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on Contract Theory and Applications |
| By: | Sarah Auster |
| Abstract: | This paper introduces asymmetric awareness into the classical principal-agent model and discusses the optimal contract between a fully aware principal and an unaware agent. The principal enlarges the agent’s awareness strategically when proposing the contract. He faces a trade off between participation and incentives. Leaving the agent unaware allows him to exploit the agent’s incomplete understanding of the world. Making the agent aware enables the principal to use the revealed contingencies as signals about the agent’s action choice. The optimal contract reveals contingencies that have low probability but are highly informative about the agent’s effort. |
| Keywords: | Unawareness, Moral Hazard, Incomplete Contracts. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2011/31&r=cta |
| By: | Marcello Miccoli (Bank of Italy) |
| Abstract: | This paper builds a dynamic model of the information flow between partially informed financial institutions and a public agency. The financial institutions decide how to allocate their portfolio between a risk-free technology with a known payoff and a risky technology whose payoff is unknown. The public agency learns about the value of the unknown payoff by observing with measurement error the actions of the financial institutions and decides whether to communicate the information at the agency's disposal. The paper characterizes the optimal public communication plan and shows that full transparency (taken as the release of information whenever it is collected) is not always optimal. Instead, optimal plans involve delayed communication, the amount of delay depending on the precision of private information and the size of the agency's measurement error. The explanation of the result lies in the collection process of public information: while releasing information improves the welfare of the agents, it also decreases the informational content of their actions, hampering the agency's learning and reducing the benefits of future public communication. |
| Keywords: | value of information, learning, pubblic communication. |
| JEL: | D80 D83 E58 E61 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_856_12&r=cta |
| By: | Eduardo Perez-Richet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | This paper studies strategic disclosure by multiple senders competing for prizes awarded by a single receiver. They decide whether to disclose a piece of information that is both verifiable and equivocal (it can inuence the receiver both ways). The standard unrav- eling argument breaks down: if the commonly known probability that her information is favorable is high, a single sender never discloses. Competition restores full disclosure only if some of the senders are sufficiently unlikely to have favorable information. When the senders are uncertain about each other's strength, however, all symmetric equilibria approach full disclosure as competition increases. |
| Keywords: | Strategic Information Transmission, Persuasion Games, Communication, Competition, Multiple Senders. |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00675126&r=cta |
| By: | Hengjie Ai; Rui Li |
| Abstract: | We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated model has implications on the cross-sectional distribution and time-series dynamics of firms' investment, managers' compensation, and dividend payout policies. Risk sharing requires that managers' equity shares decrease with firm sizes. That, in turn, implies it is harder to prevent private benefit in larger firms, where managers have a lower equity stake under the optimal contract. Consequently, small firms invest more, pay less dividends, and grow faster than large firms. Despite the heterogeneity in firms' decision rules and the failure of Gibrat's law, we show that the size distribution of firms in our model resembles a power law distribution with a slope coefficient about 1.06, as in the data. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2012-01:x:1&r=cta |
| By: | Jos Jansen |
| Abstract: | This paper studies the incentives for production cost disclosure in an asymmetric Cournot oligopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitors from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firms is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit. |
| Keywords: | Cournot oligopoly, information disclosure, exit, cost asymmetry, precommitment |
| JEL: | D82 L13 |
| Date: | 2012–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0052&r=cta |
| By: | Eduardo Perez-Richet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Delphine Prady (French Treasury - [-]) |
| Abstract: | This paper addresses a common criticism of certification processes: that they simultaneously generate excessive complexity, insuficient scrutiny and high rates of undue validation. We build a model of persuasion in which low and high types pool on their choice of complexity. A natural criterion based on forward induction selects the high-type optimal pooling equilibrium.When the receiver prefers rejection ex ante, the sender simplifies her report. When the receiver prefers validation ex ante, however, more complexity makes the receiver less selective, and we provide sufficient conditions that lead to complexity inflation in equilibrium. |
| Keywords: | Complexity Inflation, Certification, Persuasion, Strategic Information Transmission, Signaling Games |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00675135&r=cta |
| By: | Nicola Doni; Domenico Menicucci |
| Abstract: | We consider an asymmetric auction setting with two bidders such that the valuation of each bidder has a binary support. We prove that in this context the second price auction yields a higher expected revenue than the first price auction for a broad set of parameter values, although the opposite result is common in the literature on asymmetric auctions. For instance, the second price auction is superior both when a bidder’s valuation is more uncertain that the valuation of the other bidder, and in case of a not too large distribution shift or rescaling. In addition, we show that in some cases the revenue in the first price auction decreases when all the valuations increase [in doing so, we correct a claim in Maskin and Riley (1985)], and we derive the bidders’ preferences between the two auctions. |
| Keywords: | Asymmetric auctions, First price auctions, Second price auctions |
| JEL: | D44 D82 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2011/27&r=cta |
| By: | Maria Cristina Molinari (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | We consider the choice to privatize the provision of a public good in a hierarchical model with three layers: a Central Government, a decentralized agency and a (private or public) manager. In a good governance regime the privatization can be devolved upon the decentralized agency while it cannot when the governance is bad. There are two types of information asymmetries: managers are privately informed of their efficiency in reducing costs (and quality) and only the decentralized agency knows the social cost of a lower grade good. We show that corruption is always detrimental to welfare when governance is good but it could be beneficial otherwise. |
| Keywords: | Governance regimes, Corruption, Privatization, Positive selection. |
| JEL: | D73 H44 K42 L33 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2011_28&r=cta |
| By: | Andrew Atkeson; Christian Hellwig; Guillermo Ordonez |
| Abstract: | We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, an extreme "lemons problem" develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the "lemons problem" and improving welfare. |
| JEL: | D21 D82 L15 L51 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17898&r=cta |
| By: | Paulina Granados Zambrano |
| Abstract: | The recognition that information is, most of the time, incomplete and imperfect is essential in understanding the nature of the formation of beliefs. To understand human behavior in the area of (academic) performance, the beliefs individuals sustain about their ability become crucial. Before performing a certain task, the agent never knows his/her true ability. He/she only has an ex-ante notion of his/her believed ability and the truth is only revealed ex-post. Once the true ability is known and the payoffs realized, we observe different reactions that range from disappointment to happiness. The logical question is then, who would have preferred not to know the truth? This paper deals with the information acquisition decisions of individuals who face uncertainty about their own ability. At a theoretical level (Bénabou and Tirole, 2002), it has been shown that overconfident individuals (people with beliefs about themselves higher than reality) with time inconsistent preferences have more at stake when they face the decision of learning the truth about themselves than more pessimistic agents. To test this prediction, a field experiment is designed and implemented, where students face the decision of learning, or not, their true ability before performing a test. It will be shown that overconfident students indeed more often decide not to learn their true ability. |
| Keywords: | overconfidence; beliefs; ability; information acquisition; field experiment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2012/04&r=cta |
| By: | Neri, Claudia |
| Abstract: | This paper investigates the role of subjective expectations (beliefs) within a double auction experiment. The experiment elicits agents' probabilistic subjective beliefs about the bidding choices of other market participants. Observed bidding choices often deviate from the predictions of the risk-neutral Bayesian Nash Equilibrium (BNE) model. Evidence suggests that the failure of the game to converge to equilibrium is due to subjective beliefs not converging to BNE beliefs. I show that subjective beliefs cannot be modeled either by BNE beliefs or by empirical/historical beliefs, and that elicited subjective beliefs help explain observed bidding choices. |
| Keywords: | Auctions, beliefs, subjective expectations, private information, experiments |
| JEL: | D44 D82 D83 D84 C90 C92 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2012:07&r=cta |
| By: | Andrew Atkeson; Christian Hellwig; Guillermo L. Ordonez |
| Abstract: | We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the “lemons problem” and improving welfare. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:464&r=cta |
| By: | Hamid Mehran; Lindsay Mollineaux |
| Abstract: | We identify the tension created by the dual demands of financial institutions to be value-maximizing entities that also serve the public interest. We highlight the importance of information in addressing the public’s desire for banks to be safe yet innovative. Regulators can choose several approaches to increase market discipline and information production. First, they can mandate information production outside of markets through increased regulatory disclosure. Second, they can directly motivate potential producers of information by changing their incentives. Traditional approaches to bank governance may interfere with the information content of prices. Thus, the lack of transparency in the banking industry may be a symptom rather than the primary cause of bad governance. We provide the examples of compensation and resolution. Reforms that promote the quality of security prices through information production can improve the governance of financial institutions. Future research is needed to examine the interactions between disclosure, information, and governance. |
| Keywords: | Corporate governance ; Disclosure of information ; Securities ; Bank management ; Banks and banking - Regulations |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:539&r=cta |
| By: | Piero Gottardi; Rohit Rahi |
| Abstract: | At a competitive equilibrium of an incomplete-markets economy agents’ marginal valuations for the tradable assets are equalized ex-ante. We characterize the finest partition of the state space conditional on which this equality holds for any economy. This leads naturally to a necessary and sufficient condition on information that would lead to retrade, if such information were to become publicly available after the initial round of trade. |
| Keywords: | Competitive Equilibrium; Incomplete Markets; Information; Re-trading; |
| JEL: | D52 D80 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2012/03&r=cta |
| By: | Piero Gottardi; Jean Marc Tallon; Paolo Ghirardato |
| Abstract: | This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent’s degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties to not have sharp probability beliefs, the agent’s degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts. |
| Keywords: | Delegation, Flexibility, Agency Costs, Multiple Priors, Imprecision Aversion |
| JEL: | D86 D82 D81 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2011/26&r=cta |
| By: | Kai A. Konrad; Marcel Thum |
| 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: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpi:wpaper:unilateral_action_and_negotiations_about_climate_policy&r=cta |
| By: | Tirole, Jean |
| Abstract: | The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost. |
| JEL: | H81 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/3063/&r=cta |