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on Contract Theory and Applications |
| By: | Heiko Karle; Christian Staat |
| Keywords: | informed principal; moral hazard; signaling; franchising; reduced royalty rates |
| JEL: | D23 D82 D86 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/152900&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:2014-01&r=cta |
| By: | Katharina Eckartz (Friedrich-Schiller-University Jena, International Max Planck Research School on Adapting Behavior in a Fundamentally Uncertain World); Christiane Ehses-Friedrich (Max Planck Institute of Economics, Jena, International Max Planck Research School on Adapting Behavior in a Fundamentally Uncertain World, and Paris School of Economics (University Paris I).) |
| Abstract: | In this paper we attempt to compare theoretically and experimentally three models of strategic information transmission. In particular we focus on the models by Crawford & Sobel (1982), Lai (2010) and Ehses-Friedrich (2011). These three models differ in the information that the receiver possesses and the sender's knowledge about these information. Lai, 2010 introduce a partially informed decision maker into Crawford & Sobel's model. Ehses-Friedrich (2011) makes the decision maker's knowledge public knowledge. The experiment replicates the results of earlier experimental studies (Dickhaut et al., 1995, Cai & Wang, 2006, Wang et al., 2010): on the one hand experts usually give a too truthful advice, they overcommunicate. On the other hand the decision makers rely too much on the received information. Moreover, communication as well as payoffs decrease with increasing preference differences. We find that when decision makers are privately informed the messages from the expert to the decision maker are less precise than in the baseline setting. In the public information treatment, the communication is less biased. In all treatments, however, the messages are more precise than theoretically predicted. |
| Keywords: | Experiment, Strategic Information Transmission, Cheap talk, Communication |
| JEL: | C92 C72 D82 D83 |
| Date: | 2014–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-007&r=cta |
| By: | Dietrich, Franz; List, Christian |
| Abstract: | This review article introduces and evaluates various ways to aggregate probabilistic opinions of different individuals. For each of these three ways, an axiomatic characterization result is presented (a new one in the case of multiplicative pooling). The three ways satisfy different axioms and are justifiable under different conditions. Linear pooling may be justified on procedural grounds, but not on epistemic grounds. Geometric and multiplicative pooling may be justified on epistemic grounds, but which of the two is appropriate depends not just on the opinion profiles to be aggregated but also on the information on which they are based. Geometric pooling can be justified if all individuals' opinions are based on the same information, while multiplicative pooling can be justified if every individual's opinions are based solely on private information, except for some shared background information held by everyone. |
| Keywords: | subjective probability, aggregation, linear pooling, geometric pooling, multiplicative pooling, Bayesianism, informational symmetry, informational asymmetry |
| JEL: | B41 C1 C11 D7 D71 D8 D82 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54806&r=cta |
| By: | Mendolicchio, Concetta (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Pietra, Tito |
| Abstract: | "We consider Roy's economies with perfectly competitive labor markets and asymmetric information. Firms choose their investments in physical capital before observing the characteristics of the labor markets they will face. We provide conditions under which equilibrium allocations are constrained Pareto efficient, i.e., such that it is impossible to improve upon the equilibrium allocation by changing agents' investments and letting the other endogenous variables adjust to restore market clearing. We also provide a robust example of a class of economies where these conditions fail and where equilibria are characterized by overinvestments in high skills. Finally, we discuss some implications of our main results for the optimal taxation literature." (Author's abstract, IAB-Doku) ((en)) |
| Keywords: | Arbeitsmarkttheorie, Investitionsverhalten, Marktgleichgewicht, Humankapital, Besteuerung - Optimierung, Pareto Vilfredo, Arbeitsmarktmodell, Informationsfluss, Volkswirtschaftstheorie, Arbeitsmarktgleichgewicht, Unternehmen, Gleichgewichtstheorie, Bildungsinvestitionen |
| JEL: | D60 D82 J24 |
| Date: | 2014–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:201408&r=cta |
| By: | Lea Cassar |
| Abstract: | I present a model in which a principal selects one among many agents to develop a project and influences the agent’s ex post level of effort not by outcome-contingent rewards, but by the choice of the project’s mission. The closer the project’s mission to the agent’s preferred mission, the higher the agent’s intrinsic benefit from exerting effort. The principal and the agents disagree on what the project’s mission should be and the agents vary in how much they care about the project’s mission, i.e. they have heterogeneous unobservable intrinsic motivation levels. I derive the optimal mechanism (allocation rule, project’s mission, payment) to select and motivate the agent. I also consider situations where the project’s mission must be chosen prior to the allocation of the project and where the agents face budget constraints. Several applications are discussed. |
| Keywords: | Optimal contracting, non-monetary incentives, mission preferences, intrinsic motivation |
| JEL: | H41 D64 D82 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:150&r=cta |
| By: | Ennio Bilancini (Università degli Studi di Modena e Reggio Emilia); Leonardo Boncinelli (Università degli Studi di Pisa) |
| Abstract: | We develop a model of persuasion where, consistent with the psychological literature on dual process theory, the persuadee has to sustain a cognitive effort - the elaboration cost - in order to fully and precisely elaborate information. The persuader makes an offer to the persuadee and, aware that she is a dual process reasoner, also sends her a costly signal - the reference cue - which refers the offer to a category of offers whose average quality is known by the persuadee. Initially, the actual quality of the offer by the persuader is hidden to the persuadee, while the signal is visible. Then, the persuadee can either rely on cheap low elaboration and form expectations on the basis of the signal - thinking coarsely, i.e., by category - or engage in costly high elaboration to attain knowledge of the actual quality of the offer. This signaling setup allows us to keep the assumption that agents are both rational and Bayesian and, at the same time, to match many of the findings emphasized by well established psychological models of persuasion - such as the Elaboration Likelihood Model and the Heuristic-Systematic Model. In addition, the model provides novel theoretical results such as the possibility of separating equilibria that do not rely on the single-crossing property and a new rationale for the phenomenon of counter-signaling. |
| Keywords: | persuasion, coarse reasoning, peripheral and central route, heuristic and systematic reasoning, counter-signaling |
| JEL: | D01 D82 D83 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2014_04.rdf&r=cta |
| By: | Olivier Body; Régine Kolinsky |
| Keywords: | communication; experiment; information acquisition; effort |
| JEL: | C91 D83 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/158971&r=cta |
| By: | Seungjin Han |
| Abstract: | This paper shows that a competitive distribution of auctions (Peters 1997) is robust to the possibility of a seller's deviation to any arbitrary mechanism, let alone any direct mechanism because the sufficient condition for the robustness is embedded in its notion of equilibrium. This sufficient condition is generalized to examine the robustness of equilibrium in any decentralized market institution where competing principals (e.g. sellers) can offer mechanisms only from a set of mechanisms available in that market institution. The equivalence result (Gershkov et al. 2013) between Bayesian incentive compatible direct mechanisms and dominant strategy direct mechanism is also extended to express the generalized sufficient condition in terms of dominant strategy direct mechanisms. |
| Keywords: | competitive auctions, robust equilibrium, competing mechanism design |
| JEL: | C71 D82 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2014-04&r=cta |
| By: | Gete, Pedro; Tiernan, Natalie |
| Abstract: | We propose a quantitative model of lending standards with two reasons for inefficient credit: lenders' moral hazard from deposit insurance or government guarantees, and imperfect information about the persistence of asset price growth, which generates incorrect but rational beliefs in the lenders. We calibrate the model to match recent credit boom-bust episodes. Then we study which patterns of real estate price growth and banks' beliefs could serve as early warning indicators of a crisis. Finally, we propose a Value-at-Risk (VaR) rule to implement the capital requirements. The VaR framework ensures that the probability of banks not having enough equity to cover their losses is maintained at a certain level. Capital requirements should be state-contingent and lean against lenders' beliefs by tightening after periods of asset price growth. However, the relationship between asset price growth and financial risk is not monotone and this should be integrated in the setting of the capital requirements and early warning indicators. |
| Keywords: | Lending Standards, Capital Requirements, Leverage Rules, VaR, Basel III |
| JEL: | E44 G2 G21 G28 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54486&r=cta |
| By: | Cox, James C.; Sadiraj, Vjollca; Schmidt, Ulrich |
| Abstract: | This paper presents an experimental study of the random incentive mechanisms which are a standard procedure in economic and psychological experiments. Random incentive mechanisms have several advantages but are incentive-compatible only if responses to the single tasks are independent. This is true if either the independence axiom of expected utility theory or the isolation hypothesis of prospect theory holds. We present a simple test of isolation in the context of choice under risk. In the baseline (one task) treatment, we observe risk behavior in a given decision problem. We show that by adding an asymmetrically dominated choice problem in a random incentive mechanism risk behavior can be manipulated systematically; this violates the isolation hypothesis. The random incentive mechanism thus does not elicit true preferences in our example. |
| Keywords: | random incentive mechanism, isolation, asymmetrically dominated alternatives |
| JEL: | C90 D80 |
| Date: | 2014–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54722&r=cta |
| By: | Christos Koulovatianos (CREA, Université de Luxembourg) |
| Abstract: | We build a workable game of common-property resource extraction under rational Bayesian learning about the reproduction prospects of a resource. We focus on Markov-perfect strate- gies under truthful revelation of beliefs. For reasonable initial conditions, exogenously shif- ting the prior beliefs of one player towards more pressimism about the potential of natural resources to reproduce, can create anti-conservation incentives. The single player whose be- liefs have been shifted towards mor pessimism exhibits higher exploitation rate than before. In response, all other players reduce their exploitation rates in order to conserve the resource. However, the overall conservation incentive is weak, making the aggregate exploitation rate higher than before the pessimistic shift in beliefs of that single player. Due to this weakness in strategic conservation responses, if the number of players is relatively small, then in cases with common priors, jointly shifting all players' beliefs more pessimism exacerbates the commons problem. |
| Keywords: | renewable resources,resource exploitation, non-cooperative dynamic games, Bayesian learning, stochstic games, commons, rational learning, uncertainty, beliefs |
| JEL: | D83 D84 C72 C73 O13 Q20 Q50 L70 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:14-06&r=cta |
| By: | Galanis, Spyros; Vlassopoulos, Michael |
| Abstract: | We report results from a sender-receiver cheap talk game, which explores whether an individual's decision to deceive is influenced by a concern for relative standing in a reference group. We show theoretically that positively biased senders, who think they are higher in the deception distribution than they actually are, will correct their beliefs and increase their cheating, when presented with information on the actual deception distribution. Hence, a predominantly positively biased group of senders will increase its average deception. Moreover, within a group, being more positively biased implies cheating less. The experimental data confirm both of these hypotheses Keywords; deception, lying, sender-receiver game, concern for rank |
| Date: | 2014–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:stn:sotoec:1403&r=cta |
| By: | Kaplan, Todd R; Zamir, Shmuel |
| Abstract: | As a selling mechanism, auctions have acquired a central position in the free market economy all over the globe. This development has deepened, broadened, and expanded the theory of auctions in new directions. This chapter is intended as a selective update of some of the developments and applications of auction theory in the two decades since Wilson (1992) wrote the previous Handbook chapter on this topic. |
| Keywords: | Auctions; Private-Value Auctions; Multi-Unit Auctions; All-Pay Auctions; Resale; Position Auctions; Dynamic Auctions; Spectrum Auctions; Monotone Equilibrium |
| JEL: | C72 D44 D82 H57 |
| Date: | 2014–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54656&r=cta |
| By: | Rasmus Lentz |
| Abstract: | In this paper I explore optimal employment contract design in a random search framework, where workers search on and off the job for employment opportunities similar to that of Lentz (2010) and Bagger and Lentz (2013). The worker determines the frequency by which employment opportunities arrive through a costly choice of search intensity, which is unobserved by the firm and cannot be directly contracted upon. Firms differ in productivity by which they employ workers. Firms compete over workers in terms of utility promises in a fashion otherwise similar to that of Postel-Vinay and Robin (2002). As in Burdett and Coles (2003) and Burdett and Coles (2010), optimal tenure conditional contracts are shown to be back loaded to discourage the worker from generating outside competitive pressure. The analysis establishes existence, uniqueness and provides characterization of the core mechanism. The paper applies the framework to the analysis of firm provided general human capital training. It is shown that more productive firms provide more training and pay higher wages. |
| JEL: | E24 J01 J24 J31 J33 J41 J6 J63 J64 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19988&r=cta |
| By: | Marco Di Cintio (Department of Management, Economics, Mathematics and Statistics, University of Salento, Italy); Emanuele Grassi (Department of Management, Economics, Mathematics and Statistics, University of Salento, Italy) |
| Abstract: | This paper formalizes the use of flexible labor contracts in an efficiency wage framework and derives market dualism as an endogenous outcome. By allowing temporary contracts to be either renewed or converted into permanent contracts, new theoretical insights emerge both on the equilibrium wage structure and the incentive problem faced by workers and firms. Since temporary workers weigh the outside option of entering the labor market through permanent positions, the rate at which fixed-term contracts are converted into open-ended contracts is itself an incentive device which acts as a substitute for the wage. It follows that, even if temporary workers face a higher job loss risk, firms pay a wage differential in favor of permanent workers. The model also predicts that in equilibrium firms hire exclusively under flexible contracts, then half of them is converted into stable contracts while the remaining contracts are left to expire. Thus, in steady state, firms let permanent positions to survive in order to sustain the wage incentive structure. |
| Keywords: | Dual Labor Market, Efficiency Wages, Wage Differentials, Flexible Contracts |
| JEL: | J31 J41 J63 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2014.22&r=cta |
| By: | Anna Kukla-Gryz (Faculty of Economic Sciences, University of Warsaw); Michał Krawczyk (Faculty of Economic Sciences, University of Warsaw); Konrad Siwiński (Faculty of Economic Sciences, University of Warsaw); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | In this study we try to assess the prevalence of illicit downloading in the market of audio books and the willingness to admit to such practices. We compare the Bayesian Truth Serum (Prelec, 2004) treatment in which truthful responses and precise estimates are rewarded to the control treatment with a flat participation fee. We find a sizable treatment effect - incentivized “pirates” admit approximately 60% more often than the non-incentivized ones. |
| Keywords: | illegal download, digital piracy, Bayesian Truth Serum, wages |
| JEL: | A13 C93 D12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2014-10&r=cta |