|
on Contract Theory and Applications |
| By: | Lefort, Jean-Philippe; Dominiak, Adam |
| Abstract: | In this paper we show that unlike in Bayesian frameworks asymmetric information does matter and can explain differences in common knowledge decisions due to ambiguous character of agents' private information. Agents share a common-but-not-necessarily-additive prior beliefs represented by capacities. It is shown that, if each agent's information partition is made up of unambiguous events in the sense of Nehring (1999, Mat. Soc. Sci. 38, 197-213), then it is impossible that the agents disagree on their commonly known decisions, whatever these decisions are : whether posterior beliefs or conditional expectations. Conversely, an agreement on conditional expectations, but not on posterior beliefs, implies that agents' private information must consist of Nehring-unambiguous events. The results obtained allow to attribute the existence of a speculative trade to the presence of agents' diverse and ambiguous information. |
| Keywords: | capacities; Ambiguity; No-Trade Theorem; Choquet expected utility theory; unambiguous events; Agreement Theorem; common knowledge; asymmetric information; |
| JEL: | D81 D82 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/8575&r=cta |
| By: | Alia Gizatulina (Max Planck Institute for Research on Collective Goods, Bonn); Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Neeman (2004) and Heifetz and Neeman (2006) have shown that, in auctions with incomplete information about payoffs, full surplus extraction is only possible if agents’ beliefs about other agents are fully informative about their own payoff parameters. They argue that the set of incomplete-information models satisfying this so-called BDP property ("beliefs determine preferences") is negligible, in a geometric and a measure-theoretic sense. In contrast, we show that, in models with finite-dimensional type spaces, this property is topologically generic if the set of objects about which beliefs are formed is sufficiently rich and beliefs are derived by conditioning on the available information; for any agent, this information includes his own payoff parameters. |
| Keywords: | Mechanism Design, surplus extraction, BDP, correlated information, universal type space |
| JEL: | D82 D44 D40 D80 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_28&r=cta |
| By: | Junichiro Ishida |
| Abstract: | This paper explores the consequences of sabotage for the design of incentive contracts. The possibility of sabotage gives rise to a dynamic concern, similar to the Ratchet effect, which distorts the agents' incentives. We first show that the mere possibility of sabotage may make it impossible to implement the first-best effort, and then offer two distinct incentive schemes, fast track and late selection, to circumvent this problem. The present model offers a mechanism through which these two schemes arise in a unified framework. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0838&r=cta |
| By: | Ewers, Mara (University of Bonn) |
| Abstract: | This paper studies the influence of information on entry choices in a competition with a controlled laboratory experiment. We investigate whether information provision attracts mainly high productivity individuals and reduces competition failure, where competition failure occurs when a subject loses the competition because the opponent holds a higher productivity. Information on the opponent is a promising nudge to raise individuals' awareness towards the complexity of the decision problem and to update beliefs about success. In the experiment, subjects face the choice between a competition game and a safe outside option. We analyze subjects' entry behavior with a benchmark treatment without information and three treatments, where we exogenously manipulate the information on the opponents. Our results are, (1) information on the productivity distribution of all potential opponents reduces competition failures by more than 50%, (2) information on the distribution is sufficient, i.e. precise information on the matched opponent's type does not further diminish failure rates. |
| Keywords: | competition, experiment, information, overconfidence, self-assessment, self-selection, tournament |
| JEL: | C91 D03 D61 D81 D82 M13 M51 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6411&r=cta |
| By: | Vera Angelova (Max Planck Institute of Economics, Jena); Tobias Regner (Max Planck Institute of Economics, Jena) |
| Abstract: | The market for retail financial products (e.g. investment funds or insurances) is marred by information asymmetries. Clients are not well informed about the quality of these products. They have to rely on the recommendations of advisors. Incentives of advisors and clients may not be aligned, when fees are used by financial institutions to steer advice. We experimentally investigate whether voluntary contract components can reduce the conflict of interest and increase truth telling of advisors. We compare a voluntary payment upfront, an obligatory payment upfront, a voluntary bonus afterwards, and a three-stage design with a voluntary payment upfront and a bonus after. Across treatments, there is significantly more truthful advice when both clients and advisors have opportunities to reciprocate. Within treatments, the frequency of truthful advice is significantly higher when the voluntary payment is large. |
| Keywords: | financial advisors, asymmetric information, principal-agent, sender-receiver game, reciprocity, experiments, voluntary payment |
| JEL: | C91 D03 D82 G20 L15 M52 |
| Date: | 2012–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2012-011&r=cta |
| By: | Dietmar Fehr (Social Science Research Center, Berlin (WZB)); Frank Heinemann (Technische Universität Berlin); Aniol Llorente-Saguer (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | We present an experiment in which extrinsic information (signals) may generate sunspot equilibria. The underlying coordination game has a unique symmetric non-sunspot equilibrium, which is also risk-dominant. Other equilibria can be ordered according to risk dominance. We introduce salient but extrinsic signals on which subjects may condition their actions. By varying the number of signals and the likelihood that different subjects receive the same signal, we measure how strong these signals affect behavior. Sunspot equilibria emerge naturally if there are salient public signals. Highly correlated private signals may also cause sunspot-driven behavior, even though this is no equilibrium. The higher the correlation of signals and the easier they can be aggregated, the more powerful they are in dragging behavior away from the risk-dominant to risk-dominated strategies. Sunspot-driven behavior may lead to welfare losses and exert negative externalities on agents, who do not receive extrinsic signals. |
| Keywords: | coordination games, strategic uncertainty, sunspot equilibria, irrelevant information |
| JEL: | C92 C72 D84 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_33&r=cta |
| By: | Carvalho, M. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper presents the outcome of a dynamic price-descending auction when the distribution of the private values is uncertain and bidders exhibit ambiguity aversion. In contrast to sealed-bid auctions, in open auctions the bidders get information about the other bidders' private values and may therefore update their beliefs on the distribution of the values. The bidders have smooth ambiguity preferences and update their priors using consequentialist Bayesian updating. It is shown that ambiguity aversion usually affects bidding behavior the same way risk aversion does, but the main result is that this is not the case for continuous price descending auctions. This is new among a few theoretical cases where ambiguity aversion does not reinforce the risk aversion implications. |
| Keywords: | Ambiguity;Auctions;Revenue Equivalence. |
| JEL: | D03 D44 D89 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012022&r=cta |
| By: | Saskia VAN DER LOO; Stef PROOST |
| Abstract: | A federal government tries to force local governments to implement welfare optimal tolling and investment. Welfare optimal tolling requires charging for marginal external costs. Local governments have an incentive to charge more than the marginal social cost whenever there is transit traffic. We analyse the pricing and investment issue in an asymmetric information setting where the local governments have better information than the federal government. The case of air pollution and of congestion are discussed. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces11.19&r=cta |
| By: | Bognanno, Michael L. (Temple University); Melero Martín, Eduardo (Universidad Carlos III de Madrid) |
| Abstract: | This paper examines whether more informative job promotions carry larger wage increases. In job assignment models with asymmetric information, unexpected promotions send a signal to the external labor market to revise upward their assessment of a worker's ability. The employing firm must then increase wages to prevent the worker from being bid away. Less educated workers are assumed to come from a group with lower average ability. Their promotion is hypothesized to signal a larger positive assessment of their ability than for more highly educated workers for whom promotion is expected. Promotions for younger workers, with less known about their abilities, should also result in strong signaling effects. We find results in accordance with our hypotheses regarding the effect of both age and education on the gains to promotion. However, the statistical significance of the estimates hinges on the promotion definition. Younger workers receive statistically significantly higher wage increases upon promotion only when promotion is defined by the attainment of managerial responsibilities not previously held. Less educated workers obtain statistically significantly larger wage increases upon promotion at a weak level of significance (10%) across definitions of promotion but at a high level of significance (5%) only when the subjective definition of promotion is used. We interpret the sensitivity to the definition of promotion to suggest that promotions may be heterogeneous in the information they reveal about the employee in way that depends on the characteristics of the employee. |
| Keywords: | promotion, signaling, internal labor markets |
| JEL: | J3 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6431&r=cta |
| By: | Ewers, Mara (University of Bonn); Zimmermann, Florian (University of Bonn) |
| Abstract: | In this paper we ask if reports of private information about skills, abilities or achievements are affected by image concerns. We develop a simple model that illustrates how image utility can lead to misreporting of private information in contexts where truthful reports maximize monetary outcomes. In addition, we test the model's predictions in a controlled lab experiment. In the experiment, all subjects go through a series of quiz questions and subsequently report a performance measure. We vary if reports are made to an audience or not and find evidence for image effects. In the audience treatment, stated reports are significantly higher than in the private treatment. This suggests that overconfident appearance might be a consequence of social approval seeking. We also find that men state higher self-assessments than women. This gender difference seems to be driven by men responding more strongly to the presence of an audience. |
| Keywords: | image concerns, self-assessment, overconfidence, experiment |
| JEL: | C91 D03 D82 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6425&r=cta |
| By: | Cerqueiro, Geraldo (Universidade Católica Portuguesa); Ongena, Steven (CentER - Tilburg University and CEPR, Department of Finance); Roszbach, Kasper (Research Department, Central Bank of Sweden) |
| Abstract: | We study a change in the Swedish law that exogenously reduced the value of all outstanding company mortgages, i.e., a type of collateral that is comparable to the floating lien. We explore this natural experiment to identify how collateral determines borrower quality, loan terms, access to credit and bank monitoring of business term loans. Using a differences-in-differences approach, we find that following the change in the law and the loss in collateral value borrowers pay a higher interest rate on their loans, receive a worse quality assessment by their bank, and experience a substantial reduction in the supply of credit by their bank. The reduction in collateral value also precedes a decrease in bank monitoring intensity and frequency of both the collateral and the borrower, consistent with models in which the pledging of risky assets incentivizes banks to monitor. |
| Keywords: | Collateral; credit rationing; differences-in-differences; floating lien; loan contracts; monitoring; natural experiment |
| JEL: | D82 G21 |
| Date: | 2012–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0257&r=cta |
| By: | Rousakis, Michael (University of Warwick) |
| Abstract: | How does the economy respond to shocks to expectations? This paper addresses this question within a cashless, monetary economy. A competitive economy features producers and consumers/workers with asymmetric information. Only workers observe current productivity and hence they perfectly anticipate prices, whereas all agents observe a noisy signal about long-run productivity. Information asymmetries imply that monetary policy and consumers' expectations have real effects. Non-fundamental, purely expectational shocks are conventionally thought of as demand shocks. While this remains a possibility, expectational shocks can also have the characteristics of supply shocks : if positive, they increase output and employment, and lower inflation. Whether expectational shocks manifest themselves as demand or supply shocks depends on the monetary policy pursued. Forward-looking policies generate multiple equilibria in which the role of consumers' expectations is arbitrary. Optimal policies restore the complete information equilibrium. They do so by manipulating prices so that producers correctly anticipate their revenue despite their uncertainty about current productivity. I design targets for forward-looking interest-rate rules which restore the complete information equilibrium for any policy parameters. In ation stabilization per se is typically suboptimal as it can at best eliminate uncertainty arising through prices. This offers a motivation for the Dual Mandate of central banks. Key words: Asymmetric information ; producer expectations ; consumer expectations ; business cycles ; supply shocks ; demand shocks ; optimal monetary policy JEL Classification: E32 ; E52 ; D82 ; D83 ; D84 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:984&r=cta |
| By: | Zubanov, N.V. |
| Abstract: | The application of the classical "linear" model of incentive pay to the case when the noise is multiplicative to effort generates two predictions for a given strength of incentives: 1) more risk-averse workers will put in less effort, and 2) setting a performance target will weaken the negative risk aversion--effort link. The data from a real-effort laboratory experiment involving 85 student participants support both these predictions. Implications of the model and empirical findings to the literature on, and practice of, personnel management are discussed. |
| Keywords: | risk aversion;incentive pay;performance targets |
| Date: | 2012–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765032031&r=cta |
| By: | Erik Eyster; Andrea Galeotti; Navin Kartik; Matthew Rabin |
| Abstract: | We study observational learning in environments with congestion costs: as more of one's predecessors choose an action, the payoff from choosing that action decreases. If congestion on either action can get so large that an agent would prefer to take the other action no matter his beliefs about the state, then herds cannot occur. To the extent that \switching" away from the more popular action also reveals some private information, social learning is improved. The absence of herding is not enough to guarantee complete learning, however, as information cascades can occur through perpetual but uninformative switching between actions. For bounded private beliefs, we provide conditions that guarantee complete learning and conditions that guarantee bounded learning. Congestion costs have ambiguous effects on welfare as measured by the proportion of agents who choose the superior action. We apply our results to markets where congestion costs arise through responsive pricing and to queuing problems where agents dislike waiting for service. |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:706&r=cta |
| By: | Englmaier, Florian; Roider, Andreas; Sunde, Uwe |
| Abstract: | Incentive schemes affect performance and priorities of agents but, in reality, they can be complicated even for simple tasks. We analyze the effects of the salience of incentives in a team production setting where the principal has an interest in quantity and quality of output. We use data from a controlled field experiment that changed the communication of the incentive system without changing the incentive system. The results indicate that salience of incentives itself is statistically and economically important for performance. We find that higher salience of incentives for quantity increases quantity, reduces quality, and increases in-pocket income of team managers. |
| Keywords: | attention; communication; field experiments; incentives; salience |
| JEL: | D03 D80 J30 M52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8921&r=cta |