nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2014‒05‒17
eighteen papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Endogenous Information Acquisition and the Partial Announcement Policy By Hiroki Arato; Takeo Hori; Tomoya Nakamura
  2. Information Provision in Procurement Auctions By Joaquin Coleff; Daniel Garcia
  3. Evaluating Policies to Prevent another Crisis: An Economist’s View By Paul S. Willen
  4. Preferences for Data Privacy: Sharing Personal Information with Close and Distant Peers By Schudy, Simeon; Utikal, Verena
  5. Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences By Aronsson, Thomas; Johansson-Stenman, Olof
  6. Mandatory Disclosure and Financial Contagion By Alvarez, Fernando; Barlevy, Gadi
  7. Revenue non-equivalence in multidimensional procurement auctions under asymmetry By Shivangi Chandel; Shubhro Sarkar
  8. How Blackwater Takes Uncle Sam for a Ride - and Why He Likes It By Fahn, Matthias; Hadjer, Tahmina Sadat
  9. Can SMS Technology Improve Low Take-up of Social Benefits? By Mariana Blanco; Juan Fernando Vargas
  10. Market Structure, Reputation, and the Value of Quality Certification By Daniel W. Elfenbein; Raymond Fisman; Brian McManus
  11. An Experimental Examination of Compensation Schemes and Level of Effort in Differentiated Tasks By Hiromasa Takahashi; Junyi Shen; Kazuhito Ogawa
  12. Unemployment insurance in the presence of an informal By David Bardey; Fermando Jaramillo; Ximena Pena
  13. When Does Regulation Distort Costs? Lessons from Fuel Procurement in U.S. Electricity Generation By Steve Cicala
  14. The Market for High-Quality Medicine By Daniel Bennett; Wesley Yin
  15. Does Cost Uncertainty in the Bertrand Model Soften Competition? By Johan N.M. Lagerlöf
  16. Team Reasoning as a Guide to Coordination By Lahno, Amrei M.; Lahno, Bernd
  17. Segregated Security Exchanges with Ex Ante Rights to Trade: A Market-Based Solution to Collateral-Constrained Externalities By Weerachart T. Kilenthong; Robert M. Townsend
  18. Minimum Wages and Relational Contracts By Fahn, Matthias

  1. By: Hiroki Arato; Takeo Hori; Tomoya Nakamura
    Abstract: We consider implementability and the welfare effects of a partial announcement policy using a model of a beauty contest where agentsf actions are strategic complements and where their decisions on public information acquisition are endogenous. The following results are obtained: i) if the authorities sell public information at a constant price, multiple equilibria emerge and a partial announcement equilibrium is unstable; ii) here exist pricing rules that ensure the uniqueness and stability of mixed strategy equilibria, which indicates that a partial announcement policy can be implemented; iii) the optimal price of public information rises as its precision increases relative to private information; iv) the optimal price is independent of the degree of strategic complementarity.
    Keywords: Beauty contest games; Endogenous information acquisition; Transparency of information; Partial announcement policy
    Date: 2014–01
  2. By: Joaquin Coleff; Daniel Garcia
    Abstract: Abstract: We analyze the optimal provision of information in a procurement auction with horizontally differentiated goods. The buyer has private information about her preferred location on the product space and has access to a costless communication device. A seller who pays the entry cost may submit a bid comprising a location and a minimum price. We characterize the optimal information structure and show that the buyer prefers to attract only two bids. Further, additional sellers are inefficient since they reduce total and consumer surplus, gross of entrycosts. We show that the buyer will not find it optimal to send public information to all sellers. On the other hand, she may prot from setting a minimum price and that a severe hold-up problem arises if she lacks commitment to set up the rules of the auction ex-ante.
    Date: 2013–09–02
  3. By: Paul S. Willen
    Abstract: I consider four policies created to address the financial crisis: (1) the ability-to-repay requirement in mortgage underwriting; (2) reform of rating agency compensation, (3) risk retention in securitization, and (4) mandatory loan renegotiation. I show that according to standard models, policies (1)–(3) do not address the standard asymmetric information problems that afflict financial markets. Policy (4) could reduce the deadweight losses associated with asymmetric information but requires that policy makers allocate gains and losses.
    JEL: D61 D82 G21 G28
    Date: 2014–05
  4. By: Schudy, Simeon; Utikal, Verena
    Abstract: We provide evidence that people have preferences for data privacy and show that these preferences partly reflect people’s interest in controlling who receives their private information. Participants of an experiment face the decision to share validated personal information with peers. We compare preferences for sharing potentially embarrassing information (body weight and height) and non-embarrassing information (address data) with geographically proximate or distant peers. We find that i) participants are willing to give up substantial monetary amounts in order to keep both types of information private, ii) data types are valued differently, and iii) prices for potentially embarrassing information tend to be higher for geographically proximate than distant peers.
    Keywords: preferences; data privacy; information transmission; experiment
    JEL: C91 D80 D82
    Date: 2014–05
  5. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law)
    Abstract: This paper analyzes optimal differential commodity taxation, together with optimal nonlinear income taxation, in order to deal with positional preferences. It also derives the optimal public provision of private goods both when differential commodity taxation is feasible and when it is not. It is shown that publicly provided non-positional private goods which are (possibly imperfect) substitutes for positional private goods should be used as a corrective instrument even if the tax system is optimal, i.e. even when differential commodity taxation is feasible. An exception is the special case where all consumers contribute equally much to the positional externality, in which the commodity tax constitutes a perfect instrument for internalizing the positional externality.
    Keywords: Public provision of private goods; income taxation; commodity taxation; relative consumption; asymmetric information; status; positional goods
    JEL: D62 H21 H23 H41
    Date: 2014–05–06
  6. By: Alvarez, Fernando (University of Chicago); Barlevy, Gadi (Federal Reserve Bank of Chicago)
    Abstract: This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, mandatory disclosure cannot raise welfare, even if markets are frozen.
    Keywords: Information; Networks; Contagion; Stress Tests
    JEL: G01 G14 G17
    Date: 2014–04–28
  7. By: Shivangi Chandel (Indira Gandhi Institute of Development Research); Shubhro Sarkar (Indira Gandhi Institute of Development Research)
    Abstract: Using an example we show that the Revenue Equivalence in the Scoring Auctions, as postulated by Che (1993), no longer holds when the suppliers are asymmetric in their costs of production.
    Keywords: Auctions, Public Procurement, Asymmetric Bidders, Multidimensional Bids
    JEL: D44 H57
    Date: 2014–03
  8. By: Fahn, Matthias; Hadjer, Tahmina Sadat
    Abstract: Private Military and Security Companies (PMSCs) have been gaining increasing media and scholarly attention particularly due to their indispensable role in the wars in Afghanistan 2001 and Iraq 2003. Nevertheless, theoretical insights into the agency problems inherent when hiring PMSCs and how to optimally incentivize them are scarce. We study the complex relationship between intervening state, host state, and PMSC, taking into account the diverging interests of all involved parties as well as potential agency problems. We develop a theoretical model to characterize a state’s optimal choice whether to perform a task associated with an intervening mission itself, hire a PMSC and optimally design the contract, or completely abstain from it. We find that it might be optimal to hire PMSCs even if they are expected to do a worse job than the intervening state would do itself. This outcome is especially problematic for the host state, which prefers associated tasks to be done as good and carefully as possible. Furthermore, the often-heard call for transparency regarding agreements with PMSCs can lead to a situation where the latter’s performance gets even worse - namely because the ability to implicit reward PMSCs for a good performance in the past is reduced.
    Keywords: International Conflicts; Private Military and Security Companies; Moral Hazard; Relational Contracts
    JEL: C72 C73 F51 F53
    Date: 2014–05
  9. By: Mariana Blanco; Juan Fernando Vargas
    Abstract: Low take up of stigma-free social benefits is often blamed on information asymmetries or administrative barriers. There is limited evidence on which of these potential channels is more salient in which contexts. We designed and implemented a randomized controlled trial to assess the extent to which informational barriers are responsible for the prevalent low take-up of government benefits among Colombian conflict-driven internal refugees. We provide timely information on benefits eligibility responsible for the prevalent low take-up of government benefits among Colombian ity via SMS to a random half of the displaced household that migrated to Bogota over a 6-month period. We show that improving information increases benefits' take up. However, the effect is small and only true for certain type of benefits. Hence, consistent with previous experimental literature, the availability of timely information explains only part of the low-take up rates and the role of administrative barriers and bureaucratic processes should be tackled to increase the well-being of internal refugees in Colombia.
    Keywords: Information asymmetries, take-up rate, SMS, RCT
    JEL: D82 C93
    Date: 2013–12–02
  10. By: Daniel W. Elfenbein; Raymond Fisman; Brian McManus
    Abstract: Quality certification programs help consumers to identify high-quality products or sellers in markets with information asymmetries. Using data from eBay UK’s online marketplace, we study how certification’s impact on consumer demand varies with market- and seller-level attributes, exploiting quasi-experimental variation in sellers’ certification status. The positive effects of eBay’s “top rated seller” certification are stronger for categories with relatively few other certified sellers, in more competitive markets, and for sellers with shorter records of past performance. These findings indicate certification provides its greatest value when certification is rare, the product space is crowded, and for sellers lacking established reputations.
    JEL: D82 L15 L25 L86
    Date: 2014–04
  11. By: Hiromasa Takahashi (Faculty of International Studies, Hiroshima City University, Japan); Junyi Shen (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kazuhito Ogawa (Faculty of Sociology, Kansai University, Japan)
    Abstract: We examine the influence of different compensation schemes on exertion of effort for differentiated tasks. The first type of task is assumed to be boring and has no intrinsic motivation, while the second is assumed to be interesting, and has a higher intrinsic motivation. The results are as follows: (1) in the first task, standard economic theory, which claims higher pay should result in higher effort, does not hold. (2) Standard economic theory holds for the second task, which predicts that the higher the incentive, the more effort one exerts, and achieves a higher performance on average.
    Keywords: Real effort experiment, Intrinsic motivation, Loss aversion, Fixed pay, Incentive pay
    JEL: M52 J33
    Date: 2014–05
  12. By: David Bardey; Fermando Jaramillo; Ximena Pena
    Abstract: Abstract: We study the effect of UI benefits in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment, ruling out the macroeconomic consequences of UI benefits, we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits or long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers' effort to secure a formal job, their labor supply in the informal sector and leisure time. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviours that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. The overall effect is ambiguous and depends on the relative strength of these two e§ects. Additionally, we show that an increase in UI benefits increases the efforts of long-run unemployed workers. We provide a simple simulation exercise which suggests that the income effect pointed out is not necessarily of second-order importance in comparison with moral hazard strength. This result softens the widespread opinion, usually based on the microeconomic/partial equilibrium argument that the presence of dual labor markets is an obstacle to providing UI in developing countries.
    Keywords: Unemployment insurance, informal sector, income e§ect, developingcountries
    JEL: H55 I38 J65
    Date: 2013–09–03
  13. By: Steve Cicala
    Abstract: This paper evaluates changes in fuel procurement practices by coal- and gas-fired power plants in the United States following state-level legislation that ended cost-of-service regulation of electricity generation. I find that deregulated plants substantially reduce the price paid for coal (but not gas), and tend to employ less capital-intensive sulfur abatement techniques relative to matched plants that were not subject to any regulatory change. Deregulation also led to a shift toward more productive coal mines. I show how these results lend support to theories of asymmetric information, capital bias, and regulatory capture as important sources of regulatory distortion.
    JEL: D24 D72 D82 L11 L43 L51 L94 L98 Q4 Q48
    Date: 2014–05
  14. By: Daniel Bennett; Wesley Yin
    Abstract: This study examines the effect of chain store entry on drug quality and prices in the retail pharmacy market in Hyderabad, India. In contrast to prevailing mom-and-pop pharmacies, chains exploit scale economies to offer high-quality drugs at lower cost. With a unique data set and a natural experiment methodology, we show that chain entry leads to a relative 5 percent improvement in drug quality and a 2 percent decrease in prices at incumbent retailers. These changes do not depend on the socioeconomic status of consumers, suggesting that chain entry improves consumer welfare throughout the market. Despite the likely role of asymmetric information in this market, we show that consumers partially infer these quality improvements. Our findings suggest that in markets with asymmetric information, organizational technologies such as chains may play an important role translating greater demand into higher quality.
    JEL: I1 L15 O1
    Date: 2014–05
  15. By: Johan N.M. Lagerlöf (Department of Economics, Copenhagen University)
    Abstract: The answer is no. Although naive intuition may suggest the opposite, uncertainty about costs in the homogeneous-good Bertrand model intensifies competition: it lowers price and raises total surplus (but also makes profits go up). For some economic environments, this is implied by Hansen’s (RAND, 1988) analysis of a procurement auction. However, several authors appear to have overlooked Hansen’s results. Moreover, his results are derived under two assumptions that, if relaxed, conceivably could reverse them. The contributions of the present paper are threefold. First, it clarifies the implications of Hansen’s results for the relationship between uncertainty and competition in the Bertrand model. Second, it shows that his results hold also if drastic innovations are possible. Finally, the paper assumes asymmetric cost distributions and shows, using numerical methods, that then uncertainty lowers price and raises total surplus even more than under symmetry. If the asymmetry is large enough, however, industry profits are lower under uncertainty. This is in contrast to the known results and reinforces the notion that uncertainty intensifies competition rather than softens it.
    Keywords: Bertrand competition, Hansen Spulber model, private information, information sharing, asymmetric firms, asymmetric auctions, boundary value method
    JEL: D43 D44 L13
    Date: 2013–12–16
  16. By: Lahno, Amrei M.; Lahno, Bernd
    Abstract: A particular problem of traditional Rational Choice Theory is that it cannot explain equilibrium selection in simple coordination games. In this paper we analyze and discuss the solution concept for common coordination problems as incorporated in the theory of Team Reasoning (TR). Special consideration is given to TR's concept of opportunistic choice and to the resulting restrictions in using private information. We report results from a laboratory experiment in which teams were given a chance to coordinate on a particular pattern of behavior in a sequence of HiLo games. A modification of the stage game offered opportunities to improve on the team goal through changing this accustomed pattern of behavior. Our observations throw considerable doubt on the idea of opportunistic team reasoning as a guide to coordination. Contrary to what TR would predict, individuals tend to stick to accustomed behavioral patterns. Moreover, we find that individual decisions are at least partly determined by private information not accessible to all members of a team. Alternative theories of choice, in particular cognitive hierarchy theory may be more suitable to explain the observed pattern of behavior.
    Keywords: team reasoning; collective agency; coordination; opportunistic choice; laboratory experiment
    JEL: C91 C92 D03 D70
    Date: 2014–04
  17. By: Weerachart T. Kilenthong; Robert M. Townsend
    Abstract: This paper studies a competitive general equilibrium model with default and endogenous collateralized contracts. The possibility of trade in spot markets creates externalities, as spot prices and the bindingness of collateral constraints interact. We propose a market based solution which overcomes the externalities problem and obviates the needs for any government policy intervention. If agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot prices used to unwind collateral, over and above contracting on true underlying states of the world, then standard existence and welfare theorems apply, that is, competitive equilibria are equivalent with Pareto optima.
    JEL: D52 D53 D61 D62
    Date: 2014–05
  18. By: Fahn, Matthias
    Abstract: The need to give incentives is usually absent in the literature on minimum wages. However, especially in the service sector it is important how well a job is done, and employees must be incentivized to perform accordingly. Furthermore, many aspects regarding service quality cannot be verified, which implies that relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented effort, i.e., realized service quality, as well as the efficiency of an employment relationship. Hence, this paper can explain why productivity and service quality went up after the introduction of the British National Minimum Wage, and that this might actually have caused a more efficient labor market. Furthermore, several empirically observed implications of a (higher) minimum wage can be explained. It might reduce turnover of employees, have spillover effects on higher wages, and reduce wage dispersion.
    Keywords: Minimum Wages; Relational Contracts;
    JEL: C73 D21 J24 J31
    Date: 2014–03

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