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on Contract Theory and Applications |
| By: | Huric Larsen, J.F. |
| Abstract: | Governments dislike poorly performing public firms and often see deregulation and privatisation as a way to improve performance and social welfare. From a theoretical point of view poor performance may be due to information asymmetries between the informed public firm and the relatively uninformed regulator. The point of view in the paper is that the information asymmetries that makes the regulator unable to achieve first best during regulation, is also the cause of deregulation and privatization failure. The effect on public firm incentives from introducing deregulation as a consequence from choosing a specific regulation contract is analysed. |
| Keywords: | Regulation; public firms; incentives; optimal deregulation; asymmetric information; deregulation; privatization; contracts; public policy |
| JEL: | D21 D82 D01 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39351&r=cta |
| By: | Simeon Schudy; Verena Utikal |
| Abstract: | We investigate the consequences of imperfect data privacy on information acquisition about personal health status. In a simplified game of persuasion players decide on whether or not to acquire information about their health status before searching for a matching partner (e.g. an insurance company). We contrast three institutional settings: automatic dissemination of certified test results, perfect data privacy and imperfect data privacy about certified test results (i.e. potentially involuntary dissemination). Assuming that the ex-ante expected payoff of a match with an unknown type is positive, we find that equilibria with complete information acquisition and complete information revelation exist only under perfect and imperfect data privacy whereas equilibria without any information acquisition exist under all institutional settings. We test our predictions in a laboratory experiment. Indeed, both imperfect and perfect data privacy yield almost perfect information acquisition. Automatic dissemination leads to incomplete information acquisition. |
| Keywords: | data privacy, endogenous information acquisition, health, experiment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0076&r=cta |
| By: | Bekkerman, Anton; Smith, Vincent H.; Watts, Myles J. |
| Abstract: | The Supplemental Revenue Assistance Payments (SURE) program, introduced in the 2008 Farm Bill, provides disaster aid payments to producers in counties eligible for disaster payments and individual producers with crop production losses that exceed 50% of their expected yields. We show that the program’s "rules of the game" create moral hazard and adverse selection incentives. Then, we empirically analyze possible moral hazard and adverse selection behavior in response to the SURE program by corn, soybean, and wheat producers. Results suggest that recent increases in crop insurance participation may be due to increased moral hazard and adverse selection incentives. |
| Keywords: | Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124178&r=cta |
| By: | Martimort, David; Straub, Stéphane |
| Abstract: | We analyze how uncertainty regarding future climate conditions affects the design of concession contracts, organizational forms and technological choices in a principal-agent context with dynamic moral hazard, limited liability and irreversibility constraints. The prospect of future, uncertain productivity shocks on the returns on the firm’s effort creates an option value of delaying efforts which exacerbates agency costs. Contracts and organizational forms are drafted to control this cost of delegated flexibility. Our analysis is relevant for infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of Public-Private Partnerships in this context. |
| JEL: | D82 L32 Q54 |
| Date: | 2012–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:25892&r=cta |
| By: | Martimort, David; Straub, Stéphane |
| Abstract: | We analyze how uncertainty regarding future climate conditions affects the design of concession contracts, organizational forms and technological choices in a principal-agent context with dynamic moral hazard, limited liability and irreversibility constraints. The prospect of future, uncertain productivity shocks on the returns on the firm’s effort creates an option value of delaying efforts which exacerbates agency costs. Contracts and organizational forms are drafted to control this cost of delegated flexibility. Our analysis is relevant for infrastructure sectors that are sensitive to changing weather conditions and sheds a pessimistic light on the relevance of Public-Private Partnerships in this context. |
| JEL: | D82 L32 Q54 |
| Date: | 2012–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:25890&r=cta |
| By: | Stephens, Eric (University of Alberta, Department of Economics); Thompson, James (University of Waterloo) |
| Abstract: | We analyze the role of transaction costs in risk transfer markets. For example, when these markets are in their infancy, they are characterized by few contracts and high transaction costs. In this case, we show that only highly risk-averse buyers (e.g., hedgers) exist in the market alongside high quality counterparties, and no asymmetric information can be present on either the quality of the risk being transferred or the quality of the counterparty to which the risk is ceded. With lower transaction costs, we show that less risk-averse buyers (e.g., speculators) will enter the market thereby increasing risk transfer; however, these buyers will choose to contract with less stable counterparties. When transaction costs are low, we show that asymmetric information on the quality of the risk being transferred and of the quality of the counterparties can exist in equilibrium. Finally, we analyze the effect of a transaction tax, which is viewed simply as an increase in transaction costs. Such a tax is shown to push relatively less risk-averse buyers out of the market, which tends to reduce the relative number of unstable counterparties. In addition, we show that it reduces the rents that can be extracted due to asymmetric information. |
| Keywords: | risk transfer; transaction costs; counterparty risk; transaction taxes |
| JEL: | G00 G14 G22 |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2012_012&r=cta |
| By: | Simona Fabrizi (School of Economics and Finance, Massey University, New Zealand); Steffen Lippert (Department of Economics, University of Otago, New Zealand) |
| Abstract: | We build a principal-agent-client model of corruption, allowing for heterogeneity in the value of public projects relative to the cost of monitoring their execution and for uncertainty of corruptors regarding the value of a project conducted. We derive the conditions under which officials with low-value projects have an incentive to signal their projects' type, and thereby facilitate their corruption, by means of public displays of wealth. While such public displays reduce the probability with which bribes are offered to officials conducting high-value projects, they increase the probability with which these officials accept bribes sufficiently to offset any positive effect. |
| Keywords: | Corruption, Incentives, Signaling, Public Displays of Wealth |
| JEL: | D73 D82 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:otg:wpaper:1202&r=cta |
| By: | Ozdenoren, Emre; Yuan, Kathy |
| Abstract: | We propose a new theory of suboptimal risk-taking based on contractual externalities. We examine an industry with a continuum of firms. Each firm's manager exerts costly hidden effort The productivity of effort is subject to systematic shocks. Firms' stock prices reflect their performance relative to the industry average. In this setting, stock-based incentives cause complementarities in managerial effort choices. Externalities arise because shareholders do not internalize the impact of their incentive provision on the average effort. During booms, they over-incentivise managers, triggering a rat-race in effort exertion, resulting in excessive risk relative to the second-best. The opposite occurs during busts. |
| Keywords: | Contractual Externalities; Excessive Risk-Taking; Insufficient Risk-Taking; Stock-Based Incentives |
| JEL: | D86 G01 G30 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9000&r=cta |
| By: | Banerjee, Prasenjit; Shogren, Jason F. |
| Abstract: | This paper investigates the interaction between consumers and producers in designing incentive mechanism for climate protection. Firms have material interests in building a moral reputation for those consumers who prefer buying from socially responsible firms. We examine optimal monetary transfer by addressing crowding out effect due to reputation. We find green reputation leads to overprotection and brown firms buy reputation if consumers have strong preference on green products. When consumers care less about firms’ reputation, firms do not have any incentive to buy reputation. |
| Keywords: | Asymmetric Information, Climate change, Crowding out, Mechanism Design, Reputation., Consumer/Household Economics, D02, D03, Q15, Q34, Q57, |
| Date: | 2012–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124920&r=cta |
| By: | Hideo Hashimoto (Osaka University); Kojun Hamada (Niigata University); Nobuhiro Hosoe (National Graduate Institute for Policy Studies) |
| Abstract: | We develop a few numerical models to examine the moral hazard problems exemplified by Itoh (2003, Ch. 4), following our earlier study (Hashimoto et al. (2011)) on the adverse selection problems. To this end, we first model a risk averse or risk neutral entrepreneur who selects his action among two options (e.g., low efforts and high efforts). The results of the models, whose computer programs are explained in detail for novice modelers, numerically illustrate the essence of the contract theory analysis. Second, the similar models, applied to the case with three effort level options, are built with and without the assumptions often employed to simplify the theoretical analysis. Through these exercises the significance of such assumptions in the contract theory analysis would be understood clearly. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:12-03&r=cta |