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on Contract Theory and Applications |
| By: | Ennio Bilancini; Leonardo Boncinelli |
| Abstract: | In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information while the realized distribution of qualities is public information. We show that in equilibrium all goods can be traded if the size of the supply is publicly available to market participants. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. We also identify circumstances under which only full trade equilibria exist. Further, we give conditions for full trade to obtain when the realized distribution of qualities is not public information and when new goods enter the market at later stages. |
| Keywords: | dynamic adverse selection; supply size; frequency of exchanges; asymmetric information |
| JEL: | D82 L15 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:099&r=cta |
| By: | Siegert, Caspar |
| Abstract: | We analyze the incentives for information disclosure in financial markets. We show that borrowers may have incentives to voluntarily withhold information and that doing so is most attractive for claims that are inherently hard to value, such as portfolios of subprime mortgages. Interestingly, opacity may be optimal even though it increases informational asymmetries between contracting parties. Finally, in our setting a government can intervene in ways that ensure the liquidity of financial markets and that resemble the initial plans for TARP. Even if such interventions are ex-post optimal, they affect incentives for information disclosure and have ambiguous ex-ante effects. |
| Keywords: | Information Acquisition; Adverse Selection; Allocative Efficiency; Opacity |
| JEL: | D82 G21 G32 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:20937&r=cta |
| By: | Miglo, Anton |
| Abstract: | In this note I analyze situations where an entrepreneur needs external financing from an outside investor in order to start an investment project that will yield a profit for two consecutive periods. The value of second-period profit is the entrepreneur's private information. I show that the choice of financing mode can be transformed into an optimal stochastic bounded control problem, where the state variable t represents the investor's first-period payoff and the control variable α can be interpreted in terms of the investor's residual profit rights. I then show that under certain general conditions such as the monotonicity and continuity of t (which have clear economic interpretations), an optimal contract is characterized by maximal α under low values of t and minimal α under high values of t. In economic terms this corresponds to debt. |
| Keywords: | optimal financing, stochastic optimization, bounded control, asymmetric information, debt |
| JEL: | C6 C61 C79 G3 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56323&r=cta |
| By: | Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis |
| Abstract: | We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank’s leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation. |
| JEL: | E44 G01 G21 G28 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20165&r=cta |