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on Contract Theory and Applications |
| By: | Dirk Bergemann; Stephen Morris |
| Date: | 2013–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000666&r=cta |
| By: | albanese, marina; navarra, cecilia; Tortia, Ermanno |
| Abstract: | The standard explanation of wage rigidity in principal agent and in efficiency wage models is related to worker risk-aversion. However, these explanations do not consider at least two important classes of empirical evidence: (1) In worker cooperatives workers appear to behave in a less risk averse way than in for profit firms and to accept fluctuating wages; (2) The emerging experimental evidence on the employment contract shows that most workers prefer higher but more uncertain wages to lower fixed wages. Workers do not appear to express a preference for fixed wages in all situations and different ownership forms, in our case worker cooperatives and for-profit firms, behave in different ways when dealing with the trade-off between wage rigidity and employment fluctuations. More specifically, worker cooperatives are characterized, in relative terms, by fixed employment levels and fluctuating wages, while for-profit firms are characterized by fixed wages and fluctuating employment. Our paper reinterprets these stylized facts by focusing on the relationship between wage rigidity and worker risk aversion in light of the presence of employer post contractual opportunism. Contractual incompleteness and private information on the side of the employer can compound in favouring the pursuit of the employer’s objectives, when they diverge from the employee’s ones. The idea of employer moral hazard is able to disentangle the observed behavioural differences in different ownership forms. By resorting to the standard efficiency wage framework, we show that, in the presence of employer moral hazard, employees in capitalistic firms generally prefer fixed wage, accepting this way a positive risk of lay-off. On the contrary, one of the main functions of fluctuating wages in worker cooperatives is to minimize the risk of lay-off. |
| Keywords: | risk aversion; employer contract; moral hazard; asymmetric information; hidden action; risk aversion; income insurance; employment insurance; worker cooperatives |
| JEL: | D82 J31 L23 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46343&r=cta |
| By: | Ouidad Yousfi (MRM - Montpellier Recherche en Management - Université Montpellier II - Sciences et techniques : EA4557 - Université Montpellier I - Université Paul Valéry - Montpellier III - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School) |
| Abstract: | This paper analyzes the link between the financial capital structure in LBO (Leveraged Buyout) acquisitions and the agents' incentives under asymmetric information. We present a static model with three agents: the entrepreneur, the LBO fund and the bank. The first two agents provide complementary and non-observable efforts to enhance the distribution of the project's revenues. Our results provide evidence that there are no debt-equity contracts that solve the double-sided moral hazard problem; however, the project must be financed jointly by the three partners. Moreover, financing the project through a mixture of debt and equity or solely through equity does not improve the incentive to provide efforts. Under taxation, agents provide low levels of efforts, but the entrepreneur is better off if the level of leverage is the highest to take advantage of the tax deductibility of interests. |
| Keywords: | Corporate Governance Journal, Financial Capital Structure, LBO Projects, Under Asymmetric Information, Leveraged Buyout, Leveraged Management Buyout. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00813878&r=cta |
| By: | Marina Albanese; Cecilia Navarra; Ermanno Tortia |
| Abstract: | The standard explanation of wage rigidity in principal agent and in efficiency wage models is related to worker risk-aversion. However, these explanations do not consider at least two important classes of empirical evidence: (1) In worker cooperatives workers appear to behave in a less risk averse way than in for profit firms and to accept fluctuating wages; (2) The emerging experimental evidence on the employment contract shows that most workers prefer higher but more uncertain wages to lower fixed wages. Workers do not appear to express a preference for fixed wages in all situations and different ownership forms, in our case worker cooperatives and for-profit firms, behave in different ways when dealing with the trade-off between wage rigidity and employment fluctuations. More specifically, worker cooperatives are characterized, in relative terms, by fixed employment levels and fluctuating wages, while for-profit firms are characterized by fixed wages and fluctuating employment. Our paper reinterprets these stylized facts by focusing on the relationship between wage rigidity and worker risk aversion in light of the presence of employer post contractual opportunism. Contractual incompleteness and private information on the side of the employer can compound in favouring the pursuit of the employerÕs objectives, when they diverge from the employeeÕs ones. The idea of employer moral hazard is able to disentangle the observed behavioural differences in different ownership forms. By resorting to the standard efficiency wage framework, we show that, in the presence of employer moral hazard, employees in capitalistic firms generally prefer fixed wage, accepting this way a positive risk of lay-off. On the contrary, one of the main functions of fluctuating wages in worker cooperatives is to minimize the risk of lay-off. |
| Keywords: | risk aversion, employer contract, moral hazard, asymmetric information, hidden action, risk aversion, income insurance, employment insurance, worker cooperatives |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpem:2013/02&r=cta |
| By: | Antonio Estache; Renaud Foucart |
| Abstract: | We study a political system in which voters can optimally pick between political platforms,but cannot screen the quality of individual politicians associated with these platforms.A bad individual achievement can correspond to either incompetence (adverse selection) orcorruption (moral hazard). Information could improve, if independent experts assess achievementsas compared to commitments, allowing independent judges to investigate possible corruption.We find that while good experts are always beneficial as they increase transparency,the impact of the quality of judges is ambiguous. Above a threshold, with risk-averse socialplanners, good judges increase the incentive-compatible punishment of politicians, at the costof possible judiciary mistakes. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/143015&r=cta |
| By: | Erlend Berg; Maitreesh Ghatak; R Manjula; D Rajasekhar; Sanchari Roy |
| Abstract: | This paper studies the interaction of incentive pay and social distance in the dissemination of information. We analyse theoretically as well as empirically the effect of incentive pay when agents have pro-social objectives, but also preferences over dealing with one social group relative to another. In a randomised field experiment undertaken across 151 villages in South India, local agents were hired to spread information about a public health insurance programme. Relative to flat pay, incentive pay improves knowledge transmission to households that are socially distant from the agent, but not to households similar to the agent. |
| Keywords: | public services, information constraints, incentive pay, social proximity, knowledge transmission |
| JEL: | C93 D83 I38 M52 O15 Z13 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:csa:wpaper:2013-06&r=cta |
| By: | Johannes Horner; Andrzej Skrzypacz |
| Date: | 2013–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000680&r=cta |
| By: | Alasdair Brown (University of East Anglia) |
| Abstract: | Grossman and Stiglitz (1980) famously proposed that if markets are efficient, then traders will neglect to acquire information or monitor markets, thereby inadvertently rendering these markets inefficient. In this paper we use data from a simple asset market - Betfair trading on the Wimbledon Tennis Championships between 2008 and 2012 - to investigate whether traders indeed cease to collect information when a market is ostensibly efficient. In this market, risk-free arbitrage opportunities arise frequently during matches (as new information arrives and asynchronously shifts prices), but seldom arise before matches (when there is little or no new information to move prices). Arbitrageurs therefore have good reason to believe that the pre-match market is already efficient, and consequently have less reason to monitor the market at this time. As a result, we find that on the few occasions that arbitrage opportunities do arise before matches, they last substantially and significantly longer than average. This suggests, more generally, that traders will neglect to acquire information (i.e. carry out research, or watch markets) if they believe that markets are already efficient. This neglect, in turn, makes markets inefficient. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2012_43&r=cta |
| By: | Rahul Deb; Debasis Mishra |
| Abstract: | We study mechanism design in a setting where agents know their types but are uncertain about the utility from any alternative. The final realized utility of each agent is observed by the principal and can be contracted upon. In such environments, the principal is not restricted to using only transfers but can employ security contracts which determine each agent's payoff as a function of their realized utility and the profile of announced types. We show that using security contracts instead of transfers expands the set of (dominant strategy) implementable social choice functions. Our main result is that in a finite type space, every social choice function that can be implemented using a security contract can also be implemented using a royalty contract. Royalty contracts are simpler and commonly used security contracts, in which agents initially pay a transfer and keep a fraction of their realized utility. We also identify a condition called acyclicity that is necessary and sufficient for implementation in these environments. |
| Keywords: | dominant strategy implementation, acyclicity, security contracts, royalty contracts, cycle monotonicity |
| JEL: | D44 D71 D82 D86 |
| Date: | 2013–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-484&r=cta |
| By: | Edward L. Glaeser; Cass R. Sunstein |
| Abstract: | Many studies find that presentation of balanced information, offering competing positions, can promote polarization and thus increase preexisting social divisions. We offer two explanations for this apparently puzzling phenomenon. The first involves what we call asymmetric Bayesianism: the same information can have diametrically opposite effects if those who receive it have opposing antecedent convictions. Recipients whose beliefs are buttressed by the message, or a relevant part, rationally believe that it is true, while recipients whose beliefs are at odds with that message, or a relevant part, rationally believe that the message is false (and may reflect desperation). The second explanation is that the same information can activate radically different memories and associated convictions, thus producing polarized responses to that information, or what we call a memory boomerang. An understanding of these explanations reveals when balanced news will produce unbalanced views. The explanations also account for the potential influence of “surprising validators.” Because such validators are credible to the relevant audience, they can reduce the likelihood of asymmetric Bayesianism, thus promoting agreement. |
| JEL: | K0 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18975&r=cta |
| By: | Ehud Kalai; Eran Shmaya |
| Abstract: | Due to their many applications, large Bayesian games have been a subject of growing interest in game theory and related fields. But to a large extent, models (1) have been restricted to one-shot interaction, (2) are based on an assumption that player types are independent and (3) assume that the number of players is known. The current paper develops a general theory of Bayesian repeated large games that avoids some of these difficulties. To make the analysis more robust, it develops a concept of compressed equilibrium which is applicable to a general class of Bayesian repeated large anonymous games. JEL Classification Numbers: C72, C72 |
| Keywords: | Nash Anonymous games, Nash equilibrium, Repeated games, Large games, Bayesian equilibrium, Price taking, Rational expectations |
| Date: | 2013–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1562&r=cta |
| By: | Marko Pitesa (GEM - Grenoble Ecole de Management - Grenoble École de Management (GEM)); Stefan Thau (LBS - London Business School - London Business School) |
| Abstract: | This paper provides an answer to the question of why agents make self-serving decisions under moral hazard and how their self-serving decisions can be kept in check through institutional arrangements. Our theoretical model predicts that the agents' power and the manner in which they are held accountable jointly determine their propensity to make self-serving decisions. We test our theory in the context of financial investment decisions made under moral hazard using others' funds. Across three studies, using different decision-making tasks, different manipulations of power and accountability, and different samples, we show that agents' power makes them more likely to behave in a self-serving manner under moral hazard, but only when the appropriate accountability mechanisms are not in place. Specifically, we distinguish between outcome and procedural accountability and show that holding agents accountable for their decision-making procedure reduces the level of self-serving decisions under moral hazard and also curbs the negative consequences of power. Implications for decisions under moral hazard, the psychology of power, and the accountability literature are discussed. |
| Keywords: | moral hazard; accountability; power; investment decisions; unethical behavior |
| Date: | 2013–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:gemptp:hal-00814565&r=cta |
| By: | Pasqualina Arca; Gianfranco Atzeni; Luca Deidda |
| Abstract: | We analyze the effect of a bankruptcy law according to which some of the borrower’s assets are exempt from liquidation in the event of default in the context of a competitive credit market characterized either by moral hazard (MH) or by adverse selection (AS). In particular, we study how the level of such exemption affects the role of collateral depending on the dominant source of asymmetric information. Under MH, conditional on the level of exemption, the cost of credit is higher for borrowers who are requested to post collateral. Moreover, conditional on posting collateral, the cost of credit does not change with the level of asset exemption. Differently, in the case of AS, the decision to post collateral results in a lower cost of credit, whenever the equilibrium is separating. Finally, under AS, a higher level of exemption is generally associated with a lower level of credit rationing. Similarly, credit rationing either stays unchanged or goes down with exemption in the case of MH. We exploit cross State variability in the level of asset exemption from liquidation – according to personal bankruptcy US State laws prior to 2005 federal reform – in order to identify the signaling role played by collateral in a sample of american small business taken from the SBFF data. |
| Keywords: | Bankruptcy; Collateral; Exemption levels; Moral hazard; Signal; Screening |
| JEL: | K35 G32 G33 D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201302&r=cta |
| By: | Martin Pollrich; Lilo Wagner |
| Abstract: | This paper studies the interaction of information disclosure and reputational concerns in certification markets. We argue that by revealing less precise information a certifier reduces the threat of capture. Opaque disclosure rules may reduce profits but also constrain feasible bribes. For large discount factors a certifier is unconstrained in the choice of a disclosure rule and full disclosure maximizes profits. For intermediate discount factors, only less precise, such as noisy, disclosure rules are implementable. Our results suggest that contrary to the common view, coarse disclosure may be socially desirable. A ban may provoke market failure especially in industries where certifier reputational rents are low. |
| Keywords: | Certification, bribery, reputation |
| JEL: | L15 D82 L14 L11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1291&r=cta |
| By: | Nicolas CARAYOL; Valerio STERZI |
| Abstract: | Although in most countries, professors are legally obligated to disclose their inventions to their university\'s technology transfer office, the latter often does not have the real authority to enforce this rule. We here introduce a model that endogenizes a professor\'s decision of a form of transfer for her idea. If she does not disclose the idea to the transfer office, she still faces, on her own, both the difficulty of identifying a good match for her technology with a company and the incomplete information of the company on the quality of her idea. She can, however, signal that quality to the company at some cost which is decreasing with quality. We find four types of pure strategy equilibria of this signaling game. Taking these four types of equilibria into account, the model predicts that the company ownership of academic patents are associated with higher patent quality, greater inventor experience in technology transfer, and lower technology transfer office experience. We estimate the model and confirm its predictions on an original sample of 1,260 patent-professor pairs built on UK data. Specific attention is paid to the control of various forms of potential reverse causality of the type of patent applicant on patent quality. |
| Keywords: | signaling game, academic patents, technology transfer. |
| JEL: | O31 O34 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2013-13&r=cta |
| By: | Karthik Balakrishnan; Mary B. Billings; Bryan T. Kelly; Alexander Ljungqvist |
| Abstract: | Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms seek to actively shape their information environments by voluntarily disclosing more information than is mandated by market regulations and that such efforts have a sizeable and beneficial effect on liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear motivated by a desire to reduce information asymmetries between retail and institutional investors. Liquidity improves as a result of voluntary disclosure and in turn increases firm value. This suggests that managers can causally influence their cost of capital via voluntary disclosure. |
| JEL: | G12 G24 M41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18984&r=cta |
| By: | Forges, Françoise; Vida, Péter |
| Abstract: | We show that essentially every communication equilibrium of any finite Bayesian game with two players can be implemented as a strategic form correlated equilibrium of an extended game, in which before choosing actions as in the Bayesian game, the players engage in a possibly fin nitely long (but in equilibrium almost surely fi nite), direct, cheap talk. |
| Keywords: | Bayesian game; pre-play communication; cheap talk; communication equilibrium; correlated equilibrium; Two Player; |
| JEL: | C72 D70 C73 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/8159&r=cta |