nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒06‒05
sixteen papers chosen by
Simona Fabrizi
Massey University, Albany

  1. When Do We Learn to Cooperate? The Role of Social Learning in Social Dilemmas By Best, James A
  2. Inefficient Predation, Information, and Contagious Institutional Change By Paul Maarek; Michael Dorsch
  3. Bayesian Games with Unawareness and Unawareness Perfection By Martin Meier; Burkhard Schipper
  4. On Continuity of Robust Equilibria By Ori Haimanko; Atsushi Kajii
  5. Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away By Sudipto Bhattacharya; Georgy Chabakauri; Kjell G. Nyborg
  6. CEO Pay with Perks By Andrew Carrothers; Seungjin Han; Jiaping Qiu
  7. A rationale for intra-party democracy By Zudenkova, Galina
  8. Judgment aggregation in search for the truth: the case of interconnections By Bozbay Irem
  9. Shipping the Good Apples Out Under Asymmetric Information By Anthony Creane; Thomas D. Jeitschko
  10. Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance By Amanda E. Kowalski
  11. Pay-for-Luck in CEO Compensation: Matching and Efficient Contracting By Pierre Chaigneau; Nicolas Sahuguet
  12. Do Public Health Interventions Crowd Out Private Health Investments? Malaria Control Policies in Eritrea By Carneiro, Pedro; Locatelli, Andrea; Ghebremeskel, Tewolde; Keating, Joseph
  13. Discount pricing By Armstrong, Mark; Chen, Yongmin
  14. Discount Pricing By Mark Armstrong; Yongmin Chen
  15. Asymmetric information and financial markets By Estrada, Fernando
  16. Gradual Bidding in eBay-Like Auctions By Attila Ambrus; James Burns; Yuhta Ishii

  1. By: Best, James A
    Abstract: In this paper, I look at the interaction between social learning and cooperative behavior. I model this using a social dilemma game with publicly observed sequential actions and asymmetric information about pay offs. I find that some informed agents in this model act, individually and without collusion, to conceal the privately optimal action. Because the privately optimal action is socially costly the behavior of informed agents can lead to a Pareto improvement in a social dilemma. In my model I show that it is possible to get cooperative behavior if information is restricted to a small but non-zero proportion of the population. Moreover, such cooperative behavior occurs in a finite setting where it is public knowledge which agent will act last. The proportion of cooperative agents within the population can be made arbitrarily close to 1 by increasing the finite number of agents playing the game. Finally, I show that under a broad set of conditions that it is a Pareto improvement on a corner value, in the ex-ante welfare sense, for an interior proportion of the population to be informed.
    Keywords: Asymmetric information, cooperation, effciency, social learning, social dilemmas,
    Date: 2011
  2. By: Paul Maarek; Michael Dorsch (THEMA, Universite de Cergy-Pontoise; The American University of Paris)
    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 inecient 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
  3. By: Martin Meier; Burkhard Schipper (Department of Economics, University of California Davis)
    Abstract: Applying unawareness belief structures introduced in Heifetz, Meier, and Schipper (2012), we develop Bayesian games with unawareness, define equilibrium, and prove existence. We show how equilibria are extended naturally from lower to higher awareness levels and restricted from higher to lower awareness levels. We apply Bayesian games with unawareness to investigate the robustness of equilibria to uncertainty about opponents' awareness of actions. We show that a Nash equilibrium of a strategic game is robust to unawareness of actions if and only if it is not weakly dominated. Finally, we discuss the relationship between standard Bayesian games and Bayesian games with unawareness.
    Keywords: Awareness, Unawareness, Type-space, Incomplete information, Bayesian games, Equilibrium, Perfection, Undominated equilibrium, Weak dominance, Inattention.
    JEL: C70 C72 D80 D82
    Date: 2012–05–08
  4. By: Ori Haimanko (Department of Economics, Ben-Gurion University); Atsushi Kajii (Institute of Economic Research, Kyoto University)
    Abstract: We relax the Kajii and Morris (1997a) notion of equilibrium ro- bustness by allowing approximate equilibria when information in a game becomes incomplete. The new notion is termed "approximate robustness". The approximately robust equilibrium correspondence turns out to be upper hemicontinuous, unlike the (exactly) robust equilibrium correspondence. Another distinction comes to light when we show that, as a corollary of upper hemicontinuity, approximately robust equilibria exist in all zero-sum games. Thus, although approx- imate robustness is only a small variation of the original notion, it is strictly weaker than the latter, and its adoption enriches the domain of games for which robust equilibria exist.
    Keywords: incomplete information, robustness, Bayesian Nash equi- librium, ε-equilibrium, upper hemicontinuity, zero-sum games
    JEL: C72
    Date: 2012–05
  5. By: Sudipto Bhattacharya; Georgy Chabakauri; Kjell G. Nyborg
    Abstract: We develop a model of securitized (Originate, then Distribute) lending, in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later some asymmetrically observed discernment of varying qualities of subsets thereof, play crucial roles. We nd that originators and potential buyers of such assets may dier in their preferences over their timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in sellers' selected timing of trades { arising from dierences in their ex ante beliefs { coupled with initial leverage choices based on pre-shock prices, may lead to nancial crises, implying uncoordinated asset liquidations inconsistent with any inter-temporal market equilibrium. We consider and contrast two mitigating regulatory interventions: leverage restrictions, and ex ante specied resale price guarantees on securitized asset portfolios. We show that the latter tool performs strictly better than the former, by ensuring not only bank survival, but also enhanced social surplus arising from securitized lending. It does so by inducing a more coordinated market equilibrium, that does not lead to interim leverage buildup to support a \cherry picking" seller trading strategy.
    Date: 2012–05
  6. By: Andrew Carrothers; Seungjin Han; Jiaping Qiu
    Abstract: This paper develops an equilibrium matching model for a competitive CEO market in which CEOs’ wage and perks are both endogenously determined by bargaining between firms and CEOs. In stable matching equilibrium, firm size, wage, perks and talent are all positively related. Perks are more sensitive than wage to changes in firm size if there are economies of scale in the cost of providing perks. Productivity-related perks provide common value by increasing both the CEO’s productivity and utility while non productivity-related perks provide private value by increasing the CEO’s utility only. The more perks enhance the CEO’s productivity, the faster perks increase in firm size. We test the predictions of the model using information on CEO wage and perks for S&P 500 companies and find consistent empirical evidence.
    Keywords: matching, perks, executive compensation, private benefits
    JEL: C78 J33 G30
    Date: 2012–05
  7. By: Zudenkova, Galina
    Abstract: This paper provides a rationale for intra-party democracy within a political agency model with moral hazard. The focus is on the party's internal procedures for policy determination. I show that democratizing those procedures benefits the party leadership, which seeks to maximize joint reelection chances of the party's incumbents. The reason is that under intra-party democracy, the voters adopt less demanding reappointment rules and reelect the party's incumbents more often than under leaders-dominated party structure. My results therefore indicate that democratizing policy determination processes within the party is in the interests of both the leadership and the ordinary members. The voters in turn are equally well off regardless of the party's internal procedure for policy determination.
    Keywords: Intra-party democracy; Leaders-dominated party; Policy determination; Party internal structure; Political agency; Moral hazard
    JEL: D72
    Date: 2012–05–21
  8. By: Bozbay Irem (METEOR)
    Abstract: This paper analyses the problem of aggregating judgments when strategic voters hold privateinformation about which propositions are true and share a common preference for true collectivejudgments. We go beyond previous work by introducing logical interconnections between thepropositions. A voter''s private information can be inconclusive. The goal is to determine thevoting rules which lead to collective judgments that efficiently incorporate all privateinformation. We characterize the (rare) situations in which such rules exist, as well as thenature of these rules.
    Keywords: microeconomics ;
    Date: 2012
  9. By: Anthony Creane (Department of Economics, Michigan State University); Thomas D. Jeitschko (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: The importance of institutions for economic growth has gathered considerable interest. For example, weak institutions can prevent firms from communicating their quality, which can lead to lower welfare. We explore how and whether exporting to markets with strong institutions may alleviate this when firms have high and low quality goods. Surprisingly, we find that access to developed markets can exacerbate the problems caused by weak institutions and harm home welfare. First, exporting can harm home welfare: the country is better off if all exporting were prevented. Second, any harm is increasing in the amount exported. Third, if not all high quality is exported, then home welfare can always be increased by restricting exports. Fourth, the opening of trade can reduce producer surplus and so in the long run lead to a reduction in the production of the export good. Fifth, welfare can decrease even if production of the exported good increases.
    Date: 2012–04
  10. By: Amanda E. Kowalski
    Abstract: Insurance induces a well-known tradeoff between the welfare gains from risk protection and the welfare losses from moral hazard. Empirical work traditionally estimates each side of the tradeoff separately, potentially yielding mutually inconsistent results. I develop a nonlinear budget set model of health insurance that allows for the calculation of both sides of the tradeoff simultaneously, allowing for a relationship between moral hazard and risk protection. An important feature of this model is that it considers nonlinearities in the consumer budget set that arise from deductibles, coinsurance rates, and stoplosses that alter moral hazard as well as risk protection relative to no insurance. I illustrate the properties of my model by estimating it using data on employer sponsored health insurance from a large firm. Within my empirical context, the average deadweight losses from moral hazard substantially outweigh the average welfare gains from risk protection. However, the welfare impact of moral hazard and risk protection are both small relative to transfers from the government through the tax preference for employer sponsored health insurance and transfers from some agents to other agents through a common premium.
    JEL: H00
    Date: 2012–05
  11. By: Pierre Chaigneau; Nicolas Sahuguet
    Abstract: We develop a stylized model of efficient contracting with matching between firms and managers with state-contingent reservation utility. We show that the optimal contract is designed to retain and insure the manager. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. This contract can be implemented with call options based on a single performance measure which generally does not filter out luck. When costs of involuntary managerial turnover differ across firms, and the abilities of different managers are more or less precisely estimated ex-ante, the model can also explain the observed association between pay-for-luck and bad corporate governance.
    Keywords: CEO pay, corporate governance, pay-for-luck, stock-options
    JEL: D86 G34 J33
    Date: 2012
  12. By: Carneiro, Pedro (University College London); Locatelli, Andrea (University College London); Ghebremeskel, Tewolde (Ministry of Health); Keating, Joseph (Tulane University)
    Abstract: It is often argued that engaging in indoor residual spraying (IRS) in areas with high coverage of mosquito bed nets may discourage net ownership and use. This is just a case of a public program inducing perverse incentives. We analyze new data from a randomized control trial conducted in Eritrea which surprisingly shows the opposite: IRS encouraged net acquisition and use. Our evidence points to the role of imperfect information. The introduction of IRS may have made the problem of malaria more salient, leading to a change in beliefs about its importance and to an increase in private health investments.
    Keywords: crowding out, behavior, beliefs, information, indoor residual spray, bed nets, malaria, health, developing countries
    JEL: D12 D83 H42 I10 I12
    Date: 2012–05
  13. By: Armstrong, Mark; Chen, Yongmin
    Abstract: This paper investigates "discount pricing", the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price. We discuss two reasons why a discounted price---as opposed to a merely low price---can make a rational consumer more willing to purchase the item. First, the information that the product was initially sold at a high price can indicate the product is high quality. Second, a discounted price can signal that the product is an unusual bargain, and there is little point searching for lower prices. We also discuss a behavioral model in which consumers have an intrinsic preference for paying a below-average price. Here, a seller has an incentive to offer different prices to identical consumers, so that a proportion of its consumers enjoy a bargain. We discuss in each framework when a seller has an incentive to offer false discounts, in which the reference price is exaggerated.
    Keywords: reference dependence; price discounts; sales tactics; false advertising
    JEL: D18 M3 D83
    Date: 2012–05
  14. By: Mark Armstrong; Yongmin Chen
    Abstract: This paper investigates discount pricing, the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price. We discuss two reasons why a discounted price - as opposed to a mearly low price - can make a rational consumer more willing to purchase the item. First, the information that the product was initially sold at a high price can indicate the product is high quality. Second, a discounted price can signal that the product is an unusual bargain, and there is little point searching for lower prices. We also discuss a behavioral model in which consumers have an intrinsic preference for paying a below-average price. Here, a seller has an incentive to offer different prices to identical consumers, so that a proportion of its consumers enjoy a bargain. We discuss in each framework when a seller has an incentive to offer false discounts, in which the reference price is exaggerated.
    Keywords: Reference dependence, Price discounts, Sales tactics, False advertising
    JEL: D03 D18 D83 M3
    Date: 2012
  15. By: Estrada, Fernando
    Abstract: This paper aims to explore the relevance of the Asymmetric Information and the Theory of Argumentation TA in the complex area of financial crises. Specifically, we investigated the scope of the phenomenon of persuasion in advertising. It examines advertisements in publications notable economic movement in Colombia. The financial communication is important to distinguish how to run the models of behavior based on beliefs of agents. Consequently, investors' beliefs can also change systematically with changes in market prices
    Keywords: Financial crises; Financial markets; economy; theory argumentation; information; advertising
    JEL: G14 G11 D81 M3 M37 D8 D85 G01
    Date: 2012
  16. By: Attila Ambrus; James Burns; Yuhta Ishii
    Abstract: This paper shows that in online auctions like eBay, if bidders are not continuously participating in the auction but can only place bids at random times, then many different equilibria arise besides truthful bidding, despite the option to leave proxy bids. These equilibria can involve gradual bidding, periods of inactivity, and waiting to start bidding towards the end of the auction--bidding behaviors common on eBay. In a common value environment, we characterize a class of equilibria that include the best and worst equilibria for the seller. The revenue of the seller in the latter can be a small fraction of what could be obtained at a sealed-bid second-price auction. For large number of bidders, we show that the worst equilibrium has the feature that bidders are passive until near the end of the auction, and then they start bidding incrementally.
    Date: 2012

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