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on Contract Theory and Applications |
| By: | Kouroche Vafaï (Université Paris Descartes - Sorbonne Cité et Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We determine the optimal policy to cope with information concealment in a hierarchy where a principal relies on a supervisor to obtain verifiable information about an agent's output. Depending on the information he has obtained, the informed supervisor may either collude with the agent or with the principal and conceal information. The principal has the choice of four policies to cope with information concealment : it can prevent both types of information concealment, allow both of them, or prevent one of them and allow the other one. We characterize the incentive contracts in this environment and show that it is not optimal to allow information concealment, that is, the optimal policy of a hierarchy exposed to multiple types of information concealment is to prevent them all. |
| Keywords: | Hierarchy, information concealment. |
| JEL: | D20 D73 L20 M50 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12086&r=cta |
| By: | Kris De Jaegher |
| Abstract: | This paper presents a game-theoretical model of the physician-patient relationship. There is a conflict of interest between physician and patient, in that the physician prefers the patient to always obtain a particular treatment, even if the patient would not consider this treatment in his interest. The patient obtains imperfect cues of whether or not he needs the treatment. The effect is studied of an increase in the quality of the patient's information improves in this sense, he may either become better off or worse off. The precise circumstances under which either result is obtained, are derived. |
| Keywords: | physician-patient relationship, value of private information. |
| JEL: | I11 D82 C72 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1223&r=cta |
| By: | B. Onur Tas |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:tob:wpaper:1206&r=cta |
| By: | Polimeni, Rachel; Levine, David I. |
| Abstract: | A standard test for adverse selection in health insurance examines whether people with characteristics predicting high health care utilization are more likely to buy insurance (or buy more generous nsurance). George Akerlof’s theory of adverse selection suggests a test based on prices: those who purchase insurance at the regular price will have higher expected utilization than those buying insurance when offered a deeply discounted price. Both tests provide (different) lower bounds on self-selection. We use a randomly allocated coupon for deeply discounted health insurance in rural Cambodia coupled with a longitudinal survey to test for adverse selection. While the standard test can show only a small amount of self-selection, the Prices test shows vastly more self-selection – providing a much more informative lower bound. |
| Keywords: | Business, Management, Marketing, and Related Support Services, Human Resources Management and Services, D82, I13, Asymmetric and Private Information, Health Insurance |
| Date: | 2012–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:indrel:qt135813k8&r=cta |
| By: | Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M. |
| Abstract: | Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach. |
| Keywords: | theory of the firm; transaction cost economics; authority; power abuse; employment relation; fairness; reputation |
| JEL: | C91 D23 D86 M5 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:391&r=cta |
| By: | Bartling, Björn (University of Zurich); Fehr, Ernst (University of Zurich); Schmidt, Klaus M. (University of Munich) |
| Abstract: | Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz's (1972) critique of the Coasian approach. |
| Keywords: | theory of the firm, transaction cost economics, authority, power abuse, employment relation, fairness, reputation |
| JEL: | C91 D23 D86 M5 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7029&r=cta |
| By: | Gick, Wolfgang; Pausch, Thilo |
| Abstract: | The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal. -- |
| Keywords: | Stress Tests,Supervisory Information,Bayesian Persuasion,Multiple Receivers,Disclosure |
| JEL: | D81 D83 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:322012&r=cta |
| By: | Gabriel de Abreu Madeira |
| Abstract: | Abstract: This paper employs mechanism design to study how imperfect legal enforcement impacts simultaneously on the availability (or scale) of credit for investment purposes and interest rates. The analysis combines two standard ingredients of the development and contract literatures: limited commitment, which encapsulates the idea that contract enforcement is imperfect, and asymmetric information about cash flows, which justify debt contracts and default under some circumstances. Costly use of courts may be optimal, which contrasts with results from most limited commitment models, where punishments are just threats, never applied in optimal arrangements. Numerical solutions for several parametric specifications, allowing for heterogeneity on initial wealth are provided. In all such solutions, wealthier individuals borrow with lower interest rates and run higher scale enterprises, which is consistent with stylized facts. The reliability of courts has a consistently positive effect on the scale of projects. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function. |
| Keywords: | Limited Commitment, Credit Constraints, Legal Enforcement, Mechanism Design. |
| JEL: | D02 D82 L26 O12 O16 |
| Date: | 2012–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2012wpecon31&r=cta |
| By: | MacLeod, W. Bentley (Columbia University); Urquiola, Miguel (Columbia University) |
| Abstract: | Friedman (1962) suggested that in general, unfettered markets ensure the efficient provision of goods and services. Applying this logic to Education, he recommended that students be provided with vouchers and allowed to purchase schooling services in a free market ((Friedman (1955, 1962)). Hoxby (2002) refines this argument and suggests that more choice will lead to higher school productivity. We discuss the evidence in this area, concluding that the impact of competition has proven to be more mixed and modest than expected. We suggest that this in fact should not be surprising, since economic theory on incentives and incomplete contracts (beginning with many contributions also from the 1950s) leads to a more nuanced expectation. Specifically, an examination of the incentives faced by schools, parents, and students leads to predictions that are broadly consistent with the evidence, and suggests that there is no a priori reason to believe that school choice will dramatically improve test scores. We describe a simple model that illustrates this point and further implies that elements of market design might be necessary to ensure that competition enhances educational performance. |
| Keywords: | education, markets, information |
| JEL: | D2 D8 J3 I2 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7063&r=cta |
| By: | Kouroche Vafaï (Université Paris Descartes - Sorbonne Cité et Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | To control, evaluate, and motivate their agents, firms employ supervisors. As shown by empirical investigations, biased evaluation by supervisors linked to collusion is a persistent feature of firms. This paper studies how deceptive supervision affects agency relationships. We consider a three-level firm where a supervisor is in charge of producing a verifiable report on an agent's output. Depending on the output he has observed, the supervisor may either collude with the agent or with the principal, and make an uniformative report. We show that the proliferation of collusive activities in firms : modifies the configuration of the optimal preventive policy, may increase the expected cost of preventing each type collusion, is beneficial to the supervisor and detrimental to the agent, and is not always harmful. |
| Keywords: | Firm, group decision, control, biased supervision. |
| JEL: | D20 D73 L20 M50 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12084&r=cta |
| By: | Fehr, Ernst (University of Zurich); Herz, Holger (University of Zurich); Wilkening, Tom (University of Melbourne) |
| Abstract: | Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority-delegation game. Individuals often retain authority even when its delegation is in their material interest – suggesting that authority has non-pecuniary consequences for utility. Authority also leads to over-provision of effort by the controlling parties, while a large percentage of subordinates under-provide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices. |
| Keywords: | organizational behavior, incentives, experiments and contracts |
| JEL: | C92 D83 D23 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7030&r=cta |
| By: | Gyoshev, Stanley; Kaplan, Todd R.; Szewczyk, Samuel; Tsetsekos, George |
| Abstract: | In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We fi nd that the magnitude of changes and structural breaks in the stocks' price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars. |
| Keywords: | Separating Equilibrium; Put Options; Information Acquisition; Strategic Trading |
| JEL: | G14 G12 G18 G28 G24 G13 |
| Date: | 2012–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43149&r=cta |
| By: | Epstein, Gil S. (Bar-Ilan University) |
| Abstract: | This paper presents a model in which promotion of employees within the internal firm hierarchy is determined by the individuals' allocation of time between promotion/rent-seeking and productive activity. We consider the effect of an increase in the employer's knowledge (information) regarding the employees' productivity levels on the total time spent by the workers in non-productive promotion-seeking activities. |
| Keywords: | promotion-seeking activities, contest, knowledge |
| JEL: | D2 D72 J2 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7023&r=cta |