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on Contract Theory and Applications |
| By: | Gropp, Reint; Gruendl, Christian; Guettler, Andre |
| Abstract: | This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used. JEL Classification: G21, G28, G32 |
| Keywords: | competition, discretionary lending, relationship lending, soft information |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131555&r=cta |
| By: | George J. Mailath (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, Yale University) |
| Abstract: | This paper, prepared for the Handbook of Game Theory, volume 4 (Peyton Young and Shmuel Zamir, editors, Elsevier Press), surveys work on reputations in repeated games of incomplete information. |
| Keywords: | commitment, incomplete information, reputation bound, reputation effects, long-run relationships, reputations |
| JEL: | C70 C73 |
| Date: | 2013–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-044&r=cta |
| By: | Jean-Paul L'Huillier (Einaudi Institute for Economics and Fina) |
| Abstract: | This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms' prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output and inflation are hump-shaped due to consumer learning. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:65&r=cta |
| By: | Thorsten V. Koeppl (Queen's University) |
| Abstract: | Can central counterparty (CCP) clearing control counterparty risk in the presence of risk taking that can aggravate such risk? When counterparty risk is not observable, I show that central clearing leads to higher collateral requirements for two different reasons. Without collusion about risk taking, a CCP offering diversification of risk cannot selectively forgo incentives for transactions that use collateral only for insurance. With collusion about risk taking, a CCP needs to charge collateral in line with the worst counterparty quality to control risk taking. Requiring more collateral reduces market liquidity and worsens incentives causing a feedback effect that amplifies collateral costs. |
| Keywords: | CCP Clearing, Counterparty Risk, Moral Hazard, Collateral, Market Liquidity |
| JEL: | G32 G38 D82 D83 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1312&r=cta |
| By: | Alexey Kushnir |
| Abstract: | We consider general social choice environments with private values and correlated types. Each agent's matrix of conditional probabilities satisfies the full rank condition. We show that for any Bayesian incentive compatible mechanism there exists a dominant strategy incentive compatible mechanism that delivers the same interim expected utilities to all agents and generates at least the same social surplus. In addition, if there is a social alternative that is inferior to the other alternatives for all agents the dominant strategy incentive compatible mechanism matches exactly the social surplus. These results extend to environments with interdependent values satisfying the single crossing condition. |
| Keywords: | Mechanism design, Bayesian implementation, dominant strategy implementation, full surplus extraction, correlation |
| JEL: | D82 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:129&r=cta |
| By: | Colliard, Jean-Edouard |
| Abstract: | Market participants often invest in order to acquire information that pertains to the market itself (e.g. order flow) rather than to fundamentals. This enables them to infer more information from past trades. I show that agents trading on such information, typically high-frequency traders, decrease the likelihood of short-lived mispricings by trading against price pressure. In the long-run however, such countervailing speculation amounts to signal-jamming, slowing down price discovery. These traders insure the market against short-run crashes by "catching falling knives". Higher adverse selection and slower convergence form the "premium" paid by other market participants. JEL Classification: D82, G0, G12, G14. |
| Keywords: | High-frequency trading, market crashes, Speculation, supply information |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131545&r=cta |
| By: | Giacomo Rondina (University of California, San Diego) |
| Abstract: | We study the stability properties of Rational Expectations equilibria in dynamic models with incomplete information when the information set of agents is slightly perturbed. We show that equilibria where the endogenous variables resolve the information incompleteness can be informationally fragile, in the sense that a slight perturbation in the endogenous information set of the agents along the equilibrium path can lead to a break-down of the equilibrium dynamics. We then construct a class of dynamic rational expectations equilibria that are informationally stable for the same parameter space where other equilibria are informationally fragile. We show that an equilibrium that is informationally fragile is not least-squares learnable, while an equilibrium that is informationally stable always is. We finally present an application to a macroeconomic equilibrium model with productivity shocks and nominal rigidities under incomplete information that shows that both informationally fragile and stable equilibria can be obtained, with quite different shocks propagation properties. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:83&r=cta |
| By: | Nava Ashraf; Oriana Bandiera; Scott Lee |
| Abstract: | Organizations often use awards to incentivize performance. We design a field experiment to unbundle the mechanisms through which awards may affect behavior: by facilitating social comparison and by conferring recognition and visibility. In a nationwide health worker training program in Zambia, employer recognition and social visibility increase performance while social comparison reduces it, especially for low-ability trainees. These effects appear when treatments are announced and persist through training. The findings are consistent with a model of optimal expectations in which low-ability individuals exert low effort in order to avoid information about their relative ability. |
| Keywords: | awards, social comparison, optimal expectations, incentives. |
| JEL: | D84 D83 J33 M52 O15 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stieop:46&r=cta |
| By: | Meub, Lukas; Proeger, Till; Hüning, Hendrik |
| Abstract: | This paper experimentally investigates social learning in a two-agent prediction game with both exogenous and endogenous ordering of decisions and a continuous action space. Given that individuals regularly fail to apply rational timing, we refrain from implementing optimal timing of decisions conditional on signal strength. This always renders it optimal to outwait the other player regardless of private signals and induces a gamble on the optimal timing and action. In this setting, we compare exogenous and endogenous ordering in terms of informational efficiency, strategic delay and social welfare. We find that more efficient observational learning leads to more accurate predictions in the endogenous treatments and increases informational efficiency compared to the benchmark exogenous treatment. Overall, subjects act sensitively to waiting costs, with higher costs fostering earlier decisions that reduce informational efficiency. For a simple implementation of waiting costs, subjects more successfully internalize information externalities by adjusting their timing according to signal strength. Simultaneous decisions in endogenous ordering avoid observational learning and compensate the higher degree of rational decisions. Overall, endogenous timing has no net effect on social welfare, as gains in accuracy are fully compensated by waiting costs. Our results hold relevance for social learning environments characterized by a continuous action space and the endogenous timing of decisions. -- |
| Keywords: | Endogenous Timing,Information Externalities,Laboratory Experiment,Social Learning,Strategic Delay |
| JEL: | C91 D82 D83 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:167&r=cta |
| By: | Boissay, Frederic; Collard, Fabrice; Smets, Frank |
| Abstract: | The empirical literature on systemic banking crises (SBCs) has shown that SBCs are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. We attempt to explain these phenomena within a dynamic general equilibrium model featuring a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information on this market may generate sudden interbank market freezes, SBCs, credit crunches and, ultimately, severe recessions. Simulations of a calibrated version of the model indicate that typical SBCs break out in the midst of a credit boom generated by a sequence of positive supply shocks rather than being the outcome of a big negative wealth shock. We also show that the model can account for the relative severity of recessions with SBCs and their longer duration. JEL Classification: E32, E44, G01, G21 |
| Keywords: | Asymmetric information, credit crunch, lending boom, Moral Hazard, systemic banking crisis |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131514&r=cta |
| By: | Hoffmann, Peter |
| Abstract: | We study the role of informed trading in a fragmented financial market under the absence of inter-market price priority. Due to frictions in traders’ market access, liquidity providers on alternative trading platforms may be exposed to an increased adverse selection risk. As a consequence, the main market dominates (offers better quotes) frequently albeit charging higher transaction fees. The empirical analysis of a dataset of trading in French and German stocks suggests that trades on Chi-X, a lowcost trading platform, carry significantly more private information than those executed in the Primary Markets. Consistent with our theory, we find a negative relationship between the competitiveness of Chi-X’s quotes and this excess adverse selection risk faced by liquidity providers in the cross-section. Our results have some implications for the design of best-execution policies. JEL Classification: G10, G14, G24 |
| Keywords: | adverse selection, Inter-market competition, MiFID, Transaction fees |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131519&r=cta |
| By: | Bernd Irlenbusch (University of Cologne); Rainer Michael Rilke (University of Cologne) |
| Abstract: | This paper experimentally investigates into the effects of limited feedback on contributions in a repeated public goods game. We test whether feedback about good examples (i.e., the respective maximum contribution in a period) in contrast to bad examples (i.e., the minimum contributions) induces higher contributions. When the selection of feedback is non-transparent to the subjects, good examples boost cooperation while bad examples hamper them. No significant differences are observed between providing good or bad examples, when the feedback selection rule is transparent. Our results shed new light on how to design feedback provision in public goods settings. |
| Keywords: | Public Goods, Feedback, Imperfect Conditional Cooperation, Experiment |
| JEL: | H41 C92 D82 |
| Date: | 2013–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:04-04&r=cta |
| By: | Nuño, Galo; Thomas, Carlos |
| Abstract: | We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so. JEL Classification: E20, G10, G21 |
| Keywords: | call option, cross-sectional volatility, Financial intermediaries, leverage, limited liability, Moral Hazard, put option, short-term collateralized debt |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131524&r=cta |
| By: | Ales Cornanic (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jiri Novak (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | The signaling hypothesis suggests that firms have incentives to underprice their initial public offerings (IPOs) to signal their quality to the outside investors and to issue seasoned equity (SEO) at more favorable terms. While the initial empirical evidence on the signaling hypothesis was weak, Francis et al. (2010) show that foreign firms from segmented (rather than integrated) markets strategically underprice their IPO in U.S. markets to distinguish themselves from the weaker players. Hence, the attractiveness of the signaling strategy seems to be related to the a priori level of information asymmetry. We examine the use of signaling in an emerging market where the information asymmetry is likely to be higher relative to an established market. Using a sample of 158 Polish IPOs from 2005 – 2009, we show that firms that underprice their IPOs are more likely (i) to issue seasoned equity, (ii) to issue a larger portion of equity at the SEO, and (iii) to make the SEO sooner after the IPO, all of which are consistent with the signaling hypothesis. This evidence suggests that the results of Francis et al. (2010) are not limited to IPOs made by foreign firms in an established market, but they can be extended to primary listings by domestic firms in markets where the information asymmetry is sufficiently large for the benefit of the signal to outweigh its cost. |
| Keywords: | initial public offering, seasoned equity offering, underpricing, signaling, emerging market, Poland |
| JEL: | G14 G15 G30 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2013_07&r=cta |
| By: | de la Torre, Augusto; Ize, Alain |
| Abstract: | This paper explores the conceptual foundations of macroprudential policy. It does so within a framework that gradually incorporates and interacts two types of frictions (principal-agent and collective action) with two forms of rationality (full and bounded), all in the context of aggregate volatility. Four largely orthogonal rationales for macroprudential policy are identified. The first (time consistency macroprudential) arises even in the absence of externalities, not to prevent financial crises but to offset the moral hazard implications of (efficient but time inconsistent) post-crisis policy interventions. The second (dynamic alignment macroprudential) protects the less sophisticated (boundedly rational) market participants by maintaining principal-agent incentives continuously aligned along the cycle and in the face of aggregate shocks. The third (collective action macroprudential) responds to the socially inefficient yet rational instability resulting from uninternalized externalities. The fourth (collective cognition macroprudential) aims at tempering non-rational mood swings where credit-constrained rational arbitrageurs fail. Finding the right policy balance is complicated by the fact that the four dimensions face policy trade-offs and their relative importance is state-dependent, hence shifts over time. |
| Keywords: | Debt Markets,Labor Policies,Banks&Banking Reform,Emerging Markets,Economic Theory&Research |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6576&r=cta |
| By: | Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law) |
| Abstract: | Recent empirical evidence suggests that between-country social comparisons have become more important over time. This paper analyzes optimal income taxation in a multi-country economy, where consumers derive utility from their relative consumption compared with both other domestic residents and people in other countries. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to one another, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also reflects between-country comparisons. We also derive a globally efficient tax structure in a cooperative framework. Nash competition typically implies lower marginal income tax rates than chosen by the leader country in a Stackelberg game, and cooperation typically leads to higher marginal income tax rates than the non-cooperative regimes. |
| Keywords: | Optimal taxation; relative consumption; inter-jurisdictional comparison; asymmetric information; status; positional goods |
| JEL: | D03 D62 D82 H21 |
| Date: | 2013–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0862&r=cta |
| By: | Maurice Kugler; Oren Levintal (Bar-Ilan University); Hillel Rapoport (Bar-Ilan University) |
| Abstract: | The gravity model has provided a tractable empirical framework to account for bilateral flows not only of manufactured goods, as in the case of merchandise trade, but also of financial flows. In particular, recent literature has emphasized the role of information costs in preventing larger diversification of financial investments. This paper investigates the role of migration in alleviating information imperfections between home and host countries. We show that the impact of migration on financial flows is strongest where information problems are more acute (that is, for more informational sensitive investments and between more culturally distant countries) and for the type of migrants that are most able to enhance the flow of information, namely, skilled migrants. We interpret these differential effects as additional evidence pointing to the role of information in generating home-bias and as new evidence of the role of migration in reducing information frictions between countries. |
| Keywords: | Migration, international financial flows, international loans, gravity models, information asymmetries |
| JEL: | F21 F22 O1 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2013-05&r=cta |
| By: | Edward Anderson (The University of Sydney Business School); Cheng Qian |
| Abstract: | We model a situation in which a single firm evaluates competing suppliers and selects just one. Suppliers submit bids involving both price and quality variables. The buyer makes a choice which from the supplier's perspective appears to contain a stochastic element - for example the buyer may have information, which is not shared with the suppliers, and that gives one supplier an advantage in the final choice. We use a discrete choice model of buyer choice (e.g. multinomial logit). Our main result is that the supplier's choice of the quality variables is not affected by the competitive environment. Thus the suppliers compete only on price. We compare this with a second model in which the buyer's weighting on different quality variables is uncertain at the time bids are made. |
| Keywords: | Supplier choice, Quality variables, Nash equilibrium, Types of uncertainty |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:syb:wpbsba:06/2013&r=cta |