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on Contract Theory and Applications |
| By: | Daniel Krähmer; Roland Strausz; Melanie; |
| Abstract: | We study ex post information rents in sequential screening models where the agent receives private ex ante and ex post information. The principal has to pay ex post information rents for preventing the agent to coordinate lies about his ex ante and ex post information. When the agent’s ex ante information is discrete, these rents are positive, whereas they are zero in continuous models. Consequently, full disclosure of ex post information is generally suboptimal. Optimal disclosure rules trade off the benefits from adapting the allocation to better information against the effect that more information aggravates truth-telling. |
| Keywords: | Sequential screening, dynamic mechanism design, participation constraints, Mirrlees approach |
| JEL: | D82 H57 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-045&r=cta |
| By: | Daniel Krähmer; Roland Strausz; Melanie; |
| Abstract: | We study ex post information rents in sequential screening models where the agent receives private ex ante and ex post information. The principal has to pay ex post information rents for preventing the agent to coordinate lies about his ex ante and ex post information. When the agent’s ex ante information is discrete, these rents are positive, whereas they are zero in continuous models. Consequently, full disclosure of ex post information is generally suboptimal. Optimal disclosure rules trade off the benefits from adapting the allocation to better information against the effect that more information aggravates truth-telling. |
| Keywords: | information rents, sequential screening, information disclosure |
| JEL: | D82 H57 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-046&r=cta |
| By: | Yu Chen (Nanjing University) |
| Keywords: | Bayesian incentive compatible mechanism, ex post incentive compatible mechanism, quasi-linear environment |
| JEL: | C72 D82 D86 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2014001&r=cta |
| By: | Christopher Gertz (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | This work takes a closer look on the predominant assumption in usual lemon market models of having finitely many or even only two different levels of quality. We model a situation which is close to the classical monopolistic setting but admits an interval of possible quality values. Additionally, to make the model interesting, the consumer receives a signal which is correlated to the quality level and is her private information. We introduce a new concept for the consumer reaction to the received information, encompassing rationality but also allowing for a certain degree of imperfection. We find that there is always a strictly positive price-quality relation in equilibrium but the classical adverse selection effects are not observed. In contrast, low quality levels do not make any sales. After applying a refinement to these equilibria, we show that when the additional signal is very precise, more low quality levels are excluded from the market. In the limit of perfect information, the market breaks down, a behavior completely opposed to the original perfect information case. These different and quite extreme results compared to the classical lemon market case should serve as a warning to have a closer look at the assumption of having finitely many quality levels. |
| Keywords: | Quality uncertainty, Price signaling, Adverse selection, Two-sided incomplete information |
| JEL: | C72 D42 D82 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:522&r=cta |
| By: | Konrad Stahl; Roland Strausz; ; |
| Abstract: | We provide elementary insights into the effectiveness of certification to increase market transparency. In a market with opaque product quality, sellers use certification as a signaling device, while buyers use it as an inspection device. This difference alone implies that seller-certification yields more transparency and higher social welfare. Under buyer-certification profit maximizing certifiers further limit transparency, but because seller-certification yields larger profits, active regulation concerning the mode of certification is not needed. These findings are robust and widely applicable to, for instance, patents, automotive parts, and financial products. |
| Keywords: | Market Transparency; Certification; Information and Product Quality; Asymmetric Information |
| JEL: | D82 G24 L15 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-041&r=cta |
| By: | LaRiviere, Jacob; Czajkowski, Mikolaj; Hanley, Nick; Aanesen, Margrethe; Falk-Peterson, Jannike; Tinch, Dugald |
| Abstract: | This paper compares how increases in experience versus increases in knowledge about a public good affect willingness to pay (WTP) for its provision. This is challenging because while consumers are often certain about their previous experiences with a good, they may be uncertain about the accuracy of their knowledge. We therefore design and conduct a field experiment in which treated subjects receive a precise and objective signal regarding their knowledge about a public good before estimating their WTP for it. Using data for two different public goods, we show qualitative equivalence of the effect of knowledge and experience on valuation for a public good. Surprisingly, though, we find that the causal effect of objective signals about the accuracy of a subject’s knowledge for a public good can dramatically affect their valuation for it: treatment causes an increase of $150-$200 in WTP for well-informed individuals. We find no such effect for less informed subjects. Our results imply that WTP estimates for public goods are not only a function of true information states of the respondents but beliefs about those information states. |
| Keywords: | Information, Beliefs, Field Experiment, Valuation, Uncertainty, Choice Experiment, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:552&r=cta |
| By: | Czajkowski, Mikolaj; Hanley, Nick; LaRiviere, Jacob; Simpson, Katherine |
| Abstract: | In this study we elicit agents’ prior information set regarding a public good, exogenously give information treatments to survey respondents and subsequently elicit willingness to pay for the good and posterior information sets. The design of this field experiment allows us to perform theoretically motivated hypothesis testing between different updating rules: non-informative updating, Bayesian updating, and incomplete updating. We find causal evidence that agents imperfectly update their information sets. We also field causal evidence that the amount of additional information provided to subjects relative to their pre-existing information levels can affect stated WTP in ways consistent overload from too much learning. This result raises important (though familiar) issues for the use of stated preference methods in policy analysis. |
| Keywords: | Bayesian, Public Goods, Behavioral Economics, Stated Preference, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:553&r=cta |
| By: | Jos Jansen; Andreas Pollak |
| Abstract: | We study the strategic disclosure of demand information and product-market strategies of duopolists. In a setting where firms may fail to receive information, we show that firms selectively disclose information in equilibrium in order to influence their competitor's product-market strategy. Subsequently, we analyze the firms' behavior in a laboratory experiment. We find that subjects often use selective disclosure strategies, and this finding appears to be robust to changes in the information structure, the mode of competition, and the degree of product differentiation. Moreover, subjects in our experiment display product-market conduct that is largely consistent with theoretical predictions. |
| Keywords: | duopoly, Cournot competition, Bertrand competition, information disclosure, incomplete information, common value, product differentiation, asymmetry, skewed distribution, laboratory experiment |
| JEL: | C92 D22 D82 D83 L13 M4 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0075&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:wpaper:hal-01016109&r=cta |
| By: | Tomoya Nakamura |
| Abstract: | This study analyzes one-leader and multiple-follower Stackelberg games with demand uncertainty. We demonstrate that the weight on public information regarding a follower's estimation of demand uncertainty determines the strategic relationship between the leader and each follower. When the relationship is strategic complement, the leader can exit from a market. The threshold is determined by the intensity of Cournot competition among the followers. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0908r&r=cta |
| By: | Peyman Khezr (School of Economics, The University of Queensland); Abhijit Sengupta (School of Economics, University of Sydney) |
| Abstract: | We study a game in which the seller of an indivisible object wants to sell her object to a finite number of potential buyers with a posted price. The environment is such that the seller has some private information about the quality of the object that cannot be communicated with buyers at zero cost. We focus on the separating equilibrium of this game in which the seller signals her actual type via the posted price. The conditions of the existence and the uniqueness of this equilibrium are studied. In an example, we calculate the seller’s expected payoff at this equilibrium and further discuss some comparative statistics. |
| Date: | 2014–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:532&r=cta |
| By: | Joerg Bleile (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | An agent wants to derive her belief over outcomes based on past observations collected in her database (memory). There is well establish evidence in the psychology and marketing literature that agents consistently fail (or choose not) to process all available information. An agent might be constraint to pay attention (recall) and consider only parts of her potentially available information due to unawareness, cognitive or psychological limitations or intentionally for effort-efficiency. Based on this insight, we axiomatize a two-stage belief formation process in which in a first step agents filter ((un)intentionally) the available information. In a second step individuals employ the remaining observations to express a belief. We impose cognitively and normatively desirable properties on the filtering process. The axioms on the belief formation stage describe the relationship between databases and their induced beliefs. The axiomatized belief induced by a filtered databases is representable by a similarity weighted average of the estimations induced by each past attentiongrabbing observation. An appealing application is a satisficing filter that induces a filtered belief that relies only on past experiences that are sufficiently relevant for a current problem. For the specific situation that agents (are able to) always pay attention to all available information, our axiomatization coincides with the axiomatization of a belief formation in Billot et al.(Econometrica (2005)). |
| Keywords: | Belief formation, prior, case-based reasoning, relative frequencies, similarity, limited attention, consideration set, heuristics, satisficing, multicriteria choice, rationalization |
| JEL: | D01 D03 D11 D81 D83 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:518&r=cta |
| By: | Hart, Robert A; Ma, Yue |
| Abstract: | We present a wage-hours contract designed to minimize costly turnover given investments in specific training combined with firm and worker information asymmetries. It may be optimal for the parties to work ‘long hours’ remunerated at premium rates for guaranteed overtime hours. Based on British plant and machine operatives, we test three predictions. First, trained workers with longer tenure are more likely to work overtime. Second, hourly overtime pay exceeds the value of marginal product while the basic hourly wage is less than the value of marginal product. Third, the basic hourly wage is negatively related to the overtime premium. |
| Keywords: | Paid overtime, wage-hours contract, plant and machine operatives, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:568&r=cta |
| By: | Adam, Tim R.; Burg, Valentin; Scheinert, Tobias; Streitz, Daniel |
| Abstract: | We examine the impact of managerial optimism on the inclusion of performance-pricing provisions in syndicated loan contracts (PSD). Optimistic managers may view PSD as a relatively cheap form of financing given their upwardly biased expectations about the firm’s future cash flow. Indeed, we find that optimistic managers are more likely to issue PSD, and choose contracts with greater performance-pricing sensitivity than rational managers. Consistent with their biased expectations, firms with optimistic managers perform worse than firms with rational managers after issuing PSD. Our results indicate that behavioral aspects can affect contract design in the market for syndicated loans. |
| Keywords: | Optimism Bias; Performance-Sensitive Debt; Debt Contracting; Syndicated Loans |
| JEL: | G02 G30 G31 G32 |
| Date: | 2014–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:475&r=cta |
| By: | Xin Jin (Department of Economics, University of South Florida) |
| Abstract: | This article studies the consequences of firm delayering on wages and the wage distribution inside firms. I consider a job-assignment model with asymmetric information and a slot constraint. The model predicts that more efficient firms are not necessarily larger than less efficient firms if firms are allowed to adjust their internal organizational structure through delayering. After delayering, wages at all levels increase and the wage distribution becomes more unequal. These predictions match a set of empirical findings in recent studies that are not well explained by existing theories. |
| Keywords: | Delayering, asymmetric information, wage distribution, slot constraint |
| JEL: | J31 M51 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:usf:wpaper:0414&r=cta |
| By: | Chris Edmond |
| Abstract: | In standard global games, individual behavior is optimal if it constitutes a best response to agnostic - Laplacian - beliefs about the aggregate behavior of other agents. This paper considers a standard binary action global game augmented with noisy signaling by an informed policy-maker and shows that in this game, equilibrium beliefs depart in quite stark ways from the Laplacian benchmark. In the limit as signals become arbitrarily precise, so that all fundamental uncertainty is removed (leaving only strategic uncertainty), the equilibrium beliefs of the marginal individual concerning the aggregate action collapse to a discrete binomial distribution, giving probability mass only to the polar extreme outcomes. By contrast in the underlying standard global game the marginal individual believes the aggregate action has a continuous uniform distribution, giving equal likelihood to all possible outcomes. |
| Keywords: | coordination;signaling;bias;strategic uncertainty;noise |
| JEL: | C7 D7 D8 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1171&r=cta |
| By: | Julien Gooris; Carine Peeters |
| Abstract: | With the progress of information and communication technologies, the cost and efforts to remotely exchange information have drastically fallen. It has created new opportunities to leverage comparative advantages by reorganizing value chains along the geographic dimension and by reconsidering the organizational boundaries of the firm (i.e. the governance model of operations). However the global disaggregation of the firm’s processes tends to increase the dispersion of firm’s proprietary information and knowledge across locations and intermediate producers. Firms are potentially exposed to higher levels of misappropriation hazard and forced to elaborate protection strategies to mitigate that risk. This study shows that firms adjust the fragmentation of activities entrusted to foreign services production units to adapt their information and knowledge protection strategy to the availability of strong legal protection (from the local institutions) or internal control mechanisms. We hypothesize and empirically support that, when the above mechanisms are not available, firms use the substitute protection mechanism of fragmenting global business processes across multiple services production units. Through their capabilities to integrate the multiple fragments that compose production processes, firms can exploit the complementarities between these fragments while reducing the misappropriation hazard of individual fragments. We find also that the propensity to turn to this alternative protection mechanism increases with firm’s host country specific experience and with the alternative value of the proprietary information. |
| Keywords: | Fragmentation;Misappropriation;Services;Information;Institutional environment;Outsourcing |
| JEL: | F23 O34 L8 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2014-12&r=cta |
| By: | Kircher, Philipp; Kim, Kyungmin |
| Abstract: | We consider a frictional two-sided matching market in which one side uses public cheap talk announcements so as to attract the other side. We show that if the first-price auction is adopted as the trading protocol, then cheap talk can be perfectly informative, and the resulting market outcome is efficient, constrained only by search frictions. We also show that the performance of an alternative trading protocol in the cheap-talk environment depends on the level of price dispersion generated by the protocol: If a trading protocol compresses (spreads) the distribution of prices relative to the first-price auction, then an efficient fully revealing equilibrium always (never) exists. Our results identify the settings in which cheap talk can serve as an efficient competitive instrument, in the sense that the central insights from the literature on competing auctions and competitive search continue to hold unaltered even without ex ante price commitment. |
| Keywords: | Directed search, competitive search, commitment, cheap talk, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:532&r=cta |
| By: | X. Henry Wang (Department of Economics, University of Missouri-Columbia); Chenhang Zeng (Research Center for Games and Economic Behavior, Shandong University) |
| Abstract: | We study advance selling in a model with a capacity constraint for the seller and in the presence of both consumer heterogeneity and demand uncertainty. Buyers face different levels of uncertainty about their valuations in the advance selling period: one group (called informed buyers) now their individual valuations while the other group (called uninformed buyers) only know the distribution of their valuations. We find that the seller¡¯s optimal pricing strategy depends on his capacity size as well as the size of informed buyers. For a small capacity size, the Constant Price strategy with the highest possible price is adopted. For sufficiently large capacity sizes, both Advance Purchase Discount and Advance Purchase Premium strategies may be optimal. In general, the larger the size of informed buyers the more likely an Advance Purchase Premium strategy is adopted. |
| Keywords: | advance selling, capacity constraint, consumer heterogeneity, demand uncertainty. |
| JEL: | D42 L12 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:shn:wpaper:2014-04&r=cta |
| By: | Hanzhe Zhang (Department of Economics, University of Chicago) |
| Abstract: | An impatient, risk-neutral monopolist must sell one unit of an indivisible good within a fixed number of periods and privately informed myopic buyers with independent values enter the market over time. In each period, the seller can either run a reserve price auction incurring a cost or post a price without the cost. We characterize the optimal sequence of mechanisms that maximizes the seller's expected profits. When there is an infinite number of periods, repeatedly running auctions with the same reserve price or posting a constant price is optimal. When there is a finite number of periods, the optimal sequence is a sequence of declining prices, a sequence of auctions with declining reserve prices converging to the static optimal monopoly reserve price, or the combination of the two. Most interestingly, a sequence of auctions before a sequence of posted prices is never optimal. The mechanism sequence of posted prices followed by auctions remains optimal under various extensions of the basic setting and resembles a Buy-It-Now option. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2014-005&r=cta |
| By: | Barry, I.; Bonroy, O.; Garella, P.G. |
| Abstract: | This paper considers the effects of labels in a vertically differentiated duopoly. A label certifies the level of a product's measurable characteristic. It is shown that the certification label chosen by a private (for profit) certifier is lower than both the socially optimal and the firm's preferred one. Public policies that lead to an increase in the label can improve welfare - while also potentially benefiting firms. We fin that: (i) if public and private certification are offered, an indirect regulatory outcome is achieved (a second best) where the private certifier raises the standard of this label - even though no firm adopts the public label; (ii) two common tools, like a per unit tax on the unlabeled product or a subsidy in favor of the labeled one, lead to lower private certification standard with ambiguous effects on welfare; (iii) and ad valorem tax on the unlabeled product, by contrast, increases welfare. |
| Keywords: | LABELS;ECOLABELS;PRIVATE CERTIFICATION;PUBLIC CERTIFICATION;TAX;SUBSIDY |
| JEL: | L13 L15 L5 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2014-07&r=cta |
| By: | Olivier BOS; Tom TRUYTS |
| Abstract: | Social status, or prestige, is an important motive for buying art or collectibles and for participation in charity auctions. We study a symmetric private value auction with prestige motives, in which the auction outcome is used by an outside observer to infer the bidders’ types. We elicit conditions under which an essentially unique D1 equilibrium bidding function exists in four auction formats: first-price, second-price, all-pay and the English auction. We obtain a strict ranking in terms of expected revenues: the first-price and all-pay auctions are dominating the English auction but are dominated by the second-price auction. Expected revenue equivalence is restored asymptotically for the number of bidders going to infinity. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces14.19&r=cta |
| By: | Belot, Michele; Schroeder, Marina |
| Abstract: | We provide field experimental evidence of the effects of monitoring in a context where productivity is multi-dimensional and only one dimension is monitored and incentivised. We hire students to do a job for us. The job consists of identifying euro coins. We study the effects of monitoring and penalising mistakes on work quality, and evaluate spillovers on non- incentivised dimensions of productivity (punctuality and theft). We .nd that monitoring improves work quality only if incentives are large, but reduces punctuality substantially irrespectively of the size of incentives. Monitoring does not affect theft, with ten per cent of participants stealing overall. Our setting also allows us to disentangle between possible theoretical mechanisms driving the adverse effects of monitoring. Our .ndings are supportive of a reciprocity mechanism, whereby workers retaliate for being distrusted. |
| Keywords: | counterproductive behaviour, monitoring, experimentment, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:535&r=cta |
| By: | Takahashi, Shingo; Owan, Hideo; Tsuru, Tsuyoshi; Uehara, Katsuhito |
| Abstract: | Subjective performance evaluation serves as a double-edged sword. While it can mitigate multitasking agency problems, it also opens the door to evaluators’ biases, resulting in lower job satisfaction and a higher rate of worker quits. Using the personnel and transaction records of individual sales representatives in a major car sales company in Japan, we provide direct evidence for both sides of subjective performance evaluation: (1) the sensitivity of evaluations to sales performance declines with the marginal productivity of hard-to-measure tasks, and (2) measures of potential evaluation bias we construct are positively associated with the incidence of worker quits, after correcting for possible endogeneity biases. |
| JEL: | M52 M55 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:614&r=cta |