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on Contract Theory and Applications |
| By: | Banerjee, Swapnendu; Sarkar, Mainak |
| Abstract: | Using the classic moral hazard problem with limited liability we characterize the optimal incentive contracts when first an other-regarding principal interacts with a self-regarding agent. The optimal contract differs considerably when the principal is ‘inequity averse’ vis-a-vis the self-regarding case. Also the agent is generally (weakly) better-off under an ‘inequity averse’ principal compared to a ‘status seeking’ principal. Then we extend our analysis and characterize the optimal contracts when both other-regarding principal and other-regarding agent interact. |
| Keywords: | Other regarding preferences, self regarding preferences, inequity-averse, status- seeking, optimal contract |
| JEL: | L2 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59654&r=cta |
| By: | Dey, Oindrila; Banerjee, Swapnendu |
| Abstract: | This paper characterizes the structure of monetary incentives in an organization with varying differences in employee status. With the help of a moral hazard framework with limited liability we show that for agents with lower outside option increased status leads to lower incentive pay whereas exactly the opposite happens for agents with higher outside option. For agents with very high status such that the limited liability doesn’t bind, an exogenous increase in status level leads to an unambiguous decrease in optimal incentive payment. |
| Keywords: | Status, incentives, motivation, moral hazard, optimal contract |
| JEL: | L1 L14 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58399&r=cta |
| By: | Kabiraj, Tarun; Chattopadhyay, Srobonti |
| Abstract: | This paper studies incentives for cooperative research vis-Ã -vis non-cooperative research in an incomplete information framework. We show that with quantity competition under asymmetric information, the expected payoff from non-cooperative research goes down compared to the case of symmetric information; hence RJV incentives of the firms are larger under asymmetric information. In either case, however, the larger is the size of the cost-reducing innovation the lower is the incentive for cooperative research. Finally in our model, incomplete information does not affect the consumers’ welfare, but the firms become worse off. |
| Keywords: | Cooperative R&D, non-cooperative R&D, RJV, incomplete information, consumers’ welfare. |
| JEL: | D43 L13 O31 |
| Date: | 2014–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59259&r=cta |
| By: | Prudence Dato (IREGE/ University of Savoie) |
| Abstract: | In a context of high disposal costs in rich countries together with an imperfect monitoring system, the non reusable part of e-wastes is often illegally mixed with the reusable part and ends up in developing countries leading to an `environmental injustice' and important negative externalities. To tackle this problem, we propose an alternative e-waste market for a joint trade in reusable and non-reusable e-wastes, other than the monitoring system and we analyze the optimal mechanism design for its implementation. In this paper, we use the theory of incentives applied to e-waste market. We want to show how to induce firms in North to undertake sorting investment that would help implementing the alternative e-waste market. Results show that, if the sorting cost is low, the optimal contract to induce sorting investment and to implement the alternative e-waste market for a joint trade in reusable and non-reusable e-wastes is the Baron-Myerson (BM) contract. Moreover, we iden tify conditions to avoid the standard market. Finally, we construct the optimal decisions of the firm in South over the set of sorting costs. One of the direct implications of the results is that if the cost is not too high to deter the sorting investment, the firm in South should give incentives to the firm in North to invest in sorting so that the alternative market can easily be implemented. |
| Keywords: | E-waste, Imperfect information, International trade, Market. |
| JEL: | Q53 L51 D82 F18 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2014.13&r=cta |
| By: | Chen, Heng; Luo, Yulei; Pei, Guangyu |
| Abstract: | This paper examines the welfare properties of “beauty contest†games with rationally inattentive agents. Agents allocate attention between private and public signals to reduce the uncertainty about observation noises. In this setting, social welfare may not necessarily increase with the capacity to process information, and can actually decrease as a result of attention misallocation. Strikingly, social welfare can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies. |
| Keywords: | Coordination game, social welfare, rational inattention |
| JEL: | C72 D60 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59139&r=cta |
| By: | Eberhard Feess; Christian Grund; Markus Walzl; Ansgar Wohlschlegel |
| Abstract: | We analyze mechanism choices of competing sellers with private valuations and show the existence of monotone pure strategy equilibria where sellers with higher reservation value choose mechanisms with a lower selling probability and a larger revenue in case of trade. As an application we investigate the choice between posted prices and auctions and demonstrate that sellers refuse to offer posted prices as long as (risk-neutral) buyers do not differ with respect to their transaction costs in both trade institutions. If some buyers have lower transaction costs when trading at a posted price, it is optimal for sellers to offer posted prices if and only if they have a sufficiently high reservation value. We develop an econometric technique to compare the selling probabilities and revenues of posted prices and auctions and confirm our theoretical predictions with data from the EURO 2008 European Football Championship. |
| Keywords: | Competing Sellers, Single-Crossing, Auctions, Fixed Prices |
| JEL: | D43 D44 D82 L13 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2014-28&r=cta |
| By: | Edoardo Grillo |
| Abstract: | We consider a model of electoral competition in which two politicians compete to get elected. Each politician is characterized by a valence, which is unobservable to voters and can take one of two values: high or low. The electorate prefers politicians with high valence, but random shocks may lead to the victory of low-valence ones. Candidates make statements concerning their valence. We show that if voters are standard expected utility maximizers, politicians' statements lack any credibility and no information transmission takes place. By introducing reference-dependent preferences and loss aversion a là Koszegi and Rabin, we show that full revelation is possible. Indeed, if the electorate believes to candidates' announcements, such announcements will affect its reference point. As a result, if voters find out that a candidate lied, pretending to be high valence when she is not, they may decide to support the opponent in order to avoid the loss associated with appointing a candidate worse than expected. |
| JEL: | D03 D72 D82 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:353&r=cta |
| By: | Cy Maor; Eilon Solan |
| Abstract: | In repeated games, cooperation is possible in equilibrium only if players are sufficiently patient, and long-term gains from cooperation outweigh short-term gains from deviation. What happens if the players have incomplete information regarding each other's discount factors? In this paper we look at repeated games in which each player has incomplete information regarding the other player's discount factor, and ask when full cooperation can arise in equilibrium. We provide necessary and sufficient conditions that allow full cooperation in equilibrium that is composed of grim trigger strategies, and characterize the states of the world in which full cooperation occurs. We then ask whether these "cooperation events" are close to those in the complete information case, when the information on the other player's discount factor is "almost" complete. |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1411.1368&r=cta |
| By: | Pedro Gomis-Porqueras; Timothy Kam; Christopher Waller |
| Abstract: | We study the endogenous choice to accept fiat objects as media of exchange and the implications for nominal exchange rate determination. We consider an economy with two currencies which can be used to settle any transactions. However, currencies can be counterfeited at a fixed cost and the decision to counterfeit is private information. This induces equilibrium liquidity constraints on the currencies in circulation. We show that the threat of counterfeiting can pin down the nominal exchange rate even when the currencies are perfect substitutes, thus breaking the Kareken-Wallace indeterminacy result. We also find that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rates. Finally, we show that the threat of counterfeiting can also help determine nominal exchange rates in a variety of different trading environments. These include a two-country setup with tradable and non-tradable goods sectors, and with an alternative timing of money injections. |
| Keywords: | Multiple Currencies, Counterfeiting Threat, Liquidity, Exchange Rates |
| JEL: | D82 D83 F4 |
| Date: | 2014–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:econwp:eco_2014_7&r=cta |
| By: | Fischer, Sven; Guth, Werner; Kaplan, Todd; Zultan, Roi |
| Abstract: | We study first- and second-price private value auctions with sequential bidding where second movers may discover the first movers bids. There is a unique equilibrium in the first-price auction and multiple equilibria in the second-price auction. Consequently, comparative statics across price rules are equivocal. We experimentally find that in the first-price auction, leaks benefit second movers but harm first movers and sellers. Low to medium probabilities of leak eliminate the usual revenue dominance of first-price over second-price auctions. With a high probability of a leak, second-price auctions generate higher revenue. |
| Keywords: | auctions, espionage, collusion, laboratory experiments |
| JEL: | C72 C91 D44 |
| Date: | 2014–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58940&r=cta |
| By: | De, Parikshit |
| Abstract: | In this paper we analyze the implication of a particular kind of allocation rule called Rawlsian allocation rule on queueing and sequencing problems. We find that in case of queueing problems, Efficient allocation rules are Rawlsian but the converse is not true. For a particular class of Rawlsian allocation rule we characterize the unique class of transfer rule that ensures non-manipulability. Also in case of a situation where there is private information in multiple dimension, we find that a the particular kind of Rawlsian allocation rule equipped with a suitable transfer rule works as a panacea. |
| Keywords: | Queueing problems, Sequencing problems, Strategyproofness, Rawlsian allocation. |
| JEL: | C72 D82 |
| Date: | 2014–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58744&r=cta |
| By: | Sandra Cavaco; Patricia Crifo; Antoine Rebérioux; Gwenaël Roudaut |
| 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, |
| JEL: | G30 G34 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2014s-39&r=cta |
| By: | Dale Mortensen (Northwestern University); Melvyn Coles |
| Abstract: | This paper considers a labor market employers differ in productivity, which is private information, and face hiring costs. Each employer sets its current wage but does not commit to future wages. Workers search on the job for better paid employment. A signalling equilibrium is show to exist and characterized in which more productive firms pay higher wages in every state of the market and workers transit from less to more productive employers. There is firm turnover: new small start-up firms are created while some existing firms die. Consistent with Gibrat's law, firm growth rates are size independent but increase with firm productivity (which evolves stochastically). With endogenous aggregate job creation rates and job-to-job transitions, the model provides a rich, coherent, non-steady state framework of equilibrium wage formation and worker flows. Existence of a steady state equilibrium for any finite number of firm productivity types is established. Steady state is unique when firm productivity is permanent and there are many firm types. A unique non-steady state equilibrium exists in the case of one type. In the general case, a unique equilibrium can be established when the elasticity of the hire rate with respect to productivity is sufficiently small. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:462&r=cta |
| By: | Carlo Cambini; Sara De Masi; Laura Rondi |
| Abstract: | This paper examines the relationship between CEO pay and firm performance within a sample of European publicly listed energy utilities from 2000 to 2010, focusing on the differential responses that arise from being subject to different regulatory regimes. In particular, we investigate the difference in pay-performance sensitivity across regulated and unregulated firms as well as the impact of different regulatory schemes – incentive vs. cost-based regulation - on CEO monetary incentives. Using various measures of performance, we find that European energy utilities link CEO compensation to firm performance, but CEO pay-performance is higher for unregulated companies. When we focus on the effect of alternative regulatory schemes, our results show that payperformance sensitivity is significantly higher for firms under incentive regulation than within firms under cost-based regulation. This result holds after controlling for firm - private vs. state - ownership and for varying degrees of market liberalization across countries. |
| Keywords: | Managerial compensation, Incentive contracts, Incentive regulation, Energy utilities |
| JEL: | G30 J33 L51 M12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bcu:iefewp:iefewp58&r=cta |
| By: | Gilles Grandjean; Marco Mantovani; Ana Mauleon; Vincent Vannetelbosch |
| Abstract: | The paper analyzes the role of the structure of communication - i.e. who is talking with whom - on the choice of messages, on their credibility and on actual play. We run an experiment in a three-player coordination game with Pareto ranked equilibria, where a pair of agents has a profitable joint deviation from the Pareto-dominant equilibrium. According to our analysis of credibility, the subjects should communicate and play the Pareto optimal equilibrium only when communication is public. When pairs of agents exchange messages privately, the players should play the Pareto dominated equilibrium and disregard communication. The experimental data conform to our predictions: the agents reach the Pareto-dominant equilibrium only when announcing to play it is credible. When private communication is allowed, lying is prevalent, and players converge to the Pareto-dominated equilibrium. Nevertheless, at the individual level, players’ beliefs and choices tend to react to messages even when these are non-credible. |
| Keywords: | cheap talk, coordination, coalitions, experiment |
| JEL: | C72 C91 D03 D83 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-064&r=cta |
| By: | Chowdhury, Shyamal; Roy Chowdhury, Prabal; Sengupta, Kunal |
| Abstract: | This paper develops a theory of sequential lending in groups in micro-finance that centers on the notion of dynamic incentives, in particular the simple idea that default incentives should be relatively uniformly distributed across time. In a framework that allows project returns to accrue over time, as well as strategic default, we show that sequential lending can help resolve problems arising out of coordinated default, thus improving project efficiency vis-a-vis individual lending. Inter alia, we also provide a justification for the use of frequent repayment schemes, as well as demonstrate that, depending on how it is manifested, social capital has implications for project efficiency and borrower default. We next examine the optimal choices for the MFI and derive conditions for the optimality of the group lending arrangement. Our framework also provides for some plausible hypotheses as to why there has been a recent transition from group to individual lending. |
| Keywords: | Collusion; coordinated default; dynamic incentives; frequent repayment; group-lending; MFI competition; micro-finance; sequential financing; social capital; switch to individual lending |
| JEL: | D7 D9 G2 O2 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58675&r=cta |
| By: | William Fuchs; Luis Garicano; Luis Rayo |
| Abstract: | We study contractual arrangements that support an efficient use of time in a knowledge-intensive economy in which agents endogenously specialize in either production or consulting. The resulting market for advice is plagued by informational problems, since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess. We show that spot contracting is not efficient since lemons (in this case, self-employed producers with intermediate knowledge) cannot be appropriately excluded from the market. However, an ex-ante, firm-like contractual arrangement uniquely delivers the first best. This arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts. This simple characterization of the optimal ex-ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors. Our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs. |
| Keywords: | Contracting, experts, professional service firms, partnership, venture capital |
| JEL: | D86 L22 J33 J44 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1308&r=cta |
| By: | Mauritzen, Johannes (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | Using detailed data of approximately 125,000 solar photovoltaic systems installed in California between 2007 and 2014 I argue that the adoption of solar panels from Chinese manufacturers and the introduction of a leasing model for solar systems are closely intertwined. First, cheaper Chinese panels allowed a leasing model to be profitable for contractors. But an asymmetric information problem exists in the market for solar panels. Solar panels are long-lived productive assets, where quality is important but costly for individual consumers to verify. Consumers can instead be expected to rely on brands and observed reliability. This led to a barrier to entry for cheaper panels from new, primarily Chinese manufacturers. The adoption of a leasing model by several large local installers solved the asymmetric information problem and led to the adoption of Chinese panels and in turn lower overall system prices. |
| Keywords: | Solar panels; asymmetric information problem |
| JEL: | Q00 Q40 |
| Date: | 2014–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2014_035&r=cta |
| By: | Pietro Garibaldi |
| Abstract: | All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. According to the extensive liter- ature on Employment Protection Legislation (EPL), such transfers are either ineffective or less efficient than unemployment benefits in providing insurance against labor market risk. In this paper we show that mandatory severance is optimal in presence of wage deferrals when there is moral hazard of workers, shirkers can get away with it and adverse selection prevents employers to commit not to fire a non-shirker. Our model also accounts for two neglected features of EPL. The first is the discretion of judges in inter- preting the law, which relates not only to the decision as to whether the dismissal is deemed fair or unfair, but also to the nature, economic vs. disciplinary, of the layoff. The second feature is that compensation for dismissal is generally increasing with tenure. We provide new cross-country comparable measures of these two features of EPL. The model also explains why severance is generally higher in countries with less efficient judicial systems and why small firms are typically exempted from the strictest EPL provisions. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:342&r=cta |
| By: | Baghestanian, Sascha; Popov, Sergey |
| Abstract: | We present a model for academia with heterogeneous author types and endogenous effort to explain changes in the publication process in Economics. We analyze the implications of these developments on research output. Lowering the precision of refereeing signals has a negative impact on able authors but invites more submissions from less able authors. Increasing the number of journals stimulates less able authors to submit their papers. The editor can improve the journal's pool of submitted manuscripts by improving the precision of refereeing, but not by lowering quality standards. The submission strategy of an author is informative of his ability. |
| Keywords: | academia; publishing; effort; refereeing; journals |
| JEL: | I23 |
| Date: | 2014–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58539&r=cta |
| By: | Marco M. Sorge (Università di Napoli Federico II and CSEF) |
| Abstract: | When are strategic appointments useful in curbing policy bias from ex-post negotiation between state agencies and special interest groups? Bertelli and Feldmann (Jnl. of Public Admin. Research and Theory, 2007) provide an insightful analysis of the issue within a full information model of presidential appointments. This paper examines whether and how their findings extend to a world of policy uncertainty and asymmetric information, which rationalizes delegation in the first place. We establish that the existence of non-zero impact of lobbying crucially relies on interest groups' leverage over the appointment game between higher-level institutions. Remarkably, bureaucratic lobbying may prove highly non-neutral with separated powers even when a candidate agency is agreed upon. In some circumstances (e.g., recess appointments in the U.S.), by contrast, strategic appointments fully offset interest group influence in either form of government (unified versus divided), a finding in line with the conventional theory of delegation. |
| Keywords: | Legislative delegation; Strategic appointments; Bureaucratic lobbying |
| JEL: | D72 D73 H1 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:380&r=cta |
| By: | Marvao, Catarina (Stockholm Institute of Transition Economics) |
| Abstract: | The theoretical framework of the adequacy or otherwise of fine reductions under the EU and US Leniency Programmes has been explored widely. However, the characteristics of the reporting cartel members remain unexplained. This is the first paper to develop a model where heterogeneous cartel members have private information on the probability of conviction. It is shown that firms which receive higher fines are more likely to report the cartel. To validate this result and analyze the sources of fine heterogeneity, data for EU and US cartels are used. Being the first reporter is shown to be correlated with recidivism, leadership and other fine reductions. Some characteristics of the cartels where reporting occurred are also unveiled. Identifying the characteristics of the reporting firms is vital to dissolve and dissuade cartels and the wider policy implications of these findings are discussed in the paper. |
| Keywords: | Cartels; competition policy; Leniency Programme; private information; self-reporting |
| JEL: | D43 K21 K42 L13 L40 L51 |
| Date: | 2014–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hasite:0029&r=cta |
| By: | Heiner Schmittdiel (Erasmus University Rotterdam) |
| Abstract: | In this paper, we test empirically whether there is a relationship between corporate income taxes and CEO bonus payments. Using Compustat and ExecuComp data from 1992 to 2010, we find mixed results. Looking at the whole sample, the average bonus contract rewards tax savings excessively in comparison to other determinants of corporate net income. A possible explanation is that managers require to be compensated for the additional risk inherent in running an aggressive tax strategy. In accordance with previous literature, we document a substantial heterogeneity in compensation practices across industries. It appears that our main result is driven by firms in the Industrial and Retail sectors. We further find that companies with greater tax planning opportunities, for example by virtue of size or operations abroad, are more likely to condition the CEO’s bonus on corporate income taxes. |
| Keywords: | CEO incentives, executive compensation, tax avoidance |
| JEL: | H25 H26 M41 M52 |
| Date: | 2014–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140048&r=cta |
| By: | Hull, Isaiah (Research Department, Central Bank of Sweden) |
| Abstract: | A standard, no-recourse mortgage contract does not adjust when the value of the underlying collateral falls. Consequently, shocks that lower house prices may trigger one of the necessary conditions for default: negative equity. A common alternative contract attempts to prevent default by imposing full-recourse. This may cause individuals who believe they are likely to default to rent; however, it does not prevent those who buy from experiencing negative equity. I consider a contract that instead precludes negative equity by tying outstanding debt to an index of house prices. This is done in an incomplete markets model that is calibrated to match U.S. micro and macro data. I find that switching to the house price indexed contract reduces the default rate from .72% to .11% and expands homeownership rates among the young and the poor, but pushes up the equilibrium minimum mortgage rate by 90 basis points. The volatility of net cash flows to financial intermediaries also increases slightly under the new contract. |
| Keywords: | Default; Mortgages; Interest Rates; Heterogeneous Agents; Incomplete Markets |
| JEL: | E21 E43 G21 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0287&r=cta |