|
on Contract Theory and Applications |
| By: | Rudiger, Jesper; Vigier, Adrien |
| Abstract: | We analyze how financial experts influence asset prices in a sequential trading model. In the model, an expert of unknown ability sends a report about asset values to traders, who then observe a signal about the expert's type. All information about the expert's ability is private to traders and only revealed through trades. When the expert's reputation is sufficiently high, traders ignore their private signal about ability and the market enters a reputational cascade in which no information about the expert reaches the market. Reputational cascades are conducive to asset price bubbles, which eventually result in market crashes when cascades terminate. Rather than being caused by the release of new information, market crashes in our model result from the sudden depreciation of past accumulated information. Finally, we show that reputational cascades are bad for liquidity and induce high price volatility. |
| Keywords: | Informational Cascades; Experts; Reputation; Asset Price Bubbles |
| JEL: | D82 D83 D84 G14 G20 |
| Date: | 2013–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51784&r=cta |
| By: | Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon); Frank Heinemann (Fachgebiet Makroökonomik - Technische Universität Berlin) |
| Abstract: | In games with strategic complementarities, public information about the state of the world has a larger impact on equilibrium actions than private information of the same precision, because public signals are more informative about the likely behavior of others. We present an experiment in which agents' optimal actions are a weighted average of the fundamental state and their expectations of other agents' actions. We measure the responses to public and private signals. We find that, on average, subjects put a larger weight on the public signal. In line with theoretical predictions, as the relative weight of the coordination component in a player's utility increases, players put more weight on the public signal when making their choices. However, the weight is smaller than in equilibrium, which indicates that subjects underestimate the information contained in public signals about other players' beliefs. |
| Keywords: | coordination games; strategic uncertainty; private information; public information |
| Date: | 2014–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00925018&r=cta |
| By: | Andrea Gallice (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy) |
| Abstract: | We study a rent-seeking contest in which players have heterogeneous and private valuations. In addition to their own type, agents only know that all valuations are drawn from a distribution, of which they only know the mean. We obtain a closed-form solution for agents' optimal level of investment and subject it to comparative statics analysis. We also investigate the issue of entry in the game and the amount of rent dissipation that results in equilibrium. Finally, we compare our results with those that would emerge in a context of perfect information. |
| Keywords: | rent-seeking, contests, private information, imperfect information |
| JEL: | D72 D82 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:023&r=cta |
| By: | Gropp, Reint; Gruendl, Christian; Guettler, Andre |
| Abstract: | This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used. -- |
| Keywords: | soft information,discretionary lending,relationship lending,competition |
| JEL: | G21 G28 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:19&r=cta |
| By: | Bhowmik, Anuj |
| Abstract: | Consider a pure exchange economy with asymmetric information. The space of agents is a mixed measure space and the commodity space is an ordered Banach space whose positive cone has an interior point. The concept of coalitional fairness introduced in [9] is examined in the framework of asymmetric information. It is shown that the private core is contained in the set of privately coalitionally fair allocations under some assumptions. This result provides an extension of Theorem 2 in [9] to an asymmetric information economy with infinitely many commodities. |
| Keywords: | Asymmetric information economy; Coalitional fairness; Private core |
| JEL: | D51 D82 |
| Date: | 2014–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52788&r=cta |
| By: | Mikhail Drugov (Universidad Carlos III de Madrid, University of Warwick and CEPR); Roberto Hernán-González (Departamento de Teoría e Historia Económica, Universidad de Granada); Praveen Kujal (Middlesex University Business School); Marta Troya Martinez (Department of Economics, University of Oxford) |
| Abstract: | In this paper we experimentally test strategic information transmission between one informed and two uninformed agents in a cheap-talk game. We find evidence of the "disciplining" effect of public communication as compared to private; however, it is much weaker than predicted by the theory. Adding a second receiver naturally increases the complexity of strategic thinking when communication is public. Using the level-k model, we exploit the within subject design to show how individuals decrease their level-k in public communication. Surprisingly, we find that individuals become more sophisticated when they communicate privately with two receivers rather than one. |
| Keywords: | Cheap Talk, Communication, Experiment, Level-k, Cognitive ability, Cognitive Reflection Test |
| JEL: | C72 C92 D83 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:13-32&r=cta |
| By: | Francisco Alvarez (Department of Fundamentos del Análisis Económico II, Universidad Complutense de Madrid, Spain); Francisco J. André (Department of Fundamentos del Análisis Económico II, Universidad Complutense de Madrid, Spain) |
| Abstract: | We compare auctioning and grandfathering as allocation mechanisms of emission permits when there is a secondary market with market power and the firms have private information. Based on real-life cases such as the EU ETS, we consider a multi-unit, multi-bid uniform auction, modelled as a Bayesian game of incomplete information. At the auction each firm anticipates his role in the secondary market, which affects the firms’ valuation of the permits (that are not common across firms) as well as their bidding strategies and it precludes the auction from generating a cost-effective allocation of permits, as it would occur in simpler auction models. Auctioning tends to be more cost-effective than grandfathering when the firms’ costs are asymmetric enough, especially if the follower has lower abatement costs than the leader and uncertainty about the marginal costs is large enough. If market power spills over the auction, the latter is always less cost-effective than grandfathering. One central policy implication is that the specific design of the auction turns out to be crucial for cost-effectiveness. The chances of the auction to outperform grandfathering require that the former is capable of diluting the market power that is present in the secondary market. |
| Keywords: | Cap-and-Trade Systems, Auctions, Grandfathering, Market Power, Bayesian Games of Incomplete Information |
| JEL: | D44 Q58 L13 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.98&r=cta |
| By: | Biais, Bruno; Rochet, Jean-Charles; Woolley, Paul |
| Abstract: | We study the dynamics of an innovative industry when agents learn about its strength, i.e., the likelihood that it gets hit by negative shocks. Managers can exert risk-prevention export to mitigate the consequences of such shocks. As time goes by, if no shock occurs, con dence improves. This attracts managers to the innovative sector. But, when con dence becomes high, less managers exerting low risk-prevention export also enter. This accelerates the growth of the industry, while inducing a decline in risk-prevention. The longer the boom, the stronger the con dence, the larger the losses if a shock occurs. While the above dynamics arise in the fi rst best, with asymmetric information there is excessive entry of inefficient managers, earning informational rents at the expense of inneficient managers. This inflates the innovative sector and increases its vulnerability. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:27746&r=cta |
| By: | Hiroki Arato; Takeo Hori; Tomoya Nakamura |
| Abstract: | We extend the model of Cornand and Heinemann (2008, Economic Journal) and examine how to implement partial announcement by selling public information when the agents' action is strategic complements. In a game of information acquisition, there exist multiple equilibria and the partial announcement equilibrium is unstable if the authorities sell public information at a constant price. However, if the authorities offer an increasing pricing rule, partial announcement equilibrium is stable and implementable. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0892&r=cta |
| By: | Javier Rivas (Department of Economics, University of Bath); Carmelo Rodríguez-Álvarez (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa) (Department of Foundations of Economic Analysis II (Quantitative Economics)), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)) |
| Abstract: | We analyse committees of voters who take a decision between two options as a two- stage process. In a discussion stage, voters share non-verifiable information about a private signal concerning what is the best option. In a voting stage, votes are cast and one of the options is implemented. We introduce the possibility of leadership whereby a certain voter, the leader, is more influential than the rest at the discussion stage even though she is not better informed. We study information transmission and characterize the effects of the leader on the deliberation process. We find, amongst others, that both the quality of the decision taken by the committee and how truthful voters are at the discussion stage depends non-monotonically on how influential the leader is. In particular, although a leader whose influence is weak does not disrupt the decision process of the committee in any way, a very influential leader is less disruptive than a moderately influential leader. |
| Keywords: | Committees, Information Aggregation, Leadership, Voting |
| JEL: | D71 D72 D82 |
| Date: | 2013–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1337&r=cta |
| By: | Dulleck, Uwe (QUT School of Economics and Finance); Kerschbamer, Rudolf (Dept of Economics, University of Innsbruck and CEPR); Konovalov, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This article studies second-degree price-discrimination in markets for credence goods. Such markets are affected by asymmetric informationbecause expert sellers are better informed than their customers about the quality that yields the highest surplus from trade. We show that discrimination regards the amount of advice offered to customers and that it leads to a different equilibrium distortion depending on the main source of heterogeneity among consumers. If consumers differ mainly in the expected cost needed to generate consumer surplus, the inefficiency occurring at the bottom of the type distribution involves overprovision of quality. By contrast, if consumers differ in the surplus generated whenever the consumer’s needs are met, the inefficiency involves underprovision of quality. |
| Keywords: | Price Discrimination; Credence Goods; Experts; Discounters; Distribution Channels |
| JEL: | D40 D82 L15 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0582&r=cta |
| By: | Fabrizio Adriani (Department of Economics, University of Leicester); Silvia Sonderegger (School of Economics, University of Nottingham) |
| Abstract: | We consider a society with informed individuals (adults) and naive individuals (children). Adults are altruistic towards their own children and possess information that allows to better predict the behavior of other adults. Children benefit from adopting behaviors that conform to the social norm determined by aggregate adult behavior, but, lacking accurate information, have to rely on the observed behavior of their adult parent to infer the norm. We show that this causes a signaling distortion in adult behavior. Compared to the benchmark case of no signaling, parents have a higher propensity to adopt attitudes that encourage their children to behave in a socially safe way, i.e. the way which would be optimal under maximum uncertainty about the prevailing social norm. This distortion is different in nature from the typical distortion due to a conflict of interest between sender and receiver in standard signaling games. The norm-signaling bias is self-reinforcing and might lead both to (Pareto) superior and inferior outcomes relative to the case of no signaling. We discuss applications to sexual attitudes, collective reputation, and trust. |
| Keywords: | Signaling, Norms, Strategic Uncertainty, Complementarities, Coordination Games, Socialization. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2013-11&r=cta |
| By: | Luis Almeida Costa; Joao Amaro de Matos |
| Abstract: | The alignment of collective goals and individual behavior has been extensively studied by economists under a principal-agent framework. Two main solutions have been presented: explicit incentive contracts and monitoring. These solutions correspond to changes in the objective situation faced by individuals. However, an extensive literature in social psychol- ogy provides evidence that behavior is influenced, not only by situational constraints, but also by attitudes. Therefore, an important aspect of organization is to choose the struc- tures and procedures that best contribute to the dissemination of the desired attitudes throughout the organization. This paper studies how the initial configuration of attitudes and the size of the organization affect the optimal organizational structure and the timing of information flows when the objective is to align the members' attitudes. We identify and characterize three factors that affect the optimal organizational structures and procedures and the degree of alignment of attitudes: (1) clustering effects; (2) member cross-influence effects; and (3) leader cross-influence effects. JEL codes: |
| Keywords: | Organizational Structure, Timing of Information Flows, Attitude Change, Infuence |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp579&r=cta |
| By: | Leonie Gerhards (Department of Economics and Business, Aarhus University, Denmark); Neele Siemer (Goethe-University Frankfurt) |
| Abstract: | We experimentally compare the incentive effects of rewarding individuals for outstanding performance publicly versus privately. We implement two real-effort tasks, which differ in how prestigious subjects perceive working on them. In both tasks private and public feedback similarly enhances subjects' performance compared to the control treatment. Also high ability and a positive interim feedback increase performance. Competitive preferences matter only in the less prestigious task. Subjects' gender and overconfidence can in neither of the tasks explain performance. In a supplementary field experiment at a secondary school we furthermore compare the incentive effects of different forms of public recognition. |
| Keywords: | Private feedback, public feedback, relative performance, competitive preferences, laboratory experiment, field experiment |
| JEL: | C91 C93 D03 J33 M12 |
| Date: | 2014–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2014-01&r=cta |
| By: | Talia Bar; Dean R. Lillard |
| Abstract: | We formally model direct to consumer advertising (DTCA) of prescription drugs and examine factors that determine a pharmaceutical firms DTCA strategy. We highlight how the profitability of DTCA varies with the characteristics of the condition that the advertised drug treats, the incidence of the condition, and the signal value of symptoms, and risk factors. We account for the potential information benefits from DTCA as well as its potential to persuade consumers. From a welfare perspective there can be too much or too little private investment in advertising. Welfare is more likely to increase when the population is uninsured. |
| JEL: | I18 L15 L65 M37 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19794&r=cta |
| By: | Cristian Troncoso-Valverde (Facultad de Economía y Empresa, Universidad Diego Portales) |
| Abstract: | This paper studies a model of competing auctions in which bidders attach different valuations to the items offered by sellers. We provide a novel characterization of the set of (symmetric) participation rules used by bidders and show that contrary to models with homogeneous goods, heterogeneity rules out randomization when bidders choose trading partners. We also show that changes in some reserve price alter the participation decision of every buyer regardless of her valuation of the item. This implies that such changes not only affect the distribution of valuations of those buyers participating in a given auction but also modify the probability with which every buyer visits the auctions. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:46&r=cta |
| By: | Oktay Sürücü (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | This paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are diverse not only in their preferences but also in their levels of bounded rationality. The behavioral phenomenon considered here is the attraction effects when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts that screens consumers' types is characterized. The benefit of discriminating consumers based on their preference and cognitive limitation is always higher than its cost. In other words, the monopolist can exploit consumers and increase his profit with this contract. The model provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Moreover, this contract is welfare improving. |
| Keywords: | bounded rationality, attraction effect, contract design, welfare |
| JEL: | D03 D42 D60 D82 D86 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:495&r=cta |
| By: | Chen, Joyce J.; Collins, LaPorchia |
| Abstract: | There is a burgeoning literature highlighting asymmetric information among household members. However, little is known about the source of the asymmetry and its effect on efficiency. Using a unique survey of Ghanaian households, we examine the accuracy of spousal cross-reports and the effect of discrepancies on farm production. We find that information problems pertain to scale, the quantity of resources, and scope, the distribution of resources, as well as allocation decisions on the margin (Engel curves). Moreover, we find that information asymmetries lead to inefficiency in production, and the effect is equivalent to about 15% of the variation across households. |
| Keywords: | Asymmetric information, Intra-household allocation, Engel curve, Consumer/Household Economics, Production Economics, D13, D82, O12, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaeass:161652&r=cta |
| By: | Igor Mouraviev (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | The article seeks to fill the gap between tacit and explicit collusion in a setting where firms observe only their own output levels and a common price, which includes a stochastic component. Without communication, firms fail to discriminate between random shocks and marginal deviations, which constrains the scope for collusion. By eliminating uncertainty about what has happened, communication facilitates detection of deviations but reduces collusive profi?ts due to the risk of exposure to legal sanctions. With the optimal collusive strategy, firms communicate only if the market price falls somewhat below the trigger price. Moreover, they tend to communicate more often as they become less patient, a cartel grows in size, or demand uncertainty rises. |
| Keywords: | Collusion, Communication, Imperfect Monitoring, Frequency of Meetings |
| JEL: | D82 L41 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:494&r=cta |
| By: | Masaaki Fujii (The University of Tokyo); Akihiko Takahashi (The University of Tokyo) |
| Abstract: | All the financial practitioners are working in incomplete markets full of unhedgeable risk-factors. Making the situation worse, they are only equipped with the imperfect information on the relevant processes. In addition to the market risk, fund and insurance managers have to be prepared for sudden and possibly contagious changes in the investment flows from their clients so that they can avoid the over- as well as under-hedging. In this work, the prices of securities, the occurrences of insured events and (possibly a network of) the investment flows are used to infer their drifts and intensities by a stochastic filtering technique. We utilize the inferred information to provide the optimal hedging strategy based on the mean-variance (or quadratic) risk criterion. A BSDE approach allows a systematic derivation of the optimal strategy, which is shown to be implementable by a set of simple ODEs and the standard Monte Carlo simulation. The presented framework may also be useful for manufactures and energy firms to install an efficient overlay of dynamic hedging by financial derivatives to minimize the costs. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf338&r=cta |
| By: | Eufinger, Christian; Gill, Andrej |
| Abstract: | This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea of the proposed regulation is to utilize the compensation scheme to drive a wedge between the interests of top management and shareholders to counteract shareholder risk-shifting incentives. The decisive advantage of this approach compared to existing regulation is that the regulator does not need to be able to properly measure the bank investment risk, which has been shown to be a difficult task during the 2008-2009 financial crisis. -- |
| Keywords: | Basel III,capital regulation,compensation,leverage,risk |
| JEL: | G21 G28 G30 G32 G38 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:9&r=cta |