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on Contract Theory and Applications |
| By: | Berliant, Marcus; Yu, Chia-Ming |
| Abstract: | Agglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at that location. When workers' marginal willingness to pay for housing is negatively correlated with their productivity, skill-biased technological change causes a core-periphery equilibrium where only the core-periphery (partially stratified) equilibria are stable. When workers' marginal willingness to pay for housing and their productivity are positively correlated, skill-biased technological improvements will never result in a core-periphery equilibrium. Location can at best be an approximate rather than a precise sieve for high-skill workers. |
| Keywords: | Agglomeration; Adverse Selection; Asymmetric Information; Locational Signaling |
| JEL: | R13 D82 D51 |
| Date: | 2012–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41838&r=cta |
| By: | Irenaeus Wolff; J. Philipp Reiss |
| Abstract: | We examine the incentive effects of funding contracts on entrepreneurial effort decisions and allocative efficiency. We experiment with funding contracts that differ in the structure of investor repayment and, therefore, in the incentives for entrepreneurial effort provision. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. Likewise the replacement of outside equity by a repayment-equivalent standard-debt contract mitigates distortions. We test both hypotheses in the laboratory. Our results reveal that the incentive effects of funding contracts need to be experienced before they reflect in observed behavior. With sufficient experience observed behavior is consistent with the theoretical predictions and supports both hypotheses. If we allow for entrepreneur-sided manipulations of the project outcome we find that non-monotonic contracts lose its appeal. |
| Keywords: | hidden information, funding contracts, incentives, experiment, standard debt contract, non-monotonic contract, state manipulation |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0078&r=cta |
| By: | Maarten C. W. Janssen; Mariya Teteryanikova |
| Abstract: | The unraveling argument says that when a rm may produce dierent qualities and quality is unknown to consumers, the rm has an incentive to disclose the private information as in any pool of rms there is a best quality rm and this rm has an incentive to disclose. Recent literature has established that this argument does not carry over to an environment where the product is not vertically, but horizontally dierentiated. This paper argues that with horizontally dierentiated products, competition restores the unraveling argument. In a duopoly market we show that all equilibria of the disclosure game have rms fully disclosing the variety they produce. |
| JEL: | D43 D82 M37 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1205&r=cta |
| By: | Omar Al-Ubaydli; Steffen Andersen; Uri Gneezy; John A. List |
| Abstract: | Constructing compensation schemes for effort in multi-dimensional tasks is complex, particularly when some dimensions are not easily observable. When incentive schemes contractually reward workers for easily observed measures, such as quantity produced, the standard model predicts that unrewarded dimensions, such as quality, will be neglected. Yet, there remains mixed empirical evidence in favor of this standard principal-agent model prediction. This paper reconciles the literature by using both theory and empirical evidence. The theory outlines conditions under which principals can use a piece rate scheme to induce higher quantity and quality levels than analogous fixed wage schemes. Making use of a series of complementary laboratory and field experiments we show that this effect occurs because the agent is uncertain about the principal’s monitoring ability and the principal’s choice of a piece rate signals to the agent that she is efficient at monitoring. |
| JEL: | C93 D01 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18453&r=cta |
| By: | Martimort, David; Sand-Zantman, Wilfried (Toulouse School of Economics (GREMAQ and IDEI)) |
| Abstract: | This paper discusses the feasibility and performances of simple mechanisms to implement international environmental agreements in the multilateral externalities context of global warming. Asymmetric information and voluntary participation by sovereign and heterogenous countries are key constraints on the design of those agreements. Mechanisms must prevent two sorts of free-riding problems - free riding in effort provision and free riding in participation. As markets might fail to solve simultaneously those two problems, we construct instead a simple menu of options that trades off the provision of incentives for participating countries and the provision of incentives to participate.With such mechanism, all countries voluntary contribute to a fund, although at different intensities, but only the most efficient ones effectively reduce their pollution below its “business as usual” level. |
| Keywords: | Free-riding, environmental agreements, asymmetric information, mechanism design. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26340&r=cta |
| By: | Martimort, David; Sand-Zantman, Wilfried (Toulouse School of Economics (GREMAQ and IDEI)) |
| Abstract: | This paper discusses the feasibility and performances of simple mechanisms to implement international environmental agreements in the multilateral externalities context of global warming. Asymmetric information and voluntary participation by sovereign and heterogenous countries are key constraints on the design of those agreements. Mechanisms must prevent two sorts of free-riding problems - free riding in effort provision and free riding in participation. As markets might fail to solve simultaneously those two problems, we construct instead a simple menu of options that trades off the provision of incentives for participating countries and the provision of incentives to participate.With such mechanism, all countries voluntary contribute to a fund, although at different intensities, but only the most efficient ones effectively reduce their pollution below its “business as usual” level. |
| Keywords: | Free-riding, environmental agreements, asymmetric information, mechanism design. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:26339&r=cta |
| By: | Ori Haimanko (BGU); Atsushi Kajii (KIER, Kyoto University) |
| Abstract: | We relax the Kajii and Morris (1997a) notion of equilibrium ro- bustness by allowing approximate equilibria in close incomplete infor- mation games. The new notion is termed "approximate robustness". The approximately robust equilibrium correspondence turns out to be upper hemicontinuous, unlike the (exactly) robust equilibrium corre- spondence. As a corollary of the upper hemicontinuity, it is shown that approximately robust equilibria exist in all two-player zero-sum games and all two-player two-strategy games, whereas (exactly) robust equilibria may fail to exist for some games in these categories. |
| Keywords: | incomplete information, robustness, Bayesian Nash equi- librium, ?-equilibrium, upper hemicontinuity, zero-sum games. |
| JEL: | C72 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1209&r=cta |
| By: | Pierre Collin-Dufresne; Vyacheslav Fos |
| Abstract: | Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several liquidity measures reveal the presence of informed trading. The evidence suggests that when Schedule 13D filers trade aggressively, both high-frequency and low-frequency measures of stock liquidity indicate a higher stock liquidity. Importantly, measures that have been used as direct proxies for adverse selection, such the Kyle (1985) lambda, the Easley et al. (1996) pin measure, and the Amihud (2002) illiquidity measure, suggest that the adverse selection is lower when informed trading takes place. The evidence is consistent with informed traders being more aggressive when measured stock liquidity is high. |
| JEL: | G0 G00 G1 G10 G12 G14 G3 G34 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18452&r=cta |
| By: | Walther, A. |
| Abstract: | In financial markets with asymmetric information, traders may have an incentive to forgo profitable deals today in order to preserve their informational advantage for future deals. This sort of manipulative behaviour has been studied in markets with one informed trader (Kyle 1985, Chakraborty and Yilmaz 2004). The effect is slower social learning. Using an extension of Glosten and Milgrom’s (1985) trading model, we study this effect in markets with N informed traders. As N grows large, each trader’s price impact subsides, and so does manipulation in equilibrium. However, the impact of manipulation on social learning can be increasing in N. As N increases, each trader individually manipulates less. But nonetheless, the increased number of manipulative actions introduces enough noise to exacerbate the impact of manipulation on learning. |
| Keywords: | Price manipulation, asset pricing, asymmetric information, Glosten-Milgrom model |
| JEL: | D80 D82 G10 G14 |
| Date: | 2012–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1242&r=cta |
| By: | De Frutos, María Ángeles; Espinosa Alejos, María Paz |
| Abstract: | This paper analyzes auctions where bidders face nancial constraints that may force them to resell part of the property of the good (or subcontract part of a project) at a resale market. First we show that the ine¢ cient speculative equilibria of second- price auctions (Garratt and Tröger, 2006) generalizes to situations with partial resale where only the high value bidder is nancially constrained. However, when all players face nancial constraints the ine¢ cient speculative equilibria disappear. Therefore, for auctioning big facilities or contracts where all bidders are nancially constrained and there is a resale market, the second price auction remains a simple and appropriate mechanism to achieve an e¢ cient allocation. |
| Keywords: | auctions, resale, financial constraints, subcontracting |
| JEL: | L1 D44 D82 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:8758&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:upf:upfgen:1338&r=cta |
| By: | Charles Angelucci; Martijn A. Han; ; |
| Abstract: | This paper investigates the design of a leniency policy to fight corporate crime. We explicitly take into account the agency problem within the firm. We model this through a three-tier hierarchy: authority, shareholder, and manager. The manager may breach the law and report evidence to the authority. The shareholder writes the manager’s incentive scheme, monitors him, and possibly reports evidence to the authority. Finally, the authority designs a sanctioning/leniency policy that deters corporate crime at the lowest possible cost. The authority designs its policy trying to both (i) exacerbate agency problems within non-compliant firms and (ii) alleviate agency problems within compliant firms. We find that depending on the authority’s ability to punish the manager, the authority may wish to instigate a “within-firm race to the courthouse”. We also provide comparative statics, carry a welfare analysis and discuss policy implications. |
| Keywords: | corporate crime, white-collar crime, leniency, compliance, antitrust |
| JEL: | K21 K42 L40 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2012-058&r=cta |