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on Contract Theory and Applications |
| By: | Danilov, Anastasia (University of Cologne); Sliwka, Dirk (University of Cologne) |
| Abstract: | We investigate whether incentive schemes signal social norms and thus affect behavior beyond their direct economic consequences. A principal-agent experiment is studied in which prior to contract choice principals are informed about past actions of other agents and thus have more information about "norms of behavior". Compared to a setting with uninformed principals agents exert nearly 50% higher efforts under a fixed wage contract when an informed principal had chosen this contract. Apparently the informed principal's choice signals a norm not to exploit the trust which leads to more trustworthy behavior. This mechanism's robustness is explored in further experiments. |
| Keywords: | social norms, contracts, incentives, signaling, experiments |
| JEL: | D03 C91 D86 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7477&r=cta |
| By: | Kohei Daido (School of Economics, Kwansei Gakuin University); Takeshi Murooka (Department of Economics, University of California, Berkeley) |
| Abstract: | We investigate moral-hazard problems with limited liability where agents have expectation-based reference-dependent preferences. We show that stochastic compensation for low performance can be optimal. Because of loss aversion, the agents have first-order risk aversion to wage uncertainty. This causes the agents to work harder when their low performance is stochastically compensated. We also examine team incentives for credibly employing such stochastic compensation. In an optimal contract, low- and high-performance agents are equally rewarded if most agents achieve high performance. Team incentives can be optimal even when there are only two agents and the degree of loss aversion is not large. |
| Keywords: | Moral Hazard, Loss Aversion, Stochastic Compensation, Team Incentives,Reference-Dependent Preferences |
| JEL: | D03 D86 M12 M52 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:107&r=cta |
| By: | Yuichi Yamamoto (Department of Economics, University of Pennsylvania) |
| Abstract: | We investigate whether two players in a long-run relationship can maintain cooperation when the details of the underlying game are unknown. Specifically, we consider a new class of repeated games with private monitoring, where an unobservable state of the world influences the payoff functions and/or the monitoring structure. Each player privately learns the state over time but cannot observe what the opponent learned. We show that there are robust equilibria in which players eventually obtain payoffs as if the true state were common knowledge and players played a “belief-free” equilibrium. We also provide explicit equilibrium constructions in various economic examples |
| Keywords: | repeated game, private monitoring, incomplete information, belief-free equilibrium, ex-post equilibrium, individual learning |
| JEL: | C72 C73 |
| Date: | 2013–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-038&r=cta |
| By: | Ebru Isgin (West Chester University); Barry Sopher (Rutgers University) |
| Abstract: | The paper studies the role of information transparency on fairness concerns,welfare and efficiency. When the firm's productivity and ultimately profits are revealed, wage offers induce relatively fair divisions of potential gains and workers respond with higher performance. Workers respond not only to wages but also to firms' intentions concerning fairness. Information transparency serves as a mechanism that promotes fairness and performance while the lack of transparency results in reduced earnings for workers and market inefficiency. |
| Keywords: | Experiments, Incomplete Contracts, Fairness, Information Transparency |
| JEL: | C9 D8 J |
| Date: | 2013–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201303&r=cta |
| By: | Sonja Brangewitz (University of Paderborn); Claus-Jochen Haake (University of Paderborn) |
| Abstract: | In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994). |
| Keywords: | Transfer Pricing, Negotiation, Generalized Nash Bargaining Solution, Incomplete Information |
| JEL: | C78 D82 M41 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:wpaper:64&r=cta |
| By: | Forges, Françoise; Serrano, Roberto |
| Abstract: | This is a brief survey describing some of the recent progress and open problems in the area of cooperative games with incomplete information. We discuss exchange economies, cooperative Bayesian games with orthogonal coalitions, and issues of cooperation in non-cooperative Bayesian games. |
| Keywords: | Strategic Externalities; Non-Cooperative Bayesian Games; Cooperative Games with Orthogonal Coalitions; Exchange Economies; Informational Externalities; |
| JEL: | D82 D51 C72 C71 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/8158&r=cta |
| By: | Butler, Jeffrey V. (EIEF); Carbone, Enrica (Second University of Naples "SUN"); Conzo, Pierluigi (University of Turin); Spagnolo, Giancarlo (Stockholm School of Economics - SITE, University of "Tor Vergata" & CEPR) |
| Abstract: | There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement model with reputation for quality and the possibility of entry in which the entrant may start off with positive reputation. Our results suggest that while some past-performance based reputational mechanisms can reduce the frequency of entry, appropriately designed mechanisms significantly stimulate it. We find that our reputational mechanism increases quality but not prices, so that the introduction of this kind of mechanism may generate large welfare gains for the buyer. |
| Keywords: | Cross-border procurement; Entry; Feedback mechanisms; Incomplete contracts; Limited enforcement; Incumbency; Multidimensional competition; Outsourcing; Past performance; Procurement; Quality assurance; Small business subsidies; Reputation; Vendor rating |
| JEL: | H57 L14 L15 |
| Date: | 2013–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:kkveco:2013_003&r=cta |
| By: | Barry Sopher (Rutgers University); Revan Sopher (Rutgers University) |
| Abstract: | We study experimentally “partnership protocols” of the sort proposed by Kalai and Kalai (2010), for bilateral trade games with incomplete information. We utilize the familiar game analyzed by Chatterjee and Samuelson (1983) and Myerson and Sattherwaite (1983), with a buyer and seller with value and cost independently distributed uniformly on (0,100). The usual rules of the game are for the buyer and seller to submit price bids and asks, and for trade to occur if and only if the buyer’s bid price exceeds the seller’s ask price, in which case trade occurs at the average of the bid and the ask price. We compare the efficiency of trade and the nature of bid functions in this standard game to those in other versions of the game, including games in which cheap talk is allowed prior to trade (either before or after the traders know their own information, but without knowing each others’ information), games with the formal mechanisms proposed by Kalai and Kalai available as an option for the traders to use, and games with both the mechanisms and cheap talk available. We consider both ex ante and interim mechanisms. That is, traders simultaneously choose whether to opt in to the mechanism either prior to knowing their own information, or after knowing their own information. In the last two versions of the game, cheap talk takes place prior to the opt-in decision. We find that the formal mechanisms significantly increase the efficiency of trade in both the ex ante and interim cases. Specifically, in the baseline game, traders captured 73% of the available surplus (compared to a theoretical maximum of 84% possible with optimal strategies). Efficiency rises to 87% and 82% for the ex ante and interim mechanisms, respectively, and further rises to 90% and 84% when cheap talk is also allowed with the mechanisms. When only cheap talk is allowed, traders capture 81% (for ex ante talk), but only 70% (for interim talk). On average, 55% of trading pairs opt in to mechanisms when they are available. |
| Keywords: | Experiments, Bilateral Trade, Protocols |
| JEL: | C9 C7 |
| Date: | 2013–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201304&r=cta |
| By: | Thomas J. Miceli (University of Connecticut); Kathleen Segerson (University of Connecticut); Suo Wang (University of Connecticut) |
| Abstract: | This paper examines products liability when consumers have private information about their susceptibilities to product-related harm. In this case, it is efficient for consumers to self-select in their purchases, with those especially prone to harm refraining from purchase. Achieving this outcome requires consumers to bear their own harm, given that producers cannot observe consumer types. When consumers also misperceive risk, the problem becomes more complicated because accurate signaling of risk requires that firms bear liability. A trade-off therefore emerges between imposing liability on firms versus consumers. This paper characterizes the choice among liability rules in the presence of this trade-off. |
| Keywords: | Products liability, negligence, strict liability, consumer misperceptions |
| JEL: | K13 L15 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2013-15&r=cta |
| By: | Koehne, Sebastian (IIES, Stockholm University); Kuhn, Moritz (University of Bonn) |
| Abstract: | We study asset-tested unemployment insurance in an incomplete markets model with moral hazard during job search. Asset testing has two counteracting effects on welfare. On the one hand, it improves consumption insurance by introducing state contingent transfers to agents most in need. On the other hand, it worsens the moral hazard problem, since workers have a reduced incentive to save and fewer private resources are used for consumption smoothing during unemployment. Our results show that in a realistically calibrated model of the U.S. economy the two effects nearly offset each other – the optimal rate of asset-testing is approximately zero. This finding is robust to several alternative specifications of the model, including a case with heterogeneous time-discount factors. We conclude that the current U.S. unemployment insurance system is approximately optimal. |
| Keywords: | unemployment insurance, asset-testing, incomplete markets, consumption and saving |
| JEL: | E21 E24 J65 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7488&r=cta |
| By: | Michael Greinecker; Konrad Podczeck |
| Abstract: | We show that concepts introduced by Aumann more than thirty years ago throw a new light on purification in games with extremely dispersed private information. We show that one can embed payoff-irrelevant randomization devices in the private information of players and use these randomization devices to implement mixed strategies as deterministic functions of the private information. This approach gives rise to very short, elementary, and intuitive proofs for a number of purification results that previously required sophisticated methods from functional analysis or nonstandard analysis. We use our methods to prove a general purification theorem for games with private information in which a player's payoffs can depend in arbitrary ways on events in the private information of other players and in which we allow for shared information in a general way. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2013-18&r=cta |
| By: | Florian Scheuer |
| Abstract: | This paper analyzes Pareto optimal non-linear taxation of profits and labor income in a private information economy with endogenous firm formation. Individuals differ in both their skill and their cost of setting up a firm, and choose between becoming workers and entrepreneurs. I show that a tax system in which entrepreneurial profits and labor income must be subject to the same non-linear tax schedule makes use of general equilibrium (or "trickle down'') effects through wages to indirectly achieve redistribution between entrepreneurs and workers. As a result, constrained Pareto optimal policies can involve low marginal tax rates at the top and, if available, input taxes that distort the firms' input choices. However, these properties disappear when a differential tax treatment of profits and labor income is possible. In this case, redistribution is achieved directly through the tax system rather than "trickle down'' effects, and production efficiency is always optimal. |
| JEL: | D5 D8 E2 E6 H2 J2 J3 J6 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19235&r=cta |
| By: | Alexander Zimper (Department of Economics, University of Pretoria) |
| Abstract: | The financial sector of emerging economies in Africa is characterized by a non-competitive banking sector which dominates any direct participation of agents in asset markets. Based on a variant of Diamond and Dybvig's (1983) model of financial intermediation, we formally explain both stylized facts through market inexperience of agents in emerging economies. While experienced agents correctly predict future market clearing equilibrium prices, inexperienced agents are ignorant about future market equilibria. As a consequence, a monopolistic banking sector can exploit these agents because their only outside option is an autarkic investment project. |
| Keywords: | Emerging Economies, Demand Deposit Contract, Asset Market, Asymmetric Information |
| JEL: | O16 G14 G21 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201334&r=cta |
| By: | Agarwal, Vikas; Mullally, Kevin; Tang, Yuehua; Yang, Baozhong |
| Abstract: | This paper studies the impact of mandatory portfolio disclosure of mutual funds on the liquidity of disclosed stocks and on fund performance. We consider a theoretical model of informed trading with different mandatory disclosure frequencies. Using a regulation change in May 2004 that increased the frequency of mandatory disclosure, we find evidence consistent with the model's predictions. First, stocks with higher fund ownership experience a larger increase in liquidity as compared to other stocks subsequent to the mandatory increase in disclosure frequency, especially for stocks disclosed by more informed funds or subject to greater information asymmetry. Second, better performing funds experience a greater drop in their abnormal performance following the regulation change, particularly when they hold stocks with greater information asymmetry or when they take longer to complete their trades. Taken together, our evidence suggests that mandatory portfolio disclosure improves market quality by increasing stock liquidity but imposes costs on informed investors. -- |
| Keywords: | Portfolio disclosure,Stock liquidity,Mutual funds,Fund performance |
| JEL: | G14 G23 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1304&r=cta |