nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2012‒12‒10
five papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Bayesian Nash Equilibrium in ''Linear'' Cournot Models with Private Information About Cost By Sjaak Hurkens
  2. Believe only what you see: credit rating agencies, structured finance, and bonds By Mahmoud Elamin
  3. Characterization of a Risk Sharing Contract with One-Sided Commitment By Zhang, Yuzhe
  4. And Now, The Rest of the News: Volatility and Firm Specific News Arrival By Robert F. Engle; Martin Klint Hansen; Asger Lunde
  5. Investment behavior in a constrained dictator game By Coenen, Michael; Jovanovic, Dragan

  1. By: Sjaak Hurkens
    Abstract: Calculating explicit closed form solutions of Cournot models where firms have private information about their costs is, in general, very cumbersome. Most authors consider therefore linear demands and constant marginal costs. However, within this framework, the nonnegativity constraint on prices (and quantities) has been ignored or not properly dealt with and the correct calculation of all Bayesian Nash equilibria is more complicated than expected. Moreover, multiple symmetric and interior Bayesian equilibria may exist for an open set of parameters. The reason for this is that linear demand is not really linear, since there is a kink at zero price: the general ''linear'' inverse demand function is P (Q) = max{a - bQ, 0} rather than P (Q) = a - bQ.
    Keywords: Cournot, Private Information, Bayesian Nash equilibrium
    JEL: C72 D43 D82
    Date: 2012–12–03
  2. By: Mahmoud Elamin
    Abstract: This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed.
    Keywords: Financial institutions ; Uncertainty
    Date: 2012
  3. By: Zhang, Yuzhe
    Abstract: In this paper I provide a stopping-time-based solution to a long-term contracting problem between a risk-neutral principal and a risk-averse agent. The agent faces a stochastic income stream and cannot commit to the long-term contracting relationship. To compute the optimal contract, I also design an algorithm that is more efficient than value-function iteration.
    Keywords: Limited commitment; Risk sharing; Stopping time; Value-function iteration
    JEL: D86 C63
    Date: 2012–11
  4. By: Robert F. Engle (Stern School of Business, New York University); Martin Klint Hansen (Aarhus University and CREATES); Asger Lunde (Aarhus University and CREATES)
    Abstract: Starting with the advent of the event study methodology, the puzzle of how public information relates to changes in asset prices has unraveled gradually. Using a sample of 28 large US companies, we investigate how more than 3 million firm specific news items are related to firm specific stock return volatility. We specify a return generating process in conformance with the mixture of distributions hypothesis, where stock return volatility has a public and a private information processing component. Following public information arrival, prices incorporate public information contemporaneously while private processing of public information generates private information that is incorporated sequentially. We refer to this model as the information processing hypothesis of return volatility and test it using time series regression. Our results are evidence that public information arrival is related to increases in volatility and volatility clustering. Even so, clustering in public information does not fully explain volatility clustering. Instead, the presence of significant lagged public information effects suggest private information, generated following the arrival of public information, plays an important role. Including indicators of public information arrival explains an incremental 5 to 20 percent of variation in the changes of firm specific return volatility. Contrary to prior financial information research, our investigation favors the view that return volatility is related to public information arrival.
    Keywords: Firm Specific News, Realized Volatility, Public Information Arrival.
    JEL: G14
    Date: 2012–12–04
  5. By: Coenen, Michael; Jovanovic, Dragan
    Abstract: We analyze a constrained dictator game in which the dictator splits a pie which will be subsequently created through simultaneous investments by herself and the recipient. We consider two treatments by varying the maximum attainable size of the pie leading to either high or low investment incentives. We find that constrained dictators and recipients invest less than a model with self-interested players would predict. While the splitting decisions of constrained dictators correspond to the theoretical predictions when investment incentives are high, they are more selfish when investment incentives are low. Overall, team productivity is negatively affected by lower investment incentives. --
    Keywords: Bargaining Game,Dictator Game,Investment Incentives,Team Production
    JEL: C72 C91 D01
    Date: 2012

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