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on Contract Theory and Applications |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Johannes Horner (Cowles Foundation, Yale University) |
| Abstract: | We investigate the role of market transparency in repeated first-price auctions. We consider a setting with independent private and persistent values. We analyze three distinct disclosure regimes regarding the bid and award history. In the minimal disclosure regime each bidder only learns privately whether he won or lost the auction. In equilibrium the allocation is efficient and the minimal disclosure regime does not give rise to pooling equilibria. In contrast, in disclosure settings where either all or only the winner’s bids are public, an inefficient pooling equilibrium with low revenues exists. |
| Keywords: | First price auction, Repeated auction, Private bids, Information revelation |
| JEL: | D44 D82 D83 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1764r&r=cta |
| By: | Philip Brookins (Department of Economics, Florida State University); Dmitry Ryvkin (Department of Economics, Florida State University) |
| Abstract: | We prove the existence of monotone pure strategy Bayesian equilibria in two types of contests between groups under incomplete information: (i) individual-level private information group contests, where each player only knows her own ability, and (ii) group-level private information group contests, where each player knows the abilities of all members of her group. In the latter case, we also show that the equilibrium is unique. We provide the results of exploratory numerical computations and discuss the qualitative properties of the equilibria. |
| Keywords: | contest, group, incomplete information |
| JEL: | D72 C72 C02 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:fsu:wpaper:wp2014_09_02&r=cta |
| By: | Kei Kawakami |
| Abstract: | This paper studies how much information can be revealed when agents with private information lack commitment to actions in a given mechanism as well as to the mechanism itself. In a two-person decision problem, agents are allowed to hold on to an outcome in one mechanism while they play another mechanism and learn new information. Formally, decision rule is maximally informative if it is (i) posterior im-plementable and (ii) robust to a posterior proposal of another posterior implementable decision rule. Focusing on a two-person problem, we identify environments where maximally informative decision rules exist. We also show that a maximally informative decision rule must be implemented by a mechanism with a small number of actions (at most 5 for two agents). The result indicates that lack of commitment to a mechanism signi?cantly reduces the amount of information revelation in equilibrium. Keywords: Information aggregation, Limited commitment, Posterior e¢ ciency, Posterior implementation, Renegotiation-proofness. |
| Keywords: | Information aggregation, Limited commitment, Posterior effeciency,Posterior implementation, Renegotiation-proofness. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1178&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, is increasing in ability and is associated to low power of incentives. |
| JEL: | D82 D86 J31 M55 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp953&r=cta |
| By: | Norio Kitagawa (Graduate School of Business Administration, Kobe University); Shin' ya Okuda (Distribution and Communication Sciences, Osaka Gakuin University) |
| Abstract: | Studies have identified an increase in the level of average stock return volatility. In this paper, we use the management forecast error as a proxy for disclosure quality to investigate the relationship between management forecast errors and idiosyncratic risk, as management forecasts are important information source on the Japanese stock market. We find that management forecast error is positively related to idiosyncratic risk, suggesting that high-quality public information reduces idiosyncratic risk. Furthermore, we present evidence that management forecast error is even more positively related to the idiosyncratic risks in relatively bad information environments. |
| Keywords: | Management forecasts, idiosyncratic risk, information environment, quality of disclosure, Japanese stock market |
| JEL: | M41 G12 G14 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:kbb:dpaper:2013-38&r=cta |
| By: | Ning Sun (Shanghai University of Finance and Economics); Zaifu Yang (Department of Economics and Related Studies, University of York, United Kingdom) |
| Abstract: | We propose a dynamic auction mechanism for efficiently allocating multiple heterogeneous indivisible goods. These goods can be split into two distinct sets so that items in each set are substitutes but complementary to items in the other set. The seller has a reserve value for each bundle of goods and is assumed to report her values truthfully. In each round of the auction, the auctioneer announces the current prices for all items, bidders respond by reporting their demands at these prices, and then the auctioneer adjusts simultaneously the prices of items in one set upwards but those of items in the other downwards. We prove that although bidders are not assumed to be price-takers and thus can strategically exercise their market power, this dynamic auction always induces the bidders to bid truthfully as price-takers, yields an efficient outcome and also has the merit of being a detail-free, transparent and privacy preserving mechanism. |
| Keywords: | Dynamic auction, gross substitutes and complements, incentives, efficiency, indivisibility, incomplete information |
| JEL: | D44 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:523&r=cta |
| By: | Leif Brandes (Warwick Business School, University of Warwick); Marc Brechot (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich) |
| Abstract: | Existing evidence shows that decision-makers’ social ties to internal co-workers can lead to reduced firm performance. In this paper, we show that decision-makers’ social ties to external transaction partners can also hurt firm performance. Specifically, we use 34 years of data from the National Basketball Association and study the relationship between a team's winning percentage and its use of players that the manager acquired through social ties to former employers in the industry. We find that teams with “tie-hired-players” underperform teams without tie-hired-players by 5 percent. This effect is large enough to change the composition of teams that qualify for the playoffs. Importantly, we show that adverse selection of managers and teams into the use of tie-hiring procedures cannot fully explain this finding. Additional evidence suggests instead that managers deliberately trade-off private,tie-related benefits against team performance. |
| Keywords: | social relationships; social capital; principal-agent relationship; worker allocation; basketball |
| JEL: | D82 M51 Z13 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:zrh:wpaper:345&r=cta |
| By: | Gary B. Gorton (Yale School of Management, National Bureau of Economic Research); Guillermo L. Ordoñez (Department of Economics, University of Pennsylvania, National Bureau of Economic Research) |
| Abstract: | To end a financial crisis, the central bank is to lend freely, against good collateral, at a high rate, according to Bagehot’s Rule. We argue that in theory and in practice there is a missing ingredient to Bagehot’s Rule: secrecy. Re-creating confidence requires that the central bank lend in secret, hiding the identities of the borrowers, to prevent information about individual collateral from being produced and to create an information externality by raising the perceived value of average collateral. Ironically, the participation of "bad" borrowers, with low quality collateral, in the central bank’s lending program is a desirable part of re-creating confidence because it creates stigma. Stigma is critical to sustain secrecy because no borrower wants to reveal his participation in the lending program, and it is limited by the central bank charging a high rate for its loans. |
| Keywords: | Central Bank, Discount Window, Financial Crisis, Confidence |
| JEL: | E32 E44 E58 |
| Date: | 2014–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-025&r=cta |
| By: | Simon MIEGIELSEN |
| Abstract: | This paper examines the informativeness of consumer information networks and their effect on price competition between .rms. Under the proposed information mechanism, consumers share their initial information with the members of their network and as such become better informed. The main result of this paper shows how informative such networks are by characterizing how many different pieces of information a network is likely to contain. This informativeness is crucial for the degree of competition, as consumers comparing more prices induce firms to compete more fiercely. We find that larger networks imply better information transmission, which intensifies competition and decreases all the percentiles of the price distribution. An increase in the number of firms makes networks more informative, and decreases all the percentiles as well. Our results are robust to the introduction of sequential search and network segregation, but an increase in segregation decreases information transmission and increases all percentiles. |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces14.14&r=cta |
| By: | Nicolas Gravel (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Michel Poitevin (CIREQ - Centre interuniversitaire de recherche en économie quantitative - Université de Montréal, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal) |
| Abstract: | This paper discusses the problem of optimal design of a jurisdiction structure from the view point of a welfarist social planner when households with identical utility functions for non-rival public good and private consumption have private information about their contributive capacities. It shows that the superiority of a centralized provision of a non-rival public good over a federal one does not always hold. Specifically, when differences in households contributive capacities are large, it is better to provide the public good in several distinct jurisdictions rather than to pool these jurisdictions into a single one. In the specific case where households have logarithmic utilities, the paper provides a complete characterization of the optimal jurisdiction structure in the two-type case. "C'est pour unir les avantages divers qui résultent de la grandeur et de la petitesse des nations que le fédératif a été créé." (Alexis de Toqueville) |
| Keywords: | federalism; jurisdictions; asymmetric information; equalization; city mergers |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01063191&r=cta |
| By: | Irina Andrievskaya (National Research University Higher School); Maria Semenova (National Research University Higher School) |
| Abstract: | There seems to be a consensus among regulators and scholars that in order to improve the functioning of a banking system and to stimulate bank competition, it is necessary to raise the level of bank information transparency. However, empirical studies which examine the determinants of competition in the financial sector, the effect of competition on financial stability, or the relationship between transparency and bank stability, leave aside the link between transparency and competition. The aim of this paper is to fill this gap in the literature. To test the hypothesis that greater bank information disclosure is associated with lower market power and lower concentration in the banking system, we use country-level data covering 213 countries. The years under consideration are 1998, 2001, 2005 and 2010, which correspond to the years of the World Bank's Banking Regulation and Supervision Survey rounds. Our findings do not always support the conventional wisdom: countries with higher levels of transparency have lower levels of bank concentration, while the link between transparency and competition is less pronounced. The effect from information disclosure grows – for both concentration and market power – with an increase of bank credit risks |
| Keywords: | Banking system, transparency, competition, concentration. |
| JEL: | F01 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:35/fe/2014&r=cta |
| By: | A. Lemus; Diego Moreno |
| Abstract: | Since Littlechild (1983)'s report, price cap regulation has been regarded as an effective instrument to mitigate market power when precise information about cost and demand is available. Earle, Schmedders and Tatur (2007) establishes that the comparative static properties of price caps that hold when the demand is deterministic fail for a generic stochastic demand schedule. This note concerns the validity and interpretation of this result in a setting in which firms choose how much to produce ex-ante, but then upon observing the realization of demand choose how much of their output to supply, freely disposing of the output it does not supply. |
| Keywords: | Price Cap Regulation, Capacity Investment and Withholding, Demand Uncertainty |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1417&r=cta |
| By: | Brad R. Humphreys (West Virginia University, College of Business and Economics); Jie Yang (University of Alberta, Department of Economics) |
| Abstract: | Organizing employees into teams increases productivity but also generates incentives to shirk. Recent research suggests that peer enforcement plays an important role in deterring shirking in teams. We analyze 10 years of performance and compensation data for NFL offensive linemen, a high-skill, high-salary and repeatedly interacting team, using the Hausman-Taylor estimator to control for unobservable individual-specific heterogeneity. We find evidence that teammates’ effort signals reduce the salaries of individual offensive linemen, providing an optimal, low powered sanctioning mechanism for individual workers in this setting, and that a separate, independently monitored individual effort signal also reduces salaries. |
| Keywords: | peer enforcement, teams, shirking, incentives |
| JEL: | J24 J3 J44 L83 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:wvu:wpaper:14-24&r=cta |
| By: | Sandra Cavaco (LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - Université Paris II - Panthéon-Assas : EA4442 - Sorbonne Universités); Patricia Crifo (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, UP10 - Université Paris 10, Paris Ouest Nanterre La Défense - Université Paris X - Paris Ouest Nanterre La Défense, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal, EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Antoine Reberioux (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense, CREDDI/LEAD Université Antilles Guyane - Université des Antilles et de la Guyane); Gwenael Roudaut (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, AgroParisTech - AgroParisTech) |
| Abstract: | This paper develops a two-way director-firm fixed effect model to study the relationship between independent directors' individual heterogeneity and firm operating performance, using French data. This strategy allows considering and differentiating in a unified empirical framework mechanisms related to board functioning and to director selection. We first show that the independence status, netted out unobservable individual heterogeneity, is negatively related to performance. This result suggests that independent board members experience an informational gap compared to other affiliated members. However, we show that industry-specific expertise as well as informal connections inside the boardroom may help to bridge this gap. Finally, we provide evidence that independent directors have higher intrinsic ability as compared to affiliated board members, consistent with a reputation-based selection process. |
| Keywords: | independent director heterogeneity, information asymmetry, director selection, firm performance, two-way fixed effect model |
| Date: | 2014–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01060211&r=cta |
| By: | Ciril Bosch-Rosa; ; Melanie; |
| Abstract: | There is consensus that the recent nancial crisis revolved around a crash of the short-term credit market. Yet there is no agreement around the necessary policies to prevent another credit freeze. In this experiment we test the eects that contract length (i.e. maturity mismatch) has on the market-wide supply of short-term credit. Our main result is that, while credit markets with shorter maturities are less prone to freezes, the optimal policy should be state-dependent, favoring long contracts and lower maturity mismatch when the economy is in good shape, and allowing for short-term contracts when the economy is in a recession. We also report the possibility of credit runs on rms with strong fundamentals, something that cannot be observed in the canonical static models of nancial panics. Finally, we show that our experimental design produces rich learning dynamics, with a text-book bubble and crash pattern in the market for short-term credit. |
| Keywords: | Experiment, Financial Crisis, Continuous Time, ABCP |
| JEL: | C92 C91 G01 G21 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-048&r=cta |
| By: | Joerg Bleile (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | An agent needs to determine a belief over potential outcomes for a new problem based on past observations gathered in her database (memory). There is a rich literature in cognitive science showing that human minds process and order information in categories, rather than piece by piece. We assume that agents are naturally equipped (by evolution) with a efficient heuristic intuition how to categorize. Depending on how available categorized information is activated and processed, we axiomatize two different versions of belief formation relying on categorizations. In one approach an agent relies only on the estimates induced by the single pieces of information contained in so called target categories that are activated by the problem for which a belief is asked for. Another approach forms a prototype based belief by averaging over all category-based estimates (so called prototypical estimates) corresponding to each category in the database. In both belief formations the involved estimates are weighted according to their similarity or relevance to the new problem. We impose normatively desirable and natural properties on the categorization of databases. On the stage of belief formation our axioms specify the relationship between different categorized databases and their corresponding induced (category or prototype based) beliefs. The axiomatization of a belief formation in Billot et al. (Econometrica, 2005) is covered for the situation of a (trivial) categorization of a database that consists only of singleton categories and agents basically do not process information categorical. |
| Keywords: | Belief formation, prior, case-based reasoning, similarity, categorization, prototype |
| JEL: | D81 D83 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:519&r=cta |
| By: | Tian Chan (INSEAD); Francis de Véricourt (ESMT European School of Management and Technology); Omar Besbes (Columbia University) |
| Abstract: | Equipment manufacturers offer different types of maintenance service plans (MSPs) that delineate payment structures between equipment operators and maintenance service providers. These MSPs allocate risks differently and thus induce different kinds of incentives. A fundamental question, therefore, is how such structures impact service performance and the service chain value. We answer empirically this question. Our study is based on a unique panel data covering the sales and service records of over 700 diagnostic medical body scanners. By exploiting the presence of a standard warranty period, we overcome the key challenge of isolating the incentive effects of MSPs on service performance from the confounding effects of adverse selection. We found that moving an operator from a basic pay-per-service plan to a fixed-fee full-protection plan leads to both a reduction in reliability and an increase in service costs. We further show that the increase in cost is driven by both the operator and the service provider. Our results point to the presence of losses in service chain value in the maintenance of medical equipment, and provide the first evidence that a basic pay-per-service plan, where the risk of equipment failure is borne by the operator, can actually improve performance and costs. |
| Keywords: | Maintenance repair, service contracting, co-production, empirical operations management, service chain value, healthcare industry |
| Date: | 2014–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-14-05&r=cta |
| By: | Hörner, Johannes; Klein, Nicolas; Rady, Sven |
| Abstract: | This paper studies strongly symmetric equilibria (SSE) in continuous-time games of strategic experimentation with Poisson bandits. SSE payoffs can be studied via two functional equations similar to the HJB equation used for Markov equilibria. This is valuable for three reasons. First, these equations retain the tractability of Markov equilibrium, while allowing for punishments and rewards: the best and worst equilibrium payoff are explicitly solved for. Second, they capture behavior of the discrete-time game: as the period length goes to zero in the discretized game, the SSE payoff set converges to their solution. Third, they encompass a large payoff set: there is no perfect Bayesian equilibrium in the discrete-time game with frequent interactions with higher asymptotic efficiency. |
| Keywords: | Two-Armed Bandit; Bayesian Learning; Strategic Experimentation; Strongly Symmetric Equilibrium |
| JEL: | C73 D83 |
| Date: | 2014–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:469&r=cta |