|
on Contract Theory and Applications |
| By: | Robin Mason (Department of Economics, University of Exeter and CEPR.); Juuso Välimäki (Aalto University School of Economics and HECER.) |
| Abstract: | We analyse a simple model of dynamic moral hazard in which there is a clear and tractable trade-off between static and dynamic incentives. In our model, a principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterise the contracts that the principal sets, with and without commitment. We show that with full commitment, the contract involves the agent’s value and wage declining over time, in order to give the agent incentives to exert effort. The long-run levels of the value and wage depend on the relative discount rates of the principal and agent. We also characterise the set of sequentially rational equilibria, where the principal has no commitment power. |
| Keywords: | Principal-agent model, continuous time, moral hazard, project completion. |
| JEL: | C73 D82 J31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1314&r=cta |
| By: | S.Chatterji; S.Ghosal |
| Abstract: | Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex ante require costly crises to occur with positive probability at the interim stage. When bank payoffs are partially appropriable, either directly via imposition of nes or indirectly by the use of bank equity as a collateral, we argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises. |
| Keywords: | bank runs, contagion, moral hazard, liquidity, random, contracts, monitoring. |
| JEL: | G21 D82 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_21&r=cta |
| By: | Ledenyov, Dimitri O.; Ledenyov, Viktor O. |
| Abstract: | The condensed research article presents some innovative research results on the venture capital optimal investment portfolio strategies selection in the diffusion-type financial systems in the imperfect highly volatile global capital markets with the incomplete information, which are characterized by the asymmetric information flows and impacted by the various types of the nonlinearities. We discuss the venture capital firms with the different organizational structures: the corporation funded venture capital firm, investment bank funded venture capital firm, private equity funded venture capital firm, state funded venture capital firm. We consider the complicated issues on the venture capital optimal investment portfolio strategies selection, evaluation of the possible returns on the investments, and implementation of exit strategies for the venture capital investment schemes. We propose that the information signals can be mixed and self-modulated during the asymmetric information flows in the information transmission channels between the market agents, resulting in the origination of the various types of the nonlinearities, which may have a considerable impact on the venture capital investments in the diffusion-type financial system. These nonlinearities have to be taken to an account during the venture capital optimal investment portfolio strategies selection process, which is all about making the right investment choices with the application of the inductive, deductive and abductive logics. In our opinion, the State of Queensland is a very attractive place to make the venture capital investments in the hi-tech startups, comparing to other regions in the World. We conclude with the notion that the venture capital industry can greatly improve the macroeconomic indicators of national economies, creating the new hi-tech industries, generating the abundant wealth, and increasing the Gross Domestic Product. |
| Keywords: | venture capital concept, venture capital fund, venture capital investment portfolio and strategy, corporation funded venture capital firm, investment bank funded venture capital firm, private equity funded venture capital firm, state funded venture capital firm, entrepreneurship, theory of firm, wealth creation, econophysics, econometrics, nonlinearities, asymmetric information flows, mixing and modulation of information signals, diffusion-type financial system, imperfect highly volatile global capital markets with incomplete information |
| JEL: | C01 C58 D81 D82 G11 G14 G15 G17 G23 G24 |
| Date: | 2013–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51741&r=cta |
| By: | Ungureanu, S. |
| Abstract: | To understand how firms create and maintain long term relationships with consumers, or how procurement relations evolve over time, it is useful to study a dynamic variant of the classical two-type-buyer contract in mechanism design. It is less trivial and more interesting if the utility determinant (or utility type) is not fixed or completely random, and fair assumptions are that it is either stochastic, or given by a distribution whose parameters are common knowledge. The first approach is that of Battaglini (2005), while the second is pursued in this paper. With two possible types of buyers, the buyer more likely to have a high utility type will receive the first-best allocations, while the other will receive the first best only if he has the high utility type. |
| Keywords: | dynamic contracting; mechanism design; truthful reporting; information structure; learning |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:13/07&r=cta |
| By: | Thibaut Duprey (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper is a first attempt to connect the heterogeneity in bank efficiency with lending fluctuations and allocation efficiency: there is a trade-off between the two in the presence of heterogeneity in bank monitoring efficiency. The mechanism at hand is twofold. (a) First the rent extracted by the most efficient bank distorts incentives of entrepreneurs to undertake efforts. (b) Second banks specialising on contracts that do not include monitoring feature less cyclical fluctuations of aggregate lending. This has clear implications: (i) the presence of banking heterogeneity decreases firms' average productivity as it increases adverse selection by entrepreneurs as well as favours rent extractions by banks; (ii) an individual bank featuring a lower cyclicality signals a lower efficiency in its monitoring abilities; (iii) a heterogeneous banking system featuring a lower cyclicality of aggregate lending might not be desirable as it may come along with allocative and incentives distortions. |
| Keywords: | Banking heterogeneity ; Moral hazard ; Adverse selection ; Endogenous market segmentation ; Allocation efficiency ; Lending cycle |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00908941&r=cta |
| By: | Kemal K?vanc Akoz (Department of Economics, New York University, 19 W. 4th Street, 6FL, New York, NY 10012); Cemal Eren Arbatli (Department of Economics, National Research University-Higher School of Economics, 26 Shabolovka Street, Building 3, 3116A, Moscow, Russia) |
| Abstract: | We provide a game-theoretical model of manipulative election campaigns with two political candidates and a continuum of Bayesian voters. Voters are uncertain about candidate positions, which are exogenously given and lie on a unidimensional policy space. Candidates take unobservable, costly actions to manipulate a campaign signal that would otherwise be fully informative about a candidate’s distance from voters relative to the other candidate. We show that if the candidates differ in campaigning efficiency, and voters receive the manipulated signal with an individual, random noise, then the cost-efficient candidate wins the election even if she is more distant from the electorate than her opponent is. In contrast to the existing election campaign models that do not support information manipulation in equilibrium, our paper rationalizes misleading political advertising and suggests that limits on campaign spending may potentially improve the quality of information available to the electorate |
| Keywords: | Hidden actions, election campaigns, manipulation, propaganda, bias. |
| JEL: | C72 D72 D82 D84 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:31/ec/2013&r=cta |
| By: | Edison G. Yu |
| Abstract: | This paper studies information aggregation in financial markets with recurrent investor exit and entry. I consider a dynamic general equilibrium model of asset trading with private information and collateral constraints. Investors differ in their aversion to Knightian uncertainty: When uncertainty is high, some investors exit the market. Since exiting investors' information is not fully revealed by prices, conditional return volatility and risk premia both increase. I use data on institutional investors' holdings of individual stocks to show that investor exits indeed move negatively with price in-formativeness. The model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty-averse investors. The model thus predicts less informative prices toward the end of a long boom, as seen in the data. Moreover, economies with looser collateral constraints should see more volatility due to exit and partial revelation. Higher capital requirements can improve welfare by inducing more information revelation by prices. |
| Keywords: | Financial markets |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-42&r=cta |
| By: | Rudiger, Jesper |
| Abstract: | Expert opinions are often biased. To test how such bias affects the propensity to use opinions, we set up an experiment where subjects estimate the probability of an event that depends on (i) the subject's type, which is observable, and (ii) the unobserved state of the world. Before making their estimate, one group of subjects, the clients, observe the opinion (estimate) of another subject, the expert. The expert has private information about the state, but he may be of a different type than the clients, and therefore biased. Bias is observable and easily corrected. In spite of this, we find that clients' propensity to use expert opinions is decreasing in the size of the expert's bias. This aversion to use the opinions of biased experts is not explained by computational concerns, ex-post expert informativeness or reluctance to move away from the prior. |
| Keywords: | Experiments; Probability Estimation; Biased Opinions; Naive Advice |
| JEL: | C91 D81 D82 |
| Date: | 2013–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51787&r=cta |
| By: | Fuchs, William (University of California, Berkeley) |
| Abstract: | We provide a new rationale for the use of discretionary bonuses. In a setting with unknown match qualities between a worker and a firm and subjective evaluations by the principal, bonuses are useful in order to make the feedback from the firm to the workers credible. This way workers in good matches are less inclined to accept outside offers. |
| Keywords: | discretionary bonuses, feedback, signalling |
| JEL: | D82 D83 D86 M5 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7758&r=cta |
| By: | Andrei Hagiu (Harvard Business School, Strategy Unit); Hanna Halaburda (Bank of Canada) |
| Abstract: | We study the effect of different levels of information on two-sided platform profits?under monopoly and competition. One side (developers) is always informed about all prices and therefore forms responsive expectations. In contrast, we allow the other side (users) to be uninformed about prices charged to developers and to hold passive expectations. We show that platforms with more market power (monopoly) prefer facing more informed users. In contrast, platforms with less market power (i.e., facing more intense competition) have the opposite preference: they derive higher profits when users are less informed. The main reason is that price information leads user expectations to be more responsive and therefore amplifies the effect of price reductions. Platforms with more market power benefit because this leads to demand increases, which they are able to capture fully. Competing platforms are affected negatively because more information intensifies price competition. |
| Keywords: | two-sided platforms, information, responsive expectations, passive expectations, wary expectations |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:12-045&r=cta |
| By: | Levine, P.; Pearlman, J.; Yang, B. |
| Abstract: | This paper examines the implications of imperfect information (II) for optimal monetary policy with a consistent set of informational assumptions for the modeller and the private sector an assumption we term the informational consistency. We use an estimated simple NK model from Levine et al. (2012), where the assumption of symmetric II significantly improves the fit of the model to US data to assess the welfare costs of II under commitment, discretion and simple Taylor-type rules. Our main results are: first, common to all information sets we find significant welfare gains from commitment only with a zero-lower bound constraint on the interest rate. Second, optimized rules take the form of a price level rule, or something very close across all information cases. Third, the combination of limited information and a lack of commitment can be particularly serious for welfare. At the same time we find that II with lags introduces a ‘tying ones hands’ effect on the policymaker that may improve welfare under discretion. Finally, the impulse response functions under our most extreme imperfect information assumption (output and inflation observed with a two-quarter delay) exhibit hump-shaped behaviour and the fiscal multiplier is significantly enhanced in this case. |
| Keywords: | Imperfect Information; DSGE Model; Optimal Monetary Policy; Bayesian Estimation |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:13/13&r=cta |
| By: | Alessandra Bonfiglioli; Gino Gancia |
| Abstract: | We study the incentives to acquire skill in a model where heterogeneous firms and workers interact in a labor market characterized by matching frictions and costly screening. When effort in acquiring skill raises both the mean and the variance of the resulting ability distribution, multiple equilibria may arise. In the high-effort equilibrium, heterogeneity in ability is sufficiently large to induce firms to select the best workers, thereby confirming the belief that effort is important for finding good jobs. In the low-effort equilibrium, ability is not sufficiently dispersed to justify screening, thereby confirming the belief that effort is not so important. The model has implications for wage inequality, the distribution of firm characteristics, sorting patterns between firms and workers, and unemployment rates that can help explaining observed cross-country variation in socio-economic and labor market outcomes. |
| Keywords: | wage inequality, firm heterogeneity, unemployment, effort, beliefs, sorting, selection, multiple equilibria |
| JEL: | E24 J24 J64 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:734&r=cta |