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on Contract Theory and Applications |
| By: | Dominik Erharter |
| Abstract: | We study optimal direct mechanisms for a credence goods expert who can be altruistic or spiteful. The expert has private information about her distributional preferences and possibly also about her customer's needs. We introduce a method that allows the customer to offer separate contracts to different preference types and outline when separation is optimal. Furthermore, we demonstrate that the optimality of separating mechanisms is sensitive to minor changes of the customer's utility function. Additionally, we illustrate how our results extend to more than two preference types and discuss possible policy implications. |
| Keywords: | other-regarding preferences, inequality aversion, credence good, principal-agent model, adverse selection, moral hazard |
| JEL: | D63 D64 L13 L15 C72 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2013-27&r=cta |
| By: | A.K.S. Chand (University of Venice, Italy); Sergio Currarini (University of Leicester, University of Venice and CMCC, Italy); Giovanni Ursino (Catholic University of Milan, Italy) |
| Abstract: | We consider a game of information transmission, with one informed decision maker gathering information from one or more informed senders. Private information is (conditionally) correlated across players, and communication is cheap talk. For the one sender case, we show that correlation unambiguously tightens the existence conditions for a truth-telling equilibrium. We then generalize the model to an arbitrary number of senders, and we find that, in this case, the effect of correlation on the incentives to report information truthfully is non monotone, and correlation may discipline senders' equilibrium behavior, making it easier to sustain truth-telling. |
| Keywords: | Cheap Talk, Multiple Senders, Correlation |
| JEL: | C72 D82 D83 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.77&r=cta |
| By: | Mylovanov, Tymofiy; Tröger, Thomas |
| Abstract: | We show that, in environments with independent private values and transferable utility, a privately informed principal can implement a contract that is ex-ante optimal for her. As an application, we consider a bilateral exchange environment (Myerson and Satterthwaite, 1983) in which the principal is one of the traders. If the property rights over the good are dispersed among the traders, the principal will implement a contract in which she is almost surely better off than if there were no uncertainty about her information. The optimal contract is a combination of a participation fee, a buyout option for the principal, and a resale stage with posted prices and, hence, is a generalization of the posted price that would be optimal if the principal's valuation were commonly known. We also provide a condition under which the principal implements the same contract regardless of whether the agents know her information or not. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:437&r=cta |
| By: | Terstiege, Stefan |
| Abstract: | Should contract design induce an agent to conduct a precontractual investigation even though, in any case, the agent will become fully informed after the signing of the contract? This paper shows that imperfect investigations might be encouraged. The result stands in contrast to previous studies, which focus on perfect investigations. The contrast exists because if precontractual investigation is perfect, the benefits of sequential screening vanish. |
| Keywords: | Principal agent; information acquisition; sequential screening |
| JEL: | D82 D83 D86 |
| Date: | 2013–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:429&r=cta |
| By: | Niedermayer, Andras; Wu, Jianjun |
| Abstract: | Inter-firm R&D collaborations through contractual arrangements have become increasingly popular, but in many cases they are broken up without any joint discovery. We provide a rationale for the breakup date in R&D collaboration agreements. More specifically, we consider a research consortium initiated by a firm A with a firm B. B has private information about whether it is committed to the project or a free-rider. We show that under fairly general conditions, a breakup date in the contract is a (secondbest) optimal screening device for firm A to screen out free-riders. With the additional constraint of renegotiation proofness, A can only partially screen out free-riders: entry by some free-riders makes sure that A does not have an incentive to renegotiate the contract ex post. We also propose empirical strategies for identifying the three likely causes of a breakup date: adverse selection, moral hazard, and project non-viability. |
| Keywords: | Optimal R&D contracts; adverse selection; breakup date; R&D collaboration |
| JEL: | C72 D82 L20 |
| Date: | 2013–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:433&r=cta |
| By: | Terstiege, Stefan |
| Abstract: | Why does incentive pay often depend on subjective rather than objective performance evaluations? After all, subjective evaluations entail a credibility issue. While the most plausible explanation for this practice is lack of adequate objective measures, I argue that subjective evaluations might sometimes also be used to withhold information from the worker. I furthermore argue that withholding information is particularly important under circumstances where the credibility issue is small. The statements are derived from a two-stage principal-agent model in which the stochastic relationship between effort and performance is unknown. |
| Keywords: | Performance evaluation; principal-agent; moral hazard |
| JEL: | D83 D86 M12 M52 |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:430&r=cta |
| By: | Kovác, Eugen; Krähmer, Daniel |
| Abstract: | The paper extends the optimal delegation framework pioneered by Holmström (1977, 1984) to a dynamic environment where, at the outset, the agent privately knows his ability to interpret decision relevant private information received later on. We show that any mechanism can be implemented by a sequential menu of delegation sets where the agent first picks a delegation set and then chooses an action within this set. For the uniform{quadratic case, we characterize when sequential delegation is strictly better than static delegation and derive the optimal delegation menu. We provide sufficient conditions so that our results extend beyond the uniform distribution. |
| Keywords: | optimal delegation; sequential screening; dynamic mechanism design; non-transferable utility |
| JEL: | D02 D20 D82 D86 |
| Date: | 2013–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:427&r=cta |
| By: | Niedermayer, Andras; Shneyerov, Artyom |
| Abstract: | We consider optimal pricing by a profit-maximizing platform running a dynamic search and matching market. Buyers and sellers enter in cohorts over time, meet and bargain under private information. The optimal centralized mechanism, which involves posting a bid-ask spread, can be decentralized through participation fees charged by the intermediary to both sides. The sum of buyers’ and sellers’ fees equals the sum of inverse hazard rates of the marginal types and their ratio equals the ratio of buyers’ and sellers’ bargaining weights. We also show that a monopolistic intermediary in a search market may be welfare enhancing. |
| Keywords: | Dynamic random matching; two-sided private information; intermediaries |
| JEL: | D82 D83 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:436&r=cta |
| By: | Arve, Malin |
| Abstract: | This paper studies the interaction between financially constrained and financially strong firms on a procurement market. It characterizes and discusses a procurement agency’s optimal response when faced with financially asymmetric firms. By considering a dynamic setting, both present and future consequences and incentives are taken into account. |
| Keywords: | Asymmetric information; Dual sourcing; Favoritism; Financial constraints; Procurement. |
| JEL: | D82 G30 H57 |
| Date: | 2013–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:441&r=cta |
| By: | Schweizer, Urs |
| Abstract: | The acquisition of information prior to sale gives rise to a hold-up situation quite naturally. Yet, while the bulk of the literature on the hold-up problem considers negotiations under symmetric information where cooperative short-cuts such as split the difference capture the outcome of bargaining, in the present setting, parties negotiate under asymmetric information where the outcome must be derived from a non-cooperative bargaining procedure. To avoid the difficult task of specifying and solving complicated games combining elements of signalling and screening, but to still compare incentives for acquiring information under voluntary versus mandatory disclosure, use of conditions such as incentive, disclosure and participation constraints only is made that are common to all non-cooperative bargaining outcomes. |
| Keywords: | mistake; information acquisition; disclosing information |
| JEL: | K12 K13 |
| Date: | 2013–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:428&r=cta |
| By: | Bekiros, Stelios; Marcellino, Massimiliano |
| Abstract: | Economies with asymmetric information are encompassed by an extension of the model of general competitive equilibrium that does not require an explicit modeling of private information. Sellers have discretion over deliveries on contracts; this is in common with economies with default, incomplete contracts or price rigidities. Competitive equilibria exist and anonymous markets are viable. But, for a generic economy, competitive equilibrium allocations are constrained suboptimal: there exist Pareto improving interventions via linear, anonymous taxes. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiart:urn:hdl:1814/26601&r=cta |
| By: | Ken Urai (Graduate School of Economics, Osaka University); Akihiko Yoshimachi (Department of Commerce, Doshisha University); Kohei Shiozawa (Graduate School of Economics, Osaka University) |
| Abstract: | This paperfs main purpose is to introduce a new concept of the marketfs commodity-information structure (a partition of the set of real goods that are treated as one commodity for market ex- changes) on which we base our ordinary static general equilibrium arguments and settings to analyze asymmetric information problems. We concentrate on the market viability problem that is concerned with describing such situations as adverse selection under informational asymmetry among agents as an equilibrium in general equilibrium frameworks. The market equilibrium-existence conditions, non-equilibrium-existence examples, and Pareto-optimal equilibrium-properties are studied. |
| Keywords: | General Equilibrium Model, Asymmetric Information, Adverse Selection, Market Un- raveling, Market Viability Problem |
| JEL: | C62 D51 D82 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1327&r=cta |
| By: | Loukas Balafoutas; Rudolf Kerschbamer; Matthias Sutter |
| Abstract: | Empirical literature on moral hazard focuses exclusively on the direct impact of asymmetric information on market outcomes, thus ignoring possible repercussions. We present a field experiment in which we consider a phenomenon that we call second-degree moral hazard - the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or the price of the service. In the market for taxi rides, our moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed by their employer. This has an economically important and statistically significant positive effect on the likelihood of overcharging, with passengers in that treatment being about 13% more likely to pay higher-than-justified prices for a given ride. This indicates that second-degree moral hazard may have a substantial impact on service provision in a credence goods market. |
| Keywords: | Natural field experiment, credence goods, asymmetric information, moral hazard, overcharging, overtreatment, taxi |
| JEL: | C93 D82 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2013-26&r=cta |
| By: | Bertsch, Christoph (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | Market distress can be the catalyst of a deleveraging wave, as in the 2007/08 financial crisis. This paper demonstrates how market distress and deleveraging can fuel each other in the presence of adverse selection problems in asset markets. At the core of the detrimental feedback loop is agents' desire to reduce their reliance on distressed asset markets by decreasing their leverage which in turn amplifies the adverse selection problem in asset markets. In the extreme case, this leads to a market breakdown. I find that adverse selection creates both an "ex-ante" inefficiency because it distorts agents' long-term leverage choices and an "interim" inefficiency because it distorts agents' short-term liquidity management. I derive important implications for central bank policy. |
| Keywords: | Leverage; endogenous borrowing constraints; financial crisis; liquidity; asymmetric information; central bank policy |
| JEL: | D82 E58 G01 G20 |
| Date: | 2013–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0277&r=cta |
| By: | FORSTER, Manuel (Université catholique de Louvain, CORE, Belgium; CES, Université Paris 1 Panthéon-Sorbonne, France); MAULEON, Ana (Université catholique de Louvain, CORE, Belgium; CEREC, Université Saint-Louis, Bruxelles, Belgium); VANNETELBOSCH, Vincent (Université catholique de Louvain, CORE, Belgium; CEREC, Université Saint-Louis, Bruxelles, Belgium) |
| Abstract: | We investigate the role of manipulation in a model of opinion formation where agents have opinions about some common question of interest. Agents repeatedly communicate with their neighbors in the social network, can exert some effort to manipulate the trust of others, and update their opinions taking weighted averages of neighbors’ opinions. The incentives to manipulate are given by the agents’ preferences. We show that manipulation can modify the trust structure and lead to a connected society, and thus, make the society reaching a consensus. Manipulation fosters opinion leadership, but the manipulated agent may even gain influence on the long-run opinions. In sufficiently homophilic societies, manipulation accelerates (slows down) convergence if it decreases (increases) homophily. Finally, we investigate the tension between information aggregation and spread of misinformation. We find that if the ability of the manipulating agent is weak and the agents underselling (overselling) their information gain (lose) overall influence, then manipulation reduces misinformation and agents converge jointly to more accurate opinions about some underlying true state. |
| Keywords: | social networks, trust, manipulation, opinion leadership, consensus, wisdom of crowds |
| JEL: | D83 D85 Z13 |
| Date: | 2013–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2013050&r=cta |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50948&r=cta |
| By: | Jocelyn Donze; Trude Gunnes |
| Abstract: | This article studies how a firm fosters formal and informal interaction among its employees to create a collective identity and positively influence their effort. We develop an agency model, in which employees have both a personal and a social ideal for effort. The firm does not observe the personal ideals, which gives rise to an adverse selection problem, but can make its workforce more sensitive to the social ideal by allocating part of working hours to social interaction. We show that there are two reasons why the firm invests in social capital. First, it reinforces the effectiveness of monetary incentives. Second, by creating a shared identity in the workforce, the firm is able to reduce the adverse selection problem. We also show that the firm allocates more time to bonding activities when employees have low personal ideals for effort or when they are more heterogeneous as regards these ideals. |
| Keywords: | agency theory, social interaction, social norms, norm regulation. |
| JEL: | D2 D8 J3 M5 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2013-17&r=cta |
| By: | CREMER, Helmuth (Toulouse School of Economics, France); gahvari, Firouz (Department of Economics, University of Illinois, USA); PESTIEAU, Pierre (CREPP, Université de Liège; Université catholique de Louvain, CORE, Belgium; Toulouse School of Economics, France) |
| Abstract: | This paper studies the role of private and public long term care (LTC) insurance programs in a world in which family assistance is uncertain. Benefits are paid in case of disability but cannot be conditioned (directly), due to moral hazard problems, on family aid. Under a topping up scheme, when the probability of altruism is high, there is no need for insurance. At lower probabilities, insurance is required, thought not full insurance. This can be provided either privately or publicly if insurance premiums are fair, and publicly otherwise. Moreover, the amount of LTC insurance varies negatively with the probability of altruism. With an opting out scheme, there will be three possible equilibria depending on the children’s degree of altruism being “low,” “moderate,” or “very high”. These imply: full LTC insurance with no aid from children, less than full insurance just enough to induce aid, and full insurance with aid. Fair private insurance markets can support the first equilibrium, but not the other two equilibria. Only a public opting-out scheme can attain them by creating incentives for self-targeting and ensuring that only dependent parents who are not helped by their children seek help from the government. |
| Keywords: | long term care, uncertain altruism, private insurance, public insurance, topping up, opting out |
| JEL: | H2 H5 |
| Date: | 2013–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2013047&r=cta |
| By: | Mikhail Golosov; Vasiliki Skreta; Aleh Tsyvinski; Andrea Wilson |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ste:nystbu:13-03&r=cta |
| By: | Schlag, Karl H.; Vida, Péter |
| Abstract: | Games with multiple Nash equilibria are believed to be easier to play if players can communicate. We present a simple model of communication in games and investigate the importance of when communication takes place. Sending a message before play captures talk about intentions, after play captures talk about past commitments. We focus on equilibria where messages are believed whenever possible. Applying our results to Aumann’s Stag Hunt game we find that communication is useless if talk is about commitments, while the efficient outcome is selected if talk is about intentions. This confirms intuition and empirical findings in the literature. |
| Keywords: | Pre-play communication; cheap talk; coordination. |
| JEL: | C72 D83 |
| Date: | 2013–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:438&r=cta |
| By: | Dominik Erharter |
| Abstract: | This paper studies how external incentives can help agents to coordinate in summary-statistic games. Agents follow a myopic best-reply rule and face a trade-off between efficiency and strategic uncertainty. A principal can help agents to coordinate on the Pareto optimal equilibrium by monitoring an appropriate number of agents. The optimal monitoring policy is 'minimally-invasive' - for every strategy profile of the agents, the principal either monitors just enough agents to make high effort a best-reply or does not monitor at all. Furthermore, given the principal's payoffs are supermodular and increasing at an increasing rate, the optimal monitoring policy is monotone in the number of agents who choose high effort. |
| Keywords: | adaptive learning, Markov decision process, coordination failure, order-statistic game |
| JEL: | C73 C62 D86 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2013-28&r=cta |
| By: | Xuan Tam (Cambridge University); Eric Young (University of Virginia); Kartik Athreya (Federal Reserve Bank of Richmond) |
| Abstract: | Starting in the early 1990s credit scoring became widespread and central in credit granting decisions. Credit scores are scalar representations of default risk. They are used, in turn, to price credit, and as a result alter household borrowing and default decisions. We build on recent work on defaultable consumer credit under asymmetric information to develop a quantitative theory of credit scores. We construct and solve a rich and quantitatively-disciplined lifecycle model of consumption in which households have access to defaultable debt, and lenders are asymmetrically informed about household characteristics relevant to predicting default. We then allow lenders to keep record of inferences on the hidden type of a borrower, as well as a binary 'flag' indicating a past default. These inferences arise endogenously from a signalling game induced by borrowers' need to obtain loans. We show how lenders’ inferences evolve over the lifecycle as a function of household behavior in a way that can be naturally interpreted as 'credit scores.' In particular, we first show that lenders' assessments that a household has relatively low default risk matter significantly for the interest rates households pay. We then show that such assessments rise most sharply an d interest rates paid by borrowers fall most sharply (on the order of 5-6 percentage points) when the bankruptcy flag is removed, consistent with work of Musto (2005). Lastly, we compare allocations across information regimes to provide a measure of the social value of credit scores, and the dependence of these measures on lenders' ability to observe borrower characteristics. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:382&r=cta |