|
on Contract Theory and Applications |
| By: | Sarah Parlane (University College Dublin); Ying-Yi Tsai (National University of Kaohsiung) |
| Abstract: | This paper characterizes the optimal contracts issued to suppliers when delivery is subject to disruptions and when they can invest to reduce such a risk. When investment is contractible dual sourcing is generally optimal because it reduces the risk of disruption. The manufacturer (buyer) either issues symmetric contracts or selects one supplier as a major provider who invests while the buffer supplier does not. An increased reliance on single sourcing or on a major supplier is optimal under moral hazard. Indeed, we show that order consolidation increases the manufacturer’s profits because it serves as an incentive device in inducing investment. |
| Keywords: | Moral Hazard; Vertical Organization; Supply Base Management;Contract Order Size; Relationship-specific Investment; Strategic Outsourcing |
| JEL: | D23 D86 L24 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201316&r=cta |
| By: | Luigi Balletta (Università di Palermo); Giovanni Immordino (Università di Salerno and CSEF) |
| Abstract: | This paper introduces time inconsistent preferences into a moral hazard setting where the agent is risk-averse. We derive a necessary optimality condition on the consumption allocation that is different from the so-called Inverse Euler Equation of Rogerson (1985). Specifically, inverse marginal utility is not a martingale, rather it follows a partial adjustment process. If the bias for the present is sufficiently large the optimal allocation will leave the agent with the desire to borrow. We extend the analysis to the case in which the principal does not know if the agent is time consistent or not. Finally, we show that in a setting with a risk-neutral agent and limited liability everything is as if the principal faces a time consistent agent. |
| Keywords: | repeated moral hazard, time-inconsistency |
| JEL: | D82 D03 E21 D86 |
| Date: | 2013–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:341&r=cta |
| By: | Catherine Gendron-Saulnier; Marc Santugini |
| Abstract: | A monopoly decides whether to segment two separate markets. Demand depends on stochastic shocks and some buyers are uninformed about the quality of the good. Contrary to the case of complete information, we show that it is not always more profitable for the firm to segment the markets in an environment in which some buyers have incomplete information. The reason is that the presence of uninformed buyers provides the firm with the incentive to engage in noisy price-signaling. Indeed, if the benefit from price flexibility (through market segmentation) is offset by the cost of signaling quality through two distinct prices, then it is optimal not to segment the markets and to use uniform pricing. |
| Keywords: | Market integration, market segmentation, learning, monopoly, profits, noisy signaling, third-degree price discrimination |
| JEL: | D82 D83 L12 L15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1335&r=cta |
| By: | Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics); Ying-Ju Chen (University of California at Berkeley); |
| Abstract: | As a common practice, various firms initially make information and access to their products/services scarce within a social network; identifying influential players that facilitate information dissemination emerges as a pivotal step for their success. In this paper, we tackle this problem using a stylized model that features payoff externalities and local network effects, and the network designer is allowed to release information to only a subset of players (leaders); these targeted players make their contributions first and the rest followers move subsequently after observing the leaders' decisions. In the presence of incomplete information, the signaling incentive drives the optimal selection of leaders and can lead to a first-order materialistic effect on the equilibrium outcomes. We propose a novel index for the key leader selection (i.e., a single player to provide information to) that can be substantially different from the key player index in \ \cite{ballester2006s} and the key leader index with complete information proposed in \cite{zhou13benefit}. We also show that in undirected graphs, the optimal leader group identified in \cite{zhou13benefit} is exactly the optimal follower group when signaling is present. The pecking order in complete graphs suggests that the leader should be selected by the ascending order of intrinsic valuations. We also examine the out-tree hierarchical structure that describes a typical economic organization. The key leader turns out to be the one that stays in the middle, and it is not necessarily exactly the central player in the network. |
| Keywords: | social network, signaling, information management, targeted advertising, game theory |
| JEL: | D21 D29 D82 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1304&r=cta |
| By: | Akitoshi Muramoto (Graduate School of Economics, Kyoto University) |
| Abstract: | Recently, some literature on incomplete contracts studies the cases where renegotiations take place inefficiently. We extend the incomplete contract model in Hart (2009) by assuming that one party chooses an action which affects renegotiation costs. In our model, renegotiation costs are determined endogenously. We characterize the condition that she can get higher payoff by manipulating renegotiation costs than when she cannot manipulate renegotiation costs and renegotiations take place efficiently. Whereas she chooses positive renegotiation costs, renegotiations never occur on the equilibrium paths. They work just as "credible threat". Her equilibrium share ratio of the ex ante bargaining surplus is higher than her bargaining power. As an application, we discuss an investment problem by using a variant of our basic model. We show that the agents mitigate the investment problem by setting some positive renegotiation costs and increasing a high skilled agent's share ratio of the ex ante bargaining surplus to give her larger incentive of investment. |
| JEL: | D23 D86 C78 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:877&r=cta |
| By: | Lucie Bottega (Toulouse School of Economics); Jenny De Freitas (Universitat de les Illes Balears) |
| Abstract: | In a Bertrand duopoly model, we study firms’ eco-labeling behavior when certification process imperfectly signals environmental product quality to consumers. The test is noisy in the sense that brown products may be labeled while green products may not. We study how strategic interaction shapes firms’ incentives to get certified, equilibrium demand, prices and social welfare. We find that the eco-labeling policy is welfare enhancing for all parameter values. Nevertheless, the separating testing equilibrium may be too costly to sustain when the green firm probability to pass the test is small. Moreover, if the certification technology is soft, meaning that both brown and green units are awarded the label with high probability, it would be easier to sustain a separating equilibrium. This is a consequence of price strategic interaction between firms that gives firms incentives to coordinate on a separating equilibrium. |
| Keywords: | Imperfect Certification, Eco-label, Duopoly, Welfare Analysis, Environmental Quality, Credence Attribute |
| JEL: | C72 D21 D60 D82 L15 Q50 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ubi:deawps:62&r=cta |
| By: | Marzena Rostek (University of Wisconsin-Madison Economics Department); Ji Hee Yoon (University of Wisconsin-Madison Economics Department) |
| Abstract: | This paper studies the impact of heterogeneity in interdependence of trader values on price inference and welfare. A model of double auction with quasilinear-quadratic utilities is introduced that allows for arbitrary Gaussian information structures. With heterogeneous interdependence, some traders learn more from prices whereas others from private signals; thus, heterogeneity separates informed and uninformed trading. Changes in market structure can improve both informativeness of prices and private signals of a trader and make some traders learn more from prices than others. We characterize conditions on the information structure for price and signal inference to involve no tradeoff. |
| Keywords: | Price Inference; Networks; Dark Pools; Market Design |
| JEL: | D43 D53 G11 G12 L13 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1321&r=cta |
| By: | Rossi, S; Tinn, K |
| Date: | 2013–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:imp:wpaper:12194&r=cta |
| By: | Saori Chiba (Dept. of Management, Università Ca' Foscari Venice); Kaiwen Leong; Kaiwen Leong (Division of Economics, Nanyang Technological University) |
| Abstract: | In Crawford and Sobel (1982) (CS), a sender (S) uses cheap talk to persuade a receiver (R) to select an action as profitable to S as possible. This paper shows that the presence of an outside option Ð that is, allowing R to avoid taking any action, yielding state-independent reservation utilities to R and S Ð has an important qualitative impact on the results. Contrary to CS, in this model, the informativeness of communication is not always decreasing in the level of conflict of interest. Relatedly, communication can be more informative than in CS. |
| Keywords: | Cheap Talk, Information Transmission, Experts |
| JEL: | D82 D83 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpdman:52&r=cta |
| By: | Olga Gorelkina (Max Planck Institute for Research on Collective Goods, Bonn); Wolfgang Kuhle (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | This paper studies a firm’s optimal capital structure in an environment, where the firm’s stock price serves as a public signal for its credit worthiness. In equilibrium, equity investors choose how much information to acquire privately, which induces a positive relation between the amount of equity issued and the stock price signal’s precision. Thus, through its capital structure, the firm can internalize the informational externality that stock prices exert on bond yields. Firms with a strong fundamental therefore issue more equity and less debt than they would if the informational spill-over did not exist. |
| Keywords: | Information Aggregation, capital structure, Sequential Markets, Market Depth |
| JEL: | G32 D83 C73 G10 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2013_18&r=cta |