nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2014‒06‒14
twenty-one papers chosen by
Simona Fabrizi
Massey University, Albany

  1. Optimal Selling Mechanisms under Imperfect Commitment: Extending to the Multi-Period Case By Juan I. Beccuti
  2. The Comparison of Information Structures in Games: Bayes Correlated Equilibrium and Individual Sufficiency By Dirk Bergemann; Stephen Morris
  3. Optimal Selling Mechanisms under Imperfect Commitment By Juan I. Beccuti
  4. Asymmetric Information and IPO Size By Miglo, Anton; Wu, Congsheng
  5. Cooperative Transfer Price Negotiations under Incomplete Information By Sonja Brangewitz; Claus-Jochen Haake
  6. Destructive Agents, Finance Firms, and Systemic Risk By Natasa Bilkic; Thomas Gries
  7. Reputational Bidding By Francesco Giovannoni; Miltiadis Makris
  8. Characterizing implementable allocation rules in multi-dimensional environments By Berger A.; Müller R.J.; Naeemi S.H.
  9. All-pay auctions with interdependent valuations: The highly competitive case By Theodore L. Turocy; Lucas Rentschler
  10. Beliefs dynamics in communication networks By Azomahou T.T.; Opolot D.
  11. Unveiling information on opportunity costs in REDD: Who obtains the surplus when policy objectives differ? By Philippe Delacote; Charles Palmer; Ryiong Kim Bakkegaard; Bo Jellesmark Thorsen
  12. The Signaling Effect of Critics - Evidence from a Market for Experience Goods By Joe Cox; Daniel Kaimann
  13. Mergers, managerial incentives, and efficiencies By Jovanovic, Dragan
  14. Timing of Earnings and Capital Structure By Miglo, Anton
  15. Sellouts, Beliefs, and Bandwagon Behavior By Nick Vikander
  16. Building a reputation as a socially responsible firm By Aleix Calveras; Juan José Ganuza
  17. Assurance automobile et sélection adverse dans un modèle de Choquet By Pascal Toquebeuf
  18. Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting By Jed DeVaro; Jin-Hyuk Kim; Nick Vikander
  19. An Efficient and Incentive Compatible Dynamic Auction for Multiple Complements By Ning Sun; Zaifu Yang
  20. Information Aggregation in a DSGE Model By Tarek A. Hassan; Thomas M. Mertens
  21. The Interaction of Signals: A Fuzzy set Analysis of the Video Game Industry By Daniel Kaimann; Joe Cox

  1. By: Juan I. Beccuti
    Abstract: This paper studies the optimal mechanism for a seller (she) that sells, in a sequence of periods, an indivisible object per period to the same buyer (he). Buyer's willingness to pay remains constant along time and is his private information. The seller can commit to the current period mechanism but not to future ones. Our main result is that a seller cannot do better than posting a price in every period. We give a complete characterization of the optimal mechanism and equilibrium payoffs for every prior. Also, we show that, when agents are arbitrarily patient, the seller does not learn about buyer's type except in extreme cases, posting a price equal to the minimum buyer's willingness to pay in every period. This result is a reminiscence of the Coase's conjecture, where a monopolist cannot exert her monopoly power due to the lack of long-term commitment.
    Keywords: asymmetric information; dynamics; optimal mechanism; imperfect commitment
    JEL: D82
    Date: 2014–05
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: The set of outcomes that can arise in Bayes Nash equilibria of an incomplete information game where players may have access to additional signals beyond the given information structure is characterized and shown to be equivalent to the set of a version of incomplete information correlated equilibria which we dub Bayes correlated equilibria. A game of incomplete information can be decomposed into a basic game, given by actions sets and payoff functions, and an information structure. We introduce a partial order on many player information structures -- which we call individual sufficiency -- under which more information shrinks the set of Bayes correlated equilibria. We discuss the relation of the solution concept to alternative definitions of correlated equilibrium in incomplete information games and of the partial order on information structures to others, including Blackwell's for the single player case.
    Keywords: Correlated equilibrium, Incomplete information, Robust predictions, Information structure, Sufficiency, Blackwell ordering
    JEL: C72 D82 D83
    Date: 2013–09
  3. By: Juan I. Beccuti
    Abstract: This paper studies the optimal mechanisms for a seller (she) who puts up for sale one individual unit per period to a single buyer (he) in a two-period game. The buyer's willingness to pay remains constant over time and is his private information. The seller can commit to the mechanism for the first period but not to the second one. In this setting, she cannot achieve greater payoffs than those obtained by posting a price in each period. However, price posting is not optimal if he is sufficiently impatient relative to her. It is also proved that a mechanism à la Goethe (see Moldovanu and Tieztel 1998) is almost optimal.
    Keywords: asymmetric information; imperfect commitment; dynamics; mechanism design; non-optimality of posting prices
    JEL: D82
    Date: 2014–04
  4. By: Miglo, Anton; Wu, Congsheng
    Abstract: We build a model of an IPO for firms with private information about their earnings profile over time and test the model’s predictions using a complete sample of newly listed Chinese companies between 1992 and 2007. The model predicts that IPO size is positively correlated with short-term operating performance that is not directly consistent with traditional theories. It also provides an explanation for negative correlation between debt and profitability that is not consistent with standard trade-off theory or signaling theory. The empirical results provide strong support for our model.
    Keywords: Asymmetric information; Chinese IPOs; Offer size; Operating performance
    JEL: C58 D82 G32
    Date: 2014
  5. By: Sonja Brangewitz (University of Paderborn); Claus-Jochen Haake (University of Paderborn)
    Abstract: In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994).
    Keywords: Transfer Pricing, Negotiation, Generalized Nash Bargaining Solution, Incomplete Information
    JEL: C78 D82 M41
    Date: 2013–07
  6. By: Natasa Bilkic (University of Paderborn); Thomas Gries (University of Paderborn)
    Abstract: Popular opinion suggests that malfunctioning, poorly designed incentive schemes in financial firms that encouraged greed and involved excessive salaries were responsible for the excessive risk taking that eventually led to the 2008 financial crash. In this paper we discuss this claim in a theoretical model. We use a modified version of delegated portfolio choice approach with performance contracts. If, in this modified model, we allow for the existence of destructive agents - when maximizing their private utility - each financial firm will take excessive risks. As a result the finance sector develops systemic risk. We define systemic risk as inefficient and excessive risk that is chosen in an endogenous and stable manner by the aggregate market.
    Keywords: delegated portfolio choice, systemic risk, destructive agent, adverse selection
    JEL: D82 D86 G14
    Date: 2014–02
  7. By: Francesco Giovannoni; Miltiadis Makris
    Abstract: We consider auctions where bidders care about the reputational effects of their bidding and argue that the amount of information that is disclosed at the end of the auction will influence bidding. Our analysis focuses on several bid disclosure rules that capture all of the realistic cases. We show that bidders distort their bidding in a way that conforms to stylized facts about takeovers/licence auctions. Also, we rank the disclosure rules in terms of the expected revenues they generate and find that, under certain conditions, full disclosure will not be optimal.
    Keywords: Auctions, signaling, disclosure.
    JEL: D44 D82
    Date: 2014–06
  8. By: Berger A.; Müller R.J.; Naeemi S.H. (GSBE)
    Abstract: We study characterizations of implementable allocation rules when types are multi-dimensional, monetary transfers are allowed, and agents have quasi-linear preferences over outcomes and transfers. Every outcome is associated with a continuous valuation function that maps an agents type to his value for this outcome.Sets of types are assumed to be convex. Our main characterization theorem implies that allocation rules are implementable if and only if they are implementable on any two-dimensional convex subset of the type set. For finite sets of outcomes, they are implementable if and only if they are implementable on every one-dimensional subset of the type set.Our results complement and extend significantly a characterization result by Saks and Yu, as well as follow-up results thereof. Contrary to our model, this stream of literature identifies types with valuation vectors. In such models, convexity of the set of valuation vectors allows for a similar characterization as ours.Furthermore, implementability on one-dimensional subsets of valuation vectors is equivalent to monotonicity.We show by example that the latter does not hold anymore in our more general setting.Our proofs demonstrate that the linear programming approach to mechanism design, pioneered in Gui et al. and Vohra, can be extended from models with linear valuation functions to arbitrary continuous valuation functions. This provides a deeper understanding of the role of monotonicity and local implementation.In particular, we provide a new, simple proof of the Saks and Yu theorem, and generalizations thereof.Modeling multi-dimensional mechanism design the way we propose it here is of relevance whenever types are given by few parameters, while the set of possible outcomes is large, and when values for outcomes are non-linear functions in types.
    Keywords: Asymmetric and Private Information; Mechanism Design;
    JEL: D82
    Date: 2014
  9. By: Theodore L. Turocy (University of East Anglia); Lucas Rentschler (Universidad Francisco Marroquin)
    Abstract: We analyze symmetric, two-player all-pay auctions with interdependent valuations and general discrete signal structures. We extend the previous literature by being able to analyze auctions in which an increase in a bidder's posterior expected value for winning the auction is likely to be accompanied by a corresponding increase for the other bidder. Such environments are `highly competitive' in the sense that the bidder's higher valuation also signals that the other bidder has an incentive to bid aggressively. We present a construction which computes all symmetric equilibria, and show how, in highly competitive environments, the search problem this construction faces can be complex. In equilibrium, randomization can take place over disjoint ranges of bids, with equilibrium supports having a potentially rich structure.
    Date: 2014–06
  10. By: Azomahou T.T.; Opolot D. (UNU-MERIT)
    Abstract: We study the dynamics of individual beliefs and information aggregation when agents communicate via a social network. We provide a general framework of social learning that captures the interactive effects of three main factors on the structure of individual beliefs resulting from such a dynamic process; that is historical factorsprior beliefs, learning mechanismsrational and bounded rational learning, and the topology of communication structure governing information exchange. More specifically, we provide conditions under which heterogeneity and consensus prevail. We then establish conditions on the structures of the communication network, prior beliefs and private information for public beliefs to correctly aggregate decentralized information. The speed of learning is also established, but most importantly, its implications on efficient information aggregation. Keywords Learning, social networks, public beliefs, speed of learning, information aggregation.
    Keywords: Game Theory and Bargaining Theory: General; Search; Learning; Information and Knowledge; Communication; Belief; Network Formation and Analysis: Theory;
    JEL: C70 D83 D85
    Date: 2014
  11. By: Philippe Delacote (Laboratoire d'Economie Forestière, INRA; Agroparitech; CEC, Chaire économie du Climat); Charles Palmer (London School of Economics and Political Science); Ryiong Kim Bakkegaard (Department of Food and Resource Economics, University of Copenhagen); Bo Jellesmark Thorsen (Department of Food and Resource Economics, Centre for Macroecology, Evolution and Climate, University of Copenhagen)
    Abstract: Improving information about individual opportunity costs of deforestation agents has the potential to increase the efficiency of REDD when it takes the form of a payment for environmental services scheme. However, objectives pursued in REDD projects may vary across policy makers. Within a theoretical framework, this paper explores the impacts of different policy objectives under two opportunity cost settings: asymmetric and full information. For a policy maker aiming to maximize net income from REDD, having full information may not increase the amount of forest conserved but could lead to a redistribution of rents away from agents. By contrast, for an environmental policy maker focused on maximizing the amount of forest conserved under REDD having full information increases the amount of forest conserved while reducing the rents received by agents. For a policy maker pursuing poverty alleviation objectives in REDD-affected communities, having full information makes no difference to overall welfare as rents remain with agents. The amount of deforestation avoided will at least be as high as under asymmetric information. These results are illustrated with data collected on opportunity costs in Amazonas State, Brazil.
    Keywords: deforestation, Asymmetric information, Brazil, Opportunity costs, REDD, Payment for environmental services, asymétrie d'information, coût d'opportunite, paiementdéforestationservice environnementalbrésil
    JEL: Q23 H23 Q54 Q56
    Date: 2014
  12. By: Joe Cox (Portsmouth Business School); Daniel Kaimann (University of Paderborn)
    Abstract: Experience goods are characterized by information asymmetry and a lack of ex ante knowledge of product quality, such that credible and reliable external signals of product quality are likely to be highly valued. Due to their independence and expert reputations, professional critics therefore have the potential to significantly influence buyer behavior and hence product demand. In order to empirically verify the influence of critic reviews on market success, we analyze a sample of 1,480 video games and their sales figures between 2004 and 2010. We find strong evidence to suggest that reviews from professional critics have a significant effect upon sales and serve as a signal that helps consumer to overcome uncertainty and support the decision making process. The influence of professional critics on sales is also found to substantially outweigh that of word-of-mouth reviews from other consumers.
    Keywords: Signaling Theory, Information Asymmetry, Critics, Video Games
    JEL: C31 D82 L14 L82
    Date: 2013–09
  13. By: Jovanovic, Dragan
    Abstract: We analyze the effects of synergies from horizontal mergers in a Cournot oligopoly where principals provide their agents with incentives to cut marginal costs prior to choosing output. We stress that synergies come at a cost which possibly leads to a countervailing incentive effect: The merged firm's principal may be induced to stifle managerial incentives in order to reduce her agency costs. Whenever this incentive effect dominates the well-known direct synergy effect, synergies actually reduce consumer surplus which opposes the use of an efficiency defense in merger control. --
    Keywords: Managerial Incentives,Horizontal Mergers,Merger Control,Productive Efficiency Gains,Synergies,Efficiency Defense
    JEL: D21 D86 L22 L41
    Date: 2014
  14. By: Miglo, Anton
    Abstract: This paper shows that asymmetric information about the timing of earnings can affect corporate capital structure. It sheds some new light on two following questions: why may profitable firms be interested in issuing equity, and why does debt not necessarily signal a firm quality. These issues seem to be puzzling from the classical pecking-order theory or signalling theory point of view. The paper also contributes to the analysis of the link between debt-equity choice and subsequent performance after issue (short-term versus long-term) which has been widely discussed in empirical literature but did not get enough attention in theoretical research.
    Keywords: Asymmetric information, Pecking-order theory, Signalling, Timing of earnings
    JEL: D82 D86 D92 G32
    Date: 2014
  15. By: Nick Vikander (Department of Economics, Copenhagen University)
    Abstract: This paper examines how a firm can strategically use sellouts to influence beliefs about its good's popularity. A monopolist faces a market of conformist consumers, whose willingness to pay is increasing in their beliefs about aggregate demand. Consumers are broadly rational but have limited strategic reasoning about the firm's incentives. I show that in a dynamic setting, the firm can use current sellouts to mislead consumers about future demand and increase future profits. Sellouts tend to occur when demand is low, they are accompanied by introductory pricing, and certain consumers benefit from others being misled.
    Keywords: sellouts, conformity, bounded rationality, obfuscation
    JEL: D03 D42 D83
    Date: 2014–04–01
  16. By: Aleix Calveras; Juan José Ganuza
    Abstract: Many of the attributes that make a good "socially responsible" are credence attributes that cannot be learned by consumers either through search or experience. Consumers aggregate information about them from several channels (media, advertisement, NGOs, etc.). Since these sources may send contradictory messages, the information available to consumers is noisy. In this paper we model such informational environment and show the positive relationship between the accuracy of the information transmitted to consumers and CSR. We also show that firms may be tempted to adding noise to the information channel (e.g., through lobbying of the media), which might reduce the supply of the credence attributes and even harm firms themselves. As a consequence, firms might find profitable, for instance by means of forming a partnership with an NGO, to commit to not manipulate the information. Finally, we also show that such self-commitment by firms is a strategic substitute of transparency regulation by the public sector.
    Keywords: credence good, information asymmetry, corporate social responsibility, regulation
    JEL: D72 H42 L51 M14 Q52
    Date: 2014–05
  17. By: Pascal Toquebeuf (UMR 1215 GAEL : Economie Appliquée de Grenoble, Grenoble, Univ. Grenoble Alpes)
    Abstract: L’article étudie la sélection adverse dans le cas de la demande d’assurance d’une automobile louée lorsque le critère de décision est une espérance de Choquet. L’approche adoptée de l’intégration de l’information à la décision d’assurance autorise l’utilisation d’une procédure d’induction à rebours pour déterminer l’action optimale ex ante, ce qui permet de retrouver les conclusions du modèle bayésien. En revanche, le rôle de l’ambiguïté peut être pris en compte par les capacités, ce qui n’est pas le cas avec les probabilités. Lorsque le décideur présente de l’aversion envers celle-ci, son comportement consiste à surestimer l’information si un accident s’est produit à la première étape et à la sous-estimer dans le cas contraire.
    Abstract: The article studies adverse selection in the context of insurance demand for a rent car when the decision criterion is a Choquet expectation. Our approach of integrating information to the insurance decision is able to implement a backward induction procedure to determine the optimal action undertaken ex ante. It allows to obtain the same conclusion than the bayesian model. However, the role of ambiguity may be take into account since we use capacities, rather than probabilities, to represent individual’s beliefs. If the decision maker is ambiguity averse, she overweights the information if an accident has occurred at the first stage and under-weights it in the opposite case.
    Keywords: ASSURANCE AUTOMOBILE, MODELE DE CHOQUET, SELECTION ADVERSE, comportement économique, consentement à payer, consentement à payer du consommateurautomobile, assurance, modèle économique
    Date: 2013
  18. By: Jed DeVaro (California State University); Jin-Hyuk Kim (University of Colorado at Boulder); Nick Vikander (Department of Economics, Copenhagen University)
    Abstract: This study investigates the structure of optimal incentives in a stochastic environment and provides evidence for the use of self-enforcing relational contracts. We show theoretically that under relational contracting, firms can credibly promise chief executive officers (CEOs) larger bonuses in good states than in bad, in a way that depends crucially on the state's persistence and the firm's discount factor. Formal contracting instead implies the same bonus in both states. Estimating an empirical model using ExecuComp data, we find that CEO annual bonuses are related to "luck" in a manner consistent with relational contracting.
    Keywords: relational contracts, CEO compensation, pay-for-luck
    JEL: C73 D86 J41
    Date: 2014–04–08
  19. By: Ning Sun; Zaifu Yang
    Abstract: This article proposes an efficient and incentive compatible dynamic auction for selling multiple complementary goods to finitely many bidders. The goods are traded in discrete quantities. The seller has a reserve price for every bundle of goods and determines which bundles to sell based on prevailing prices. The auctioneer announces a current price for every bundle of goods and a supply set of goods, every bidder subsequently responds with a set of goods demanded at these prices, and then the auctioneer adjusts prices. We prove that even when bidders can exercise their market power strategically, this dynamic auction always induces them to bid truthfully as price-takers, resulting in an efficient allocation, its supporting Walrasian equilibrium price for every bundle of goods, and a generalized Vickrey-Clarke-Groves payment for every bidder.
    Keywords: Dynamic auction, complements, incomplete information, incentive, efficiency, ex post perfect equilibrium, indivisibility.
    JEL: D44
    Date: 2014–05
  20. By: Tarek A. Hassan; Thomas M. Mertens
    Abstract: We introduce the information microstructure of a canonical noisy rational expectations model (Hellwig, 1980) into the framework of a conventional real business cycle model. Each household receives a private signal about future productivity. In equilibrium, the stock price serves to aggregate and transmit this information. We find that dispersed information about future productivity affects the quantitative properties of our real business cycle model in three dimensions. First, households' ability to learn about the future affects their consumption-savings decision. The equity premium falls and the risk-free interest rate rises when the stock price perfectly reveals innovations to future productivity. Second, when noise trader demand shocks limit the stock market's capacity to aggregate information, households hold heterogeneous expectations in equilibrium. However, for a reasonable size of noise trader demand shocks the model cannot generate the kind of disagreement observed in the data. Third, even moderate heterogeneity in the equilibrium expectations held by households has a sizable effect on the level of all economic aggregates and on the correlations and standard deviations produced by the model. For example, the correlation between consumption and investment growth is 0.29 when households have no information about the future, but 0.41 when information is dispersed.
    JEL: C63 D83 E2 E3 E44 G11
    Date: 2014–06
  21. By: Daniel Kaimann (University of Paderborn); Joe Cox (Portsmouth Business School)
    Abstract: Customers continuously evaluate the credibility and reliability of a range of signals both separately and jointly. However, existing econometric studies pay insufficient attention to the interactions and complex combinations of these signals, and are typically limited as a result of difficulties controlling for multicollinearity and endogeneity in their data. We develop a novel theoretical approach to address these issues and study different signaling effects (i.e., word-of-mouth, brand reputation, and distribution strategy) on customer perceptions. Using data on the US video games market, we apply a fuzzy set qualitative comparative analysis (fsQCA) to account for cause-effect relationships. The results of our study address a number of key issues in the economics and management literature. First, our results support the contention that reviews from professional critics act as a signal of product quality and therefore positively influence unit sales, as do the discriminatory effects of prices and restricted age ratings. Second, we find evidence to support the use of brand extension strategies as marketing tools that create spillover effects and support the launch of new products.
    Keywords: Signaling Theory, Information Asymmetry, Interactions, Fuzzy sets, Qualitative Comparative Analysis, Video Game Industry
    JEL: C18 D82 L10 L82
    Date: 2014–06

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