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on Contract Theory and Applications |
| By: | Rahul Deb; Maher Said |
| Abstract: | We examine a model of dynamic screening and price discrimination in which the seller has limited commitment power. Two cohorts of anonymous, patient, and risk-neutral buyers arrive over two periods. Buyers in the first cohort arrive in period one, are privately informed about the distribution of their values, and then privately learn the value realizations in period two. Buyers in the second cohort are ``last-minute shoppers'' that already know their values upon their arrival in period two. The seller can fully commit to a long-term contract with buyers in the first cohort, but cannot commit to the future contractual terms that will be offered to second-cohort buyers. The expected second-cohort contract serves as an endogenous type-dependent outside option for first-cohort buyers, reducing the seller's ability to extract rents via sequential contracts. We derive the seller-optimal equilibrium and show that the seller mitigates this effect by inducing some first-cohort buyers to strategically delay their time of contracting---the seller manipulates the timing of contracting in order to endogenously generate a commitment to maintaining high future prices. The seller's optimal contract pools low types, separates high types, and induces intermediate types to delay contracting. |
| Keywords: | Asymmetric information, Dynamic mechanism design, Limited commitment, Sequential screening, Type-dependent participation |
| JEL: | C73 D82 D86 |
| Date: | 2013–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-485&r=cta |
| By: | Hiroshi Osano (Institute of Economic Research, Kyoto University); Keiichi Hori (Faculty of Economics, Ritsumeikan University) |
| Abstract: | This paper explores a continuous-time agency model with double moral hazard. Using a venture capitalist—entrepreneur relationship where a manager provides unobservable effort while a venture capitalist (VC) both supplies unobservable effort and chooses the optimal timing of the initial public offering (IPO) with an irreversible investment, we show that optimal IPO timing is earlier under double moral hazard than under single moral hazard. Our results also indicate that the manager's compensation tends to be paid earlier under double moral hazard. We also derive several comparative static results for the IPO timing and managerial compensation profile, all of which provide new empirically testable implications. Usefully, even where the VC does not completely exit with the IPO, such that there is a requirement for a multiagent analysis after the IPO, most of our results remain unchanged. In addition, our model applies to not only the VC exit through the M&A (Mergers and Acquisitions) process but also the dissolution of joint ventures and corporate spin-offs. |
| Keywords: | two-sided moral hazard, IPO timing, managerial compensation, dynamic incentives, spin-offs |
| JEL: | D82 D86 G24 G34 M12 M51 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:863&r=cta |
| By: | Jordi Blanes i Vidal; Marc Möller |
| Abstract: | We use a mechanism-design approach to study a team whose members choose a joint project and exert individual efforts to execute it. Members have private information about the qualities of alternative projects. Information sharing is obstructed by a trade-off between adaptation and motivation. We determine the conditions under which first-best project and effort choices are implementable and show that these conditions can become relaxed as the team grows in size. This contrasts with the common argument (based on free-riding) that efficiency is harder to achieve in larger teams. We also characterize the second-best mechanism and find that decision-making may be biased either in favor or against the team's initially preferred alternative. |
| Keywords: | teams, adaptation, motivation, decision–making, incentives |
| JEL: | D02 D23 L29 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1208&r=cta |
| By: | Andrei Barbos (Department of Economics, University of South Florida) |
| Abstract: | We study a Bayesian game of two-sided incomplete information in which an agent, who owns a project of unknown quality, considers proposing it to an evaluator, who has the choice of whether or not to accept it. There exist two distinct tiers of evaluation that differ in the benefits they deliver to the agent upon acceptance of a project. The agent has to select the tier to which the project is submitted for review. Making a proposal incurs a cost on the agent in the form of a submission fee. We examine the effect of a change in the submission fees at the two tiers of evaluation on the expected quality of projects that are implemented by the evaluator. |
| Keywords: | Evaluation, Project Screening |
| JEL: | D01 D82 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:usf:wpaper:0913&r=cta |
| By: | Rahul Deb; Mallesh Pai |
| Abstract: | Practical or legal constraints often restrict auctions to being symmetric (anonymous and nondiscriminatory). We examine when this restriction prevents a seller from achieving his objectives. In an independent private value setting with heterogenous buyers, we characterize the set of incentive compatible and individually rational outcomes that can be implemented via a symmetric auction. We show that symmetric auctions can yield many discriminatory outcomes such as revenue maximization and affirmative action. We also characterize the set of implementable outcomes when individual rationality holds ex-post rather than in expectation. This additional requirement may prevent the seller from maximizing revenue. |
| Keywords: | symmetric auctions, implementation, indirect mechanisms, optimal auctions |
| JEL: | D44 |
| Date: | 2013–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-486&r=cta |
| By: | Fulvio Fontini (Department of Economics and Management - University of Padua); Katrin Millock (Centre d'Economie de la Sorbonne - Paris School of Economics); Michele Moretto (Department of Economics and Management - University of Padua) |
| Abstract: | In many cases consumers cannot observe firms' investment in quality or safety, but have only beliefs on the average quality of the industry. In addition, the outcome of the collective investment game of the firms may be stochastic since firms cannot control perfectly the technology or external factors that may affect production. In such situations, when only consumers' subjective perceptions of the industry level of quality matters, the regulator may make information available to firms or subsidize their information acquisition. Under what conditions is it desirable to make information available? We show how firms' overall level of investment in quality depends upon the parameters of the quality accumulation process, the cost of investment and the number of firms in the industry. We also show the potentially negative effects on the total level of quality from providing information on consumers' actual valuation. |
| Keywords: | Collective reputation, option value, quality. |
| JEL: | C73 D92 L15 Q52 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:13044&r=cta |
| By: | Sarolta Laczo (University of California, Los Angeles); Arpad Abraham (European University Institute) |
| Abstract: | In the typical model of risk sharing with limited commitment (e.g. Kocherlakota, 1996) agents do not have access to any technology transferring resources intertemporally. In our model, agents have a private (non-contractible and/or non-observable) saving technology. We first show that, under general conditions, agents would like to use their private saving technology, i.e. their Euler constraints are violated at the constrained-optimal allocation of the basic model. We then study a problem where both the default and saving incentives of the agents are taken into account. We show that when the planner and the agents have access to the same intertemporal technology, agents no longer want to save at the constrained-optimal allocation. The reason is that endogenously incomplete markets provide at least as much incentive for the planner to save, because she internalizes the effect of aggregate assets on future risk sharing. This implies that aggregate savings are positive in equilibrium even when there is no aggregate uncertainty and the return to saving is below the discount rate. Further, we show that assets remain stochastic whenever only moderate risk sharing is implementable in the long run, but become constant if high but still imperfect risk sharing is the long-run outcome. In contrast, if the return on saving is as high as the discount rate, perfect risk sharing is always self-enforcing in the long run. We also show that higher consumption inequality implies higher public asset accumulation. In terms of consumption dynamics, two counterfactual properties of limited commitment models, amnesia and persistence, do not hold in our model when assets are stochastic in the long run. We also provide an algorithm to solve the model, and illustrate the effects of changing the discount factor and the return to saving by computed examples. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:680&r=cta |
| By: | Raul V. Fabella (University of the Philippines School of Economics) |
| Abstract: | Many supply contracts between the state and private agents in a developing country are cost-re-imbursement variety and are rolled out under weak and unreliable governance. The latter has to be provided for through higher supply cost. The state in turn can lower the contract cost by providing verifiable credible commitments of its intentions. We show using a modified the Laffont-Tirole cost-reimbursement contract model that the more reliable is the state in respect to the delivery of its contractual obligations, the lower the cost of contracts to the state and society. We argue that the various actions taken by the Philippine government before the privatization of the water service in Metro Manila in 1997, viz., the substantial increase in the tariff, the reduction in the labor complement by 30% and the outsourcing of the dispute resolution mechanism to an international appeals panel, induced entry and aggressive bidding by the contenders that dramatically reduced the cost to the public of the water services concession contract in Metro Manila, Philippines. |
| Keywords: | signaling, credible commitment, procurement contracts, weak governance |
| JEL: | L33 I30 H57 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:phs:dpaper:201213&r=cta |