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on Contract Theory and Applications |
| By: | Takeshi Nishimura |
| Abstract: | This paper considers a scoring auction used in procurement. In this auction, each supplier offers both price and quality, and a supplier whose offer achieves the highest score wins. The environment we consider has two features: the buyer has private information and quality is multi-dimensional. We show that a scoring auction implements the ex ante optimal mechanism for the buyer when the value complementarity between quality attributes is sufficiently greater than the cost substitutability. We further show how the buyer should design scoring rules. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd11-224&r=cta |
| By: | Miettinen, Paavo (Bank of Finland Research) |
| Abstract: | In this paper we consider equilibrium behavior in a Dutch (descending price) auction where the bidders are uninformed of their valuations with probability q and can acquire information about their valuation at a positive cost during the auction. We assume that the information acquisition activity is covert. We characterize the equilibrium behavior in a setting where bidders are ex ante symmetric and have independent private values. We show that, if the number of bidders is large, the Dutch auction produces more revenue than would a first price auction. |
| Keywords: | auctions; information acquisition |
| JEL: | D44 D82 D83 |
| Date: | 2012–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_008&r=cta |
| By: | Mäkinen, Taneli (Dept. of Economics, Stockholm School of Economics); Ohl, Björn (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | We study firms' incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining asymmetric business cycles. When the economy has been in a boom in the previous period, and firms enter the current period with an optimistic belief, the incentive to acquire information is weaker than when the economy has been in a recession and firms share a pessimistic belief. However, the price system, in transmitting information from informed to uninformed firms, moderates asymmetric incentives in information acquisition and renders the aggregate learning outcome approximately acyclical. Our results challenge the prevailing view of procyclical learning as the source of asymmetric business cycles. |
| Keywords: | information choice; rational expectations; asymmetric information; Bayesian learning; strategic substitutability; business cycle asymmetries |
| JEL: | D51 D82 D83 D84 E39 |
| Date: | 2012–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0740&r=cta |
| By: | Schmitz, Patrick W. |
| Abstract: | A principal wants two sequential tasks to be performed by wealth-constrained agents. When the tasks are conflicting (i.e., when a first-stage success makes second-stage effort less effective), the principal's profit-maximizing way to induce high efforts is to hire one agent to perform both tasks. In this case, the prospect to get a larger second-stage rent after a first-stage success motivates the agent to work hard in the first stage. In contrast, when the tasks are synergistic, the principal prefers to hire two different agents for the two tasks. These results are in contrast to previous studies that consider simultaneous tasks. |
| Keywords: | moral hazard; limited liability; conflicting tasks; synergies |
| JEL: | D23 D86 L23 M12 M54 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36914&r=cta |
| By: | J-P. Niinimaki |
| Abstract: | The paper investigates the optimal design of bank bailouts. Under three types of ex post moral hazard that tempt banks to hide loan losses, the paper analyzes banking regulation via three Prompt Corrective Action instruments: prohibition of dividends, limits on compensation to managers and early closure policy. The first two have a mitigating effort on moral hazard but the last instrument has a damaging impact. As to bad debts and the cleaning of banks' balance sheets, asset insurance and equity capital motivate banks to disclose loan losses. In some cases, prohibition of dividends or limits on compensation to managers has the same effect. |
| Keywords: | Financial intermediation, Mechanism design, Bank bailouts, Banking regulation, Prompt Corrective Action |
| JEL: | G21 G28 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp69&r=cta |
| By: | Mikel Berdud (Departamento de Economía-UPNA); Juan M. Cabasés Hita (Departamento de Economía-UPNA) |
| Abstract: | This paper explores the conditions that characterize the optimality for a principal (health manager) to undertake investments to motivate agents (doctors). In the model, doctors are intrinsically motivated and can have different identities. We develop a principal agent dynamical model with moral hazard, which captures the possibility of affecting doctors’ intrinsic motivation and identity through contracts offered by the health manager. Identity and intrinsic motivation of the doctor can be undermined (crowding-out) or enhanced (crowding-in) by incentive policies and monetary rewards. When motivations beyond the money play a role in the agents behaviour, the optimality of the equilibrium outcomes may be altered. Intrinsic motivation is defined as doctor’s experienced enjoyment from doing her work and commit toward a mission. By “full” identity we mean a situation in which the doctor shares the organizational objectives and views herself as a part of the organization. We assume that “full” identity can be achieved when health managers include mission supportive investments in contracts. This also crowds in intrinsic motivation. However, crowding out occurs when the health manager uses only pure monetary rewards to incentivize doctors with the goal of drive their actions in his own interest. Solving the model, we are allowed to make comparative statics and discuss the conditions under which spending resources to invest in motivational capital, is optimal for the health organization’s manager. Our results may help to inform policy-makers about optimal policy design and optimal management of health organizations. For instance, we conclude that investing in motivational capital is more likely to be profitable in the long run whereas mere monetary incentives are more likely to be optimal in the short run. |
| Keywords: | contracts, moral hazard, intrinsic motivation, crowding effects, mission, motivational capital |
| JEL: | C32 E30 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1201&r=cta |
| By: | Veronica Guerrieri; Robert Shimer |
| Abstract: | We develop a dynamic equilibrium model of asset markets affected by adverse selection. There exists a unique equilibrium where better assets trade at higher prices but in less liquid markets. Sellers of high-quality assets can separate because they are more willing to accept a lower trading probability. As a result, the emergence of adverse selection generates a drop in liquidity. It may also lead to a decline in the price-dividend ratio—a fire sale—and a flight to quality. Subsidies to purchasing assets may be Pareto improving and can reverse the fire sale and flight to quality. |
| JEL: | D82 E44 G14 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17876&r=cta |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine) |
| Abstract: | The leveraging of control is the possibility for the controlling shareholder to lower her direct participation in capital through a convergence of financial and economic interest with other shareholders or would-be shareholders in the firm. In this paper, the setting of a coalition contract is done by awarding stocks to managers and employees. This article analyses it, on one side, in a rationale of economic incentive and, on the other side, in a rationale of political coalition of the initial dominant shareholder with managers and employees. It is shown that the two logics are not opposite but complementary. The sharing of the private benefits between members of the new coalition is at the heart of a new implicit contract. The initial controlling shareholder "buys" efficient efforts by awarding a stake of capital to managers or employees, but also by allowing them to share a part of the private benefits and to join a new dominant group. Even if the effort function of the employees is not productive nor observable, a targeted broad diffusion of new stocks may still respect the coherence between an economic incentive rationale and a political substitution rationale. At the end, we introduce the idea of political management of the leverage of control. |
| Keywords: | Ownership structure, private benefits, stock ownership plans, employees' incentives, coalition contract, control |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00636608&r=cta |
| By: | Yuichi Yamamoto (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper proposes and studies a tractable subset of Nash equilibria, belief-free review-strategy equilibria, in repeated games with private monitoring. The payoff set of this class of equilibria is characterized in the limit as the discount factor converges to one for games where players observe statistically independent signals. As an application, we develop a simple sufficient condition for the existence of asymptotically efficient equilibria, and establish a folk theorem for N-player prisoner’s dilemma. All these results are robust to a perturbation of the signal distribution, and hence remain true even under almost-independent monitoring. |
| Keywords: | repeated game, private monitoring, conditional independence, belief-free review-strategy equilibrium, prisoner’s dilemma |
| JEL: | C72 C73 D82 |
| Date: | 2012–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:12-005&r=cta |
| By: | Moreno, Diego (Departamento de Economía, Universidad Carlos III de Madrid); Takalo , Tuomas (Bank of Finland Research) |
| Abstract: | Consider a competitive bank whose illiquid asset portfolio is funded by short-term debt that has to be refinanced before the asset matures. We show that in this setting maximal transparency is not socially optimal, and that the existence of social externalities of bank failures further lowers the optimal level of transparency. Moreover, asset risk taking recedes as the level of transparency declines towards the socially optimal level. As for the sign of the transparency impact on refinancing risk, it is negative given the risk associated with the asset, but ambiguous if one accounts for its indirect effect via risk taking. |
| Keywords: | financial stability; information disclosure; market discipline; Basel III; global games |
| JEL: | D43 D82 G14 G21 G28 |
| Date: | 2012–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_009&r=cta |
| By: | Zuazo Garín, Peio; Rocha, André Barreira da Silva; Laruelle, Annick |
| Abstract: | We generalise and extend the work of Iñarra and Laruelle (2011) by studying two person symmetric evolutionary games with two strategies, a heterogenous population with two possible types of individuals and incomplete information. Comparing such games with their classic homogeneous version vith complete information found in the literature, we show that for the class of anti-coordination games the only evolutionarily stable strategy vanishes. Instead, we find infinite neutrally stable strategies. We also model the evolutionary process using two different replicator dynamics setups, each with a different inheritance rule, and we show that both lead to the same results with respect to stability. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:6608&r=cta |
| By: | Roy Zilberman |
| Abstract: | This paper examines the procyclical e¤ects of bank capital requirements in a simple static general equilibrium model with credit market imperfections. A "bank capital channel" is introduced by assuming that bank capital buffers increase banks' incentives to screen and monitor borrowers more carefully, thus reducing the borrowers' probability of default and allowing banks to charge a lower interest rate on loans provided for investment purposes. We also identify a "collateral channel" by assuming that higher levels of effective collateral mitigate moral hazard behaviour by firms, which raises the repayment probability and lowers the loan rate. Basel I and Basel II regulatory regimes are then de…ned in terms of the calculation of the risk weights on loans with a distinction made between the Standardized and Foundation Internal Ratings Based (IRB) approaches of Basel II. We analyze the role of the bank capital channel in the transmission of a supply shock (and associated changes in prices) when the bank capital channel dominates the collateral channel and when the collateral channel dominates the bank capital channel. Our results suggest that in the former case, the lending rate is always procyclical with respect to supply shocks while in the latter, the loan rate can be either procyclical or countercyclical. Finally, in order to compare between the different regulatory regimes, it is crucial to understand which of the abovementioned channels dominates the other. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:161&r=cta |