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on Contract Theory and Applications |
| By: | Xi Wu; Li Gan |
| Abstract: | Conventional theory for private information of adverse selection predicts a positive correlation between insurance coverage and ex post risk. This paper shows the opposite in the life insurance market despite the clear evidence of private information on mortality risk. The reason for this contradictory result is the existence of multiple dimensions of private information. The paper discusses how the private information on insurance preference offsets the effect of the private information on mortality risk. A mixture density model is applied to disentangle these two effects. |
| JEL: | D82 G22 I13 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19629&r=cta |
| By: | Rahul Deb (University of Toronto); Debasis Mishra (Indian Statistical Institute, New Delhi) |
| Abstract: | We study mechanism design in a setting where agents know their types but are uncertain about the utility from any alternative. The lnal realized utility of each agent is observed by the principal and can be contracted upon. In such environments, the principal is not restricted to using only transfers but can employ security contracts which determine each agent's payoff as a function of their realized utility and the profile of announced types. We show that using security contracts instead of transfers expands the set of (dominant strategy) implementable social choice functions. Our main result is that in a lnite type space, every social choice function that can be implemented using a security contract can also be implemented using a royalty contract. Royalty contracts are simpler and commonly used security contracts, in which agents initially pay a transfer and keep a fraction of their realized utility. We also identify a condition called acyclicity that is necessary and suncient for implementation in these environments. |
| Keywords: | dominant strategy implementation, acyclicity, security contracts, royalty contracts, cycle monotonicity |
| JEL: | D44 D71 D82 D86 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ind:isipdp:13-05&r=cta |
| By: | Balafoutas, Loukas (University of Innsbruck); Kerschbamer, Rudolf (University of Innsbruck); Sutter, Matthias (European University Institute) |
| 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: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7714&r=cta |
| By: | C. Kirabo Jackson; Henry S. Schneider |
| Abstract: | Moral hazard is endemic to employment relationships and firms often use performance pay and managerial control to address this problem. While performance pay has received much empirical attention, managerial control has not. We analyze data from a managerial-control field experiment in which an auto-repair firm provided detailed checklists to mechanics and monitored their use. Revenue was 20 percent higher under the experiment. We compare this effect to that of quasi-experimental increases in mechanic commission rates. The managerial-control effect is equivalent to that of a 10 percent commission increase. We find evidence of complementarities between the two, suggesting benefits from an all-of-the-above approach. We also find evidence of incentive gaming under performance pay. |
| JEL: | D0 D82 D86 H0 J0 J33 J41 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19645&r=cta |
| By: | Debasis Mishra (Indian Statistical Institute, New Delhi); Anup Pramanik (Indian Statistical Institute, New Delhi); Souvik Roy (Indian Statistical Institute, New Delhi) |
| Abstract: | We consider implementation of a deterministic allocation rule using transfers in quasi-linear private values environments. We show that if the type space is a multidimensional domain satisfying some ordinal restrictions, then an allocation rule is implementable in such a domain if and only if it satisfies a familiar and simple condition called 2-cycle monotonicity. Our ordinal restrictions cover type spaces which are non-convex, e.g., the single peaked domain and its generalizations. We apply our result to show that in the single peaked domain, a local version of 2-cycle monotonicity is necessary and sufficient for implementation and every locally incentive compatible mechanism is incentive compatible. |
| Keywords: | implementation, 2-cycle monotonicity, revenue equivalence, local incentive compatibility |
| JEL: | D44 D71 D82 D86 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ind:isipdp:13-07&r=cta |
| By: | Qingmin Liu; Konrad Mierendorff; Xianwen Shi |
| Abstract: | We study auction design in the standard symmetric independent private values environment, where the seller lacks the commitment power to withhold an unsold object off the market. The seller has a single object and can conduct an infinite sequence of standard auctions with reserve prices to maximize her expected profit. In each period, the seller can commit to a reserve price for the current period but cannot commit to future reserve prices. We analyze the problem with limited commitment through an auxiliary mechanism design problem with full commitment, in which an additional constraint reflects the sequential rationality of the seller. We characterize the maximal profit achievable in any perfect Bayesian equilibrium in the limit as the period length vanishes. The static full commitment profit is not achievable but the seller can always guarantee the profit of an efficient auction. If the number of buyers exceeds a cutoff which is small for many distributions, the efficient auction is optimal. Otherwise, the efficient auction is not optimal, and we give conditions under which the optimal solution consists of an initial auction with a non-trivial reserve price followed by a continuously decreasing price path. The solution is described by a simple ordinary differential equation. Our analysis combines insights from bargaining, auctions, and mechanism design. |
| Keywords: | Auctions, Commitment, Bargaining, Mechanism Design, Coase Conjecture |
| JEL: | D44 C73 C78 |
| Date: | 2013–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-504&r=cta |
| By: | Yi-Fang Liu; Chao Xu; Wei Zhang; J{\o}rgen Vitting Andersen |
| Abstract: | This paper studies the switching of trading strategies and the effect it can have on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First we verify that our model is able to reproduce some of the typical properties (stylized facts) of real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that the returns of all the uninformed agents are negatively related to the percentage of switchers in the market. In addition, we find that the market volatility is higher with the presence of switchers in the market and that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to switch at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1311.4274&r=cta |
| By: | Bharat Ramaswami (Indian Statistical Institute, New Delhi); Sangeeta Bansal (Centre for International Trade and Development, JNU, New Delhi); Sujoy Chakravarty (Centre for Economic Studies and Planning, JNU, New Delhi) |
| Abstract: | Much of the debate between the European and U.S. positions about labeling of genetically modified foods has been whether consumers perceive labels as a source of information or a signal to change behavior. In this paper, we provide an experimental framework for examining these roles of information and signaling. While previous studies have focused on the impact of labels on consumer behavior, our interest is also what happens prior to the expression of aversion to GM-labeled foods. In particular, the experiment design allows the researcher to estimate a lower bound of the informational impact of labels on GM food aversion. The other novel feature of this paper is that unlike earlier studies, it uses subjects from a developing country. |
| Keywords: | Genetically modified foods; experimental methods; informational impact of labels; signaling impact of labels |
| JEL: | C9 Q13 Q16 Q18 L15 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:isipdp:13-01&r=cta |
| By: | Vaidyanathan Venkateswaran (Pennsylvania State University); Hugo A. Hopenhayn (UCLA); Joel David (USC) |
| Abstract: | Capital markets function as aggregators of private information and in an environment with imperfectly informed firms, guide investment and production decisions. We study the implications of poorly functioning capital markets for the misallocation of factors of production across heterogeneous firms. Our theoretical framework combines a noisy rational expectations model of asset markets with a standard model of production by heterogeneous firms. We use a model calibrated to cross-country stock market and firm-level data to investigate the extent to which differences in capital market conditions can explain TFP differences across countries. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:455&r=cta |
| By: | Irina Telyukova (UC San Diego); Leena Rudanko (Boston University) |
| Abstract: | House prices fall as the time on the market passes. We document this negative duration dependence for the US housing market using house-level data on listed prices. We interpret the pattern as a result of sellers' imperfect information about the "appeal" of houses to potential buyers. When listing a house sellers have beliefs about this appeal, but these beliefs get downgraded as the house remains on the market. We formalize these ideas in an equilibrium model of search and learning in the housing market, which builds on the work of Gonzalez and Shi (2009). We use the model to derive further testable predictions relating the degree of duration dependence in prices to cross-sectional variation in the activity-level of different housing markets. In the model learning takes place faster in more active markets, implying stronger duration dependence in prices. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:490&r=cta |