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on Contract Theory and Applications |
| By: | FOUNANOU, Mathurin/M; RATSIMALAHELO, Zaka/Z |
| Abstract: | We study the optimal regulation of a cooperative credit society which has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the cooperative’s choice of effort to improve this quality cannot be observed by the regulator (moral hazard). We characterize the optimal contracts offered by the regulator to the credit cooperatives. We have been able to show that the optimal contracts depend on 3 main factors namely: on the accuracy of the supervisor’s signal, the likelihood of facing a high quality credit cooperative, and the cost of supervision. |
| Keywords: | Microfinance; Informational asymmetry; optimal incentive contract; regulation; supervision |
| JEL: | G28 G10 G21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39581&r=cta |
| By: | Antonio Nicita; Simone Sepe |
| Abstract: | Many real world transactions occur in a common agency environment in which an agent interacts with several principals having competing interests. The hold-up literature, however, has so far neglected to investigate common agency transactions. In this paper, we consider the hold-up problem that arises in a context where there are a monopolistic seller and multiple buyers on the one side and all the parties on the other are required to make specific self-investments. Our contribution is twofold. First, we show that absent initial contracts (i.e., preliminary agreements) between the parties, total efficiency increases when the buyers act competitively using implicit contractual coordination, i.e., contractual menus. Second, we show that introducing initial simple contracts allows parties to reach the first best only under cooperative common agency. Absent this machinery, competition among the principals emerges as a more efficient governance structure for common agency in incomplete transactions. |
| Keywords: | incomplete contracts, common agency, mechanism design |
| JEL: | K12 L22 J41 C70 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:636&r=cta |
| By: | Giacomo Ponzetto; Ugo Troiano |
| Abstract: | Countries with greater social capital have higher economic growth. We show that social capital is also highly positively correlated across countries with government expenditure on education. We develop an infinite-horizon model of public spending and endogenous stochastic growth that explains both facts through frictions in political agency when voters have imperfect information. In our model, the government provides services that yield immediate utility, and investment that raises future productivity. Voters are more likely to observe public services, so politicians have electoral incentives to underprovide public investment. Social capital increases voters' awareness of all government activity. As a consequence, both politicians' incentives and their selection improve. In the dynamic equilibrium, both the amount and the efficiency of public investment increase, permanently raising the growth rate. |
| Keywords: | Social Capital, Government Expenditures, Economic Growth, Public Investment, Elections, Imperfect Information |
| JEL: | D72 D83 H50 H54 O43 Z13 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1307&r=cta |
| By: | Di Gaetano, Luigi; Mazza, Isidoro |
| Abstract: | The recent global crisis has forced many countries to a tight fiscal discipline. As a consequence, the cultural sectors in those countries have experienced severe budget cuts. In this context, disparate suggestions for additional sources of revenue available to public institutions have emerged. In particular, deaccessioning seems able to guarantee the sustainability of public cultural institutions without serious negative impacts on the fruition of cultural goods. This paper addresses the consequences that a widespread deaccessioning would have on private bequests to public institutions. We develop a sequential game with incomplete information between a Museum and a Donor. There are two types of museums: one type is committed not to sale its collection; the second type has no restriction on selling a share of its art endowment. The Donor does not know the type of Museum. The non-committed Museum can sale items in the first stage and/or in the third stage. Donors contribute only in the second stage. Therefore, deaccessioning triggers a moral hazard problem. We derive a number or results concerning the allocation of gifts and the decision of deaccessioning and provide numerical simulations to interpret the parameters. Most notably, with respect to a benchmark case where deaccessioning is illegal, contributions are reduced when the non-committed Museum deaccesses in the first stage (separating strategy). If, however, that Museum does not deaccess at the beginning (pooling strategy), also the committed Museum receives less than in the benchmark case. Interestingly, an increase of public grants to Museums (of any type) allows the non-committed Museum to adopt a pooling strategy, causing a reduction of donations to the committed Museum. This result provides an intuition for the widespread resistance of museum directors to deaccessioning and for their efforts to enforce common and strict guidelines. |
| Keywords: | Deaccessioning; Museums financing policy; sequential game; moral hazard |
| JEL: | Z10 D82 Z11 C72 |
| Date: | 2012–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39611&r=cta |
| By: | Schottmuller, C. (Tilburg University) |
| Abstract: | The fourth paper explains why it might not be welfare maximizing to incentivize doctors to take costs of treatment into account in their prescription decisions. By extending the classic cheap talk model, it is shown that cost incentives reduce the information transmitted from patient to doctor which leads to a welfare loss. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-5556784&r=cta |
| By: | Nikiforakis, Nikos; Oechssler, Jörg; Shah, Anwar |
| Abstract: | The power to coerce workers is important for the efficient operation of hierarchically structured organizations. However, this power can also be used by managers to exploit their subordinates for their own benefit. We examine the relationship between the power to coerce and exploitation in a laboratory experiment where a senior and a junior player interact repeatedly for a finite number of periods. We find that senior players try repeatedly to use their power to exploit junior workers. These attempts are successful only when junior workers have incomplete information about how their effort impacts on the earnings of senior players, but not when they have complete information. Evidence from an incentive-compatible questionnaire indicates that the social acceptability of exploitation depends on whether the junior worker can detect she is being exploited. We also show how a history of exploitation affects future interactions. |
| Keywords: | coercion; exploitation; disobedience; hierarchy; social norms. |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0530&r=cta |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements. |
| Keywords: | Banking regulation, Basel II, capital requirements, procyclicality. |
| JEL: | G21 G28 E44 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1205&r=cta |
| By: | David Autor; Mark Duggan; Jonathan Gruber |
| Abstract: | We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies using a database of approximately 10,000 policies and 1 million workers from a major LTD insurer. We document that LTD claims rates are much lower than claims rates on the public analogue to LTD, the Social Security Disability Insurance program, yet LTD policies have a much higher return-to-work rate among initial claimants. Nevertheless, our analysis indicates that the impact of moral hazard on LTD claims is substantial. Using within firm, over time variation in plan parameters, we find that a higher replacement rate and a shorter waiting time to benefits receipt—also known as the Elimination Period or EP—significantly increase the likelihood that workers claim LTD. About sixty percent of the effect of a longer EP is due to censoring of shorter claims, while the remainder is due to deterrence: workers facing a longer EP are less likely to claim benefits for impairments that would lead to a only a brief period of LTD receipt. This deterrence effect is equally large among high and low-income workers, suggesting that moral hazard rather than liquidity underlies the behavioral response. Consistent with this interpretation, the response of LTD claims to plan parameters is driven primarily by the behavior of the healthiest disabled, those who would return to work after receiving LTD. |
| JEL: | H55 J32 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18172&r=cta |
| By: | Philippe Gagnepain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Marc Ivaldi (TSE - Toulouse School of Economics - Toulouse School of Economics); David Martimort (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | Economic theory claims that contracts renegotiation prevents from reaching the informationally constrained efficient solution that could have been obtained under full commitment. Assessing the cost of renegotiation compared to the full commitment scenario still remains an open issue from an empirical viewpoint. To address this question, we fit a structural principal-agent model with renegotiation on a set of contracts for urban transport services. The model captures two important features of the industry. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies are greater when a cost-plus contract was signed earlier on than following a fixed-price contract. We then compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators. |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00710639&r=cta |
| By: | George W. Evans; Seppo Honkapohja; Thomas Sargent; Noah Williams |
| Abstract: | Agents have two forecasting models, one consistent with the unique rational expectations equilibrium, another that assumes a time-varying parameter structure. When agents use Bayesian updating to choose between models in a self-referential system, we find that learning dynamics lead to selection of one of the two models. However, there are parameter regions for which the non-rational forecasting model is selected in the long-run. A key structural parameter governing outcomes measures the degree of expectations feedback in Muth's model of price determination. |
| Keywords: | Learning dynamics, Bayesian model averaging, grain of truth, self-referential systems. |
| JEL: | D83 D84 C52 C11 |
| Date: | 2012–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1203&r=cta |