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on Contract Theory and Applications |
| By: | Dirk Bergemann; Stephen Morris |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000601&r=cta |
| By: | Angelucci, Charles (Harvard University); Russo, Antonio (Doctorant TSE) |
| Abstract: | We investigate the scope for supervisory activities in organizations in which information is non-verifiable and opportunism severe. A principal-supervisor-agent hierarchy is considered. Side-contracts between supervisor and agent may be reached both before and after the agent has chosen his hidden action. We find that the supervisor is useful if and only if appointed before the agent has chosen his action. We also show that delegation of payroll authority is suboptimal. Finally, some insights concerning the optimal design of verification activities are provided: when information is non-verifiable, the supervisor should be employed as a monitor rather than as an auditor. |
| Keywords: | collusion, extortion, delegation, mechanism design |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26384&r=cta |
| By: | Zhiguo He; Asaf Manela |
| Abstract: | We study information acquisition and withdrawal decisions when a liquidity event triggers a spreading rumor and exposes a solvent bank to a run. Uncertainty about the bank's liquidity and potential failure motivates agents who hear the rumor to acquire additional signals. Depositors with unfavorable signals may wait and thus gradually run on the bank, leading to an endogenous aggregate withdrawal speed. A bank run equilibrium exists when agents aggressively acquire information. We study threshold parameters (e.g. liquidity reserve and deposit insurance) that eliminate runs. Public provision of solvency information can eliminate runs by indirectly crowding-out individual depositors' effort to acquire liquidity information. However, providing too much information that slightly differentiates competing solvent-but-illiquid banks can result in inefficient runs |
| JEL: | E61 G01 G21 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18513&r=cta |
| By: | Pradeep Dubey (Department of Economics, Stony Brook University) |
| Abstract: | Consider a contest for a prize in which each player knows his own ability, but may or may not know those of his rivals (the complete or incomplete information regimes). Our main result is that, if the value of the prize is high, more e¤ort and output are engendered under incomplete information; whereas, if the value is low, that distinction goes to complete information. We also examine strategic behavior of a "contest manager" who is privy to information about the abilities of all the players. It turns out that, in order to inspire performance, it is often better for him neither to reveal all nor to conceal all, but to follow a middle path of partial revelation. |
| JEL: | C70 C72 C79 D44 D63 D82 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:12-11&r=cta |
| By: | Costa Lima, Rafael; Moreira, Humberto; Verdier, Thierry |
| Abstract: | We re-address the tradeoff between centralized and decentralized decision making of local policies when policymakers are subject to capture by special interest groups. In particular, we consider the case where lobbies have private information about their ability to exert influence. We find a new informational effect in the political game under centralized structures that gives the policymaker additional bargaining power against lobbies. Thus, when compared to decentralization, centralization reduces capture, and is more likely to be welfare enhancing in the presence of information asymmetries. Then, we apply the model to the classical problem of local public goods provision and to the incentives towards the creation of customs unions agreements. |
| Keywords: | Asymmetric information; Centralization; custom unions; lobbying; public goods |
| JEL: | D72 D82 F15 H41 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9199&r=cta |
| By: | LEV RATNOVSKI (International Monetary Fund); Giovanni Dell'Ariccia (IMF) |
| Abstract: | We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks (bailout) creates moral hazard and encourages risk-taking. However, when a bank's success depends on both its idiosyncratic risk and the overall stability of the banking system, a government's commitment to shield banks from contagion may increase their incentives to invest prudently. We explore these issues in a simple model of financial intermediation where a bank's survival depends on another bank's success. We show that the positive effect from systemic insurance dominates the classical moral hazard effect when the risk of contagion is high. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:133&r=cta |
| By: | Bruno Biais (Toulouse School of Economics (TSE)); Florian Heider (European Central Bank); Marie Hoerova (European Central Bank) |
| Abstract: | We study the optimal design of clearing systems. We analyze how counterparty risk should be allocated, whether traders should be fully insured against that risk, and how moral hazard affects the optimal allocation of risk. The main advantage of centralized clearing, as opposed to no or decentralized clearing, is the mutualization of risk. While mutualization fully insures idiosyncratic risk, it cannot provide insurance against aggregate risk. When the latter is significant, it is efficient that protection buyers exert effort to find robust counterparties, whose low default risk makes it possible for the clearing system to withstand aggregate shocks. When this effort is unobservable, incentive compatibility requires that protection buyers retain some exposure to counterparty risk even with centralized clearing. JEL Classification: G22, G28, D82 |
| Keywords: | Risk-sharing, moral hazard, optimal contracting, counterparty risk, central clearing counterparty, mutualization, aggregate and idiosyncratic risk |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121481&r=cta |
| By: | Sonja Brangewitz (Department of Economics - University of Paderborn); Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We study the consequences of dropping the perfect competition assumption in a standard infinite horizon model with infinitely-lived traders and real collateralized assets, together with one additional ingredient : information among players is asymmetric and monitoring is incomplete. The key insight is that trading assets is not only a way to hedge oneself against uncertainty and to smooth consumption across time : it also enables learning information. Conversely, defaulting now becomes strategic : certain players may manipulate prices so as to provoke a default in order to prevent their opponents from learning. We focus on learning equilibria, at the end of which no player has incorrect beliefs — not because those players with heterogeneous beliefs were eliminated from the market (although default is possible at equilibrium) but because they have taken time to update their prior belief. We prove a partial Folk theorem à la Wiseman (2011) of the following form : for any function that maps each state of the world to a sequence of feasible and strongly individually rational allocations, and for any degree of precision, there is a perfect Bayesian equilibrium in which patient players learn the realized state with this degree of precision and achieve a payoff close to the one specified for each state. |
| Keywords: | Strategic market games, infinite horizon, incomplete markets, collateral, incomplete information, learning, adverse selection. |
| JEL: | C72 D43 D52 G12 G14 G18 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12062&r=cta |
| By: | Jayant Ganguli; Scott Condie |
| Abstract: | Ambiguous private information leads to informational inefficiency of market prices in rational expectations equilibrium. This inefficiency implies lower asset prices as uninformed traders require a premium to hold assets. This premium is increasing in the riskiness of the asset and leads to excess volatility, price swings, and abrupt volatility and illiquidity variation across informational efficiency regimes. Public information affects the informational efficiency of price and can also lead to abrupt changes involatility and illiquidity. |
| Date: | 2012–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:720&r=cta |
| By: | G. Coco; G. Pignataro |
| Abstract: | This paper investigates the impact of credit allocation on heterogeneous wealth entrepreneurs from an egalitarian opportunity point of view. We show that in a model with hidden information about both entrepreneurial wealth and e¤ort aversion, and moral hazard, collateral proves ineffective in sorting good entrepreneurs from bad ones. Due to DARA, poor entrepreneurs, other things equal realize better projects. This notwithstanding, they may be rationed out or obtain a loan only at the cost of cross subsidizing bad projects realized by rich entrepreneurs. |
| JEL: | D31 D82 G21 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp851&r=cta |
| By: | Herweg, Fabian; Schmidt, Klaus M. |
| Abstract: | We propose a theory of ex post inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationshipspecific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate. |
| Keywords: | Renegotiation; Incomplete Contracts; Reference Points; Employment Contracts; Behavioral Contract Theory |
| JEL: | C78 D03 D86 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:14191&r=cta |
| By: | De Borger, Bruno; Fosgerau, Mogens |
| Abstract: | We study the interaction between pricing, frequency of service and information provision by public transport firms offering scheduled services, and we do so under various regulatory regimes. The model assumes that users can come to the bus stop or rail station at random or they can plan their trips; the fraction of users who plan their trips is endogenous and depends on the frequency of service and on the quality of information provided. Four institutional regimes are considered, reflecting various degrees of government regulation. A numerical example illustrates the theoretical results. Findings include the following. First, fare regulation induces the firm to provide less frequency and less information than is socially optimal. Second, if information and frequency did not affect the number of planning users a higher fare always induces the firm to raise both frequency and the quality of information. With endogenous planning, however, this need not be the case, as the effect of higher fares strongly depends on how frequency and information quality affect the number of planners. Third, a profit-maximizing firm offers more information than a fare-regulated firm. Fourth, if the agency regulates both the fare and the quality of information then more stringent information requirements induce the firm to reduce frequency; this strongly limits the welfare improvement of information regulation. Finally, of all institutional structures considered, socially optimal fares, frequency and quality of information stimulate passengers least to plan their trips, because the high frequency offered reduces the benefits of trip planning. |
| Keywords: | Optimal information provision; Price regulation; Scheduled services |
| JEL: | D21 R40 D82 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42267&r=cta |
| By: | Simeon Alder (Department of Economics, University of Notre Dame); Guillermo Ordonez (University of Pennsylvania and NBER) |
| Abstract: | Many policies enhance welfare under certain conditions, but have the potential to generate private rents at other times. This can prompt rent-seeking governments to adopt such policies excessively. If the economy's constituents can easily detect opportunistic policymaking, rent-seeking is constrained by the prospect of loosing political reputation and the removal from power. If, in contrast, information is scarce and the politician's motives are accordingly murky, his discretion depends critically on the ability of different constituents to report instances of abuse. Governments, however, can mitigate scrutiny by way of excessive transfers that benefit prospective political clients. The patterns of inefficiency and redistribution that our model generates match salient stylized facts. In contrast to the standard view that inefficiencies are unavoidable when implementing redistributive policies, we argue that redistribution may be a means to disguise inefficient policies that generate private benefits to politicians. |
| Keywords: | Reputation, Rent-Seeking, Redistribution, Asymmetric Information, Institutions, Political Economics |
| JEL: | O43 D72 D82 P16 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nod:wpaper:017&r=cta |
| By: | Nina Boyarchenko |
| Abstract: | This paper considers the problem of information acquisition in an intermediated market, where the specialists have access to superior technology for acquiring information. These informational advantages of specialists relative to households lead to disagreement between the two groups, changing the shape of the intermediation-constrained region of the economy and increasing the frequency of periods when the intermediation constraint binds. Acquiring the additional information is, however, costly to the specialists, making them less likely to decrease their risky asset holdings when the intermediation constraint binds. I show that this behavior leads the equity capital constraint to bind more frequently, making asset prices in the economy more volatile. I find empirical evidence consistent with these predictions. |
| Keywords: | Information theory ; Information technology ; Technology - Economic aspects ; Assets (Accounting) ; Households - Economic aspects ; Intermediation (Finance) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:571&r=cta |
| By: | Kiridaran Kanagaretnam; Stuart Mestelman; S. M. Khalid Nainar; Mohamed Shehata |
| Abstract: | In a laboratory-controlled environment characterized by uncertainty and incomplete information we provide experimental evidence on the effects of transparency and empowerment on trust (investment by a principal) and trustworthiness (reciprocal behavior of an agent) in a simple two-person investment game. We find that when principals are empowered by being able to punish agents who may not act in a way the principal believes is in the principal’s best interest, trust and investment increases over that which is realized in the absence of empowerment. We also find that when asymmetric or incomplete information characterizes the investment game the levels of trust (investment) are lower than when information is complete (the environment is transparent). In transparent environments the effect of empowerment is about the same regardless of whether empowerment is introduced or removed. However, in opaque environments, the loss of empowerment has a substantially greater negative effect on trust that the positive effect associated with the introduction of empowerment. While this environment is substantially abstracted from the naturally occurring environment, these results suggest that practical public policies designed to increase transparency in financial transactions are likely to have positive effects on investment. Furthermore, public policies designed to empower principals, such as the Say on Pay practices, are likely to increase investment while the limitation of the empowerment of principals with respect to their agents (consistent with deregulation) will have a much more dramatic negative impact on trust (and investment). |
| Keywords: | investment, empowerment, veto, trust, trustworthiness, reciprocity, say on pay |
| JEL: | C70 C91 D63 D81 D82 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2012-12&r=cta |
| By: | Thomas Giebe and Paul Schweinzer |
| Abstract: | We analyse a procurement auction in which sellers are distinguished on the basis of the ratios of quality per unit of money they offer. Sellers are privately informed on the quality of the technology or good they offer. We assume that the procurer cannot perfectly identify the best offer. Thus, with positive (and decreasing) probability, the second, third, etc. best ratio offered is selected as the winner of the auction. We model the decision process as based on a general noisy ranking of offers. We show that, although the problem seems to be analytically intractable in general, there exists a simple symmetric pure-strategy equilibrium, provided that the procurer’s ranking technology employs the right degree of noisiness. |
| Keywords: | Auctions, Contests, Procurement |
| JEL: | C7 D7 H57 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:12/26&r=cta |
| By: | Jens Leth Hougaard (Institute of Food and Resource Economics, University of Copenhagen); Kurt Nielsen (Institute of Food and Resource Economics, University of Copenhagen); Athanasios Papakonstantinou (Department of Economics, Copenhagen Business School) |
| Abstract: | We analyze a simple multi-attribute procurement auction that uses yardstick competition to settle prices. Upon receiving the submitted bids the auctioneer computes the yardstick prices (bids) by a linear weighting of the other participants’ bids. The auction simplifies the procurement process by reducing the principal’s articulation of preferences to simply choosing the most preferred offer as if it was a market with posted prices. The auction is not incentive compatible. For some bidders, it may be optimal to bid strategically and manipulate the outcome of the auction. By simulations we show that these opportunities are limited. It is only a small fraction of all bidders that may gain by deviating from submitting true cost bids and this fraction is decreasing as the number of bidders increases. Furthermore, for those that may gain from deviating from telling the truth, the mechanism counteracts strategic bidding in both thin and thick markets. In thin markets deviation have to be large and therefore more risky, in thick markets only small deviations are optimal. The yardstick auction is not efficient nor optimal relative to a situation where the principal articulates his preferences a priori and uses the efficient second score auction. However, the auction approximates efficiency and the cost of not investing sufficient time and money in articulating a scoring function a priori, is also diminishing as the number of bidders increases. Compared with the efficient second score auction, our numerical results suggest that the yardstick auction generates approximately 1% less social values and 2% less private value with 10 or more bidders. |
| Keywords: | Multi-attribute auction, yardstick competition, articulation of preferences, simulation |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:foi:msapwp:02_2012&r=cta |
| By: | Richard Van Weelden (University of Chicago); Massimo Morelli (Columbia University) |
| Abstract: | We provide a positive analysis of effort allocation by a politician facing reelection when voters are uncertain about the politician's preferences on a divisive issue. We then use this framework to derive normative conclusions on the desirability of transparency, term limits, and independence of executive power. There is a pervasive incentive to ``posture'' by over-providing effort to pursue the divisive policy, even if all voters would strictly prefer to have a consensus policy implemented. As such, the desire of politicians to convince voters that their preferences are aligned with the majority can lead them to choose strictly pareto dominated effort allocations in the first period. Transparency over the politicians' effort choices can either mitigate or re-enforce the distortions depending on the strength of politicians' office motivation and the efficiency of institutions. When re-election concerns are paramount, and executive institutions are strong, transparency about effort choices can be bad for both incentivizing politicians and for sorting. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:111&r=cta |
| By: | Farid Gasmi; Juan Daniel Oviedo |
| Abstract: | This paper develops a model of the regulator-regulated firm relationship in a regional natural gas commodity market which can be linked to a competitive market by a pipeline. We characterize normative policies under which the regulator, in addition to setting the level of the capacity of the pipeline, regulates the price of gas, under asymmetric information on the firm’s technology, and may (or may not) operate (two-way) transfers between consumers and the firm. We then focus on capacity and investigate how its level responds to the regulator’s taking account of the firm’s incentive compatibility constraints. The analysis yields some insights on the role that transport capacity investments may play as an instrument to improve the efficiency of geographically isolated markets. |
| Date: | 2012–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:010074&r=cta |
| By: | Barreira da Silva Rocha, André; Laruelle, Annick |
| Abstract: | Differently from previous studies of tag-based cooperation, we assume that individuals fail to recognize their own tag. Due to such incomplete information, the action taken against the opponent cannot be based on similarity, although it is still motivated by the tag displayed by the opponent. We present stability conditions for the case when individuals play unconditional cooperation, unconditional defection or conditional cooperation. We then consider the removal of one or two strategies. Results show that conditional cooperators are the most resilient agents against extinction and that the removal of unconditional cooperators may lead to the extinction of unconditional defectors. |
| Keywords: | evolution, similarity, cooperation, snowdrift game, replicator dynamics |
| Date: | 2012–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:201262&r=cta |
| By: | Maria Racionero; Pierre Pestieau |
| Abstract: | We study the optimal design of a social security system when individuals differ in health status and occupation. The health status is private information but is imperfectly correlated with occupation: individuals in harsh occupations have a higher probability of being in poor health. We explore the desirability of allowing the social security policy to differ by occupation and compare the results with those obtained if disability tests are used instead. We show that tagging by occupation is preferable to disability testing when the audit technology is relatively expensive and/or the ratio of disabled to healthy workers is significantly different across occupations. We also study the implications of imposing horizontal equity among disabled workers in different occupations and show that the disabled workers in harsher occupations may be induced to retire later. |
| Keywords: | health status, retirement are, tagging, disability tests |
| JEL: | H21 H55 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:auu:dpaper:672&r=cta |