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on Contract Theory and Applications |
| By: | Yeung, Timothy |
| Abstract: | This paper presents a cheap-talk one-sender-multiple-receiver model in which audiences freeride on each other in the context of global environmental protections. The sender observes the magnitude of damage of emission, and sends the same message simultaneously to all audiences, who then play a game to determine individual emission level. The sender may find it impossible to credibly send the truth when externality is large enough because of the incentive to correct free-riding behavior. If a private club is established for sharing information, the sender’s information with more countries may not be optimal because the sender is less truthful when the club is larger. |
| Keywords: | Cheap Talk, Externality, Environmental Protections |
| JEL: | D82 H41 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28291&r=cta |
| By: | Alexander Matros (Darla Moore School of Business, University of South Carolina); Alex Possajennikov (Department of Economics, University of Nottingham) |
| Abstract: | We consider mechanisms for allocating a common-value prize between two players in an incomplete information setting. In this setting, each player receives an independent private signal about the prize value. The signals are from a discrete distribution and the value is increasing in both signals. First, we characterize symmetric equilibria in four mechanisms: a lottery; and Â…rst-price, second-price, and all-pay auctions. Second, we establish revenue equivalence of these auction mechanisms in this setting. Third, we describe conditions under which the expected revenue is higher in the lottery than in any of the auctions. Finally, we identify an optimal mechanism and its implementation by means of reserve prices in lottery and auction mechanisms. |
| Keywords: | common value; contests; auctions |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2014-07&r=cta |
| By: | Yamashita, Takuro |
| Abstract: | We study the mechanism-design problem of guaranteeing desirable performances whenever agents are rational in the sense of not playing weakly dominated strategies. We first provide an upper bound for the best performance we can guarantee among all feasible mechanisms. We then prove the bound to be tight under certain conditions in auction and bilateral-trade applications. In particular, we find that a second-price auction is optimal in revenue with interdependent values, which is neither dominant-strategy nor ex post incentive compatible, but satisfies the novel incentive compatibility introduced in this analysis. |
| Keywords: | Robust mechanism design, Robust implementation |
| JEL: | D82 D86 |
| Date: | 2014–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28370&r=cta |
| By: | Louis-Gaëtan Giraudet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech); Sébastien Houde (University of Maryland - University of Maryland) |
| Abstract: | We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We argue that such problems are likely to be important for home energy retrofits, where both the seller and the buyer can take hidden actions. The retrofit contractor may cut on the quality of installation to save costs, while the homeowner may rebound, that is, increase her use of energy services when provided with higher energy efficiency. We first formalize the double moral hazard problem described above and examine how the resulting energy efficiency gap can be reduced through minimum quality standards or energy-savings insurance. We then calibrate the model to the U.S. home insulation market and quantify the deadweight loss. We find that for a large range of market environments, the welfare gains from undoing moral hazard are substantially larger than the costs of quality audits. They are also about one order of magnitude larger than those from internalizing carbon dioxide externalities associated with the use of natural gas for space heating. Moral hazard problems are consistent with homeowners investing with implied discount rates in the 15-35% range. Finally, we find that minimum quality standards outperform energy-savings insurance. |
| Keywords: | Energy efficiency gap, moral hazard, energy-savings insurance, minimum quality standard |
| Date: | 2014–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:ciredw:hal-01016109&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Dept. of Economics, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | In an economy of interacting agents with both idiosyncratic and aggregate shocks, we examine how the information structure determines aggregate volatility. We show that the maximal aggregate volatility is attained in a noise free information structure in which the agents confound idiosyncratic and common components of the payoff state, and display excess response to the common component, as in Lucas (1972). The upper bound on aggregate volatility is linearly increasing in the variance of idiosyncratic shocks, for any given variance of aggregate shocks. Our results hold in a setting of symmetric agents with linear best responses and normal uncertainty. We show our results by providing a characterization of the set of all joint distributions over actions and states that can arise in equilibrium under any information structure. This tractable characterization, extending results in Bergemann and Morris (2013b), can be used to address a wide variety of questions. |
| Keywords: | Incomplete information, Bayes correlated equilibrium, Volatility, Moments restrictions, Linear best responses, Quadratic payoffs |
| JEL: | C72 C73 D43 D83 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1928r&r=cta |
| By: | Ojo, Marianne |
| Abstract: | As well as consolidating on the existing literature on fair value accounting, by way of reference to jurisdictional analyses which include a focus on China, Japan, Brazil, and South Africa, this paper not only highlights why there is need for a re-think of the use of fair values as the primary basis for the implementation of IFRS, but also accentuates the links between systemic risk and information asymmetries – hence the justification for greater focus on information channels as well as disclosure and financial reporting requirements. Audits, which serve as vital signalling mechanisms in capital markets, have limited roles in many emerging economies than is the case with industrial nations. In contributing to the extant literature on the topic, this paper also aims to address the vital and crucial question relating to whether certain emerging economies are justified in their reluctance to fully embrace audits – based on cost- benefit considerations, as well as other inadequacies relating to fair value measurements. Furthermore, it will be highlighted that whilst audits may appear to have more limited roles in certain jurisdictions, there appears to be greater willingness to embrace Basel III requirements – and in particular, the Basel III leverage ratios in jurisdictions such as China. Ultimately the paper also aims to investigate whether there are any justifications or rationales for a jurisdiction's willingness and pace to adopt IFRS, Basel III requirements, in relation to the existing role assumed by audits in such jurisdictions. |
| Keywords: | fair value accounting; Finance Theory; information asymmetries; risk; corporate governance; ownership structures; auditor; disclosure; principal; agent; regulation; moral hazard; IFRS; China; Japan; Brazil; South Africa |
| JEL: | D8 E3 G3 G38 K2 |
| Date: | 2014–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57826&r=cta |
| By: | Rivas, Javier |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:37903&r=cta |
| By: | Maria Rosaria Alfano (Seconda Università di Napoli, Italy); Anna Laura Baraldi (Seconda Università di Napoli, Italy); Claudia Cantabene (Seconda Università di Napoli, Italy) |
| Abstract: | This work contributes to empirical studies on decentralization and corruption by trying to resolve the uncertainty that the literature so far has shown. It also gives reasons supporting the ‘best’ decentralization structure which a country can adopt to discourage corrupt behaviour, and suggests an intermediate degree of decentralization. The trade-off between the moral hazard and the adverse selection aspect of the principal-agent framework, that emerges in this literature, can be better captured by a non-linear specification (e.g. cubic, as the more general non-linear model); neither very small nor very high degrees of decentralization are appropriate against corruption, but an intermediate one. Being monitored by the voters, local politicians, in a intermediate decentralized setting, have an incentive to perform in the voters’ interest and, being local resources they manage not very much, they have little incentive to appropriate? part of such resources for personal use. |
| Keywords: | Corruption, Decentralization |
| JEL: | H7 D73 C33 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ipu:wpaper:4&r=cta |
| By: | Kinda Hachem |
| Abstract: | I analyze whether banks are efficient at allocating resources across intermediation activities. Competition between lenders means that resources are needed to draw borrowers into credit matches. At the same time, imperfect information between lenders and borrowers means that resources are also needed for screening. I show that the privately optimal allocation of resources is constrained inefficient. In particular, too many resources are spent on getting rather than vetting borrowers but, once properly vetted, not enough matches are retained. Uninformed lending is thus inefficiently high, informed lending is inefficiently low, and a tax on matching activities helps remedy the situation. |
| JEL: | D62 D83 E44 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20365&r=cta |