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on Contract Theory and Applications |
| By: | Nataliya Klimenko (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| Abstract: | The experience of the 2007-09 financial crisis has showed that the bank capital regulation in place was inadequate to deal with "manufacturing" tail risk in the financial sector. This paper proposes an incentive-based design of bank capital regulation aimed at efficiently dealing with tail risk engendered by bank top managers. It has two specific features: (i) first, it incorporates information on the optimal incentive contract between bank shareholders and bank managers, thereby dealing with the internal agency problem; (ii) second, it relies on the mechanism of mandatory recapitalization to ensure this contract is adopted by bank shareholders. |
| Keywords: | capital requirements; tail risk; recapitalization; incentive compensation; moral hazard |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796490&r=cta |
| By: | Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We study how asymmetric information affects the set of rationalizable solutions in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium is also the unique rationalizable solution when the sensitivity of the outcome to agents' forecasts is less than one, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, multiple rationalizable solutions arise when the proportion of agents who know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than one. Instability is equivalent to existence of some kind of sunspot equilibria. |
| Keywords: | Asymmetric information; common knowledge; eductive learning; rational expectations; rationalizability |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00780372&r=cta |
| By: | Matthias Kräkel |
| Abstract: | The paper analyzes how the choice of organizational structure leads to the best compromise between controlling behavior based on authority rights and minimizing costs for implementing high efforts. Concentrated delegation and hierarchical delegation turn out to be never an optimal compromise. If the CEO is more efficient than the division heads (i.e., the CEO's costs from exerting high effort are smaller than those of the division heads), the owner will prefer full delegation to the divisions to replace high incentive pay for motivating the division heads by incentives based on private benefits of control. In that situation, the importance of cooperative behavior between the firm's divisions determines whether decentralization or cross-authority delegation is the optimal form of full delegation. If, however, the division heads are more efficient than the CEO, then centralization or partial delegation can also be optimal. |
| Keywords: | authority, centralization, contracts, decentralization, moral hazard |
| JEL: | D21 D23 D86 L22 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse03_2013&r=cta |
| By: | Margherita Bottero (Bank of Italy); Giancarlo Spagnolo (SITE – Stockholm School of Economics) |
| Abstract: | Credit registers collect, store and share information regarding borrowers’ past and current credit relations. Interestingly, such data is typically erased from the public records after a number of years, in accordance with privacy protection laws, which aim at providing individuals with a fresh start from past events. In order to secure credit-worthy but unlucky borrowers with a new beginning, however, these provisions end up removing all of the public information, including that possibly still relevant for screening purposes. This paper assesses such trade-off, by studying the impact of limited records on borrowers’ behavior and market outcomes in a stylized credit market for unsecured loans. In this setup, limited records endogenously give rise to beneficial reputation effects in the form of higher equilibrium effort, which alleviate, rather than worsen, the distortions caused by asymmetric information. Further, we demonstrate that when moral hazard is high, 1-period records can achieve higher welfare and lead to a lower default rate than records that show all, or nothing, of the past history. |
| Keywords: | privacy, data retention, credit registers, limited records |
| JEL: | G24 G18 D82 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_903_13&r=cta |
| By: | Francesco Fallucchi (School of Economics, University of Nottingham); Elke Renner (School of Economics, University of Nottingham); Martin Sefton (School of Economics, University of Nottingham) |
| Abstract: | We investigate the effects of information feedback in rent-seeking games with two different contest structures. In the deterministic contest a contestant receives a share of the rent equal to her share of rent-seeking expenditures, while in the stochastic contest a contestant wins the entire rent with probability equal to her share of rent-seeking expenditures. In deterministic contests average expenditures converge to equilibrium levels when subjects only get feedback about own earnings, and additional feedback about rivals’ choices and earnings raises average expenditures. In stochastic contests information feedback has an opposite, and even stronger, effect: when subjects only get feedback on own earnings we observe high levels of rent dissipation, usually exceeding the value of the rent, and additional feedback about rivals’ choices and earnings has a significant moderating influence on expenditures. In a follow-up treatment we endogenize information feedback by allowing contestants in a stochastic contest to make “public” or “private” expenditures. Subjects make the vast majority of expenditures privately and overall excess expenditures are similar to the stochastic contest with own feedback. |
| Keywords: | contests, rent-seeking, information feedback, learning, experiments |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2013-02&r=cta |
| By: | Lars Peter Metzger |
| Abstract: | Second price allpay auctions (wars of attritions) have an evolutionarily stable equilibrium in pure strategies if valuations are private information. I show that for any level of uncertainty there exists a pure deviation strategy close to the equilibrium strategy such that for some valuations the equilibrium strategy has a selective disadvantage against the deviation if the population mainly plays the deviation strategy. There is no deviation strategy with this destabilizing property for all valuations if the distribution of valuations has a monotonic hazard rate. I argue that in the Bayesian game studied here, a mass deviation can be caused by the entry of a small group of agents. Numeric calculations indicate that the closer the deviation strategy to the equilibrium strategy, the less valuations are destabilizing. I show that the equilibrium strategy does not satisfy continuous stability. |
| Keywords: | Continuous strategies; evolutionary stability; war of attrition; strict equilibrium; neighborhood invader strategy; continuous stability; evolutionary robustness |
| JEL: | C72 C73 D44 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0405&r=cta |
| By: | Alex Barrachina (University Carlos III); Yair Tauman (IDC Herzliya and Stony Brook); Amparo Urbano Salvador (ERI-CES) |
| Abstract: | We analyze industrial espionage in the context of entry deterrence. We consider a monopoly incumbent, who may expand capacity to deter entry, and a potential entrant who owns an inaccurate Intelligence System. The Intelligence System generates a noisy signal on incumbent’s actions and the potential entrant decides whether to enter based on this signal. If the precision of the Intelligence System is commonly known, the incumbent will signal-jam to manipulate the distribution of likely signals and hence the entrant’s decisions. Therefore, the incumbent will benefit from his rival’s espionage. In contrast, the spying firm (the entrant) will typically gain if the espionage accuracy is sufficiently high and privately known by her. In this setting, the market will be more competitive under espionage. |
| Keywords: | Espionage; Entry; Asymmetric information; Signal-Jamming. |
| JEL: | C72 D82 L10 L12 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:dbe:wpaper:0113&r=cta |
| By: | Bezalel Peleg; Shmuel Zamir |
| Abstract: | We model constitutions by effectivity functions. We assume that the constitution is common knowledge among the members of the society. However, the preferences of the citizen are private information. We investigate whether there exist decision schemes (i. e., functions that map profiles of (dichotomous) preferences on the set of outcomes to lotteries on the set of social states), with the following properties: i) The distribution of power induced by the decision scheme is identical to the effectivity function under consideration; and ii) the (incomplete information) game associated with the decision scheme has a Bayesian Nash equilibrium in pure strategies. If the effectivity function is monotonic and superadditive, then we find a class of decision schemes with the foregoing properties. When applied to n-person games in strategic form, a decision scheme d is a mapping from profiles of (dichotomous) preferences on the set of pure strategy vectors to probability distributions over outcomes (or equivalently, over pure strategy vectors). We prove that for any feasible and individually rational payoff vector of a strategic game, there exists a decision scheme that yields that payoff vector as a (pure) Nash equilibrium payoff in the game induced by the strategic game and the decision scheme. This can be viewed as a kind of purification result. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp634&r=cta |
| By: | Aronsson, Thomas (Dept of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This paper analyzes optimal differential commodity taxation, together with optimal nonlinear income taxation, in order to deal with positional preferences. It also derives the optimal public provision of private goods both when differential commodity taxation is feasible and when it is not. It is shown that publicly provided non-positional private goods which are (possibly imperfect) substitutes for positional private goods should be used as a corrective instrument even if the tax system is optimal, i.e. even when differential commodity taxation is feasible. An exception is the special case where all consumers contribute equally much to the positional externality, in which the commodity tax constitutes a perfect instrument for internalizing the positional externality.<p> |
| Keywords: | Public provision of private goods; income taxation; commodity taxation; relative consumption; asymmetric information; status; positional goods |
| JEL: | D62 H21 H23 |
| Date: | 2013–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0558&r=cta |
| By: | Oliver Denk (OECD - Economics Department and CEPII); Jean-Baptiste Michau (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | Workers are exposed to the risk of permanent disability. We rely on a dynamic mechanism design approach to determine how imperfect information on health should optimally be used to improve the trade-off between inducing the able to work and providing insurance against disability. After deriving the fi rst-order conditions to this problem, we calibrate the model to the U.S. economy and run a numerical simulation. The government should offer back-loaded incentives and make strategic use of the difference between the age at which disability occurs and the age of eligibility to disability bene ts. Also, the able who are (mistakenly) tagged as disabled should be encouraged to work until some early retirement age. This makes a decrease in the strictness of the disability test desirable which would reduce the number of disabled who are not awarded the tag and, hence, improve insurance. Finally, we show how the first-best allocation of resources can asymptotically be implemented by making strategic use of the disability test. |
| Keywords: | Disability insurance, Imperfect tagging, Optimal policy, Social Security |
| Date: | 2013–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00796521&r=cta |
| By: | Gunay, Hikmet; Meng, Xin; Nagelberg, Mark |
| Abstract: | The authors analyze the optimal reserve price in a second price auction when there are N types of bidders whose valuations are drawn from different distribution functions. The seller cannot determine the specific type of each bidder. First, the authors show that the number of bidders affects the reserve price. Second, they give the sufficient conditions for the uniqueness of the optimal reserve price. Third, the authors find that if a bidder is replaced by a stronger bidder, the optimal reserve price may decrease. Finally, they give sufficient conditions that ensure the seller will not use a reserve price; hence, the auction will be efficient. -- |
| Keywords: | auction,reserve (reservation) price,asymmetric bidders |
| JEL: | D44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201319&r=cta |
| By: | Peter Koudijs |
| Abstract: | This paper employs a natural experiment from financial history to study the process by which private information is incorporated into prices. I look at the market for English securities in the Netherlands during the 1770s and 1780s. Anecdotal evidence suggests that English insiders traded actively on their private signals, both in London and in Amsterdam. I reconstruct the arrival dates of sailing boats that transmitted information from London to Amsterdam and I look at the movement of English security prices between the arrivals of boats. The evidence is consistent with a Kyle (1985) model in which insiders trade on their private signals in a strategic way and private information is only slowly revealed to the market as a whole. The speed of information revelation in Amsterdam crucially depended on how long insiders expected it would take for the private signal to be publicly revealed. The importance of private information is underlined by the response of London prices to price discovery in Amsterdam. |
| JEL: | G14 N2 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18845&r=cta |
| By: | Inga Deimen; Felix Ketelaar; Mark T. Le Quement |
| Abstract: | This paper analyzes truthtelling incentives in pre-vote communication in heterogeneous committees. We generalize the classical Condorcet jury model by introducing a new informational structure that captures consistency of information. In contrast to the impossibility result shown by Coughlan (2000) for the classical model, full pooling of information followed by sincere voting is an equilibrium outcome of our model for a large set of parameter values implying the possibility of ex post conflict between committee members. Furthermore, abandonning the assumption of sincere voting, we characterize necessary and sufficient conditions for the implementability of the first best decision rule via truthful equilibria. |
| Keywords: | Communication, Committees, Voting |
| JEL: | D72 D82 D83 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse02_2013&r=cta |
| By: | Schmitz, Patrick W. |
| Abstract: | In the property rights approach to the theory of the firm (Hart, 1995), parties bargain about whether or not to collaborate after non-contractible investments have been made. Most contributions apply the regular Nash bargaining solution. We explore the implications of using the generalized Nash bargaining solution. A prominent finding regarding the suboptimality of joint ownership turns out to be robust. However, in contrast to the standard property rights model, it may well be optimal to give ownership to a party whose investments are less productive, provided that this party's ex-post bargaining power is relatively small. |
| Keywords: | ownership, incomplete contracts, bargaining, investment incentives |
| JEL: | C78 D23 D86 L23 L24 M11 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44953&r=cta |