nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒10‒11
seven papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Tullock Contests with Asymmetric Information By Einy, E; Haimanko, O; Moreno, D; Sela, A; Shitovitz, B
  2. Information-Revelation and Coordination Using Cheap Talk in a Battle of the Sexes with Two-Sided Private Information By Chirantan Ganguly; Indrajit Ray
  3. Linear Prices Equilibria and Nonexclusive Insurance Market By Frédéric Loss; Gwanaël Piaser
  4. Saving the public from the private? Incentives and outcomes in dual practice By Kuhn, Michael; Nuscheler, Robert
  5. Bayesian Inference and Non-Bayesian Prediction and Choice: Foundations and an Application to Entry Games with Multiple Equilibria By Larry G. Epstein; Kyoungwon Seo
  6. Interrogation and Evidence Fabrication By Jesse Bull
  7. On the value of partial commitment for cooperative investment in buyer-supplier relationship By José De Sousa; Xavier Fairise

  1. By: Einy, E; Haimanko, O; Moreno, D; Sela, A; Shitovitz, B
    Abstract: Under standard assumptions about players’ cost functions, we show that a Tullock contest with asymmetric information has a pure strategy equilibrium. Moreover, when players have a common value and a common state independent linear cost function, a two player Tullock contest in which one player has an information advantage has a unique equilibrium. In this equilibrium both players exert the same expected effort, although the player with information advantage has a greater payoff and wins the prize less frequently than his opponent. When there are more than two players in the contest, an information advantage leads to higher payoffs, but the other properties of equilibrium no longer hold.
    JEL: C72 D44 D82
    Date: 2013–09
  2. By: Chirantan Ganguly; Indrajit Ray
    Abstract: We consider a Battle of the Sexes game with two types, High and Low, for each player and allow cheap talk regarding players' types before the game. We prove that the unique fully revealing symmetric cheap talk equilibrium exists for a low range of prior probability of the High-Type. This equilibrium has a desirable type-coordination property: it fully coordinates on the ex-post efficient pure Nash equilbrium when the players' types are different. Type-coordination is also obtained in a partially revealing equilibrium in which only the High-type is not truthful, for a medium range of prior probability of the High-type.
    Keywords: Battle of the Sexes, Private Information, Cheap Talk, Coordination, Full Revelation
    JEL: C72
    Date: 2013–09
  3. By: Frédéric Loss (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CNAM Paris - Conservatoire National des Arts et Métiers - Conservatoire National des Arts et Métiers (CNAM)); Gwanaël Piaser (IPAG - Business School)
    Abstract: We consider a competitive insurance market in which agents can privately enter into multicontractual insurance relationships and undertake hidden actions. We study the existence of linear equilibria when insurance companies do not have any restriction on their pricing rules. We provide conditions under which a linear equilibrium exists. We show that two different types of linear equilibria could exist: A first one in which insurance companies make zero expected profits, and a second one in which they make strictly positive expected profits. We also analyze the welfare properties of the linear equilibria. We show that they are not always second best Pareto optimal.
    Keywords: Common Agency, Insurance, Moral Hazard, Perfect Competition, Linear Prices Equilibria
    Date: 2013–10–05
  4. By: Kuhn, Michael; Nuscheler, Robert
    Abstract: We consider a setting of dual practice, where a physician offers free public treatment and, if allowed, a private treatment for which patients have to pay out of pocket. Private treatment is superior in terms of health outcomes but more costly and time intensive. For the latter reason it generates waiting costs. As patients differ in their propensity to benefit from private treatment and in their costs of waiting for treatment, we study the physician's incentives to supply private care and to allocate waiting time to public and private sectors and contrast it with the first-best allocation. The physician shifts waiting costs to public patients in order to increase the willingness-topay for private treatment. While this waiting time allocation turns out to be socially optimal, the resulting positive network effect leads to an over-provision of private care if and only if waiting costs are sufficiently high. A second-best allocation arises when the health authority selects physician reimbursement in the public segment but has no control over private provision. Depending on the welfare weight the health authority attaches to physician profits a ban of dual practice may improve on the second-best allocation. Due to patient heterogeneity, such a ban would affect patients differently. --
    Keywords: dual practice,health outcomes,health care financing,provider contract,waiting times
    JEL: I11 I18 H51 L33 L51
    Date: 2013
  5. By: Larry G. Epstein (Department of Economics, Boston University); Kyoungwon Seo
    Abstract: We generalize de Finetti’s exchangeable Bayesian model to accommodate ambiguity. As a central motivating example, we consider a policy maker facing a cross-section of markets in which …rms play an entry game. Her theory is Nash equilibrium and it is incomplete because there are multiple equilibria and she does not understand how equilibria are selected. This leads to partial identi…cation of parameters when drawing inferences from realized outcomes in some markets and to ambiguity when considering (policy) decisions for other markets. We model both her inference and choice.
    Date: 2013–01
  6. By: Jesse Bull (Department of Economics, Florida International University)
    Abstract: I explore the rather common legally permissible practice of police lying to suspects and/or fabricating evidence by analyzing a simple model in which police can fabricate/lie and then the accused chooses whether to confess. When police are not permitted to fabricate/lie, the police presenting evidence, which in this case can be viewed as hard evidence, to the accused conveys information about the accused's chances at trial. However, when police are permitted to fabricate/lie, the evidence does not convey information to the accused. I find that allowing police to lie is helpful in cases where it either leads to a guilty accused confessing when he would otherwise go to trial, or an innocent accused not confessing when he otherwise would confess if police were not allowed to lie. However, allowing police to lie is harmful in cases where it either leads to a guilty accused not confessing when he would confess if the police were not allowed to lie, or an innocent accused confessing when he would not if police were not allowed to lie. These cases are characterized and some policy implications are provided.
    JEL: C70 D74 K10
    Date: 2013–10
  7. By: José De Sousa (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, ADIS - Analyse des Dynamiques Industrielles et Sociales - Département d'Economie - Université Paris XI - Paris Sud); Xavier Fairise (TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV), GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - Université du Maine)
    Abstract: Does formal contracting foster cooperation in a buyer-supplier relationship? In line with the literature, we find that a renegotiable contract with relationshipspecific joint investments does not make it possible to reach the first-best. However, we show that a renegotiable contract may induce more cooperation than an informal arrangement can. This result may help to understand how cooperation emerges in Japanese procurement practices, which typically involve relationshipspecific joint investments and renegotiable contracts.
    Keywords: incomplete contracts ; relationship-specific investments ; cooperation
    Date: 2013–05–07

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