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on Contract Theory and Applications |
| By: | Johannes Gerd Becker (ZHAW, Switzerland); Hans Gersbach (ETH Zurich, Switzerland) |
| Abstract: | We consider an innitely repeated reappointment game in a principal- agent relationship. Typical examples are voter-politician or government- public servant relationships. The agent chooses costly effort and enjoys being in office until he is deselected. The principal observes a noisy signal of the agent's effort and decides whether to reappoint the agent or not. We analyse the stationary Markovian equilibria of this game and examine the consequences of threshold contracts, which forbid reappointment if the principal's utility is too low. We identify the circumstances under which such threshold contracts are welfare-improving or beneficial for the principal. |
| Keywords: | principal-agent model; repeated game; reappointment; stationary Markovian strategies; threshold strategies; threshold contracts, asymmetric information; commitment. |
| JEL: | C83 D82 D86 H11 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:13-182&r=cta |
| By: | Kräkel, Matthias; Müller, Daniel |
| Abstract: | We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies—even when targets with high synergies are available—to obtain high-powered incentives and, hence, a high personal income at the merger-management stage. We derive conditions under which shareholders prefer a self-commitment policy or a rent-reduction policy to deter the CEO from opportunistic recommendations. |
| Keywords: | acquisition; merger; moral hazard |
| JEL: | D82 D86 G34 |
| Date: | 2013–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:410&r=cta |
| By: | Vermeulen A.J.; Schröder M.J.W.; Peters H.J.M. (GSBE) |
| Abstract: | We consider effectivity functions for finitely many players and alternatives. We assume that players have incomplete information with respect to the preferences of the other players. Our main result is the characterization of effectivity functions which have an ex post Nash consistent representation, i.e., there is a game form such that i the distribution of power among coalitions of players is the same as in the effectivity function and ii there is an ex post Nash equilibrium in pure strategiesfor any preference profile. |
| Keywords: | Existence and Stability Conditions of Equilibrium; Game Theory and Bargaining Theory: General; Asymmetric and Private Information; Mechanism Design; |
| JEL: | C62 C70 D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013049&r=cta |
| By: | Matteo Bassi (Università di Napoli Federico II and CSEF); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica delSacro Cuore di Milano and CSEF) |
| Abstract: | We study a supply chain model where competing manufacturers located around a circle contract with privately informed and exclusive retailers. The number of brands in the market (determined by the manufacturers’ zero profit condition) depends on the level of asymmetric information within supply chains and on the types of contracts between manufacturers and retailers. With two-part tariffs, wholesale prices fully reflect retailers’ costs. With linear contracts, wholesale prices are constant and independent of retailers’ costs. The number of brands is lower (resp. higher) with asymmetric information than with complete information when contracts are linear (resp. with two-part tariffs). Moreover, the number of brands is always higher with linear contracts than with two-part tari¤s. We also analyze the effects of endogenous entry on welfare. |
| Keywords: | Product Variety, Entry, Competing Supply Chains, Vertical Contracting, Asymmetric Information |
| JEL: | D43 D82 L13 L51 |
| Date: | 2013–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:343&r=cta |
| By: | Jullien, Bruno (Toulouse School of Economics (CNRS-GREMAQ and IDEI)); Pavan, Alessandro (Northwestern University) |
| Abstract: | We study monopoly and duopoly pricing in a two-sided market with dispersed information about users' preferences. We first show how the dispersion of information introduces idiosyncratic uncertainty about participation rates and how the latter shapes the elasticity of the demands and thereby the equilibrium prices. We then study informative advertising campaigns and product design affecting the agents' ability to estimate their own valuations and/or the distribution of valuations on the other side of the market. |
| Keywords: | two-sided markets, dispersed information, platform competition, global-games, informative advertising |
| JEL: | D82 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27580&r=cta |
| By: | Imhof, Lorens; Kräkel, Matthias |
| Abstract: | Previous work on moral-hazard problems has shown that, under certain conditions, bonus contracts create optimal individual incentives for risk-neutral workers. In our paper we demonstrate that, if a firm employs at least two workers, it may further bene.t from combining worker compensation via a bonus-pool contract and relative performance evaluation. Such combination leads to saved rents under a wide class of luck distributions. In addition, if the employer is wealth-constrained, complementing individual bonus contracts by the possibility of pooling bonuses can increase the set of implementable effort levels. All our results hold even though workers’ outputs are technically and stochastically independent so that, in view of Holmstrom’s informativeness principle, individual bonus contracts would be expected to dominate bonus-pool contracts. |
| Keywords: | contract; hazard rate; informativeness principle; limited liability; relative performance. |
| JEL: | C72 D86 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:413&r=cta |
| By: | Wataru Tamura (The University of Tokyo) |
| Abstract: | This paper examines an auction platform in which the platform provider maximizes profits by adjusting participation fees and by choosing an auction format. The seller has private information on the quality of the good, and each participating buyer receives a private signal about his valuation of the good. The choice of auction format determines the allocation of trading surplus among participating seller and buyers. This paper shows that when the seller’s type is affiliated with buyers’ signals, the platform provider can charge higher participation fees to both sides by choosing a first-price auction rather than a second-price or English auction. It also examines the effect of allowing participating buyers to acquire information on the seller’s type and shows that the provider can charge higher participation fees under a non-transparency policy. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf330&r=cta |
| By: | Imhof, Lorens; Kräkel, Matthias |
| Abstract: | A standard tournament contract specifies only tournament prizes. If agents’ performance is measured on a cardinal scale, the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize. We analyze a tournament with two risk averse agents. Under unlimited liability, the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs. If the agents are protected by limited liability, the principal sticks to the standard tournament. |
| Keywords: | limited liability; moral hazard; risk aversion; tournament; unlimited liability |
| JEL: | C72 D86 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:411&r=cta |
| By: | Axel Dreher; Silvia Marchesi |
| Abstract: | This paper explores the role of information transmission in explaining donors' choice between project aid and budget support. Budget support increases the involvement of recipient governments in the decision-making process and can thus be an example of a "delegation-scheme". Conversely, project aid represents a more "centralized" type of aid. According to the theory, when countries' local knowledge is more important than donors' information, recipient countries' discretion in the choice of policies should be increased (delegation). Conversely, there should be less freedom in designing policies when donors' information is more relevant (centralization). The empirical analysis conrms that the importance of donors' private information influences the amount of project aid, while recipients' local knowledge is positively correlated with the amount of budget support. |
| Keywords: | Delegation, communication, ownership, foreign aid |
| JEL: | C23 D82 F33 O1 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:255&r=cta |
| By: | Kräkel, Matthias |
| Abstract: | The paper analyzes the choice of organizational structure as solution to the trade-off between controlling behavior based on authority rights and minimizing costs for implementing high efforts. The analysis includes the owner of a firm, a top manager and two division heads. If it is more expensive to incentivize the division heads, the owner will prefer full delegation of authority to them to replace their high incentive pay by incentives based on private benefits of control. In that situation, decentralization is optimal given that selfish behavior is more important than cooperation for maximizing returns, but concentrated delegation of full authority to a single division head is optimal for cooperation being crucial. If, however, incentivizing the division heads is clearly less expensive than creating incentives for the top manager, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial. |
| Keywords: | authority; centralization; contracts; decentralization; moral hazard. |
| JEL: | D21 D23 D86 L22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:412&r=cta |
| By: | Peter Kondor (Central European University); Ana Babus (Imperial College London) |
| Abstract: | We model trading and information diffusion in OTC markets, when dealers can engage in many bilateral transactions at the same time. We show that information diffusion is effective, but not efficient. While each bilateral price partially reveals all dealers' private information after a single round of trading, dealers could learn more even within the constraints imposed by our environment. This is not a result of dealers' market power, but arises from the interaction between decentralization and differences in dealers' valuation of the asset. We apply our framework to confront several explanations for the disruption of OTC markets with stylized facts from the empirical literature. We find more support for narratives emphasizing increased counterparty risk as opposed to increased informational frictions. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:792&r=cta |
| By: | Matteo Bassi (Università di Napoli Federico II and CSEF); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica delSacro Cuore di Milano and CSEF) |
| Abstract: | Motivated by the recent experimental evidence on altruistic behavior, we study a simple principal-agent model where each player cares about other players’ utility, and may reciprocate their attitude towards him. We show that, relative to the selfish benchmark, efficiency improves when players are altruistic. Nevertheless, in contrast to what may be expected, an increase in the degree of the agent’s altruism as well as a more reciprocal behavior by players has ambiguous effects on efficiency. We also consider the effects of the presence of spiteful players and discuss how monetary transfers between players depend on their degrees of altruism and spitefulness. |
| Keywords: | Adverse selection, altruism, reciprocity, optimal contracting |
| JEL: | D64 D86 |
| Date: | 2013–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:342&r=cta |
| By: | Theodoros M. Diasakos (University of St Andrews); Kostas Koufopoulos |
| Abstract: | This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (QJE, 1976). We propose a simple extension of the game-theoretic structure in Hellwig (EER, 1987) under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson (ECMA, 1983). |
| Keywords: | Insurance Market, Adverse Selection, Incentive Efficiency |
| JEL: | D86 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1313&r=cta |
| By: | Gershkov, Alex; Moldovanu, Benny; Shi, Xianwen |
| Abstract: | We study dominant strategy incentive compatible (DIC) and deterministic mechanisms in a social choice setting with several alternatives. The agents are privately informed about their preferences, and have single-crossing utility functions. Monetary transfers are not feasible. We use an equivalence between deterministic, DIC mechanisms and generalized median voter schemes to construct the constrained-efficient, optimal mechanism for an utilitarian planner. Optimal schemes for other welfare criteria such as, say, a Rawlsian maximin can be analogously obtained. |
| Date: | 2013–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:417&r=cta |
| By: | Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University) |
| Abstract: | A broad array of law enforcement strategies, from income tax to bank regulation, involve self-reporting by regulated agents and auditing of some fraction of the reports by the regulating bureau. Standard models of self-reporting strategies assume that although bureaus only have estimates of the of an agent's type, agents know the ability of bureaus to detect their misreports. We relax this assumption, and posit that agents only have an estimate of the auditing capabilities of bureaus. Enriching the model to allow two-sided private information changes the behavior of bureaus. A bureau that is weak at auditing, may wish to mimic a bureau that is strong. Strong bureaus may be able to signal their capabilities, but at a cost. We explore the pooling, separating, and semi-separating equilibria that result, and the policy implications. Important possible outcomes are that a cap on penalties increases compliance, audit hit rates are not informative of the quality of bureau behavior, and by mimicking strong bureaus even weak bureaus can induce compliance. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp2013-026&r=cta |
| By: | Giuseppe Cappelletti (Bank of Italy); Lucia Esposito (Bank of Italy) |
| Abstract: | This paper studies the interaction between monetary and fiscal authorities while investors are coordinating on a speculative attack. The authorities want to achieve specific targets for output and inflation but also to avoid a regime change (i.e. sovereign default). They use the traditional policy instruments. The model examines the informational role of simultaneous implementation of monetary and fiscal policies in coordination environments. While endogenous information generated by the intervention of one policy maker has been shown to lead to multiple equilibria, we show that if the actions chosen by the central bank and the government not only deliver information to the markets but also influence the fundamentals of the economy, when the authorities have a strong incentive to preserve the status quo over other objectives, then there is no equilibrium in which investors' strategies depend monotonically on their private information on fundamentals. |
| Keywords: | global games, complementarities, signaling, self-fulfilling expectations, multiple equilibria, crises, regime change, policy interactions |
| JEL: | C7 D8 E5 E6 F3 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_934_13&r=cta |
| By: | Fuchs, William (University of CA, Berkeley); Skrzypacz, Andrzej (Stanford University) |
| Abstract: | We study a dynamic market with asymmetric information that creates the lemons problem. We compare efficiency of the market under different assumptions about the timing of trade. We identify positive and negative aspects of dynamic trading, describe the optimal market design under regularity conditions and show that continuous-time trading can be always improved upon. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2133&r=cta |
| By: | David Johnson (University of Calgary); John Ryan |
| Abstract: | In this paper, we examine how interrogators can get potential sources to provide information which entails defecting from their group. In our experiment, subjects are faced with an interrogator either using coercive techniques or offering rewards. We argue that coercion and reward affect individuals who are “conditional defectors†differently. These individuals will defect only when they can justify that selfish action as either fair or truth telling. For subjects who possess the information the interrogator desires, these conditional defectors will provide that information in both treatments because they are simply telling the truth. For ignorant subjects, conditional defectors provide bad information under coercion because honestly stating ignorance leads to unequal outcomes. In the reward treatment, truthfully saying “I don’t know†leads to a more equal outcome. This means that interrogators receive more information under coercion, but that information is of lower quality. |
| Keywords: | Group Identity, Punishment, Rewards, Information Gathering |
| JEL: | C91 D03 D02 L38 |
| Date: | 2013–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2013-23&r=cta |
| By: | David Johnson (University of Calgary); David Cooper |
| Abstract: | Many incentive plans are inherently ambiguous, lacking an explicit mapping between performance and compensation. Using an online labor market, Amazon Mechanical Turk, we study the effect of ambiguity on willingness to accept contracts to do a real-effort task as well as completion and performance of this task. Ambiguity about the relationship between performance and compensation affects the willingness of individuals to accept contracts and the likelihood of quitting before completion, but not performance. These effects are non-monotonic in the level of ambiguity. Information about ability at the task reduces willingness to accept and increases quitting, but does not affect performance. |
| Keywords: | ambiguity, incentives, performance pay, quitting, online experiment |
| JEL: | C99 D81 J33 |
| Date: | 2013–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2013-27&r=cta |
| By: | Rhys Bidder |
| Abstract: | What determines the frequency domain properties of a stochastic process? How much risk comes from high frequencies, business cycle frequencies or low frequency swings? If these properties are under the influence of an agent, who is compensated by a principal according to the distribution of risk across frequencies, then the nature of this contracting problem will affect the spectral properties of the endogenous outcome. We imagine two thought experiments: in the first, the principal (or “regulator”) is myopic with regard to certain frequencies—he is characterized by a filter—and the agent (“bank”) chooses to hide risk by shifting power from frequencies to which the regulator is attuned to those to which he is not. Thus, the regulator is fooled into thinking there has been an overall reduction in risk when, in fact, there has simply been a frequency shift. In the second thought experiment, the regulator is not myopic, but simply cares more about risk from certain frequencies, perhaps due to the preferences of the constituents he represents or because certain types of market incompleteness make certain frequencies of risk more damaging. We model this intuition by positing a filter design problem for the agent and also by a particular type of portfolio selection problem, in which the agent chooses among investment projects with different spectral properties. We discuss implications of these models for macroprudential policy and regulatory arbitrage. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-29&r=cta |
| By: | Herbst, Luisa; Konrad, Kai A.; Morath, Florian |
| Abstract: | We study endogenous group formation in tournaments employing experimental three-player contests. We find that players in endogenously formed alliances cope better with the moral hazard problem in groups than players who are forced into an alliance. Also, players who are committed to expending effort above average choose to stand alone. If these players are forced to play in an alliance, they invest even more, whereas their co-players choose lower effort. Anticipation of this exploitation may explain their preference to stand alone. |
| Keywords: | Endogenous group formation; contest; conflict; alliance; experiment; moral hazard problem; free-riding; in-group favoritism |
| JEL: | D72 D74 |
| Date: | 2013–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:419&r=cta |
| By: | Enriqueta Aragones; Dimitrios Xefteris |
| Abstract: | We analyze a unidimensional model of two-candidate electoral competition where voters have im- perfect information about the candidates' policy proposals, that is, voters cannot observe the exact policy proposals of the candidates but only which candidate offers the most leftist/rightist platform. We assume that candidates are purely office motivated and that one candidate enjoys a valence advan- tage over the other. We characterize the unique Sequential Equilibrium in very-weakly undominated strategies of the game. In this equilibrium the behavior of the two candidates tends to maximum extremism, due to the voters' lack of information. But it may converge or diverge depending on the size of the advantage. For small values of the advantage candidates converge to the extreme policy most preferred by the median and for large values of the advantage candidates strategies diverge: each candidate specializes in a different extreme policy. These results are robust to the introduction of a proportion of well informed voters. In this case the degree of extremism decreases when the voters become more informed. |
| Keywords: | Downsian model; imperfect information; advantaged candidate; maximum differentiation |
| JEL: | D72 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:938.13&r=cta |