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on Contract Theory and Applications |
| By: | Gwenaël Piaser |
| Abstract: | It is argued that the revelation principle in multi-principal multi-agent games cannot be generalized. In other words, one cannot restrict attention to incentive compatible mechanisms, even if the concept of information is enlarged. |
| Keywords: | Direct Mechanisms, Incentive compatible, Multiprincipals. |
| JEL: | D82 |
| Date: | 2014–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:201408&r=cta |
| By: | Taneli Mäkinen (Bank of Italy); Björn Ohl (Narodowy Bank Polski) |
| Abstract: | We study firms’ incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining business cycles. We find that when the economy has been in a recession in the previous period, and firms enter the current period with a pessimistic belief, the incentive to acquire information is stronger than when the economy has been in a boom and firms share an optimistic belief. The cyclicality of the aggregate learning outcome is moderated by the price system, which transmits information from informed to uninformed firms, thus dampening information demand. Though learning from equilibrium prices acts to stabilize fluctuations by discouraging information acquisition, it can be welfare-enhancing to make information prohibitively costly to obtain. |
| Keywords: | information acquisition, rational expectations equilibrium, asymmetric information, strategic substitutability |
| JEL: | D51 D83 E32 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_946_14&r=cta |
| By: | Ken Urai (Graduate School of Economics, Osaka University); Akihiko Yoshimachi (Department of Commerce, Doshisha University); Kohei Shiozawa (Graduate School of Economics, Osaka University) |
| Abstract: | In this paper, we investigate a new concept of a market's commodity-information structure (a partition of the set of real goods that are treated as one commodity for market exchanges) and technologies relat- ing to it, commodity-information technologies. Using this concept, we can always affirmatively answer the market viability problem, concerning the existence of general equilibrium even when information asymmetry among agents such as adverse selection prevails in the economy. Some Pareto-optimality problems and policy implications are also discussed. |
| Keywords: | General Equilibrium Model, Asymmetric Information, Adverse Selection, Market Via- bility Problem, Commodity-information Structure |
| JEL: | C62 D51 D82 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1402&r=cta |
| By: | Andrea Attar; Eloisa Campioni; Gwenaël Piaser |
| Abstract: | In the present note, we show that a weak restriction on out of equilibrium beliefs allows to extend the Revelation Principle to exclusive agency games, even if we consider mixed strategy equilibria. Next, we argue that this result does not extend to games with several agents, even if we restrict the analysis to pure strategy equilibria. |
| Keywords: | Competing Mechanisms, Exclusive Contracts, Incomplete Information, Participation decision |
| JEL: | D82 |
| Date: | 2014–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:201407&r=cta |
| By: | Axel Dreher (Heidelberg University); Kai Gehring (University of Göttingen); Christos Kotsogiannis (University of Exeter); Silvia Marchesi (University of Milan Bicocca and Centro Studi Luca d’Agliano) |
| Abstract: | This paper explores the role of information transmission and misaligned interests across levels of government in explaining variation in the degree of decentralization across countries. Within a two-sided incomplete information principal-agent framework, it analyzes two alternative policy-decision schemes –‘decentralization’ and ‘centralization’– when ‘knowledge’ consists of unverifiable information and the quality of communication depends on the conflict of interests between the government levels. It is shown that, depending on which level of policy decision-making controls the degree of decentralization, the extent of misaligned interests and the relative importance of local and central government knowledge affects the optimal choice of policy-decision schemes. The empirical analysis shows that countries’ choices depend on the relative importance of their private information and the results differ significantly between unitary and federal countries. |
| Keywords: | delegation, centralization, communication, fiscal decentralization, state and local government |
| JEL: | H7 H77 D82 D83 C23 |
| Date: | 2013–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:355&r=cta |
| By: | Axel Dreher (Heidelberg University); Silvia Marchesi (University of Milan Bicocca and Centro Studi Luca d’Agliano) |
| Abstract: | This paper explores the role of information transmission in explaining donors\' choice between project aid and budget support. Budget support increases the involvement of recipient governments in the decision-making process and can thus be an example of a “delegation-scheme\". Conversely, project aid represents a more “centralized\" type of aid. According to the theory, when countries\' local knowledge is more important than donors\'information, recipient countries\' discretion in the choice of policies should be increased (delegation). Conversely, there should be less freedom in designing policies when donors\' information is more relevant (centralization). The empirical analysis confirms that the importance of donors\' private information influences the amount of project aid, while recipients\' local knowledge is positively correlated with the amount of budget support. |
| Keywords: | Delegation, communication, ownership, foreign aid |
| JEL: | C23 D82 F33 O1 |
| Date: | 2013–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:356&r=cta |
| By: | Marco A. Marini (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Paolo Polidori (University of Urbino); Desiree Teobaldelli (University of Urbino); Davide Ticchi (IMT Institute for Advanced Studies Lucca) |
| Abstract: | One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom's (1987) framework, we obtain that lower agent's risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion-incentive relationship can be positive when this function is rigid |
| Keywords: | principal-agent; incentives; risk aversion; endogenous technology |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:aeg:report:2014-1&r=cta |
| By: | Kvaløy, Ola (UiS Business School, University of Stavanger); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | This paper analyses and compares optimal relational contracts between a principal/firm and a set of agents when (a) only aggregate output can be observed, and (b) individual outputs can be observed. We show that the optimal contract under (a) is a team incentive scheme where each agent is paid a maximal bonus for aggregate output above a threshold and a minimal (no) bonus otherwise. The team’s efficiency decreases with its size (number of agents) when outputs are non-negatively correlated, but may increase considerably with size if outputs are negatively correlated. In the case where individual output can be observed, we show that the optimal contract is a tournament scheme where the conditions for an agent to obtain the (single) bonus are stricter for negatively compared to positively correlated outputs. We finally show that if agents have bargaining power, firms may deliberately choose to organize production as a team where only aggregate output is observable. The team alternative is more likely to be superior under negatively correlated outputs. |
| Keywords: | Relational Contracts; team incentive scheme; tournament |
| JEL: | D00 D20 D21 D80 D86 |
| Date: | 2013–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2013_013&r=cta |
| By: | Andrew Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer Reinganum (Department of Economics and Law School, Vanderbilt University) |
| Abstract: | A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, we find that the optimal (plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected. |
| Keywords: | Settlement bargaining, litigation funding, non-recourse loan, signaling |
| JEL: | K4 C7 |
| Date: | 2014–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-14-00002&r=cta |
| By: | Ahnert, Toni (Bank of Canada); Bertsch, Christoph (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | A successful speculative attack against one currency is a wake-up call for speculators elsewhere. Currency speculators have an incentive to acquire costly information about exposures across countries to infer whether their monetary authority's ability to defend its currency is weakened. Information acquisition per se increases the likelihood of speculative currency attacks via heightened strategic uncertainty among speculators. Contagion occurs even if speculators learn that there is no exposure. Our new contagion mechanism offers a compelling explanation for the 1997 Asian currency crisis and the 1998 Russian crisis, both of which spread across countries with seemingly unrelated fundamentals and limited interconnectedness. The proposed contagion mechanism applies generally in global coordination games and can also be applied to bank runs, sovereign debt crises, and political regime change. |
| Keywords: | contagion; coordination failure; global games; information acquisition |
| JEL: | C70 D82 F31 G01 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0282&r=cta |
| By: | Kerstin Lopatta (University of Oldenburg - Accounting and Corporate Governance & ZenTra); Frerich Buchholz (University of Oldenburg - Accounting and Corporate Governance); Thomas Kaspereit (University of Oldenburg - Accounting and Corporate Governance) |
| Abstract: | We investigate the relation between asymmetric information of insider trades and international corporate social responsibility for U.S. firms listed in the MSCI world index during the period 2004 to 2010. In comparison to current studies, which focus on measuring the interrelation between the cost of capital or firm value and corporate sustainability, our analysis entails the direct relationship between international corporate sustainability and information asymmetry. We measure information asymmetry by the abnormal returns that occur when insiders trade in the stock of their firms. Hence, our investigation is based on a micro level and helps to explain the results at the more aggregated level of cost of capital, and at the fully aggregated level of firm value. In our cross-sectional analysis we found evidence that firms with a higher degree of corporate sustainability spend more efforts in reducing information asymmetry. |
| Keywords: | Asymmetric Information, Corporate Governance, International Corporate Social Responsibility, Cross-Sectional Analysis, Event Study, Insider Trading |
| JEL: | D53 D82 G14 D21 G34 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:zen:wpaper:29&r=cta |
| By: | Charles W. Calomiris; Mark Carlson |
| Abstract: | Managers’ incentives may conflict with those of shareholders or creditors, particularly at leveraged, opaque banks. Bankers may abuse their control rights to give themselves excessive salaries, favored access to credit, or to take excessive risks that benefit themselves at the expense of depositors. Banks must design contracting and governance structures that sufficiently resolve agency problems so that they can attract funding from outside shareholders and depositors. We examine banks from the 1890s, a period when there were no distortions from deposit insurance or government interventions to assist banks. We use national banks’ Examination Reports to link differences in managerial ownership to different corporate governance policies, risk, and methods of risk management. Formal corporate governance is lower when manager ownership shares are higher. Managerial rent seeking via salaries and insider lending is greater when managerial ownership is higher, and lower when formal governance controls are employed. Banks with higher managerial ownership target lower default risk. Higher managerial ownership and less-formal governance are associated with a greater reliance on cash rather than capital as a means of limiting risk, which we show is consistent both with higher adverse-selection costs of raising outside equity and with greater moral-hazard with respect to risk shifting. |
| JEL: | G21 G32 N21 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19806&r=cta |
| By: | Cox, Caleb |
| Abstract: | I show how improper conditioning of beliefs can lead to under-contribution in public goods environments with interdependent values. I consider a simple model of a binary, excludable public good. In equilibrium, provision of the public good is good news about its value. Naive players who condition expectations only on their private information contribute too little, despite the absence of free-riding incentives. In a laboratory experiment, subjects indeed under-contribute relative to equilibrium. Using modified games with different belief conditioning effects, I verify that under-contribution is due to improper belief conditioning. I find little evidence of learning over multiple rounds of play. |
| Keywords: | Public goods; experiments; cursed equilibrium; game theory |
| JEL: | C72 C92 D71 H41 |
| Date: | 2014–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53074&r=cta |
| By: | Masaaki Fujii (Faculty of Economics, The University of Tokyo); Akihiko Takahashi (Faculty of Economics, 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. |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2014cf914&r=cta |
| By: | Ding, Yucheng |
| Abstract: | A durable good monopolist sells its branded product over two periods. In period 2, when there is entry of a counterfeiter, the branded firm may charge a high price to signal its quality. Counterfeit competition thus enables the branded firm to commit to high future price in period 2, alleviating the classic time-inconsistency problem under durable good monopoly. This can increase the branded firm's profit by encouraging consumer purchase without delay, despite the revenue loss to the counterfeiter. Total welfare can also increase, because early purchase eliminates delay cost and consumers enjoy the good for both periods. |
| Keywords: | Counterfeits, Coase Conjecture, Quality Signaling |
| JEL: | D82 L11 L13 |
| Date: | 2014–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52933&r=cta |
| By: | Yasushi Asako; Kozo Ueda |
| Abstract: | Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is late. Our model suggests that governments need to lower the probability of spurious warnings. |
| Keywords: | Riding bubbles, crashes, public warnings, asymmetric information |
| JEL: | C72 D82 D84 E58 G12 G18 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-03&r=cta |
| By: | Raymond P. Guiteras; B. Kelsey Jack |
| Abstract: | An observed positive relationship between compensation and productivity cannot distinguish between two channels: (1) an incentive effect and (2) worker selection. We use a simplified Becker-DeGroot-Marschak mechanism, which provides random variation in piece rates conditional on revealed reservation rates, to separately identify the two channels in the context of casual labor markets in rural Malawi. A higher piece rate increases output in our setting, but does not attract more productive workers. Among men, the average worker recruited at higher piece rates is actually less productive. Local labor market imperfections appear to undermine the worker sorting observed in well-functioning labor markets. |
| JEL: | C93 J22 J24 J33 O12 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19825&r=cta |
| By: | Carine Franc (CERMES centre de recherche medecine, sciences, sante et societe); Marc Perronnin (IRDES Institute for research and information in health economics); Aurelie Pierre (IRDES Institute for research and information in health economics) |
| Abstract: | We analyze the existence and persistence of moral hazard over time to test the assumption of pent-up demand. We consider the effects of supplemental health insurance provided by a private insurer when added to compulsory public insurance already supplemented by private insurance. Using panel data from a French mutuelle, we compute error component models with the Chamberlain specification to control for adverse selection. By separating outpatient care consumption into (1) the probability of healthcare use, (2) the number of uses conditional on use and (3) the per-unit cost of care, we provide evidence that supplemental insurance is significantly and positively associated with (1), (2) and (3). However, these effects decrease significantly over time. This pattern supports the existence of pent-up demand, the magnitude of which varies greatly and depends on the dimensions (1), (2) and (3) and the type of care (physician care, prescription drugs, dental care or optical care). |
| Keywords: | Supplemental health insurance, moral hazard, health care expenditures, longitudinal analysis |
| JEL: | I13 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:irh:wpaper:dt58&r=cta |