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on Contract Theory and Applications |
| By: | Pollrich, Martin; Wagner, Lilo |
| Abstract: | This paper studies the interaction of information disclosure and reputational concerns in certification markets. We argue that by revealing less precise information a certifier reduces the threat of capture. Opaque disclosure rules may reduce profits but also constrain feasible bribes. For large discount factors a certifier is unconstrained in the choice of a disclosure rule and full disclosure maximizes profits. For intermediate discount factors, only less precise, such as noisy, disclosure rules are implementable. Our results suggest that contrary to the common view, coarse disclosure may be socially desirable. A ban may provoke market failure especially in industries where certifier reputational rents are low. |
| Keywords: | Certification; Bribery; Reputation |
| JEL: | L15 D82 L14 L11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:481&r=cta |
| By: | Rebecca Morton (Department of Politics, New York University); Jean-Robert Tyran (Department of Economics, Copenhagen University) |
| Abstract: | We investigate experimentally the effects of corrupt experts on information aggregation in committees. We find that non-experts are significantly less likely to delegate through abstention when there is a probability that experts are corrupt. Such decreased abstention, when the probability of corrupt experts is low, actually increases information efficiency in committee decision-making. However, if the probability of corrupt experts is large, the effect is not sufficient to offset the mechanical effect of decreased information efficiency due to corrupt experts. Our results demonstrate that the norm of “letting the expert decide” in committee voting is influenced by the probability of corrupt experts, and that influence can have, to a limited extent, a positive effect on information efficiency. |
| Keywords: | Information aggregation, Voting, Asymmetric information, Swing voter's curse |
| JEL: | C92 D71 D72 D81 D82 |
| Date: | 2014–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1418&r=cta |
| By: | Sergio Vicente |
| Abstract: | This paper analyzes the effects of informational asymmetries on screening borrowers. Lenders with access to accurate credit scores offer the most valuable borrowers lower interest rates than lenders with an advantage in costly screening. This cream-skimming induces a negative externality, which reduces the value of investing in screening. This distortion translates into excessive lending with credit scores, too little screening, higher default rates than optimal and credit rationing. The model explains some patterns of loan pricing and defaults, as well as of firm selection by types of lenders, which are consistent with the received empirical evidence. |
| Keywords: | Credit scores, Screening, Hard and soft information |
| JEL: | G14 G21 G24 D82 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb142710&r=cta |
| By: | Leonard J. Mirman; Egas M. Salgueiro; Marc Santugini |
| Abstract: | We study the informativeness of the price in a perfectly competitive market. A price-taking firm sells a good whose quality is unknown to some buyers. The uninformed buyers use the price to infer information about quality. The shape of the supply curve influences the amount of information contained in the equilibrium price. |
| Keywords: | Asymmetric information, Learning, Perfect competition, Rational expectations |
| JEL: | D2 D41 D8 L1 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1423&r=cta |
| By: | Arnd Heinrich Klein; Armin Schmutzler |
| Abstract: | This paper analyzes two-stage rank-order tournaments. A principal decides (i) how to spread prize money across the two periods, (ii) how to weigh performance in the two periods when awarding the second-period prize, and (iii) whether to reveal performance after the first period. The information revelation policy depends exclusively on properties of the effort cost function. The principal always puts a positive weight on first-period performance in the second period. The size of the weight and the optimal prizes depend on properties of the observation error distribution; they should be chosen so as to strike a balance between the competitiveness of fi rst- and second-period tour- naments. In particular, the principal sets no first-period prize unless the observations in period one are considerably more precise than in period two. |
| Keywords: | Dynamic tournaments, repeated contests, information revelation, effort incentives |
| JEL: | D02 D44 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:175&r=cta |
| By: | Patrick J. Kelly (New Economic School) |
| Abstract: | Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R2s, Morck, Yeung, and Yu (2000) begin a large body of research which interprets R2 as an inverse measure of price informativeness. Low R2s or “synchronicity,” as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R2s indicate less. For this to be true, we would expect that low-R2 stocks have characteristics that facilitate private informed trade, i.e. lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R2 stocks than high, and that differences in R2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R2 to measure the information content of stock prices. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0208&r=cta |
| By: | Chari, V. V. (Federal Reserve Bank of Minneapolis); Phelan, Christopher (Federal Reserve Bank of Minneapolis) |
| Abstract: | In this paper, we argue that the anticipation of bailouts creates incentives for banks to herd in the sense of making similar investments. This herding behavior makes bailouts more likely and potential crises more severe. Analyses of bailouts and moral hazard problems that focus exclusively on bank size are therefore misguided in our view, and the policy conclusion that limits on bank size can effectively solve moral hazard problems is unwarranted. |
| Date: | 2014–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:14-3&r=cta |
| By: | Alan Elizondo; Enrique Seira |
| Abstract: | Consumer protection in financial markets in the form of information disclosure is high on governments agendas, despite the fact that the empirical evidence on its effectiveness is scarce. To measure the impact of Truth-in-Lending-Act-type disclosures on default and indebtedness, as well as of debiasing warning messages and social comparison information, we implement a randomized control trial in the credit card market for a large population of indebted cardholders. We find that providing salient interest rate disclosures has no effect, while social comparisons and debiasing messages have only a odest effect. Other types of disclosures discussed in the paper could have larger effects. |
| Keywords: | Credit cards, information disclosure, truth in lending, Mexico. |
| JEL: | D12 D14 D83 G02 G21 G28 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2014-18&r=cta |
| By: | Nicolas Gravel (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Michel Poitevin (Université de Montréal, CIREQ, and CIRANO) |
| 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: | 2014–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1444&r=cta |
| By: | Long, Iain W. (Cardiff Business School) |
| Abstract: | Throughout history, victory in conflict has created fearsome reputations. With it, the victor ensures greater allegiance of the wider population, increasing their rents at the expense of their enemy. Such reputational concerns generate two motives for conflict. When only victory or defeat is informative, the less scary party may attack to show that they are tougher than expected. If the occurrence of conflict also conveys information, the scarier party is more likely to attack. By failing to do so, the population would perceive them as weak and switch loyalties anyway. In this case, conflict arises to save face. |
| Keywords: | Conflict; Reputations |
| JEL: | D74 C73 D83 F51 H56 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2014/19&r=cta |
| By: | Susan Lu (Purdue University, West Lafayette, Illinois 47907); Huaxia Rui (University of Rochester, Rochester, New York 14627) |
| Abstract: | Despite heated debate about the pros and cons of online physician ratings, very little systematic work examines the correlation between physicians’ online ratings and their actual medical performance. Using patients’ ratings of physicians at RateMDs.com and the Florida Hospital Discharge data, we investigate whether online ratings reflect physicians’ medical performance by means of a two-stage model that takes into account patients’ ratings-based selection of cardiac surgeons. Estimation results show that five-star surgeons are associated with significantly lower mortality rates and are more likely to be selected by sicker patients compared with lower-rated surgeons. In contrast, not accounting for patients’ rating-based selection leads to the opposite outcome: patients treated by five-star surgeons had higher mortality rates than patients treated by surgeons rated below five stars. Further, we find that patients are not naïve: they know how to use different dimensions of online rating information when choosing a surgeon. Our findings suggest that we can trust online physician ratings, at least of cardiac surgeons. |
| Keywords: | word of mouth, physician ratings, patient selection, quality disclosure |
| JEL: | L15 I1 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1401&r=cta |
| By: | Claudio Michelacci (EIEF and CEPR); Hernan Ruffo (UTDT) |
| Abstract: | We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1411&r=cta |