nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒11‒14
five papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Marking to Market and Inefficient Investment Decisions By Otto, Clemens A.; Volpin , Paolo F.
  2. Incentive compensation for risk managers when effort is unobservable By Paul H. Kupiec
  3. Selling Cookies By Bergemann, Dirk; Alessandro Bonatti
  4. A Multi-attribute Yardstick Auction without Prior Scoring By Jens Leth Hougaard; Kurt Nielsen; Athanasios Papakonstantinou
  5. Risky Investments with Limited Commitment By Thomas F. Cooley; Ramon Marimon; Vincenzo Quadrini

  1. By: Otto, Clemens A.; Volpin , Paolo F.
    Abstract: We examine how mark-to-market accounting affects investment decisions in an agency model with reputation concerns. Reporting the current market value of a firm's assets in the financial statements can serve as a disciplining device because the information contained in the market price provides a benchmark against which the agent's actions can be evaluated. However, the fact that market prices are informative can have a perverse effect on the investment decisions: The agent may prefer to ignore relevant but contradictory private information whose revelation would damage his reputation. Surprisingly, this effect makes mark-to-market accounting less desirable as market prices become more informative.
    Keywords: Accounting rules; marking to market; historical cost accounting; investment decisions; reputation; agency problem
    JEL: D81 G31 M41
    Date: 2013–06–29
  2. By: Paul H. Kupiec (American Enterprise Institute)
    Abstract: In a financial intermediary, risk managers can expend effort to reduce loan probability of default and loss given default, but effort is unobservable. Incentive compensation (IC) can induce manager effort. When deposit insurance is subsidized, the demand for risk management declines. Regulatory policy should then reinforce incentives to offer risk mangers appropriate IC contracts.
    Keywords: AEI Economic Policy Working Paper Series
    JEL: A G
    Date: 2013–10
  3. By: Bergemann, Dirk (Cowles Foundation, Yale University); Alessandro Bonatti (Sloan School of Management, MIT)
    Abstract: We analyze data pricing and targeted advertising. Advertisers seek to tailor their spending to the value of each consumer. A monopolistic data provider sells cookies. informative signals about individual consumers' preferences. We characterize the set of consumers targeted by the advertisers and the optimal monopoly price of cookies. The ability to influence the composition of the targeted set provides incentives to lower prices. Thus, the price of data decreases with the reach of the database and increases with the fragmentation of data sales. We characterize the optimal policy for selling information and its implementation through nonlinear pricing of cookies.
    Keywords: Data providers, Information sales, Targeting, Online advertising, Media markets
    JEL: D44 D82 D83
    Date: 2013–10
  4. By: Jens Leth Hougaard (Department of Food and Resource Economics, University of Copenhagen); Kurt Nielsen (Department of Food and Resource Economics, University of Copenhagen); Athanasios Papakonstantinou (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: We analyze a simple multi-attribute procurement auction that uses yardstick competition to settle prices. Upon receiving the submitted bids, a mediator computes the yardstick prices (bids) by a linear weighting of the other participants’ bids. The auction simplifies the procurement process by reducing the principal’s articulation of his preferences to simply choosing the most preferred offer as if it was a market with posted prices. Although truthful reporting does not constitute a Nash equilibrium, we demonstrate by simulations that truth-telling may indeed be some kind of focal point. By focusing on the initial winner in case everyone tells the truth, we show that even if the other bidders are allowed to misreport by as much as 20% of their true cost, the initial winner remains the winner in 80% of all simulated auctions in the case of 3 competing bidders. Furthermore, as it takes aggressive bidding to become the new winner of the auction, we show that the new winners typically win with a loss. Combining the two results we have that, almost independently of the number of competing bidders and the degree of misreporting, approximately 90% of all simulations will either have the same initial winner or a new winner who wins the auction with a loss in its utility.
    Keywords: Multi-attribute auction, yardstick competition, articulation of preferences, simulation
    Date: 2013–05
  5. By: Thomas F. Cooley; Ramon Marimon; Vincenzo Quadrini
    Abstract: Over the last three decades there has been a dramatic increase in the size of the financial sector and in the compensation of financial executives. This increase has been associated with greater risk-taking and the use of more complex financial instruments. Parallel to this trend, the organizational structure of the financial sector has changed with the traditional partnership replaced by public companies. The organizational change has increased the competition for managerial talent, which may have weakened the commitment between investors and managers. We show how increased competition and the weaker commitment can raise the managerial incentives to undertake risky investment. In the general equilibrium, this change results in higher risk-taking, a larger and more productive financial sector with greater income inequality (within and across sectors), and a lower market valuation of financial institutions.
    JEL: E25 E44 G01 G3
    Date: 2013–10

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