nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒08‒05
thirteen papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Optimal Information Disclosure: Quantity vs. Quality By Anton Kolotilin
  2. Redistribution and Tax Evasion: an Asymmetric Information Approach By Silvia Platoni; Francesco Timpano
  3. Optimal Project Selection Mechanisms By Tania Bar; Sidartha Gordon
  4. Irreconcilable Differences: Judicial Resolution of Business Deadlock By Landeo, Claudia; Spier, Kathryn
  5. Shotgun Mechanisms for Common-Value Partnerships: The Unassigned-Offeror Problem By Landeo, Claudia; Spier, Kathryn
  6. Platform Competition under Dispersed Information By Bruno Jullien; Alessandro Pavan
  7. Rule Rationality By Heller, Yuval; Winter, Eyal
  8. Terms of Trade Shocks and Incomplete Information By Daniel Rees
  9. The impact of taxation on international assignment decisions: A principal-agent approach By Martini, Jan Thomas; Niemann, Rainer
  10. Egalitarian Equivalence And Strategyproofness In The Queueing Problem By Youngsub Chun; Manipushpak Mitra; Suresh Mutuswami
  11. Contingent Trade Policy and Economic Efficiency By Phillip McCalman; Frank Stähler; Gerald Willmann
  12. Reordering an existing queue By Youngsub Chun; Manipushpak Mitra; Suresh Mutuswami
  13. Complexity of Optimal Lobbying in Threshold Aggregation By Ilan Nehama

  1. By: Anton Kolotilin (School of Economics, the University of New South Wales)
    Abstract: A sender chooses ex ante how her information will be disclosed to a privately informed receiver who then takes one of two actions. The sender wishes to maximize the probability that the receiver takes the desired action. The sender faces an ex ante quantity-quality tradeoff: sending positive messages more often (in terms of the sender's information) makes it less likely that the receiver will take the desired action (in terms of the receiver's information). Interestingly, the sender's and receiver's welfare is not monotonic in the precision of the receiver's private information: the sender may find it easier to influence a more informed receiver, and the receiver may suffer from having more precise private information. Necessary and sufficient conditions are derived for full and no information revelation to be optimal.
    Keywords: information disclosure, persuasion, informed decision maker, two-way communication
    JEL: C72 D81 D82 D83
    Date: 2013–07
  2. By: Silvia Platoni (DISCE, Università Cattolica); Francesco Timpano (DISCE, Università Cattolica)
    Abstract: The article studies the optimal redistribution system, achieved by direct taxation, indirect taxation and public provision of the pseudo-necessary good, when individuals, who differ in productivity, can take hidden actions (tax evasion by moral hazard) and have hidden information (tax evasion by adverse selection). It proves that any Government willing to effectively reallocate resources among individuals has to undertake measures against tax evasion, i.e. to establish tax evasion fines.
    Keywords: Redistribution; Tax Evasion; Asymmetric Information.
    JEL: H23 H42 H26 D82
    Date: 2013–07
  3. By: Tania Bar (University of Connecticut); Sidartha Gordon (Département d'économie)
    Abstract: We study mechanisms for selecting up to m out of n projects. Project managers’ private information on quality is elicited through transfers. Under limited liability, the optimal mechanism selects projects that maximize some function of the project’s observable and reported characteristics. When all reported qualities exceed their own project-specific thresholds, the selected set only depends on observable characteristics, not reported qualities. Each threshold is related to (i) the outside option level at which the cost and benefit of eliciting information on the project cancel out and (ii) the optimal value of selecting one among infinitely many ex ante identical projects.
    Keywords: adverse selection, information acquisition, mechanism design, project selection, limited liability, R&D.
    JEL: D82 O32
    Date: 2013–07
  4. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: This article studies the judicial resolution of business deadlock. Asset valuation, a necessary component of business divorce procedures, can pose serious problems in case of closely-held businesses such as general partnerships and limited liability companies (LLCs). Courts face the challenge of designing valuation mechanisms that will trigger the owners to truthfully reveal their private information. We theoretically and experimentally assess the ex post judicial design and properties of judicially-mandated Shotgun and Private Auction mechanisms. In the former mechanism, the court would require one owner to name a buy-sell price, and the other owner would be required to either buy or sell his or her shares at the named price. In the latter mechanism, the court would mandate both owners to simultaneously submit a price to buy the other owner's assets. Our experimental findings support our theory: The Shotgun mechanism with an informed offeror is superior to the Private Auction in terms of an equity criterion. In the Shotgun mechanism, the informed offeror has an incentive to truthfully reveal his private information and, as a result, an equitable outcome is more likely to be achieved. The analysis presented in this article provides an equity rationale for the judicial implementation of the Shotgun mechanism in business divorce cases, and demonstrates the empirical feasibility of our proposal.
    Keywords: judicial resolution of business deadlocks; general partnerships; limited liability companies; closely-held business entities; shotgun provisions; buy-sell clauses; cake-cutting mechanisms; auctions; bargaining with common values; asymmetric information; experiments
    JEL: C72 C90 D44 D82 K20 K40
    Date: 2013–07–01
  5. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: Shotguns clauses are commonly included in the business agreements of partnerships and limited liability companies (LLCs), but the role of offeror typically remains unassigned. In a common-value, one-sided asymmetric information setting, unfair and ineffcient outcomes occur with an unassigned offeror. Experimental results are aligned with our theory.
    Keywords: Business Deadlock; Shotgun Mechanisms; Asymmetric Information; Experiments
    JEL: C72 C90 D82 K40
    Date: 2013–07–01
  6. By: Bruno Jullien; Alessandro Pavan
    Abstract: We study monopolistic and competitive pricing in a two-sided market where agents have incomplete information about the quality of the product provided by each platform. The analysis is carried out within a global-game framework that offers the convenience of equilibrium uniqueness while permitting the outcome of such equilibrium to depend on the pricing strategies of the competing platforms. We first show how the dispersion of information interacts with the network effects in determining the elasticity of demand on each side and thereby the equilibrium prices. We then study "informative" advertising campaigns that increase the agents’ ability to estimate their own valuations and/or the distribution of valuations on the other side of the market.
    Date: 2013–05–01
  7. By: Heller, Yuval; Winter, Eyal
    Abstract: We study the strategic advantages of following rules of thumb that bundle different games together (called rule rationality) when this may be observed by one's opponent. We present a model in which the strategic environment determines which kind of rule rationality is adopted by the players. We apply the model to characterize the induced rules and outcomes in various interesting environments. Finally, we show the close relations between act rationality and “Stackelberg stability” (no player can earn from playing first).
    Keywords: Bounded Rationality, Commitments, Categorization, Value of information.
    JEL: C72 D82
    Date: 2013–07–31
  8. By: Daniel Rees (Reserve Bank of Australia)
    Abstract: The terms of trade are subject to both permanent and transitory shocks. Particularly for commodity-producing small open economies, it is sometimes argued that the inability of agents to determine which of these shocks are permanent and which are transitory leads to more macroeconomic volatility than would be the case if agents had perfect information about the persistence of these shocks. I set up a small open economy model in which agents have imperfect information about the persistence of terms of trade shocks and estimate the parameters of the model using Australian data. The results point to the existence of large informational frictions. In fact, agents' beliefs about the future path of the terms of trade following transitory and permanent shocks are almost identical. However, the results also suggest that incomplete information causes agents to respond more cautiously to terms of trade shocks. Consequently, consumption, output and the trade balance are less volatile under incomplete information than they are under full information.
    Keywords: terms of trade; imperfect information; small open economy; real business cycle
    JEL: C32 E32 F41 Q33
    Date: 2013–07
  9. By: Martini, Jan Thomas; Niemann, Rainer
    Abstract: In many industries like management consulting, IT consulting, or construction highly qualified employees, i.e., experts or executive managers, have to be assigned to temporary projects. In firms with many employees and various different projects, this assignment decision involves a complex optimization procedure. Obviously, the employees' productivities in the respective projects are crucial for the employer's optimal assignment decision, but assignment can also be affected by risk-incentive trade-offs. Moreover, taxation can alter the assignment decision, especially if employees are sent abroad as expatriates so that international tax law has to be taken into account. To address these issues simultaneously, we combine a human resource assignment problem with a principal-agent problem of the LEN type. Both wage taxation at the agents' level and corporate taxation at the principal's level are integrated. We show that national tax rules aswell as the methods for avoiding double taxation and the agents' tax characteristics are important determinants for international assignment decisions. The effects of tax rate variations can be ambiguous and depend on whether the exemption method or the credit method are applied, in particular if agents make differing choices of residence. From a tax policy perspective, the exemption method should be preferred because the tax effects are more transparent than under the credit method. Special deductions for incoming expatriates have only little effects on the optimal assignment decision. --
    Keywords: Assignment,Expatriates,International taxation,Principal-agent model,LEN model
    JEL: H24 H25 M41
    Date: 2013
  10. By: Youngsub Chun; Manipushpak Mitra; Suresh Mutuswami
    Abstract: We investigate the implications of egalitarian equivalence (Pazner and Schmeidler [22]) together with queue efficiency and strategyproofness in the context of queueing problems. We completely characterize the class of mechanisms satisfying the three requirements. Though there is no mechanism in this class satisfying budget balance, feasible mechanisms exist. We also show that it is impossible to find a mechanism satisfying queue efficiency, egalitarian equivalence and a stronger notion of strategyproofness called weak group strategyproofness. In addition, we show that generically there is no mechanism satisfying two normative notions, egalitarian equivalence and no-envy, together.
    Keywords: Queueing problem, queue efficiency, strateyproofness, egalitarian equivalence, budget balance, feasibility, weak group strategyproofness, no-envy.
    JEL: C72 D63 D82
    Date: 2013–07
  11. By: Phillip McCalman; Frank Stähler; Gerald Willmann
    Abstract: This paper develops an efficiency theory of contingent trade policies. We model the competition for a domestic market between one domestic and one foreign firm as a pricing game under incomplete information about production costs. The cost distributions are asymmetric because the foreign firm incurs a trade cost to serve the domestic market. We show that the foreign firm prices more aggressively to overcome its cost disadvantage. This creates the possibility of an inefficient allocation, justifying the use of contingent trade policy on efficiency grounds. Despite an environment of asymmetric information, contingent trade policy that seeks to maximize global welfare can be designed to avoid the potential inefficiency. National governments, on the other hand, make excessive use of contingent trade policy due to rent shifting motives. The expected inefficiency of national policy is larger (smaller) for low (high) trade costs compared to the laissez-faire case. In general, there is no clear ranking between the laissez-faire outcome and a contingent national trade policy
    Keywords: Contingent Trade Policy, Efficiency
    JEL: F12 F13
    Date: 2013–07
  12. By: Youngsub Chun; Manipushpak Mitra; Suresh Mutuswami
    Abstract: We investigate the problem of reordering agents starting from an existing queue. First, we introduce four important axioms of the problem, budget balance (BB), outcome efficiency (OE), strategyproofness (SP), and individual rationality (IR). Unfortunately, it is easy to show that these four axioms are incompatible in the current setup. Given this negative result, we examine the consequences of relaxing BB, OE and SP, one at a time. Our results are as follows: (i) There is no mechanism satisfying OE, SP and IR which runs a nonnegative surplus at all profiles. (ii) When there are two agents, the only non-trivial mechanisms satisfying BB, SP and IR are Fixed price trading mechanisms but there are additional mechanisms when there are more than two agents. We identify an intuitive mechanism which we call the median price exchange mechanism and characterize its maximal level of inefficiency. (iii) By weakening SP to `one-sided' strategyproofness, we identify two mechanisms, the buyers' mechanism and the sellers' mech- anism, and characterize them on the basis of independence axioms.
    Keywords: Queueing problem with an initial order, budget balance, outcome efficiency, strateyproofness, individual rationality
    JEL: C72 D63 D82
    Date: 2013–07
  13. By: Ilan Nehama (The Hebrew University of Jerusalem, Israel)
    Abstract: Optimal Lobbying is the problem a lobbyist or a campaign manager faces in a full-information voting scenario of a multi-issue referendum when trying to influence the result. The Lobby is faced with a profile that specifies for each voter and each issue whether the voter approves or rejects the issue, and seeks to find the smallest set of voters it must influence to change their vote, for a desired outcome to be obtained. This computational problem also describes problems arising in other scenarios of aggregating complex opinions, such as principal-agents incentives scheme in a complex combinatorial problem, and bribery and manipulation in Truth-Functional Judgement Aggregation. We study the computational complexity of Optimal Lobbying when the issues are aggregated using an anonymous monotone function and the family of desired outcomes is an upward-closed family. We analyze this problem with regard to two parameters: the minimal number of supporters needed to pass an issue, and the size of the maximal minterm of the desired set. We show that for the extreme values of the parameters, the problem is tractable, and provide algorithms. On the other hand, we prove intractability of the problem for the non-extremal values, which are common values for the parameters.
    Date: 2013–07

This nep-cta issue is ©2013 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.