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on Contract Theory and Applications |
| By: | Sara Malekan; Georges Dionne |
| Abstract: | Securitization is one of the most important innovations in financial markets. It is a process of converting illiquid loans that cannot be sold readily to third-party investors into liquid securities and selling them to dispersed investors. As a result, securitization improves liquidity in capital markets by allowing originators to remove the issued loans from its balance sheet and use the proceeds for other purposes or even to originate new loans. In spite of all its advantages, securitization is often suspected of being one of the main reasons for the recent financial crisis. One concern that is frequently raised in the literature is that securitization leads to moral hazard in lender screening and monitoring. By selling loans to investors and removing them from their books, banks have a lesser incentive to carefully evaluate and monitor borrowers’ credit quality to ensure that they can repay the loans, because the risk of delinquencies falls on investors rather than lenders. One problem in the literature is that the analysis of securitization is very general and suffers from a lack a specific security design analysis under asymmetric information. We address the moral hazard problem using a principal-agent model where the investor is the principal and the lender is the agent. We show that the optimal contract must contain a retention clause in the presence of moral hazard. |
| Keywords: | Securitization, optimal retention, moral hazard, principal-agent model, default, screening monitoring |
| JEL: | D81 D82 D86 G24 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1221&r=cta |
| By: | Gürtler, Marc; Gürtler, Oliver |
| Abstract: | We analyze the interaction of explicit and implicit contracts in a model with selfish and fair principals. Fair principals are willing to honor implicit agreements, whereas selfish principals are not. Principals are privately informed about their types. We investigate a separating equilibrium in which principals reveal their type through the contract o er to the agent. If this equilibrium is played, explicit and implicit contracts are substitutes. Since the agent learns the principal's type, a selfish principal has to rely on explicit incentives. A fair principal, by contrast, can effectively induce implicit incentives and hence does not need to use explicit incentives. Interestingly, if a selfish principal can rely on more effective explicit incentives, a fair principal becomes more likely to be able to separate from the selfish type and, hence, to make better use of implicit incentives. In this sense, there is a strategic complementarity between explicit and implicit incentives. -- |
| Keywords: | explicit contracts,implicit contracts,separating equilibrium,substitutes,strategic,complementarity |
| JEL: | D82 D86 M52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tbsifw:if38v1&r=cta |
| By: | Shunya Sugawara (Graduate School of Economics, University of Tokyo); Yasuhiro Omori (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper proposes a simple econometric framework that can identify moral hazard and selection problems separately in insurance markets. Although our methodology requires behavioral assumptions on the consumer's optimization, we show that these assumptions are necessary for the separate identification of the two sources of information asymmetry. Our method is applied to the dental insurance market in the United States. In addition to standard moral hazard, we find advantageous selection, which is not detected by a conventional methodology. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2012cf849&r=cta |
| By: | Nicolas Dupas (Caisses des Dépôts et Consignations - Caisse des dépôts et consignations); Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université de Nice Sophia Antipolis (UNS), OFCE - OBSERVATOIRE FRANCAIS DES CONJONCTURES ECONOMIQUES - Institut d'Études Politiques (IEP) - Paris); Arnaud Voisin (Caisses des Dépôts et Consignations - Caisse des dépôts et consignations) |
| Abstract: | Private finance has brought to public-private partnerships a third-party overlook on the contracts. Bringing into the appraisal of PPP deals banks and rating agencies results in outsourcing the due diligence of the project to the party best suited to perform it. This reduction in asymmetries of information can occur both in the competition for the market stage or in the competition within the market stage (yardstick competition).At the negotiation stage, funding competition helps to increase the public sector's information on the deal. Of course, the cost of collecting this information should not overweight the savings it induces. In order to maintain competitive pressure through the lifecycle of the project, value testing schemes, as benchmarking or market testing are used. However, they induce concerns about transaction costs and could reduce the certainty about the charge for the public partner. |
| Keywords: | Private finance initiative, asymmetries of information, funding competition |
| Date: | 2011–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00202327&r=cta |
| By: | Peitz, Martin; Inderst, Roman |
| Abstract: | We analyze a model of monopolistic price discrimination where only some consumers are originally sufficiently informed about their preferences, e.g., about their future demand for a utility such as electricity or telecommunication. When more consumers become informed, we show that this benefits also those consumers who remain uninformed, as it reduces the firm’s incentives to extract information rent. By reducing the costs of information acquisition or forcing firms to supply consumers with the respective information about past usage, policy can further improve welfare, as contracts become more efficient. The last observation stands in contrast to earlier findings by Crémer and Khalil (American Economic Review 1992), where all consumers are uninformed. |
| Keywords: | Nonlinear pricing , price discrimination , monopolistic screening , information acquisition |
| JEL: | D42 D82 L12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mnh:wpaper:31325&r=cta |
| By: | Marie-Cécile Fagart; Claude Fluet |
| Abstract: | We provide sufficient conditions for the first-order approach in the principal-agent problem when the agent’s utility has the non-separable form u(y - c(a)) where y is the contractual payoff and c(a) is the money cost of effort. We first consider a decision-maker facing prospects which cost c(a) with distributions of returns y that depends on a. The decision problem is shown to be concave if the primitive of the cumulative distribution of returns is a convex function, a condition we call Concavity of the Cumulative Quantile (CCQ). Next we apply CCQ to the distribution of outcomes (or their likelihood-ratio transforms) in the principal-agent problem and derive restrictions on the utility function that validate the first-order approach. We also discuss a stronger condition, log-convexity of the distribution, and show that it allows binding limited liability constraints, which CCQ does not. |
| Keywords: | Principal-agent models, moral hazard, stochastic decision problem, quantile function, information systems |
| JEL: | D81 D82 D86 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1220&r=cta |
| By: | Stephanie Wang |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:489&r=cta |
| By: | Juan-José Ganuza; Jos Jansen |
| Abstract: | By using general information structures and precision criteria based on the dispersion of conditional expectations, we study how oligopolists' information acquisition decisions may change the effects of information sharing on the consumer surplus. Sharing information about individual cost parameters gives the following trade-off in Cournot oligopoly. On the one hand, it decreases the expected consumer surplus for a given information precision, as the literature shows. On the other hand, information sharing increases the firms' incentives to acquire information, and the consumer surplus increases in the precision of the firms' information. Interestingly, the latter effect may dominate the former effect. |
| Keywords: | Information acquisition, information sharing, information structures, oligopoly, consumer surplus |
| JEL: | D82 D83 L13 L40 |
| Date: | 2012–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0054&r=cta |
| By: | Alistair J. Wilson; Emanuel Vespa |
| Abstract: | We implement the Battaglini (2002) model of multi-sender-multi-dimension cheap talk in the laboratory, analyzing the effects of sender competition on information transmission. Our results indicate that competing senders provide enough information for close to full revelation, but receiver`s ability to use this information crucially depends on senders` biases. Receivers are close to full extraction when biases identify an ex-ante trustworthy sender. When there is no ex-ante trustworthy source, fully exploiting sent messages requires information to be inferred across dimensions. However, receivers seem to treat dimensions as separate choices, and are much closer to best-responding within each separate dimension. |
| Keywords: | Multiple Senders, Strategic Information Transmission, Experiment, Recommendations |
| JEL: | C72 C92 D83 D84 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:461&r=cta |
| By: | Guerrazzi, Marco |
| Abstract: | This paper introduces a model of efficiency-wage competition along the lines put forward by Hahn (1987). Specifically, I analyse a two-firm economy in which employers screen their workforce by means of increasing wage offers competing one another for high-quality employees. The main results are the following. First, using a specification of effort such that the problem of firms is concave, optimal wage offers are strategic complements. Second, a symmetric Nash equilibrium can be locally stable under the assumption that firms adjust their wage offers in the direction of increasing profits by conjecturing that any wage offer above (below) equilibrium will lead competitors to underbid (overbid) such an offer. Finally, the exploration of possible labour market equilibria reveals that effort is counter-cyclical. |
| Keywords: | Efficiency-Wages; Wage Competition; Nash Equilibria; Effort |
| JEL: | E12 E24 J41 C72 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38140&r=cta |
| By: | Bernhard Ganglmair; Emanuele Tarantino |
| Abstract: | In a model of industry standard setting with private information about firms' intellectual property, we analyze (a) firms' incentives to contribute to the development and improvement of a standard, and (b) firms' decision to disclose the existence of relevant intellectual property to other participants of the standard-setting process. If participants can disclose after the end of the process and fully exploit their bargaining leverage, then patent holders aspire to disclose always after the end of the process. However, if a patent holder cannot rely on the other participants to always contribute to the process, then it may be inclined to disclose before the end of the process. We also analyze under which conditions firms enter cross-licensing agreements that eliminate the strategic aspect of patent disclosure, and show that, in an institutional setting that implies a waiver of intellectual property rights if patents are not disclosed timely, firms aspire to disclose before the end of the process. Finally, we study the effect of product-market competition on patent disclosure. |
| JEL: | D71 D83 L15 O34 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17999&r=cta |
| By: | Dirk Bergemann; Stephen Morris; Satoru Takahashi |
| Date: | 2012–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000427&r=cta |
| By: | Sharmina Ahmed; Christopher Findlay |
| Abstract: | Though sharecropping remains widespread, its determinants are still poorly understood and the debate over the extent of risk-sharing and moral hazard is far from settled. Moreover, existing empirical study very often plague by selection problem. We address both issues using data from rural Bangladesh. This paper tested a model empirically where the leasing decision and contract choice are simultaneous. A modified Heckman model is estimated which avoids the selectivity bias of observed contracts. Empirical tests reject the hypothesis of pure risk sharing and a wide range of support for the presence of moral hazard problem in the choice of contracts. |
| Keywords: | Contract choice, Heckman model, Moral hazard, Risk, Sharecropping. |
| JEL: | Q15 |
| Date: | 2012–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2012_04&r=cta |
| By: | Englmaier, Florian (University of Würzburg); Roider, Andreas (University of Heidelberg); Sunde, Uwe (University of St. Gallen) |
| 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: | incentives, attention, salience, communication, field experiments |
| JEL: | M52 J30 D03 D80 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6448&r=cta |
| By: | Joy A. Buchanan (Interdisciplinary Center for Economic Science, George Mason University); Steven Gjerstad (Economic Science Institute, Chapman University); David Porter (Economic Science Institute, Chapman University) |
| Abstract: | This study compares bidding behavior in a multi-unit uniform-price descending price (Dutch) auction under four different information conditions. Bidders are either informed of the number of bidders in the auction, or know that it is one of two possible sizes; they also either know the number of units remaining for sale or are unaware of how many units have been taken by other bidders. We find that revealing group size decreases bids, and therefore revenue, if units remaining are not shown. When group size is unknown the price also falls if the number of units remaining is revealed. The most efficient and largest revenue outcome occurs when bidders are not provided information on either group size or units remaining. |
| Keywords: | Experimental Economics, Auctions, Institutions |
| JEL: | C9 D44 D02 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:12-08&r=cta |
| By: | Marco Casari; Timothy N. Cason |
| Abstract: | Experimental evidence has accumulated highlighting the limitations of formal and explicit contracts in certain situations, and has identified environments in which informal and implicit contracts are more efficient. This paper documents the superior performance of explicit over implicit contracts in a new partnership environment in which both contracting parties must incur effort to generate a joint surplus, and one (“strong”) agent controls the surplus division. In the treatment in which the strong agent makes a non-binding, cheap talk “bonus” offer to the weak agent, this unenforceable promise doubles the rate of joint high effort compared to a baseline with no promise. The strong agents most frequently offered to split the gains of the high effort equally, but actually delivered this amount only about onequarter of the time. An explicit and enforceable contract offer performs substantially better, increasing the frequency of the most efficient outcome by over 200 percent relative to the baseline. |
| Keywords: | Experiments; laboratory; social preferences; inequity aversion; reciprocity; trust. |
| JEL: | C70 D03 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1270&r=cta |
| By: | Sourav Bhattacharya |
| Abstract: | Poor communities sometimes resist private investment and destroy economic surplus even if the government has the willingness and ability to redistribute. We interpret such acts of resistance as demands for redistribution: destruction contains credible information about how affected groups value surplus, which helps the government in implementing the optimal redistribution policy. Destruction is increasing in the extent of political marginalization of the affected group. While resistance has informational value, it has two distinct costs: it directly reduces surplus and also reduces the investor's incentives to create surplus. The government uses a tax/subsidy on the investor to maximize weighted social surplus, and we show that the possibility of destruction may force the government to be too soft in its negotiations with the investor. We discuss conditions under which the government should ban resistance or should allow resistance but compensate the investor for its losses incurred in order to enhance social welfare. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:454&r=cta |