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on Contract Theory and Applications |
| By: | Ulbricht, Robert |
| Abstract: | The paper studies a model of delegated search. The distribution of search revenues is unknown to the principal and has to be elicited from the agent in order to design the optimal search policy. At the same time, the search process is unobservable, requiring search to be self-enforcing. The two information asymmetries are mutually enforcing each other; if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection problems, indirect nonlinear tarifs are strictly dominated. |
| Keywords: | adverse selection, bonus contracts, delegated search, moral hazard, optimal stopping. |
| JEL: | C72 D82 D83 D86 |
| Date: | 2014–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:27966&r=cta |
| By: | Christoph Kuzmics (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | In this note I give a full characterization of all deterministic direct mechanisms in the public good provision problem with independent private values that are dominant strategy incentive compatible, ex-post individually rational, and ex-post budget balanced. |
| Keywords: | public good provision, asymmetric information, dominant strategy |
| JEL: | C72 D82 H41 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:504&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, Princeton University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out "third degree price discrimination." We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade. |
| Keywords: | First degree price discrimination, Second degree price discrimination, Third degree price discrimination, Private information, Privacy, Bayes correlated equilibrium, Concavification |
| JEL: | C72 D82 D83 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1896rr&r=cta |
| By: | Martin Kuncl |
| Abstract: | This paper studies the effciency of financial intermediation through securitization with asymmetric information about the quality of securitized loans. In this theoretical model, I show that, in general, by providing reputation-based implicit recourse, the issuer of a loan can credibly signal its quality. However, in boom stages of the business cycle, information on loan quality remains private, and lower quality loans accumulate on balance sheets. This deepens a subsequent downturn. The longer the duration of a boom, the deeper will be the fall of output in a subsequent recession. In recessions, the model also produces amplification of adverse selection problems on re-sale markets for securitized loans. These are especially severe after a prolonged boom period and when securitized loans of high quality are no longer traded. Finally, the model suggests that excessive regulation that requires higher explicit risk-retention by the originators of loans can adversely affect both quantity and quality of investment in the economy. |
| Keywords: | securitization; financial crisis; asymmetric information; reputation; implicit recourse; market shutdowns; macro-prudential policy; |
| JEL: | E32 E44 G01 G20 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp506&r=cta |
| By: | Aanesen, Margrethe; Czajkowski, Mikolaj; Falk-Peterson, Jannike; Hanley, Nicholas; LaRiviere, Jacob; Tinch, Dugald |
| Abstract: | This paper compares how increases in experience versus increases in knowledge about a public good affect willingness to pay (WTP) for its provision. This is challenging because while consumers are often certain about their previous experiences with a good, they may be uncertain about the accuracy of their knowledge. We therefore design and conduct a field experiment in which treated subjects receive a precise and objective signal regarding their knowledge about a public good before estimating their WTP for it. Using data for two different public goods, we show qualitative equivalence of the effect of knowledge and experience on valuation for a public good. Surprisingly, though, we find that the causal effect of objective signals about the accuracy of a subject's knowledge for a public good can dramatically affect their valuation for it: treatment causes an increase of $150-$200 in WTP for well-informed individuals. We find no such effect for less informed subjects. Our results imply that WTP estimates for public goods are not only a function of true information states of the respondents but beliefs about those information states. |
| Keywords: | Choice Experiment; Uncertainty; Valuation; Field Experiment; Beliefs; Information |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2014-04&r=cta |
| By: | Andrea Attar (Toulouse School of Economics); Thomas Mariotti (Toulouse School of Economics); François Salanié (Toulouse School of Economics) |
| Abstract: | Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results stand in stark contrast with those obtained so far in the literature, reflecting different assumptions about the richness of the insider's information. |
| Keywords: | Adverse Selection, Competing Mechanisms, Limit-Order Book |
| JEL: | D43 D82 D86 |
| Date: | 2014–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:314&r=cta |
| By: | Czajkowski, Mikolaj; Hanley, Nicholas; LaRiviere, Jacob; Simpson, Katherine |
| Abstract: | In this study we elicit agents' prior information set regarding a public good, exogenously give information treatments to survey respondents and subsequently elicit willingness to pay for the good and posterior information sets. The design of this field experiment allows us to perform theoretically motivated hypothesis testing between different updating rules: non-informative updating, Bayesian updating, and incomplete updating. We find causal evidence that agents imperfectly update their information sets. We also field causal evidence that the amount of additional information provided to subjects relative to their pre-existing information levels can affect stated WTP in ways consistent overload from too much learning. This result raises important (though familiar) issues for the use of stated preference methods in policy analysis. |
| Keywords: | Stated Preference; Behavioral Economics; Public Goods; Bayesian |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2014-05&r=cta |
| By: | Hatchondo, Juan Carlos (Federal Reserve Bank of Richmond); Krusell, Per (IIES); Schneider, Martin (Stanford University) |
| Abstract: | This paper considers an asset market where investors have private information not only about asset payoffs, but also about their own exposure to an aggregate risk factor. In equilibrium, rational investors disagree about asset payoffs: Those with higher exposure to the risk factor are (endogenously) more optimistic about claims on the risk factor. Thus, information asymmetry limits risk sharing and trading volumes. Moreover, uncertainty about exposure amplifies the effect of aggregate exposure on asset prices, and can thereby help explain the excess volatility of prices and the predictability of excess returns. |
| Keywords: | Asset trading; Asset valuation |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-05&r=cta |
| By: | Czarnitzki, Dirk; Hall, Bronwyn H.; Hottenrott, Hanna |
| 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. -- |
| Keywords: | Patents,Quality Signal,Research and Development,Financial Constraints,Innovation Policy |
| JEL: | O31 O32 O38 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14023&r=cta |
| By: | Cogley, Timothy (New York University); Matthes, Christian (Federal Reserve Bank of Richmond); Sbordone, Argia M. (Federal Reserve Bank of New York) |
| Abstract: | Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficient are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum's (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited. |
| Keywords: | Inflation; Monetary policy; Learning; Policy reforms; Transitions |
| JEL: | E31 E52 |
| Date: | 2014–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-07&r=cta |
| By: | Zuazo Gain, Peio |
| Abstract: | In everyday economic interactions, it is not clear whether sequential choices are visible or not to other participants: agents might be deluded about opponents'capacity to acquire,interpret or keep track of data, or might simply unexpectedly forget what they previously observed (but not chose). Following this idea, this paper drops the assumption that the information structure of extensive-form games is commonly known; that is, it introduces uncertainty into players' capacity to observe each others' past choices. Using this approach, our main result provides the following epistemic characterisation: if players (i) are rational,(ii) have strong belief in both opponents' rationality and opponents' capacity to observe others' choices, and (iii) have common belief in both opponents' future rationality and op-ponents' future capacity to observe others' choices, then the backward induction outcome obtains. Consequently, we do not require perfect information, and players observing each others' choices is often irrelevant from a strategic point of view. The analysis extends {from generic games with perfect information to games with not necessarily perfect information{the work by Battigalli and Siniscalchi (2002) and Perea (2014), who provide different sufficient epistemic conditions for the backward induction outcome. |
| Keywords: | perfect information, incomplete information, backward induction, rationality, strong belief, common belief |
| JEL: | C72 D82 D83 |
| Date: | 2014–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:12097&r=cta |
| By: | Seungjin Han |
| Abstract: | This paper studies competition among multiple sellers in frictional markets. Ex-post equilibrium is tractable in terms of market information revelation. Applying the sufficient condition for equilibrium robustness (with respect to a seller's deviation to any arbitrary selling mechanism) to ex-post equilibrium yields comparative statics on the distribution of trading prices and profits. |
| Keywords: | ex-post equilibrium, market frictions, robust equilibrium, comparative statics, competing mechanism desgin |
| JEL: | C71 D82 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2014-05&r=cta |
| By: | Schnedler, Wendelin (University of Paderborn); Vanberg, Christoph (Alfred-Weber-Institut für Wirtschaftswissenschaften, Universität Heidelberg) |
| 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 specific 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 |
| JEL: | D1 M5 D8 D4 C9 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8108&r=cta |
| By: | Roig, Guillem |
| Abstract: | This work studies how the introduction of competition to the side of the market offering trading contracts affects the equilibrium investment profile in a bilateral investment game. By using a common agency framework, where contracts are not exclusive, we find that the equilibrium investment profile depends on the competitiveness of the equilibrium outcome. Full efficiency can only be implemented when the trading outcome is the most competitive. Moreover, lowering the outcome competitiveness is not always Pareto dominant for the parties offering the contracts, and larger social welfare can be obtained with low competitive equilibria. |
| Keywords: | bilateral investment; hold-up; competition; Pareto dominance; social surplus. |
| JEL: | D44 L11 |
| Date: | 2014–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28042&r=cta |
| By: | Björn Bartling; Nick Netzer |
| Abstract: | An auction is externality-robust if unilateral deviations from equilibrium leave the other bidders’ payoffs unaffected. The equilibrium and its outcome will then persist if certain types of externalities arise between bidders. One example are externalities due to spiteful preferences, which have been used to explain overbidding in the second-price auction (SPA). Another example are cross-shareholdings between companies that compete in an auction. We derive an auction that coincides with the SPA in terms of efficiency and revenue but, in contrast to the SPA, is externality-robust. The externality-robust auction (ERA) is a first-price auction in which truthful bidding is encouraged by bonus payments. We test the robustness property experimentally by comparing SPA and ERA. We replicate the earlier finding of significant average overbidding in the SPA, but we find that bidders bid on average their value in the ERA. We conduct additional treatments where bidders play against the computer and we use controls for cognitive skills and joy of winning to further pin down the reasons behind the subjects’ bidding behavior. |
| Keywords: | Second-price auction, spitefulness, mechanism design, experimental auctions |
| JEL: | C91 D03 D44 D82 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:153&r=cta |
| By: | Josef Falkinger |
| Abstract: | This paper presents a general equilibrium model with technological uncertainty, financial markets and imperfect information. The future consists of uncertain environments that are more or less clearly distinguishable (measurable). This limits the possibilities of specialization and diversification. Households have no direct information about the productivity of risky technologies. They rely on the information conveyed by the set of financial products provided by the financial sector, the pay-off promises of the products and their prices. Unreliable information-processing by financial markets leads to deception of households. As a result, extending the space spanned by financial products is not unambiguously good. This suggests a policy rule which ties financial innovations to the experience base of the economy. |
| Keywords: | Real and financial economics, incomplete knowledge, risk and uncertainty, financial crisis, size of financial sector, responsible finance |
| JEL: | D53 D83 G01 G21 B41 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:154&r=cta |