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on Contract Theory and Applications |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | The set of outcomes that can arise in Bayes Nash equilibria of an incomplete information game where players may or may not have access to more private information is characterized and shown to be equivalent to the set of an incomplete information version of correlated equilibrium, which we call Bayes correlated equilibrium. We describe a partial order on many player information structures -- which we call individual sufficiency -- under which more information shrinks the set of Bayes correlated equilibria. We discuss the relation of the solution concept to alternative definitions of correlated equilibrium in incomplete information games and of the partial order on information structures to others, including Blackwell's for the single player case. |
| Keywords: | Correlated equilibrium, Incomplete information, Robust predictions, Information structure |
| JEL: | C72 D82 D83 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1822r&r=cta |
| By: | MAULEON, Ana (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium); VANNETELBOSCH, Vincent (CEREC, Saint-Louis University, Brussels, Belgium; Université catholique de Louvain, CORE, Belgium) |
| Abstract: | We consider Rubinstein's two-person alternating-offer bargaining model with two-sided incomplete information. We investigate the effects of one party having relative concerns on the bargaining outcome and the delay in reaching an agreement. We find that facing an opponent having stronger relative concerns only hurts the bargainer when she is stronger than her opponent. In addition, we show that an increase of one party's relative concerns will decrease the maximum delay in reaching an agreement. |
| Keywords: | relative concerns, alternating-offer bargaining, private information, maximal delays |
| JEL: | C70 D60 J50 |
| Date: | 2013–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2013034&r=cta |
| By: | Berg, Erlend; Ghatak, Maitreesh; Manjula, R; Rajasekhar, D; Roy, Sanchari |
| Abstract: | This paper studies the interaction of incentive pay and social distance in the dissemination of information. We analyse theoretically as well as empirically the effect of incentive pay when agents have pro-social objectives, but also preferences over dealing with one social group relative to another. In a randomised field experiment undertaken across 151 villages in South India, local agents were hired to spread information about a public health insurance programme. Relative to flat pay, incentive pay improves knowledge transmission to households that are socially distant from the agent, but not to households similar to the agent. |
| Keywords: | incentive pay; information constraints; knowledge transmission; public services; social proximity |
| JEL: | C93 D83 I38 M52 O15 Z13 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9477&r=cta |
| By: | Klein, Tobias; Lambertz, Christian; Stahl, Konrad O |
| Abstract: | We study the effects of improvements in eBay's rating mechanism on seller exit and continuing sellers' behavior. Following a large sample of sellers over time, we exploit the fact that the rating mechanism was changed to reduce strategic bias in buyer rating. That improvement did not lead to increased exit of poorly rated sellers. Yet, buyer valuation of the staying sellers – especially the poorly rated ones – improved significantly. By our preferred interpretation, the latter effect results from increased seller effort; also, when sellers have the choice between exiting (a reduction in adverse selection) and improved behavior (a reduction in moral hazard), then they prefer the latter because of lower cost. |
| Keywords: | adverse selection; anonymous markets; moral hazard; reputation building mechanisms |
| JEL: | D83 L15 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9501&r=cta |
| By: | Zhiwei Liu; Nicholas C. Yannelis |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1318&r=cta |
| By: | Nabi, Mahmoud Sami |
| Abstract: | This paper compares profit sharing and debt contracts in presence of moral hazard. Its originality relatively to the existing studies consists in performing the comparison between the two contracts in a more general context. Firstly, the internal funds of the agent (entrepreneur) are enabled to vary between 0% and 99%. Secondly, an incentive mechanism is incorporated to the sharing contract in the context of a two-period relationship. Both contracts are shown to be feasible for sufficiently high internal funds of the entrepreneur. The debt contract is shown to be characterized by larger financial access than the profit sharing contract. In addition, the extension of the financial-relationship to two periods reduces moral hazard and enhances financial access for both contracts, in case of sufficiently foresighted agent and fulfillment of two distinct conditions. For the sharing contract, the additional condition stated an upper bound on the size of the project. For the debt contract, the condition is related to the threat of non-renewal of the financing in case of first-period failure. It is interestingly shown that a more restrictive threat of financing non-renewal improves financial access but lowers the second-period investment. Finally, the paper suggests policy recommendations to enhance financial access without impeding investment through taxation and subsidizing policies. |
| Keywords: | Profit sharing, debt contract, moral hazard |
| JEL: | D82 D86 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49815&r=cta |
| By: | Dirk Bergemann; Stephen Morris |
| Date: | 2013–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000730&r=cta |
| By: | Kraus, Daniel |
| Abstract: | Although credit rationing has been a stylized fact since the groundbreaking papers by Stiglitz and Weiss (1981, hereinafter S-W) and Besanko and Thakor (1987a, hereinafter B-T), Arnold and Riley (2009) note that credit rationing is unlikely in the S-W model, and Clemenz (1993) shows that it does not exist in the B-T model. In this chapter, I explain why credit rationing, more specifically rationing of loan applicants, does exist in a competitive market with imperfect information, and occurs only for low-risk loan applicants. In cases of indivisible investment technologies, low-risk applicants are rationed. In cases of divisible investment technologies, rationing of loan size is restricted to rationing of loan applicants. In the event that the difference in the marginal return between the investment technologies is sufficiently small relative to the difference in their riskiness, rationing of loan size alone yields high opportunity costs; in addition, low-risk loan applicants are rationed in this case. -- |
| Keywords: | Asymmetric Information,Financial Intermediation,Credit Rationing |
| JEL: | G21 D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:roswps:131&r=cta |
| By: | Theodore Koutmeridis (University of St Andrews) |
| Abstract: | During the past four decades both between and within group wage inequality increased significantly in the US. I provide a microfounded justification for this pattern, by introducing private employer learning in a model of signaling with credit constraints. In particular, I show that when financial constraints relax, talented individuals can acquire education and leave the uneducated pool, this decreases unskilled-inexperienced wages and boosts wage inequality. This explanation is consistent with US data from 1970 to 1997, indicating that the rise of the skill and the experience premium coincides with a fall in unskilled-inexperienced wages, while at the same time skilled or experienced wages do not change much. The model accounts for: (i) the increase in the skill premium despite the growing supply of skills; (ii) the understudied aspect of rising inequality related to the increase in the experience premium; (iii) the sharp growth of the skill premium for inexperienced workers and its moderate expansion for the experienced ones; (iv) the puzzling coexistence of increasing experience premium within the group of unskilled workers and its stable pattern among the skilled ones. The results hold under various robustness checks and provide some interesting policy implications about the potential conflict between inequality of opportunity and substantial economic inequality, as well as the role of minimum wage policy in determining the equilibrium wage inequality. |
| Keywords: | wage inequality, experience premium, skill premium, employer learning, signaling, financial constraints, minimum wages |
| JEL: | D31 D82 E44 J31 |
| Date: | 2013–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1307&r=cta |
| By: | Yang Lu (Hong Kong University of Science and Technology); Ernesto Pasten (Banco Central de Chile and Toulouse School of Economics); Robert King (Boston University) |
| Abstract: | How should policy be optimally designed when a monetary authority faces a private sector that is somewhat skeptical about policy announcements and which interprets economic data as providing evidence about the monetary authority's preferences or its ability to carry through on policy plans? To provide an answer to this question, we extend the standard New Keynesian macroeconomic model to include imperfect inflation control (implementation error relative to an inflation action) and Bayesian learning by private agents about whether the monetary authority is the committed type (capable of following through on announced plans) or an alternative type (producing higher and more volatile inflation). In a benchmark case, we find that optimal policy involves dramatic anti-inflation actions which include an interval of deflation during the early stages of a plan, motivated by investing in a reputation for strength. Such policies resemble recommendations during the 1980s for a "cold turkey" approach to disinflation. However, we also find that such policy is not robustly optimal. A more "gradualist" policy arises if the initial level of credibility is very low. We also investigate a setting where the alternative monetary authority follows a simple behavioral rule that mimics variations in the committed authority's policy action but with a bias toward higher and more volatile inflation. In this case, which we call a "tag along" alternative policymaker, a form of gradualism is always optimal. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:241&r=cta |
| By: | Robert Shimer (University of Chicago); Veronica Guerrieri (University of Chicago) |
| Abstract: | This paper explores price formation in environments with multidimensional private information. Asset sellers are informed both about their need to raise cash and about the quality of the asset they are selling. Asset buyers have rational expectations about the distribution of assets for sale at different prices. Any equilibrium with trade involves partial pooling: identical assets sell for different prices, depending on the seller's need to raise cash; while conversely different assets sell for the same price. Sellers who set a higher price are less likely to succeed at selling. We find a simple condition under which a continuum of such equilibria exist. This condition admits the possibility that some assets are intrinsically worthless, in which case there is also an equilibrium with no trade. In general, the set of equilibria depends on the joint distribution of seller and asset characteristics, and not just the support of that distribution. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:210&r=cta |
| By: | Robert Evans; Sonje Reiche |
| Abstract: | We characterize decision rules which are implementable in mechanism design settings when, after the play of a mechanism, the uninformed party can propose a new mechanism to the informed party. The necessary and sufficient conditions are, essentially, that the rule be implementable with commitment, that for each type the decision is at least as high as if there were no mechanism, and that the slope of the decision function is not too high. The direct mechanism which implements such a rule with commitment will also implement it in any equilibrium without commitment, so the standard mechanism is robust to renegotiation. |
| Keywords: | Renegotiation, Mechanism Design |
| Date: | 2013–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1331&r=cta |
| By: | Carpenter, Jeffrey P. (Middlebury College); Gong, Erick (Middlebury College) |
| Abstract: | Economic theory predicts that agents will work harder if they believe in the "mission" of the organization. Well-identified estimates of exactly how much harder they will work have been elusive, however, because agents select into jobs. We conduct a real effort experiment with participants who work directly for organizations with clear missions. Weeks before the experiment, we survey potential participants for their organizational preferences. At the experiment, we randomly assign workers to organizations, creating either mission matches or mismatches. We overlay performance incentives to test whether they can make up for the motivational deficit caused by a mismatch. Our estimates suggest that matched workers produce 72% more than mismatched workers and that performance pay can increase output by 35% compared to workers who only receive a base wage. Considering matches and mismatches separately, we find that performance pay has only a modest effect on matched workers (a 13% increase) while it has a large effect (a 86% increase) on mismatches, an effect that erodes much of the performance gap caused by the poor match. Our results have broad implications both for those organizations already with well-defined missions (i.e., compensation and screening policies) as well as for those organizations strategizing about strengthening or clarifying their missions. |
| Keywords: | principal-agent, mission, incentive, labor supply, experiment |
| JEL: | C91 J22 J33 M52 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7602&r=cta |
| By: | Dietrichson, Jens (Department of Economics, Lund University) |
| Abstract: | Why are coordination problems common when public sector organizations share responsibilities, and what can be done to mitigate such problems? This paper uses a multi-task principal-agent model to examine two related reasons: the incentives to coordinate resource allocation and the difficulties of measuring performance. The analysis shows that when targets are set individually for each organization, the resulting incentives normally induce inefficient resource allocations. If the principal impose shared targets, this may improve the incentives to coordinate but the success of this instrument depends in general on the imprecision and distortion of performance measures, as well as agent motivation. Besides decreasing available resources, imprecise performance measures also affect agents' possibility to learn the function that determines value. Simulations with a least squares learning rule show that the one-shot model is a good approximation when the imprecision of performance measures is low to moderate and one parameter is initially unknown. However, substantial and lengthy deviations from equilibrium values are frequent when three parameters have to be learned. |
| Keywords: | Public sector organizations; Coordination incentives; Performance measurement; Shared targets; Learning |
| JEL: | D23 D73 D83 H11 H83 |
| Date: | 2013–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2013_026&r=cta |