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on Contract Theory and Applications |
| By: | Iwata, Hiroki |
| Abstract: | In recent years, voluntary approaches are expected to function as new environmental protection tools. This article analyzes whether environmental information of firms should be mandatorily disclosed or disclosed voluntarily, where consumers consider the environmental burdens of firms when buying their goods. If a mandatory policy is implemented, every firm in the market will be required to disclose their environmental burdens. On the contrary, only firms that want to disclose their environmental burdens will share their environmental information if a voluntary approach is implemented. This article particularly demonstrates the effects of the disclosure rule (mandatory or voluntary) on investment to reduce environmental burdens. The model has two types of firms, clean and dirty ones. Firms that investigate their environmental burdens and turn out to be dirty can invest to reduce them and become clean before they disclose their environmental information. The main conclusions in this article are as follows. (1) Mandatory disclosure policies may induce firms to invest more than a voluntary approach. (2) Firms may have lower expected profit under the mandatory rule than the voluntary approach. (3) Under full information disclosure policy, the environmental burden is smaller than that of other policies. |
| Keywords: | Environmental information disclosure; Investment; Asymmetric information |
| JEL: | D82 L15 Q55 |
| Date: | 2014–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:54784&r=cta |
| By: | David Reinstein; Joon Song |
| Abstract: | Real-world policymakers want to extract investors private information about a policy's likely effects by listening to "asset markets". However, this brings the risk that investors will profitably "manipulate" prices to steer policy. We model the interaction between a policymaker and an informed (profit-seeking) investor who can buy/short-sell an asset from uniformed traders. We characterize when the investor's incentives do not align with the policymaker's, implying that to induce truth-telling behaviour the policymaker must commit to sometimes ignoring the signal (as revealed by the investor's behaviour driving the asset's price). This implies a commitment to executing the policy with a probability depending on the asset's price. We develop a taxonomy for the full set relationships between private signals, asset values, and policymaker welfare, characterizing the optimal indirect mechanism for each case. We find that where the policymaker is ex-ante indifferent, she commits to sometimes/never executing after a bad signal, but always executes after a good signal. Generically, this "listeneing" mechanism leads to higher (policymaker) welfare then ignoring the signals. We discuss real-world evidence, implications for legislative processes, and phenomena such as "trial balloons" and "committing political capital". |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:748&r=cta |
| By: | Michael J. Roberts (Department of Economics, University of Hawaii at Manoa & Sea Grant); Erik O'Donoghue (USDA Economic Research Service); Nigel Key (USDA Economic Research Service) |
| Abstract: | We use data from the administrative les of the U.S. Department of Agriculture's Risk Management Agency to examine how the distribution of crop yields changed as individual farmers shifted into and out of the federal crop insurance program. The large panel facilitates use of fixed effects that span each combination of farmer and production practice to account for unobserved differences in farmer abilities, risk preferences and soils, in addition tofixed effects for interactions between all years and all counties to account for geographically-specific technological change, local prices, and weather. We also account for farm-specific yield variances. Conditional on this large set of fixed effects, we estimate the mean shift in yield and non-parametrically estimate the shift in the distribution around the conditional mean associated with enrollment incrop insurance. Because differences between farmer and land types have been accounted for (i.e., controlling for adverse selection), the estimated shifts in yield distributions likely reflect moral hazard. For most crops in most states we find insurance is associated with statistically signicant but small downward shifts in average yield. The largest shifts occur for cotton and rice, the highest-value of ve crops considered. By integrating the estimated shift in yield distributions over actual indemnities paid, we provide estimates of the total indemnities paid due to moral hazard. Our results indicate moral hazard accounted for an estimated $53.7 million in indemnities between 1992 and 2001, which amounts to 0.9% of indemnities paid to the insured crops and states considered. |
| Keywords: | Moral hazard, asymmetric information, insurance, agricultural policy |
| JEL: | D82 G22 Q18 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201410&r=cta |
| By: | Todd R. Kaplan (Department of Economics, University of Exeter and University of Haifa); Shmuel Zamir (Department of Economics, University of Exeter and the Center for the Study of Rationality, The Henrew University of Jerusalem, Israel) |
| 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: | D44 D82 C72 H57 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1405&r=cta |
| By: | Williamson, Stephen D. (Washington University in St. Louis); Carapella, Francesca (Board of Governors of the Federal Reserve System) |
| Abstract: | A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not. |
| JEL: | E4 E5 E6 |
| Date: | 2014–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-010&r=cta |
| By: | David Hugh-Jones; David Reinstein |
| Abstract: | In public goods environments, the threat to punish non-contributors may increase contributions. However, this threat may make players' contributions less informative about their true social preferences. This lack of information may lead to lower contributions after the threat disappears, as we show in a two stage model with selfish and conditionally cooperatives types. Under specified conditions welfare may be improved by committing not to punish or exclude. Our laboratory evidence supports this. Contributions under the threat of targeted punishment were less informative of subjects' later choices than contributions made anonymously. Subjects also realised that these were less informative, and their incentivized predictions reflected this understanding. We find evidence of conditional cooperation driven by beliefs over other's contributions. Overall, our anonymous treatment led to lower first-stage contributions but significantly higher second-stage contributions than our revealed treatment. Our model and evidence may help explain why anonymous contributions are often encouraged in the real world. |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:750&r=cta |
| By: | Gaudeul, A.; Crosetto, P.; Riener, G. |
| Abstract: | We explore in an experiment what leads to the breakdown of partnerships. Subjects are assigned a partner and participate in a repeated public good game with stochastic outcomes. They can choose each period between staying in the public project or working on their own. There is excessive exit as subjects overestimate the likelihood their partner will leave. High barriers to exit thus improve welfare. We observe that exit is driven by failure within the common project but also by pay-off comparisons across options and beliefs about being exploited. Those considerations increasingly matter as we lower exit costs across treatments. |
| Keywords: | BREAKUP;COLLABORATION;COOPERATION;EXIT;IMPERFECT PUBLIC MONITORING;MORAL HAZARD;PARTNERSHIP;PUNISHMENT;PUBLIC GOOD;REPEATED GAME;SOCIAL RISK;TEAM |
| JEL: | C23 C92 H41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2014-02&r=cta |
| By: | Colliard, Jean-Edouard |
| Abstract: | The regulatory use of banks' internal models aims at making capital requirements more accurate and reducing regulatory arbitrage, but may also give banks incentives to choose their risk models strategically. Current policy answers to this problem include the use of risk-weight floors and leverage ratios. I show that banks for which those are binding reduce their credit supply, which drives interest rates up, invites other banks to adopt optimistic models and possibly increases aggregate risk in the banking sector. Instead, the strategic use of risk models can be avoided by imposing penalties on banks with low risk-weights when they suffer abnormal losses or bailing out defaulting banks that truthfully reported high risk measures. If such selective bail-outs are not desirable, second-best capital requirements still rely on internal models, but less than in the first-best. JEL Classification: D82, D84, G21, G32, G38 |
| Keywords: | Basel risk-weights, internal risk models, leverage ratio, tail risk |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141641&r=cta |
| By: | Schnedler, Wendelin; Vanberg, Christoph |
| Abstract: | Anecdotal, empirical, and experimental evidence suggests that offering extrinsic rewards for certain activities can reduce people's willingness to engage in those activities voluntarily. We propose a simple rationale for this 'crowding out' phenomenon, using standard economic arguments. The central idea is that the potential to earn rewards in return for an activity may create incentives to play 'hard to get' in an effort to increase those rewards. We discuss two specic contexts in which such incentives arise. In the first, refraining from the activity causes others to attach higher value to it because it becomes scarce. In the second, restraint serves to conceal the actor's intrinsic motivation. In both cases, not engaging in the activity causes others to offer larger rewards. Our theory yields the testable prediction that such effects are likely to occur when a motivated actor enjoys a sufficient degree of 'market power.' |
| Keywords: | intrinsic motivation; crowding out; behavioral economics; market power; hidden information |
| Date: | 2014–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0559&r=cta |