nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒04‒06
twelve papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Characterizing Social Value of Information By Ui, Takashi; Yoshizawa, Yasunori
  2. Who Should Pay for Credit Ratings and How? By Anil K Kashyap; Natalia Kovrijnykh
  3. Uncertainty, risk, and incentives: theory and evidence By Zhiguo He; Si Li; Bin Wei; Jianfeng Yu
  4. Task Assignment under Agent Loss Aversion By Kohei Daido; Kimiyuki Morita; Takeshi Murooka; Hiromasa Ogawa
  5. Incomplete Information about Social Preferences Explains Equal Division and Delay in Bargaining. By KOHLER, Stefan
  6. Creating Attachment through Advertising: Loss Aversion and Pre–Purchase Information By Heiko Karle
  7. Strive to be first or avoid being last: An experiment on relative performance incentives. By E. Glenn Dutcher; Loukas Balafoutas; Florian Lindner; Dmitry Ryvkin; Matthias Sutter
  8. Price competition and reputation in credence goods markets: Experimental evidence By Wanda Mimra; Alexander Rasch; Christian Waibel
  9. Self-Image and Strategic Ignorance in Moral Dilemmas By Grossman, Zachary; van der Weele, Joël
  10. Bayesian Repeated Games By Francoise Forges; Antoine Salomon
  11. The structure of bank supervision and corruption in lending: a study for transition economies By Zenathan Hasannudin
  12. Cheap talk with simultaneous versus sequential messages By Gurdal, Mehmet Y.; Ozdogan, Ayca; Saglam, Ismail

  1. By: Ui, Takashi; Yoshizawa, Yasunori
    Abstract: This paper examines the social value of information in symmetric Bayesian games with quadratic payoff functions and normally distributed public and private signals. The main results identify necessary and sufficient conditions for welfare to increase with public or private information. Using the conditions, we classify games into eight types by welfare effects of information. In the first type, welfare necessarily increases with both public and private information. In the second type, welfare can decrease, but only with public information. In the third type, welfare can decrease as well as increase with both public and private information. In the fourth type, welfare can decrease with both, but can increase only with private information. The remaining four types are the counterparts of the above four types with the opposite welfare effects of information. For each type, we characterize a socially optimal information structure and a socially optimal Bayesian correlated equilibrium.
    Keywords: Bayesian game, incomplete information, optimal information structure, potential game, private signal, public signal, team, value of information
    JEL: C72 D82
    Date: 2013–03
  2. By: Anil K Kashyap; Natalia Kovrijnykh
    Abstract: This paper analyzes a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on the unobservable effort exerted by a credit rating agency (CRA). We analyze optimal compensation schemes for the CRA that differ depending on whether a social planner, the firm, or investors order the rating. We find that rating errors are larger when the firm orders it than when investors do. However, investors ask for ratings inefficiently often. Which arrangement leads to a higher social surplus depends on the agents' prior beliefs about the project quality. We also show that competition among CRAs causes them to reduce their fees, put in less effort, and thus leads to less accurate ratings. Rating quality also tends to be lower for new securities. Finally, we find that optimal contracts that provide incentives for both initial ratings and their subsequent revisions can lead the CRA to be slow to acknowledge mistakes.
    JEL: D82 D83 D86 G24
    Date: 2013–03
  3. By: Zhiguo He; Si Li; Bin Wei; Jianfeng Yu
    Abstract: Uncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off, this "learning-by-doing" effect generates a positive relation between profitability uncertainty and incentives. We document empirical support for this prediction.
    Date: 2013
  4. By: Kohei Daido (School of Economics, Kwansei Gakuin University); Kimiyuki Morita (Graduate School of Commerce and Management, Hitotsubashi University); Takeshi Murooka (Department of Economics, University of California-Berkeley); Hiromasa Ogawa (Graduate School of Economics, University of Tokyo)
    Abstract: We analyze a simple task-assignment model in which a principal assigns a task to one of two agents depending on the state. If the agents have standard concave utility, the principal assigns the task to an agent with the highest productivity in each state. In contrast, if the agents are loss averse, in order to alleviate their expected losses the principal may assign the task to a single agent in all states. Furthermore, the optimal contract may specify the same effort level across states. Our results imply that such simple contracts can be optimal even when employers can write contingent contracts at no cost.
    Keywords: task assignment, loss aversion, reference-dependent preferences
    JEL: D03 D86 M12 M52
    Date: 2013–03
  5. By: KOHLER, Stefan
    Abstract: Two deviations of alternating-offer bargaining behavior from economic theory are observed together, yet have been studied separately. Players who could secure themselves a large surplus share if bargainers were purely self-interested incompletely exploit their advantage. Delay in agreement occurs even if all experimentally controlled information is common knowledge. This paper rationalizes both regularities coherently by modeling heterogeneous social preferences, either self-interest or envy, of one bargaining party as private information in a three period game of bargaining and preference screening and signaling.
    Date: 2012
  6. By: Heiko Karle (ETH Zurich, Switzerland)
    Abstract: Complementing the existing literature on anchoring effects and loss aversion, we analyze how firms can influence loss–averse consumers’ willingness to pay by product information in the form of informative advertising rather than by prices. We find that consumers’ willingness to pay is greatest when only partial information about the product—i.e. only a fraction of product attributes—is disclosed, and that partial information disclosure is the optimal mode of advertising for a monopolistic firm. This causes the consumers’ realized product valuation to diverge from their intrinsic product valuation, which leads to a reduction of consumer surplus. Consequently, transparency policies can help to protect consumers.
    Keywords: Advertising; Loss Aversion; Information Disclosure.
    JEL: D83 L41 M37
    Date: 2013–03
  7. By: E. Glenn Dutcher; Loukas Balafoutas; Florian Lindner; Dmitry Ryvkin; Matthias Sutter
    Abstract: Managers often use tournaments which motivate workers to compete for the top, compete to avoid the bottom, or both. In this paper we compare the effectiveness and efficiency of the corresponding incentive schemes. To do so, we utilize optimal contracts in a principal-agent setting, using a Lazear-Rosen type model that predicts equal effort and efficiency levels for the three mechanisms with the appropriate distribution of prizes. We test the model's predictions in a laboratory experiment and find that a mechanism which incorporates both competition for the top and away from the bottom produces the highest effort from agents, especially in contests of a relatively larger size. Avoiding being last is shown to produce the lowest variance of effort, be more effective and, in larger contests, more efficient than competing for the top. Finally, we show that behavior in all mechanisms is consistent with basic directional and reinforcement learning.
    Keywords: tournament, reward, punishment, promotion, firing, contract, experiment, learning
    JEL: M52 J33 J24 D24 C90
    Date: 2013–03
  8. By: Wanda Mimra (ETH Zurich, Switzerland); Alexander Rasch (Universität zu Köln); Christian Waibel (ETH Zurich, Switzerland)
    Abstract: In credence goods markets, experts have better information about the appropriate quality of treatment than their customers. As experts provide both diagnosis and treatment, this leaves scope for fraud. We experimentally investigate how intensity of price competition and the level of customer information about past expert behavior influence an expert’s incentive to defraud his customers when the expert can build up reputation. We show that the level of fraud is significantly higher under price competition than when prices are fixed. The price decline under competitive prices superimposes quality competition. More customer information does not necessarily decrease the level of fraud.
    Keywords: Credence good; Expert; Fraud; Price competition; Reputation; Overcharging; Undertreatment.
    JEL: D82 L15
    Date: 2013–03
  9. By: Grossman, Zachary; van der Weele, Joël
    Abstract: Avoiding information about adverse welfare consequences of self-interested decisions, orstrategic ignorance, is an important source of corruption, anti-social behavior and even atrocities. We model an agent who cares about self-image and has the opportunity to learn the social benefits of a personally costly action.  The trade-off between self-image concerns and material payoffs can lead the agent to use ignorance as an excuse, even if it is deliberately chosen. Two experiments, modeled after Dana, Weber, and Kuang (2007), show that a) many people will reveal relevant information about others' payoffs after making an ethical decision, but not before, and b)  some people are willing to pay for ignorance. These results corroborate the idea that Bayesian self-signaling drives people to avoid inconvenient facts in moral decisions.
    Keywords: Economics, Economics, General, prosocial behavior, dictator games, strategic ignorance, self-signaling
    Date: 2013–03–15
  10. By: Francoise Forges (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine, LEDa - Laboratoire d'Economie de Dauphine - Université Paris IX - Paris Dauphine); Antoine Salomon (LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442)
    Abstract: We consider Bayesian games, with independent private values, in which uniform punishment strategies are available. We establish that the Nash equilibria of the Bayesian infinitely repeated game without discounting are payoff equivalent to tractable separating (i.e., completely revealing) equilibria and can be achieved as interim cooperative solutions of the initial Bayesian game. We also show, on a public good example, that the set of Nash equilibrium payoffs of the undiscounted game can be empty, while limit Nash equilibrium payoffs of the discounted game, as players become infinitely patient, do exist.
    Keywords: Bayesian game, incentive compatibility, independent private values, individual rationality, infinitely repeated game, public good
    Date: 2013–03–23
  11. By: Zenathan Hasannudin (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper try to examine the relation between the structure of bank supervision and corruption in lending based on the data from 21 transition economies in Eastern Europe and Central Asia. We support Beck, Kunt, and Levine (2006) that higher supervisory power will increase the degree of corruption in lending while supervisory policies which promote private monitoring by pushing banks to disclose accurate information and give incentives to private agents to monitor bank will reduce the degree of corruption in lending. As the main finding in this paper, we prove that the structure of bank supervision has significant effect to corruption in lending. More specifically, we found that the degree of corruption in lending will increase when the bank supervisor function is not in the central bank. We also have found that after we control our model with various country-level variables, the higher independency of bank supervisor will decrease the degree of corruption in lending.
    Keywords: banques, pratiques déloyales
    Date: 2012
  12. By: Gurdal, Mehmet Y.; Ozdogan, Ayca; Saglam, Ismail
    Abstract: Recent experimental studies find excessive truth-telling and excessive trust in one sender/one receiver cheap talk games with an essentially unique and babbling equilibrium. We extend this setup by adding a second sender into the play and study the behavior of the players both theoretically and experimentally. We examine games where senders are assumed to communicate with the receiver either simultaneously or sequentially as well as a game where the receiver chooses one of these two communication methods. The theoretical predictions for truth-telling, non-conflicting messages observed and trust frequencies are the same for both the simultaneous and sequential plays; however, we observe systematic differences between the treatments of these plays. While the truth-telling frequencies stay above the theoretical prediction of the one half during all the experiments, the nature of truth-telling seems to differ between sequential and simultaneous plays. Under simultaneous communication, the messages of senders are non-conflictive more than half of the time, while the non-conflicting messages are significantly more likely to be correct than not. The frequency of non-conflicting messages is lower under sequential plays due to the tendency of the second sender to revert the message of the first sender. We observe that subjects who prefer to get non-conflicting messages prefer simultaneous mode of communication more often. When acting as senders, these subjects also adjust their truth-telling frequencies so as to generate conflictive messages.
    Keywords: Strategic information transmission; truth-telling; trust; sender-receiver game.
    JEL: C72 C90 D83
    Date: 2013–04–01

This nep-cta issue is ©2013 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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