nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2014‒10‒03
thirteen papers chosen by
Simona Fabrizi
Massey University

  1. How private is private information? The ability to spot deception in an economic game By Belot, Michele; van de Ven, Jeroen
  2. Endogenous Growth and Research Activity under Private Information By Oscar Mauricio Valencia
  3. Strategic Disclosure of Demand Information by Duopolists: Theory and Experiment By Jos Jansen; Andreas Pollak
  4. Estate Taxation and Human Capital with Information Externalities By Aaron Hedlund
  5. Information Aggregation and Optimal Market Size By Kei Kawakami
  6. Changing partner in a cheap talk game: experimental evidence By Bonroy, O.; Garapin, A.; Llerena, D.
  7. Market composition and price informativeness in a large market with endogenous order types By Edouard Challe; Edouard Chretien
  8. The Signaling Role of Not Being Promoted: Theory and Evidence By Xin Jin
  9. Air pollution in Urban Beijing: The role of Government-controlled information By Timothy Swanson; Chiara Ravetti; Yana Popp Jin; Mu Quan; Zhang Shiqiu
  10. Selling Cookies By Bergemann, Dirk; Alessandro Bonatti
  11. Political Selection with Pessimistic Voters By Alvaro Forteza
  12. Tell Me Something I Don’t Already Know:Informedness and External Validity in Information Programs By David P. Byrne; Andrea La Nauze; Leslie A.Martin
  13. Corrupción, desigualdad y evasión de impuestos By Elvio Accinelli; Edgar J. Sánchez Carrera

  1. By: Belot, Michele; van de Ven, Jeroen
    Abstract: We provide experimental evidence on the ability to detect deceit in a buyer-seller game with asymmetric information. Sellers have private information about the buyer's valuation of a good and sometimes have incentives to mislead buyers. We examine if buyers can spot deception in face-to-face encounters. We vary (1) whether or not the buyer can interrogate the seller, and (2) the contextual richness of the situation. We find that the buyers' prediction accuracy is above chance levels, and that interrogation and contextual richness are important factors determining the accuracy. These results show that there are circumstances in which part of the information asymmetry is eliminated by people's ability to spot deception.
    Keywords: Deception, lie detection, asymmetric information, face-to-face interaction, experiment,
    Date: 2013
  2. By: Oscar Mauricio Valencia
    Abstract: This paper examines an endogenous growth model with occupational choice in which innovators produce ideas. Each innovator has private knowledge of their production costs. Developers offer innovators non-linear contract schemes that affect the number of active innovators and the economic growth rate. Two main results are obtained. First, the equilibrium contract under asymmetric information leads to the selection of highly-talented workers in R&D activities and higher profits for developers. Second, the efficiency-rent extraction tradeoff lowers the economic growth rate with respect to the full information case. Classification JEL: 031, 033, D82.
    Date: 2014–09
  3. By: Jos Jansen (Department of Economics and Business, Aarhus University, Denmark); Andreas Pollak (University of Cologne)
    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
  4. By: Aaron Hedlund (Department of Economics, University of Missouri-Columbia)
    Abstract: This paper investigates the effects of estate taxation when firms cannot directly observe worker skill levels. Imperfect labor market signaling gives rise to an information externality that causes workers to free-ride off of others' human capital acquisition. Inherited wealth exacerbates the information externality because risk-averse workers with larger inheritances exert less effort to acquire skills. By reducing these inheritances, an estate tax induces greater skill acquisition effort, resulting in a higher number of skilled workers, and in many cases, increased wages and output. In a parametrized model, I establish that the optimal estate tax rate is significantly above zero.
    Keywords: information externalities, signaling, free-rider problem, labor markets, bequests, inheritance taxes
    JEL: D62 D82 E21 E24 E60 H21
    Date: 2014–08–08
  5. By: Kei Kawakami
    Abstract: This paper studies a rational expectations model of trading where strategic traders face information asymmetries and endowment shocks. We show that negative partici- pation externalities arise due to an endogenous interaction between information aggre-gation and multiple trading motives. Moreover, the negative externalities are strong enough to make optimal market size ?nite. In a decentralized process of market for- mation, multiple markets can survive due to the negative externalities among traders. The model also predicts: (i) that only in a su¢ ciently large market the equilibrium multiplicity due to self-ful?lling trading motives can arise, (ii) that a high correlation in endowment shocks can make markets extremely illiquid.
    Keywords: Asymmetric information, Aggregate shock, Imperfect competition, Market fragmentation, Multiple equilibria, Network externality puzzle, Price impact.
    Date: 2014
  6. By: Bonroy, O.; Garapin, A.; Llerena, D.
    Abstract: This paper considers the effects of the opportunity to change partners on communication. We experiment a standard cheap talk game where a player observes a private forecast before disclosing it (truthfully or untruthfully) in a message that he/she sends to his/her partner. Two treatments are applied: i) each two-player team remains unchanged until the experiment ends; and ii) players are offered the possibility to change their partner. We find that the opportunity to change partners affects communication in the relationship positively. Interestingly, this effect is explained by more beliefs in the messages and not by more truthful disclosure.
    JEL: C90 D82
    Date: 2014
  7. By: Edouard Challe (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Banque de France - -); Edouard Chretien (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: We analyse the joint determination of price informativeness and the composition of the market by order type in a large asset market with dispersed information. The market microstructure is one in which informed traders may place market orders or full demand schedules and where market makers set the price. Market-order traders trade less aggressively on their information and thus reduce the informativeness of the price; in a full market-order market, price informativeness is bounded, whatever the quality of tradersinformation about the assets dividend. When traders can choose their order type and demand schedules are (even marginally) costlier than market orders, then market-order traders overwhelm the market when the precision of private signals goes to in…nity. This is because demand schedules are substitutes: at high levels of precision, a residual fraction of demand-schedule traders is sufficient to take the trading price close to traders signals, while the latter is itself well aligned with the dividend. Hence, the gain from trading conditional on the price (as demand-schedule traders do) in addition to ones own signal (as all informed traders do) vanishes.
    Date: 2014–09–03
  8. By: Xin Jin (Department of Economics, University of South Florida)
    Abstract: This article studies the negative signals associated with non-promotion. I first show theoretically that, when workers’ productivity rises little with additional years on the same job level, the negative signal associated with non-promotion leads to wage decreases. On the other hand, when additional job-level tenure leads to a sizable increase in productivity, workers’ wages increase. I test my model’s predictions using the personnel records from a large US firm from 1970-1988. I find a clear hump-shaped wage-job-tenure profile for workers who stay in the same job level, which supports my model’s prediction.
    Keywords: Asymmetric Information, Human Capital Accumulation, Signaling, Promotion, Wages
    JEL: J24 J31 M51
    Date: 2014–09
  9. By: Timothy Swanson (Centre for International Environmental Studies, IHEID, The Graduate Institute of International and Development Studies, Geneva); Chiara Ravetti; Yana Popp Jin; Mu Quan; Zhang Shiqiu
    Abstract: This paper looks at the problem of information control behind the unsustainable levels of air pollution in China. In particular, it focuses on a large urban area, Beijing, and it examines the role of the public, government-controlled information and the adaptation choices of households in response to signals about high pollution. Our analysis is based on a simple theoretical framework in which people migrate from rural areas to polluted cities, receiving a signal from the government about urban pollution; hence, they decide whether to adapt to pollution or not. We find that the government has no incentive to ensure sustainable air quality, as it can distort pollution information in order to attract cheap labour. We then analyse empirically two different air pollution indexes from different sources and agents’ behaviour in an original household survey collected in Beijing. We find that the official air pollution values are systematically distorted, creating perverse incentives for households to react to bad air quality, especially for people who rely on government-controlled sources of information.
    Keywords: Air Pollution; Government; Information; Averting Behaviour; Sustainability.
    JEL: Q53 Q56 Q58
    Date: 2014–08–29
  10. By: Bergemann, Dirk (Cowles Foundation, Yale University); Alessandro Bonatti (Sloan School of Management, MIT)
    Abstract: We propose a model of data provision and data pricing. A single data provider controls a large database that contains information about the match value between individual consumers and individual firms (advertisers). Advertisers seek to tailor their spending to the individual match value. The data provider prices queries about individual consumers' characteristics (cookies). We determine the equilibrium data acquisition and pricing policies. Advertisers choose positive and/or negative targeting policies. The optimal query price influences the composition of the targeted set. The price of data decreases with the reach of the database and increases with the fragmentation of data sales.
    Keywords: Data providers, Data pricing, Selling information, Targeting, Online advertising, Cookies, Media markets
    JEL: D44 D82 D83
    Date: 2013–10
  11. By: Alvaro Forteza (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República.)
    Abstract: I analyze political agency models with potentially two equilibria, one in which elections are e¤ective selection mechanisms and only "good" individuals participate in politics and another one in which elections are not e¤ective and "bad" individuals participate in politics. These equilibria are self-ful.lling prophecies: if citizens expect a low-quality political class, bad individuals will participate and the political class will have low quality. If citizens expect a high-quality political class, only good individuals will have incentives to participate and the political class will be of high quality. The model exhibits only the good equilibrium if the proportion of good individuals in the society is su¢ ciently high. I analyze the impact of popularity shocks and redistribution on the set of equilibria.
    Keywords: Agencia polÌtica, selecciÛn polÌtica, equilibrios m?ltiples
    JEL: E69 P16
    Date: 2013–10
  12. By: David P. Byrne; Andrea La Nauze; Leslie A.Martin
    Abstract: Information programs that leverage peer comparisons are used to encourage pro-social behavior in many contexts. We document how imperfect information generates heterogenous responses to treatments involving personalized feedback and peer comparisons. In our field experiment in retail electricity, we find that most households either overestimate or underestimate their relative energy consumption pre-treatment. Households that overestimated respond to new information by temporarily increasing electricity consumption, whereas households that underestimated take steps that lead to long term energy conservation. We explore the implications of these results for the external validity and design of information programs.
    JEL: C93 D12 D84 L94 Q41
    Date: 2014
  13. By: Elvio Accinelli (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Edgar J. Sánchez Carrera (Universidad Autónoma de San Luis Potosí)
    Abstract: In this paper, we consider a society composed of citizens grouped in different economic strata based on income, who must pay taxes, but there are incentives to do so, and a set of public officials (auditors), whose function is to monitor compliance with the tax rules among citizens. We assume that corrupt auditors can accept bribes from evaders. We show that income inequality as a driver acts of corruption and tax evasion. Next we introduce an evolutionary model to analyze the progress or regression of evasion and corruption among public officials. We conclude with some observations on policies and incentives to combat these social ills.
    Keywords: corrupt behavior; taxes; evolutionary game.
    JEL: C72 C73 O11 O55 K42

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