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on Contract Theory and Applications |
| By: | Dey, Oindrila; Banerjee, Swapnendu |
| Abstract: | This paper aims to provide a survey on the studies on incentive, especially non-monetary incentive like status. We intend to summarize the different studies in a concise manner and comment on the divergent views on valuation for status, relation between monetary and status incentives, the technique of modeling status and on the cost of introducing status. We also underline the some probable adverse consequences associated with the use of status incentive. In this paper it also highlights the problem associated with asymmetric information in the labour market, specifically, the (post contractual) moral hazard problem. |
| Keywords: | Status, incentives, principal–agent problem |
| JEL: | L1 |
| Date: | 2014–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57658&r=cta |
| By: | Alex Gershkov; Jianpei Li; Paul Schweinzer |
| Abstract: | We study the role of information exchange, leadership and coordination in team or partnership structures. For this purpose, we view individuals jointly engaging in productive processes -- a 'team' -- as endowed with individual and privately held information on the joint production process. Once individual information is shared, team members decide individually on the effort they exert in the joint production process. This effort, however, is not contractible; only the joint output (or profit) of the team can be observed. Our central question is whether or not incentives can be provided to a team in this environment such that team members communicate their private information and exert efficient productive efforts on the basis of this communication. Our main result shows that there exists a simple ranking-based contract which implements both desiderata in a wide set of situations. |
| Keywords: | Moral hazard, Adverse selection, Leadership, Teams |
| JEL: | C7 D7 D8 L2 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:14/08&r=cta |
| By: | Achim Voß (University of Münster, Germany); Jörg Lingens (University of Münster, Germany) |
| Abstract: | Many environmental-policy problems are characterized by complexity and uncertainty. Government’s choice concerning these policies commonly relies on information provided by a bureaucracy. Environmental bureaucrats often have a political motivation of their own, so they might be tempted to misreport environmental effects in order to influence policy. This transforms a problem of uncertainty into one of asymmetric information. We analyze the ensuing principal-agent relationship and derive the government’s optimal contract, which conditions policy and rewards on reported environmental effects. We find that agents who are more environmentalist than the government are rewarded for admitting that the environmental impact is low (and vice versa). With higher uncertainty, the bureaucrat has a stronger influence on policy. For some values of the environmental impact, the bureau is permitted to set its own preferred policy (optimal delegation). |
| Keywords: | Environmental Policy, Political Economy, Delegation, Bureaucracy, Regulatory Agency, Mechanism Design, Type-dependent Participation Constraint, Pure State Constraints in Optimal Control |
| JEL: | D73 D82 C61 Q52 Q58 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2014.66&r=cta |
| By: | Long, Iain W. (Cardiff Business School); Polito, Vito (Cardiff Business School) |
| Abstract: | We study an individual's incentive to search for a job in the presence of random criminal opportunities. These opportunities extenuate moral hazard, as the individual sometimes commits crime rather than searching. Even when he searches, he applies less effort. We then revisit the design of optimal unemployment insurance in this environment. If the individual is more likely to remain unemployed and unpunished when he commits crime than when he searches for a job (as suggested by empirical studies), declining unemployment benefits reduce the payoff from crime relative to that from searching. Compared to the canonical models of optimal unemployment insurance, this provides a further incentive to reduce benefits over time. |
| Keywords: | Unemployment insurance; Moral hazard; Crime; Recursive contracts |
| JEL: | C61 D82 H55 J65 K42 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2014/9&r=cta |
| By: | Toni Ahnert; Ali Kakhbod |
| Abstract: | We propose a parsimonious model of information choice in a global coordination game of regime change that is used to analyze debt crises, bank runs or currency attacks. A change in the publicly available information alters the uncertainty about the behavior of other investors. Greater strategic uncertainty makes private information more valuable, so more investors acquire information. This change in the proportion of informed investors amplifies the impact of the initial change in public information on the probability of a crisis. Our amplification result explains how a small deterioration in public information can cause a financial crisis. |
| Keywords: | Financial Institutions, Financial stability |
| JEL: | D83 G01 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-30&r=cta |
| By: | Behr, Patrick; Drexler, Alejandro; Gropp, Reint; Guettler, Andre |
| Abstract: | In this paper we investigate the implications of providing loan officers with a compensation structure that rewards loan volume and penalizes poor performance versus a fixed wage unrelated to performance. We study detailed transaction information for more than 45,000 loans issued by 240 loan officers of a large commercial bank in Europe. We examine the three main activities that loan officers perform: monitoring, originating, and screening. We find that when the performance of their portfolio deteriorates, loan officers increase their effort to monitor existing borrowers, reduce loan origination, and approve a higher fraction of loan applications. These loans, however, are of above-average quality. Consistent with the theoretical literature on multitasking in incomplete contracts, we show that loan officers neglect activities that are not directly rewarded under the contract, but are in the interest of the bank. In addition, while the response by loan officers constitutes a rational response to a time allocation problem, their reaction to incentives appears myopic in other dimensions. -- |
| Keywords: | loan officer,incentives,monitoring,screening,loan origination |
| JEL: | G21 J33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:62&r=cta |
| By: | Alberto Bisin; Piero Gottardi; Guido Ruta |
| 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. |
| JEL: | G10 G32 G33 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20345&r=cta |
| By: | Author-Name: Luca Di Corato (Department of Economics, Swedish University of Agricultural Sciences, Sweden); Cesare Dosi (Department of Economics and Management, University of Padova and Centro di Ricerca Interuniversitario sull’Economia Pubblica (CRIEP), Italy); Michele Moretto (Department of Economics and Management, University of Padova, Fondazione Eni Enrico Mattei (FEEM) and Centro Studi Levi-Cases, Italy) |
| Abstract: | Contracts providing payments for not developing natural areas, or for removing cropland from production, generally require long-term commitments. Landowners, however, can decide to prematurely terminate the contract when the opportunity cost of complying with conservation requirements increases. The paper investigates how this can affect bidding behavior in multi-dimensional auctions, where agents bid on both the conservation plan and the required payment, when contracts do not provide for sufficiently strong incentives against early exit. Integrating the literature on scoring auctions with that which views non-enforcement of contract terms as a source of real-options, the paper offers the following contributions. First, it is shown that bidders’ expected payoff is higher when facing enforceable project deadlines. Second, that failure to account for the risk of opportunistic behavior could lead to the choice of sellers who will not provide the contracting agency with the highest potential payoff. Finally, we examine the role that eligibility rules and the degree of competition can play in avoiding such potential bias in contract allocation. |
| Keywords: | Conservation Contracts, Scoring Auctions, Non-enforceable Contract Duration, Real Options |
| JEL: | C61 D44 D86 Q24 Q28 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2014.65&r=cta |
| By: | Christoph Aymanns; Co-Pierre Georg |
| Abstract: | When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1408.0440&r=cta |
| By: | Ozlem Akin; José Garcia Montalvo; Jaume Garcia Villar; José-Luis Peydró; Josep M. 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:upf:upfgen:1430&r=cta |
| By: | Masaki Aoyagi; Manaswini Bhalla; Hikmet Gunay |
| Abstract: | This paper studies dynamic price competition over two periods between two firms selling differentiated durable goods to two buyers who are privately informed about their types, but have valuations of the two goods dependent on the other buyer's type. The firms' pricing strategy in period 1 must take into account the buyers' incentive to wait and learn from the other buyer's decision. We construct an equilibrium based on the key observation that the expected price of either good in period 2 is the same as its price in period 1 on and off the path of play. The equilibrium is shown to be non-preemptive in the sense that even if either firm fails to make a sale in period 1, it still makes a sale with positive probability in period 2. A characterization of the equilibrium is given in terms of the probability of delay as a function of the degree of interdependence between the two buyers. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0909&r=cta |
| By: | Martini, Jan-Thomas; Niemann, Rainer; Simons, Dirk |
| Abstract: | The introduction of a common consolidated corporate tax base (CCCTB) and tax allocation via formula apportionment (FA) is hotly debated in the European Union (EU) since more than a decade. While the literature has thoroughly analyzed the economic effects of FA from a macro-level perspective, the firm view has been added only recently. Within this micro-level framework discussing possible tax-induced distortions of multi-jurisdictional entities' (MJE) decisions becomes feasible. Anticipating the reactions of MJEs to the introduction of FA requires considering delegation and incentivisation, because management decisions are influenced by principal agent relationships. How FA affects the demand for managerial effort is a hitherto neglected research question. Accordingly, the objective of this paper is to highlight the tax-induced distortions of managerial incentives caused by FA. For this purpose we set up a LEN-type principal-agent model with agents in two different jurisdictions. Compared to the case with separate taxation (ST) the principal demands increased effort and pays an increased compensation to managers in low-tax jurisdictions, if payroll enters the FA formula. Managers in high-tax jurisdictions face the opposite effect. Further, the composition of the compensation packages changes. Overall, net profit increases, because FA offers potential for profit shifting. -- |
| Keywords: | Common Consolidated Corporate Tax Base,Formula Apportionment,Managerial Compensation,Multi-Jurisdictional Entities,Principal-Agent-Problem |
| JEL: | H25 M41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:arqudp:168&r=cta |
| By: | Guo Li; Sherrill Shaffer |
| Abstract: | This study provides new evidence regarding reciprocal brokered deposits (RBDs), regulatory responses, and bank risk, contributing to prior studies in four ways. First, using updated financial Call Report data and bank failure data through 2012, we reexamine the moral hazard hypothesis that banks using RBDs exhibit higher risk. Second, we uncover a previously overlooked positive association between RBDs and banks’ cost of failure. Third, we apply Granger causality tests; and finally, we test whether the FDIC’s recent revision of its pricing discourages the use of RBDs and weakens its association with bank risk. |
| Keywords: | Reciprocal Brokered Deposits, Moral Hazard, cost of failure |
| JEL: | G21 G22 G28 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-56&r=cta |
| By: | Bertrand Chopard; Thomas Cortade; Eric Langlais |
| Abstract: | This paper analyzes the effects of two damage rules (Lost Profi t vs Unjust Enrichment) mainly used by Courts in patent litigations. In our model, the Infringer either is a mere imitator of the Patentee or introduces incremental innovations, and litigation costs are private information such that a pretrial settlement may be better for both litigants. We show that the Unjust Enrichment rule yields less trials than the Lost Pro fit one. But regarding three main objectives, Patentee's protection, incentives to invest in R&D, and social welfare maximization,we find that no rule is better than the other generally speaking. Our model also allows to emphasize how the combination between the size of litigation costs, the negotiation gains and the IPR strength, shapes the incentives to enforce as well infringe a IPR, although in a way specifi c to each rule. |
| Keywords: | intellectual property, probabilistic patents, patent litigations, incremental innovations, pretrial negotiations, legal costs, imperfect competition. |
| JEL: | L1 L4 D8 K2 K4 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-41&r=cta |
| By: | Makoto Shimoji |
| Abstract: | We employ weak dominance to analyze both first-price and second-price auctions under the discrete private-value setting. We provide a condition under which the expected revenue from second-price auction is higher than that of first-price auction. We also provide implications for large auctions, including the “virtual†revenue equivalence. |
| Keywords: | Discrete Private-Value Auctions, Revenue Comparison, Weak Dominance. |
| JEL: | C72 D44 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:14/13&r=cta |