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on Contract Theory and Applications |
| By: | Benndorf, Volker; Kübler, Dorothea; Normann, Hans-Theo |
| Abstract: | We study the voluntary revelation of private, personal information in a labor-market experiment with a lemons structure where workers can reveal their productivity at a cost. While rational revelation improves a worker's payout, it imposes a negative externality on others and may trigger further unraveling. Our data suggest that subjects reveal their productivity less frequently than predicted in equilibrium. A loaded frame emphasizing personal information about workers' health leads to even less revelation. We show that three canonical behavioral models all predict too little rather than too much revelation: level-k reasoning, quantal-response equilibrium, and to a lesser extent inequality aversion. -- |
| Keywords: | information revelation,privacy,lemons market,level-k reasoning,quantalresponse equilibrium,inequality aversion |
| JEL: | C72 C90 C91 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbmbh:spii2013208&r=cta |
| By: | Manuel Förster (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique); Ana Mauleon (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique, CEREC - Université Saint-Louis - Bruxelles); Vincent Vannetelbosch (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique, CEREC - Université Saint-Louis - Bruxelles) |
| 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 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00881145&r=cta |
| By: | Santiago Oliveros |
| Abstract: | We study aggregation of information when voters can collect information of different precision, with increased precision entailing an increasing marginal cost. In order to properly understand the incentives to collect information we introduce another dimension of heterogeneity: on top of the ideological dimension we allow for different levels of intensity in preferences. Contrary to traditional models of endogenous information, in equilibrium, there are voters collecting information of different qualities. After characterizing all symmetric Bayesian equilibria in pure strategies for arbitrary rules of election and fairly general distribution of types. We study information aggregation in symmetric electorates and show that information aggregates even when voters collect information of different qualities. |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:733&r=cta |
| By: | Biais, Bruno; Foucault, Thierry; Moinas, Sophie |
| Abstract: | High-speed market connections and information processing improve …nancial institutions'ability to seize trading opportunities, which raises gains from trade. They also enable fast traders to process information before slow traders, which generates adverse selection. We fi…rst analyze trading equilibria for a given level of investment in fast-trading technology and then endogenize this level. Investments can be strategic substitutes or complements. In the latter case, investment waves can arise, where institutions invest in fast-trading technologies just to keep up with the others. When some traders become fast, it increases adverse selection costs for all, i.e., it generates negative externalities. Therefore equilibrium investment can exceed its welfare-maximizing counterpart. |
| Keywords: | high frequency trading; liquidity; welfare |
| JEL: | G10 |
| Date: | 2013–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0968&r=cta |
| By: | David S. Ahny; Santiago Oliveros |
| Abstract: | Consider the problem of deciding a winner among three alternatives when voters have common values, but private information regarding the values of the alternatives. We compare approval voting with other scoring rules. For any finite electorate, the best equilibrium under approval voting is more efficient than either plurality rule or negative voting. If any scoring rule yields a sequence of equilibria that aggregates information in large elections, then approval voting must do so as well. |
| Date: | 2013–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:732&r=cta |
| By: | Mark Flood; Jonathan Katz; Stephen J Ong; Adam Smith |
| Abstract: | We elucidate the tradeoffs between transparency and confidentiality in the context of financial regulation. The structure of information in financial contexts creates incentives with a pervasive effect on financial institutions and their relationships. This includes supervisory institutions, which must balance the opposing forces of confidentiality and transparency that arise from their examination and disclosure duties. Prudential supervision can expose confidential information to examiners who have a duty to protect it. Disclosure policies work to reduce information asymmetries, empowering investors and fostering market discipline. The resulting confidentiality/transparency dichotomy tends to push supervisory information policies to one extreme or the other. We argue that there are important intermediate cases in which limited information sharing would be welfare-improving, and that this can be achieved with careful use of new techniques from the fields of secure computation and statistical data privacy. We provide a broad overview of these new technologies. We also describe three specific usage scenarios where such beneficial solutions might be implemented. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1312&r=cta |
| By: | Niu, Zilong |
| Abstract: | This article studies how relative performance concerns affect institutional investors' information choices in the context of a multi-security market. I show that due to relative performance concerns and learning capacity constraint, institutional investors tend to acquire the same piece of information and the same asset as their peers. I also show that the change of distribution of capacity constraint can affect the price efficiency and cost of capital, but only through its effect on investors' average capacity constraint. |
| Keywords: | relative performance concerns, attention allocation, complementarities in information acquisition |
| JEL: | D82 G14 G23 |
| Date: | 2013–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51194&r=cta |
| By: | Jeong-Bon Kim (City University of Hong Kong); Li Li (University of International Business and Economics and Hong Kong Institute for Monetary Research); Mary L. Z. Ma (York University); Frank M. Song Author-Workplace-Name: University of Hong Kong |
| Abstract: | This study predicts and finds that chief executive officer (CEO) risk-taking incentives induced by stock option compensation increase a bank's contribution to systemic distress risk and systemic crash risk. We also predict and find that this CEO incentive systemic risk relation operates through three channels (i) a bank's engagement in non-interest income-generating activities, (ii) investments in innovative financial products such as collateralized debt obligations and credit default swaps, and (iii) maturity mismatch associated with on short-term debt financing. Finally, the CEO incentive-systemic risk relation is moderated by information transparency, bank size, market liquidity, and financial crisis. We also discuss relevant policy implications. |
| JEL: | G01 G21 G32 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:182013&r=cta |
| By: | Éric Langlais; Marie Obidzinski |
| Abstract: | This paper revisits the issue of law enforcement and the design of monetary sanctions when the public law enforcer's incentives depart from those of a benevolent authority, which is the most frequent assumption made in the literature on crime deterrence. We rst consider the case of an elected enforcer. We nd that when the harm generated by offenses is quite small relative to the average private bene ts, equilibrium with weak enforcement/low sanction prevails. Instead, when the harm generated by offenses is high relative to the average private bene ts, it is the equilibrium with strong enforcement/high sanctions that prevails. Therefore, we provide an explanation for the empirical puzzle highlighted by Lin(2007): elected enforcers punish major (minor) crimes more (less) severely than the benevolent social planer. The case of an appointed enforcer prone to rent seeking is also considered. The monetary sanction under rent seeking is closer to the utilitarian level, as compared with the one under election. |
| Keywords: | law enforcement, deterrence, monetary sanctions, punishment, electoral competition, democracy, rent seeking, dictature |
| JEL: | D72 D73 H1 K14 K23 K4 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-35&r=cta |
| By: | Foucault , Thierry; Hombert , Johan; Rosu, Ioanid |
| Abstract: | Speed matters: we show that an investor's optimal trading strategy is significantly different when he observes news faster than others versus when he does not, holding the precision of his signals constant. When the investor has fast access to news, his trades are much more sensitive to news, account for a much bigger fraction of trading volume, and forecast short run price changes. Moreover, in this case, an increase in news informativeness increases liquidity, volume, and the fast investor's share of trading volume. Last, price changes are more correlated with news and trades contribute more to volatility when the investor has fast access to news. |
| Keywords: | Informed trading; news; volatility; volume; price discovery; high frequency trading |
| JEL: | D82 D83 G14 |
| Date: | 2013–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0975&r=cta |
| By: | Chen, Yongmin; Gu, Dingwei; Yao, Zhiyong |
| Abstract: | Credit rating agencies play a crucial role in financial markets. There are two competing views regarding their behavior: some argue that they engage in rating inflation, while others suggest that they deflate ratings. This article offers a rationale that reconciles the two opposite arguments. We find that both rating inflation and rating deflation can occur in equilibrium. Furthermore, we show that credit rating is procyclical: rating inflation is more likely to happen in a boom while rating deflation is more likely to happen in a recession. |
| Keywords: | rating inflation, rating deflation, procyclical rating |
| JEL: | D82 G10 G24 |
| Date: | 2013–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51159&r=cta |
| By: | Christoph Diehl; Christoph Kuzmics (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | Chakraborty and Harbaugh (2010) prove the existence of influential cheap talk equilibria in one sender one receiver games when the state is multidimensional and the preferences of the sender are state-independent. We show that only the babbling equilibrium survives the introduction of any small degree of uncertainty about the sender’s preferences in the spirit of Harsanyi (1973). None of the influential equilibria are robust to this kind of uncertainty. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:489&r=cta |
| By: | Frank Jr. , Douglas H.; Obloj , Tomasz |
| Abstract: | This paper explores conflicting implications of firm-specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more sophisticated “gaming” of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high-FSHC managers. Finally, profit losses increase more rapidly for high-FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits. |
| Keywords: | FSHC; firm-specific human capital; firm performance; incentives; multiunit retail bank |
| JEL: | G00 |
| Date: | 2013–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0999&r=cta |