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on Contract Theory and Applications |
| By: | Florian Ederer (Cowles Foundation & SOM, Yale University); Richard Holden (Australian School of Business, University of New South Wales); Margaret Meyer (Dept. of Economics, Nuffield College) |
| Abstract: | It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments in a two-task moral hazard model in which the agent is privately informed about which task is less costly for him to work on. We examine two simple classes of incentive scheme that are "opaque" in that they make the agent uncertain ex ante about the values of the incentive coefficients in the linear payment rule. We show that, relative to deterministic menus of linear contracts, these opaque schemes induce more balanced efforts, but they also impose more risk on the agent per unit of aggregate effort induced. We identify settings in which optimally designed opaque schemes not only strictly dominate the best deterministic menu but also completely eliminate the efficiency losses from the agent's better knowledge of the environment. Opaque schemes are more likely to be preferred to transparent ones when i) efforts on the tasks are highly complementary for the principal; ii) the agent's privately known preference between the tasks is weak; iii) the agent's risk aversion is significant; and iv) the errors in measuring performance on the tasks have large correlation or small variance. |
| Keywords: | Incentives, Gaming, Contracts, Opacity |
| JEL: | D86 D21 L22 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1935&r=cta |
| 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:2014-08&r=cta |
| By: | Li X.; Peeters R.J.A.P. (GSBE) |
| Abstract: | We consider a cheap-talk setting that mimics the situation where an incumbent firm the sender is endowed with incentives to understate the true size of the market demand to two potential entrants the receivers. Although our experimental data reveals that senders messages convey truthful information and this is picked up by the receivers, this overcommunication relative to standard theoretical prediction does not enhance efficient entry levels and payoffs to beyond what can be achieved without any communication. The reason is that receivers fail to optimally translate the information received in their entry decision, possibly due to overcautiousness. |
| Keywords: | Noncooperative Games; Design of Experiments: Laboratory, Group Behavior; Asymmetric and Private Information; Mechanism Design; Search; Learning; Information and Knowledge; Communication; Belief; |
| JEL: | C72 C92 D82 D83 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2013035&r=cta |
| By: | Schnedler, Wendelin |
| Abstract: | Incentives often distort behavior: they induce agents to exert effort but this effort is not employed optimally. This paper proposes a theory of incentive design allowing for such distorted behavior. At the heart of the theory is a trade-off between getting the agent to exert effort and ensuring that this effort is used well. The theory covers various moral-hazard models, ranging from traditional single-task to multi-task models. It also provides -for the first time- a formalization and proofs for various widely-spread perceived wisdoms about incentive design and distorted behavior. -- |
| JEL: | M52 D86 J33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79775&r=cta |
| By: | Herbold, Daniel |
| Abstract: | We study an infinitely repeated principal-agent relationship with on-the-job search. On-the-job search is modeled as a dimension of the agent's effort vector that has no effect on output, but raises his future outside option. The agent's incentives to search are increasing in the degree to which a higher outside option improves his gains from trade. Search also increases the agent's cost of effort thus generating an effort-substitution problem between work and search effort. We show that the principal can mute search incentives by offering an e fficiency wage contract. Due to effort substitution, e fficiency wages increase the agent's work effort incentives for a given bonus scheme. Thus, effi ciency wages serve as a complement rather than as a substitute to piece rates. Our results provide a new rationale for the use of effi ciency wages as an incentive device and hence greatly extend the set of environments in which e fficiency wages are predicted to be useful as an incentive device. Our findings thus also contribute to the explanation of empirically observed inter-industry variation in the size and composition of worker compensation. -- |
| JEL: | C73 D86 J33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79983&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:2014-07&r=cta |
| By: | Wagner, Lilo; Baumann, Julian |
| Abstract: | We rationalize a special type of sharing information which can typically be found in markets for occupational disability insurances. There, firms share information about acceptances and rejections of an applicant. We set up a multiple-step signalling model with uninformed agents and endogenize competing principals' decisions to acquire information on risk types. We formalize the idea that information exchange also serves as a tool to signal an applicant's switching type. This may lessen competition and increase industry profits or result in a higher share of uninsured applicants as compared to a market without information sharing. In any case, consumer welfare is reduced. Our model also helps to understand why access to the system is not made dependent on the provision of own data. In addition, we rationalize the existence of anonymous prequalification tests that allow consumers to gain information about their risk type without risking to enter a system entry. -- |
| JEL: | D82 D83 G22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80015&r=cta |
| By: | Vermeulen A.J.; Schr?der M.J.W.; Flesch J. (GSBE) |
| Abstract: | We consider a bilateral trade model in which both players have a finite number of possible valuations. The sellers valuation and the buyers valuation for the object are private information, but the independent beliefs about these valuations are common knowledge. In this setting, we provide a characterization of the set of interim individually rational-implementable trading rules, analogous to the result of Myerson and Satterthwaite 1983. Thereafter, we derive necessary conditions for incentive compatible and ex post individually rational direct mechanisms. For the special class of corner mechanisms with discrete uniform beliefs, we characterize the set of ex post individually rational-implementable trading rules. In this context it is also shown that ex post efficiency can only be achieved if the number of different valuations is small. The maximal number of different valuations for which efficiency is still possible depends on the prior probability distribution of valuations. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2013025&r=cta |
| By: | Vermeulen A.J.; Schröder M.J.W.; Peters H.J.M. (GSBE) |
| Abstract: | We consider effectivity functions for finitely many players and alternatives. We assume that players have incomplete information with respect to the preferences of the other players. Our main result is the characterization of effectivity functions which have an ex post Nash consistent representation, i.e., there is a game form such that i the distribution of power among coalitions of players is the same as in the effectivity function and ii there is an ex post Nash equilibrium in pure strategiesfor any preference profile. |
| Keywords: | Existence and Stability Conditions of Equilibrium; Game Theory and Bargaining Theory: General; Asymmetric and Private Information; Mechanism Design; |
| JEL: | C62 C70 D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2013049&r=cta |
| By: | Schöttner, Anja; Kragl, Jenny |
| Abstract: | We analyze the effects of wage floors on optimal job design in a moral-hazard model with asymmetric tasks and imperfect aggregate performance measurement. Due to cost advantages of specialization, assigning the tasks to different agents is efficient. A sufficiently high wage floor, however, induces the principal to dismiss one agent or to even exclude tasks from the production process. Imperfect performance measurement always lowers profit under multitasking, but may increase profit under specialization. We further show that variations in the wage floor and the agents' reservation utility have significantly different effects on welfare and optimal job design. -- |
| JEL: | M52 M51 M54 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79941&r=cta |
| By: | Kräkel, Matthias; Müller, Daniel |
| Abstract: | We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies even when targets with high synergies are available to obtain high-powered incentives and, hence, a high personal income at the merger-management stage. We derive conditions under which shareholders prefer a self-commitment policy or a rent-reduction policy to deter the CEO from opportunistic recommendations. -- |
| JEL: | D82 D86 G34 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79914&r=cta |
| By: | Lindner, Florian; Dutcher, E. Glenn; Balafoutas, Loukas; Ryvkin, Dmitry; Sutter, Matthias |
| Abstract: | Managers often use tournament incentive schemes which motivate workers to compete for the top, compete to avoid the bottom, or both. In this paper we test the effectiveness and efficiency of these incentive schemes. To do so, we utilize optimal contracts in a principal-agent setting, using a Lazear-Rosen type model that predicts equal effort and efficiency levels for three tournament incentive schemes: reward tournaments, punishment tournaments, and tournaments combining reward and punishment. We test the model s predictions in a laboratory experiment and find that the combination of reward and punishment produces the highest effort from agents, especially in contests of a relatively larger size. Punishment is shown to be more effective and, in larger contests, more efficient than rewards, and it is also the mechanism with the lowest variance of effort. Finally, we show that behavior in all mechanisms is consistent with a model of basic directional and reinforcement learning. -- |
| JEL: | M52 J33 C90 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79885&r=cta |
| By: | Rosar, Frank |
| Abstract: | I study the interaction between optimal procurement and outsourcing of production in small industries. First, two sellers decide about outsourcing. By outsourcing, a seller loses information about the costs of producing to his supplier. Then the buyer designs the procurement mechanism and sellers who outsourced production subcontract with their respective suppliers. The focal equilibrium might exhibit bilateral outsourcing although outsourcing is modeled to have no direct positive effects. When a seller is able to extract his supplier s rent ex ante, the focal equilibrium exhibits bilateral outsourcing for any distribution of production costs satisfying a regularity condition. -- |
| JEL: | D44 D82 L23 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79812&r=cta |
| By: | Seel, Christian |
| Abstract: | This paper analyzes a two-player all-pay auction with incomplete information. More precisely, one bidder is uncertain about the size of the initial advantage of his rival modeled as a head start in the auction. I derive the unique Bayesian Nash equilibrium outcome for a large class of cumulative distribution functions over head starts. In equilibrium, the stronger player generates an informational rent if and only if his head start distribution is not stochastically dominated by a uniform distribution. This result introduces a new perspective on lobbying contests and procurement contests. -- |
| JEL: | C72 C73 D72 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79930&r=cta |
| By: | Elías Albagli |
| Abstract: | I study a generalized OLG economy where asymmetrically informed agents have arbitrary investment horizons. As horizons increase, the age-adjusted risk aversion of investors fall, and the risk transfer from forced liquidators into voluntary buyers drops. Two equilibria coexist for long enough horizons: a stable, low volatility equilibrium, and an unstable one with higher volatility. Along the stable equilibrium, longer horizons raise prices, lower volatility, and incite aggressive trading by the informed investors, which impound their knowledge into prices and improve market efficiency. For short horizons, cautious trading disaggregates information from prices, and the economy approaches one with no private information. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:709&r=cta |
| By: | Hilmer, Michael |
| Abstract: | We analyze the consequences of bonus taxes, limited deductibility of bonuses from company pro ts and a corporate income tax (CIT) in a principal-agent model and explore how these tax instruments a ffect managerial incentives and how they change the design of incentive contracts used in equilibrium. Introducing bonus taxes decreases the agent's net bonus and reduces eff ort. Limited deductibility has no such e ffects. In equilibrium both instruments lead to a lower eff ort incentivized by the principal with a lower bonus when bonuses are less deductible. We find that a bonus tax can lead to an increase in bonus payments. Moreover, the model explains the welfare eff ects and distributional implications of the actions named above. Limited deductibility and bonus taxes are close substitutes and lead to a welfare loss compared to a taxation by a CIT as the CIT neither has an eff ect on incentives nor on the incentive contract. Furthermore welfare can be increased by paying a subsidy for bonus payments. -- |
| JEL: | H25 J33 M52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79703&r=cta |
| By: | Pablo Kurlat; Johannes Stroebel |
| Abstract: | We study equilibrium outcomes in markets with asymmetric information about asset values among both buyers and sellers. In residential real estate markets hard-to-observe neighborhood characteristics are a key source of information heterogeneity: sellers are usually better informed about neighborhood values than buyers, but there are some sellers and some buyers that are better informed than their peers. We propose a new theoretical framework for analyzing such markets with many heterogeneous assets and differentially informed agents. Consistent with the predictions from this framework, we find that changes in the seller composition towards (i) more informed sellers and (ii) sellers with a larger supply elasticity predict subsequent house-price declines and demographic changes in that neighborhood. This effect is larger for houses whose value depends more on neighborhood characteristics, and smaller for houses bought by more informed buyers. Our findings suggest that home owners have superior information about important neighborhood characteristics, and exploit this information to time local market movements. |
| JEL: | D53 D82 G14 R21 R31 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19875&r=cta |
| By: | Sieg, Gernot; Rothbauer, Jula |
| Abstract: | A welfare-maximizing Public Service Broadcaster (PSB) broadcasts both information-type and show-type content if (i) the information consumption of TV viewers generates external benefits for society by improving the ability of voters to control politicians and (ii) the marginal external benefits of information consumption diminish as the information possessed by voters increases. We analyze a two-sided free-to-air TV market with two differentiated private channels and a commercial-free PSB. Welfare depends on the efficiency of the PSB, the external benefits of voter information, and lost rents from the advertising market. Welfare can be higher without a PSB. -- |
| JEL: | L82 D72 L32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79800&r=cta |
| By: | Wambach, Achim; Gretschko, Vitali |
| Abstract: | We compare two commonly used mechanisms in procurement: auctions and negotiations. The execution of the procurement mechanism is delegated to an agent of the buyer. The agent has private information about the buyer s preferences and may collude with one of the sellers. We provide a precise definition of both mechanisms and show contrary to conventional wisdom that an intransparent negotiation yields a higher buyer surplus than a transparent auction for a range of parameters. In particular, for small expected punishments there exists a lower and an upper bound on the number of sellers such that the negotiation yields a higher buyer surplus with a probability arbitrary close to 1 in the parameter space. Moreover, if the expected punishment is small, the negotiation is always more efficient and generates a higher surplus for the sellers. -- |
| JEL: | D44 D73 H57 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79774&r=cta |
| By: | Kragl, Jenny; Gogova, Martina |
| Abstract: | We analyze optimal labor contracts when the worker is inequity averse towards the employer. Welfare is maximized for an equal sharing rule of surplus between the worker and the firm. That is, profit sharing is optimal even if effort is contractible. If the firm can make a take-it-or leave-it offer, the optimal contract is also state-dependent but always suboptimal with respect to welfare. The reason is that the firm will always pay the worker less than half of the surplus, thereby leading to agency costs due inequity aversion. If the parties bargain over the optimal contract, the optimal division of surplus is more equitable compared to the case with a purely selfish worker. Moreover, the optimal contract with bargaining approaches the welfare-optimal contract as the parties' bargaining power converges. Our results help explain why workers are willing to accept lower wages in times of crisis but demand higher wages in times of economic rise. Moreover, our findings imply that raising the bargaining power of the less powerful party may increase welfare -- |
| JEL: | M52 D03 D86 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79790&r=cta |
| By: | Müller, Daniel; Herweg, Fabian |
| Abstract: | We consider a monopolistic supplier's optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts often improves welfare. This also holds if the manufacturer is not an unconstrained monopolist. Moreover, uniform pricing increases downstream investments in cost reduction in the long run. -- |
| JEL: | D43 L11 L42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79978&r=cta |
| By: | Ott, Marion; Beck, Marissa |
| Abstract: | We find new equilibria of minimum-revenue core-selecting (MRCS) auctions that, in contrast to previously identified equilibria, involve overbidding - bidding more than one's true value for some packages of goods. With full information, every MRCS auction in every possible setting has equilibria with overbidding and these equilibria have different properties than the previously known equilibria with bid shading. Namely, they can lead to strictly higher revenues for the seller and larger price differences among bidders. Previous studies of MRCS games with incomplete information assumed restricted strategy spaces that prevented overbidding. In this paper, we allow bidders access to their complete strategy sets and show that, in some settings, overbidding occurs in all Bayesian equilibria in undominated strategies. In a simple setting with independent private values, equilibrium strategies of a particular set of MRCS auctions employ a mixture of bid shading and overbidding. These new equilibria improve expected effi ciency relative to equilibria with restricted strategy spaces and lead to higher expected revenues than those from the Vickrey package auction. A second incomplete-information setting demonstrates that equilibria with overbidding can be in some sense unique. In this setting, every Bayesian equilibrium in undominated strategies of every MRCS auction has at least one bidder who overbids and there is no bid shading on winning packages. Overbidding eliminates the threshold problem, leading to an effi cient assignment and payoffs that are in the core with respect to the true values. -- |
| JEL: | D44 D02 L13 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79946&r=cta |
| By: | Johannes Horner (Yale University) |
| Abstract: | This paper examines the optimal design of recommendation systems. Given the option value of experimentation, short-run consumers' incentives to experiment are too low; the social planner can encourage experimentation by providing selective information to the consumers, in the form of a recommendation. Under the optimal scheme, we show that the amount of experimentation is optimal, but experimentation occurs too slowly. Moreover, the rate of experimentation increases over an initial phase. Whether recommendations should be coarse or precise depends on the designer's information about the consumers' idiosyncratic characteristics. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:881&r=cta |
| By: | Kislat, Carmen; Menkhoff, Lukas; Neuberger, Doris |
| Abstract: | The ex ante theory of collateral states that better informed lenders, such as informal lenders, rely less on collateral. We test this by contrasting the use of collateral between formal and informal lenders in the same market. Indeed, formal lenders rely more often on collateral, controlling for conventional determinants of collateral. Moreover, better information about borrowers has implications within lender groups: first, relationship lending reduces asymmetric information, but only for formal lenders who use collateral less with longer relationship; second, short distance between lender and borrower reduces asymmetric information, mainly for informal lenders who use collateral less at shorter distances. -- |
| JEL: | O16 O17 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79765&r=cta |
| By: | Li X.; Peeters R.J.A.P. (GSBE) |
| Abstract: | In the recent past there have been numerous scandals around bad practices in the food industry. Although it can be easily rationalized why these bad practices have not been reported by the inflictors themselves, it is more difficult to understand why the non-inflicting competitors did not report their rivals conspicuous acts. In this paper we study these competitors incentives to acquire and to disclose information on the quality of their rivals products and how regulatory intervention may enhance information disclosure. Our model involves two firms that compete in prices within a differentiated product market, where the quality of one of the firms is publicly known while that of the other firm is unknown. Before the firms set their prices, the former firm has the possibility to acquire information on the quality of the latter firms product, and, if decided to do so, subsequently, the possibility to credibly reveal this information to the public. We find that low quality levels can be disclosed in a substitute market, but should not be expected to be disclosed in a complement market. Policies that mandate acquisition or disclosure may enhance disclosure of low quality levels, but fail to be welfare enhancing. |
| Keywords: | Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection; Information and Product Quality; Standardization and Compatibility; Enterprise Policy; |
| JEL: | L15 L53 D43 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2013032&r=cta |
| By: | Büchel, Berno; Hellmann, Tim; Klößner, Stefan |
| Abstract: | We present a model of opinion formation where individuals repeatedly engage in discussion and update their opinion in a social network similarly to the DeGroot model. Abstracting from the standard assumption that individuals always report their opinion truthfully, agents in our model may state an opinion that differs from their true opinion. The incentive to do so is induced by agents' preferences for conformity. We model opinion formation as a dynamic process and identify conditions for convergence to a consensus. Studying the consensus in detail, we show that an agent's social influence on the consensus opinion is increasing in network centrality and decreasing in the level of conformity. Thus, lower conformity fosters opinion leadership. Moreover, assuming that the initial opinion is a noisy signal about some true state of the world, we study how conformity affects the efficiency of information aggregation or the ``wisdom'' of the society. We show that the society becomes wiser, in the sense of a smaller mean squared error of their estimate, if players who are well informed (relative to their network importance) are less conform, while uninformed players (relative to their network importance) conform more with their neighbors. -- |
| JEL: | D83 D85 Z13 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79770&r=cta |