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on Contract Theory and Applications |
| By: | Ui, Takashi |
| Abstract: | In a beauty contest framework, welfare can decrease with public information if the precision of private information is exogenous, whereas welfare necessarily increases with public information if the precision is endogenous with linear costs of information acquisition. The purpose of this paper is to reconcile these results by considering nonlinear costs of information acquisition. The main result of this paper is a necessary and sufficient condition for welfare to increase with public information. Using it, we show that costs of information acquisition are linear if and only if welfare necessarily increases with public information. Thus, welfare can decrease with public information for any strictly convex costs. This is because convex costs mitigate the so-called crowding-out effect of public information on private information, thereby making the social value of public information with endogenous precision closer to that with exogenous precision. |
| Keywords: | public information, private information, crowding-out effect, linear quadratic Gaussian game |
| JEL: | C72 D82 E10 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2014-05&r=cta |
| By: | Robert J. Gary-Bobo (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Alain Trannoy (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| Abstract: | We characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines student loans with an elementary optimal income-tax problem. The second-best optima provide incomplete insurance because of moral hazard; they typically involve cross-subsidies between students. Generically, optimal loan repayments cannot be decomposed as the sum of an income tax, depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent, or the income tax must comprise a graduate tax. The interaction of adverse selection and moral-hazard, i.e., self-selection constraints and effort incentives, determines an equal treatment property; the expected utilities of different types of students are equalized at the interim stage, conditional on the event of academic success (i.e., graduation). But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution). |
| Keywords: | student loans; graduate tax; adverse selection; moral hazard; risk aversion |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00993124&r=cta |
| By: | Sergei Kovbasyuk (EIEF) |
| Abstract: | We study the interaction between the seller of a product, the buyers who are uncertain about the product quality and a rating agency who observes the quality and send signals about it. Assuming the seller-pays model of rating agency, we analyze the cases in which payment to the rater is publicly disclosed and fixed, publicly disclosed and rating-contingent, private and rating-contingent. First, we characterize all possible equilibrium partitions of the underlying quality range into ratings in these three cases. We then characterize the seller's optimal ratings in the three cases. Finally, we perform welfare analysis and discuss regulation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1330&r=cta |
| By: | Mireille Chiroleu-Assouline; Sebastien Roussel |
| Abstract: | According to several studies, agricultural carbon sequestration could be a relatively low cost opportunity to mitigate greenhouse gas concentrations. However the potential for storing additional carbon quantities in agricultural soils is critical, and depends on the past behavior of agricultural firms with regards to land heterogeneity. In this paper, we set incentive mechanisms to enhance carbon sequestration as a principalagent relationship between a regulator and agricultural firms. The potential for additional carbon sequestration is treated as an exhaustible resource, under the assumption that the sequestration costs increase with the amount of carbon already stored. We specify contracts in order to induce truthful revelation by firms regarding the characteristics of their intrinsic behaviour towards carbon sequestration, while analytically characterizing the optimal path to sequestering carbon as an exhaustable resource. Firstly, we take into account the impact of the co-effects on the sequestration path, due to carbon sequestering practices. Secondly, we show that incomplete information slows the sequestration process and increases the unexploited potential of carbon sequestration. Thirdly, our paper provides a sound basis for differentiated per-hectare subsidies, dynamically defined for the entire duration of the contract. A type-dependent participation constraint acknowledges the previous efforts of the farmers who have previously accepted policy to incur some sequestration costs, and this constraint prevents them from deciding to switch back to less sequestering practices. The proposed contract has the advantage of avoiding the inefficiency of per-hectare subsidies, as well as the excess costs of a uniform per-tonne subsidy. In addition, it does not penalize early adopters of practices with more intensive sequestration. |
| Keywords: | Agriculture, Carbon Sequestration, Hidden Information, Incentives, Land-use, Payment for Environmental Services (PES) |
| JEL: | D62 D82 H23 Q15 Q58 |
| Date: | 2014–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:eus:ce3swp:0114&r=cta |
| By: | Pablo Ruiz-Verdú; Ravi Singh |
| Abstract: | We study how directors' reputational concerns influence executive compensation and the use ofcamouflaged forms of pay. We show that, in order to signal their independence to investors,boards lower managers' pay, but may also pay managers in hidden ways or structure compensationinefficiently. We also show that independent boards are more likely to make use of hiddencompensation than manager-friendly boards. We apply our model to study the costs and benefitsof greater pay transparency and of measures, such as say-on-pay initiatives, that increase boards'accountability to shareholders |
| Keywords: | Executive compensation, Board independence, Hidden pay, Signaling, Director, Reputation |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb140704&r=cta |
| By: | Francis de Véricourt (ESMT); Denis Gromb (INSEAD) |
| Abstract: | This paper studies the interplay between the operational and financial facets of capacity investment. We consider the capacity choice problem of a firm with limited liquidity and whose access to external capital markets is hampered by moral hazard. The firm must therefore not only calibrate its capacity investment and the corresponding funding needs, but also optimize its sourcing of funds. Importantly, the set of available sources of funds is derived endogenously and includes standard financial claims (debt, equity, etc.). We find that when higher demand realizations are more indicative of high effort, debt financing is optimal for any given capacity level. In this case, the optimal capacity is never below the efficient capacity level but sometimes strictly above that level. Further, the optimal capacity level increases with the moral hazard problem's severity and decreases with the firm's internal funds. This runs counter to the newsve dor logic and to the common intuition that by raising the cost of external capital and hence the unit capacity cost, financial market frictions should lower the optimal capacity level. We trace the value of increasing capacity beyond the efficient level to a bonus effect and a demand elicitation effect. Bh stem from the risk of unmet demand, which is characteristic of capacity decisions under uncertainty. |
| Keywords: | Capacity, optimal contracts, financial constraints, newsvendor model |
| Date: | 2014–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-14-03&r=cta |
| By: | Benjamin Lester; Ludo Visschers; Ronald Wolthoff |
| Abstract: | In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers’ revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations. |
| Keywords: | Asking Prices, Directed Search, Inspection Costs, Efficiency |
| JEL: | C78 D44 D82 D83 L11 R31 R32 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1411&r=cta |
| By: | Güth, Werner (Max Planck Institute of Economics); Levati, Vittoria (University of Verona); Montinari, Natalia (Department of Economics, Lund University); Nardi, Chiara (University of Verona) |
| Abstract: | In the hybrid game, one proposer confronts two responders with veto power: one responder can condition his decisions on his own offer but the other cannot. We vary what the informed responder knows about the offers as well as the uninformed responder's conflict payoff. Neither variation affects behavior: proposers always favor informed responders, who frequently accept minimal offers. |
| Keywords: | Ultimatum; Yes/No game |
| JEL: | C72 C92 |
| Date: | 2014–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2014_016&r=cta |
| By: | Schilizzi, Steven; Latacz-Lohmann, Uwe |
| Abstract: | In order to maximize efficiency, should conversation contracts include incentive payments and also be put up for tender? This work uses laboratory experiments to investigate this question. We find that there exists an optimal share of performance payment which yields maximum total stewardship effort and expected environmental outcome. While cost-effectiveness is maximized with the totality of payments linked to outcomes, it comes at the cost of reduced participation. Tendering such contracts yields additional benefits in terms of effort extraction and cost-effectiveness, but these benefits rapidly decline with the share of performance payment. Combining high shares of performance payments with tendering runs the risk of falling far short of the environmental target. |
| Keywords: | Conservation tenders, auctions, incentive contracts, agricultural policy, market-based instruments, experimental economics, Agricultural and Food Policy, International Relations/Trade, C92, D44, D82, D86, H57, Q24, Q28, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare14:165873&r=cta |
| By: | Cao, Ying; Just, David R.; Wansink, Brian |
| Abstract: | Using psychological terms such as cognitive dissonance and confirmation bias, this study reveals how individual consumers inadequately process (food safety) information, pay limited attention to signals, and make purchase decisions that are bias towards their initial choices. While it is expected that reading extra information about potential risk associated with the food decreases consumers' willingness to pay (WTP), the magnitude of the impact varies across individuals. In general, consumer's judgment and information processing depend a lot on their initial beliefs or consumption status. They tend to use higher bidding prices to justify previous behaviors and selectively pay attention to information in favor of their initial choices. Using an incentive compatible auction mechanism, this study elicited consumers' WTP under different informational settings. Results showed that consumers bid much higher when they chose to commit to food items (treatment) than when they were randomly assigned (control), suggesting cognitive dissonance. On average, the bidding premium was about 13 cents (roughly 30%) higher for low-risk food item and 30 cents (almost 60%) higher for high-risk item. The bidding premiums were further enlarged as food safety information was revealed to consumers. Confirmatory bias hypothesis was supported by the finding that those who made commitment earlier were more reluctant to change the bids despite of increased risk perceptions. In terms of market responses, due to psychological biases among consumers, demand curves were less possible to shift down under food safety risk. Results in this study implied that consumers were less responsive to public information due to their existing habits. Extra strategies would be needed to increase the efficiency of public communication to promote health. |
| Keywords: | Cognitive Dissonance, Conrmatory Bias, Risk Perception, Self-Justication, Consumer/Household Economics, Institutional and Behavioral Economics, D03, D12, D44, |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aajs14:166096&r=cta |
| By: | Julie De Brux (GREGOR - Groupe de Recherche en Gestion des Organisations - Institut d'Administration des Entreprises (IAE) - Paris - Université Paris 1 - Panthéon-Sorbonne); Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis (UNS)) |
| Abstract: | This article analyzes some of the issues raised by institutionalized public-private partnerships in an economic perspective. We demonstrate that although they may address some of the main limits of purely contractual public-private partnerships, such as the issues of control, know-how transfer, or additional financial cost, they may induce some intrinsic risks, related to alterations of the contractual incentive structure and judicial challenges. Based on economic theory, we stem some recommendations and comments about the adequacy of legal requirements with economic normative views. |
| Keywords: | public-private partnerships, hybrid structures, incentives |
| Date: | 2014–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00990951&r=cta |