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on Contract Theory and Applications |
| By: | Natalia Montinari; Antonio Nicolo; Regine Oexl |
| Abstract: | We report evidence from an experiment where a principal chooses an agent out of two to perform a task for a fixed compensation. The principal's payoff depends on the agent's ex-ante ability and on a non-contractible effort that the agent has to exert once employed. We find that a significant share of principals select the mediocre agent (i.e. the one with the lower ex-ante ability). When the principal is allowed to send a message, mediocre agents exert more effort than agents with higher ability, and principals who choose mediocre agents on average have a larger payoff than principals who select agents with higher ability. This difference in effort overcompensates the difference in ability. Mediocre agents reciprocate more than agents who have ex-ante higher ability when the principals are able to make them feeling indebted. |
| Keywords: | reciprocity, communication, incentives, mediocrity |
| JEL: | C9 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2012-19&r=cta |
| By: | Anderson, Ronald W.; Bustamante, Maria Cecilia; Guibaud, Stéphane |
| Abstract: | We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is more capable of growing the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. Firms may pay severance to incentivize their managers to report truthfully the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract implies excessive retention. |
| Keywords: | agency; compensation policy; firm growth; managerial turnover; optimal contracting; severance pay |
| JEL: | G30 G35 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9147&r=cta |
| By: | Kashefi, Mohammad Ali |
| Abstract: | This paper examines the effect of information sharing on supply chain configuration where the market characterized by demand uncertainty. A dynamic multi-stage game theoretic model with incomplete information is employed to capture the sequence of events. Our supply chain consists of two suppliers with exogenous wholesale prices and two retailers, the incumbent and the entrant, with asymmetric demand information. Informed incumbent prefers to conceal its private information from the entrant in order to reap more profits in the market. The channel of information flows is only through the first supplier and the incumbent can supply just from him, but the entrant is free to choose its proper supplier considering the point that the second supplier is uninformed. Our analytical model demonstrates that how the mean demand of the market, wherein our retailers compete, and its relation with the relative wholesale price of the suppliers play crucial role in equilibrium determination. Our results show under which circumstances separation and pooling equilibrium could occur in some range of demand variation. It is also shown that the entrant sometimes prefers to avoid information acquisition by choosing the second supplier and playing Cournot instead of Stackelberg which is more profitable for him in some occasions. |
| Keywords: | Information Sharing; Asymmetric Information; Supply Chain; Dynamic Game; Signaling Game; Demand Uncertainty; Strategic Information Management |
| JEL: | M11 Y40 L13 L81 C61 D82 C72 |
| Date: | 2012–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41460&r=cta |
| By: | Jared Rubin (Argyros School of Business and Economics, Chapman University); Roman Sheremeta (Argyros School of Business and Economics, Chapman University) |
| Abstract: | Using a gift exchange experiment, we show that the ability of reciprocity to overcome incentive problems inherent in principal-agent settings is greatly reduced when the agent’s effort is distorted by random shocks and transmitted imperfectly to the principal. Specifically, we find that gift exchange contracts without shocks encourage effort and wages well above standard predictions. However, the introduction of random shocks reduces wages and effort, regardless of whether the shocks can be observed by the principal. Moreover, the introduction of shocks significantly reduces the probability of fulfilling the contract by the agent, the payoff of the principal, as well as total welfare. |
| Keywords: | gift exchange, principal-agent model, contract theory, reciprocity, effort, shocks, laboratory experiment |
| JEL: | C72 C91 D63 D81 H50 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:12-21&r=cta |
| By: | Heidhues, Paul; Rady, Sven; Strack, Philipp |
| Abstract: | We consider two players facing identical discrete-time bandit problems with a safe and a risky arm. In any period, the risky arm yields either a success or a failure, and the first success reveals the risky arm to dominate the safe one. When payoffs are public information, the ensuing free-rider problem is so severe that the equilibrium number of experiments is at most one plus the number of experiments that a single agent would perform. When payoffs are private information and players can communicate via cheap talk, the socially optimal symmetric experimentation profile can be supported as a perfect Bayesian equilibrium for sufficiently optimistic prior beliefs. These results generalize to more than two players whenever the success probability per period is not too high. In particular, this is the case when successes occur at the jump times of a Poisson process and the period length is sufficiently small. |
| Keywords: | Strategic Experimentation; Bayesian Learning; Cheap Talk; Two-Armed Bandit; Information Externality. |
| JEL: | C73 D83 |
| Date: | 2012–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:387&r=cta |
| By: | Penélope Hernández (ERI-CES); Bernhard von Stengel (London School of Economics) |
| Abstract: | This paper studies the stability of communication protocols that deal with transmission errors. We consider a coordination game between an informed sender and an uninformed decision maker, the receiver, who communicate over a noisy channel. The sender's strategy, called a code, maps states of nature to signals. The receiver's best response is to decode the received channel output as the state with highest expected receiver payoff. Given this decoding, an equilibrium or ``Nash code'' results if the sender encodes every state as prescribed. We show two theorems that give sufficient conditions for Nash codes. First, a receiver-optimal code defines a Nash code. A second, more surprising observation holds for communication over a binary channel which is used independently a number of times, a basic model of information transmission: Under a minimal ``monotonicity'' requirement for breaking ties when decoding, which holds generically, any code is a Nash code. |
| Keywords: | sender-receiver game, communication, noisy channel |
| JEL: | C72 D82 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:dbe:wpaper:0912&r=cta |
| By: | Bester, Helmut; Gehrig, Thomas; Stenbacka, Rune |
| Abstract: | We analyze the effect of loan sales on the intensity of costly screening. Loan sales strengthen screening incentives when screening primarily improves the bank’s ability to identify profitable loans and when banks retain most of those profitable loans. However, loan sales dampen screening incentives when the benefit of screening primarily helps to weed out unprofitable projects. Moreover, alternative institutions of information production and the institutional market framework affect the relative benefits and costs of loan sales, and screening respectively. Accordingly, the potential regulation of loan sales has to take into account the whole impact on societal information production, both in markets and non-market institutions. |
| Keywords: | loan sales; screening; securitization |
| JEL: | D83 G21 G32 L15 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9084&r=cta |
| By: | Andrea Canidio; Thomas Gall |
| Abstract: | Market wages reflect expected productivity by using signals of past performance and past experience. These signals are generated at least partially on the job and create incentives for agents to choose high-profile and highly visible tasks. If agents have private information about the profitability of different tasks, firms may wish to prevent over- investment in visible tasks by increasing their opportunity costs. Firms can do so, for instance, by using employee perks. Heterogeneity in employee types induces substantial diversity in organizational and contractual choices, particularly regarding the extent to which conspicuous activities are tolerated or encouraged, the use of employee perks, and contingent wages |
| Date: | 2012–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:ceu:econwp:2012_14&r=cta |
| By: | Alexis Derviz (Czech National Bank); Jakub Seidler (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | We discuss (dis)incentives for fair cooperation related to delegating macroprudential policy decisions to a supranational body, as well as their welfare implications. The question is studied by means of a signaling game of imperfect information between two national regulators. The model concentrates on informational frictions in an environment with otherwise fully aligned preferences. We show that even in the absence of evident conflicting goals, the non-transferrable nature of some regulatory information creates misreporting incentives. However, the major problem is not the reporting accuracy but the institutional arrangement focused on maximal multilateral satisfaction to the detriment of credible enforcement of rules. The main application is meant to be systemic risk management by the relevant EU institutions. |
| Keywords: | macroprudential regulation, integration, autonomy, information, reporting |
| JEL: | F55 H77 D02 C72 D83 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_21&r=cta |
| By: | Schmitz, Patrick W |
| Abstract: | The government and a non-governmental organization (NGO) can invest in the provision of a public good. In an incomplete contracting framework, Besley and Ghatak (2001) have argued that the party who values the public good most should be the owner. We show that this conclusion relies on their assumption that the parties split the renegotiation surplus 50:50. If the generalized Nash bargaining solution is applied, then for any pair of valuations that the two parties may have, there exist bargaining powers such that either ownership by the government or by the NGO can be optimal. |
| Keywords: | incomplete contracts; investment incentives; ownership; public goods |
| JEL: | D23 D86 H41 L31 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9141&r=cta |
| By: | Hitoshi Matsushima (Graduate School of Economics, The University of Tokyo, Tokyo) |
| Abstract: | We investigate allocation problems that generalize auction and bargaining, namely multiunit exchanges, where both a central planner and participants bring homogeneous commodities to sell altogether, and there exist restrictions on feasible allocations. We characterize the optimal mechanism in terms of revenue-maximization under dominant strategy incentive compatibility and ex-post individual rationality. We introduce modified virtual valuation, and show that, irrespective of the restrictions, the optimization can be replaced with the maximization of the sum of modified virtual valuations. We apply this result to an important class of allocation problems for heterogeneous items with single-item demands based on Mussa and Rosen (1978). |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf292&r=cta |
| By: | Francesco Fallucchi (School of Economics, University of Nottingham); Elke Renner (School of Economics, University of Nottingham); Martin Sefton (School of Economics, University of Nottingham) |
| Abstract: | We investigate the role of information feedback in rent-seeking games with two different contest structures. In the stochastic contest a contestant wins the entire rent with probability equal to her share of rent-seeking expenditures; in the deterministic contest she receives a share of the rent equal to her share of rent-seeking expenditures. Information feedback has very different effects depending on the contest structure. We observe the highest rent dissipation in stochastic contests when players only get feedback on own choices and earnings. In these contests aggregate expenditures usually exceed the value of the rent. We find that giving additional feedback about rivals? choices and earnings moderates average expenditures. In contrast, in deterministic contests average expenditures converge to equilibrium levels when subjects only get feedback about own choices and earnings. In these contests additional feedback about rivals? choices and earnings has the opposite effect of raising average expenditures. |
| Keywords: | contests, rent-seeking, information, learning, imitation, experiments |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2012-12&r=cta |