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on Contract Theory and Applications |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Microsoft Research New England & UC Berkeley) |
| Abstract: | We characterize the profit-maximizing mechanism for repeatedly selling a non-durable good in continuous time. The valuation of each agent is private information and changes over time. At the time of contracting every agent privately observes his initial type which influences the evolution of his valuation process. In the profit-maximizing mechanism the allocation is distorted in favor of agents with high initial types. We derive the optimal mechanism in closed form, which enables us to compare the distortion in various examples. The case where the valuation of the agents follows an arithmetic/geometric Brownian motion, Ornstein-Uhlenbeck process, or is derived from a Bayesian learning model are discussed. We show that depending on the nature of the private information and the valuation process the distortion might increase or decrease over time. |
| Keywords: | Mechanism design, Dynamic auctions, Repeated sales |
| JEL: | D44 D82 D83 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1953&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti (MIT); Alex Smolin (Dept. of Economics, Yale University) |
| Abstract: | A monopolist sells informative experiments to heterogeneous buyers. Buyers differ in their prior information, and hence in their willingness to pay for additional signals. The monopolist can profitably offer a menu of experiments. We show that, even under costless information acquisition and free degrading of information, the optimal menu is quite coarse. The seller offers at most two experiments, and we derive conditions under which at vs. discriminatory pricing is optimal. |
| Keywords: | Experiments, Mechanism design, Price discrimination, Product differentiation, Selling information |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1952&r=cta |
| By: | A. Bernales |
| Abstract: | We examine a number of unexplored factors that affect the ex-post adoption rates of newly listed stock options. We show that a variety of measures of information asymmetries concerning underlying stocks predict option adoption rates. These predictive relationships are robust to control factors that have been found to be significant in earlier literature, such as stock volatility and volume. Nevertheless, option listings induce a reduction in the strength of the information asymmetries in the underlying stock. Further, option bid-ask spreads start from low initial levels and increase over time, which is consistent with a modest initial aggressiveness of informed investors. |
| Keywords: | Stock options; option listings; asymmetric information; adoption rates; option volume, open interest. |
| JEL: | D82 G10 G14 O31 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:495&r=cta |
| By: | Jellal, Mohamed |
| Abstract: | This paper is a theoretical introduction to modern governance of universities in developing countries. Indeed, adopting the approach of the paradigm of the theory of incentives Laffont and Tirole (1993), this paper discusses the effects of the presence of information asymmetry between the State and the university. The State, through taxation is responsible for funding education. We show that presence of asymmetric information between the state and a representative university generates a sub-optimal allocation. Indeed, the situation of private information on all relevant variables naturally creates a situation of rent for university. Therefore, given the cost of public funds and in order to reduce the rent of public universities the state is led to create strategic distortion that actually lead to limit the rent, which results in terms of allocation to a second-best solution associated to a decline in performance of university. |
| Keywords: | Higher Education, Universities, Regulation, Governance, Information , Contract theory |
| JEL: | D82 D86 I21 I22 I25 I28 |
| Date: | 2014–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57275&r=cta |
| By: | Agne Kajackaite (University of Cologne) |
| Abstract: | This paper tests whether staying ignorant about the negative consequences of one's own actions affects agents' performance in a real effort experiment. We conducted treatments in which subjects' effort either increased only one's own payoff or also increased the donation to a bad charity. Ignorance was introduced by letting agents to decide whether or not to learn if the effort benefits the charity. Overall, we find that in the conditions with complete information agents exert significantly higher efforts if there are no benefits for the bad charity. With respect to ignorance, we show that (i) almost a third of agents stay ignorant, and (ii) the ignorant agents exert significantly more effort than agents who know that their effort benefits the bad charity. We also find evidence for a sorting of low social types into ignorance, as exogenously uninformed agents exert less effort than ignorant agents. |
| Keywords: | ignorance, moral wiggle room, experiment, real effort |
| JEL: | C91 D03 D80 M52 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:05-03&r=cta |
| By: | Bisin, Alberto;; Gottardi, Piero;; Ruta, Guido |
| Abstract: | This paper analyzes a class of competitive economies with production, incomplete financial markets, and agency frictions. Firms take their production, financing, and contractual decisions so as to maximize their value under rational conjectures. We show that competitive equilibria exist and that shareholders always unanimously support firms' choices. In addition, equilibrium allocations have well-defined welfare properties: they are constrained efficient when information is symmetric, or when agency frictions satisfy certain specific conditions. Furthermore, equilibria may display specialization on the part of identical firms and, when equilibria are constrained inefficient, may exhibit excessive aggregate risk. Financial decisions of the corporate sector are determined at equilibrium and depend not only on the nature of financial frictions but also on the consumers' demand for risk. Financial intermediation and short sales are naturally accounted for at equilibrium. |
| Keywords: | Capital structure; Competitive equilibria; Incomplete markets; Asymmetric information |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2014/09&r=cta |
| By: | Domenico Menicucci; Sjaak Hurkens; Doh-Shin Jeon |
| Abstract: | This paper considers a monopolist selling two objects to a single buyer with privately observed valuations. We prove that if each buyer’s type has a non-negative virtual valuation for each object, then the optimal price schedule is such that the objects are sold only in a bundle; weaker conditions suffice if valuations are independently and identically distributed. Under somewhat stronger conditions, pure bundling is the optimal sale mechanism among all individually rational and incentive compatible mechanisms. |
| Keywords: | monopoly pricing, price discrimination, multi-dimensional mechanism design, pure bundling |
| JEL: | D42 D82 L11 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:771&r=cta |
| By: | Volker Britz (ETH Zurich, Switzerland); Hans Gersbach (ETH Zurich, Switzerland) |
| Abstract: | We examine whether and how democratic procedures can achieve socially desirable public good provision in the presence of deep uncertainty about the benefits of the public good, i.e., when citizens are able to identify the distribution of benefits only if they aggregate their private information. Some members of the society, however, are harmed by socially desirable policies and try to manipulate information aggregation by misrepresenting their private information. We show that information can be aggregated and the socially desirable policy implemented under a new class of democratic mechanisms involving an experimentation group. Those mechanisms reflect the principles of liberal democracy, are prior{free, and involve a differential tax treatment of experimentation group members which motivates them to reveal their private information truthfully. Conversely, we show that standard democratic mechanisms with an arbitrary number of voting rounds but no experimentation do not generally lead to the socially desirable policy. Finally, we demonstrate how experimentation can be designed in such a way that differential tax treatments occur only off the equilibrium path. |
| Keywords: | Democratic Mechanisms; Experimentation; Public Goods; Voting; Information Aggregation |
| JEL: | D62 D72 H40 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:14-199&r=cta |
| By: | Philippe Aghion; Matthew Jackson |
| Abstract: | In this paper we analyze the problem of whether and/or when to replace a leader (agent) when no monetary rewards are available, and it is the leader's competence rather than effort that is being evaluated. The only decisions that the leader takes over time are whether to undertake risky but potentially high payoff projects, the choice of which can reveal the leader's competency. If the value of foregone projects are observed, then the probability that a leader is replaced is bell-shaped and saw-toothed over time. If the value of foregone projects are not observed, and the leader's competency is only indirectly inferrable through the success or failure of projects that the leader undertakes, then the incentives of the leader depend on the replacement strategy. If the principal can commit to a replacement strategy in advance, then we show that (approximately) optimal mechanisms either involve a probationary period and then indefinite tenure, or else a random dismissal strategy. If instead commitment is impossible, and for instance voters regularly choose whether to replace the leader, then there are poor incentives and inefficiently low payoffs, even below that of simply replacing the leader in every period. Incentives can be improved via term limits. |
| JEL: | C72 D72 D82 D86 M12 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20301&r=cta |
| By: | F. Barigozzi; N. Burani |
| Abstract: | We study optimal contracts offered by two firms competing for the exclusive services of one worker, who is privately informed about her ability and her motivation. Firms differ both in their production technology and in the mission they pursue and a motivated worker is keen to be hired by the mission-oriented firm. We find that the matching of worker types to firms is always Pareto-efficient. When the difference in firms’ technology is high, only the most efficient firm is active. When the difference is not very high, then agent types sort themselves by motivation: the mission-oriented firm hires motivated types and the profit-oriented firm employs non-motivated ones, independently of ability. Effort provision is higher when the worker is hired by the mission-oriented firm, but a compensating wage differential might exist: the motivated worker is paid less by the mission-oriented firm. Such an earnings penalty is driven entirely by motivation and is increasing in ability. |
| JEL: | D82 D86 J31 M55 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp953&r=cta |
| By: | Kfir Eliaz (Tel Aviv University, Eitan Berglas School of Economics; University of Michigan, Economics Department); Ran Spiegler (Tel Aviv University, Eitan Berglas School of Economics; Centre for Macroeconomics (CFM)) |
| Abstract: | We study a repeated principal-agent interaction, in which the principal offers a "spot" wage contract at every period, and the agent’s outside option follows a Markov process with i.i.d shocks. If the agent rejects an offer, the two parties are permanently separated. At any period during the relationship, the agent is productive if and only if his wage does not fall below a "reference point" (by more than an infinitesimal amount), which is defined as his lagged-expected wage in that period. We characterize the game’s unique subgame perfect equilibrium. The equilibrium path exhibits an aspect of wage rigidity. The agent’s total discounted rent is equal to the maximal shock value. |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:repec:cfm:wpaper:1414&r=cta |
| By: | Christopher Gedge; James W. Roberts; Andrew Sweeting |
| Abstract: | The one-shot nature of most theoretical models of strategic investment, especially those based on asymmetric information, limits our ability to test whether they can fit the data. We develop a dynamic version of the classic Milgrom and Roberts (1982) model of limit pricing, where a monopolist incumbent has incentives to repeatedly signal information about its costs to a potential entrant by setting prices below monopoly levels. The model has a unique Markov Perfect Bayesian Equilibrium under a standard form of refinement, and equilibrium strategies can be computed easily, making it well suited for empirical work. We provide reduced-form evidence that our model can explain why incumbent airlines cut prices when Southwest becomes a potential entrant into airport-pair route markets, and we also calibrate our model to show that it can generate the large price declines that are observed in the data. |
| JEL: | D43 D82 L13 L41 L93 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20293&r=cta |
| By: | Kenjiro Hori (Department of Economics, Mathematics & Statistics, Birkbeck); Jorge Martin Ceron (Department of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | This paper investigates two elements of agency costs, namely the wealth-transfer and the value destruction problems, associated with the equity-conversion and writedown CoCo bonds. By focusing on the costs as those stemming from the deviation from absolute priority rule (DAPR), we derive the expressions for the CoCo bonds and show that both agency costs are aggravated under these structures. We demonstrate this by studying the case of Monte Di Paschi bail-out in 2010. We argue that the replacement of government bailout by bail-in is akin to replacing moral hazard for agency costs, and that by encouraging bail-in structures the regulator prioritises the reduction of the former while ignoring the aggravation of the latter. |
| Keywords: | CoCo bond, bail-in, agency cost, incentives. |
| JEL: | D82 G21 G28 G32 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1407&r=cta |
| By: | Timothy King (Leeds University); Jonathan Williams (Bangor University, UK) |
| Abstract: | We investigate whether handsomely rewarding bank executives’ realizes superior efficiency by determining if executive remuneration contracts produce incentives that offset potential agency problems and lead to improvements in bank efficiency. We calculate executive Delta and Vega to proxy executives’ risk-taking following changes in their compensation contracts and estimate their relationship with alternative profit efficiency. Our study uses novel instruments to account for the potentially endogenous relationship between efficiency and Delta and Vega whilst controlling for the structure of executive compensation, board structure, and bank-level characteristics. Our main results demonstrate that shareholders use executive Vega to incentivise executives into taking risks that improve bank efficiency, and also that executive perquisites can be used to attract and retain executives which ex post deliver efficiency gains. |
| Keywords: | Banks, corporate governance, executive remuneration, efficiency, stochastic frontier. |
| JEL: | C2 G21 G3 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:13009&r=cta |
| By: | Asli Demirgüç-Kunt; Edward J. Kane; Luc Laeven |
| Abstract: | This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. We extend our earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks’ assets and liabilities, including during the recent global financial crisis. We also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks’ balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward. |
| JEL: | G01 G21 G28 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20278&r=cta |
| By: | Jellal, Mohamed |
| Abstract: | This paper provides a theory of rational offer of training policy and efficiency wage by industrial firms. We show that the main determinants of training Policy depends on the level of qualification of workers, the level of control within the firm and its productive structure. The optimal training policy is discontinuous and our model does not exclude the possibility of lack of training policy. Indeed, for a low level of qualification, firms have no incentive to provide training to workers. Finally, the model shows that the profile of the efficiency wage increases with the amount of training , hence our theory is able to explain the positive correlation between high wages and training. |
| Keywords: | Efficiency Wage, Training Policy , Human Capital Productivity, Industrial Firms. |
| JEL: | D21 J3 J31 M53 M54 |
| Date: | 2014–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57306&r=cta |
| By: | Ozlem Akin; José G. Montalvo; Jaume García Villar; José-Luis Peydró; Josep Maria Raya |
| Abstract: | We analyze the determinants of real estate and credit bubbles using a unique borrower-lender matched dataset on mortgage loans in Spain. The dataset contain real estate credit and price conditions (loan principal and spread, and the appraisal and market price) at the mortgage level, matched with borrower characteristics (such as income, labor status and contract) and the lender identity, over the last credit boom and bust. We find that lending standards are softer in the boom than in the bust. Moreover, despite some adjustment in lending conditions in the good times depending on borrower risk, the results suggest too soft lending standards and excessive risk-taking in the boom. For example, mortgage spreads for non-employed are identical to employed borrowers during the boom. Banks with worse corporate governance problems soften even more the standards. Finally, we analyze the mechanism by which banks could increase the supply of mortgage loans despite of regulatory restrictions on LTVs. The evidence is consistent with banks encouraging real estate appraisal firms to introduce an upward bias in appraisal prices (29%), to meet loan-to-value regulatory thresholds (40% of mortgages are just bunched on these limits), thus building-up the credit and the real estate bubble. |
| Keywords: | lending standards, credit supply, excessive risk-taking, bank incentives, conflicts of interest, moral hazard, prudential policy, financial crises, real estate bubble |
| JEL: | G01 G21 G28 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:772&r=cta |