, overreaction, transparency,coordination, experiment
    JEL: C92 D82 D84 E58
    Date: 2011
  11. By: Marion Leturcq (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Are married couples more credit constrained than unmarried households? If the cost of separation increases the risk of default, banks might be willing to lend to stable couples. In presence of incomplete information, marriage could be used as a signal of the quality of the match. This paper investigates the link between marriage and credit constraints. I use matching methods to evaluate the impact of marriage on credit constraints. I find that married couples are more likely to be approved for their loan, but they bear higher costs of credit. The differences between married and unmarried couples can be attributed to selection in the marriage rather than to discrimination against unmarried couples.
    Keywords: marriage, credit constraints, signal, matching estimator
    Date: 2011–04
  12. By: L. Elisa Celis (Department of Computer Science, University of Washington); Gregory Lewis (Department of Economics, Harvard University); Markus Mobius (Microsoft Research New England); Hamid Nazerzadeh (Marshall School of Business, University of Southern California)
    Abstract: Increasingly sophisticated tracking technology offers publishers the ability to offer targeted advertisements to advertisers. Such targeting enhances advertising efficiency by improving the match quality between advertisers and users, but also thins the market of interested advertisers. Using bidding data from Microsoft's Ad Exchange (AdECN) platform, we show that there is often a substantial gap between the highest and second highest willingness to pay. This motivates our new BIN-TAC mechanism, which is effective in extracting revenue when such a gap exists. Bidders can ``buy-it-now'', or alternatively ``take-a-chance'' in an auction, where the top d > 1 bidders are equally likely to win. The randomized take-a-chance allocation incentivizes high valuation bidders to buy-it-now. We show that for a large class of distributions, this mechanism achieves similar allocations and revenues as Myerson's optimal mechanism, and outperforms the second-price auction with reserve. For the AdECN data, we use structural methods to estimate counterfactual revenues, and find that our BIN-TAC mechanism improves revenue by 11% relative to an optimal second-price auction.
    Keywords: Advertising, Auctions, Mechanism Design
    JEL: D44 L86
    Date: 2011–09
  13. By: Michael Carter; John Morrow
    Abstract: The political left turn in Latin America, which lagged its transition to liberalized market economies by a decade or more, challenges conventional economic explanations of voting behavior. While the implications of upward mobility for the political preferences of forward-looking voters have been studied, neither the upward mobility model nor conventional myopic median voter models are well equipped to explain Latin America's political transformation. This paper generalizes the forward-looking voter model to consider a broad range of dynamic processes. When voters have full information on the nature of income dynamics in a transition economy, we show that strong support for redistributive policies will materialize rapidly if income dynamics offer few prospects of upward mobility for key sections of the electorate. In contrast, when voters have imperfect information, our model predicts a slow and politically polarizing shift toward redistributive voter preferences under these same non-concave income dynamics. Simulation using fitted income dynamics for two Latin American economies suggests that the imperfect information model better accounts for the observed shift back to the left in Latin America, and that this generalized, forward-looking voter approach may offer additional insights about political dynamics in other transition economies.
    Keywords: income dynamics, redistributive politics, polarization, Bayesian learning, Latin America
    JEL: D31 D72 D83 P16
    Date: 2012–01
  14. By: Di Gaetano, Luigi
    Abstract: Several new auction formats are spreading over the Internet. They have usually the aim of raising revenues by increasing the number of participant, who will pay a participation fee, rather than selling the object at the highest possible price. The aim of this paper is to study a format of descending price auction with hidden starting price and endogenous price decrease. In this format, usually known as price reveal auction, the price is hidden and players have to pay a fee to observe it. The price decreases only if a bidder observes it and not because of the time, like in the usual Dutch format. In the following pages, we will analyse the effect of the concealment of the price in a standard Dutch auction. We will, then, define a model for price reveal auction, and analyse its most important aspects. We will, finally, derive players' best strategy and the Nash equilibrium of the game. Our result is that players use a threshold strategy to decide whether or not participate the auction (observe the price and pay the fixed fee). However, in our model there is not a separating equilibrium. Moreover, we will find that there is a process of beliefs updating, which takes account of the time as a signal of the price. Therefore, if the game continues, players infer that the price is too high and update their beliefs accordingly. We will finally compare our theoretical results with empirical data about 135 price reveal auctions held between December 2009 and April 2011 on the website
    Keywords: Price reveal auction; Endogenous price; Descending auction
    JEL: D44 D82 C72
    Date: 2011–10–01

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.
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