nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒10‒25
ten papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Quality Uncertainty with Imperfect Information Acquisition By Christopher Gertz
  2. Optimal Incentives in a Principal-Agent Model with Endogenous Technology. By Marco Marini; Paolo Polidori; Davide Ticchi; Désirée Teobaldelli
  3. Market Transparency, Adverse Selection, and Moral Hazard By Klein, Tobias J.; Lambertz, Christian; Stahl, Konrad O.
  4. Why the traditional principal agent theory may no longer apply to concentrated ownership systems and structures By Ojo, Marianne
  5. Imperfectly Informed Voters and Strategic Extremism By Enriqueta Aragonès; Dimitrios Xefteris
  6. The Consequences of Uncertain Debt Targets By Alexander W. Richter; Nathaniel A. Throckmorton
  7. Does Transparency Reduce Corruption ? By Octavian Strimbu; Patrick Gonzalez
  8. Competing for contracts with buyer uncertainty: Choosing price and quality variables By Anderson, Edward; Qian, Cheng
  9. Identifying Structural Models of Committee Decisions with Heterogeneous Tastes and Ideological Bias By Yonghong An; Xun Tang
  10. Premuneration Values and Investments in Matching Markets By George J. Mailath; Andrew Postlewaite; Larry Samuelson

  1. By: Christopher Gertz (Center for Mathematical Economics, Bielefeld University)
    Abstract: I analyze a monopolistic model of quality uncertainty but with the possibility of information acquisition on the consumer side. Information is costly and its amount is chosen by the consumer. The analysis of Bayesian equilibria shows the possibility of three equilibrium classes, only one of which leaves positive utility to the consumer. The classic adverse selection results of these markets are weakened in this situation. I show that cheaper information does not necessarily benefit the consumer but can instead rule out the buyer-friendly and welfare maximizing equilibria. Moreover, making quality search arbitrarily efficient does not lead to sure selling of the high quality product. A sustainable adverse selection effect, though weaker than in the classical model, remains even in the limit.
    Keywords: Quality uncertainty, Price signaling, Adverse selection, Information acquisition, Two-sided incomplete information
    JEL: C72 D42 D82 D83
    Date: 2013–09
  2. By: Marco Marini (Department of Computer, Control and Management Engineering, Università "La Sapienza" Roma); Paolo Polidori (Department of Law, University of Urbino “Carlo Bo”); Davide Ticchi (IMT Institute for Advanced Studies Lucca); Désirée Teobaldelli (Department of Law, University of Urbino “Carlo Bo”)
    Abstract: One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher e¢ ciency are also riskier. Using a modi…ed version of the Holmstrom and Milgroms (1987) framework, we obtain that lower agents risk aversion unambiguously leads to higher incentives when the technology function linking e¢ ciency and riskiness is elastic, while the risk aversion-incentive relation- ship can be positive when this function is rigid.
    Keywords: Principal-agent, Incentives, Risk aversion, Endogenous technolog
    JEL: D82
    Date: 2013
  3. By: Klein, Tobias J.; Lambertz, Christian; Stahl, Konrad O.
    Abstract: We study the effects of improvements in market transparency on eBay on seller exit and continuing sellers’ behavior. An improvement in market transparency by reducing strategic bias in buyer ratings led to a significant increase in buyer valuation especially of sellers rated poorly prior to the change, but not to an increase in seller exit. When sellers had the choice between exiting—a reduction in adverse selection—and improved behavior—a reduction in moral hazard—, they preferred the latter because of lower cost. Increasing market transparency improves on market outcomes.
    Keywords: Anonymous markets; adverse selection; moral hazard; reputation building mechanisms; market transparency; market design.
    JEL: D83 L15
    Date: 2013–09
  4. By: Ojo, Marianne
    Abstract: This paper not only considers why many concentrated ownership structured systems and jurisdictions are considering a shift to the Anglo American style of corporate governance, but also explores why the traditional principal agency theory model may no longer apply in many concentrated ownership structures.
    Keywords: principal agent theory; stakeholder theory; informational asymmetries; risk; corporate governance; UK; India; Germany; U.S; Japan
    JEL: D8 D82 D86 K2
    Date: 2013–10–20
  5. By: Enriqueta Aragonès; Dimitrios Xefteris
    Abstract: We analyze a unidimensional model of two-candidate electoral competition where voters have imperfect 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 advantage 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
  6. By: Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: Recent proposals to reduce U.S. debt reveal large differences in their implied targets. These differences demonstrate the uncertainty surrounding future tax rates and long-run debt targets. We use a standard real business cycle model in which a Bayesian household learns about the state-dependent debt target in an endogenous tax rule. The household extracts the debt target state from a noisy tax process and jointly estimates the transition probabilities. We compare the household's ability to learn and the consequences of the uncertainty across different limited information sets. The information set influences the household's behavior but also impose two-sided risk. Despite the popular viewpoint that fiscal uncertainty has negative effects, limited information can result in welfare gains or losses, depending on whether the household's expectations are consistent with the realization of future states. Although the welfare distribution includes gains, we stress that the uncertainty created by the recent fiscal policy debate slowed the recovery and led to welfare losses. When Congress provides clarity about future policy, output and welfare increase and the economy quickly recovers.
    Keywords: Bayesian learning; Limited information; Fiscal uncertainty; Welfare
    JEL: D83 E32 E62 H68
    Date: 2013–10
  7. By: Octavian Strimbu; Patrick Gonzalez
    Abstract: Does a better monitoring (transparency) of officials lowers the incidence of corruption ? Using a common agency game with imperfect information, we show that the answer depends on the measure of corruption that one uses. More transparency lowers the prevalence of corruption but it may raise the average bribe as it motivates the corruptor to bid more aggressively for the agent’s favour. We show that transparency affects the prevalence of corruption at the margin through a competitive effect and an efficiency effect.
    Keywords: Corruption, Transparency, Common Agency
    JEL: D73 D80
    Date: 2013
  8. By: Anderson, Edward; Qian, Cheng
    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 uncerta inty
    Date: 2013–05–09
  9. By: Yonghong An (Department of Economics, University of Connecticut); Xun Tang (Department of Economics, University of Pennsylvania)
    Abstract: We study the nonparametric identification and estimation of a structural model for committee decisions. Members of a committee share a common information set, but differ in ideological bias while processing multiple information sources and in individual tastes while weighing multiple objectives. We consider two cases of the model where committee members have or don't have strategic incentives for making recommendations that conform with the committee decision. For both cases, pure-strategy Bayesian Nash equilibria exist, and we show how to use variations in the common information set to recover the distribution of members' private types from individual recommendation patterns. Building on the identification result, we estimate a structural model of interest rate decisions by the Monetary Policy Committee (MPC) at the Bank of England. We find some evidence that recommendations from external committee members are less distorted by strategic incentives than internal members. There is also evidence that MPC members differ more in their tastes for multiple objectives than in ideological bias.
    Keywords: Committee decisions, nonparametric identification, MPC at the Bank of England
    JEL: C14 D71
    Date: 2013–10–07
  10. By: George J. Mailath (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, Yale University)
    Abstract: We analyze a model in which agents make investments and then match into pairs to create a surplus. The agents can make transfers to reallocate their pretransfer ownership claims on the surplus. Mailath, Postlewaite, and Samuelson (2013) showed that when investments are unobservable, equilibrium investments are generally inefficient. In this paper we work with a more structured model that is sufficiently tractable to analyze the nature of the investment inefficiencies. We provide conditions under which investment is inefficiently high or low and conditions under which changes in the pretransfer ownership claims on the surplus will be Pareto improving, as well as examine how the degree of heterogeneity on either side of the market affects investment efficiency.
    Keywords: Directed search, matching, premuneration value, prematch investments, search
    JEL: C78 D40 D41 D50 D83
    Date: 2013–10–14

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