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on Contract Theory and Applications |
| By: | Silvia Martínez-Gorricho (Dpto. Análisis Económico Aplicado) |
| Abstract: | This article considers a two-sided private information model. We assume that two exogenously given qualities are offered in a monopolistic market. Prices are ¿xed. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We discuss the signaling role of the consumer’s private information on the equilibrium level of dishonesty, incidence of fraud and trade. We demonstrate that the equilibrium incidence of fraud is nonmonotonic in the buyer’s private information when the prior belief favors the low-quality seller strongly enough. This result holds as long as information is noisy and regardless of its private or public nature. Welfare consequences are ambiguous. |
| Keywords: | Consumer Fraud; Asymmetric Information; Price Signalling |
| JEL: | D42 D82 G14 L15 L51 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2014-01&r=cta |
| By: | Carsten Helm (University of Oldenburg - Public Economics & ZenTra); Franz Wirl (University of Vienna, Center of Business Studies) |
| Abstract: | We consider contracting of a principal with an agent if multilateral externalities are present. The motivating example is that of an interna- tional climate agreement given private information about the willingness- to-pay (WTP) for emissions abatement. Due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation. Optimal contracts equalize marginal abatement costs and, thus, can be implemented by a system of competitive permit trading. Moreover, optimal contracts can include a boundary part (i.e., the endogenous, type dependent participation constraint is binding), which is not a copy of the outside option of no contract. Compared to this outside option, a contract can increase emissions of the principal for types with a low WTP, and reduce her payo§ for high types. Subsidies can be constant or even decreasing in emission reductions, and turn negative so that the agent reduces emissions and pays the principal. |
| Keywords: | private information, multilateral externalities, mecha- nism design, environmental agreements, type-dependent outside options |
| JEL: | D82 Q54 H87 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:zen:wpaper:32&r=cta |
| By: | Mäkinen, Taneli (Banca d’Italia); Ohl , Björn (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: | 2014–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_007&r=cta |
| By: | MAULEON, Ana; VANNETELBOSCH, Vincent |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvrp:-2482&r=cta |
| By: | Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Kerstin Pull (University of Tübingen, School of Business and Economics); Manfred Stadler (University of Tübingen, School of Business and Economics); Alexandra Zaby (University of Tübingen, School of Business and Economics) |
| Abstract: | Based on the "acquiring-a-company" game of Samuelson and Bazerman (1985), we theoretically and experimentally analyze the acquisition of a firm. Thereby we compare cases of symmetrically and asymmetrically informed buyers and sell- ers. This setting allows us to predict and test the effects of information disclosure as prescribed by two recently implemented directives of the European Union, the Transparency and the Takeover-Bid Directive. Our theoretical and experimental results suggest a welfare-enhancing effect of compulsory information disclosure. Hence, the EU Transparency and the EU Takeover-Bid Directive should both be welfare enhancing. |
| Keywords: | Acquisition of firms, disclosure of private information, experimental economics |
| JEL: | C91 D61 D82 |
| Date: | 2014–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-003&r=cta |
| By: | Laszlo Goerke (Institute for Labour Law and Industrial Relations in the EU, University of Trier) |
| Abstract: | A tax buyout is a contract between tax authorities and a tax payer which reduces the marginal income tax rate in exchange for a lump-sum payment. While previous contributions have focussed on labour supply, we consider the interaction with tax evasion and show that a buyout can increase expected tax revenues. This will be the case if (1) the audit probability is constant and the penalty for evasion is a function of undeclared income or (2) the penalty depends on the amount of taxes evaded, and authorities use information about income generated by the decision about a tax buyout offer when setting audit probabilities. Since individuals will only utilise a tax buyout if they are better off, higher tax revenues imply that such contracts can be Pareto-improving. |
| Keywords: | Asymmetric information, Revenues, Self-selection, Tax buyouts, Tax evasion |
| JEL: | D82 H21 H24 H26 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iaa:dpaper:201401&r=cta |
| By: | Egbert, Henrik; Greiff, Matthias; Xhangolli, Kreshnik |
| Abstract: | Pay What You Want (PWYW) pricing has received considerable attention recently. Empirical studies show that a PWYW pricing mechanism is able to increase a seller’s turnover and profit. This paper addresses PWYW pricing for bundles of experience goods. The paper shows that a PWYW pricing mechanism, if applied ex post consumption, separates the decision to buy from the decision how much to pay. Information asymmetries about the quality of the good are reduced during the act of consumption so that buyers are informed about the product’s quality when they decide how much to pay. As a consequence, risk-averse buyers who would otherwise refrain from purchasing under a fixed price mechanism, can be attracted to purchase under a PWYW pricing ex post consumption (PWYW-EPC) mechanism. In this case, the pricing mechanism itself constitutes a signal. The paper concludes that a PWYW pricing mechanism, applied ex post consumption, can be a profitable strategy for a seller if she sells bundles of experience goods and if she wants to attract risk-averse buyers for realizing economies of scale in production. |
| Keywords: | PWYW pricing, PWYW-EPC, asymmetric information, economies of scale, experience good, bundling, ex post consumption |
| JEL: | D4 D49 D8 M31 |
| Date: | 2014–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53376&r=cta |
| By: | Pierre Chaigneau; Nicolas Sahuguet |
| Abstract: | Puzzling associations between low levels of ownership concentration and CEO pay practices such as pay-for-luck, a low pay-performance sensitivity, a more asymmetric pay-performance relation, and high salaries, have been documented. They have been interpreted as evidence that CEO pay is not set optimally. We explain these associations in a model in which firms design contracts optimally to attract and retain CEOs. The results are driven by the matching process: firms with greater ownership concentration have a higher monitoring capacity, and can better handle the downside risk of hiring CEOs with more uncertain ability. The outside option of these CEOs is more sensitive to their performance net of luck, which generates a higher pay-performance sensitivity and less pay-for-luck. If managerial skills are sufficiently transferable across firms and the cost of CEO dismissal is sufficiently high, these CEOs are less valuable and therefore receive relatively lower salaries. |
| Keywords: | CEO pay, corporate governance, monitoring, pay-for-luck |
| JEL: | D86 G34 M12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1406&r=cta |
| By: | Andrew Caplin; Mark Dean |
| Abstract: | We develop a revealed preference test for optimal acquisition of costly information. The test encompasses models of rational inattention, sequential signal processing, and search. We provide limits on the extent to which attention costs can be recovered from choice data. We experimentally elicit state dependent stochastic choice data of the form the tests require. In simple cases, tests confirm that subjects adjust their attention in response to incentives as the theory dictates. |
| JEL: | D80 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19876&r=cta |
| By: | Tanja Hörtnagl; Rudolf Kerschbamer |
| Abstract: | This paper challenges recent results on the fragility of the value of commitment. It introduces a specific notion of the ’value of information’ for a later-moving player about the action choice of a previously-moving player, gives conditions under which this value is positive and shows that a positive value of information for the latermoving player is sufficient for a positive value of commitment for the previouslymoving player. It then argues that the value of information for a later-moving player is unlikely to vanish in real-world applications, implying that the value of commitment for the previously-moving player does not vanish either. |
| Keywords: | Value of Information, Value of Commitment, Sequential Move Game, Imperfect Observability, Stackelberg Duopoly, First-Mover Advantage |
| JEL: | C72 D82 D83 L13 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2014-03&r=cta |
| By: | Camargo, Braz (Sao Paulo School of Economics); Camelo, Rafael (Sao Paulo School of Economics); Firpo, Sergio (Sao Paulo School of Economics); Ponczek, Vladimir (Sao Paulo School of Economics) |
| Abstract: | This paper uses a discontinuity on the test score disclosure rules of the National Secondary Education Examination in Brazil to test whether test score disclosure affects student performance, the composition of students in schools, and school observable inputs. We find that test score disclosure has a heterogeneous impact on test scores, but only increases average test scores in private schools. Since test score disclosure has no impact on student composition and school observable inputs in both public and private schools, our results suggest that test score disclosure changes the behavior of teachers and school managers in private schools by affecting the market incentives faced by such schools. We also develop a model of school and student behavior to help explain our empirical findings. |
| Keywords: | test score disclosure, market incentives, public and private schools |
| JEL: | I20 I21 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7941&r=cta |
| By: | Loukas Balafoutas; Adrian Beck; Rudolf Kerschbamer; Matthias Sutter |
| Abstract: | In markets where transactions are governed by contractual incompleteness, revealed intentions to evade taxes may affect market performance. We experimentally examine the impact of tax evasion attempts on the performance of credence goods markets, where contractual incompleteness results from asymmetric information on the welfare maximizing quality of the good. We find that tax evasion attempts – independently of whether they are successful or not – lead to efficiency losses in the form of too low quality and less frequent trade. Thus, shadow economies induce an excess burden not only by hampering the collection of tax revenues, but also by reducing market efficiency. |
| Keywords: | Credence goods, expert services, tax evasion, fraud, experiment |
| JEL: | C72 C91 D82 H26 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2014/01&r=cta |