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on Contract Theory and Applications |
| By: | Paul Maarek; Michael Dorsch; Karl Dunz (THEMA, Universite de Cergy-Pontoise and THEMA; The American University of Paris; The American University of Paris) |
| Abstract: | This paper considers the role of asymmetric information in a political agency theory of autocratic economic policy-making. Within the context of a static game, we analyze the strategic interaction between a self-interested elite ruling class, who may extract rent ineciently through hidden regulations, and an imperfectly informed disenfranchised class, who may choose to revolt. In various models, we identify the Perfect Bayesian Equilibrium (PBE), which we describe in terms of the economy's level of development potential. One model has two-sided uncertainty and a cost of regulation. This model has a PBE such below a threshold development level the elite chose inecient regulation and above the threshold development level the elite chose the ecient policy. A further extension where the elite own assets allows for a voluntarily transition to democracy. |
| Keywords: | Political transition, Revolution, Asymmetric information, Perfect Bayesian equilibrium |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2012-42&r=cta |
| By: | Saak, Alexander E. |
| Abstract: | Recent food safety events have raised concerns about food traceability in both developed and developing countries. In this paper we study the decision to adopt a traceability system in a supply chain with repeated upstream and downstream moral hazard and imperfect consumer monitoring. In deciding whether to maintain information regarding product origin, firms face a trade-off. On one hand, the downstream firm’s threat to punish upstream shirking is more credible when products are traceable to their firm of origin. On the other hand, the downstream firm has less incentive to collude with a subset of upstream firms to shirk in the provision of quality when it cannot tell whether a product originates from a shirking or non-shirking firm. We show that firms achieve higher joint profits when products are not traceable to upstream suppliers if the cost savings from upstream shirking and the discounted cost savings from downstream shirking are sufficiently similar or the consumer experience is a sufficiently noisy signal of quality. |
| Keywords: | Food safety, Health, Supply chains, Traceability, Reputation, Monitoring, contracts, moral hazard, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:1211&r=cta |
| By: | Arthur Fishman (Bar-Ilan University) |
| Abstract: | This paper shows that prices may be sticky when buyers must search to determine the current market price and there is uncertainty about the expected duration of cost changes. Speci cally, during periods when costs, and hence prices are high, low valuation consumers optimally stop searching and consequently are uninformed about price changes. Then, when costs go down, sellers must advertise to inform those consumers about price cuts. If advertising is costly, relative to single period profit, advertising is profitable only if the cost cut is likely to persist, but not if it is likely to be short lived. Thus, if sellers are initially uncertain about the expected longevity of a cost cut, they might adopt a ‘watch and wait’ strategy, delaying price reductions until better information becomes available. Importantly, it is shown that the same logic does not apply to cost increases. Thus the model is consistent with asymmetric price rigidity (e.g., Peltzman (2000) ). |
| Keywords: | search, advertising, asymmetric price adjustment, sticky prices, absentee consumers |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2012-01&r=cta |
| By: | Marco Battaglini; Bård Harstad |
| Abstract: | We analyze participation in international environmental agreements (IEAs) in a dynamic game where countries pollute and invest in green technologies. If complete contracts are feasible, participants eliminate the hold-up problem associated with their investments; however, most countries prefer to free-ride rather than participate. If investments are non-contractible, countries face a hold-up problem every time they negotiate; but the free-rider problem can be mitigated and significant participation is feasible. Participation becomes attractive because only large coalitions commit to long-term agreements that circumvent the hold-up problem. Under well-specified conditions even the first-best outcome is possible when the contract is incomplete. Since real-world IEAs fit in the incomplete contracting environment, our theory may help explaining the rising importance of IEAs and how they should be designed. |
| JEL: | D86 F53 H87 Q54 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18585&r=cta |
| By: | Pierpaolo Battigalli; Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci |
| Abstract: | Recent work of us (Battigalli, Cerreia-Vioglio, Maccheroni and Marinacci, 2011) emphasizes the importance of information feedback in situations of recurrent decisions and strategic interaction, showing how it affects the uncertainty that underlies selfconfirming equilibrium. Here we discuss in some detail the properties of such a key feature of recurrent interaction. This allows us to elucidate our notion of Waldean selfconfirming equilibrium and compare it with an equilibrium concept due to Lehrer (2012).Keywords: Selfconfirming equilibrium, conjectural equilibrium, information feedback, partially specified probabilities JEL classification: C72, D80. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:459&r=cta |
| By: | Berliant, Marcus; Tabuchi, Takatoshi |
| Abstract: | We consider information aggregation in national and local elections when voters are mobile and might sort themselves into local districts. Using a standard model of private information for voters in elections in combination with a New Economic Geography model, agglomeration occurs for economic reasons whereas voter stratification occurs due to political preferences. We compare a national election, where full information equivalence is attained, with local elections in a three-district model. We show that full information equivalence holds at a stable equilibrium in only one of the three districts when transportation cost is low. The important comparative static is that full information equivalence is a casualty of free trade. When trade is more costly, people tend to agglomerate for economic reasons, resulting in full information equivalence in the political sector. Under free trade, people sort themselves into districts, most of which are polarized, resulting in no full information equivalence in these districts. We examine the implications of the model using data on corruption in the legislature of the state of Alabama and in the Japanese Diet. |
| Keywords: | information aggregation in elections; informative voting; new economic geography; local politics |
| JEL: | D82 D72 R12 |
| Date: | 2012–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43086&r=cta |
| By: | L. Elisa Celis; Gregory Lewis; Markus M. Mobius; Hamid Nazerzadeh |
| Abstract: | Increasingly detailed consumer information makes sophisticated price discrimination possible. At fine levels of aggregation, demand may not obey standard regularity conditions. We propose a new randomized sales mechanism for such environments. Bidders can "buy-it-now" at a posted price, or "take-a-chance" in an auction where the top d > 1 bidders are equally likely to win. The randomized allocation incentivizes high valuation bidders to buy-it-now. We analyze equilibrium behavior, and apply our analysis to advertiser bidding data from Microsoft Advertising Exchange. In counterfactual simulations, our mechanism increases revenue by 4.4% and consumer surplus by 14.5% compared to an optimal second-price auction. |
| JEL: | D4 D44 D82 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18590&r=cta |
| By: | Jennifer Brown; Dylan B. Minor |
| Abstract: | We study how monitoring, expert skill and consumer awareness affect the level of misconduct in markets with asymmetric information and price-taking experts. Theoretical predictions show that experts subject to more intense monitoring may be less ethical in equilibrium. Similarly, more experienced experts are predicted to exhibit greater levels of misconduct. We test these predictions in the insurance sales industry and find that monitored experts are 21 to 98% more likely to take advantage of customers, relative to unmonitored experts. We also find empirical evidence that more experienced experts are significantly more likely to mislead their customers. |
| JEL: | D8 G2 L15 M5 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18608&r=cta |
| By: | Paul Castãneda Dower (New Economic School); Andrei Bremzen (New Economic School) |
| Abstract: | Economists use relational or reputational concerns to explain the implicit enforcement of contracts. Both mechanisms require special assumptions concerning contracting parties' identities; in particular, these assumptions would not hold in one-period settings in which outcomes cannot affect reputation. In such a setting, this paper shows how a signaling mechanism can support the implicit enforcement of contracts that Pareto improve upon the null contract. Furthermore, this mechanism is independent of the discount factor and can outperform the relational contract in a range of cases. We find empirical support for our theory using contracts from nancing alliances in the biotech industry. |
| Keywords: | Implicit contracts, biotech alliances, identity |
| JEL: | D29 L24 O31 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0187&r=cta |
| By: | Buehler, B.; Schuett, F. (Tilburg University, Tilburg Law and Economics Center) |
| Abstract: | Abstract: We compare certification to a minimum quality standard (MQS) policy in a duopolistic industry where firms incur quality-dependent fixed costs and only a fraction of consumers observes the quality of the offered goods. Compared to the unregulated outcome, both profits and social welfare would increase if firms could commit to producing a higher quality. An MQS restricts the firms' quality choice and leads to less differentiated goods. This fuels competition and may therefore deter entry. A certification policy, which awards firms with a certificate if the quality of their products exceeds some threshold, does not restrict the firms' quality choice. In contrast to an MQS, certification may lead to more differentiated goods and higher profits. We find that firms are willing to comply with an ambitious certification standard if the share of informed consumers is small. In that case, certification is more effective from a welfare perspective than a minimum quality standard because it is less detrimental to entry. |
| Keywords: | Certification;minimum quality standard;unobservable quality;policy intervention. |
| JEL: | L15 L13 L51 D82 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubtil:2012040&r=cta |