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on Contract Theory and Applications |
| By: | Salvatore Piccolo (Università Cattolica del Sacro Cuore (Milano) and CSEF); Giovanni Immordino (Università di Salerno and CSEF) |
| Abstract: | We study the problem of a Legislator designing immunity for privately informed cooperating accomplices. Our objective is to highlight the positive (vertical) externality between expected returns from crime and the information rent that must be granted by the Legislator to whistleblowers in order to break their code of silence (omertà) and elicit truthful information revelation. We identify the accomplices' incentives to release distorted information and characterize the second-best policy limiting this behavior. The central finding is that this externality leads to a second-best policy that purposefully allows whistleblowers not to disclose part of their private information. We also show that accomplices must fulfill minimal information requirements to be admitted into the program (rationing), that a bonus must be awarded to accomplices providing more reliable information and that, under some conditions, rewarding a self-reporting `boss' can increase efficiency. These results are consistent with a number of widespread legislative provisions. |
| Keywords: | Accomplice-witnesses, Adverse Selection, Leniency, Organized Crime |
| Date: | 2012–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:304&r=cta |
| By: | Mikhail Golosov (Yale University and NES); Vasiliki Skreta (New York University, Stern School of Business); Aleh Tsyvinski (Yale University and NES); Andrea Wilson (New York University) |
| Abstract: | This paper studies strategic information transmission in a dynamic environment where, each period, a privately informed expert sends a message and a decision maker takes an action. Our main result is that, in contrast to a static environment, full information revelation is possible. The gradual revelation of information and the eventual full revelation is supported by the dynamic rewards and punishments. The construction of a fully revealing equilibrium relies on two key features. The first feature is that the expert is incentivized, via appropriate actions, to join separable groups in which she initially pools with far-away types, then later reveals her type. The second feature is the use of trigger strategies. The decision maker is incentivized by the reward of further information revelation if he chooses the separation-inducing actions, and the threat of a stop in information release if he does not. Our equilibrium is non-monotonic. With monotonic partition equilibria, full revelation is impossible. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1110&r=cta |
| By: | [no author] |
| Abstract: | Economies with asymmetric information are encompassed by an extension of the model of general competitive equilibrium that does not require an explicit modeling of private information. Sellers have discretion over deliveries on contracts; this is in common with economies with default, incomplete contracts or price rigidities. Competitive equilibria exist and anonymous markets are viable. But, for a generic economy, competitive equilibrium allocations are constrained suboptimal: there exist Pareto improving interventions via linear, anonymous taxes. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ner:euiflo:urn:hdl:1814/19838&r=cta |
| By: | Martin Szydlowski |
| Abstract: | I study a dynamic principal agent model in which the effort cost of the agent is unknown to the principal. The principal is ambiguity averse, and designs a contract which is robust to the worst case effort cost process. Ambiguity divides the contract into two regions. After sufficiently high performance, the agent reaches the over-compensation region, where he receives excessive benefits compared to the contract without ambiguity, while after low performance, he enters the under-compensation region. Ambiguity also causes a disconnect between the current effort cost and the strength of incentives. That is, even when the agent is under-compensated, his incentives are as strong as in the over-compensation region, since the principal fears the agent might shirk otherwise. Under ambiguity, the agent’s true effort cost does not need to equal the worst-case. I analyze the agent’s incentives for this case, and show that the possibility of firing is detrimental to the agent’s incentives. I study several extensions concerning the timing structure and the nature of the principal’s ambiguity aversion. JEL Code: D82, D86, M52 |
| Keywords: | Dynamic contract, principal-agent model, ambiguity aversion, continuous time |
| Date: | 2012–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1543&r=cta |
| By: | David Martimort (Paris School of Economics-EHESS. Email: david.martimort@parisschoolofeconomics.eu); Stéphane Straub (Toulouse School of Economics, ARQADE and IDEI. Email: stephane.straub@univ-tlse1.fr) |
| Abstract: | We analyze how the deep current scientific uncertainty regarding future climate conditions affects the design of Public Private Partnerships (PPPs) contracts between a government (principal) and a firm (agent), especially in infrastructure sectors that are highly sensitive to such changing weather conditions. Consistently with the literature on uncertainty and irreversibility, the prospect of future, uncertain productivity shocks that affect the returns on the firm’s effort in the future creates an option value of delaying efforts. By designing dynamic intertemporal incentive schemes for his agent, the principal can play on this option value. Whether this option value is exacerbated or not in an agency context depends on the properties of the agent’s cost of efforts. |
| Keywords: | Public-private partnerships, global warming, option value, principal-agent. |
| JEL: | D82 Q54 O13 H44 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:msm:wpaper:2011/25&r=cta |
| By: | Francoise Forges; Roberto Serrano |
| Abstract: | This is a brief survey describing some of the recent progress and open problems in the area of cooperative games with incomplete information. We discuss exchange economies, cooperative Bayesian games with orthogonal coalitions, and issues of cooperation in non-cooperative Bayesian games. |
| Keywords: | # |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2011-15&r=cta |
| By: | Achille Basile (Università di Napoli Federico II and CSEF); Maria Gabriella Graziano (Università di Napoli Federico II and CSEF); Maria Laura Pesce (Università di Napoli Federico II) |
| Abstract: | The paper proposes a notion of fairness which overcomes the conflict arising between efficiency and the absence of envy in economies with uncertainty and asymmetrically informed agents. We do it in general economies which include, as particular cases, the main differential information economies studied in the literature. The analysis is further extended by allowing the presence of large traders, which may cause the lack of perfect competition. |
| Keywords: | Mixed markets, fairness, envy, efficiency, asymmetric information |
| JEL: | C71 D51 D82 |
| Date: | 2012–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:303&r=cta |
| By: | Takahiro Watanabe (Department of Business Administration, Tokyo Metropolitan University) |
| Abstract: | A game in which an incumbent and an entrant decide the timings of entries into a new market is investigated. The profit flows involve two uncertain factors: (1) the basic level of the demand of the market observed only by the incumbent and (2) the fluctuation of the profit flow described by a geometric Brownian motion that is common to both firms. The optimal timing for the incumbent, who privately knows the high demand, is earlier than that for the low-demand incumbent. This earlier entrance, however, reveals the information of the high demand to the entrant, so that the entrant observing the timing of the incumbent would accelerate the its own timing of the investment that reduces the monopolistic profit of the incumbent. Therefore, the high-demand incumbent may delay the timing of the investment in order to hide the information strategically. The equilibria of this signaling game are characterized, and the conditions for the manipulative revelation are investigated. The values of both firms are compared with the case of complete information. |
| Keywords: | Real Option, Investment Timing, Signaling, Asymmetric Information, Game Theory |
| JEL: | G31 D81 C73 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:809&r=cta |
| By: | Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| 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 |
| Date: | 2012–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00657943&r=cta |
| By: | João Correia da Silva (CEF.UP, Faculdade de Economia, Universidade do Porto); Carlos Hervés-Beloso (Universidad de Vigo) |
| Abstract: | Private state-verification is introduced in a two-period economy with spot markets in both periods and complete futures markets for contingent delivery in the second period. Existence of equilibrium is established, under standard assumptions. The equilibrium allocation is shown to be generically efficient if the number of states is not greater than the number of goods. |
| Keywords: | General equilibrium, Differential information, Private state-verification, Two-period economies, Existence of equilibrium, Generic efficiency |
| JEL: | C62 C72 D51 D82 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:443&r=cta |
| By: | Konrad, Kai A.; Thum, Marcel |
| Abstract: | We analyze bargaining over international climate agreements in a setting with incomplete information about abatement costs. Unilateral commitment to high abatement reduces the gains from global cooperation. This reduces the probability of reaching efficient international environmental agreements. -- |
| Keywords: | Mitigation,international climate agreements,bargaining,unilateral advances |
| JEL: | Q54 Q58 F53 H41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbfff:spii2011109&r=cta |
| By: | Citci, Haluk; Inci, Eren |
| Abstract: | We analyze the effects of CEOs' layoff risk on their risk choice while overseeing a firm. A CEO, whose managerial ability is unknown, is fired if her expected ability is below average. Her risk choice changes the informativeness of output and market's belief about her ability. She can decrease her layoff risk by taking excessive risk and trade off current compensation for layoff risk. The firm may voluntarily or involuntarily allow excessive risk taking even under optimal linear compensation contracts. Above-average CEOs always keep their jobs, but among below-average CEOs, a higher-ability one is more likely to be fired. |
| Keywords: | career concern; CEO turnover; excessive risk taking; managerial conservatism; reputation |
| JEL: | L21 G32 D82 M12 J33 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35979&r=cta |
| By: | Ralph-C Bayer; Changxia Ke |
| Abstract: | Prices usually adjust much faster when costs increase than when costs decrease. The mechanism driving this "Rockets-and-Feathers" phenomenon is not well understood despite of ample empirical evidence for its existence. We use simple experimental markets with and without consumer search and either privately or publicly observed cost shocks to study this puzzle. In contrast to the theoretical predictions, we observe price dispersion and asymmetric price adjustment in all four settings. We attribute the pricing behavior to bounded rationality and its interaction with adaptive expectations. We conclude that neither search costs nor private information are indispensable for prices to adjust asymmetrically. |
| Keywords: | Asymmetric Price Adjustment, Price Dispersion, Adaptive Search, Bounded Rationality |
| JEL: | D82 D83 C91 L13 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mpi:wpaper:are_rockets_and_feathers_caused_by_search_or_informational_frictions&r=cta |
| By: | Konrad, Kai A. |
| Abstract: | This paper surveys some of the strategic aspects that emerge if players fight in an alliance against an enemy. The survey includes the free-rider problem and the hold-up problem that emerges in the baseline model, the role of supermodularity in alliance members' effort contributions, the role of budget constraints, the role of information transfer inside the alliance, and the role of in-group favoritism. -- |
| Keywords: | Alliances,contests,conflict,in-group favoritism |
| JEL: | D72 D74 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbfff:spii2011105&r=cta |
| By: | Paul Hubert (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques) |
| Abstract: | Focusing on a set of central banks that publish their internal macroeconomic forecasts in real time enables one to shed light on the expectations channel of monetary policy. The main contribution of this paper is to assess whether central bank forecasts influence private forecasts. The response is positive for inflation forecasts in Sweden, the UK and Japan. To disentangle the sources of influence of central banks, two concepts are proposed: endogenous influence, which is due to more accurate central bank forecasts, and exogenous influence, which is due to central bank signals on either future policy decisions or private information. Original empirical evidence on the central bank forecasting performance relative to private agents is provided, and estimates show that in Sweden, more accurate inflation forecasts generate specific central bank influence that is different from the influence from signals. The publication of forecasts may therefore refer to two central banking strategies that aim to shape private expectations: forecasting or policymaking. |
| Keywords: | Monetary Policy; Imperfect Information; Communication; Endogenous Influence; Exogenous Influence. |
| JEL: | E52 E58 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1120&r=cta |
| By: | E.J. Anderson (The University of Sydney Business School) |
| Abstract: | It is common for rewards to be given on the basis of a rank ordering, so that relative performance amongst a cohort is the criterion. In this paper we formulate an equilibrium model in which an agent makes successive decisions on whether or not to gamble and is rewarded on the basis of a rank ordering of final wealth. This is a model of the behaviour of mutual fund managers who are paid depending on funds under management which in turn are largely determined by annual or quarterly rank orderings. In this model fund managers can elect either to pick stocks or to use a market tracking strategy. In equilibrium the final distribution of rewards will have a negative skew. We explore how this distribution depends on the number of players, the probability of success when gambling, the structure of the rewards, and on information regarding the other player?s performance. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:syb:wpbsba:06/2011&r=cta |
| By: | Tsuruta, Daisuke |
| Abstract: | The banking literature concludes that the performance of client firms deteriorates if their distressed main bank reduces the supply of credit. However, these results rely on the assumption that main banks have an information advantage over other banks, such that if a client firm changes its main bank, its access to credit worsens. Using Japanese data from a period including financial shocks, we show that firms change the main banking relationship when their main bank becomes distressed. In addition, the performance of client firms improves after a change in the main bank relationship. This implies that the availability of credit improves for these firms, despite the change in main bank. |
| Keywords: | Bank--firm relationships; Bank distress; Private information |
| JEL: | G32 G21 G20 |
| Date: | 2012–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35895&r=cta |
| By: | Jing-Yuan Chio (IMT Lucca Institute for Advanced Studies); Laura Magazzini (Department of Economics, University of Verona); Fabio Pammolli (IMT Lucca Institute for Advanced Studies and CERM Foundation; IMT Lucca Institute for Advanced Studies and Department of Managerial Economics, Strategy and Innovation, K.U. Leuven) |
| Abstract: | We build a cumulative innovation model in which both success and failure provide valuable information for future research. To test this learning mechanism, we use a dataset covering outcomes of world-wide R&D projects in the pharmaceutical industry, and proxy knowledge flows with forward citations received by patents associated with each project. Empirical results confirm theoretical predictions that patents associated with successfully completed projects (i.e., leading to drug launch on the market) receive more citations than those associated to failed (terminated) projects, which in turn are cited more often than patents lacking clinical or preclinical information. We therefore offer evidence of the value of failures as research inputs in (pharmaceutical) innovation |
| Keywords: | R&D competition, patent policy, pharmaceutical industry |
| JEL: | D23 D83 O3 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ial:wpaper:1&r=cta |
| By: | Marchegiani, Lucia (University of Rome 3); Reggiani, Tommaso (University of Bologna); Rizzolli, Matteo (Free University of Bozen/Bolzano) |
| Abstract: | In our simple model the supervisor: i) cannot observe the agent's effort; ii) aims at inducing the agent to exert high effort; but iii) can only offer rewards based on performance. Since performance is only stochastically related to effort, evaluation errors may occur. In particular, deserving agents that have exerted high effort may not be rewarded (Type I errors) and undeserving agents that have exerted low effort may be rewarded (Type II errors). We show that, although the model predicts both errors to be equally detrimental to performance, this prediction fails with a lab experiment. In fact, failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. We discuss our result in the light of some economic and managerial theories of behavior. Our result may have interesting implications for strategic human resource management and personnel economics and may also contribute to the debate about incentives and organizational performance. |
| Keywords: | agency theory, organizational justice, compensation, type I and type II errors, real effort |
| JEL: | C91 M50 J50 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6254&r=cta |
| By: | Robert Wagner (Ludwig-Maximilians University, Munich); Thomas Zwick (Ludwig-Maximilians University, Munich and Centre for European Economic Research, Mannheim) |
| Abstract: | This paper jointly analyses the consequences of adverse selection and signalling on entry wages of skilled employees. It uses German linked employer employee panel data (LIAB) and introduces a measure for relative productivity of skilled job applicants based on apprenticeship wages. It shows that post-apprenticeship employer changers are a negative selection from the training firms’ point of view. Negative selection leads to lower average wages of employer changers in the first skilled job than stayers. Entry wages of employer changers are specifically reduced by high occupation and training firm retention rates. Additional training firm signals are high apprenticeship wages that a positive selection of apprenticeship applicants, works councils and firm size that increase training quality. Finally, positive individual signals such as schooling background affect the skilled entry wages of employer changers positively. |
| Keywords: | entry wages, employer change, adverse selection, signalling |
| JEL: | J24 J31 J62 J63 M52 M53 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:iso:educat:0071&r=cta |