nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒09‒03
sixteen papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Incentive Contracts and Efficient Unemployment Benefits in a Globalized World By Carsten Helm; Dominique Demougin
  2. Competing Through Information Provision By Jean Guillaume Forand
  3. Consumers' Imperfect Information and Price Rigidities By Jean-Paul L'Huillier
  4. Matching with Incomplete Information By Quingmin Liu; George J. Mailath; Andrew Postlewaite; Larry Samuelson
  5. De-synchornized Clocks in Preemption Games with Risky Prospects By Barbos, Andrei
  6. Project Screening with Tiered Evaluation By Barbos, Andrei
  7. Optimal contracts based on subjective evaluations and reciprocity By Alexander Sebald; Markus Walzl
  8. "Payment Mechanisms in the Healthcare Industry: An Experimental Study of Physician Incentives in a Multiple Principal Agent Setting" By Ellen P. Green
  9. Population Monotonic and Strategy-Proof Mechanisms Respecting Welfare Lower Bounds By Duygu Yengin
  10. The Dark Side of the Vote: Biased Voters, Social Information, and Information Aggregation Through Majority Voting By Morton, Rebecca; Piovesan, Marco; Tyran, Jean-Robert
  11. Useless Prevention vs. Costly Remediation By Jean Guillaume Forand
  12. A Theory of Reciprocity with Incomplete Information By Vostroknutov Alexander
  13. Imperfect Evaluation in Project Screening By Barbos, Andrei
  14. Asymmetry and rent dissipation in contests By Kiho Yoon
  15. How smart are investors after the subprime mortgage crisis? Evidence from the securitization market By Gürtler, Marc; Hibbeln, Martin
  16. Beliefs and truth-telling: A laboratory experiment By Ronald Peeters; Marc Vorsatz; Markus Walzl

  1. By: Carsten Helm (University of Oldenburg); Dominique Demougin (European Business School at the EBS University, Wiesbaden)
    Abstract: Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyse this issue in a principal-agent model, higher level of unemployment benefits improves the workers' position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.
    Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalization
    JEL: J65 D82 J41 E24
    Date: 2012–08
  2. By: Jean Guillaume Forand (Department of Economics, University of Waterloo)
    Abstract: This paper studies the symmetric equilibria of a two-buyer, two-seller model of directed search in which sellers commit to information provision. More informed buyers have better differentiated private valuations and extract higher rents from trade.When sellers cannot commit to sale mechanisms, information provision is higher under competition than under monopoly, yet partial information is provided when sellers are price-setters. In contrast, when sellers commit to both information provision and sale mechanisms, I identify simple conditions under which sellers post auctions and provide full information in every equilibrium, ensuring that all equilibrium outcomes are constrained efficient. Sellers capture the efficiency gains from increased information and compete only over non-distortionary rents offered to buyers.
    JEL: C72 D43 D44 D82
    Date: 2012–04
  3. By: Jean-Paul L'Huillier (EIEF)
    Abstract: This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms' prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output are hump-shaped due to consumer learning.
    Date: 2012
  4. By: Quingmin Liu (Dept. of Economics, Columbia University); George J. Mailath (Dept. of Economics, University of Pennsylvania); Andrew Postlewaite (Dept. of Economics, University of Pennsylvania); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: A large literature uses matching models to analyze markets with two-sided heterogeneity, studying problems such as the matching of students to schools, residents to hospitals, husbands to wives, and workers to firms. The analysis typically assumes that the agents have complete information, and examines core outcomes. We formulate a notion of stable outcomes in matching problems with one-sided asymmetric information. The key conceptual problem is to formulate a notion of a blocking pair that takes account of the inferences that the uninformed agent might make from the hypothesis that the current allocation is stable. We show that the set of stable outcomes is nonempty in incomplete information environments, and is a superset of the set of complete-information stable outcomes. We provide sufficient conditions for incomplete-information stable matchings to be efficient.
    Keywords: Matching, Stability, Stable outcome, Incomplete information, Core
    JEL: C71 C78 D5 D8
    Date: 2012–08
  5. By: Barbos, Andrei
    Abstract: We study an optimal timing decision problem where an agent endowed with a risky investment opportunity trades the benefits of waiting for additional information against a potential loss in first-mover advantage. The players' clocks are de-synchronized in that they learn of the investment opportunity at different times. Previous literature has uncovered an inverted-U shaped relationship between a player's equilibrium expected expenditures and the measure of his competitors. This result no longer holds when the increase in the measure of players leads to a decrease in the degree of clock synchronization in the game. We show that the result reemerges if information arrives only at discrete times, and thus, a player's strategic beliefs are updated between decision times in a measurably meaningful way.
    Keywords: Clock Games; Timing Games; Preemption
    JEL: D90 D80
    Date: 2012–05–31
  6. By: Barbos, Andrei
    Abstract: We study a Bayesian game of two-sided incomplete information in which an agent, who owns a project of unknown quality, considers proposing it to an evaluator, who has the choice of whether or not to accept it. There exist two distinct tiers of evaluation that differ in the benefits they deliver to the agent upon acceptance of a project. The agent has to select the tier to which the project is submitted for review. Making a proposal incurs a cost on the agent in the form of a submission fee. We examine the effect of a change in the submission fees at the two tiers of evaluation on the expected quality of projects that are implemented by the evaluator.
    Keywords: Evaluation; Project Screening
    JEL: D02 D82
    Date: 2012–08–14
  7. By: Alexander Sebald; Markus Walzl
    Abstract: As we have demonstrated in a recent laboratory experiment [see Sebald and Walzl (2012)], individuals tend to sanction others who subjectively evaluate their performance whenever this assessment falls short of the individual's self-evaluation even if their earnings are unaffected by the assessment. Hence, performance assessments which fall short of the agents' self-evaluation can be interpreted as an unkind act that triggers a negatively reciprocal response not only if the assessment determines an agent's earnings but also if it lacks monetary consequences. We propose a principal-agent model that accommodates this kind of payoff independent reciprocity and identify conditions for a positive welfare effect of increasing costs of conflict or increasing psychological sensitivity, and a negative welfare effect of a more informative information technology. As a consequence, principals may choose imperfect information technologies in equilibrium even if the signal quality is costless.
    Keywords: Contracts, Subjective Evaluations, Self-Esteem, Ego-Threats, Reciprocity
    JEL: D01 D02 D82 D86 J41
    Date: 2012–08
  8. By: Ellen P. Green (Department of Economics, University of Delaware)
    Abstract: Current failures in the healthcare industry emphasize the need for a more fundamental understanding of how these contracts incentivize doctors. To aid this understanding, we treat the established physician-client-employer relationship as a multiple principal agent problem. We use a laboratory experiment, with a real-effort task, to test the relative performance of common payment mechanisms employed in this dual-principal agent relationship (Piece Rate, Flat Rate, Salary, Bonus, and Socialization). This study suggests, contrary to standard contract theory, that relying on extrinsic incentives to motivate physicians may be detrimental and costly for the healthcare industry.
    Keywords: Multiple principal agent theory, intrinsic motivation, other-regarding behavior, Fee-For-Service, Capitation, Salary
    JEL: I10 I12 I18 J01 J3 L2
    Date: 2012
  9. By: Duygu Yengin (School of Economics, University of Adelaide)
    Abstract: The significance of population monotonicity and welfare bounds is well-recognized in the fair division literature. We characterize population monotonic and incentive compatible mechanisms which allocate the goods efficiently and respect a welfare lower bound chosen in the fair allocation problem of allocating collectively owned indivisible goods or bads when monetary transfers are possible and preferences are private information. We consider the welfare bounds that are central to the fair allocation literature, namely, the identical-preferences lower-bound, individual rationality, the stand-alone lower-bound, and k-fairness. We also compare the strength and associated budget deficits of and the logical relations between the aforementioned lower bounds.
    Keywords: welfare bounds, the identical-preferences lower-bound, individual rationality, the stand-alone lower-bound, k-fairness, population monotonicity, collective ownership, allocation of indivisible goods and money, NIMBY problems, imposition of tasks, Groves mechanisms, strategy-proofness
    JEL: C79 D61 D63
    Date: 2012–08
  10. By: Morton, Rebecca; Piovesan, Marco; Tyran, Jean-Robert
    Abstract: We experimentally investigate information aggregation through majority voting when some voters are biased. In such situations, majority voting can have a “dark side”, i.e. result in groups making choices inferior to those made by individuals acting alone. We develop a model to predict how two types of social information shape efficiency in the presence of biased voters and we test these predictions using a novel experimental design. In line with predictions, we find that information on the popularity of policy choices is beneficial when a minority of voters is biased, but harmful when a majority is biased. In theory, information on the success of policy choices elsewhere de-biases voters and alleviates the inefficiency. In the experiment, providing social information on success is ineffective. While voters with higher cognitive abilities are more likely to be de-biased by such information, most voters do not seem to interpret such information rationally.
    Keywords: biased voters; information aggregation; majority voting
    JEL: C92 D02 D03 D7
    Date: 2012–08
  11. By: Jean Guillaume Forand (Department of Economics, University of Waterloo)
    Abstract: I model the dynamic agency relationship underlying prevention. In each period, a politician with private information about a problem affecting the economy levies taxes from a voter and either directs them to solving the problem or diverts them into rents. Problems are persistent and rectifiable: they randomly generate observable disasters until enough money has been committed to solving them. In equilibrium, the voter trades off (a) preventing disasters while squandering tax levies in informational rents to politicians facing trivial problems and (b) limiting taxes and remediating costly disasters that eliminate politicians informational advantage and prove the need for action.
    JEL: D72 H10 C73
    Date: 2012–07
  12. By: Vostroknutov Alexander (METEOR)
    Abstract: A model of belief dependent preferences in finite multi-stage games with observable actions isproposed. It combines two dissimilar approaches: incomplete information (Levine, 1998) andintentionality (Dufwenberg and Kirchsteiger, 2004; Falk and Fischbacher, 2006). Incompleteinformation is important because social preferences are not directly observable; intentions arefound to be indispensable in explaining behavior in games (Falk, Fehr, and Fischbacher, 2008). Inthe model it is assumed that the players have social attitudes that define their socialpreferences. In addition, players care differently about the payoffs of other players depending ontheir beliefs about their social attitude and possibly on the beliefs of higher orders. As thegame unfolds players update their beliefs about the types of other players. An action of a playershows intention when she chooses it anticipating future belief updating by others. A reasoningprocedure is proposed that allows players to understand how to update beliefs by constructing asequence of logical implications.
    Keywords: microeconomics ;
    Date: 2012
  13. By: Barbos, Andrei
    Abstract: This paper studies a model in which an agent considers proposing a project of unknown quality to an evaluator, who decides whether or not to accept it. First, we show that there exist instances where an agent with a better track record of producing high-quality projects should be subjected to more stringent standards. Second, we show that an increase in the submission fee may lead to a decrease in the quality of projects that are implemented because of its effects on the evaluator's acceptance policy.
    Keywords: Evaluation; Project Screening; Regulatory Burden
    JEL: D02 D82 L50
    Date: 2012–06–14
  14. By: Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper studies the e¢çect of relative strength of the players in incomplete information all-pay auctions. The analysis shows that total expenditures decrease as relative asymmetry increases. Hence, asymmetry does reduce competitiveness between players and rent dissipation. This implies that the result of Kirkegaard(2012, International Journal of Industrial Organization) holds due to the absolute increase in valuation. This paper also analyzes optimal contest mechanisms and obtains quite different comparative static results.
    Keywords: Asymmetry, Relative strength, All-pay auctions, Optimal contest mechanisms
    JEL: C72 D44 D72 D82
    Date: 2012
  15. By: Gürtler, Marc; Hibbeln, Martin
    Abstract: Two factors have proven to be strongly relevant for the subprime mortgage crisis. The first is the lack of screening incentives of originators, which had not been anticipated by investors. The second is that investors relied too much on credit ratings. We examine whether investors have learned from these shortcomings. On the basis of securitizations from 2010 and 2011, we find that investors require a significantly higher risk premium when there is a high degree of asymmetric information. The credit spreads of information sensitive tranches are significantly higher if originators do not retain a part of the securitization or if they choose vertical slice retention instead of retaining the equity tranche. Moreover, the relevance of credit ratings in comparison to other credit factors has significantly decreased. Apparently, investors mainly consider ratings to discriminate between information sensitive and information insensitive tranches, beyond that they rely on their own risk analysis. This suggests that investors have learned their lesson from the subprime mortgage crisis. --
    Keywords: security design,asset-backed securities,retention,rating,credit spreads
    JEL: G21 G24 G28
    Date: 2012
  16. By: Ronald Peeters; Marc Vorsatz; Markus Walzl
    Abstract: We conduct a laboratory experiment with a constant-sum sender-receiver game to investigate the impact of individuals' first- and second-order beliefs on truth-telling. While senders are more likely to lie if they expect the receiver to trust their message, they are more likely to tell the truth if they belief the receiver expects them to tell the truth. Our results therefore indicate that second-order beliefs are an important component of the motives for individuals in strategic information transmission.
    Keywords: Experiment, Sender-receiver games, Strategic information transmission, Guilt-from-blame, let-down aversion
    JEL: C70 C91 D03
    Date: 2012–08

This nep-cta issue is ©2012 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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