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on Contract Theory and Applications |
| By: | Xavier d'Haultfoeuille (CREST); Philippe Février (CREST) |
| Keywords: | incentives, asymmetric information, optimal contracts, nonparametric identification |
| JEL: | C14 D82 D86 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2011-29&r=cta |
| By: | Gabriel Desgranges (THEMA); Stéphane Gauthier (CREST) |
| Abstract: | We study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability obtains when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability obtains when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1 |
| Keywords: | Asymmetric Information, Common Knowledge, Eductive Learning, Rational Expectations, Rationalizability, Volatility |
| JEL: | C62 D82 D84 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2011-14&r=cta |
| By: | Jacob K. Goeree; Jingjing Zhang |
| Abstract: | Traders' values and information typically consist of both private and common-value elements. In such environments, full allocative efficiency is impossible when the private rate of information substitution differs from the social rate (Jehiel and Moldovanu, 2001). We link this impossibility result to a failure of the efficient market hypothesis, which states that prices adequately reflect all available information (Fama, 1970, 1991). The intuition is that if prices were able to reveal all information then the common value would simply shift traders' private values by a known constant and full allocative efficiency would result. In a series of laboratory experiments we study price formation in markets with private and common values. Rational expectations, which form the basis for the efficient market hypothesis, predict that the introduction of common values has no adverse consequences for allocative and informational efficiency. In contrast, a "private" expectations model in which traders' optimal behavior depends on both their private and common-value information predicts that neither full allocative nor full informational efficiency is possible. We test these competing hypotheses and find that the introduction of common values lowers allocative efficiency by 28% on average, as predicted by the private expectations model, and that market prices differ significantly and substantially from their rational expectation levels. Finally, a comparison of observed and predicted payoffs suggests that observed behavior is close to the equilibrium predicted by the private expectations model. |
| Keywords: | Efficient market hypothesis, informational and allocative efficiency, experiments |
| JEL: | C92 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:072&r=cta |
| By: | Maciej H. Kotowski (Harvard Kennedy School); Fei Li (Department of Economics, University of Pennsylvania) |
| Abstract: | We consider all-pay auctions in the presence of interdependent, affiliated valuations and private budget constraints. For the sealed-bid, all-pay auction we characterize a symmetric equilibrium in continuous strategies for the case of N bidders and we investigate its properties. Budget constraints encourage more aggressive bidding among participants with large endowments and intermediate valuations. We extend our results to the war of attrition where we show that budget constraints lead to a uniform amplification of equilibrium bids among bidders with sufficient endownments. An example shows that with both interdependent valuations and private budget constraints, a revenue ranking between the two mechanisms is generally not possible. |
| Keywords: | All-Pay Auction, War of Attrition, Budget Constraints, Common Values, Private Values, Affiliation, Contests |
| JEL: | D44 |
| Date: | 2012–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:12-019&r=cta |
| By: | Ayca Ozdogan |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:tob:wpaper:1204&r=cta |
| By: | Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Giovanni Immordino (Università di Salerno and CSEF) |
| Abstract: | This paper studies how incentives are affected by intention-based reciprocity preferences when the principal hires many agents. Our results describe the agents' psychological attitudes required to sustain a given strategy profile. We also show that hiring reciprocal agents to implement a first or a second-best contract will always benefit the principal if the strategy profile is symmetric. When instead the profile (first or second-best) is asymmetric the principal's best interest might be better served by self-interested agents. We conclude the paper by clarifying when symmetric profiles are most likely to arise. |
| Keywords: | reciprocity, many agents, psychological games |
| JEL: | C72 D03 D86 |
| Date: | 2012–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:314&r=cta |
| By: | Giovanni Ferri (University of Bari); Pierluigi Murro (LUISS University) |
| Abstract: | This paper tests the impact of an imperfect bank-firm type match on firms' financial constraints using a dataset of about 4,500 Italian manufacturing firms. We start considering an optimal matching of opaque (transparent) borrowing firms with relational (transactional) lending main banks. Next we contemplate the possibility that firm-bank "odd couples" materialize where opaque (transparent) firms end up matched with transactional (relational) main banks. Our results show that more than 25% of the firms falls into an "odd couple". Moreover, we find that the probability of rationing is larger when firms and banks match in "odd couples". We conjecture the "odd couples" emerge either since the bank's lending technology is not perfectly observable to the firm or because riskier firms - even though opaque - strategically select transactional banks in the hope of being classified as lower risks. |
| Keywords: | Bank-firm Relationship, Asymmetric Information, Credit Rationing. |
| JEL: | G21 D82 G30 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1207&r=cta |
| By: | Zwart, G.; Broer, D.P. (Tilburg University, Tilburg Law and Economics Center) |
| Abstract: | When a monopolist has discretion over the timing of infrastructure investments, regulation of post-investment prices interferes with incentivizing socially optimal investment timing. In a model of regulated lumpy investment under uncertainty, we study regulation when the regulator can condition price caps on investment timing. We analyse optimal regulation when there is asymmetric information on investment costs and regulation has to respect a budget constraint. We show that optimal regulation involves a price cap that decreases as a function of the monopolist's chosen investment time. |
| Keywords: | investment under uncertainty;asymmetric information;optimal regulation;budget constraint. |
| JEL: | D81 D82 L51 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubtil:2012020&r=cta |
| By: | Ingmar Nyman (Hunter College); Matthew Baker (Hunter College) |
| Abstract: | We study a labor market in which principals and agents must search for a trading partner, and agents have private information about the value of a match. We show that competitive pressure can induce agents to lie and over-state the value of the match. This leads to insufficient frictional unemployment and search, and lower average productivity and utility. A fully tax-financed unemployment insurance can therefore eliminate the inefficiency. Moreover, because inefficient “job-hoarding” by workers occurs when there are many workers per job, the analysis provides a novel explanation for the stylized macroeconomic fact that labor productivity is procyclical. |
| Keywords: | Search; Private Information; Competition; Labor Productivity; Unemployment Insurance |
| JEL: | D24 D82 D83 E32 J64 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:htr:hcecon:437&r=cta |
| By: | Sophie Bade (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | The study of matching problems typically assumes that agents precisely know their preferences over the goods to be assigned. Within applied contexts, this assumption stands out as particularly counterfactual. Parents typically do invest a large amount of time and resources to find out which school would be best for their children, doctors run costly tests to establish which kidney might be best for a given patient. In this paper I introduce the assumption of endogenous information acquisition into otherwise standard house allocation problems. I find that there is a unique ex ante Pareto-optimal, strategy-proof and non-bossy allocation mechanism: serial dictatorship. This stands in sharp contrast to the very large set of such mechanisms for house allocation problems without endogenous information acquisition. |
| Keywords: | Serial Dictatorship, House Allocation Problems, Endogenous Information |
| JEL: | C78 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2012_11&r=cta |
| By: | Karlsson, Martin; Klohn, Florian; Rickayzen, Ben |
| Abstract: | Our study reexamines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk - although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; ie people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied. |
| Keywords: | Information Asymmetries; Insurance markets; Applied Econometrics |
| Date: | 2012–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:dar:ddpeco:57826&r=cta |
| By: | Dorsch, Michael; Maarek, Paul |
| Abstract: | This paper presents an agency theory of revolutionary political transitions from autocracy to democracy. We model authoritarian economic policy as the equilibrium outcome of a repeated game between an elite ruling class and a disenfranchised working class, in which workers have imperfect information about the elite's policy choice and the economy's productive capacity. We characterize the conditions under which, in equilibrium, (i) the elite will set inefficient economic institutions under the threat of revolution, (ii) information shocks can catalyze democratic revolutions that may be contagious among similar countries, and (iii) democracy can be consolidated following a political transition. |
| Keywords: | Political transition; Revolution; Asymmetric information; Contagion; Democratic consolidation; Arab Spring |
| JEL: | D71 D74 P48 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38759&r=cta |
| By: | Isabelle Chort (PSE); Flore Gubert (Author-Workplace-Name:PSE); Jean-Noël Senne (CREST, PSE) |
| Keywords: | remittances, migrant workers, asymmetric information |
| JEL: | F24 F22 D82 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2011-34&r=cta |
| By: | Jellal, Mohamed; Bouzahzah, Mohamed |
| Abstract: | Under Principal-Agent-Supervisor paradigm, we examine in this paper how a tax collection agency changes optimal schemes in order to lessen the occurrence of corruption between the tax collector and the taxpayer. The Principal, who maximizes the expected net fiscal revenue, reacts by decreasing tax rates when the supervisor is likely to engage in corrupt transaction with taxpayer.The combat against collusion and corruption may explain the greater reliance on indirect taxes than on direct taxes both in developed and developing countries like Morocco. |
| Keywords: | Principal;Supervisor;Agent; Corruption; Tax Evasion |
| JEL: | D73 D82 H2 H26 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38813&r=cta |
| By: | Junichiro Ishida |
| Abstract: | This paper explores the consequences and implications of the "dual role of promotion" in an environment where a firm must simultaneously achieve two distinct goals -- assignment and incentive provision -- via the strategic use of promotions. We argue that the efficient promotion rule is generally not implementable, as it necessarily entails time-inconsistent objectives: the firm is always tempted ex post to promote the worker with the highest upside potential rather than the one with the highest output. This ex post bias towards the assignment role of promotion leads to inefficient task choices where too many workers are induced to work on the difficult task to signal their productivities. The framework identifies the costs and benefits of decentralization, in relation to factors such as the levels of human and social capital, the degree of market competition, firm size, and distance to the technology frontier, and provides predictions that are in line with recent empirical evidence. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0843&r=cta |