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on Contract Theory and Applications |
| By: | Maija Halonen-Akatwijuka; Oliver D. Hart |
| Abstract: | Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on “contracts as reference points”. Including a contingency of the form, “The buyer will require a good in event E”, has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract can be strictly superior to a contingent contract. |
| JEL: | D23 D86 K12 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19001&r=cta |
| By: | Ermanno Celeste Tortia (University of Trento; University of Turin and Namur, Belgium; University of Naples, Federico II) |
| 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 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ent:wpaper:wp46&r=cta |
| By: | Fabio Landini (MEDAlics and CRIOS, Bocconi University); Antonio Nicolò (University of Padua); Marco Piovesan (Department of Food and Resource Economics, University of Copenhagen) |
| Abstract: | Given the advantages of specialization, employers encourage their employees to acquire distinct expertise to better satisfy clients’ needs. However, when the client is unaware of the employees’ expertise and cannot be sorted out to the most competent employee by means of a gatekeeper, a mismatch can occur. In this paper we attempt to identify the optimal condition so an employer can eliminate this mismatch and offer a team bonus that provides the first-contacted employee with an incentive to refer the client to the correct expert. We show that the profitability of this referral contract increases with the agents’ degree of specialization and decreases with the clients’ competence at identifying the correct expert. Interestingly, a referral contract may be more profitable than an individual contract -that does not pay a team bonus- even if the former provides less incentive to the agents to improve their expertise. Thus, we provide a new rationale for the use of team bonuses even when the production function depends on a single employee’s effort. |
| Keywords: | Team and Individual Contracts, Matching Client-Expert, Incentives to Refer |
| JEL: | C72 D01 D21 D86 M52 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:foi:wpaper:2013_9&r=cta |
| By: | Heinrich H. Nax (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole normale supérieure de Paris - ENS Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Maxwell N. Burton-Chellew (Department of Zoology - University of Oxford (UK)); Stuart A. West (Department of Zoology - University of Oxford (UK)); H. Peyton Young (Department of Economics - University of Oxford (UK)) |
| Abstract: | Many interactive environments can be represented as games, but they are so large and complex that individual players are in the dark about what others are doing and how their own payo s are a ected. This paper analyzes learning behavior in such 'black box' environments, where players' only source of information is their own history of actions taken and payoff s received. Speci fically we study repeated public goods games, where players must decide how much to contribute at each stage, but they do not know how much others have contributed or how others' contributions a effect their own payoff s. We identify two key features of the players' learning dynamics. First, if a player's realized payoff increases he is less inclined to change his strategy, whereas if his realized payo ff decreases he is more inclined to change his strategy. Second, if increasing his own contribution results in higher payoff s he will tend to increase his contribution still further, whereas the reverse holds if an increase in contribution leads to lower payo ffs. These two e ffects are clearly present when players have no information about the game; moreover they are still present even when players have full information. Convergence to Nash equilibrium occurs at about the same rate in both situations. |
| Keywords: | Learning ; Information ; Public goods games |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:hal-00817201&r=cta |
| By: | Holden, Steinar (Dept. of Economics, University of Oslo); Natvig, Gisle James (Norges Bank); Vigier, Adrien (Dept. of Economics, University of Oslo) |
| Abstract: | We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings aect investors' choice and, thereby, also issuers' access to funding and default risk. We show that in equilibrium { the informational content of credit ratings is inferior to that of CRAs' private information. We nd that CRAs have a pro-cyclical impact on default risk: in a liq- uidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating stan- dards tend to be pro-cyclical, while biased CRA-incentives will ultimately be self-defeating. |
| Keywords: | Credit rating agencies; global games; coordination failure |
| JEL: | C72 D82 G24 G33 |
| Date: | 2012–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2013_001&r=cta |
| By: | Leppälä, Samuli (Cardiff Business School) |
| Abstract: | Arrow's information paradox asserts that demand for undisclosed information is undefined. Reassessing the paradox, I argue that the value of information for the buyer depends on its relevance, which can be known ex ante, and the uncertainty shifts to the capability of the seller to acquire the knowledge and her reliability in disclosing it. These three together form the buyer’s reservation price. Consequently, differences in capability and reliability between the sellers may revoke the appropriation problem of nonproprietary information, where the original source loses her monopoly after the first purchase. |
| Keywords: | Arrow’s information paradox; markets for information; knowledge; reliability; appropriability |
| JEL: | D83 L15 O31 O34 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2013/2&r=cta |
| By: | Huang, Pidong |
| Abstract: | This work builds on the model in Goldstein and Pauzner (GP) (2005), a global-games version of the Diamond-Dybvig (DD) (1983) model in which there is uncertainty about the long-term return and in which agents observe noisy signals about that return. GP limited their investigation to a banking contract that makes a noncontingent promised payoff to those who withdraw early until the bank's resources are exhausted. We amend the contract and permit suspension. As we show, there is a class of suspension policies that gives rise to uniqueness without requiring the new assumption introduced in a proof in GP; namely, the short-term return is also random. In general, both the GP policy and my generalization of it to allow suspension seem not to be the best banking contracts. However, if the return uncertainty is sufficiently small, then there are policies in the class we study that imply ex ante welfare close to the first-best outcome in DD, which itself is an upper bound on welfare in the model with return uncertainty. |
| Keywords: | Bank run: Global Game |
| JEL: | G21 |
| Date: | 2013–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46622&r=cta |
| By: | Philip Bond; Yaron Leitner |
| Abstract: | This paper supersedes Working Paper No. 12-8.> We study trade between an informed seller and an uninformed buyer who have existing inventories of assets similar to those being traded. We show that these inventories may lead to prices that increase even absent changes in fundamentals (a .run-up.), but may also make trade impossible (a .freeze.) and hamper information dissemination. Competition may amplify the run-up by inducing buyers to enter loss-making trades at high prices to prevent a competitor from purchasing at a lower price and releasing bad news about inventory values. Inventories also prevent seller competition from delivering the Bertrand outcome, in which prices match sellers’ valuations. We discuss both empirical implications and implications for regulatory intervention in illiquid markets. |
| Keywords: | Mortgages ; Markets ; Inventories ; Trade |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-14&r=cta |
| By: | Lukasz A. Drozd; Ricardo Serrano-Padial |
| Abstract: | In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. We develop a new theory of credit card lending that takes these two features into account. The two key elements of our model are moral hazard and costly state verification that relies on the use of information technology. We show that the model gives rise to a novel channel through which IT progress can affect outcomes in the credit markets, and argue that this channel can be critical to understand the trends associated with the rapid expansion of credit card borrowing in the 1980s and over the 1990s. Independently, the mechanism of the model helps reconcile high levels of defaults and indebtedness observed in the US data. |
| Keywords: | Credit cards ; Consumer credit ; Credit ; Moral hazard |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-12&r=cta |
| By: | Aitor Erce |
| Abstract: | This paper discusses the merits of the statutory approach to sovereign debt crises. It presents a model of sovereign debt roll-overs where, in the event of a liquidity crisis, a Sovereign Bankruptcy Court has powers to declare a standstill on debt payments. The model shows the ability of the Court to mitigate the coordination problem inherent to roll-overs in sovereign debt markets. Moreover, the scale of the coordination problem is reduced regardless of the quality of the information handled by the Court. The mere existence of the Court forces investors to focus on its course of action rather than on other investors beliefs. Nonetheless, such an entity might affect negatively countries’ incentives to apply costly policies. |
| Keywords: | Bankruptcy ; Globalization |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:142&r=cta |
| By: | Marc Sangnier (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Yanos Zylberberg (CREI, Universitat Pompeu Fabra) |
| Abstract: | Leaders’ misbehaviors may durably undermine the credibility of the state. Using individual level survey in the aftermath of geo-localized social protests in Africa, we find that trust in monitoring institutions and beliefs in social coordination strongly evolve after riots, together with trust in leaders. As no signs of social unrest can be recorded before, the social conflict can be interpreted as a sudden signal sent on a leader’s action from which citizens extract information on the country’s institutions. Our interpretation is the following. Agents lend their taxes to a leader with imperfect information on the leader’s type and the underlying capacity of institutions to monitor her. A misbehavior is then interpreted as a failure of institutions to secure taxes given by citizens and makes agents (i) reluctant to contribute to the state effort, (ii) skeptical about the contributions of others. |
| Keywords: | Social conflicts, norms of cooperation, trust, institutions. |
| JEL: | D74 D83 H41 O17 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1328&r=cta |
| By: | Gaurab Aryal; Dong-Hyuk Kim |
| Abstract: | We study the identification and estimation of first-price auction models with independent private values where bidders are risk averse and there is ambiguity about the valuation distribution. When bidders' preferences are represented by the maxmin expected utility of [Gilboa and Schmeidler, 1989], we provide sufficient conditions for nonparametric identification of the valuation distribution and bidders' attitude toward ambiguity, separately from the risk aversion (CRRA, CARA). We propose a semi-parametric method and apply it to two datasets, one from experimental auctions and the other from USFS timber auctions. We find, for both cases, that bidders are not only risk averse but also ambiguity averse. In addition, we consider the multiplier preferences of [Hansen and Sargent, 2001] and identify the valuation distribution using the same conditions, and show that normalizing, additionally, (any) one quantile of the value, e.g. upper bound of the support, is sufficient to identify the ambiguity parameter separately from the nonparametric utility. |
| Keywords: | first-price auction, identification, Bayesian econometrics, ambiguity aversion |
| JEL: | C11 C44 D44 E61 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2013-607&r=cta |