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on Contract Theory and Applications |
| By: | Marco Pagnozzi (University of Napoli "Federico II" and CSEF); Salvatore Piccolo (Università Cattolica di Milano) |
| Abstract: | When do principals independently choose to share the information obtained from their privately informed agents? Information sharing affects contracting within competing organizations and induces agents’ strategies to be correlated through the distortions imposed by principals to obtain information. We show that the incentives to share information depend on the nature of upstream externalities between principals and the correlation of agents’ information. With small externalities, principals share information when externalities and correlation have opposite signs, and do not share information when externalities and correlation have the same sign. In this second case, principals face a prisoners’ dilemma since they obtain higher profits by sharing information. |
| Keywords: | communication, information sharing, adverse selection, vertical hierarchies |
| JEL: | D43 D82 L14 |
| Date: | 2012–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:322&r=cta |
| By: | Testa, Alessia |
| Abstract: | We define path-dependency as the generic phenomenon according to which agents take an action regardless of their private information. Path-dependency can be of two types contingent on whether agents act with the crowd (herding) or against the crowd (contrarianism). We consider a quote-driven market where traders can in some cases observe whether their predecessors were informed, although they cannot observe their private information, while in other cases they are left with the uncertainty that their predecessors acted purely for liquidity motives. In this setting we recover herding and contrarianism and we find that better-informed markets (i.e. where informed traders receive high precision signals) can generate path-dependent behavior more easily than poorly informed ones. Moreover, we illustrate how a market dominated by herding features a price that is more informative of the asset value than the price of a market where traders always follow their signal. We also discuss how contrarianism has the exact opposite effect by decreasing price informativeness. |
| Keywords: | Herding; Contrarianism; Financial Markets |
| JEL: | D82 D83 G14 |
| Date: | 2012–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:388&r=cta |
| By: | A.K.S. Chand (Department of Economics, University Of Venice Ca’ Foscari) |
| Abstract: | In this paper, I discuss a Cheap Talk model that arises during the allocation of a limited budget to multiple Senders by a Receiver with private communication. The Receiver's utility is the sum of the utilities of the Senders. Considering quadratic utility functions, I show that there is no fully revealing equilibrium with budget constraint. I also show that a higher budget facilitates information transmission to the Receiver in terms of ex-ante expected utility by considering (1) an equilibrium where only one Sender reveals truthfully, (2) a symmetric equilibrium with two intervals and (3) a commitment strategy by the Receiver where only one Sender receives his desired amount. The commitment strategy is doing better than the other two types of equilibria for budget more than a particular value. This requires us to look for equilibria with higher number of intervals which does better than the commitment strategy. |
| Keywords: | Cheap Talk, Multiple Senders, Budget Constraint |
| JEL: | C72 D82 D83 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2012_19&r=cta |
| By: | Mireille Chiroleu-Assouline; Jean-Christophe Poudou; Sébastien Roussel |
| Abstract: | In this paper we aim at theoretically grounding the Reducing Emissions from Deforestation and Forest Degradation + (REDD+) scheme as a contractual relationship between countries in the light of the theory of incentives. Considering incomplete information about reference levels of deforestation as well as exogenous implementation and transaction costs, we compare two types of contracts: a deforestation performance-based contract and a conditional avoided deforestation-based contract. Because of the implementation and transaction costs, each kind of REDD+ contract implies a dramatically different information rent / effciency trade-off. If the contract is performance- based (resp. conditionality-based), information rents are awarded to countries with the ex ante lowest (resp. highest) deforestation. In a simple quadratic setting, there is a reference level threshold in terms of effciency towards less deforestation. In terms of expected welfare, conditional avoided deforestation-based schemes are preferred. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:12-31&r=cta |
| By: | Levent Ulku (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | I characterize the set of implementable allocation functions in the standard one dimensional mechanism design environment where the relationship between private information and payoffs is possibly non-monotone. The characterization is useful in two aspects. First it leads to a rather mild condition under which individual rationality follows directly from incentive compatibility. Second, it can be conveniently used to determine the implementability of allocation functions in certain novel applications. In particular I show that neither monotonicity of allocations, nor the monotone differences property on values is necessary for implementation. In an application, I study a buyer-seller relationship where the buyer’s value displays habit formation, which enters into his payoff through a commonly known parameter. Habit implies that the agent’s value is a nonmonotone function of his type and that monotone diferences condition can not be satisfied for all parameters. For a set of parameters, the seller-optimal mechanism is nonmonotone: the seller screens out low and high types. |
| Keywords: | Implementation, Monotonicity, Monotone differences, Habits |
| JEL: | D42 D61 D82 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1202&r=cta |
| By: | Sebastián Cea-Echenique; Carlos Hervés-Beloso; Juan Pablo Torres-Martínez |
| Abstract: | We develop a general equilibrium model with differential information and incomplete financial participation. Agents endogenously update information from commodity prices and financial contracts. Without require financial survival assumptions, we prove equilibrium existence in a model where the heterogeneity of preferences across states of nature may depends on available information. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp361&r=cta |
| By: | Helmut M. Dietl (Department of Business Administration (IBW), University of Zurich); Martin Grossmann (Department of Business Administration (IBW), University of Zurich); Markus Lang (Department of Business Administration (IBW), University of Zurich); Simon Wey (Department of Business Administration (IBW), University of Zurich) |
| Abstract: | Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus taxes affect the agent's incentives to exert effort and the principal's decision regarding the composition of the compensation package (fixed salary and bonus rate). We find that, surprisingly, a bonus tax can increase the bonus rate and decrease the fixed salary. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases. |
| Keywords: | Principal-agent model, bonus tax, executive compensation, incentive, pay regulation |
| JEL: | H24 J30 M52 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:zrh:wpaper:313&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: | ownership; incomplete contracts; investment incentives; public goods |
| JEL: | D23 D86 H41 L31 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41730&r=cta |
| By: | Arthur Lewbel (Boston College); Xun Tang (University of Pennsylvania) |
| Abstract: | The existing literature on binary games with incomplete information assumes that either payoff functions or the distribution of private information are finitely parameterized to obtain point identification. In contrast, we show that, given excluded regressors, payoff functions and the distribution of private information can both be nonparametrically point identified. An excluded regressor for player i is a sufficiently varying state variable that does not affect other players utility and is additively separable from other components in is payoff. We show how excluded regressors satisfying these conditions arise in contexts such as entry games between firms, as variation in observed components of fixed costs. Our identification proofs are constructive, so consistent nonparametric estimators can be readily based on them. For a semiparametric model with linear payoffs, we propose root-N consistent and asymptotically normal estimators for parameters in players payoffs. Finally, we extend our approach to accommodate the existence of multiple Bayesian Nash equilibria in the data-generating process without assuming equilibrium selection rules. |
| Keywords: | Games with Incomplete Information, Excluded Regressors, Nonparametric Identification, Semiparametric Estimation, Multiple Equilibria. |
| JEL: | C14 C51 D43 |
| Date: | 2012–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:808&r=cta |
| By: | Riener, Gerhard; Wiederhold, Simon |
| Abstract: | This paper investigates the interaction of intrinsic and extrinsic incentives. We propose a simple principal-agent model with control that incorporates the existence of social groups resulting from common experiences in the past. Our laboratory experiment shows that agents with previous common experiences with their principals (CE agents) perform better than agents without such experiences (NCE agents). However, as soon as actual control exceeds their expectation, CE agents decrease their performance substantially, which has no equivalent for NCE agents. This pronounced decrease in effort when control is perceived as excessive represents a novel channel through which hidden costs of control materialize. Our results have important implications for firms' strategies to motivate employees. -- |
| Keywords: | Employee motivation,Principal-agent theory,Experiments |
| JEL: | C92 M54 D03 J22 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:66&r=cta |
| By: | Christian Matthes; Francesca Rondina |
| Abstract: | This paper investigates the role of learning by private agents and the central bank (two-sided learning) in a New Keynesian framework in which both sides of the economy have asymmetric and imperfect knowledge about the true data generating process. We assume that all agents employ the data that they observe (which may be distinct for different sets of agents) to form beliefs about unknown aspects of the true model of the economy, use their beliefs to decide on actions, and revise these beliefs through a statistical learning algorithm as new information becomes available. We study the short-run dynamics of our model and derive its policy recommendations, particularly with respect to central bank communications. We demonstrate that two-sided learning can generate substantial increases in volatility and persistence, and alter the behavior of the variables in the model in a signifficant way. Our simulations do not converge to a symmetric rational expectations equilibrium and we highlight one source that invalidates the convergence results of Marcet and Sargent (1989). Finally, we identify a novel aspect of central bank communication in models of learning: communication can be harmful if the central bank's model is substantially mis-specified |
| Keywords: | : asymmetric information, learning, monetary policy |
| JEL: | E52 |
| Date: | 2012–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:913.12&r=cta |
| By: | Christian Matthes; Francesca Rondina |
| Abstract: | This paper investigates the role of learning by private agents and the central bank (two-sided learning) in a New Keynesian framework in which both sides of the economy have asymmetric and imperfect knowledge about the true data generating process. We assume that all agents employ the data that they observe (which may be distinct for different sets of agents) to form beliefs about unknown aspects of the true model of the economy, use their beliefs to decide on actions, and revise these beliefs through a statistical learning algorithm as new information becomes available. We study the short-run dynamics of our model and derive its policy recommendations, particularly with respect to central bank communications. We demonstrate that two-sided learning can generate substantial increases in volatility and persistence, and alter the behavior of the variables in the model in a significant way. Our simulations do not converge to a symmetric rational expectations equilibrium and we highlight one source that invalidates the convergence results of Marcet and Sargent (1989). Finally, we identify a novel aspect of central bank communication in models of learning: communication can be harmful if the central bank’s model is substantially mis-specified. |
| Keywords: | asymmetric information, learning, monetary policy |
| JEL: | E52 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:661&r=cta |
| By: | Aikman, David (Bank of England); Nelson, Benjamin (Bank of England); Tanaka, Misa (Bank of England) |
| Abstract: | This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. Unprofitable banks have strong incentives to invest in risky assets and generate inefficient credit booms when macroeconomic fundamentals are good in order to signal high ability. We show that across-the-system countercyclical capital requirements that deter credit booms are constrained optimal when fundamentals are within an intermediate range. We also show that when fundamentals are deteriorating, a public announcement of that fact can itself play a powerful role in preventing inefficient credit booms, providing an additional channel through which macroprudential policies can improve outcomes. |
| Keywords: | Macroprudential policy; credit booms; bank capital regulation |
| JEL: | E60 G10 G38 |
| Date: | 2012–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0462&r=cta |
| By: | Diego Moreno; John Wooders |
| Abstract: | The inefficiency of competitive markets for lemons raises fundamental questions about market performance and the role of policy intervention. We study the performance of dynamic markets, and show that when the time horizon is finite decentralized markets perform better and high quality is more liquid than centralized ones. When frictions are small, decentralized markets become completely illiquid at all but the first and the last date. When the time horizon is infinite, decentralized markets yield the static competitive surplus, whereas centralized markets have separating equilibria that yield a greater surplus. Subsidizing low quality or taxing high quality tends to increase surplus in both decentralized and centralized markets. |
| Keywords: | Decentralized dynamic market for lemons, Adverse selection, Efficiency, Liquidity, Policy intervention |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1226&r=cta |
| By: | de, Vries Frans; Franckx, Laurent |
| Abstract: | A multi task principal-agent model is employed to derive optimal environmental liability rules for risk neutral managers under two alternative organizational structures - a functional organization and a product-based organization. For a product-based organization it is shown that efficiency is independent of whether the firm or managers are liable for environmental damages. In a functional organization it is optimal either to hold the firm liable for environmental damages or, equivalently, not to hold the production managers liable for environmental damages. We derive conditions to obtain the first-best solution for a given organizational structure. Finally, the organizational form that induces the highest environmental effort induces the lowest production effort and vice versa. This suggests that production and environmental protection are substitutes rather than c omplements. |
| Keywords: | organizations; principal-agent; multi-task; vicarious liability; contr acts |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2012-09&r=cta |
| By: | Raj Chetty; Amy Finkelstein |
| Abstract: | We survey the literature on social insurance, focusing on recent work that has connected theory to evidence to make quantitative statements about welfare and optimal policy. Our review contains two parts. We first discuss motives for government intervention in private insurance markets, focusing primarily on selection. We review the original theoretical arguments for government intervention in the presence of adverse selection, and describe how recent work has refined and challenged the conclusions drawn from early theoretical models. We then describe empirical work that tests for selection in insurance markets, documents the welfare costs of this selection, and analyzes the welfare consequences of potential public policy interventions. In the second part of the paper, we review work on optimal social insurance policies, which are designed to maximize expected utility taking into account the costs of moral hazard. We discuss formulas for the optimal level of insurance benefits in terms of empirically estimable parameters. We then consider the consequences of relaxing the key assumptions underlying these formulas, e.g. by allowing for fiscal externalities or behavioral biases. We also summarize recent work on other dimensions of optimal policy, including mandated savings accounts and the optimal path of benefits. Finally, we discuss the key challenges that remain in understanding the optimal design of social insurance policies. |
| JEL: | H5 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18433&r=cta |
| By: | Russell, Noel P.; Sauer, Johannes |
| Abstract: | The role of adverse selection in schemes for the procurement of ecosystem services has been investigated by many who suggest that efficiency of these schemes is impaired by problems arising from adverse selection. However recent research on the UK Environmental Stewardship Scheme suggests that these types of procurement system may not be characterised by adverse selection but by what might be more appropriately labelled as “beneficial selection”. These results are based on the analysis of a simple theoretical model and the empirical implications are confirmed using econometric analysis. However it is also suggested that, even with beneficial selection, there will still remain systemic inefficiency arising from a continuing need for the payment of informational rents to the farmers participating in the scheme. This paper presents the analysis of a model that focuses on the Principal- Agent characteristics of this problem and sets out to investigate the tradeoffs that arise in designing ecosystem procurement mechanisms where payment of informational rents to participants can be used to increase overall efficiency. The impact of beneficial selection is carefully explored here, and we suggest implications for policy makers and empirical propositions to be tested using a suitable data set. |
| Keywords: | Asymmetric Information, Beneficial Selection, Adverse Selection, Payment for Ecosystem Services, Environmental Economics and Policy, D82, Q57, |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc12:134988&r=cta |