nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒10‒27
ten papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Information revelation in procurement auctions: an equivalence result By Domenico Colucci; Nicola Doni; Vincenzo Valori
  2. Preferential treatment in procurement auctions through information revelation By Domenico Colucci; Nicola Doni; Vincenzo Valori
  3. Public-private partnerships versus traditional procurement: Innovation incentives and information gathering By Hoppe, Eva I.; Schmitz, Patrick W.
  4. Strategic behavior in regressions: an experimental By Javier Perote; Juan Perote-Peña; Marc Vorsatz
  5. Information Acquisition and Welfare By Luca Colombo; Gianluca Femminis; Alessandro Pavan
  6. Truth-Telling: A Representative Assessment By Abeler, Johannes; Becker, Anke; Falk, Armin
  7. Optimal Preventive Bank Supervision Combining Random Audits and Continuous Intervention By Mohamed Belhaj; Nataliya Klimenko
  8. A Game Theoretic Foundation of Competitive Equilibria with Adverse Selection By Nick Netzer; Florian Scheuer
  9. Designing Informative Securities By Yiling Chen; Mike Ruberry; Jennifer Wortman Vaughan
  10. Behavioral Hazard in Health Insurance By Katherine Baicker; Sendhil Mullainathan; Joshua Schwartzstein

  1. By: Domenico Colucci (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze); Nicola Doni (Dipartimento di Scienze dell'Economia - Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)
    Abstract: Procurement auctions often involve quality considerations as a determinant of the final outcome. When qualities are the procurer’s private information then various information policies may be used to affect the expected outcome. For auctions with two cost heterogeneous suppliers, this work defines a notion of duality between pairs of policies, and shows that dual policies are revenue equivalent.
    Keywords: procurement, information revelation, discriminatory policy, asymmetric auctions
    Date: 2012–10
  2. By: Domenico Colucci (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze); Nicola Doni (Dipartimento di Scienze dell'Economia - Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)
    Abstract: We study a model of procurement auctions in which information policies can be used to treat two heterogeneous suppliers asymmetrically. The buyer is shown to be better off revealing information about her preferences to the weak supplier only, when there is a sufficient cost difference between the weak and the strong. Conversely, when the two competitors have similar cost structures, for the buyer it is best to disclose her preferences publicly.
    Keywords: procurement, information revelation, discriminatory policy, asymmetric auctions
    Date: 2012–10
  3. By: Hoppe, Eva I.; Schmitz, Patrick W.
    Abstract: A government agency wants a facility to be built and managed to provide a public service. Two different modes of provision are considered. In a public-private partnership, the tasks of building and managing are bundled, whereas under traditional procurement, these tasks are delegated to separate private contractors. The two provision modes differ in their incentives to innovate and to gather private information about future costs to adapt the service provision to changing circumstances. The government agency's preferred mode of provision depends on the information gathering costs, the costs of innovation efforts, and on the degree to which effort is contractible.
    Keywords: Public-private partnerships; Integration versus separation; Information gathering; Incomplete contracts
    JEL: D86 H11 L33
    Date: 2012–10
  4. By: Javier Perote; Juan Perote-Peña; Marc Vorsatz
    Abstract: We study experimentally in the laboratory the situation when individuals have to report their private information (that is commonly known to be the sum of an observable and a random component) to a public authority that then makes inference about the true value hold by each of the individuals. It is assumed that individuals prefer this inferred or predicted value to be as close as possible to the their true value. Consistent with the theoretical literature, we show that the participants in our experiment misrepresent their private information more under the OLS than under the resistant line estimator (which extends the median voter theorem to the two{dimensional setting). Moreover, only the resistant line estimator is empirically unbiased and subjects earn signicantly less if the OLS estimator is applied.
    Date: 2012–10
  5. By: Luca Colombo; Gianluca Femminis; Alessandro Pavan
    Abstract: We study information acquisition in a exible framework with strategic complementarity or substitutability in actions and a rich set of externalities that are responsible for possible wedges between the equilibrium and the efficient acquisition of information. First, we relate the (in)efficiency in the acquisition of information to the (in)efficiency in the use of information and explain why efficiency in the use does not guarantee efficiency in the acquisition. Next, we show how the acquisition of private information affects the social value of public information (i.e., the comparative statics of equilibrium welfare with respect to the quality of public information). Finally, we illustrate the implications of our results in a few applications that include beauty contests, monetary economies with price-setting complementarities, and economies with negative production externalities.
    Keywords: endogenous information, strategic complementarity/substitutability, externalities, efficiency, welfare JEL Classification Numbers: C72, D62, D83, E50.
    Date: 2012–05–01
  6. By: Abeler, Johannes (University of Oxford); Becker, Anke (University of Bonn); Falk, Armin (University of Bonn)
    Abstract: A central assumption of the canonical cheap talk literature is that people misreport their private information if this is to their material benefit. Recent evidence from laboratory experiments with student subjects suggests, however, that while many people do report the payoff-maximizing outcome, some report their private information truthfully or at least do not lie maximally. We measure truth-telling outside the laboratory by calling a representative sample of the German population at home. In our setup, participants have a strong monetary incentive to misreport, misreporting cannot be detected, and reputational concerns are negligible. Yet, we find that aggregate reporting behavior closely follows the expected truthful distribution. Our results underline the importance of lying costs and raise questions regarding the influence of the decision-making environment and the elicitation mode on reporting behavior.
    Keywords: private information, cheap talk, honesty, lying costs, representative experiment
    JEL: C93 D01 D82 D83
    Date: 2012–10
  7. By: Mohamed Belhaj (Centrale Marseille (Aix-Marseille School of Economics), CNRS & EHESS); Nataliya Klimenko (Aix-Marseille Université, Greqam)
    Abstract: Early regulator interventions into problem banks are one of the key suggestions of Basel II. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: continuous regulator intervention and random audits. Random audit technologies differ as to quality and cost. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision effort to the bank's financial health. We also consider preventive supervision in a setting where audits can be delegated to an independent audit agency, showing how to induce agency compliance with regulatory instructions in the least costly way.
    Keywords: banking supervision, random audit, incentives, moral hazard, delegation.
    JEL: G21 G28
    Date: 2012–01
  8. By: Nick Netzer; Florian Scheuer
    Abstract: We construct a fully specified extensive form game that captures competitive markets with adverse selection. In particular, it allows firms to offer any finite set of contracts, so that cross-subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists and that, in fact, when withdrawal is costless, the set of subgame perfect equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that exist both when withdrawal costs are zero and when they are arbitrarily small but strictly positive. We show that the Miyazaki-Wilson contracts are the unique robust equilibrium outcome of our game. This outcome is always constrained efficient and involves cross-subsidization from low to high risk agents that is increasing in the share of low risks in the population under weak conditions on risk preferences.
    JEL: C73 D02 D82 D86 G22 H1 L1
    Date: 2012–10
  9. By: Yiling Chen; Mike Ruberry; Jennifer Wortman Vaughan
    Abstract: We create a formal framework for the design of informative securities in prediction markets. These securities allow a market organizer to infer the likelihood of events of interest as well as if he knew all of the traders' private signals. We consider the design of markets that are always informative, markets that are informative for a particular signal structure of the participants, and informative markets constructed from a restricted selection of securities. We find that to achieve informativeness, it can be necessary to allow participants to express information that may not be directly of interest to the market organizer, and that understanding the participants' signal structure is important for designing informative prediction markets.
    Date: 2012–10
  10. By: Katherine Baicker; Sendhil Mullainathan; Joshua Schwartzstein
    Abstract: This paper develops a model of health insurance that incorporates behavioral biases. In the traditional model, people who are insured overuse low value medical care because of moral hazard. There is ample evidence, though, of a different inefficiency: people underuse high value medical care because they make mistakes. Such “behavioral hazard” changes the fundamental tradeoff between insurance and incentives. With only moral hazard, raising copays increases the efficiency of demand by ameliorating overuse. With the addition of behavioral hazard, raising copays may reduce efficiency by exaggerating underuse. This means that estimating the demand response is no longer enough for setting optimal copays; the health response needs to be considered as well. This provides a theoretical foundation for value-based insurance design: for some high value treatments, for example, copays should be zero (or even negative). Empirically, this reinterpretation of demand proves important, since high value care is often as elastic as low value care. For example, calibration using data from a field experiment suggests that omitting behavioral hazard leads to welfare estimates that can be both wrong in sign and off by an order of magnitude. Optimally designed insurance can thus increase health care efficiency as well as provide financial protection, suggesting the potential for market failure when private insurers are not fully incentivized to counteract behavioral biases.
    JEL: D01 D03 D8
    Date: 2012–10

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