nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒11‒24
eight papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Deceptive advertising with rational buyers By Ursino, Giovanni; Piccolo, Salvatore; Tedeschi, Piero
  2. Herding in a Laboratory Asset Market with a Rich Action Set By Lora R. Todorova; Bodo Vogt
  3. Correlation of Types in Bayesian Games By Luciano De Castro
  4. Uncertainty, Electoral Incentives and Political Myopia By Alessandra Bonfiglioli; Gino Gancia
  5. Household Inflation Expectations: Information Gathering, Inattentive or ‘Stubborn’? By J. Easaw; R. Golinelli
  6. Bank Capital Regulation with Asymmetric Countries By Damien S.Eldridge; Heajin H.Ryoo; Axel Wieneke
  7. Updating Beliefs with Imperfect Signals: Experimental Evidence. By Poinas, François; Rosaz, Julie; Roussillon, Béatrice
  8. Corporate Criminal Liability and Optimal Behavior by Firms.Internal Monitoring Devices versus Managerial Incentives. By Paolo Polidori; Désirée Teobaldelli

  1. By: Ursino, Giovanni; Piccolo, Salvatore; Tedeschi, Piero
    Abstract: We study a Bertrand game where two sellers supplying products of different and unverifiable qualities can outwit potential clients through their (costly) deceptive advertising. We characterize a class of pooling equilibria where sellers post the same price regardless of their quality and low quality ones deceive buyers. Although in these equilibria low quality goods are purchased with positive probability, the buyer (expected) utility can be higher than in a fully separating equilibrium. It is also argued that low quality sellers invest more in deceptive advertising the better is their reputation vis-à-vis potential clients — i.e., firms that are better trusted by customers, have greater incentives to invest in deceptive advertising when they produce a low quality product. Finally, we characterize the optimal monitoring effort exerted by a regulatory agency who seeks to identify and punish deceptive practices. When the objective of this agency is to maximize consumer surplus, its monitoring effort is larger than under social welfare maximization.
    Keywords: Misleading advertising; Deception; Bayesian Consumers; Asymmetric Information
    JEL: L1
    Date: 2012–11–08
  2. By: Lora R. Todorova (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper experimentally examines the efficiency of information aggregation in a simple asset market. Traders decide how to allocate an endowment of 1000 eurocent between two assets. Only one asset will be successful and that will pay back the amount invested in it. The experiment carried out here is original in that it considered a very rich action set. We find that when the action set is sufficiently rich, traders' actions, most of the time, perfectly reveal their private information. Further, the participants in the experiment performed probability matching and took such actions, which were broadly consistent with Bayesian learning.
    Keywords: information cascade, information aggregation, herding, probability matching, Bayes' rule
    JEL: G10 D8 C11 C92
    Date: 2012–09
  3. By: Luciano De Castro
    Abstract: Despite their importance, games with incomplete information and dependent types are poorly understood; only special cases have been considered and a general approach is not yet available. In this paper, we propose a new condition (named richness) for correlation of types in (asymmetric) Bayesian games. Richness is related to the idea that “beliefs do not determine preferences” and that types should be modeled with two explicit parts: one for payoffs and another for beliefs. With this condition, we are able to provide the first pure strategy equilibrium existence result for a general model of multi-unit auctions with correlated types. We then focus on a special case of richness, called “grid distributions,” and establish necessary and sufficient conditions for the existence of a symmetric monotonic pure strategy equilibrium in first-price auctions with general levels of correlation. We also provide a polynomial-time algorithm to verify this existence and suggest, using simulations, that the revenue superiority of English auctions may not hold for positively correlated types in general. JEL Classification Numbers: C62, C72, D44, D82
    Date: 2012–01–12
  4. By: Alessandra Bonfiglioli; Gino Gancia
    Abstract: We study the determinants of political myopia in a rational model of electoral accountability where political ability is ex-ante unknown and policy choices are not perfectly observable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians invest too little in costly policies with future returns in an attempt to signal high ability and increase their reelection probability. Contrary to the conventional wisdom, uncertainty reduces political myopia and may, under some conditions, increase social welfare. We use the model to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of our theory are consistent with a number of stylized facts and with a new empirical observation documented in this paper: aggregate uncertainty, measured by economic volatility, is associated to better fiscal discipline in a panel of 20 OECD countries.
    Keywords: elections, political myopia, asymmetric information, uncertainty
    JEL: E6 H3
    Date: 2012–10
  5. By: J. Easaw; R. Golinelli
    Abstract: The purpose of this paper is to investigate the microfoundations of how non-experts’ (or general public) form inflation expectations. Using a unique dataset we investigate the range of near rational inflation expectations. An important contribution to understanding how non-experts form their expectations is ‘sticky information expectations’, specifically the epidemiological model. Our analysis uses an extended version of the epidemiological model. We find that the general public are best depicted as those who are either information gathers or inattentive. In addition, the inattentive general public can be either forward-looking or ‘stubborn’, that is persistent.
    JEL: D84 E31
    Date: 2012–11
  6. By: Damien S.Eldridge (School Economics, La Trobe University); Heajin H.Ryoo (School of Economics, La Trobe University); Axel Wieneke (School of Economics, La Trobe University)
    Abstract: Financial markets are increasingly globalized, so that the impacts of na- tional banking regulations extend beyond national borders. Strict regulation reduces global loan supply and thus widens interest rate spreads. This is an externality insofar as it affects foreign banks profitability and stability. The sovereigns' motivation to join an internationally coordinated regulatory regime, such as the Basel Accords, has been discussed in the literature. How- ever, regulatory enforcement remains a domestic responsibility. In combina- tion with asymmetric information, this gives national authorities room to deviate in the form of lax regulation. We show that each regulator's en- forcement choice is affected by the relative country size. Lax enforcement improves the profitability of home banks, but diminishes the global interest rate spreads. An authority regulating a small market has only a small effect on global interest rates. As such, it may choose lax regulation to improve domestic bank profitability without significantly diminishing global spreads. In contrast, an authority regulating a large market will have a significant im- pact on global spreads. Therefore, small country regulators have a stronger incentive to deviate from strict international regulatory standards.
    Keywords: Bank regulation, Market integration, Regulatory competition. EDIRC Provider-Institution: RePEc:edi:sblatau
    JEL: G21 G18 F36
    Date: 2012
  7. By: Poinas, François; Rosaz, Julie; Roussillon, Béatrice
    Date: 2012–06
  8. By: Paolo Polidori (Department of Law, University of Urbino “Carlo Bo”); Désirée Teobaldelli (Department of Law, University of Urbino “Carlo Bo”)
    Abstract: Corporate criminal liability legislation has been the subject of a widespread debate around the world in response to the financial scandals of the early 2000s. The existing legal regimes en- tail compliance requirements, such as internal monitoring mechanisms, with the aim of inducing firms to detect the wrongful conduct of their agents. We develop an analytical framework to address when and to what extent firms may find convenient to adopt these regulatory devices. We conclude that more productive firms and those operating in sectors where managers have more opportunities to undertake criminal activities are more likely to prevent such activities (through monitoring or the payment of e¢ ciency wages). When the potential returns of ille- gal activities are high or when the firms are large, implementing internal monitoring devices may be optimal, while smaller firms should generally prefer the payment of efficiency wages to prevent crimes by managers.
    Keywords: Corporate Governance, Law Enforcement, Compliance, Deterrence, Regulation.
    JEL: K22 K42 G34 G38 L50
    Date: 2012

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