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on Contract Theory and Applications |
| By: | Dimitri Vayanos; Jiang Wang |
| Abstract: | We analyze how asymmetric information and imperfect competition a®ect liquidity and asset prices. Our model has three periods: agents are identical in the ¯rst, become heterogeneous and trade in the second, and consume asset payo®s in the third. We show that asymmetric information in the second period raises ex ante expected asset returns in the first, comparing both to the case where all private signals are made public and to that where private signals are not observed. Imperfect competition can instead lower expected returns. Each imperfection can move common measures of illiquidity in opposite directions. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp708&r=cta |
| By: | Anthony Creane (Department of Economics, Michigan State University); Thomas D. Jeitschko (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) |
| Abstract: | In markets for experience or credence goods adverse selection can drive out higher quality products and services. This negative implication of asymmetric information about product quality for trading and welfare, poses the question of how such markets first originate. We consider a market in which sellers make observable investment decisions to enter a market in which each seller's quality becomes private information. Entry has the tendency to lower prices, which may lead to adverse selection. The implied price collapse limits the amount of entry so that high prices are sustained in equilibrium, which results in above normal profits. The analysis suggests that rather than observing the canonical market collapse, markets with asymmetric information about product quality may instead be characterized by above normal profits even in markets with low measures of concentration and less entry than would be expected. |
| Keywords: | adverse selection, asymmetric information, quality, experience goods, cre- dence goods, entry, entry barriers |
| JEL: | D8 D4 L1 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:doj:eagpap:201206&r=cta |
| By: | Ryan Chahrour (Boston College) |
| Abstract: | This paper models the tradeoff, perceived by central banks and other public actors, between providing the public with useful information and the risk of overwhelming it with excessive communication. An information authority chooses how many signals to provide regarding an aggregate state and agents respond by choosing how many signals to observe. When agents desire coordination, the number of signals they acquire may decrease in the number released. The optimal quantity of communication is positive, but does not maximize agents' acquisition of information. In contrast to a model without information choice, the authority always prefers to provide more precise signals. |
| Keywords: | Transparency, Central Bank Communication, Monetary Policy, Global Games, Information Acquisition |
| JEL: | E50 E58 E60 D83 |
| Date: | 2012–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:803&r=cta |
| By: | Emre Ozdenoren (London Business School and CEPR); Kathy Yuan (London School of Economics and CEPR) |
| 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: | Stock-Based Incentives, Excessive Risk-Taking, Insucient Risk-Taking, Contractual Externalities. |
| JEL: | D86 G01 G30 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1222&r=cta |
| By: | Paulo R. Silva (University of Évora, Department of Management and CEGI-ISEGI-Univ. Nova de Lisboa); Elisabete G.S. Félix (University of Évora, Department of Management, CEFAGE-UE) |
| Abstract: | This article analyses information asymmetry in conceptual terms. It presents one characterization of the asymmetric information concept, described more by a socio-economic vision of it and its relationship with the digital economy. It also frames asymmetry of information as a public good versus private good versus common good, and checks how it creates externalities. Finally, it identifies the challenges and potential policies that will mitigate the negative effects of information asymmetry. |
| Keywords: | Information, Information Asymmetry, Digital Economy, Information Society. |
| JEL: | D82 D83 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cfe:wpcefa:2012_15&r=cta |
| By: | Juan I Block; David K Levine |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000480&r=cta |
| By: | Robert Dur (Erasmus University Rotterdam, CESifo, and IZA); Jan Tichem (Erasmus University Rotterdam) |
| Abstract: | This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium. |
| Keywords: | Altruism; spite; social relations; incentives; relational contracts; efficiency wages; subjective performance evaluation; Nash bargaining |
| JEL: | D23 J33 M52 M55 |
| Date: | 2012–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120054&r=cta |
| By: | Earl L. Grinols (Hankamer School of Business, Baylor University); Peri Silva (Kansas State University and Centro Studi Luca d’Agliano) |
| Abstract: | Assume that government maximizes the well being of its citizens subject to technological, political, and informational constraints. How should equilibrium be perturbed so that equilibrium post-perturbation quantities satisfy new exogenously-specified bounds? We prove an intervention principle and an incentive symmetry result that jointly describe the efficient intervention plus generate for it an equivalence class of interventions. If information is imperfect, asymmetric information may render some members of the equivalence class ineffective, but not others. This fact may be exploited in selected policy applications, meaning in cases where it is possible to increase the effectiveness of traditional entitlement programs, reduce their cost, or both. |
| Keywords: | Welfare Analysis, Policy Intervention, Theory of Policy |
| JEL: | D61 D62 |
| Date: | 2012–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:334&r=cta |
| By: | Makoto Shimoji and Paul Schweinzer |
| Abstract: | We consider implementation problems under incomplete information without incentive compatibility. If the social choice functions do not satisfy incentive compatibility, full implementation is unattainable via the existing approaches. By focusing on the actual problems from Typhoon by Joseph Conrad and The Traveler's Dilemma by Kaushik Basu (1994, 2007), we provide a new approach to such implementation problems. For each problem, we first construct a mechanism which takes advantage of a unique feature of these problems, i.e., the planners possess some information regarding the actual state. We then provide a sufficient condition on players' beliefs for each problem under which every player has a unique rationalizable action. The conditions we identify however depend on the informational structures, suggesting that obtaining a general result within this type of frameworks is nontrivial. |
| Keywords: | Implementation, Rationalizability, Incentive Compatibility, Incomplete Information |
| JEL: | C72 D82 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:12/21&r=cta |
| By: | Nathaniel Hendren |
| Abstract: | Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance; and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest private information prevents the existence of large segments of these three major insurance markets. |
| JEL: | H0 I11 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18282&r=cta |
| By: | Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne) |
| Abstract: | We extend the Cornet-de Boisdeffre (2002-2009) asymmetric information finite dimensional model to a more general setting, where agents may forecast prices with some private uncertainty. This new model drops both Radner's (1972-1979) classical, but restrictive, assumptions of rational expectations and perfect foresight. It deals with sequential financial equilibrium, when agents, unaware of how equilibrium prices or quantities are determined, are prone to uncertainty between - possibly uncountable - forecasts. Under perfect foresight, the extended model coincides with Cornet-de Boisdeffre's (2002-2009). Yet, when anticipations are private, we argue any element of a typically uncountable 'minimum uncertainty set' may prevail as an equilibrium price tomorrow. This outcome is inconsistent with perfect foresight and appeals for a broader definition of sequential equilibrium, which we propose hereafter. By standard techniques, we embed and extend Cornet-de Boisdeffre's (2002-2009) results, to the infinite dimensional model. The aim is to lay foundations for another paper, showing that the concept of sequential equilibrium we propose may solve the classical existence problems of the perfect foresight model, following Hart (1974). |
| Keywords: | Sequential equilibrium; temporary equilibrium; perfect foresight; expectations; incomplete markets; asymmetric information; arbitrage |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00722035&r=cta |
| By: | Lionel de Boisdeffre (Centre d'Economie de la Sorbonne) |
| Abstract: | We extend the Cornet-de Boisdeffre (2002-2009) asymmetric information finite dimensional model to a more general setting, where agents may forecast prices with some private uncertainty. This new model drops both Radner's (1972-1979) classical, but restrictive, assumptions of rational expectations and perfect foresight. It deals with sequential financial equilibrium, when agents, unaware of how equilibrium prices or quantities are determined, are prone to uncertainty between - possibly uncountable - forecasts. Under perfect foresight, the extended model coincides with Cornet-de Boisdeffre's (2002-2009). Yet, when anticipations are private, we argue any element of a typically uncountable ‘minimum uncertainty set’ may prevail as an equilibrium price tomorrow. This outcome is inconsistent with perfect foresight and appeals for a broader definition of sequential equilibrium, which we propose hereafter. By standard techniques, we embed and extend Cornet-de Boisdeffre's (2002-2009) results, to the infinite dimensional model. The aim is to lay foundations for another paper, showing that the concept of sequential equilibrium we propose may solve the classical existence problems of the perfect foresight model, following Hart (1974). |
| Keywords: | Sequential equilibrium, temporary equilibrium, perfect foresight, expectations, incomplete markets, asymmetric information, arbitrage. |
| JEL: | D52 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12053&r=cta |
| By: | Karim Jamal (University of Alberta); Michael Maier (University of Alberta); Shyam Sunder (School of Management, Yale University) |
| Abstract: | Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate traders’ private information to others. It is known that markets populated by asymmetrically-informed profit-motivated human traders can converge to rational expectations equilibria. This paper reports comparable market outcomes when human traders are replaced by boundedly-rational algorithmic agents who use a simple means-end heuristic. These algorithmic agents lack the capability to optimize; yet outcomes of markets populated by them converge near the equilibrium derived from optimization assumptions. These findings suggest that market structure is an important determinant of efficient aggregate level outcomes, and that care is necessary not to overstate the importance of human cognition and conscious optimization in such contexts. |
| Keywords: | Bounded rationality, Dissemination of asymmetric information, Efficiency of security markets, Minimally-rational agents, Rational expectations, Structural properties of markets |
| JEL: | C92 D44 D50 D70 D82 G14 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1868&r=cta |