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

  1. Learning in a Black Box By H Peyton Young; H.H. Nax; M.N. Burton-Chellew; S.A. West
  2. Reducing the debt : is it optimal to outsource an investment? By Gilles Edouard Espinosa; Caroline Hillairet; Benjamin Jourdain; Monique Pontier
  3. Harsh occupations, health status and social security By PESTIEAU, Pierre; RACIONERO, Maria
  4. Knowledge is power - A theory of information, income, and welfare spending By Jo Thori Lind; Dominic Rohner
  5. The Lemons Problem in a Labor Market with Intrinsic Motivation. When Higher Salaries Pay Worse Workers By F. Barigozzi; D. Raggi
  6. Large elections with multiple alternatives: a Condorcet Jury Theorem and inefficient equilibria By GOERTZ, Johanna; MANIQUET, François
  7. Theoretical and Experimental Analysis of Auctions with Negative Externalities By Hu, Youxin; Kagel, John; Xu, Xiaoshu; Ye, Lixin
  8. Folk Theorems, Second Version By Olivier Compte; Andrew Postlewaite
  9. Overtime Working and Contract Efficiency By Hart, Robert A; Ma, Yue
  10. A three-stage supply chain investment model under asymmetric information By AGRELL, Per; BOGETOFT, Peter
  11. Strategic transparency and electoral pressure By Moretti, Laura; Suzuki, Toru
  12. Optimal Provision of Loans and Insurance Against Unemployment From A Lifetime Perspective By Joseph Stiglitz; Jungyoll Yun
  13. Controlling Shareholders and Firm Value By Borja Larraín; Matías Tapia
  14. Consumers' Complaints, the Nature of Corruption, and Social Welfare By Amegashie, J. Atsu

  1. By: H Peyton Young; H.H. Nax; M.N. Burton-Chellew; S.A. West
    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 payoffs are affected.  This paper analyzes learning behavior in such 'black box' environments, where players' only source of information is their own history of actions taken and payoffs received.  Specifically 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 affect their own payoffs.  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 payoff decreases he is more inclined to change his strategy.  Second, if increasing his own contribution results in higher payoffs he will tend to increase his contribution still further, whereas the reverse holds if an increase in contribution leads to lower payoffs.  These two effects 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
    JEL: C70 C73 C91 D83 H41
    Date: 2013–04–23
  2. By: Gilles Edouard Espinosa (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Ecole des Ponts ParisTech); Caroline Hillairet (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS : UMR7641); Benjamin Jourdain (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Ecole des Ponts ParisTech); Monique Pontier (IMT - Institut de Mathématiques de Toulouse - Université Paul Sabatier [UPS] - Toulouse III - Université Toulouse le Mirail - Toulouse II - Université des Sciences Sociales - Toulouse I - Institut National des Sciences Appliquées (INSA) - Toulouse - CNRS : UMR5219)
    Abstract: We deal with the problem of outsourcing the debt for a big investment, according two situations: either the firm outsources both the investment (and the associated debt) and the exploitation to a private consortium, or the firm supports the debt and the investment but outsources the exploitation. We prove the existence of Stackelberg and Nash equilibria between the firm and the private consortium, in both situations. We compare the benefits of these contracts. We conclude with a study of what happens in case of incomplete information, in the sense that the risk aversion coefficient of each partner may be unknown by the other partner.
    Keywords: Outsourcing; Public Debt; Public-Private-Partnership; Nash equilibrium; Stackelberg equilibrium; Optimization; Stochastic control; Partial information
    Date: 2013–05–21
  3. By: PESTIEAU, Pierre (CREPP, Université de Liège, Belgium; Université catholique de Louvain, CORE, Belgium); RACIONERO, Maria (Research School of Economics, Australian National University)
    Abstract: We study the optimal design of a social security system when individuals differ in health status and occupation. Health status is private information but is imperfectly correlated with occupation: individuals in harsh occupations are more likely to be in poor health. We explore the desirability of letting the social security policy differ by occupation and compare the results with those obtained when disability tests are used instead. We show that tagging by occupation is preferable to testing when the audit technology is relatively expensive and/or the proportion of disabled workers differs markedly across occupations. We also study the implications of imposing horizontal equity among disabled workers and show that those in the harsh occupation may be induced to retire later.
    Keywords: health status, retirement age, tagging, disability tests
    JEL: H21 H55
    Date: 2013–02–22
  4. By: Jo Thori Lind; Dominic Rohner
    Abstract: No voters cast their votes based on perfect information, but richer voters are on average best informed. We develop a model where the voting mistakes resulting from low political knowledge reduce the weight of poor voters, and cause parties to choose political platforms that are better aligned with the preferences of rich voters. In US election survey data, income is more important in affecting voting behavior for more informed voters than for less informed voters. Further, when there is a strong correlation between income and political information, Congress representatives vote more conservatively, which is also in line with our theory.
    Keywords: Redistribution; Welfare Spending; Information; Income; Voting; Political Economics
    JEL: D31 D72 D82 H53
    Date: 2013–04
  5. By: F. Barigozzi; D. Raggi
    Abstract: We study the Lemons Problem when workers have private information on both their skills and their intrinsic motivation for the job offered by firms in the labor market. We first show that, when workers are motivated, inefficiencies due to adverse selection are mitigated. More interestingly, depending on the association between productivity and motivation, higher salaries affect the pool of candidates in three possible ways: they can attract (i) more skilled but less motivated applicants, as expected; (ii) more skilled and more motivated applicants; (iii) less skilled and less motivated applicants. The last two counterintuitive effects can only occur when a positive correlation exists between productivity and motivation. Our results are relevant in the policy debate on whether it is possible to improve the quality of workers in vocational markets by changing their wage rate and allow to reconcile the different empirical evidence provided so far on motivated workers as teachers, nurses, public servants and politicians.
    JEL: J24 D82 D40
    Date: 2013–05
  6. By: GOERTZ, Johanna (University of Guelph, Canada & Université catholique de Louvain, CORE, Belgium); MANIQUET, François (Université catholique de Louvain, CORE, Belgium)
    Abstract: We investigate whether the plurality rule aggregates information efficiently in large elections with multiple alternatives, in which voters have common interests. Voters’ preferences depend on an unknown state of nature, and they receive imprecise private signals about the state of nature prior to the election. Similar to two-alternative elections (e.g., Myer- son (1998)), there always exists an informationally efficient equilibrium in which the correct alternative is elected. However, we identify new types of coordination failures in elections with more than two alternatives that lead to new types of inefficient equilibria. These can have interesting new properties: Voters may vote informatively, but the correct alternative is not elected.
    Keywords: efficient information aggregation, simple plurality rule, Poisson games, Condorcet Jury Theorem
    JEL: C72 D71 D72 D82
    Date: 2013–05–22
  7. By: Hu, Youxin; Kagel, John; Xu, Xiaoshu; Ye, Lixin
    Abstract: We investigate a private value auction in which a single "entrant" on winning imposes a negative externality on two "regular" bidders. In an English auction, when all bidders are active "regulars" free ride, exiting before price reaches their value. In a first-price sealed-bid auction incentives for free riding and aggressive bidding coexist, limiting free riding. We find substantial, though incomplete, free riding in the clock auction. In first-price auctions, regular bidders bid more aggressively than the "entrant" and both bid higher than in auctions with no externality. Predictions regarding revenue, efficiency, and successful entry between the two auctions are satisfied.
    Keywords: Auctions, externality, free riding, aggressive bidding, experiments.
    JEL: C91 D44 D82
    Date: 2012–12
  8. By: Olivier Compte (Paris School of Economics); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: Much of the repeated game literature is concerned with proving Folk Theorems. The logic of the exercise is to specify a particular game, and to explore for that game specification whether any given feasible (and individually rational) value vector can be an equilibrium outcome for some strategies when agents are sufficiently patient. A game specification includes a description of what agents observe at each stage. This is done by defining a monitoring structure, that is, a collection of probability distributions over the signals players receive (one distribution for each action profile players may play). Although this is simply meant to capture the fact that players don’t directly observe the actions chosen by others, constructed equilibria often depend on players precisely knowing these distributions, somewhat unrealistic in most problems of interest. We revisit the classic Folk Theorem for games with imperfect public monitoring, asking that incentive conditions hold not only for a precisely defined monitoring structure, but also for a ball of monitoring structures containing it. We show that efficiency and incentives are no longer compatible.
    Keywords: Repeated games, folk theorem, robustness
    JEL: C72 C73
    Date: 2013–01–03
  9. By: Hart, Robert A; Ma, Yue
    Abstract: We present a wage-hours contract designed to minimize costly turnover given investments in specific training combined with firm and worker information asymmetries. It may be optimal for the parties to work ‘long hours' remunerated at premium rates for guaranteed overtime hours. Based on British plant and machine operatives, we test three predictions. First, trained workers with longer tenure are more likely to work overtime. Second, hourly overtime pay exceeds the value of marginal product while the basic hourly wage is less than the value of marginal product. Third, the basic hourly wage is negatively related to the overtime premium.
    Keywords: Paid overtime, wage-hours contract, plant and machine operatives
    Date: 2013–05
  10. By: AGRELL, Per (Université catholique de Louvain, CORE & Louvain School of Management, Belgium); BOGETOFT, Peter (Copenhagen Business School, Denmark)
    Abstract: Specific supply-chain investments are vital in achieving faster lead-time performance and more competitive costs. In practice, such as in the highly leveraged telecom sector, the coordinating original equipment manufacturers (OEM) often delegate the upstream coordination of suppliers to contract manufacturers. This can be justified by informational advantages or economies of scale. However, the rationale of such schemes has also been challenged by analytical work on three-stage chains, leading to open questions. In this paper, we study the organizational and contractual choice of a supply chain coordinator (say an OEM) to either control or delegate the investment decision of some shared resource (say dedicated machines, information or product standards, etc) to a contract manufacturer (CM) or to an upstream supplier in a three-stage supply chain. The analysis derives closed-form results for the economic performance of three scenarios under asymmetric information on investment cost: direct contracting with an integrated CM-supplier, decentralized contracting to tier-1 suppliers and centralized contracting to tier-1 and tier-2 suppliers. The results show that the observed practice to delegate investments to tier-1 and possibly tier-2 suppliers leads to relatively poor performance due to under-investments. The superior arrangement is the centralized conditional model, where the OEM forces coordination among upstream suppliers by offering conditional financing. We close the paper with an analogy to the Boeing 787 supply chain and some discussion about the assumptions and applicability of the model.
    Keywords: supply chain, coordination, investments, contracts, organization
    Date: 2013–04–26
  11. By: Moretti, Laura; Suzuki, Toru
    Abstract: This paper provides theory as well as empirical results for pre-averaging estimators of the daily quadratic variation of asset prices. We derive jump robust inference for pre-averaging estimators, corresponding feasible central limit theorems and an explicit test on serial dependence in microstructure noise. Using transaction data of different stocks traded at the NYSE, we analyze the estimators' sensitivity to the choice of the pre-averaging bandwidth and suggest an optimal interval length. Moreover, we investigate the dependence of pre-averaging based inference on the sampling scheme, the sampling frequency, microstructure noise properties as well as the occurrence of jumps. As a result of a detailed empirical study we provide guidance for optimal implementation of pre-averaging estimators and discuss potential pitfalls in practiceThis paper investigates how an office-motivated incumbent can use transparency enhancement on public spending to signal his budgetary management ability and win re-election. We show that when the incumbent faces a popular challenger, transparency policy can be an effective signaling device. A more popular challenger can reduce the probability to enhance transparency, while voters can be better off due to a more informative signaling. It is also shown that a higher level of public interest in fiscal issues can increase the probability of enhancing transparency, while voters can be worse off by a les informative signaling. --
    Keywords: Fiscal Transparency,Electoral Pressure,Signaling Game,Perfect Sequential Equilibrium
    JEL: D72 D82
    Date: 2012
  12. By: Joseph Stiglitz; Jungyoll Yun
    Abstract: In an earlier paper, we showed that integrated individual accounts, allowing individuals to borrow against future pensions when they are unemployed, can be welfare increasing, because it allows increased inter-temporal consumption smoothing without attenuating incentives to search. Here, we examine from a lifetime perspective how the optimal mix between publicly provided unemployment insurance (UI) and loans against pension accounts changes over time in a model where unemployment may occur in any period. Even loans can have an adverse effect on search, because they attenuate the consequences of unemployment; and even more so when there is a chance that the loan will not be repaid. As we present the optimal mix of loans and UI as the one that balances the adverse incentive costs with the benefits of inter-state and inter-temporal smoothing while taking into consideration the interactions between loans and UI benefits, we provide general conditions under which loans should still be a part of the unemployment package for the young unemployed. We also show that, if the incidence of long-term unemployment is relatively low, the optimal mix entails more loans and a smaller UI benefit for the young than for the old, while the amount of consumption for the unemployed young is greater than for the unemployed old. We demonstrate that there will be incentives to save excessively in good states as well as to borrow excessively from the market when unemployed. Individuals and markets do not take into account the externalities of such actions: they affect search, and thus the magnitude of UI payments and loan defaults in subsequent periods. Finally, we show how non-market groups can improve welfare through loan-cosigning, which may be voluntarily provided within the group, as it allows income smoothing with lower incentive costs, and while the income sharing is less effective than market pooling, the incentive benefits of co-signing dominate.
    JEL: D86 J65
    Date: 2013–05
  13. By: Borja Larraín; Matías Tapia
    Abstract: We study the relationship between firm value and ownership concentration in a market where firms are controlled by large shareholders. We set up an equilibrium model with private benefits of control and bargaining between large shareholders. With simulated data from the model we are able to match approximately the value-concentration relationship observed among Chilean firms in 1990-2009. The model also delivers novel predictions regarding the relationship between investor protection and: (1) the identity of the controlling shareholder (e.g., founder or outside investor), (2) the frequency of productivity-decreasing transfers of control, and (3) the separation between direct ownership and cash-flow ownership.
    Date: 2012
  14. By: Amegashie, J. Atsu
    Abstract: A primary means of bureaucratic oversight is consumer complaints. Yet, this important control mechanism has received very little attention in the literature on corruption. I study a model of corruption with incomplete information in which consumers require a government service from officials who may be corrupt. A victim of corruption can report corrupt officials to higher-ranking officials (supervisors) who may be corrupt or honest. I find that social welfare may be non-monotonic in the proportion of honest supervisors. In some cases, an increase in the proportion of honest supervisors increases social welfare only if there is a critical mass of honest supervisors. Under certain conditions, there is, surprisingly, an equilibrium in which no one reports corruption regardless of the proportion of honest supervisors although all lower-ranking officials are corrupt. The analysis shows that using an increase in consumer complaints as a measure of the success of an anti-corruption campaign may be wrong because the consumers may benefit in other ways (e.g., a fall in the equilibrium bribe). I also fill a gap in the literature by endogenizing an official's decision to engage in "corruption with theft" or "corruption without theft" as defined by Shleifer and Vishny (1993) and use the model to shed light on recent anti-corruption initiatives such as the Punjab Citizen Feedback Model in Pakistan and a recent proposal by Kaushik Basu (2012).
    Keywords: bribes; consumer complaints; corruption with theft; corruption without theft; Bayesian equilibrium.
    JEL: H0 O1 O12
    Date: 2013–05–01

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