nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2013‒11‒29
23 papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Decentralised Bilateral Trading in a Market with Incomplete Information By Kalyan Chatterjee; Kaustav Das
  2. Do women self-select as good borrowers? By Irene Comeig; Ainhoa Jaramillo-Gutiérrez; Federico Ramírez
  3. Managerial Economics of Cheap Talk By Saori Chiba; Kaiwen Leong
  5. Hide or show? Endogenous observability of private precautions against crime when property value is private information By Baumann, Florian; Denter, Philipp; Friehe, Tim
  6. Unique equilibrium in contests with incomplete information By Christian Ewerhart; Federico Quartieri
  7. Competition and uncertainty in a paper's news desk By Ascensi—n Andina D’az
  8. Bailouts and Systemic Insurance By Giovanni Dell'Ariccia; Lev Ratnovski
  9. Eliciting Private Information with Noise: The Case of Randomized Response By Andreas Blume; Ernest K. Lai; Wooyoung Lim
  10. Like biases and information in elections By Ascensi—n Andina D’az
  11. Signaling in Online Credit Markets By Kosuke Uetake; Ken ONISHI; Kei Kawai
  12. Financial constraints and moral hazard: The case of franchising By Fan, Ying; Kühn, Kai-Uwe; Lafontaine, Francine
  13. Migration to the Public Cloud By Tong Wang
  14. JOB SEARCH COSTS AND INCENTIVES By Andriy Zapechelnyuk; Ro'i Zultan
  15. The Hidden Value of Lying: Evasion of Guilt in Expert Advice By Kiryl Khalmetski
  16. Consumer flexibility, data quality and targeted pricing By Sapi, Geza; Suleymanova, Irina
  17. CAN HIGHER REWARDS LEAD TO LESS EFFORT? INCENTIVE REVERSAL IN TEAMS By Esteban Klor; Sebastian Kube; Eyal Winter; Ro'i Zultan
  18. The Value of Familiarity: Effects of Experience, Knowledge and Signals on Willingness to Pay for a Public Good By Jacob Lariviere; Mikołaj Czajkowski; Nick Hanley; Margrethe Aanesen; Jannike Falk-Petersen; Dugald Tinch
  19. The contractor game: a theoretical and experimental analysis By Nejat Anbarci; Nick Feltovich; Mehmet Y. Gurdal
  20. Lying in Politics: Evidence from the US By Alessandro Bucciol; Luca Zarri
  21. A new solution for the moral hazard problem in team production By Guillen, Pablo; Merrett, Danielle; Slonim, Robert
  22. Liquidity and Governance By Kerry Back; Tao Li; Alexander Ljungqvist
  23. Reciprocity, Matching, and Wage Competition By Maria Micevski

  1. By: Kalyan Chatterjee (Department of Economics, Pennsylvania State University.); Kaustav Das (Department of Economics, University of Exeter)
    Abstract: We study a model of decentralised bilateral interactions in a small market where one of the sellers has private information about her value. There are two identical buyers and another seller, whose valuation is commonly known to be in between the two possible valuations of the informed seller. We consider two in?nite horizon games, with public and private simultaneous one-sided o¤ers respectively and simultaneous responses. We show that there is a stationary perfect Bayes?equilibrium for both models such that prices in all transactions converge to the same value as the discount factor goes to 1.
    Keywords: Bilateral Bargaining, Incomplete information, Outside options, Coase conjecture.
    JEL: C78 D82
    Date: 2013
  2. By: Irene Comeig (Department of Finance, U. of Virginia, USA & U. of Valencia, Spain); Ainhoa Jaramillo-Gutiérrez (LEE-Department of Economics, Universitat Jaume I-Castellón, ERICES-University of Valencia, Spain); Federico Ramírez (Department of Finance, University of Valencia, Spain)
    Abstract: A key question in credit markets is how to disclose borrowers’ private information. Typically, banks offer incentive compatible contracts (with collateral) to induce borrowers to disclose their private information. However, if men and women systematically differ in their risk taking behavior, contract choices in the self selection mechanism with collateral may differ. If women are particularly averse to financial risk, they may be classified as high risk borrowers thus not receiving the loan designed for the good borrowers, or even suffering credit rationing. In this paper, we conduct a laboratory experiment on financial decision making in three different European countries designed to study systematic gender differences in self selection. Our results show that incentive compatible contracts with collateral fail to disclose women private information, while they disclose men private information. Thus, low risk women borrowers do not self select as “theoretical” good borrowers. Beside this contribution, our results show that gender differences arise when subjects face low failure probabilities. We provide some suggestive evidence on differences in probability weighting between men and women.
    Keywords: adverse selection, behavioral finance, gender, credit screening, self-selection
    JEL: C91 D03 D82 G32
    Date: 2013
  3. By: Saori Chiba (Dept. of Management, Università Ca' Foscari Venice); Kaiwen Leong (Nanyang Technological University)
    Abstract: Consider an uninformed decision maker (DM) who communicates with a partially informed speaker (S) through cheap talk. DM can choose a project to implement or the outside option of no project. We show that if the agentsÕ ex-ante rankings over projects do not coincide, then this conflict of interest can reduce SÕs incentive to pander and hence facilitate information transmission. Intuitively, SÕs ex-ante bias and the incentive to pander affect SÕs information revelation in opposite directions and hence offset each other. We also explore the relationship between information transmission and managerial issues such as delegation, disclosure, and interpersonal authority.
    Keywords: Cheap Talk, Delegation, Disclosure, Interpersonal Authority, Pandering
    JEL: D82 D83 M10
    Date: 2013–11
  4. By: Ezra Einy (BGU); Ori Haimanko (BGU); Ram Orzach (Oakland University, Rochester, MI 48309, USA); Aner Sela (BGU)
    Abstract: We study two-player common-value all-pay auctions in which the players have ex-ante asymmetric information represented by finite partitions of the set of possible values of winning. We consider two families of such auctions: in the first, one of the players has an information advantage (henceforth, IA) over his opponent, and in the second, no player has an IA over his opponent. We show that there exists a unique equilibrium in auctions with IA and explicitly characterize it; for auctions without IA we find a sufficient condition for the existence of equilibrium in monotonic strategies. We further show that, with or without IA, the ex-ante distribution of equilibrium effort is the same for every player (and hence the players' expected efforts are equal), although their expected payoffs are different. In auctions with IA, the players have the same ex-ante probability of winning, which is not the case in auctions without IA.
    Keywords: Common-value all-pay auctions, asymmetric information, information advantage
    JEL: C72 D44 D82
    Date: 2013
  5. By: Baumann, Florian; Denter, Philipp; Friehe, Tim
    Abstract: This paper analyzes a contest in which defenders move first, have private information about the value of the objects they are trying to protect, and determine the observability of their defense efforts. The equilibrium consistent with the intuitive criterion depends on the distribution of defender types, the magnitude of the difference between defender types, and the asymmetry between defender and aggressor regarding the valuation of the objects at stake in the contest. Our setting captures key characteristics of the interaction between households and thieves, focusing on the classic distinction between observable and unobservable private precautions against crime. An analysis of welfare implications determines that a setting in which information about the value of the protected objects is private results in a better outcome than a complete-information scenario. --
    Keywords: Contest,Private Information,Timing,Crime,Private Precaution Against Crime
    JEL: D62 D82 K42
    Date: 2013
  6. By: Christian Ewerhart; Federico Quartieri
    Abstract: Szidarovszky and Okuguchi (Games and Economic Behavior, 1997) have provided useful conditions for the existence of a unique purestrategy Nash equilibrium in rent-seeking games of complete information. In this paper, we generalize their results to contests with incomplete information. Two assumptions are imposed on the information structure. First, the players?' valuations of winning are assumed to be multiplicatively separable (which includes the polar cases of private values and pure common value). Second, it is assumed that a player is never certain to be the only one with a positive budget. It is also shown that, unless the budgets of all players are zero in all states, at least two players realize a positive expected net rent.
    Keywords: Contests, equilibrium existence and uniqueness, incomplete information, rent dissipation
    JEL: D72 C72
    Date: 2013–11
  7. By: Ascensi—n Andina D’az (Department of Economic Theory, Universidad de M‡laga)
    Abstract: We propose a model in which different types of journalists have superior information to a newspaper's editor. Journalists compete for having their report published, but when writing their reports, they are uncertain about the preferences of the editor. We analyze the effects of competition and uncertainty on the incentives of the journalists to write informative reports. We obtain that there is not a unique prediction as to the effects of competition, but the correct answer depends on how much uncertainty there is. Thus, if the editor is perceived to be honest, we show there is an equilibrium in which all the journalists write informative reports, provided that a certain level of competition is met. In contrast, if the editor is perceived to be biased, partial revelation of information exists, even in the absence of competition. Last, high levels of uncertainty inevitably results in uninformative reporting.
    Keywords: Information transmission, media bias, competing journalists, uncertainty
    JEL: D72 D82
    Date: 2013–11
  8. By: Giovanni Dell'Ariccia; Lev Ratnovski
    Abstract: We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks creates moral hazard—increases bank risk taking. However, when a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high. The optimal policy may then be not to try to avoid bailouts, but to make them “effectiveâ€: associated with lower rents.
    Keywords: Banking crisis;Financial intermediation;Moral hazard;Banking systems;Risk management;Economic models;Bailouts, banking crises, moral hazard, systemic risk, contagion, bank resolution
    Date: 2013–11–12
  9. By: Andreas Blume; Ernest K. Lai; Wooyoung Lim
    Abstract: The paper formalizes Warner's (1965) randomized response technique (RRT) as a game and implements it experimentally, thus linking game theoretic approaches to randomness in communication with survey practice in the field and a novel implementation in the lab. As predicted by our model and in line with Warner, the frequency of truthful responses is significantly higher with randomization than without. The model predicts that randomization weakly improves information elicitation, as measured in terms of mutual information, although, surprisingly, not always by RRT inducing truth-telling. Contrary to this prediction, randomization significantly reduces the elicited information in our experiment.
    Keywords: Randomized Response, Lying Aversion, Stigmatization Aversion, Mutual Information, Laboratory Experiments
    JEL: C72 C92 D82 D83
    Date: 2013–07
  10. By: Ascensi—n Andina D’az (Department of Economic Theory, Universidad de M‡laga)
    Abstract: We model an election between two downsian candidates and a third deterministic one. There is uncertainty about the state of the world. Candidates receive signals on the state and propose a policy to implement. There are two types of voters: social concerned and biased. For both the cases in which the deterministic candidate is biased towards the policy preferred by the majority or the minority group, we characterize all the government structures (coalition governments) that allow for information transmission by the two candidates. Our results show that the third candidate helps to restore the informativeness of the electoral process and that, contrary to expected, information transmission occurs more frequently when the deterministic candidate is biased towards the policy preferred by the majority than when he is against it. Loosely put, the more populist this candidate, the better.
    Keywords: Multi-party electoral competition, heterogeneous voters, information transmission
    JEL: D72 D82
    Date: 2013–11
  11. By: Kosuke Uetake (Northwestern University); Ken ONISHI (Northwestern University); Kei Kawai (New York University)
    Abstract: This paper studies how signaling can facilitate the functioning of a market with classical adverse selection problems. Using data from, an online credit market where loans are funded through auctions, we provide evidence that reserve interest rates that borrowers post can serve as a signaling device. We then develop and estimate a structural model of borrowers and lenders where low reserve interest rates can credibly signal low default risk. Announcing a high reserve interest rate increases the probability of receiving funding at the cost of higher expected interest payments conditional on obtaining a loan. Borrowers regard this trade-off differentially, which results in a separating equilibrium. Using the estimated parameters of the model, we compare the credit supply curve and welfare under three alternative market designs in our counterfactual policy experiment -- a market with signaling, a market without signaling, and a market with no asymmetric information. We find that the cost of adverse selection can be as much as 16% of the total surplus created under no asymmetric information, up to 95% of which can be restored with signaling. We also estimate the credit supply curves for each of the three market designs and find backward-bending supply curves for some of the markets, consistent with the prediction of Stiglitz and Weiss (1981).
    Date: 2013
  12. By: Fan, Ying; Kühn, Kai-Uwe; Lafontaine, Francine
    Abstract: Financial constraints are an important impediment to the growth of small businesses. We study theoretically and empirically how the financial constraints of agents affect their decisions to exert effort, and, hence the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in a region delays chains' entry into franchising by 0.28 years on average, 9 percent of the average waiting time, and slows their growth by around 10 percent, leading to a 10 percent reduction in franchised chain employment. --
    Keywords: R&D,contracting,incentives,principal-agent,empirical,collateralizable housing wealth,entry,growth
    JEL: L14 L22 D22 D82 L8
    Date: 2013
  13. By: Tong Wang
    Abstract: Along with the development of cloud computing technology, website owners begin to consider migrating their website from private in-house server to public cloud servers. In this paper, we use a principal-agent model to analyze the underlying economic trade-offs of such migration and then extend it into a dynamic environment. Our results indicate that the trade-off between market information precision and rent extraction affects the decision choice between private server and public cloud in the short run; in the long run, the rent extraction effect diminishes and the demand for public cloud increases. In a long run equilibrium, private servers exist but are constrained to a comparatively low level.
    Keywords: Cloud Computing, Agency Cost, Dynamic Migration.
    Date: 2013–06
  14. By: Andriy Zapechelnyuk (School of Economics and Finance, Queen Mary, University of London, Mile End Road, London E1 4NS, UK); Ro'i Zultan (BGU)
    Abstract: The costs of searching for a job vacancy are typically associated with fric- tion that deters or delays employment of potentially productive individuals. We demonstrate that in a labor market with moral hazard where effort is non- contractible, job search costs play a positive role, whose effect may outweigh the negative implications. As workers are provided incentives to exert effort by the threat of losing their job and having to search for a new vacancy, a reduction in job search costs leads to fewer employees willing to exert effort. The overall lower productivity will make more individuals and firms opting to stay out of the labor market, resulting in lower employment and decreased welfare. Eventually, a reduction of jobs search costs below a certain level results in collapse of the labor market.
    Keywords: job search, moral hazard, labor market, unemployment insurance
    JEL: D83 J64 J65
    Date: 2013
  15. By: Kiryl Khalmetski
    Abstract: I develop a model of strategic communication between an uninformed receiver and a partially informed sender who is averse to lying. The sender's cost of lying is endogenous, depending on the receiver's beliefs induced by the sender's message, rather than on its exogenous formulation. One of my main findings is that this leads to the endogenous emergence of evasive communication, i.e., pretending to be uninformed, even when communication is completely unrestricted. Furthermore, the belief-dependent cost of lying gives rise to specific predictions regarding the welfare implications of several conventional policies. In particular, prohibition of lying (i.e., of explicit falsification) may lead to a decrease in the receiver's welfare. In addition, dealing with an ex-ante less informed sender can be beneficial to the receiver. The results are attributed exclusively to belief-dependent preferences and cannot be explained by an outcome-based model.
    JEL: D82 D83 D84 C72
    Date: 2013–11–20
  16. By: Sapi, Geza; Suleymanova, Irina
    Abstract: We investigate how firms' incentives to acquire customer data for targeted offers depend on its quality. A two-dimensional Hotelling model is proposed where consumers are heterogeneous both with respect to their locations and transportation cost parameters (flexibility). Firms have perfect data on the locations of consumers while data on their flexibility is imperfect. When consumers are relatively homogeneous in their flexibility, in equilibrium both firms acquire customer data regardless of its quality. This increases profits but harms consumers. When consumers are relatively differentiated in flexibility, data acquisition incentives depend on its quality. Only if the data is sufficiently precise, both firms acquire it and their profits decrease, while consumers are better-off. Our model has particular relevance for location-based marketing such as in mobile telephony, where firms have near-perfect information on the proximity of customers but may have imperfect knowledge of other consumer characteristics. --
    Keywords: Price Discrimination,Customer Data,Market Segmentation
    JEL: D43 L13 L15 O30
    Date: 2013
  17. By: Esteban Klor; Sebastian Kube; Eyal Winter; Ro'i Zultan (BGU)
    Abstract: Conventional wisdom suggests that a global increase in monetary rewards should induce agents to exert higher effort. In this paper we demonstrate that this may not hold in team settings. In the context of sequential team production with positive externalities between agents, incentive reversal might occur: an increase in monetary rewards (either because bonuses increase or effort costs decrease) may lead agents to exert lower effort in the completion of a joint task — even if agents are fully rational, self-centered money maximizers. Herein we discuss this seemingly paradoxical phenomenon and report on two experiments that provide supportive evidence.
    Keywords: Incentives, Incentive Reversal, Team Production, Externalities, Laboratory Experiments, Personnel Economics.
    JEL: C92 D23 J31 J33 J41 M12 M52
    Date: 2013
  18. By: Jacob Lariviere (Department of Economics and Baker Center for Public Policy, University of Tennessee); Mikołaj Czajkowski (Faculty of Economic Sciences, University of Warsaw); Nick Hanley (Division of Economics, University of Stirling); Margrethe Aanesen (Faculty of Biosciences, Fisheries and Economics, University of Tromso); Jannike Falk-Petersen (Faculty of Biosciences, Fisheries and Economics, University of Tromso); Dugald Tinch (Division of Economics, University of Stirling)
    Abstract: This paper compares how increases in experience versus increases in knowledge about a public good affect willingness to pay (WTP) for its provision. This is challenging because while consumers are often certain about their previous experiences with a good, they may be uncertain about the accuracy of their knowledge. We therefore design and conduct a field experiment in which treated subjects receive a precise and objective signal regarding their knowledge about a public good before estimating their WTP for it. Using data for two different public goods, we show qualitative equivalence of the effect of knowledge and experience on valuation for a public good. Surprisingly, though, we find that the causal effect of objective signals about the accuracy of a subject’s knowledge for a public good can dramatically affect their valuation for it: treatment causes an increase of $150-$200 in WTP for well-informed individuals. We find no such effect for less informed subjects. Our results imply that WTP estimates for public goods are not only a function of true information states of the respondents but beliefs about those information states.
    Keywords: Information, Beliefs, Field Experiment, Valuation, Uncertainty, Choice Experiment
    JEL: C93 Q51 D83
    Date: 2013
  19. By: Nejat Anbarci; Nick Feltovich; Mehmet Y. Gurdal
    Abstract: We introduce the contractor game , related to the ultimatum game (UG). The proposer makes an offer , and simultaneously sends a cheap talk message , indicating (possibly falsely) the amount of the offer. The responder observes the message with certainty and the offer with probability p before accepting or rejecting the offer. We theoretically examine versions with p = 0 and p = 0.5 along with the UG, played by some standard economic agents and others who are averse to inequity, lies and lying. The equilibria yield intuitive predictions, which are supported by our experimental results. Offers are higher when they might be seen by the responder. Messages over–state offers, but less so when the offer might be seen. Responders are more likely to accept an unseen offer if it might have been seen. When offers are seen, responders reward truthful messages, rather than punishing lies, compared to when no message is sent.
    Keywords: ultimatum game, messages, lies, truth–telling, other–regarding behaviour
    JEL: C72 C78 D82
    Date: 2013–11–20
  20. By: Alessandro Bucciol (Department of Economics (University of Verona)); Luca Zarri (Department of Economics (University of Verona))
    Abstract: In this paper, we quantify the extent and identify some major determinants of lying in politics. We focus on public claims made by US national politicians between 2007 and 2012 and present a series of intriguing results. While politicians – and prominent ones in particular – are reluctant to tell complete (or ‘black’) lies, they have a strong propensity to (strategically) tell ‘grey’ lies, i.e. claims that are only partly true. Moreover, party affiliation has a huge influence, with Republicans being more likely to depart from the truth than Democrats. Also one’s state of origin plays an important role: whereas politicians in general are significantly less likely to lie if they come from swing (or battleground) states, Democratic politicians lie more frequently if they come from traditionally Blue states. Politicians are also less likely to be untruthful if they come from highly educated states and from Southern states, where traditional values prevail. As to political topics, both black and grey lies occur more often on health-related issues. As to presidential candidates, Obama lies significantly less than his opponents. Our results on the extent and sources of variation of lying in politics inform the theory of strategic information transmission as well as the streams of literature on persuasive communication, democratization, human lying in general and deceptive behavior in politics.
    Keywords: Lying, Democracy, Political Competition, Beliefs
    JEL: D72 D03 C25 D82
    Date: 2013–11
  21. By: Guillen, Pablo; Merrett, Danielle; Slonim, Robert
    Abstract: We propose an intergroup competition scheme (ICS) to theoretically solve free-riding in team production and provide experimental evidence from a voluntary contribution mechanism (VCM) public goods game. The ICS includes an internal transfer payment from the lowest to highest contributing team proportional to the difference in group contributions. The ICS requires minimal information, makes the efficient contribution a dominant strategy and is budget balanced. These features make the ICS ideally suited to solve the moral hazard problem in team production. Our experiment demonstrates that the ICS raises contributions to almost reach optimality with appropriate parameters. We also show experimentally that the success of the ICS can be primarily attributed to the effect of higher returns and to the introduction of competition, and is not due to the introduction of potential losses or information regarding other groups.
    Keywords: economic experiments; voluntary contributions mechanism; intergroup competition; public goods; free riding; moral hazard; team production
    Date: 2013–11
  22. By: Kerry Back; Tao Li; Alexander Ljungqvist
    Abstract: Is greater trading liquidity good or bad for corporate governance? We address this question both theoretically and empirically. We solve a model consisting of an optimal IPO followed by a dynamic Kyle market in which the large investor's private information concerns her own plans for taking an active role in governance. We show that an increase in the liquidity of the firm's stock increases the likelihood of the large investor 'taking the Wall Street walk.' Thus, higher liquidity is harmful for governance. Empirical tests using three distinct sources of exogenous variation in liquidity confirm the negative relation between liquidity and blockholder activism.
    JEL: G23 G34
    Date: 2013–11
  23. By: Maria Micevski (Department of Economics, University of Konstanz, Germany)
    Abstract: The presented model demonstrates how the coexistence of reciprocal and selfish types influences the formation of employment relationships, their profitability, wage differentials, wage competition, and unemployment in the presence of moral hazard. Wage and profitability differentials result from the differences in workers’ reactions to the managers’ wage offers. Moreover, these behavioral differences affect managers’ preferences for worker types. Thus, managers might make higher offers to attract the preferred worker type in a competitive labor market with excess supply of labor compared to a situation without competition. The resulting competitive matching allocates favored reciprocal workers to reciprocal managers. Consequently, unemployment arises first among unfavored reciprocal and selfish workers, respectively.
    Keywords: reciprocity, gift exchange, matching, profitability, wage differentials, wage competition, unemployment
    JEL: D03 D21 E24 J31
    Date: 2013–11–21

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