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on Contract Theory and Applications |
| By: | Sumitro Banerjee (ESMT European School of Management and Technology); Alex P. Thevaranjan (Whitman School of Management, Syracuse University) |
| Abstract: | We show that prices and incentives recommended by the salesforce literature when targeting a profitable segment can attract unprofitable customers, particularly when salespeople have high productivity and low risk (i.e., risk aversion times uncertainty). Therefore, when customers are unidentifiable, unprofitable customers may also enter the market creating an adverse selection problem for the salespeople. By solving the moral hazard and adverse selection problems simultaneously, we show that firms can prevent the entry of unprofitable customers by “screening”. Although, screening generally requires a higher price to dissuade unprofitable customers, when firms hire salespeople, however, it requires lowering of both selling effort and the price. It also leads to a “sales trap” restricting the sales to the profitable segment to a fixed level. Screening, therefore, lowers firm profits obtained from the profitable customers. When salespeople are highly productive and risk tolerant, this drop in profit can be so high that “accommodating” unprofitable customers becomes the preferred strategy. Furthermore, the adverse selection problem intensifies and accommodation becomes more preferable when there is no moral hazard between firm and the salesperson. Behavior of unprofitable customers, therefore, must be an important consideration when targeting high-value customers and designing salesforce compensation. |
| Keywords: | Salesforce compensation, target markets, adverse selection, screening, pooling, principal-agent models, agency theory |
| Date: | 2013–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-13-05&r=cta |
| By: | Bardey, David; De Donder, Philippe |
| JEL: | D82 I18 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/3493/&r=cta |
| By: | Itay Goldstein; Yaron Leitner |
| Abstract: | We study an optimal disclosure policy of a regulator who has information about banks’ ability to overcome future liquidity shocks. We focus on the following trade-off: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We also relate our results to the debate on the disclosure of stress test results. |
| Keywords: | Financial crises ; Financial stability |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-26&r=cta |
| By: | Dhillon, Amrita (Department of Economics, University of Warwik); Iversen, Vegard (Department of Economics, University of Manchester); Torsvik, Gaute (Department of Economics, University of Bergen) |
| Abstract: | We study an important mechanism underlying employee referrals into informal low skilled jobs in developing countries. Employers can exploit social preferences between employee referees and potential workers to improve discipline. The profitability of using referrals increases with referee stakes in the firm, and, in most cases, with the strength of the social tie between the referee and the new recruit. We provide an empirical counterpart to these results using primary data covering low- and unskilled migrants in India. Consistent with the theoretical predictions, we find a high prevalence of workplace referral and strong kinship ties between referees and new recruits. Finally, workplace intermediaries are different from and typically in more ‘prestigious’ jobs than those recruited. |
| Keywords: | networks; low- and unskilled jobs; India; moral hazard; employee referrals; efficiency wages; referee incentives; strength of ties |
| JEL: | D82 D86 J31 J41 O12 O17 |
| Date: | 2013–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bergec:2013_004&r=cta |
| By: | Alejandro Bernales; Massimo Guidolin |
| Abstract: | We examine a number of unexplored factors that affect the ex-post adoption rates of newly listed stock options. We show that a variety of measures of information asymmetries for underlying stocks predict option adoption rates. This occurs even when we control for factors that have been found to be significant in earlier literature, such as stock volatility and volume. However, option listings induce a reduction in the strength of the information asymmetries in the underlying stock. Further, option bid-ask spreads start from low initial levels and increase over time, which is consistent with a modest initial aggressiveness of informed investors.Keywords: Stock options; option listings; asymmetric information; adoption rates; option volume, open interest. JEL Codes: D82; G10; G14; O31.Series:IGIER Working Paper Series |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:484&r=cta |
| By: | Kasahara, Tetsuya |
| Abstract: | This paper analyzes the role and effects of public investment policy when coordination problems among agents can result in individually rational but socially inefficient investment decisions. Developing a coordination investment model in which individuals simultaneously and independently determine whether to undertake a risky but potentially more profitable investment project or an alternative with safe but lower returns, we first show that the risk of coordination failure can in equilibrium result in socially inefficient investment and small consumption. We then investigate the role and effects of a public investment policy designed to help mitigate inefficiency. In our model, the size of a feasible public investment policy is determined endogenously. Our numerical results show that the divisibility of investment projects, the presence of financial constraints, the productivity of public investments, and the relative precision of public and private information, as well as the relative tax rates imposed on risky investments and safe investments, have complex effects on the effectiveness of public investment policy and welfare. In particular, we demonstrate that a public investment policy of a larger size and the availability of more precise information do not necessarily increase welfare. |
| Keywords: | Strategic complementarities, coordination games, information precision, public investment policy, financial constraints |
| JEL: | C72 D81 H21 H53 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:589&r=cta |
| By: | Boeri, Tito (Bocconi University); Garibaldi, Pietro (University of Turin); Moen, Espen R. (Norwegian Business School (BI)) |
| Abstract: | All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. According to the extensive literature on Employment Protection Legislation such transfers are either ineffective or highly distortionary. In this paper we show that mandatory severance is optimal in presence of wage deferrals when there is moral hazard of employers and workers, notably when employers cannot commit not to fire a non-shirker and shirkers can also get away with it. Our model also accounts for two neglected features of EPL. The first is that dismissal costs depend not only on whether the dismissal is deemed fair or unfair, but also on the nature, economic vs. disciplinary, of the layoff. The second feature is that compensation for unfair dismissal or severance is generally increasing with tenure. |
| Keywords: | severance, unfair dismissal, graded security |
| JEL: | J63 J65 J33 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7455&r=cta |
| By: | Armantier, Olivier; Treich, Nicolas |
| JEL: | C91 D81 D84 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/3494/&r=cta |