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on Contract Theory and Applications |
| By: | Martimort, David; Semenov, Aggey; Stole, Lars |
| Abstract: | We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset. Public enforcement relies on remedies for breach. Private enforcement comes from severing relationships. We first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly. Whether a long-term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller. While under complete information, the optimal contract would remain stationary, non-stationarity might arise under asymmetric information. Enforcement constraints are time-dependent and easier to satisfy as time passes. Indeed, a high-cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on. Yet, such take-the-money-and-run strategy becomes less attractive as time passes and can be prevented with backloaded payments. The optimal contract thus goes through two different phases. First, quantities and prices increase at the inception of the relationship. Later on, the contract looks more stationary. The public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting. Long-run screening distortions encapsulate the quality of enforcement, offering de facto a link between the quality of the legal system and contractual performances. |
| Keywords: | Asymmetric information, enforcement, breach of contracts, dynamic contracts |
| JEL: | D82 D86 |
| Date: | 2014–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53504&r=cta |
| By: | Semenov, Aggey |
| Abstract: | We consider a delegation problem with a potentially uninformed agent when the principal cannot use monetary payments. If the bias between the principal and the agent is large, then the optimal delegation set is an interval. When the bias is small or medium however, the optimal delegation set is no longer connected. It can be one of two types: with an interval and low option, the other with two intervals. In all cases the agent has less discretion. However, in the case of medium biases the principal delegates in a wider range than in the case of informed agent. In all cases the agent will be given more freedom if he is more informed. |
| Keywords: | Delegation, non-informed agent, delegation set |
| JEL: | D86 D82 |
| Date: | 2012–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42080&r=cta |
| By: | Sidartha Gordon (Département d'économie); Ying Chen |
| Abstract: | We introduce a “nestedness” relation for a general class of sender-receiver games and compare equilibrium properties, in particular the amount of information transmitted, across games that are nested. Roughly, game is nested in game if the players’s optimal actions are closer in game. We show that under some conditions, more information is transmitted in the nested game in the sense that the receiver’s expected equilibrium payoff is higher. The results generalize the comparative statics and welfare comparisons with respect to preferences in the seminal paper of Crawford and Sobel (1982). We also derive new results with respect to changes in priors in addition to changes in preferences. We illustrate the usefulness of the results in three applications: (i) delegation to an intermediary with a different prior, the choice between centralization and delegation, and two-way communication with an informed principal. |
| Keywords: | sender-receiver games, information transmission, nestedness, inter- mediary, delegation, informed principal. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/5adcidkke9omt0s9p6m01j1rh&r=cta |
| By: | Dhillon, Amrita (Kings College, London); Peeters, Ronald (Maastrict); Muge Yukse, Ayse (Maastrict) |
| Abstract: | The use of social networks in the workplace has been documented by many authors, although the reasons for their widespread prevalence are less well known. In this paper we present evidence based on a lab experiment that suggests quite strongly that social networks are used by employers to reduce worker moral hazard. We capture moral hazard with a dictator game between the referrer and worker. The worker chooses how much to return under dierent settings of social proximity. Social proximity is captured using Facebook friendship information gleaned anonymously from subjects once they have been recruited. Since employers themselves do not have access to social connections, they delegate the decision to referrers who can select among workers with dierent degrees of social proximity to themselves. We show that employers choose referrals over anonymous hiring relatively more when they know that the referrer has access to friends, and are willing to delegate more often when the social proximity between referrer and worker is potentially higher. In keeping with this expectation, referrers also choose workers with a greater social proximity to themselves and workers who are closer to referrers indeed pay back more to the referrer. The advantage of the lab setting is that we can isolate directed altruism as the only reason for these results. |
| Keywords: | Eciency wage contracts, Moral hazard, Dictator game, Referrals, Altruism, Reciprocity, Directed altruism, Social proximity, Facebook, Experiment, Social networks, Strength of ties, Spot market. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:183&r=cta |
| By: | Sumit Agarwal; Itzhak Ben-David |
| Abstract: | We study a controlled corporate experiment in which loan officers’ compensation structure was altered from fixed salary to volume-based pay. The incentives increased aggressiveness of origination: higher origination rates (+31%), larger loan sizes (+15%), and higher default rates (+28%). Under the incentive system, loan officers have greater influence on loan approval decisions; however, their recommendations do not convey more information. Poor loan performance is caused by lax approval and aggressive loan terms, and is more likely to occur among end-of-month originations, male loan officers, and tenured loan officers. About 10% of the loans under the incentive system are likely to have negative net present value. |
| JEL: | G01 G21 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19945&r=cta |
| By: | G. F. Gori; L. Lambertini |
| Abstract: | This paper investigates the relationship between trade liberalisation, consumers' environmental awareness and a negative environmental externality in consumption. We adopt an international Hotelling duopoly setup, where firms are located in two asymmetric countries. We find that, if the intensity of environmental externality is common knowledge for country governments, this setup delivers no need of accompanying trade policies in order to enforce trade liberalisation. In the opposite case, in which information is asymmetric, i.e., the small country's Government cannot observe the positive enviromental effects of its firm's exports to foreign consumers, we find that: (i) the Pareto optimum is always enforced, since the brown country always relaxes the distortionary trade policy, and (ii) cheating on the environmental externality allows the brown country's government to extract extra surplus from the green country. Allowing for trade in green technology delivers opposite conclusions: the externality is minimised and welfare is maximised in equilibrium if information is symmetric while trade liberalisation with asymmetric information always entails a second best outcome. |
| JEL: | F12 L13 H23 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp930&r=cta |
| By: | Chia-Hui Chen; Junichiro Ishida |
| Abstract: | While political correctness is a dominant norm in many public situations, we also observe behaviors that are apparently ''politically incorrect,'' often from professionals and experts. This paper examines the flip side of political correctness as analyzed in Morris (2001) to shed some light on the elusive notion of political incorrectness and elucidate its equilibrium and welfare properties. We show that there are circumstances in which unbiased experts deliberately take a politically incorrect stance out of reputational concerns and identify key elements which give rise to this perverse reputational incentive. The results suggest that political incorrectness cannot necessarily be viewed as a sign of blunt honesty when informed experts have long-term reputational concerns. We also examine the welfare consequences of political incorrectness and argue that this form of information manipulation can be beneficial under some conditions. |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0894&r=cta |
| By: | Chiraz Ben Ali |
| Abstract: | Disclosure could mitigate the weakness of institutional context in protecting investors by reducing information asymmetry. This study examines a set of corporate governance features that influence disclosure quality in a context of of principal-principal conflicts and poor investor protection. Using a sample of French firms, our results show that minority expropriation risk harms disclosure quality. We find that disclosure is negatively associated with ownership concentration, major shareholder voting rights, the existence of double voting rights and family control. The results obtained also evidence a positive relationship between disclosure quality and the existence of executive stock option plans giving support that this mechanism plays a key role in corporate transparency. This study adds to the research on principal-principal conflicts and contributes to the controversial debate on stock-options efficiency. |
| Keywords: | Corporate governance, Disclosure, Principal-principal conflicts |
| Date: | 2014–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-125&r=cta |
| By: | Dirk Czarnitzki; Bronwyn H. Hall; Hanna Hottenrott |
| Abstract: | Information about the success of a new technology is usually held asymmetrically between the research and development (R&D)-performing firm and potential lenders and investors. This raises the cost of capital for financing R&D externally, resulting in financing constraints on R&D especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms’ patenting activity on the degree of financing constraints on R&D for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal. |
| JEL: | G32 O31 O32 O38 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19947&r=cta |
| By: | Inderst, Roman; Pfeil, Sebastian |
| Abstract: | We show how a brand manufacturer’s control over retail prices can lead to efficiencies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers. |
| Keywords: | Resale Price Maintenance; Quality Incentives; Quality Image |
| JEL: | L15 L42 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54139&r=cta |