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on Contract Theory and Applications |
| By: | Schmitz, Patrick W |
| Abstract: | An agent can make an observable but non-contractible investment. A principal then offers to collaborate with the agent to provide a public good. Private information of the agent about his valuation may either decrease or increase his investment incentives, depending on whether he learns his type before or after the investment stage. |
| Keywords: | asymmetric information; incomplete contracts; investment incentives; public goods |
| JEL: | D82 D86 H41 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9065&r=cta |
| By: | Daniel Danau (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy) |
| Abstract: | A multidimensional-and-sequential screening problem arises in a framework where the agent is privately informed about expected cost and cost variability and, subsequently, learns the realized cost as well. As the principal's marginal surplus function becomes less concave/more convex, the optimal mechanism reflects progressively stronger incentives to mimic less inefficient types, and to misrepresent the cost variability relative to the expected cost. When the principal's knowledge imperfection about the cost variability is sufficiently less important than that about the expected cost, quantities are pooled with respect to the former for a high-expected-cost agent. A low-expected-cost agent is not assigned the first-best output at least in some state of nature. |
| Keywords: | Multidimensional screening; Sequential screening; Expected cost; Cost variability; Marginal surplus function |
| JEL: | D82 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201228&r=cta |
| By: | Jun, Byoung Heon; Wolfstetter, Elmar G. |
| Abstract: | A principal uses security bid auctions to award an incentive contract to one among several agents, in the presence of hidden action and hidden information. Securities range from cash to equity and call options. “Steeper†securities are better surplus extractors that narrow the gap between the two highest valuations, yet reduce effort incentives. In view of this trade-off, the generalized equity auction that includes a (possibly negative) cash reward to the winner tends to outperform all other auctions, although it cannot extract the entire surplus implement efficient effort. Hence, profit sharing emerges without risk aversion or limited liability. |
| Keywords: | Auctions; agency problems; licensing; innovation; mechanism design |
| JEL: | D21 D43 D44 D45 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:371&r=cta |
| By: | Waldyr Areosa; Marta Areosa |
| Abstract: | We study the transmission of information in a model with a vertical input-output structure and dispersed information. Firms observe input prices with noise that endogenize the precision of information that is public within a stage but not across stages. In contrast to the case with an exogenous and overall public signal, our main result is that agents may find it optimal to rely less on public information along the chain. A direct implication is that, while information precision remains unchanged with exogenous public signals (information chains), it may decrease along the chain when semi-public signals are endogenous (information in chains). |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:286&r=cta |
| By: | Krähmer, Daniel; Strausz, Roland |
| Abstract: | This paper considers the canonical sequential screening model and shows that when the agent has an expost outside option, the principal does not benefit from eliciting the agent’s information sequentially. Unlike in the standard model without expost outside options, the optimal contract is static and conditions only on the agent’s aggregate final information. The benefits of sequential screening in the standard model are therefore due to relaxed participation rather than relaxed incentive compatibility constraints. We argue that in the presence of expost participation constraints, the classical, local approach fails to identify binding incentive constraints and develop a novel, inductive procedure to do so instead. The result extends to the multi–agent version of the problem. |
| Keywords: | Sequential screening; dynamic mechanism design; participation constraints; Mirrlees approach |
| JEL: | D82 H57 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:363&r=cta |
| By: | Nieken, Petra; Schmitz, Patrick W. |
| Abstract: | This paper reports data from a laboratory experiment on two-period moral hazard problems. The findings corroborate the contract-theoretic insight that even though the periods are technologically unrelated, due to incentive considerations principals can benefit from offering long-term contracts that exhibit memory. |
| Keywords: | Repeated moral hazard; Sequential hidden actions; Laboratory experiment |
| JEL: | D82 J33 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:372&r=cta |
| By: | David Andolfatto; Aleksander Berentsen; Christopher Waller |
| Abstract: | While both public and private financial agencies supply asset markets with large quantities of information, they do not necessarily disclose all asset-related information to the general public. This observation leads us to ask what principles might govern the optimal disclosure policy for an asset manager or financial regulator. To investigate this question, we study the properties of a dynamic economy endowed with a risky asset, and with individuals that lack commitment. Information relating to future asset returns is available to society at zero cost. Legislation dictates whether this information is to be made public or not. Given the nature of our environment, nondisclosure is generally desirable. This result is overturned, however, when individuals are able to access hidden information - what we call undue diligence - at sufficiently low cost. Information disclosure is desirable, in other words, only in the event that individuals can easily discover it for themselves. |
| Keywords: | Monetary policy, liquidity, financial markets |
| JEL: | E52 E58 E59 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:045&r=cta |
| By: | Cole, Shawn; Kanz, Martin; Klapper, Leora |
| Abstract: | This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk-assessment and lending decisions. The paper first shows that, while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by loan officers. Second, the paper presents direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance. |
| Keywords: | Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Microfinance |
| Date: | 2012–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6146&r=cta |
| By: | Sascha Behnk (LEE and Economics Department, Universitat Jaume I, Castellón, Spain); Iván Barreda-Tarrazona (LEE and Economics Department, Universitat Jaume I, Castellón, Spain); Aurora García-Gallego (LEE and Economics Department, Universitat Jaume I, Castellón, Spain) |
| Abstract: | Asymmetric information is a common characteristic of economic relationships and often provides incentives to deceive. Being aware of previous findings showing that ex post transparency about conflicts of interest leads to even more deception, we hypothesize that the timing of disclosing a conflict of interest plays a role in this context. Using different scenarios of a sender-receiver game, we investigate if, instead of providing ex ante information, the effect of an ex post disclosure is to reduce treacherous advice. Our results show that timing actually matters: subsequent transparency significantly reduces deception when it is announced as a threat, which creates awareness of the presence of a whistleblower. An intrinsic motivation seems to play a certain role that goes beyond lying and guilt aversion: embarrassment. Furthermore, we examine if the provision of different alternatives to deception (honest vs. payoff-equalizing messages) has an important impact on individual behavior. We find that honesty is not the most favored alternative to deception. Subsequent transparency increases honest behavior only under particular conditions but strongly increases the tendency to equalize payoffs. |
| Keywords: | deception, transparency, disclosure, sender-receiver game, information transmission, behavior, experiment |
| JEL: | D03 C91 D82 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2012/14&r=cta |
| By: | Daniel Danau (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy) |
| Abstract: | A government delegates construction and operation of an essential facility to a private firm. When parties sit at the contracting table, they are uncertain about the operating cost. At the construction stage, the firm can improve its distribution by exerting some non-contractible effort. As soon as the facility is in place, the firm learns the realized cost privately. In case any of the parties breaks down the relationship and the firm is replaced during the operation phase, the government bears a cost that is more important the earlier the interruption, relative to the stipulated duration. We show that, under limited commitment, the optimal full-commitment allocation is implementable if and only if the firm holds some minimum amount of own funds that can be destined to the project, it is able to borrow funds for that specific project, and the replacement cost is sufficiently high. Implementation is made by instructing the firm to invest some intermediate amount of own and borrowed funds, by conditioning the loan guarantee (provided under the aegis of a third party not suffering from commitment problems) on the outcome of the potential renegotiation process between the government and the firm, and by setting duration neither too short nor too long. Making duration contingent on the realized operating cost helps the government lessen the more concerning between moral-hazard and commitment problems. |
| Keywords: | public-private contracting; limited commitment; duration; private funds; debt; guarantees; replacement cost |
| JEL: | D82 H57 H81 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201227&r=cta |
| By: | Simon Cornée (University of Rennes 1 - CREM, UMR CNRS 6211) |
| Abstract: | Based on a unique hand-collected database of 389 loans obtained from a French social bank dealing with small businesses, this paper compares two predictive models of future default events: the first relies on soft information (SI model), the second on hard information (HI model). The results indicate that the SI model outperforms the HI model in terms of forecast quality and goodness of fit. In so doing, this paper provides further empirical evidence that, when they serve small businesses, small or decentralized banks have a greater ability to collect and act on soft information. This empirical conclusion conveys practical implication for social banks’ internal credit rating procedures, especially in their calibration of capital requirements. |
| Keywords: | Credit Rating, Debt Default, Small Business Lending, Relationship Lending, Social Banking |
| JEL: | G21 M21 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201226&r=cta |
| By: | Hikmet Gunay; Xin Meng; Mark Nagelberg |
| Abstract: | We analyze the optimal reserve price in a second price auction when there are N types of bidders whose valuations are drawn from different distribution functions. The seller cannot determine the specific type of each bidder. First, we show that the number of bidders affects the reserve price. Second, we give the sufficient conditions for the uniqueness of the optimal reserve price. Third, we find that if a bidder is replaced by a stronger bidder, the optimal reserve price may decrease. Finally, we give sufficient conditions that ensure the seller will not use a reserve price; hence, the auction will be efficient. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0849&r=cta |
| By: | Dominic Spengler |
| Abstract: | We construct a one-shot corruption game with three players, a briber who can decide to bribe or not, an official who can reciprocate or not and an inspector who can decide to inspect or not. We employ four penalties that can be distributed asymmetrically, making it possible to punish bribing and bribe-taking as well as reciprocating and accepting considerations to different degrees. Penalties apply if corruption is detected. The probability of detection is endogenised, as it depends on inspection. The model differs from other inspection games in that the offence (corruption) can only be completed in a joint effort between two of the players. This leads to surprising results, especially in conjunction with asymmetric penalties. First, in contrast to Tsebelis' counterintuitive results, we find confirmed that with endogenous detection, higher penalties do reduce the overall rate of offence. Second, this result holds only if the penalty for reciprocating on the official is raised. Surprisingly, and unlike other asymmetric penalty prescriptions in the corruption literature, higher penalties on on the briber have the opposite effect. They may reduce the probability of bribery, but they also increase the probability of reciprocation to the extent that the overall probability of reciprocated bribery is increased. |
| Keywords: | Inspection game, Corruption, Asymmetric penalties, Endogenising detection |
| JEL: | K42 H00 C72 O17 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:12/20&r=cta |