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on Contract Theory and Applications |
| By: | Bhaskar, Venkataraman |
| Abstract: | We study dynamic moral hazard, with symmetric ex ante uncertainty and learning. Unlike Holmstrom's career concerns model, uncertainty pertains to the difficulty of the job rather than the general talent of the agent, so that contracts are required to provide incentives. Since effort is privately chosen, the agent can always cause a misalignment of beliefs between the principal and himself, by shirking. We show that such a misalignment is always profitable for the agent, and must be dissuaded by providing more high powered incentives. However, high powered incentives in the future only aggravate the incentive problem today, so that the problem is compounded as the interaction becomes longer. We also study the benefits of long term contracts with full commitment, and the role of random effort choice. |
| Keywords: | learning; moral hazard |
| JEL: | D83 D86 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8948&r=cta |
| By: | Julie Ing (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon) |
| Abstract: | We study the optimal contracts (payment and extraction path) implemented by a regulator unable to commit to long term contracts that delegates the extraction of a nonrenewable resource to a firm. The regulator wishes to maximize the tax revenue and does not know the firm's efficiency which is private information. As the regulator is unable to commit, the ratchet effect appears. We show that the contracts implemented depend on which types of firms exhaust the stock. If both types exhaust the stock, the contracts are fully separating and similar to those implemented under full commitment. The efficient firm produces the first best and gets an informational rent whereas the inefficient one produces lower quantity. If the stock is not exhausted, the contracts are semi separating and the inefficient firm produces higher quantity than under full commitment and the tax revenue is lower. However, those contracts may not be incentive compatible if the discount factor and the second period price are high and thus the regulator may be forced to implement a pooling contract. |
| Keywords: | Nonrenewable resources; commitment; asymmetric information |
| Date: | 2012–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00690896&r=cta |
| By: | Simon Gaechter (University of Nottingham); Esther Kessler (University College London); Manfred Koenigstein (Universitaet Erfurt) |
| Abstract: | Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive compatible contracts. Incentive-compatible contracts induce best-reply effort and crowd out any voluntary cooperation. Further experiments show that this result is robust to two important variables: experiencing Trust contracts without any incentives and implicit incentives coming from repeated interaction. Implicit incentives have a strong positive effect on effort only under non-incentive compatible contracts. |
| Keywords: | principal-agent games; gift-exchange experiments; incomplete contracts, explicit incentives; implicit incentives; repeated games; separability; experiments |
| JEL: | C70 C90 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2011-06&r=cta |
| By: | Pagès, H.; Possamai, D. |
| Abstract: | In this paper, we take up the analysis of a principal/agent model with moral hazard introduced in [15], with optimal contracting between a competitive investor and an impatient bank monitoring a pool of long-term loans subject to Markovian contagion. We provide here a comprehensive mathematical formulation of the model and show using martingale arguments in the spirit of Sannikov [17] how the maximization problem with implicit constraints faced by investors can be reduced to a classic stochastic control problem. The approach has the advantage of avoiding the more general techniques based on forward-backward stochastic differential equations described in [6] and leads to a simple recursive system of Hamilton-Jacobi-Bellman equations. We provide a solution to our problem by a verification argument and give an explicit description of both the value function and the optimal contract. Finally, we study the limit case where the bank is no longer impatient. |
| Keywords: | Default Correlation, Dynamic Moral Hazard, Forward-Backward Stochastic Differential Equations. |
| JEL: | G21 G28 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:378&r=cta |
| By: | Pagès, H. |
| Abstract: | The paper examines a continuous-time delegated monitoring problem between a competitive investor and an impatient bank monitoring a pool of long-term loans subject to Markovian "contagion." Moral hazard induces a foreclosure bias unless the bank is compensated with the right incentive-compatible contract. Fees are paid when the bank's performance is on target and liquidation arises when the bank's performance is sufficiently poor. I show that the optimal contract can be implemented with a whole loan sale involving both credit risk retention based on ABS credit default swaps and credit enhancement in the form of a reserve account. The optimal securitization bears out rulemaking recently proposed in the wake of the Dodd-Frank Act on a number of controversial provisions. I argue that further efficiency gains could be reaped by extending the role of the "premium capture" account into a liquidity buffer capturing performance-based compensation as a way to increase skin in the game over the life of the deal. |
| Keywords: | ABS Credit Default Swaps, Banking Regulation, Default Correlation, Dynamic Moral Hazard, Optimal Securitization, Risk Retention. |
| JEL: | G21 G28 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:377&r=cta |
| By: | Segev, Ella; Sela, Aner |
| Abstract: | We study multi-stage sequential all-pay contests (auctions) where heterogeneous contestants are privately informed about a parameter (ability) that affects their cost of effort. We characterize the sub-game perfect equilibrium of these multi-stage sequential all-pay contests and analyze the effect of the number of contestants, their types, and their order on the expected highest effort. |
| Keywords: | All-pay auctions; Sequential contests |
| JEL: | D44 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8949&r=cta |
| By: | Laun, Tobias (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | This paper analyzes optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting, so-called, prevention effort, which is costly in terms of utility. A healthy, i.e., not disabled, individual either works or is unemployed. An unemployed individual can exert search effort in order to increase the probability of finding a new job. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal in this setting. The prevention constraint implies increasing benefits over time while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently much to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment. |
| Keywords: | Unemployment insurance; Disability insurance; Optimal contracts |
| JEL: | D86 E24 H53 J65 |
| Date: | 2012–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0742&r=cta |
| By: | Besancenot, Damien (University of Paris 13 and CEPN); Dubart, Delphine (ESSEC Business School); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | Humans can lie strategically in order to leverage on their negotiation power. For instance, governments can claim that a "scapegoat" third party is responsible for reforms that impose higher costs on citizens, in order to make the pill sweeter. This paper analyzes such communication strategy within a variant of the ultimatum game. The first player gets an endowment, and the second player can impose a tax on it. The former can reject the allocation submitted by the tax-setter. A third party is then allowed to levy its own tax, and its intake is private information to the tax-setter. In a frameless experiment, 65% of the subjects in the tax-setter role overstate the tax levied by the third party in order to manipulate taxpayer’s expectations and submit less advantageous offers; on average, for every additional currency unit of lie, measured by the gap between the claimed and the actual tax, they would reduce their offer by 0.43 currency units. |
| Keywords: | Ultimatum game; Taxation; Lies; Deception; Asymmetric information |
| JEL: | C91 D82 D83 |
| Date: | 2012–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-12005&r=cta |
| By: | Besancenot, Damien (CEPN); Dubart, Delphine (ESSEC Business School); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | Humans often lie strategically. We study this problem in an ultimatum game involving informed proposers and uninformed responders, where the former can send an unverifiable statement about their endowment. If there are some intrinsically honest proposers, a simple message game shows that the rest of them are likely to declare a lower-than-actual endowment to the responders. In the second part of the paper, we report on an experiment testing this game. On average, 88.5% of the proposers understate the actual endowment by 20.5%. Regression analysis shows that a one-dollar gap between the actual and declared amounts prompts proposers to reduce their offer by 19 cents. However, responders appear not to take such claims seriously, and thus the frequency of rejections should increase. The consequence is a net welfare loss, that is specific to such a "free-to-lie" environment. |
| Keywords: | Ultimatum game; Asymmetric information; Lying costs; Strategic lies; Deception; Welfare loss |
| JEL: | C91 D82 D83 |
| Date: | 2012–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-12007&r=cta |
| By: | Pintér, Miklós |
| Abstract: | Ely and Peski (2006) and Friedenberg and Meier (2010) provide examples when changing the type space behind a game, taking a "bigger" type space, induces changes of Bayesian Nash Equilibria, in other words, the Bayesian Nash Equilibrium is not invariant under type morphisms. In this paper we introduce the notion of strong type morphism. Strong type morphisms are stronger than ordinary and conditional type morphisms (Ely and Peski, 2006), and we show that Bayesian Nash Equilibria are not invariant under strong type morphisms either. We present our results in a very simple, finite setting, and conclude that there is no chance to get reasonable assumptions for Bayesian Nash Equilibria to be invariant under any kind of reasonable type morphisms. |
| Keywords: | Games with incomplete information; Bayesian Nash Equilibrium; Type space |
| JEL: | D80 C72 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38499&r=cta |
| By: | Raduna, Daniela Viviana; Roman, Mihai Daniel |
| Abstract: | Human behavior, rational or irrational one, influences one of the most complex markets worldwide: the insurance market. In most situations, insurance markets are not competitive and risk neutral insurers negotiate under asymmetric information with actors who exhibit risk aversion. In this paper we develop a game theory model that analyzes the negotiation of an insurance contract under risk aversion conditions (in static and dynamic approach). Risk aversion influence was introduced in the model by intermediary of a discount factor (the in equivalent to players’ patience) instead of using a utility function. The main conclusion is that the customer prefers to agree on a contract of insurance in the first stage of negotiation than having to wait for another round of negotiations, during which they could register various losses. |
| Keywords: | contract negotiations; model; insurance; dynamic game; risk aversion; discount factor |
| JEL: | C78 D81 G22 C73 |
| Date: | 2011–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37725&r=cta |
| By: | Eijffinger, Sylvester C W; Nijskens, Rob |
| Abstract: | Bailout expectations have led banks to behave imprudently, holding too little capital and relying too much on short term funding to finance long term investments. This paper presents a model to rationalize a constructive ambiguity approach to liquidity assistance as a solution to forbearance. Faced with a bank that chooses capital and liquidity, the institution providing liquidity assistance can commit to a mixed strategy: never bailing out is too costly and therefore not credible, while always bailing out causes moral hazard. In equilibrium, the bank chooses above minimum capital and liquidity, unless either capital costs or the opportunity cost of liquidity are too high. We also find that the probability of a bailout is higher for a regulator more concerned about bank failure, and when the bailout penalty for the bank is higher; this suggests that forbearance is not entirely eliminated by adopting ambiguity. |
| Keywords: | banking; commitment; Lender of Last Resort; liquidity; regulation |
| JEL: | E58 G21 G28 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8953&r=cta |
| By: | Boffa, F.; Piolatto, A.; Ponzetto, G.A.M. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper studies fiscal federalism when voter information varies across regions. We develop a model of political agency with heterogeneously informed voters. Rentseeking politicians provide public goods to win the votes of the informed. As a result, rent extraction is lower in regions with higher information. In equilibrium, electoral discipline has decreasing returns. Thus, political centralization e¢ ciently reduces aggregate rent extraction. The model predicts that a region's benefits from centralization are decreasing in its residents' information. We test this prediction using panel data on pollutant emissions across U.S. states. The 1970 Clean Air Act centralized environ- mental policy at the federal level. In line with our theory, we find that centralization induced a differential decrease in pollution for uninformed relative to informed states. |
| Keywords: | Political centralization;Government accountability;Imperfect information;Interregional heterogeneity;Elections;Environmental policy;Air pollution . |
| JEL: | D72 D82 H73 H77 Q58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012033&r=cta |
| By: | Loukas Balafoutas; Glenn Dutcher; Florian Lindner; Dmitry Ryvkin |
| Abstract: | Tournaments are widely used in organizations, explicitly or implicitly, to reward the best-performing employees, e.g., through promotion or bonuses, and to punish the worst-performing employees, e.g., through firing or unfavorable job assignments. We use a principal-agent model to compare the efficiency of two tournament incentive schemes, reward tournament and punishment tournament, which, respectively, reward the best performer and punish the worst performer. We show that while the two schemes are equivalent when agents are symmetric in their ability, the equivalence is broken in the presence of heterogeneity. Specifically, punishment tournaments lead to higher profits of the firm. The reason is that low-ability agents are discouraged less in punishment tournaments than in reward tournaments, and hence can be compensated less to meet their participation constraints. Hence, our results predict that firms using punishment tournament contracts will perform better. |
| Keywords: | tournament, reward, punishment, contract, heterogeneous agents |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2012-08&r=cta |