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on Contract Theory and Applications |
| By: | Dmitry Orlov (Stanford Graduate School of Business) |
| Abstract: | This paper studies the joint design of optimal incentive pay and information disclosure in a dynamic moral hazard problem. The principal is more informed about the outcomes of agent's actions and actively manages information available to the agent. Sharing information with the agent increases productivity (for example, allowing a better allocation of resources or effort), but increases the cost of providing incentives. The optimal contract features incomplete information sharing with positive information shared more than negative information and past negative information leading to less information sharing in the future. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:314&r=cta |
| By: | Herbold, Daniel |
| Abstract: | This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades. -- |
| Keywords: | Repeated Principal-Agent Model,On-the-Job Search,Moral Hazard,Multitasking,Efficiency Wages |
| JEL: | C73 D82 D86 J33 L14 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:64&r=cta |
| By: | Claudia Keser; Andreas Markstädter |
| Abstract: | We investigate the formation of market prices in a new experimental setting involving multi-period call-auction asset markets with state-dependent fundamentals. We are particularly interested in two informational aspects: (1) the role of traders who are informed about the true state and/or (2) the impact of the provision of Bayesian updates of the assets’ state-dependent fundamental values (BFVs) to all traders. We find that bubbles are a rare phenomenon in all of our treatments. Markets with asymmetrically informed traders exhibit smaller price deviations from fundamentals than markets without informed traders. The provision of BFVs has little to no effect. Behavior of informed and uninformed traders differs in early periods but converges over time. On average, uninformed traders offer lower (higher) limit prices and hold less (more) assets than informed traders in “good”-state (“bad”-state) markets. Informed traders earn superior profits. |
| Keywords: | Experimental economics, asset markets, informational asymmetries, |
| JEL: | C92 D53 D82 G14 |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2014s-30&r=cta |
| By: | Erwan Quintin (University of Wisconsin at Madison); Cyril Monnet (Universitat Bern) |
| Abstract: | Differently sophisticated and informed investors coexist in most asset markets. At the same time, differently opaque trading avenues also coexist in most markets. We describe a simple environment where the second-best allocation calls precisely for this juxtaposition. Informed investors are useful because their presence provides the right incentives to generate the optimal volume and distribution of investment opportunities. The optimal opacity design serves to eliminate superfluous rents that would otherwise accrue to informed investors. The model makes precise predictions for the composition of different subsegment of a given asset markets and we argue that these predictions are consistent with the pertinent evidence. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:283&r=cta |
| By: | Neale Mahoney; E. Glen Weyl |
| Abstract: | Standard policies to correct market power and selection can be misguided when these two forces co-exist. Using a calibrated model of employer-sponsored health insurance, we show that the risk adjustment commonly used by employers to offset adverse selection often reduces the amount of high-quality coverage and thus social surplus. Conversely, in a model of subprime auto lending calibrated to Einav, Jenkins and Levin (2012), realistic levels of competition among lenders generate a significant oversupply of credit, implying greater market power is desirable. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection and use graphical price-theoretic reasoning to provide a general analysis of the interaction between selection and imperfect competition. We use the same logic to show that in selection markets four principles of the United States Horizontal Merger Guidelines are often reversed. |
| JEL: | D42 D43 D82 I13 L10 L41 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20411&r=cta |
| By: | Dean Corbae (University of Wisconsin) |
| Abstract: | We propose a theory of unsecured consumer credit where: (i) borrowers have the legal option to default; (ii) defaulters are not exogenously excluded from future borrowing; (iii) there is free entry of lenders; and (iv) lenders cannot collude to punish defaulters. In our framework, limited credit or credit at higher interest rates following default arises from the lender's optimal response to limited information about the agent's type and earnings realizations. The lender learns from an individual's borrowing and repayment behavior about his type and encapsulates his reputation for not defaulting in a credit score. We take the theory to data choosing the parameters of the model to match key data moments such as the overall and subprime delinquency rates. We test the theory by showing that our underlying framework is broadly consistent with the way credit scores affect unsecured consumer credit market behavior. The framework can be used to shed light on household consumption smoothing with respect to transitory income shocks and to examine the welfare consequences of legal restrictions on the length of time adverse events can remain on one's credit record. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:274&r=cta |
| By: | Joachim De Weerdt (EDI, Tanzania); Garance Genicot (Georgetown University); Alice Mesnard (City University, London and Institute for Fiscal Studies.) |
| Abstract: | This paper studies asymmetry of information and transfers within a unique data set of 712 extended family networks from Tanzania. Using cross-reports on asset holdings, we construct measures of misperception of income among all pairs of households belonging to the same network. We show that there is significant asymmetry of information and no evidence of major systematic over-evaluation or under-evaluation of income in our data, although there is a slight over-evaluation on the part of migrants regarding non-migrants. We develop a static model of asymmetric information that contrasts altruism, pressure and exchange as motives to transfer. The model makes predictions about the correlations between misperceptions and transfers under these competing explanations.Testing these predictions in the data gives support to the model of transfers under pressure or an exchange motive with the recipient holding all the bargaining power. |
| Keywords: | Asymmetric Information, Transfers, Pressure, Exchange, Altruism. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:crm:wpaper:1433&r=cta |